5.

1 INTRODUCTION Having been introduced in the previous section to professional ethics and the fundamental principles of ethical behaviour, you will now be familiar with the principles of professional competence and due care. The professional accountant should endeavour to carry out their professional duties effectively, to meet deadlines, and to meet minimum expectations. The professional accountant in the corporate sector will be required to meet the expectations set by their employer. These expectations will undoubtedly be higher than will be achieved by simply complying with the fundamental principles. Therefore, it can be seen that the professional accountant is usually expected to have regard to levels of behaviour and performance that extend beyond basic professional competence and due care. This may be described as best practice. The professional accountant must comply with the fundamental principles of ethical behaviour, but should also aspire to best practice. An employee (either in practice or in business) should understand and comply with the procedures established by their employer. In addition, they have a personal responsibility with regard to their effectiveness within the organisation. These responsibilities include managing themselves and their own workload effectively, communicating and reporting appropriately and in some cases handling potential areas of conflict. The remainder of this section considers these various factors in order to maximise personal effectiveness.

5.2 CHARACTERISTICS OF PERSONAL EFFECTIVENESS At work, the main characteristics of personal effectiveness are as follows: Timeliness Accuracy (Literacy and numeracy) Flexibility Cooperativeness

5.2.1 TIMELINESS Accounting and bookkeeping work is usually dependent on tight deadlines, particularly when there are requirements to file accounts by set dates to comply with law (see Section 3.6). In an organisation, bookkeeping must be kept up-to-date in order to provide meaningful data, and management accounts need to be available in time to provide information for decision-making. In order to consistently meet deadlines, a professional needs to have effective time management skills. This will involve: Objectives of time management The overarching objective of time management may be said to be the reduction (or elimination) of wasted time, by reducing errors and inefficiencies. This will involve: Planning each task to the extent necessary Working at a reasonable pace (but not rushing) Avoiding errors (getting it right first time) Reviewing your work, or asking someone else to review it, when no other checks are available (in other words avoiding unnecessary duplication of effort) Ensuring that all work is undertaken by the appropriate person, and delegated as appropriate In order to achieve this, you will need to: Plan the use of your time over a given period (a day, week or month) Ensure the necessary resources will be available to you over that period Understand the links and dependencies between tasks (can some things be done at the same time as each other, or is one dependent on the other?)

5.2.1 TIMELINESS Planning over a given period

Planning the effective use of your time may involve the use of any of the following: Calendars and diaries (to log meetings, other activities and deadlines) Schedules showing tasks to be achieved each day or each week Task lists (to identify tasks outstanding and the order in which they are to be completed) Activity logs (to record what has been completed and how long it has taken learning from experience) Project plans (to ensure larger projects are completed expeditiously) Resources The tasks you set yourself to complete on a given day or in a given week will usually require resources. For example, these may take the form of: Supporting staff Line manager support Access to IT facilities Client contact time

It will often be advisable to discuss your planning with a manager, and those with whom you will need to interact during the course of each assignment. Understanding activity links and dependencies This forms part of the detailed planning of an assignment, and specifically requires the following: Setting out a timeframe for the whole assignment Identifying precisely which tasks need to be completed Identifying who should be assigned to each task Assessing how long each task should take Identifying those tasks that must be completed sequentially (and the preferred order in which they should be performed) Assigning a deadline to each task Identifying those tasks in respect of which timing is unimportant, and scheduling them in accordance with resources available Drawing up a schedule (or project plan) for the completion of all the tasks Identifying the critical path

5.2.1 TIMELINESS
Example: The accounts team in a small wholesale company has to produce quarterly draft financial accounts within one week of the period end. The period end is 30 June; the planning is taking place in the middle of June; and the final accounts must be available for a Board meeting on 8 July. The following tasks are to be carried out (listed in a random order): Table A Activity Count and value closing inventories Prepare and review the final accounts Calculate and account for depreciation charge Process final adjustments Prepare draft financial accounts Discuss draft financial accounts with the responsible officer Identify and account for the movement in accruals and prepayments Reconcile the bank statement with the cash book and the general ledger Extract the trial balance Consider the recoverability of receivables, and account for the movement in provision Estimated time 6.0 hours(supervising 4 warehouse staff) 2.5 hours 0.7 hours 3.0 hours 1.5 hours 2.5 hours 3.5 hours 2.0 hours 1.5 hours 2.5 hours

By preparing the above table the following steps have been completed, in other words: 1. Identifying which tasks that must be completed 2. Identifying how long each task is estimated to take The next step is to identify which tasks must be done in sequential order, and which may be performed alongside each other.

