
Concept explainers
1)
Introduction:
The Statement of Ethical Professional Practice of Institute of
- The Statement of Ethical Professional Practice of Institute of Management Accountants is a guideline of the various principles and policies regarding the ethical obligations of the members of the Institute of Management Accountants.
- It comprises of the Principles of the Institute of Management Accountants, Standards of the Institute of Management Accountants and the course of Action prescribed by the Institute of Management Accountants in resolving ethical conflicts.
If revision of proposal violates the Statement of Ethical Professional Practice of Institute of Management Accountants.
1)

Answer to Problem 31C
Solution:
The revision of proposal is in violation of the Statement of Ethical Professional Practice of Institute of Management Accountants since the fundamental and overarching ethical principles of Institute of Management Accountants, i.e., Honesty, Fairness, Objectivity, and Responsibility were violated when the proposal was revised to present a fraudulent
Explanation of Solution
- In the given scenario, the proposal to purchase the third business jet costing $11 Million shows a negative net present value, when prepared fairly and without intent to misrepresent the facts and figures.
- However, the proposal is sought to be revised in a fraudulent manner, such that it favors the personal interests of the director of the company, namely, the opportunity to fly in a bigger aircraft than his superiors.
- Such an action violates the fundamental and overarching ethical principles of Institute of Management Accountants and how each of the principles is violated is explained as follows:
- Honesty − It means the members of the Institute of Management Accountants have to be honest in their dealings with others in professional matters. The Members cannot be a part of business transactions that knowingly carry an element of fraud.
- Since the proposal is sought to be revised in a fraudulent manner, such that it favors the personal interests of the director of the company, the principle of honesty is violated.
- Fairness − It means the members of the Institute of Management Accountants have to be fair in their dealings with others in professional matters. The Members cannot be a part of business transactions that knowingly are unfair or prejudicial to the interests of the members of the Institute or others.
- Since the revised fraudulent proposal favors the personal interests of the director of the company over his professional objectives, the principle of fairness is violated
- Objectivity - It means the members of the Institute of Management Accountants have to be objective in their dealings with others in professional matters. The Members cannot be a part of business transactions without objectively evaluating their responsibilities in their dealings.
- Since the secretary has ignored her professional objectivity and revised the proposal in a fraudulent manner, the principle of objectivity has been violated.
- Responsibility - It means the members of the Institute of Management Accountants have to be responsible in their dealings with others in professional matters. The Members cannot be irresponsible or negligent in their duties and professional matters.
- The secretary is responsible for not carrying out actions that are detrimental to the company, namely preparation of proposals knowing that they contain inaccurate estimates and figures. Hence the principal of responsibility is violated.
Hence, it is explained how revision of proposal violates the Statement of Ethical Professional Practice of Institute of Management Accountants.
2)
Introduction:
The Statement of Ethical Professional Practice of Institute of Management Accountants
- The Statement of Ethical Professional Practice of Institute of Management Accountants is a guideline of the various principles and policies regarding the ethical obligations of the members of the Institute of Management Accountants.
- It comprises of the Principles of the Institute of Management Accountants, Standards of the Institute of Management Accountants and the course of Action prescribed by the Institute of Management Accountants in resolving ethical conflicts.
If the directors’ actions violate the Statement of Ethical Professional Practice of Institute of Management Accountants by dictating how the proposal should be revised.
2)

