Ethical issues in controllers' work

Seminararbeit, 2016

26 Seiten, Note: 2,00



1. Introduction

2. Controllers and ethics
2.1. What is a controller
2.2. Role Transformation
2.3. Importance of ethics in controllers' work

3. Ethical issues in controllers’ work and possible solutions
3.1. Goal incongruences through role conflicts between different levels of organizational structure
3.1.1. Role conflict as a reason for goal incongruences
3.1.2. Solutions for goal incongruences
3.2. The creation of budgetary slacks
3.2.1. The ethical dilemma with budgetary slacks
3.2.2. Solutions for preventing budgetary slack Decouple budgeting and target setting from employees forecasts Bonus systems that reward realistic forecasting Employing controllers according to their personality
3.3. Shareholder value orientation VS long-term success orientation
3.4. Issues concerning third parties

4. Preventing unethical Behaviour - Ethics in Accounting Education
4.1. Why did Accounting Education fail?
4.2. How to teach ethics?

5. Scrutinizing the conception of ethics

6. Conclusion

I References

1. Introduction

Since managers were confronted with the problem of governing extensively extended organizations by some facile mechanisms, instruments and other means, they constituted the professional area of controlling. The main objective of controlling thereby should be to govern and direct organizations and their business actions by financial as well as non‑financial information. Because of its easier interpretability financial information until now is still considered as the fundamental instrument of corporate governance, however, non‑financial information nowadays is more and more considered with increasing importance.

Although this conception of numerical leadership seems to be an innovation nobody in the 21st century wants to miss anymore, it has also a downside. As numerous, more or less grave incidents within the last decades give evidence, sole numerical leadership by the usage of operating numbers and driven by the endeavour of profit maximization regularly comes in conflict with ethical and moral behaviour. At least since the Enron scandal in 2001, which illustrates the absolute worst case of unethical behaviour in controlling and auditing and which is responsible for the loss of billions of dollars as well as thousands of jobs, the society became aware of the hazards that come along with unethical controlling techniques.

This case study is tied to this critical approach to controlling and endeavours to show some conflicting points where controlling, driven by the objective of profit maximization, leads to unethical and/or even hazardous behaviour. Taking this deliberation one step further we also try to show possible solutions to prevent or alleviate such unethical behaviour and make a critical appraisal of them. Furthermore we will focus on how ethical values should be educated to ensure conformity of managers’ future business decisions with ethical values.

In a last step we endeavour to show, that the conception of ethical behaviour itself constitutes not an absolute measure for assessing economical behaviour. Ethical behaviour is rather a relative way of thinking than an absolute one i.e. what is ethical for one part does not need to be considered as ethical for the other part. Thus it is important to know that there exist some points of view from which controllers’ unethical behaviour may be considered as ethically correct.

2. Controllers and ethics

In recent years Controller and Controller’s work became a more and more important managerial function within many companies. Nowadays you rarely can find a major enterprise without a Controller, but there is still a “Controller-Gap” in small and middle sized companies, as well as in the public administration.

Controlling and Ethics are two frequently discussed and used notions. But where is the coherence between these two terms or to put it in another way what has Controlling to do with Ethics? In this section therefore we first clarify the job description of a Controller and explain how their work changed over time and second we define what Ethics mean and why they are that important in Controllers’ Work.

2.1. What is a controller

Controller is a widespread apprehension everybody already heard it, but only the fewest are able to elucidate it. The definition of a Controller as well as their assignments continuously changed over time. Jackson 1949 said that “...the basic function of the controller is to take accounting out of its strait jacket so that it can be used by practical management.” Whereas Goodman 1975 claims that the “controller is the financial executive of a large or medium sized corporation who combines the responsibilities...” Horvath in 2000 ultimately defined controlling as a cross-functional control concept with the purpose of event-orientated coordination of planning, control and the supply of information to improve the executive ability of an organization. Once more there is no rigorous fixed definition in business literature. However it is incontestable that this role steadily gained in celebrity.