5.2.1 TIMELINESS

In order to be able to prepare draft accounts, all the accounting entries must have been processed, need to have been completed before extracting the trial balance and producing the first draft: Table B Activity Calculate and account for depreciation charge Identify and account for the movement in accruals and prepayments Reconcile the bank statement with cash book and the general ledger Consider the recoverability of receivables, and account for the movement in provision Duration 0.7 hours 3.5 hours 2.0 hours 2.5 hours

These tasks may be performed in any order or at the same time although it would be advisable to carry out the bank reconciliation first, to gain confidence in postings made to the nominal ledger. The trial balance may then be extracted, and the draft financial accounts prepared. Before the final accounts can be produced, the draft accounts need to be reviewed with the responsible officer such as the finance director, and final adjustments agreed. The sequence of events at this stage is critical, and so the table below sets out the final sequence of activities in order: Table C Activity Extract the trial balance Prepare draft financial accounts Discuss draft financial accounts with the responsible officer Process final adjustments Prepare and review the final accounts Duration 1.5 hours 1.5 hours 2.5 hours 3.0 hours 2.5 hours

Note, however, that before any of the tasks in Tables A and B are addressed, the counting and valuing of inventories must take place. Clearly, this must occur on 30 June, and this task itself will require careful planning.

The previous lists of tasks can be shown as a network diagram. In the diagram that follows, the critical path is identified by the shaded boxes. This indicates the minimum amount of time in which the whole series of tasks may be completed. Each box represens an activity, and D represents the duration of the activity. Network diagram for the preparation of final accounts

5.2.2 ACCURACY (LITERACY AND NUMERACY)

A key aspect of competence in accounting is the ability to work and communicate effectively, accurately and in the appropriate way, both verbally and numerically. A professional accountant must be accurate in their work and must seek to minimise errors. Some of the tools available to accountants to help them include email, presentation software, accounting packages, spreadsheets and databases. Accountants should make the most of these tools to effectively retrieve, prepare, analyse, present and report information. Effective communication is very important to the work of an accountant. An accountant must develop skills to use relevant media to convey information to users and to communicate internally with colleagues and managers. Effective and accurate communication can involve the use of the following: Emails Reports Memos Telephone or face to face Meetings and presentations Spreadsheets Databases

The competent accountant will understand which of the above media to use in different situations and for different purposes.

5.2.2 ACCURACY (LITERACY AND NUMERACY)

Email Email is the most popular medium of communication. It is fast; it can reach a large number of people (over a wide geographical area); and, if used properly, it provides a useful trail of evidence.

The organised accountant will create electronic folders, under various subject headings, for easy retrieval of emails if necessary. The use of a scanner and appropriate software means that almost any business document may be attached to an email. Email retrieval is also made easier by sorting the emails within a folder by sender, date sent or subject matter. However, emails should be used with caution. Organisations should document protocols and procedures for use of email. The language used in email should be clear and unambiguous. Emails need to be carefully composed, in order to avoid confusion or offence to the reader. Email security may also be an issue. Computer security and IT systems will have an impact on confidentiality. IT systems should be in place to ensure that emails can be securely stored and retrieved. Reports The professional accountant will sometimes be required to write reports, either to colleagues or to external users. Each report should be produced for a specific objective and audience. Reports are effective in providing information to support decision-making. Reports should include the following: addressee(s) writer(s) subject matter date on which it was written

Reports of a certain length or complexity might also include: A clear statement of the objectives of the report Concise conclusions An executive summary When considering the style of the report, consider the following: Pay attention to the structure, using a hierarchy of headings, and labeling them as appropriate (1, a), (i), etc.) Use a formal tone and language that is understandable and appropriate for the intended audience

