When Cost Can Kill Ethical Challenges Facing Cost Accountants

Ukleja Center for Ethical Leadership, CSULB2 Why do cost accountants need ethics? What are the consequences of unethical cost accounting behavior? Why do cost accountants need ethics? What are the consequences of unethical cost accounting behavior?

Ukleja Center for Ethical Leadership, CSULB3 Constant Dilemma: Cost control vs. Ethical behavior Wall Street and investor demand for profit – tight cost control Postpone maintenance Reduce workforce and employee training Expedite new product introduction without sufficient testing Use litigation to avoid environmental cleanup Wall Street and investor demand for profit – tight cost control Postpone maintenance Reduce workforce and employee training Expedite new product introduction without sufficient testing Use litigation to avoid environmental cleanup

Ukleja Center for Ethical Leadership, CSULB4 Constant Dilemma: Cost control vs. Ethical behavior Can cost cutting go too far? Illegal practice Human rights violation Environmental violation Can cost cutting go too far? Illegal practice Human rights violation Environmental violation

Ukleja Center for Ethical Leadership, CSULB5 When cost can kill! British Petroleum: 2005 Texas City oil refinery explosion, 15 dead, 80 injured Contributor: “High-level decision to defer overhaul, cut staff and rein in cost” General Electric: Over 1.3 million pounds of PCB's were dropped in the Hudson river by GE. Exxon Mobil: Oil spill in Brooklyn British Petroleum: 2005 Texas City oil refinery explosion, 15 dead, 80 injured Contributor: “High-level decision to defer overhaul, cut staff and rein in cost” General Electric: Over 1.3 million pounds of PCB's were dropped in the Hudson river by GE. Exxon Mobil: Oil spill in Brooklyn

Ukleja Center for Ethical Leadership, CSULB6 Overview I. Standards of Ethical Conduct II. Cost Accounting Ethical Dilemmas III. Procedures to Resolve an Ethical Dilemma IV. Measures to Prevent Unethical Conduct I. Standards of Ethical Conduct II. Cost Accounting Ethical Dilemmas III. Procedures to Resolve an Ethical Dilemma IV. Measures to Prevent Unethical Conduct

Ukleja Center for Ethical Leadership, CSULB7 I. Ethics & Management Accountants Ethics: Branch of philosophy concerned with the nature of ultimate value and the standards by which human actions can be judged right or wrong. Britannica Concise Encyclopedia IMA principles: Ethics: Branch of philosophy concerned with the nature of ultimate value and the standards by which human actions can be judged right or wrong. Britannica Concise Encyclopedia IMA principles: Honesty Fairness Objectivity Responsibility

Ukleja Center for Ethical Leadership, CSULB8 I. Ethics & Management Accountants Standards of Ethical Conduct for Management Accountants by Institute of Management Accountants (IMA) Competence Confidentiality Integrity Credibility

Ukleja Center for Ethical Leadership, CSULB9 Competence Members have a responsibility to: Maintain an appropriate level of professional expertise by continually developing knowledge and skills Perform their professional duties in accordance with relevant laws, regulations, and technical standards Maintain an appropriate level of professional expertise by continually developing knowledge and skills Perform their professional duties in accordance with relevant laws, regulations, and technical standards

Ukleja Center for Ethical Leadership, CSULB10 Competence (continued) Members have a responsibility to: Provide decision support information and recommendations that are accurate, clear, concise, and timely Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity Provide decision support information and recommendations that are accurate, clear, concise, and timely Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity

Ukleja Center for Ethical Leadership, CSULB11 Confidentiality Members have a responsibility to: Keep information confidential except when disclosure is authorized or legally required. Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates’ activities to ensure compliance. Refrain from using confidential information for unethical or illegal advantage Keep information confidential except when disclosure is authorized or legally required. Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates’ activities to ensure compliance. Refrain from using confidential information for unethical or illegal advantage

Ukleja Center for Ethical Leadership, CSULB12 Integrity Members have a responsibility to: Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest. Advise all appropriate parties of any potential conflict. Refrain from engaging in any conduct that would prejudice carrying out duties ethically Abstain from engaging in or supporting any activity that might discredit the profession. Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest. Advise all appropriate parties of any potential conflict. Refrain from engaging in any conduct that would prejudice carrying out duties ethically Abstain from engaging in or supporting any activity that might discredit the profession.

Ukleja Center for Ethical Leadership, CSULB13 Credibility Members have a responsibility to: Communicate information fairly and objectively Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law. Communicate information fairly and objectively Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.