There are two major fields in which every controller has to assume. First his role as an advisor by supporting line-managers with their decision making and control functions and for the purpose of management executives exoneration (the so called service management field) and second his role as a supervisor where it is crucial to ensure that everyone complies with the law, acts ethical and notably in the best interest of the whole organization (Compare Merchant & Van der Stede, 2012). This two responsibility areas could also lead to a role conflict which will be elaborated later. Controllers are the mainly responsible persons and experts in respect of external financial reporting, management control systems and internal control. In smaller firms they also assume the provision of capital as well as money and risk management. Though in middle-sized and especially large companies, the latter tasks are undertaken separately by a so called Treasurer (Compare Merchant & Van der Stede, 2012). Generally all controlling tasks can be derived from business goals and encourage profit and sales increase within the organization. It is agreed upon in various literature sources that planning, supervision and the provision as well as the examination of information are the key aspects of controlling.

2.2. Role Transformation

The origins of Controlling come down to the 15th century where Controller already been assigned to supervise the in- and outgoing flows of funds and goods at the English royal court. In America the first utilization of the term controller occurs in the 18th century with the purpose to monitor the national budget and expenditures. In German-speaking Europe the prevalence of Controlling then started in the mid-1950s. Whereas controller had to deal with surveillance and scrutiny of finance and accounting in the initial period meanwhile their assignment spilled over to strategic aspects (Compare Gary, 2013).

In the U.S. Fligstein (1990) compartmentalize the history of CEO’s into the following three stages:

- The manufacturing conception of control (~1915-1925): First the professional background of CEO’s focuses on the manufacturing process. It was tried to ensure an own totally stable and independent production by vertical integration, binding contracts and monopolies and cartels.
- The sales and marketing conception of control (~1925-1955): Once strict regulations concerning monopolies, cartels, binding contracts and so on (e.g. vertical integration) arose. This was the beginning of another way of thinking about ensuring sales: “The success will proceed if the company will sell its own products. Therefore they needed a strong marketing. Manufacturing faded from the spotlight and sales & marketing become more important.
- The finance conception of control (started ~1955): Just as the market was saturated, companies hardly could continue being successful in an uniform manner. Thus they needed to expand their business over a big variety of branches to diversify the risk of bad times within one branch. This is why a company thenceforth needed CEO’s with a professional background in finance, because of their numbers affinity they namely had a broad overview over all branches within a company. At the same time is deemed to be the beginning of Management Accountants and companies started to create shareholder value by emitting shares on stock exchanges.

2.3. What are ethics?

Today ethics are counted among the most important matters within the business world. Every Manager should be familiar with the fundamental grasp of ethics to determine morally reasonable behaviour and to distinguish between ‘right’ or ‘wrong’ – ethical or unethical (Compare Merchant & Van der Stede, 2012). Once more there is no universal correct definition of ethics “but in a general sense ethics is defined as the systematic study of conduct based on moral principles, reflective choices, and standards of right and wrong conduct” (Wheelwright 1959 cited in Onyebuchi, 2011, p. 275). To act ethically means that every individual should have consideration for the influence which certain behaviour entails, not only for other persons but also for animals and the environment. Especially a controller should be able to make right decision without worrying about the consequences. That implies that there always will be a battle between acting in the company’s best interest and doing what is ethically right.

To clarify what is meant when talking about ethics nearly each company has already adopted a written code of ethics or professional behaviour guideline to influence the viewpoint and actions of their employees. Typically a promising code of ethics should cover the following three main points (Compare Montoya & Richard, 1994):

- Draw up moral values stipulated by the company itself,
- Acquaint employees with the prior defined scheme; and then
- Show both insiders and outsiders that the company pursues morally accurate targets.

If the implementation of such a code of ethics was successful unethical behaviour will be significantly less distinct.

Furthermore there are additional codes and standards elaborated and supervised by different institutes around the world as for instance IMA (Institute of Management Accountants), AICPA (American Institute of Certified Public Accountants), SEC (U.S. Securities and Exchange Commission) or PCAOB (Public Company Accounting Oversight Board). This codes and standards should support business professionals in their decision making process in deference of ethical behaviour.

IMA is the global leader for ethical behaviour regarding to professional management accountants and set its sights on providing “a forum for ... the advocacy of the highest ethical and best business practices in management accounting and finance”. ( They are also offering a free Ethics Helpline for all financial professionals. Honesty, Fairness, Objectivity and Responsibility take top priority and should be followed by all members.