5.2.2 ACCURACY (LITERACY AND NUMERACY)

Memos Memos should be addressed in a similar way to reports, with the names of the addressee and the writer, the subject matter and the date. However, a memo should be brief and to the point. If a memo is too long, a formal report may be more appropriate and easier for the reader to comprehend. Memos should be written in a clear and concise style. They may be appropriate for formally announcing decisions, setting meetings, or for confidential communications, for which email may appear too casual. Telephone The telephone should be used in circumstances when written communication is inappropriate, and a meeting is either not possible or unnecessary. Two-way telephone conversations and teleconferencing for groups of people are appropriate if immediate interaction is required and where a face-to-face meeting is not possible for any reason. Other occasions when telephone conversations are preferable to written

communications or meetings include the following: When time is short, and an instant feedback is required When it is necessary to clarify issues where misunderstandings have occurred, or might occur When politically sensitive or subtle messages need to be conveyed with tact Whenever it is desirable to establish a dialogue (or an informal atmosphere)

Meetings and presentations If a face to face meeting is not possible, internet based teleconferencing might be the solution. These may involve several participants and the use of the internet. Computer workstation connectivity between participants can allow presentations to be given in the

form of a virtual face to face meeting. Formal presentations are usually used in meetings when imparting detailed information to a group of people. Presentations may also be delivered through teleconferencing or via the internet. Presentations usually benefit from the support of visual aids, such as flip charts, white boards, or software packages. Ideas and concepts are clearly explained with the use of visuals, such as graphs, diagrams, quotes and bullet points. These are an effective way to highlight important points and assist the audience in retaining key information.

Spreadsheets Spreadsheets are versatile and powerful software tools. They can allow easy and accurate storage and processing of detailed numerical information, including a wide range of formulae, financial functions and chart functions which are most useful to financial and cost accountants. The applications for which spreadsheets are useful for accountants include the following examples: Budgets and cash flow forecasts; using =SUM and cell references, in other words =A1

5.2.2 ACCURACY (LITERACY AND NUMERACY)

Databases Databases are powerful software tools for storing, processing, updating and retrieving large amounts of data, such as customer lists, stock items, price lists, non-current asset registers, and customer / supplier accounts. Databases allow information to be stored by field, record and file. These can be searched, updated, retrieved and manipulated quickly and easily. An example could be a customer database which is divided into the following two main files: Customers owing >= $1,000 Customers owing < $1,000

A file is a collection of records (in other words - customer names). Records contain single pieces of data known as fields. Such a file structure is shown below. File: Customers owing >= $1,000 Record: Customer name Field A: Address Field B: Telephone number Field C: Amount owing In this database the accountant can retrieve from the relevant customer file, a particular customer record and update fields A, B or C at any time, or these fields can be updated automatically from another linked programme this is known as an integrated database. Rules can be set within the database to move records from one file to another. For example, if the customer balance field C were to fall below $1,000, the record could be automatically transferred to the file called Customers owing < $1,000. The accountant can use databases to work more effectively by allowing large amounts of data to be easily and logically stored, constantly kept up-to-date and instantly retrieved.

5.2.3 FLEXIBILITY
A professional accountant should be able to work flexibly. This is important because many tasks are interdependent, or demanding deadlines have to be met, and may arise at short notice. Accountants must be flexible either to meet their employers needs, or to satisfy clients. They must be responsive to the demands of others, and could be required to carry out a wide range of tasks. Time management skills and clear communication are essential.

This is in order to fully convey and understand the objectives and scope of each task, and to satisfy the client/employer. When accepting a task or project, you must be able to deliver the results on time (managing the other demands on your time also), and remember to make it clear if you need more time or additional resources. Plan each task or assignment undertaken. As a task progresses, you should be prepared to flex the plan according to new information that is discovered. There will be occasions when, due to circumstances beyond the accountants control, a deadline cannot reasonably be met. This will not only mean a change to the assignment plan, but also the change will need to be communicated (and the reasons for it) to the client (or your line manager). There will also be occasions when the accountant will be required to work additional hours to ensure that deadlines are met or meetings take place when convenient for the majority. Flexibility also means being able to work with a variety of people, in different situations, and accepting that things cannot always be easy. Flexibility is not simply having the ability to perform many different tasks, but also having the attitude that enables you to adapt to different situations.

