MODULE

2
Week 2 THE PROFESSIONAL ENVIRONMENT OF
COST MANAGEMENT

INTRODUCTION
Module 2 is all about the role of the management accountant in
an organization, the code of ethics/conduct in the discharge of his role and the
organizations that governs the issuance of international certifications available to him.

INTENDED LEARNING OUTCOMES

Students are expected of the following upon completion of Module 2:

1. Describe the position of the management accountant in the organization structure of the business
firm
2. Explain the role and the relationship between the Chief Financial and the Controller
3. Describe the functions and responsibilities of the Controller as the top management accountant
4. Explain the role and the relationship between the Chief Financial Officer and the Treasurer
5. Describe the functions and responsibilities of the Treasurer
6. Understand the ethical standards for management accountants
7. Realize the need for a company code of conduct
8. Be familiar with typical ethical challenges that management accountants encounter
9: Describe the international certifications that are available to management accountants

CONTENT

ORGANIZATION STRUCTURE AND THE MANAGEMENT ACCOUNTANT

Many of the activities constituting the field of management accounting are interrelated and
thus must be coordinated, ranked and implemented by the management accountant in such
a fashion as to meet the objectives of the organization as perceived by him or her. A major
function of the management accountant is that of tailoring the application of the process to
the organization so that the organization's objectives, short-term and long-term, are
achieved effectively.

Management accounting is intended to include persons involved in such functions as

controllership, treasury, financial analysis, planning, and budgeting, cost accounting, internal
audit, systems, and general accounting. Management accountants thus may have titles as
controller, treasurer, budget analyst, cost analyst, and accountant, among others.

The accounting function is usually "staff’, with responsibility for providing line managers and
also other staff managers, with specialized services. This includes advice and help in the
areas of budgeting, controlling, pricing and special decisions.

Line authority is the authority to command action or give orders to subordinates. Line
managers are directly responsible for attaining the objectives of the business firm as
efficiently as possible. Sales and production managers typically have line authority. Staff
authority is the authority to advise but not command others; it is exercised laterally or
upward. Staff managers give support, advice and service to line departments. Examples of
staff authority are found in personnel, purchasing, engineering and accounting.

Except for exercising line authority over his department, the chief accounting officer usually
the controller generally fills the staff role in his company as contrasted with the line roles of
sales and production executives. Theoretically, the controller transmits the best accounting
procedures to be followed by the line people to the President who will communicate such
through a manual of instructions. In practice however, the controller holds delegated
authority from top line management to direct the line people on how to apply these
procedures. This is known as function authority which is the right to command action,
laterally or downward with regard to a specific function or specialty.

THE CHIEF FINANCIAL OFFICER AND THE CONTROLLER

The chief financial officer (CFO) - also called the finance director in many countries-is the
executive responsible for overseeing the financial operations of an organization. The
responsibilities of the CFO vary among organizations, but they usually include the following
areas:

Controllership - includes providing financial information for reports to managers and reports
to shareholders and overseeing the overall operations of the accounting system.

Treasury - includes banking and short- and long-term financing, investments, and
management of cash.

Risk management - includes managing the financial risk of interest-rate and exchange-rate
changes and derivatives management.

Taxation - includes income taxes, sales taxes, and international tax planning.

Internal audit - includes reviewing and analyzing financial and other records to attest to the
integrity of the organization's financial reports and to adherence to its policies and
procedures.
In some organizations, the CFO is also responsible for information systems. In other
organizations, an officer of équivalent rank to the CFO - called the chief information officer-
is responsible for information systems

The controller (also called the chief accounting officer) is the financial executive primarily
responsible for management accounting and financial accounting. This module focuses on
the controller as the chief management accounting executive. Modern controllers do not do
any controlling in terms of line authority except over their own departments. Yet, the
modern concept of controllership maintains that the controller does control in a special
sense. That is, by reporting and interpreting relevant data (problem-solving and: attention-
directing roles), the controller exerts a force or influence that impels management toward
making better-informed force or influence that impels management toward making better-
informed decisions

The Controller as the Top Management Accountant

Controllership is the practice of the established science of control which is the process by
which management assures itself that the resources are procured and utilized according to
plans in order to achieve the company's objectives.