Answer to Problem 31C
Solution:
The directors’ actions are in violation of the Statement of Ethical Professional Practice of Institute of Management Accountants since the fundamental and overarching ethical principles of Institute of Management Accountants i.e. Honesty, Fairness, Objectivity, and Responsibility are violated when the proposal was revised to present a fraudulent net present value and personal interests of the director are placed over professional duties.
Explanation of Solution
- In the given scenario, the proposal to purchase the third business jet costing $11 Million shows a negative net present value, when prepared fairly and without intent to misrepresent the facts and figures.
- However, the proposal is sought to be revised in a fraudulent manner, such that it favors the personal interests of the director of the company, namely, the opportunity to fly in a bigger aircraft than his superiors.
- The director tells the secretary to begin the proposal with a positive net present value of $100,000 whereas the actual net present value of the proposal to purchase the third jet is negative and detrimental to the interests of the company.
- Such an action violates the fundamental and overarching ethical principles of Institute of Management Accountants and how each of the principles is violated is explained as follows:
- Honesty − It means the members of the Institute of Management Accountants have to be honest in their dealings with others in professional matters. The Members cannot be part of business transactions that knowingly carry an element of fraud.
- Fairness − It means the members of the Institute of Management Accountants have to be fair in their dealings with others in professional matters. The Members cannot be part of business transactions that knowingly are unfair or prejudicial to the interests of the members of the Institute or others.
- The act of intentionally misrepresenting the facts and figures of a business proposal solely favoring the director’s personal interests over his professional duties is in blatant disregard and violation of the principles of Honesty and Fairness.
- Objectivity - It means the members of the Institute of Management Accountants have to be objective in their dealings with others in professional matters. The Members cannot be part of business transactions without objectively evaluating their responsibilities in their dealings.
- Since the director has ignored his professional objectivity and ordered the revision of the proposal in a fraudulent manner, the principle of objectivity has been violated.
- Responsibility - It means the members of the Institute of Management Accountants have to be responsible in their dealings with others in professional matters. The Members cannot be irresponsible or negligent in their duties and professional matters.
- The director is responsible for not carrying out actions that are detrimental to the company, namely ordering the preparation of proposals knowing that they contain inaccurate estimates along with incorrect and intentionally misleading figures of cost savings and net present value. Hence the principal of responsibility is violated.
Hence it is explained how the directors’ actions violate the Statement of Ethical Professional Practice of Institute of Management Accountants.
3)
Internal Control
- Internal controls refer to the systems and processes implemented by an organization to reduce errors and frauds that can occur in the course of the business on a day to day basis.
- Internal controls are primarily implemented to mitigate the risks of errors and frauds as well as ensure chain of authority and responsibility and business systems are functioning the way they are intended to.
- Formulation and Implementation is primarily the responsibility of the management and along with reviewing and monitoring the internal controls and analyzing the variances and deviations if any from expected results.
Internal controls that can be implemented to prevent unethical behavior

Answer to Problem 31C
Solution:
Internal controls that can be implemented to prevent unethical behavior are:
- Segregation of Duties,
- Access and Logical Controls,
- Periodic Audits,
- Approval Mechanism,
- Reconciliation and
Variance Analysis .
Explanation of Solution
- Internal controls refer to the systems and processes implemented by an organization to reduce errors and frauds that can occur in the course of the business on a day to day basis and seek to mitigate the risks of errors and frauds as well as ensure business systems are functioning the way they are intended to.
- Segregation of Duties means that the duties and responsibilities of a particular function of an organization such as Accounts Payable, Cash management etc. should be delegated and distributed so that one person does not have too many responsibilities.
- To prevent unethical behavior, this can be implemented by ensuring there is rotation of duties and shuffling of resources across functions periodically along with decentralization of power at the upper management level.
- Access and Logical Controls refer to checks and entry mechanisms that act as a deterrent to unauthorized access and ensure that access is granted to those persons who are authorized to do so.
- To prevent unethical behavior, this can be implemented by ensuring there is password protection for access to systems, biometric entry etc. along with periodic monitoring of access logs with justifications for discrepancies.
- Periodic Audits assist in review of the results of business process and help in detection of irregularities and gross deviations as compared to the expected results. Audits are usually conducted by third parties to ensure independence.
- To prevent unethical behavior, this can be implemented by ensuring there are regular internal and external audits conducted on a periodic as well as spontaneous basis. Findings and results of the audits must be dealt with appropriately and disciplinary measures must be enforced if required.
- Approval Mechanisms refer to delegation of authority at varying levels in order to ensure that there is a check on carrying out actions that are authorized by the required authorities and are hence checked before execution.
- To prevent unethical behavior, this can be implemented by ensuring there are clearly defined and documented approval mechanisms and there are sufficient measures to ensure expenses, reimbursements and all monetary transactions of the vice president must receive requisite approvals from higher management.
- Reconciliation and Variance Analysis facilitate comparison of actual results of business processes with the expected analysis and assist in variance analysis of deviations if any.
- To prevent unethical behavior, this can be implemented by ensuring there are periodic reviews and
reconciliation statements to reconcile the expenses incurred against budgeted estimates and major variances and deviations if any.
Hence specific internal controls have been identified to prevent unethical behavior.
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Chapter 13 Solutions
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