5.2.4 CO-OPERATIVENESS
Linked to flexibility, professionals need to cooperate and liaise courteously and effectively with colleagues, managers, clients and external parties, such as potential investors, taxation authorities and regulatory bodies etc. They should also be able to manage, resolve or refer conflicts when they arise. Accountants are part of a team who produce, communicate and report financial information. It is essential to cooperate both internally and externally of the organisation, with managers, colleagues, clients and other authorities. The professional accountant is employed to provide finance related services, and is expected to be responsive to the needs of others. The accountant must be mindful of the time and resources available, and manage the expectations of others (in other words, not take on work that they will be unable to perform competently).

In order to work effectively, you will need to obtain information from a variety of sources. This will require cooperation between you and those that provide the information, to ensure that the relevant information is received, accurately and on time. At times, the accountant may also be required to cooperate with third parties such as auditors or tax authorities, in order to enable their employing organisations to comply with legal obligations. Accountants also need to know when and to whom they must report or submit information. This was covered to some extent under legal obligations in Section 3.6 on reporting and filing requirements. They may also, as part of their professional duties, be required to report certain matters to higher authorities under particular circumstances.

5.2.4 CO-OPERATIVENESS
Accountants like other professionals should always be aware of their reporting responsibilities within an organisation. This means knowing the following: Who you immediately report to (your line manager) and your reporting responsibilities Who reports to you (if applicable) and their reporting responsibilities Who else to keep informed of activities, problems or performance issues as they arise Who to refer situations of conflict or disagreement to, in the event of a conflict arising and remaining unresolved through the usual channels

Conflicts and their resolution In many organisations where resources are scarce, deadlines are tight and demands placed on human resources are pressurised, conflicts can often arise. The professional is expected to deal with these situations in a manner which is consistent with the five fundamental principles, particularly objectivity and professional behaviour. Conflict can be defined as an incompatibility of goals or values between two or more parties in a relationship. The common sources of conflict will now be examined.

5.2.4 CO-OPERATIVENESS
Economic conflict involves competing for scarce resources such as can happen when budgets are being negotiated and set. Value conflict involves disagreements caused by differing personal values,

perceptions, attitudes and beliefs. This will be covered in more detail in Section 6. Power conflict occurs when each party wishes to increase or maximize the amount of influence that they can exert in a relationship. In business conflicts this can arise between people of different levels within a management structure or between those of equivalent official status, but usually occurs because one party wishes to impose their will over colleagues, to gain or increase control. Most conflicts involve a mixture of sources. For example, budgetary negotiations typically involve economic competition, but may also take the form of a power struggle between managers or subordinates. Ineffective communication can create unnecessary conflict. Lack of skills in communicating in a clear, respectful and sensitive fashion often results in confusion, hurt and anger, all of which can create or escalate conflict. Sometimes conflict or resentment can arise due to a lack of, or perceived lack of, communication. In addition, parties may have different perceptions about the facts of a situation. It is only when they properly share information and clarify their perceptions that the conflict can begin to be resolved.

5.2.4 CO-OPERATIVENESS
Types of conflict Interpersonal Role Intergroup

Interpersonal conflict occurs when two individuals have incompatible needs, goals, or approaches in their relationship. Communication breakdown is often an important source of interpersonal conflict and learning effective communication skills is invaluable

