7.2 Resolving Ethical Conflicts & Fraud

The IMA Conflict-Resolution Process

When a member cannot resolve an ethical issue, the IMA Statement prescribes an ordered process. The exam loves to test the correct first step and the correct order.

1. Follow the organization's established policy, including its anonymous reporting or ethics hotline, if one exists. This is always the first move — not going public.
2. If policy does not resolve it (or there is no policy), discuss the issue with your immediate supervisor — unless the supervisor is involved. If so, present the issue to the next higher level.
3. Escalate up the chain as needed: the next manager, then potentially the audit committee, board of directors, or owners.

The IMA expects members to keep the issue confidential to those not involved in resolving it, and to avoid acting on the conflict until it is resolved. Documenting the facts and your communications protects you and clarifies whether the matter is truly an ethics violation or simply a difference in professional judgment — the latter does not, by itself, trigger the resolution ladder.

Outside Advisors and Last Resorts

Alongside the internal chain, the member may:

• Contact the IMA Ethics Helpline (a confidential ethics counselor) to clarify how the standards apply, while keeping the matter confidential from the employer.
• Consult your own attorney about legal rights and obligations.
• As a last resort, if the conflict remains unresolved after exhausting all levels, the member may resign and submit an informative memorandum to an appropriate representative of the organization.

Key trap: the Statement does not instruct the member to immediately notify authorities outside the organization or go to the press. Except where legally required, confidentiality continues during resolution. Choose the escalate-internally-first answer.

What the Member Should NOT Do

The Statement is also explicit about wrong moves. A member should not confront the wrongdoer with threats, comply with an unethical directive "just this once," or quietly fix the numbers without raising the issue. Recording a fraudulent entry while privately documenting an objection is still a violation — participation is participation. The correct path always runs through the resolution ladder, supplemented by the Helpline and legal counsel, ending only in resignation when every internal level has failed.

The Fraud Triangle

Fraud risk is explained by the fraud triangle, three conditions that together make fraud likely.

Of the three, opportunity is the leg management can most directly reduce through internal controls. Some models add a fourth element, capability (the fraud diamond), but the classic triangle is what Part 2 tests.

Types of Fraud

The Association of Certified Fraud Examiners groups occupational fraud into three categories:

• Asset misappropriation — theft or misuse of assets (skimming cash, fake vendors, payroll schemes). It is the most common type but usually the least costly per scheme.
• Financial-statement fraud — intentional misstatement of the financials (overstated revenue, hidden liabilities, channel stuffing). It is the least common but most costly, and is usually committed by senior management to hit targets.
• Corruption — misuse of influence in a transaction: bribery, kickbacks, conflicts of interest, and economic extortion.

Exam tip: revenue recognition manipulation and reserve "cookie-jar" accounting are financial-statement fraud; vendor kickbacks are corruption.

Financial-statement fraud usually involves timing or recognition tricks: recording sales before they are earned, capitalizing costs that should be expensed, or hiding debt off the balance sheet. Asset misappropriation hits the cash and inventory cycles — billing schemes, expense-reimbursement padding, and check tampering. Corruption requires a second party to the scheme (the briber or colluding vendor), which is why segregation of duties alone does not stop it; rotation, mandatory vacations, and vendor audits help.

Red Flags and Whistleblower Considerations

Common Red Flags

• A large gap between net income and operating cash flow (low earnings quality).
• An employee who never takes vacation or refuses to share duties.
• Lifestyle beyond known income; unusually close vendor relationships.
• Frequent journal entries near period-end, missing documents, or many override transactions.
• Management override of controls — the single hardest fraud risk to prevent.

Whistleblowing

Whistleblower protections (notably under Sarbanes-Oxley and the Dodd-Frank Act in the U.S.) shield employees who report suspected fraud from retaliation; Dodd-Frank can pay bounties for tips to the SEC. Even so, the IMA process expects internal escalation first unless the law or the severity of the matter requires otherwise. Balance the duty of confidentiality against the legal duty to disclose.

A practical sequence to remember for both MCQs and essays: (1) clarify the facts and the relevant standard; (2) follow company policy and the internal chain; (3) seek the Helpline and personal legal counsel; (4) keep the matter confidential while resolving it; and (5) resign with an informative memo only as a last resort. Anchoring an essay to these steps, in order, earns the resolution points graders look for.