In most organizations, the top managerial accounting position is held by the controller. The
controller provides reports for planning and evaluating company activities (e.g, budgets and
performance reports) and provides the information needed to make management decisions
(e.g, decisions related to construction of a new factory or decisions related to adding or
dropping a product). The controller also has responsibility for all financial accounting reports
and tax filings with the Bureau of Internal Revenue and other taxing agencies, as well as
coordinating the activities of the firm's external auditors.

Note that one of the areas reporting to the controller’s office is cost accounting. Most
medium-sized and large manufacturing companies have such a department. Cost
accountants estimate costs to facilitate management decisions and develop cost information
for purposes of valuing inventory.

The controller is an integral part of the top management team. If one wants a high-level
career in management accounting, he/she will need not only strong accounting skills but
also skills required of all high-level executives. These skills include excellent written and oral
communication skills, solid interpersonal skills and a deep knowledge of the industry in
which the firm competes.

The controller's authority is basically staff authority in that the controller's office gives
advice and service to other departments. However, in his own department, he has line
authority. In the modern concept of controllership, it is maintained that the controller does
control in a special sense. That is, by reporting and interpreting relevant data, the controller
exerts a force or influence that impels management toward logical decisions consistent with
objectives.

Basic Functions of Controllership

The basic principal functional responsibilities and activities of controllership may be

categorized as follows:
1. Planning. Establish and maintain an integrated plan of operation consistent with the
company's goals and objectives, both short and long term, analyzed and revised, as required,
communicated to all levels of management, with appropriate systems and procedures
installed.

2. Control. Develop and revise standards against which to measure performance and provide
guidance and assistance to other members or management in insuring conformance of
actual results to standards.

3. Reporting. Prepare, analyze, and interpret financial results for utilization by management
in the decision-making process, evaluate the data with reference to company and unit
objectives; prepare and file external reports as required to satisfy government regulatory
bodies, shareholders, financial institution, customers, and the general public.

4. Accounting. Design, establish, and maintain general and cost accounting systems at all
company levels, including corporate, divisional, plant, and unit to properly record all
financial transactions in the books of accounts and records in accordance with sound
accounting principles with adequate internal control.

5. Other Primary Responsibilities. Manage and supervise such functions as taxes, including
interface with the respective taxing authorities and agents; maintain appropriate
relationships with internal and external auditors; develop and maintain systems and
procedures; develop record retention programs; supervise assigned treasury functions;
institute investor and financial public relations programs; office management; and direct
other assigned functions.

As circumstances warrant, there may be many deviations from the basic functions just
described. It should be pointed out that the controller's efforts should not be diluted and
render him less effective by assigning to him unrelated functions of an operational nature.
The financial planning and control functions are too important to the success of the business
enterprise to burden the controller with activities that others can perform.

Qualifications of the Controller

The qualifications of an effective controller wound include:

1. An excellent technical foundation in accounting and finance with an understanding and

thorough knowledge of accounting principles.

2. An understanding of the principles of planning, organizing, and. control.

3. A general understanding of the industry in which the company competes and the social,
economic, and political forces involved.

4. A thorough understanding of the company, including its technologies, products, policies,

objectives, history, organization, and environment.

5. The ability to communicate with all levels of management and a basic understanding of
the other functional problems related to engineering, production, procurement, industrial
relations, and marketing.

6. The ability to express ideas clearly in writing or in making informative presentations.

7. The ability to motivate others to achieve positive action and results.

The controller may have the technical capability and be able to lay out the assigned tasks as
well as supervise and direct his personnel, but he must also have integrity and the ability to
communicate if he is to succeed. He must be fair, reasonable, and sincere with all concerned
if he is to be recognized for the importance of the controllership function.

As in any executive position, the controller must be able to work with people at all levels,
have respect for the ideas and opinions of others, and have the resourcefulness, to meet all
challenges.

THE CHIEF FINANCIAL OFFICER AND THE TREASURER

Although organizational structures vary from firm to firm, the role of finance is assigned to
the Chief of Financial Officer (CFO) or the Vice President-Finance who reports to the
President.

The financial vice-president's key subordinates are the Treasurer and the Controller.