in preventing and resolving such difficulties. Personality or value based conflicts are caused by differences in approach or style in working with people that are not resolvable. For example, if both parties in a relationship have a high need for power and both want to be dominant in the relationship, a power struggle can occur. Role conflict involves differences or amibiguities in role definitions, expectations or responsibilities between individuals who are interdependent in an organisation. If there is lack of clarity in job roles in an organisation or unclear boundaries of responsibilities, then conflict can occur, which can bring about negativity or unwillingness to co-operate. This type of conflict can often be confused with interpersonal conflict, and resolution is therefore more complicated. This type of conflict is avoided if specific roles and responsibilities are very clearly laid out and understood by all. Intergroup conflict occurs between departments or teams in the same organisation and between management groups. This type of conflict is often the result of departments becoming isolated from each other or competing with each other. Competition for scarce resources or comparisons between working conditions and perceived inequalities are often common sources of intergroup conflict. The costs of intergroup conflict can be high in both economic and social terms for individuals, and destructive for the organisation as a whole. Methods of Conflict Resolution Regardless of the source of conflict, it can result in alternative outcomes depending on the approach taken. If conflict can be managed creatively, solutions can be found that are mutually satisfactory to both parties. Sometimes this will involve a re-distribution of resources or power that is perceived as being fairer, or it may be resolved by increasing the available resources. Creative outcomes are more likely when the parties are interdependent, and where both are open to see the benefit from a given solution. There are three general strategies which have been identified to resolve conflict; winlose, lose-lose, and win-win (originally from Blake, Shepard & Mouton, 1964). The win-lose approach can be described as the 'fixed quantity' assumption. The assumption is that, in resolving a conflict, one party gains and the other must lose. The outcome is determined by the relative power and influence that the one party can exert over the other. Sometimes, this is done through agreed formal social mechanisms such as voting, the acceptance of the legitimate authority of the manager, or accepting the decision of a judge or arbitrator. The win-lose approach can be achieved by less open or legitimate means such as through threat, innuendo or inducement such as bribes.

The lose-lose approach is essentially a compromise. This is a passive approach where to avoid conflict, both sides accept a less than ideal solution. Each party therefore only gets some of what it wants. The win-win approach is a more open, proactive approach towards maximizing the goals of both parties, through collaborative problem solving. A win-win approach often requires a completely fresh look at the situation and a thorough exploration of the causes of conflict and exploring a range of solutions. The win-win approach requires a very high degree of innovation and a maturity of attitude. The win-win approach often requires people to take a wider view of the overall objectives of the organisation and recognise how individual or team cooperation is essential to achieving common goals.

6.1 INTRODUCTION
When facing a difficult dilemma at work is it enough for a professional accountant to obey the law and adhere to fundamental principles of professional ethics? Having a good knowledge of the law and applying fundamental principles of professional ethics may not in every instance provide sufficient guidance on what exactly to do. Personal values and personal integrity play a part in the process.

6.2 RULES V PRINCIPLES Should conduct and behaviour be guided by rules or by principles? This is an important debate in accounting regulation and in financial reporting. For clarity, we need to define what is meant by these terms: A rule externally compels someone, through force, threat or punishment, to do the things someone else has deemed good or right. People obey or break rules. A principle internally motivates people to do the things that seem good and right. People develop principles by working and living with people with similar principles and seeing the positive consequences and real benefits of appropriate conduct. Having detailed rules is simpler and more effective as it ensures that accountants comply with requirements precisely and behave appropriately. However, if a set of overriding principles are agreed upon and believed in, then such detailed rules arent always necessary. Professionals would know how to behave in a given situation by applying their personal values and integrity to interpret the principles to the specific circumstances that they face and by arriving at the right decision naturally. Although rules can be detailed, they cannot cover every situation - they could not be fully applicable or clear. It may be necessary to rely on a set of general principles for guidance in addition to the rules which are prescribed. There are laws and professional codes of conduct that must be complied with, but a professionals behaviour and actions should also be determined by the broader consequences and what is morally right, derived from accepted principles. Failures in accounting and financial reporting in the cases of Enron, Worldcom, Parmalat and the global banking crisis were not necessarily due to accountants breaking rules and regulations, but to a lack of consideration of the broader consequences. Practices such as creative accounting are based on a belief that as long as the letter of the law

and accounting regulations are complied with, then all is well. This demonstrates a fundamentally immature attitude to ethics and business. This attitude perceives rules as barriers or obstacles to be overcome and fails to recognise that wider principles are usually involved. This is not a view which is morally or ethically acceptable.

