What are the ethical considerations for accountants who serve as internal consultants? Do they differ from the ethical issues faced by accountants who do not act as internal consultants?

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In some organizations, accountants act as "internal consultants"; they use their knowledge of the company's financial workings to advise the company on financial decisions.

What are the ethical considerations for accountants who serve as internal consultants? Do they differ from the ethical issues faces by accountants who do not act as internal consultants?
Throughout the process, from initial consideration about accepting or continuing a client to issuance of their report, internal consultants are faced with risk. This risk can be thought of as having three components:
· The entity's business risk - The risk that the entity will not survive or will not be profitable.
· The internal consultant's business risk - The risk to the internal consultant from association with the client, consisting of the risk of potential litigation costs and the related effect on the accountant's reputation and the risk of other costs (not related to litigation) such as the effects on fee realization.
· The internal consultant's employment risk - The risk that the internal consultant may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated.

The matters that an accountant may wish to consider in connection with establishing policies and procedures for client acceptance and continuance. The extent to which an accountant may choose to employ any of the following is, with the exception of certain procedures required by generally accepted auditing standards, largely a matter of professional judgment. The discussion of specific policies and procedures is intended to be thought-provoking and useful to a firm in assessing the particular client acceptance and continuance policies and procedures it may consider whether any financial interests or relationships exist that would impair the appearance of the firm's independence from the accountant and preclude its expression of an opinion on the entity's financial statements. The accountant should consider Rule 101 of the AICPA Code of Professional Ethics. For clients that are public companies, the firm should also consider the requirements of the SEC. "

and also,

"Consider any potential conflicts of interest that could result from the acceptance of the position as a consultant". As indicated in the case, one of the accountant in another office has invested in a venture capital fund that owns shares of the common stock. Would this situation constitute a violation of independence of the consultant?.
Before accepting the position as internal consultant, the accountant should consider the following aspects of the company from the ethical perspective:
- Engages in activities indicative of a lack of integrity.
- Is prone to engage in speculative ventures or accept unusually high business risks.
- Displays a poor attitude toward compliance with outside regulatory or legislative obligations.
- Engages in complex transactions or innovative deals that make the determination of the effects on the financial statements difficult to assess or highly subjective.
- Lacks a proven track record.

If the accountant is convinced that his ethical standpoint will not be compromised he can go ahead with accepting the position as internal consultant.

1. What are some of the advantages and disadvantages of traditional product costing systems?
Advantages of the traditional product costing system are that conventional cost accounting systems focus on units of particular products/services. Another advantage is that costs are allocated or "traced" to a product/service because each unit of the product or service is assumed to consume resources. An important advantage is traditional allocation bases of resources to these units thus measure only attributes of a unit, eg. the number of direct labour hours, machine hours, or material costs consumed in making the product or providing the service. Thus it is easy to understand and prepare. In accountancy terms, these allocation bases that measure characteristics of the product or service unit are called unit-level allocation bases.
The disadvantages are given as a part of the next question.

2. For what type of business case were traditional costing systems designed? Why isn't a traditional costing system appropriate for today's companies?
One major factor that is changing in the manufacturing world is how we approach the pricing of our products and a major factor in this is the way we treat overhead allocation. Most manufacturing industry recovers the overheads by increasing the direct cost of the products by some arbitrary factor.
In the simplest form the accountants find the total overhead cost and divide this by the total number of available direct labor hours (or machine hours) to give an 'overhead rate'. The number of direct labor hours required for the individual product to give an overhead allocation then multiplies the overhead rate. This overhead allocation, the cost of direct labor and the cost of materials involved are all added up to give the cost of the product.
These methods grew up in the first half of this century when direct labour represented a high proportion of the costs and overheads were lower. Since then increased investment in machinery has reduced direct labour costs and simultaneously increased overhead costs. Despite this most of the accountancy systems we use have not changed to reflect these facts. We cannot really attack the accountants but must instead educate them to recognize that the model we have all grown used to is no longer valid.
In fact the problem is getting worse as automation increases, the direct labor base is shrinking further but overhead costs are increasing dramatically. This is making the old style cost accounting formulas more inaccurate.
The problem with the traditional method is that the costs are being recovered on the basis of an arbitrary allocation rather than on the true cost of the product. The resulting 'costs' sometimes bear little relation to the true state of affairs.
If costs are allocated according to the traditional methods based on direct labour hours then you may well find that the increased overheads drive up the price of your traditional work whilst simultaneously underpricing for the contract work (which has required the extra costs). A dangerous situation to be in.

3. What is activity based costing? How does this system ...