Treasurership

Treasurership is concerned with the acquisition, financing and management of assets of a

business concern to maximize the wealth of the firms for its owners.

In addition to the position of the controller, many companies have a position called
treasurer. The treasurer has custody of cash and funds invested in various marketable
securities. In addition to money management duties, the treasurer generally responsible for
maintaining relationships with investors, banks, and other creditors. Thus, the treasurer
plays a major role in managing cash and marketable securities, preparing cash forecasts and
obtaining financing from banks and other lenders. Both the controller and the treasurer
report to the chief financial officer (CFO) who is the senior executive responsible for both
accounting and financial operations.

In most firms the treasurer has the following responsibilities:

1. Funds Procurement

This involves raising of funds in accordance with the firms planned capital structure. This
responsibility may require negotiating for loans, short-term or long-term, issuing equity of
debt instruments at the best terms and conditions possible.

2. Banking and Custody of Funds

This involves direct management of cash and cash equivalents and maintenance of good
relations with banks and other non-bank institution.

3. Investment of Funds

This involves management of the company's placements and securities or purchase of debt
or equity instruments such as ordinary or preference shares in other corporate entities. This
responsibility also includes analysis of decisions related to investment in property, plant and
equipment.

4. Operating Responsibilities related to

(a) Credit and Collection

 (b) Inventory Management

(c) Corporate pension and retirement fund

(d) Investor Relations

(e) Insurance

(f) Compliance with legal and regulatory provisions relating to funds procurement,
use and distribution as well as coordination of the finance function with accounting
function.

ETHICAL STANDARDS FOR MANAGEMENTACCOUNTANTS

In recent years, many concerns have been raised regarding ethical, behavior in business and
in public life. Allegations and scandals l of unethical conduct have been directed toward
managers in virtually all segments of society including government, business, charitable
organizations, and even religion. Although these allegations and scandals have received a lot
of attention, it is doubtful that they represent a wholesale breakdown of the moral fiber of
the nation. After all, hundreds of millions of transactions are conducted every day that
remain untainted. Nevertheless, it is important to have an appreciation of what is and is not
acceptable behavior in business and why. Fortunately, the Institute of Management
Accountants (IMA) of the United States has developed a very useful ethical code called the
Standards of Ethical Conduct for Practitioners of Management Accounting and Financial
Management. Even though the standards were specifically developed for management
accountants, they have much broader application.

Code of Conduct for Management Accountants

The Institute of Management Accountants (IMA) issued the Standards of Ethical Conduct for
Practitioners of Management Accounting and Financial Management. There are two parts to
the standards. The first part provides general guidelines for ethical behavior. In a nutshell,
the management accountant has ethical responsibilities in four broad areas namely

1. to maintain a high level of professional competence,

2. to treat sensitive matters with confidentiality,

3. to maintain personal integrity, and

4. to be objective in all disclosing.

The second part of the standards gives specific guidance concerning what should be done if
an individual finds evidence of ethical misconduct within an organization.

The ethical standards provide sound, practical advice for management accountants and
managers. They require professional behavior, especially in avoiding conflicts of interest.
They require management accountants to bring bad news to attention of their supervisors,
and to work competently.

Most of the rules in the ethical standards are motivated by a very practical consideration - if
these rules were not generally followed in business, then the economy could come to a halt.
The following are examples of the consequences of not abiding by the standards:
1. Suppose employees could not be trusted with confidential information. Top managers
would therefore be reluctant to distribute confidential information within the company. This
could result to decisions being made based on incomplete information and could lead to
deterioration of operations.

2. Suppose employees accept bribes from suppliers. Then contracts would tend to go to
suppliers who pay the highest bribe rather than to the most competent suppliers. Would
you like to fly in an airplane whose wings were made by the subcontractor who was willing
to pay the highest bribe to a purchasing agent?

3. Suppose the CEOs or presidents of companies routinely lied in their annual reports to
shareholders and grossly distorted financial statements. If the basic integrity of the
company's financial statement could not be relied on, investors and creditors would have
little basis for making informed decisions. Rational investors would suspect the worst and
would pay less for securities issued by companies. As a result, less funds would be available
for productive investments and many firms might be unable to raise any funds at all. This
ultimately, would lead to slower economic growth, fewer goods and services, and higher
prices.