6.2 RULES V PRINCIPLES

Example: An accounting rule states that inventory must be shown on the statement of financial position at the lower of cost or net realisable value (NRV). This rule tells the accountant (for example, in a manufacturing company) that if the selling price of an item is less than its full cost, then a loss must be written down immediately through reducing the value of the inventory and reducing gross profit. The rule also gives specific guidance on how the respective valuations of the full cost and the net realisable value of the inventory should be arrived at. A rules focused accountant facing a self-interest or intimidation threat might be motivated to avoid an inventory write-down and to maintain gross profit in the companys, and possibly in the shareholders, short-term interests. Their attitude might be to try and justify, through a particular interpretation of the rule, possibly relating to the calculation of conversion costs, that the cost of the inventory itself is lower than it really is. They might also examine ways in which the application of different cost formulae could be used to achieve this end or may look further for supporting evidence to justify that NRV is higher than it really is. From a legal and professional perspective some people may be of the view that taking this approach would be acceptable. A principles based accountant is more likely to adopt a different perspective. They would demonstrate integrity, objectivity and professional competence in assessing the economic substance of the situation rather than merely the legal form. They would apply the accounting concept of prudence which would guide them not to explore ways to overstate NRV or understate costs and they would write off the loss, unless it was economically justified to do otherwise. Such an accountant would therefore adopt a principle to guide them to the right decision rather than use or hide behind any complexity or exploit loopholes within particular rules to justify a decision that in principle might otherwise be wrong.

6.3 THE MAIN ETHICAL THEORIES As already explained in this module, professional behaviour is mainly restricted to what complies with the law and with fundamental principles. However at the third level of the decision filter explained in the introduction to this module, there is further scope to make choices of behaviour as guided by your own personal values. Personal values relate to standards of behaviour that human beings should uphold in the many situations in which they find themselves, as friends, parents, children, citizens, teachers, professionals, etc. There are two fundamental questions in identifying which ethical standards to uphold: 1. What should personal values be based on? 2. How should these values be applied in specific situations? Many philosophers and ethicists have tried to answer these critical questions. They have suggested different sources of ethical standards: Consequentialism A popular way of viewing personal ethics is to consider the consequences of decisions or your actions for other people and yourself. Using this theory it is necessary to consider the effect decisions will have and attempt to evaluate these effects. Generally, this way of thinking determines that an action is right if it leads to the most benefit or pleasure and the least pain for the greatest number of people. This is sometimes known as utilitarianism As an accounting example, a trainee accountant processing accounting entries should strive to work as accurately as possible and minimise errors, because inaccuracy and errors cause negative consequences through creating extra work for themselves and colleagues. Errors and inaccuracies need to be detected and corrected and can lead to unreliability and delay. It is therefore beneficial for all to minimise errors even if it takes more time and effort to do so. Duty to others Another view of personal ethics is based on duty to others. It determines what is right by examining the behaviour or act itself, rather than the consequences of the behaviour as in

consequentialism above. In this approach to ethics people are expected to behave out of a duty to act according to the rules and obligations as generally expected by society or by the profession to which someone may belong. Using the above accounting example, the trainee accountant is expected to process accounting entries accurately because a professional accounting trainee is simply expected to do so by his employers, by the professional body to which they belong and by society at large, regardless of the actual consequences of this behaviour. A simple way to understand the difference between these two ethical perspectives is to think of lying as an act. Consequentialists might consider a lie to be ethical in certain situations, but only if by doing so more benefits than harm would come to all those involved. Under the duty to others perspective, lying would always be thought of as being wrong within most societies. Mirror test Once you have ensured that your behaviour complies with legal requirements and professional standards, you can use a reflective approach or a mirror test to apply these ethical perspectives in quite a practical way. Imagine you are looking in a mirror and asking yourself these questions: If I take this course of action what will happen? In other words what implications will my decision have on people who are affected by my decisions such as clients, customers and investors? What will others think if I take this course of action others including friends, family, my manager, my professional association or the media, etc? Is my decision right personally, or do I have a moral obligation to do this? - What does my conscience or my instinct tell me? The mirror test reinforces the idea that you are responsible for your own behaviour and you must therefore consider both the consequences of your actions and their moral acceptability before you act.