AICPA is notable for the Code of Professional Conduct which was originally adopted in 1988 and revised routinely to the current version of 2014. Its main functions are the preparation of the Generally Accepted Auditing Standards (GAAP), the development of profession principles and defending the professions interests. The Code “consists of principles and rules as well as interpretations and other guidance” regarding the performance of all members professional responsibilities (

SEC is equipped with a specifically Office of the Ethics Counsel which supports and advises all his members and employees among others in personal and financial conflicts of interests. Also the Ethic staff “drafts, comments on, and implements regulations concerning ethical conduct issues” ( Consequently they play an important role within the process of developing and enhancing their code of ethics.

PCAOB pursues with its Ethics Code the maintenance and support of the highest possible standard regarding to ethical behaviour and “to provide the public with confidence in the objectivity of the Board’s decisions by seeking to avoid conflicts of interest...” ( Guidelines set in this code provides the foundation for ethical rules and behaviour.

2.3. Importance of ethics in controllers' work

The ultimate ambition of each company is profiteering which not always harmonizes with ethical behaviour. Controllers thus are responsible to find the right compound of both constants.

There are various types of people and different reasons why humans tend to behave unethically. The first group of people is simply ruthless and do not care about other people and the consequences of their actions. They prefer to act in the easiest way, no matter if they make a right or wrong decision. Secondly some people are not able to perceive occurring ethical issues. Therefore they do not feel bad and belief that they do not have to alter because they are oblivious to do something wrong. Third group indeed knows that their behaviour is not fully ethical but tries to justify certain actions by explaining it to others, such as ‘we need to fulfil the targets otherwise we need to run down staff numbers’. Intimidations like this enables people to act unethically but rarely made them accountable for those actions. Fourthly and finally there are people who exactly know that they are doing something wrong, but do not worry about that false decisions, because they fear their personal consequences. Frequently employees get excluded or even fired because of acting not fully in the organizations best interest although their actions definitely correspond to ethical behaviour. Relatives of the latter group are definitely not qualified for controller’s work (Compare Merchant & Van der Stede, 2012).

Another essential causing of unethical behaviour is that the salary of controllers and managers usually is bound to a bonus system. In such a case they have to decide how to behave. Would they act ethical and prejudice their bonus (or even job) or do they decide to act unethically and consequently ignorant just to cinch it?

As happened in the Airshop Case Study (Puyou & Faÿ, 2013) where Airshop (a French airport retailer for luxury goods) lost one of his newest points of sale in consequence of a terminal collapse. The CFO decided not to alter the forecasts, because he considers that the debauchment of one point of sale would not have any impact to the overall business. Sales instead will increase within the other shops but he did not observe the circumstance how much this incident affects the employees on site who have to reorganize businesses while they were still confronted with unmodified targets.

3. Ethical issues in controllers’ work and possible solutions

3.1. Goal incongruences through role conflicts between different levels of organizational structure

Through different levels in organizations’ structure and different interests between single employees, like business unit controllers and the organization as a whole, represented by the higher management, it is possible that also targets may drift apart. If these not convenient or even contrary targets appear, this situation is called goal incongruence. As a controller this problem is likely to appear because of the duality between different roles on different levels of the organizational structure.

3.1.1. Role conflict as a reason for goal incongruences

Business unit controllers experience a role conflict between their function as a “watchdog” and an “advisory” within the company. This conflict has a great impact on the quality and truth of financial reporting. For that reason it is important to know why such conflicts appear and how they can be turned away. The roles of a controller can be separated in a “functional responsibility” and a “local responsibility”. In the functional role, the controller is seen as a “watchdog”, responsible for the whole company control and an objective report of the business unit. The local role includes the task to offer information to the unit manager for operational and strategic decisions. (Compare Maas, V. S., Matjka, M., 2009, p. 1234)


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Ethical issues in controllers' work
Leopold-Franzens-Universität Innsbruck  (Institut für Organisation und Lernen - Bereich Management Accounting)
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BSc MSc Alexander Moßhammer (Autor), 2016, Ethical issues in controllers' work, München, GRIN Verlag,


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