As these examples suggest, if ethical standards were not generally adhered to, there
would be undesirable consequences for everyone. Following ethical rules such as those in
the Standards of Ethical Conduct for Practitioners of Management Accounting and
Financial Management is not just a matter of being "nice"; it is absolutely essential for the
smooth functioning of an advanced market economy.

Standards of Ethical Conduct for Practitioners of Management Accounting and Financial

Management

Practitioners of management accounting and financial management have an obligation to

the public, their profession, the organization they serve, and themselves, to maintain the
highest standards of ethical conduct. In recognition of this obligation, the Institute of
Management Accountants has promulgated the following standards of ethical conduct for
practitioners of management accounting and financial management. Adherence to these
standards, both domestically and internationally, is integral to achieving the Objectives of
Management Accounting. Practitioners of management accounting and financial
management shall not commit acts contrary to these standards nor shall they condone the
commission of such acts by others within their organizations.

Competence. Practitioners of management accounting and financial management have

responsibility to:

 Maintain an appropriate level of professional competence by ongoing development

of their knowledge and skills.
 Perform their professional duties in accordance with relevant laws, regulations, and
of their knowledge and skills.
 Prepare complete and clear reports and recommendations after appropriate
analysis technical standards of relevant and reliable information.

Confidentiality. Practitioners of management accounting and financial management have a

responsibility to:
  Refrain from disclosing confidential information acquired in the course of their work
except when authorized, unless legally obligated to do so.
 Inform subordinates as appropriate regarding the confidentiality of information
acquired in the course of their work and monitor their activities to assure the
maintenance of that confidentiality.
 Refrain from using or appearing to use confidential information acquired in the
course of their work for unethical or legal advantage ether personally or through
third parties

Integrity. Practitioners of management accounting and financial management have a

responsibility to:

 Avoid actual or apparent conflicts of interest and advise all appropriate parties of
any potential conflict.
 Refrain from engaging in any activity that would prejudice their ability to carry out
their duties ethically.
 Refuse any gift, favor, or hospitality that would influence or would appear to
influence their actions.
 Refrain from either actively or passively subverting the attainment of the
organization's legitimate and ethical objectives.
 Recognize and communicate professional limitations or other constraints that would
preclude responsibility judgment or successful performance of an activity.
 Communicate unfavorable as well as favorable information and professional
judgments or opinions.
 Refrain from engaging in or supporting any activity that would discredit the
profession.

Objectivity. Practitioners of management accounting and financial management have a

responsibility to:

 Communicate information fairly and objectively.

 Disclose fully all relevant information that could reasonably be expected to influence
an intended user's understanding of the reports, comments, and recommendations
presented.

Resolution of Ethical Conflict. In applying the standards of ethical conduct, practitioners of

management accounting and financial management may encounter problems in identifying
unethical behavior or in resolving an ethical conflict. When faced with significant ethical
issues, practitioners of management accounting and financial management should follow
the established policies of the organization bearing on the resolution of such conflict. If
these policies do not resolve the ethical conflict, such practitioner should consider the
following courses of action:

 Discuss such problems with the immediate superior except when it appears that the
superior is involved, in which case the problem should be presented initially to the
next higher managerial level. Lf a satisfactory resolution cannot be achieved when
the problem is initially presented, submit the issues to the next higher managerial
level.
 If the immediate superior is the chief executive officer, or equivalent, the acceptable
reviewing authority may be a group such as the audit committee, executive
 committee, board of directors, board of trustees, or owners. Contact with levels
above the immediate superior should be initiated only with the superior's
knowledge, assuming the superior is not involved. Except where legally prescribed,
communication of such problems to authorities or individuals not employed or
engaged by the organization is not considered appropriate.
 Clarify relevant ethical issues by confidential discussion with an objective advisor
(e.g, IMA Ethics Counseling Service) to obtain a better understanding of possible
courses of action.
 Consult your own attorney as to legal obligations and rights concerning the ethical
conflict.
 If the ethical conflict still exists after exhausting all levels of internal review, there
may be no other recourse on significant matters than to resign from the
organization and to submit and informative memorandum to an appropriate
representative of the of the organization. After resignation, depending on the nature
of the ethical conflict, it may also be appropriate to notify other parties.