Ukleja Center for Ethical Leadership, CSULB14 II. Cost Accounting Ethical Dilemmas The role of Cost Accountants in corporate decision-making Planning and budgeting Project cost-benefit analyses Performance report after implementation The role of Cost Accountants in corporate decision-making Planning and budgeting Project cost-benefit analyses Performance report after implementation

Ukleja Center for Ethical Leadership, CSULB15 Dilemmas Examples A. Cost control A1. Labor cost A2. Regular maintenance and repair cost A3. Environmental cleanup cost B. Cost estimates C. Cost reporting D. Performance measure A. Cost control A1. Labor cost A2. Regular maintenance and repair cost A3. Environmental cleanup cost B. Cost estimates C. Cost reporting D. Performance measure

Ukleja Center for Ethical Leadership, CSULB16 A1. Labor cost Measures to reduce labor cost Outsource to overseas Reduce healthcare coverage Cut workforce and employee training Use illegal immigrants and below minimum wage pay Measures to reduce labor cost Outsource to overseas Reduce healthcare coverage Cut workforce and employee training Use illegal immigrants and below minimum wage pay

Ukleja Center for Ethical Leadership, CSULB17 A1. Labor cost Wal-Mart 2003: 245 illegal immigrants arrested; they were hired to clean the stores by cleaning companies contracting with Wal-Mart. General Motors 2007: plans to eliminate 30k of its 113k US hourly factory positions while expanding in India and China Wal-Mart 2003: 245 illegal immigrants arrested; they were hired to clean the stores by cleaning companies contracting with Wal-Mart. General Motors 2007: plans to eliminate 30k of its 113k US hourly factory positions while expanding in India and China

Ukleja Center for Ethical Leadership, CSULB18 A1. Labor cost Any good example of labor control? Mittal Steel Promise of no layoff Profit-sharing Our people is our culture Any good example of labor control? Mittal Steel Promise of no layoff Profit-sharing Our people is our culture

Ukleja Center for Ethical Leadership, CSULB19 A2. Maintenance cost Cut or delay regular maintenance and repair costs for immediate boost in bottom line Myopic behavior with higher future remedy cost Unsustainable cost cutting that adds noise in earnings signal Cut or delay regular maintenance and repair costs for immediate boost in bottom line Myopic behavior with higher future remedy cost Unsustainable cost cutting that adds noise in earnings signal

Ukleja Center for Ethical Leadership, CSULB20 A3: Environmental cost Prevention Evaluate and select suppliers and pollution control equipment Design process and products Evaluate environmental risk Recycling Detection Environmental auditing and inspection Testing and measurement for contamination Prevention Evaluate and select suppliers and pollution control equipment Design process and products Evaluate environmental risk Recycling Detection Environmental auditing and inspection Testing and measurement for contamination

Ukleja Center for Ethical Leadership, CSULB21 A3: Environmental cost Internal failure: Pollution control and toxic waste management Licensing facilities for pollution External failure: Cleaning up polluted water and soil Cleaning up oil spill Settling personal injury claims Damaging ecosystem Loose sales due to reputation Internal failure: Pollution control and toxic waste management Licensing facilities for pollution External failure: Cleaning up polluted water and soil Cleaning up oil spill Settling personal injury claims Damaging ecosystem Loose sales due to reputation

Ukleja Center for Ethical Leadership, CSULB22 A3: Environmental costs Environmental cost report and product costing Companies that saved millions by reducing or eliminating environmental impact GM Commonwealth Edison Andersen Corp. Xerox Europe Environmental cost report and product costing Companies that saved millions by reducing or eliminating environmental impact GM Commonwealth Edison Andersen Corp. Xerox Europe

Ukleja Center for Ethical Leadership, CSULB23 B. Cost estimates Under-estimate R&D costs Under-estimate break-even points for new products Under-estimate time to test and launch new products Over-estimate chance of FDA or other regulatory approval Under-estimate R&D costs Under-estimate break-even points for new products Under-estimate time to test and launch new products Over-estimate chance of FDA or other regulatory approval

Ukleja Center for Ethical Leadership, CSULB24 Cost estimates Airbus Jumbo airplane A380, maiden flight 4/27/ , estimated BE point: , estimated BE point: , estimated BE point: 420 What’s the difference between legitimate estimation error and false reporting? Airbus Jumbo airplane A380, maiden flight 4/27/ , estimated BE point: , estimated BE point: , estimated BE point: 420 What’s the difference between legitimate estimation error and false reporting?