6.4

APPLYING PERSONAL AND ETHICAL VALUES TO

DECISION-MAKING AT WORK
Any of the above approaches can help us determine which standards of behaviour can be considered ethical. Firstly, we may not agree on the interpretation of these approaches in every situation. For example, we may not agree which option benefits the most or harms the fewest, or which method is the most generally accepted as being right and best upholds our duty to others. Secondly the two main approaches (consequentialism and duty to others) may not both answer the question 'What is ethical?' in the same way. Nonetheless, each approach gives a framework with which to determine what is ethical in a particular circumstance and more often than not, rather than conflicting, the two different approaches often lead to similar answers and decisions. Example: A production manager is responsible for a production budget and can potentially earn an additional bonus for minimising production costs and coming in below budget. Recently he was told informally by a supplier at a social event that the price for the most heavily used material at the factory will definitely be reduced by 10% during the next year, as the result of a recent official regulatory decision, to be announced shortly in the media. The production manager has been asked to prepare next years budget urgently for the Production Director, so that the overall budgetary targets for the company may be finalised. As he has not heard officially about the price reduction at the time of submitting the budget, the production manager includes the current years material cost price as the budgeted cost and bases his total costs on this, knowing that this will build some slack into his budget when the price reduction eventually comes through. Discuss the reasons for and against, from one of the two main ethical perspectives above?

Perspective: ConsequentialismDuty to Others

Reasons:

Introduction First of all, from a legal or even professional conduct perspective it could be argued that the production manager is within his rights to submit the budget incorporating the current prices rather than the expected lower prices. He has not been told in any official capacity that these prices will be reduced. The decision has not yet been formally announced and in theory there is an argument for not revising the budget until more is known or until anything is finally confirmed. This might be described as a rules based approach. But what if this decision were analysed from either of the two main personal ethics perspectives discussed above? 1. Consequentialism:

This approach focuses on outcomes or consequences, and specifically, maximising the good and minimising any harm resulting to most people. It is likely that keeping the original material costs within the budget will benefit a relatively small number of people, namely the production manager, who is more likely to receive a profit-related bonus by coming in under budget when the prices are reduced. However, the budget for production costs will be less accurate than it would be if it were to include the anticipated, lower material costs. If the original figures are submitted, other stakeholders including more senior managers and directors, will have inaccurate information on which to base resource allocation and pricing decisions. Shareholders would also prefer the budgets to be more accurate, so that the company can be run more effectively. Inaccurate information in the budget about material costs may also lead to higher costs to customers, who will presumably have to pay higher prices for longer, than might have been the case if the correct, lower, materials costs had been included in the original budget.

2.

Duty to others:

Someone thinking of their duty to others, including their profession, would consider how the manager should act, without focusing on the effects. If the manager has been issued with rules to follow when preparing the budget, then these should be followed. In the absence of such rules, it could be argued that most people would consider that the manager has a duty to those relying on information in the budget, and therefore, the budget should be as accurate as possible. Therefore, the right thing to do would be to include the most likely (lower) cost of materials in the budget, adding a note to explain any doubts the manager has about this. Knowingly concealing relevant information about future material prices when preparing a production cost budget would be perceived by others, including the accounting profession, as being morally wrong.

6.5 MAKING ETHICAL DECISIONS Making ethical decisions requires the legal aspects and professional ethics to be considered first, to eliminate any options which are either illegal or unprofessional. The remaining options require interpretation through personal values. This process can benefit from exploring the ethical aspects of a decision in a structured method and weighing up the considerations of taking each course of action. The more difficult and unusual the ethical choices faced, the more helpful it is to discuss the dilemma as long as the fundamental principle of confidentiality is not breached. By careful exploration of the problem, aided by the insights and different perspectives of others, it is possible to make better ethical choices. The following framework for ethical decisions is a useful method for exploring ethical dilemmas and identifying ethical courses of action.

6.6 FRAMEWORK FOR ETHICAL DECISION-MAKING In Section 4.5 a framework for ethical decision-making was introduced which can help someone identify alternative courses of action in specific circumstances or when facing ethical dilemmas: The framework contained the following five questions: What are the relevant facts?

What are the ethical issues involved? Which fundamental principles are being threatened? Do internal procedures exist that mitigate the threats? What are the alternative courses of action?

This framework will now be used to analyse a case study introduced in Section 7. The case study will require you to put yourself in the role of an accountant working in a small organisation who faces some difficult choices and has to decide what to do next. The accountant will have to take into account legal, professional and personal factors when coming to their decisions and will have to reflect on their actions once they have finished.