COMPANY CODE OF CONDUCT

Ethical standards serve a very important practical function in an advanced market market
economy. Without widespread adherence to ethical standards, material living Standards
would fall. A former president of CMA emphasizes the importance of

“Employees like to work for a company that they can trust. Customers like to deal
with an ethically reliable business. Suppliers like to sell to firms with which they can
have a real partnership. Communities are more likely to cooperate with
organizations that deal honestly and fairly with them. If the business community is
to function effectively, all of the players need to act ethically."

It is unfortunate though, that some companies place so much emphasis on short term profits
that may make it seem like the only way to get ahead is to act unethically.

Those who engage in unethical behavior often justify their actions with one or more of the
following reasons

(1) the organization expects unethical behavior,

(2) everyone else is unethical, and/or

(3) behaving unethically is the only way to get ahead.

To counter the first justification for unethical behavior, many companies have adopted
formal ethical codes of conduct. These codes are generally broad-based statements of a
company's responsibilities to its employees, its customers, its suppliers and the community
in which the company operates. Codes give broad guidelines rather than that spell out
specific do's and don'ts or suggest proper behavior in a specific situation. Companies with a
strong code of ethics can create strong customer and employee loyalty. While liars and
cheats may win occasion, their victories are often short-term. Companies in business for the
long-term find that it pays to treat all of their constituents honestly and loyally.

TYPICAL ETHICAL CHALLENGES

Ethical issues can confront management accountants in many ways. Here are two examples:
Case A.

Roger Cruz, a management accountant, knows that reporting a loss for a software division
will result in yet another series of layoffs, and has concerns about the commercial potential
of software for which R&D costs are currently being capitalized as an asset rather than being
shown as an expense for internal reporting purposes. The division manager argues that the
new product will be successful and profitable but presents little evidence to support her
argument. The last two products from this division have been unsuccessful. The
management accountant has many friends in the division and wants to avoid a personal
confrontation with the division manager.

Case B:

A packaging supplier, bidding for a new contract, offers the management accountant of the
purchasing company an all-expense paid weekend to the Boracay Resort. The supplier does
not mention the new contract when giving the invitation. The accountant is not a personal
friend of the supplier. He knows cost issues are critical in approving the new contract and is
concerned that the supplier will ask for details about bids by competing packaging
companies.

In both cases, the management accountant is faced with an ethical dilemma. Case A involves
competence, objectivity, and integrity. The management accountant should request that the
division manager provide credible evidence that the new product is commercially viable. If
the manager does not provide such evidence, expensing R&D costs in the current period is
appropriate.

Case B involves confidentiality and integrity. Ethical issues are not always clear-cut. The
supplier in Case B may have no intention of raising issues associated with the bid. However,
the appearance of a conflict of interest in Case B is sufficient for many companies to prohibit
employees from accepting "favors" from suppliers. Figure 2-3 includes the IMA's guidance
on "Resolution of Ethical Conflict." The accountant in Case B should discuss the invitation
with his immediate supervisor.

If the visit is approved, the supplier should be informed that the invitation has been officially
approved subject to his following corporate policy (which includes the confidentiality of
information).

CODES CONDUCT ON THE INTERNATIONAL LEVEL

In July 1990, the International Federation of d Accountants "Guidelines (IFAC) in which the
Philippines through the PICPA is a member, issued the "Guidelines on Ethics for Professional
Accountants" which governs the activities of all professional accountants throughout the
world; regardless of whether they are practicing as independent CPAs, employed in
government service or employed as internal accountants. In addition to outlining ethical
requirements in matters dealing with competence, objectivity, independence, and
confidentiality, the IFACs code also outlines the accountant's ethical responsibilities in
matters relating to taxes, fees and commissions, advertising and solicitation, the handling of
monies and cross- border activities. Where cross-border activities are involved, the IFAC
ethical requirements must be followed if these requirements are stricter than the ethical
requirements of the country in which the work is being performed.
The Board of Accountancy of the Professional Regulation Commission approved the
implementation of the Revised Code of Ethics for Professional Accountants in the Philippines
effective January 1, 2016.