Ukleja Center for Ethical Leadership, CSULB25 Cost estimates Factors contribute to estimation errors: Unforeseen circumstance in design, testing, labor market, legal environment, supply, economy, corporate politics and bureaucracy As the company learns and revise its estimates: DISCLOSE immediately Factors contribute to estimation errors: Unforeseen circumstance in design, testing, labor market, legal environment, supply, economy, corporate politics and bureaucracy As the company learns and revise its estimates: DISCLOSE immediately

Ukleja Center for Ethical Leadership, CSULB26 C. Cost reporting Falsely report capital investment progress Falsely report cost of new product R&D or clinical trial Over-report cost for cost-plus pricing Falsely report capital investment progress Falsely report cost of new product R&D or clinical trial Over-report cost for cost-plus pricing

Ukleja Center for Ethical Leadership, CSULB27 D. Performance measure For each of the following common performance measures, construct a scenario to game the system. Sales Net income Residual income Return on investment (ROI) Economic-value-added (EVA) Balanced score-card For each of the following common performance measures, construct a scenario to game the system. Sales Net income Residual income Return on investment (ROI) Economic-value-added (EVA) Balanced score-card

Ukleja Center for Ethical Leadership, CSULB28 III. Before You Blow the Whistle Steps you can take before resignation What can you expect for whistle blowing? Laws that protect whistleblower. Steps you can take before resignation What can you expect for whistle blowing? Laws that protect whistleblower.

Ukleja Center for Ethical Leadership, CSULB29 Steps you should consider Report it to higher management If the higher (or highest) management personnel are involved in the unethical behavior, talk to the Chief Ethics Officer, ethics or audit committee Consult a lawyer Resign Blow the Whistle Report it to higher management If the higher (or highest) management personnel are involved in the unethical behavior, talk to the Chief Ethics Officer, ethics or audit committee Consult a lawyer Resign Blow the Whistle

Ukleja Center for Ethical Leadership, CSULB30 Outside Sources IMA ethics helpline: AICPA: ethics decision tree If you must below the whistle, make sure you have the proper evidence to support your claim. IMA ethics helpline: AICPA: ethics decision tree If you must below the whistle, make sure you have the proper evidence to support your claim.

Ukleja Center for Ethical Leadership, CSULB31 What can you expect for whistle blowing? Get fired Lose your house and savings Smeared reputation Unable to find another job Long and tiresome lawsuit Get fired Lose your house and savings Smeared reputation Unable to find another job Long and tiresome lawsuit

Ukleja Center for Ethical Leadership, CSULB32 Legislation on ethics Securities and Exchange Act 1933 and 1934 Foreign Corrupt Practices Act of 1977 FIDCA Improvement Act of 1991 Private Securities Litigation Reform Act of 1995 Federal False Claims Act Sarbanes-Oxley Act of 2002 Securities and Exchange Act 1933 and 1934 Foreign Corrupt Practices Act of 1977 FIDCA Improvement Act of 1991 Private Securities Litigation Reform Act of 1995 Federal False Claims Act Sarbanes-Oxley Act of 2002

Ukleja Center for Ethical Leadership, CSULB33 Laws that protect whistleblower. Federal False Claims Act 15% - 25% of settlement proceeds Sarbanes-Oxley Act of 2002 TITLE VIII--CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY Sec Short title. Sec Criminal penalties for altering documents. Sec Debts nondischargeable if incurred in violation of securities fraud laws. Sec Statute of limitations for securities fraud. Sec Review of Federal Sentencing Guidelines for obstruction of justice and extensive criminal fraud. TITLE VIII--CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY Sec Short title. Sec Criminal penalties for altering documents. Sec Debts nondischargeable if incurred in violation of securities fraud laws. Sec Statute of limitations for securities fraud. Sec Review of Federal Sentencing Guidelines for obstruction of justice and extensive criminal fraud. TITLE VIII--CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY Sec Sec Sec Sec Sec TITLE VIII--CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY Sec Sec Sec Sec Sec Sec Protection for employees of publicly traded companies who provide evidence of fraud. Sec Criminal penalties for defrauding shareholders of publicly traded companies. Sec Protection for employees of publicly traded companies who provide evidence of fraud. Sec Criminal penalties for defrauding shareholders of publicly traded companies.Sec Sec. 807.Sec Sec Federal False Claims Act 15% - 25% of settlement proceeds Sarbanes-Oxley Act of 2002 TITLE VIII--CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY Sec Short title. Sec Criminal penalties for altering documents. Sec Debts nondischargeable if incurred in violation of securities fraud laws. Sec Statute of limitations for securities fraud. Sec Review of Federal Sentencing Guidelines for obstruction of justice and extensive criminal fraud. TITLE VIII--CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY Sec Short title. Sec Criminal penalties for altering documents. Sec Debts nondischargeable if incurred in violation of securities fraud laws. Sec Statute of limitations for securities fraud. Sec Review of Federal Sentencing Guidelines for obstruction of justice and extensive criminal fraud. TITLE VIII--CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY Sec Sec Sec Sec Sec TITLE VIII--CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY Sec Sec Sec Sec Sec Sec Protection for employees of publicly traded companies who provide evidence of fraud. Sec Criminal penalties for defrauding shareholders of publicly traded companies. Sec Protection for employees of publicly traded companies who provide evidence of fraud. Sec Criminal penalties for defrauding shareholders of publicly traded companies.Sec Sec. 807.Sec Sec. 807.

