Through managerial accounting, organizations receive the information they need so that they can plan, make decisions, and oversee business processes. Although an organization’s accounting statements (both internal and external) should fully and transparently reflect the organization’s actual financial situation, sometimes they do not. Sometimes there is intentional deception or fraud. Yet, even when an organization uses legal and accepted accounting practices, accounting statements may fail to present risks or explain unusual costs, profits, or assumptions. In this Discussion, you will consider your professional experience to recommend ways to ensure ethical responsibility within an organization.
Think about a time in your professional experience when a decision was made based on inaccurate accounting information or unethical behavior resulting in fraudulent information. If you do not have professional experience directly related to accounting and decision making, research a situation in which inaccurate or fraudulent accounting information was provided by a company. Consider the outcomes of utilizing fraudulent accounting information for decision making and research how to avoid such situations.
Post your proposed recommendations for ensuring ethical responsibility within an organization, to include the following:
Describe the situation from either your professional experience or your research in which unethical or fraudulent behavior occurred. If you are describing an example from experience, please do not report real names of either the company or individuals. If you are using an example from research, you must include the reference and citation of the source.
As a manager, explain the steps you would have taken or did take to address the described unethical behavior. What methods or techniques could have been used to both detect and mitigate the described situation?
As a manager, propose what actions you could take to help prevent situations of unethical or fraudulent behavior in managerial accounting.
Sample Answer
Ensuring Ethical Responsibility in Managerial Accounting
The integrity of managerial accounting information is vital for sound planning and decision-making. When this information is inaccurate or fraudulent, it can lead to devastating consequences for an organization and its stakeholders. Here are recommendations for ensuring ethical responsibility, based on a representative case and proposed managerial actions.
Description of Unethical or Fraudulent Behavior
I will describe a researched example of fraudulent accounting information: the HealthSouth Corporation scandal of the early 2000s.
Situation: Richard Scrushy, the CEO of HealthSouth, along with other senior executives, directed employees to inflate the company’s reported earnings to meet Wall Street expectations. This fraud was systematic, lasting several years, and involved altering financial statements by:
Manipulating Revenue and Expense Accounts: Falsely boosting recorded revenue and reducing recorded expenses. The key mechanism was recording fictitious income in a reserve account, which was later transferred to an income account to manipulate earnings per share (EPS).
Misleading Financial Users: The fraudulent reporting created the illusion of a profitable and rapidly growing company, enabling the company to secure financing, artificially inflate its stock price, and ensure executives received substantial performance-based bonuses.
Outcome: The deception ultimately led to a restatement of earnings by over $2.7 billion . The fraud devastated shareholder value, led to numerous executive resignations and criminal prosecutions (including the CEO, though he was later acquitted of all accounting fraud charges), and fundamentally destroyed the company's credibility.
Managerial Response to Address the Unethical Behavior
As a manager or executive tasked with addressing this situation after detection, I would have taken the following steps to detect and mitigate the fraud:
1. Immediate Action and Investigation (Mitigation)
Halt and Secure: Immediately suspend any individuals identified as participating in the fraud and restrict their access to all financial records and systems. Secure all digital and physical documents.
Independent Investigation: Appoint an independent external forensic accounting firm and legal counsel (reporting directly to the Audit Committee or Board, not management) to conduct a thorough investigation to quantify the full extent of the misstatement and identify all culpable parties.
Public Transparency: Immediately issue a public statement (a restatement if necessary) clearly outlining the discovered issues, the steps being taken, and the potential impact on prior financial statements.
2. Detection and Mitigation Methods
Mandatory Rotation of Personnel (Detection/Mitigation): Implement a policy requiring the mandatory rotation of accounting personnel in sensitive areas (like accounts receivable, general ledger) every 3-5 years. The HealthSouth fraud was sustained because the same small group of executives and accountants had continuous control over the accounts.
Continuous Auditing (Detection): Implement Continuous Auditing/Monitoring (CA/CM) systems that use data analytics to automatically search for anomalies, such as:
Unusual or round-number journal entries posted after the typical accounting close date.
Significant reserve account transfers that lack clear, verifiable documentation.
Large, unexplained fluctuations between budgeted figures and actual managerial reports.
Strengthen Internal Controls (Mitigation): Enforce strict Segregation of Duties (SoD). No single individual should have control over initiating, recording, and reconciling a transaction. In the HealthSouth case, too few executives controlled the reporting process.