INTERNATIONAL CERTIFICATIONS

The three certifications available to management accountants are as follows:

 Certificate of Management Accounting (CMA)

 Certificate in Public Accounting (CPA)
 Certificate in Internal Auditing (CIA)

CMA. A Certified Management Accountant is one who has passed the rigorous qualifying
examination, has met an experience requirement, and participates in continuing educations.
The CMA Certificate is granted by the Institute Management Accountants (IMA).

CPA. A Certified Public Accountant is one who has met the pre-qualification educational
requirements, passed the CPA licensure examinations given by the Professional Regulatory
Board of Accountancy and has satisfied all other legal and regulatory requirements of a
public accountant. The CPAs main responsibility is to provide assurance concerning the
reliability of the information contain in the firm's financial statements.

CIA. Since one of the management control responsibilities of the management accountant is
to develop effective systems to detect and prevent errors and fraud in the accounting
records, it is common for the management accountant to have strong ties to the control-
oriented organization such as the Institute of Internal Auditors (IA) granting Certification in
Internal Auditing (CIA). To attain the status of Certified Internal Auditor an individual must
pass a comprehensive examination designed to ensure technical competence and have the
required number of years of work experience.

INSTITUTE OF MANAGEMENT ACCOUNTANTS (IMA)

Management accountants have gained status in recent years as they now spend more time
analyzing a company's operations and less with the problems of recording and computing
costs of products. The Institute of Management Accountants (IMA), the principal
organization of management accountants in the United States, has instituted a program to
provide certifications for management accountants and financial managers. The Certified
Management Accountant (CMA) examination was first given in 1972. A listing of the
required subject areas in the CMA examination indicates the breadth of knowledge expected
of the professional management accountant. The examination consists of the following four
parts: Economics, Finance, and Management; Financial Accounting and Reporting;
Management Reporting, Analysis and Behavioral Issues; and Decision Analysis and
Information Systems. The Certified in Financial Management (CFM) examination was first
given in 1996. The CFM examination is similar to the CMA examination with one major
difference: the Financial Accounting and Reporting section is replaced with Corporate
Financial Management. The IMA also promulgated a code of ethics for management
accountants, with is discussed in the previous section.

The Institute of Management Accounting (IMA) is a professional organization that publishes

the monthly magazine Strategic Finance. Since 1973, the IMA has conducted a
comprehensive examination to test the knowledge a management accountant must have to
be successful in a complex and fast-changing business world. More than 3,000 individuals
take the exam each year. Those who pass the exam are issued a Certificate in Management
Accounting and are proud to indicate the designation CMA on resumes and business cards.
For details on student and professional memberships in the IMA and for information on the
CMA examination, visit the IMA Web site.

One of contributions of the IMA is the development of standards of ethical conduct conduct
and maintenance of an ethics hotline that members can call to discuss ethical conflicts. One
may also visit the IMA website to review these ethical standards

PHILIPPINE ASSOCIATION OF MANAGEMENT ACCOUNTANT (PAMA)

PAMA was established in 1972 as the National Association of Accountants (NAA) Philippine
Chapter, Inc. It is affiliated with NAA in New York. It was founded primarily to provide its
members with educational and professional activities that supplement in the knowledge of
management accounting practices and methods.

Monthly technical meetings, seminars and workshops are held to present relevant and
current topics by leading speakers from the government, private and educational sectors.
The open forum provides the nerve for the exchange of ideas and experiences among the
participants and the speakers. Publication of technical materials is also part of the
Association's efforts to service its members.

To propagate and professionalize Management Accounting in 'the Philippines, PAMA

Conducts the Certificate in Management Accounting (CMA) Program through its continuing
education arm, the Philippine Institute of Management Accounting (PIMA). Basic objectives
of the program are:

1. To establish management accounting as a recognized profession by identifying the

role of the management accountant and the underlying body of knowledge, and by
outlining a course of study by which such knowledge can be acquired.

2. To foster higher educational standards in the field of management accounting.

3. To assist employees, educators and students by establishing an objective measure

of an individuals knowledge and competence in the field of management accounting.