Ukleja Center for Ethical Leadership, CSULB34 SOX - continued TITLE IX--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS Sec Short title. Sec Attempts and conspiracies to commit criminal fraud offenses. Sec Criminal penalties for mail and wire fraud. Sec Criminal penalties for violations of the Employee Retirement Income Security Act of Sec Amendment to sentencing guidelines relating to certain white-collar offenses. Sec Corporate responsibility for financial reports. TITLE IX--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS Sec Short title. Sec Attempts and conspiracies to commit criminal fraud offenses. Sec Criminal penalties for mail and wire fraud. Sec Criminal penalties for violations of the Employee Retirement Income Security Act of Sec Amendment to sentencing guidelines relating to certain white-collar offenses. Sec Corporate responsibility for financial reports. TITLE IX--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS Sec Sec. 902 Sec Sec Sec Sec TITLE IX--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS Sec Sec. 902 Sec Sec Sec Sec TITLE IX--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS Sec Short title. Sec Attempts and conspiracies to commit criminal fraud offenses. Sec Criminal penalties for mail and wire fraud. Sec Criminal penalties for violations of the Employee Retirement Income Security Act of Sec Amendment to sentencing guidelines relating to certain white-collar offenses. Sec Corporate responsibility for financial reports. TITLE IX--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS Sec Short title. Sec Attempts and conspiracies to commit criminal fraud offenses. Sec Criminal penalties for mail and wire fraud. Sec Criminal penalties for violations of the Employee Retirement Income Security Act of Sec Amendment to sentencing guidelines relating to certain white-collar offenses. Sec Corporate responsibility for financial reports. TITLE IX--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS Sec Sec. 902 Sec Sec Sec Sec TITLE IX--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS Sec Sec. 902 Sec Sec Sec Sec. 906.

Ukleja Center for Ethical Leadership, CSULB35 SOX - continued TITLE XI--CORPORATE FRAUD AND ACCOUNTABILITY Sec Short title. Sec Tampering with a record or otherwise impeding an official proceeding. Sec Temporary freeze authority for the Securities and Exchange Commission. Sec Amendment to the Federal Sentencing Guidelines. Sec Authority of the Commission to prohibit persons from serving as officers or directors. Sec Increased criminal penalties under Securities Exchange Act of Sec Retaliation against informants. TITLE XI--CORPORATE FRAUD AND ACCOUNTABILITY Sec Short title. Sec Tampering with a record or otherwise impeding an official proceeding. Sec Temporary freeze authority for the Securities and Exchange Commission. Sec Amendment to the Federal Sentencing Guidelines. Sec Authority of the Commission to prohibit persons from serving as officers or directors. Sec Increased criminal penalties under Securities Exchange Act of Sec Retaliation against informants. TITLE XI--CORPORATE FRAUD AND ACCOUNTABILITY Sec Sec Sec Sec Sec Sec Sec TITLE XI--CORPORATE FRAUD AND ACCOUNTABILITY Sec Sec Sec Sec Sec Sec Sec TITLE XI--CORPORATE FRAUD AND ACCOUNTABILITY Sec Short title. Sec Tampering with a record or otherwise impeding an official proceeding. Sec Temporary freeze authority for the Securities and Exchange Commission. Sec Amendment to the Federal Sentencing Guidelines. Sec Authority of the Commission to prohibit persons from serving as officers or directors. Sec Increased criminal penalties under Securities Exchange Act of Sec Retaliation against informants. TITLE XI--CORPORATE FRAUD AND ACCOUNTABILITY Sec Short title. Sec Tampering with a record or otherwise impeding an official proceeding. Sec Temporary freeze authority for the Securities and Exchange Commission. Sec Amendment to the Federal Sentencing Guidelines. Sec Authority of the Commission to prohibit persons from serving as officers or directors. Sec Increased criminal penalties under Securities Exchange Act of Sec Retaliation against informants. TITLE XI--CORPORATE FRAUD AND ACCOUNTABILITY Sec Sec Sec Sec Sec Sec Sec TITLE XI--CORPORATE FRAUD AND ACCOUNTABILITY Sec Sec Sec Sec Sec Sec Sec

Ukleja Center for Ethical Leadership, CSULB36 IV. Measures Company can Take Code of ethics Chief Ethics Officer Ethics committee Ethics hotline Mandatory ethics training Code of ethics Chief Ethics Officer Ethics committee Ethics hotline Mandatory ethics training

Ukleja Center for Ethical Leadership, CSULB37 An open, transparent and ethical corporate culture is much more effective than rules-based approach!