ESR Lecture 6: Accounting Ethics

LMS briefing for lockdown browser do not be late for class and bring your
laptop.

Survey results from week 1

Here is the ranking for those with high or very high ethical standards (out of 84
respondents)
1. Teachers 86.9% 7. Accountants 54.8%
2. Nurses 82.1% 8. Coffee Baristas 38.1%
3. Doctors 77.4% 9. Hawkers 35.7%
4. Policemen 73.8% 10. Lawyers 21.4%
5. Pharmacists 63.1% 11. Journalists 15.5%
6. Engineers 58.3% 12. Sales Personnel 6.0%

An opinion poll carried out by Gallup in 2005 asking the public in the US to rank
professions on a 5 point scale like ours, showed only 6 out of 21 professions were
considered to have high or very high ethical standards:
1. 82% 9. 39%
2. 67%
3. 65%
4. 64%
5. 61% 28%
6. 54% 7%

[Taken from the book Accounting and Business Ethics by Ken McPhail and Diane
Walters, Routledge, 2009]

Activity #1:
1. Write a brief description of your image of the good accountant.

2. Reflect briefly on where your characteristics come from.

Activity #2: Enron The Smartest Guys in the Room

From this documentary, what do you think are the possible contributors of
Enrons financial scandal?

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At 57th min of video,
Enron Fraud is an example of synergistic corruption. There are supposed to be
checks and balances in the system. The lawyers are supposed to say no, the
accountants are supposed to say no, the bankers are supposed to say no. But no
one who was supposed to say no said no. They all put their share of the money and
put it into their pocket.

AA receives US$1 million a week.

The bankers knowingly participated in the fraud.
Merrill Lynch assisted Enron in cooking its book by pretending to purchase existing
Enrons assets when it really engaged in a loan.

Overview of Enron Problems:

Emerging Governance Trends SOX

Independence of Directorsjudgement, role
Chair//CEO, Audit Committee, unrelated , resp. for Auditor
Clarification of responsibilities of Directors, Officers, Audit
Committee charters - oversight, strategies, compliance
Internal culture, ethics, tone at the top,
Broader risk management, competencies (financial literacy/financial
expertise), performance measures
Greater accountability & transparency
CEO, CFO sign-off certification of annual and quarterly fin. statements,
compensation, stock options approved, additional disclosures risks,
internal control, earlier insider trade reporting, fraud prevention
Specific criminal liability for CEO & CFO for misstatements
Independence of Auditors
Whistleblower systems Financial & Non-financial

How about the employees?

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What ethical moral reasoning do you think the perpetrators are following?

Most people are the product of the context they find themselves in. They tend
to look up and look around, and they do what others around them do or
expect them to do.
[Taken from Managing to be ethical: debunking five business ethics myths by Linda
Trevino and Michael Brown (one of your reading for last lecture)]

The Public Interest and Self Interest (taken from Accounting and Business Ethics
by McPhail & Walters)

The accounting profession does claim to be operating in the interests of the public.

The ISCA Code of Professional Conduct and Ethics begin with

Introduction and Fundamental Principles

100.1 A distinguishing mark of the accountancy profession is its acceptance of the
responsibility to act in the public interest. Therefore, a professional accountants
responsibility is not exclusively to satisfy the needs of an individual client or
employer (http://www.isca.org.sg/media/777626/code-of-ethics-for-isca-code-of-
professional-conduct-and-ethics-2015-clean.pdf)

McPhail & Walters noted in their book:

Regardless of the traditional public interest rhetoric of the profession, there can be
little doubt that the practice of accounting has taken on a distinctly commercial
orientation.

The profession has decided to compete in a commercial marketplace in a wide

variety of professional services.

Why? What was their solution?

We see this in the case of ENRON.

Accountings Big Four need more competition (Financial Times, 24 August 2016)
https://www.ft.com/content/7f4b8b8e-69e2-11e6-ae5b-a7cc5dd5a28c

In August last year, in Florida, there was a case brought by the trustee of a failed US
mortgage lender, Taylor, Bean & Whitaker (TBW) against PwC. The plaintiff was
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seeking $5.5 billion in damages from PwC for failing to detect a massive fraud
perpetrated by TBWs own executives in cahoots with another lender, Colonial Bank,
which collapsed in 2009.

While the case is complex, it raises familiar questions for the accounting profession
one that stretch back at least as far back as the Enron fraud about 15 years ago.
What duties should auditors have placed on them for rooting out bad behaviours?
How can this oligopolistic industry be overhauled to prevent firms slipping into
complicity with their clients?

And there are also calls to break up the Big Four Accounting Firms.

Oligarchs of the Treasure Islands is an article that claimed that the Big Four are the
masterminds of multinational tax avoidance.
Although presenting as the guardians of commerce they are unregulated and
unaccountable; they have infiltrated governments at every level and should be
broken up.
(http://www.michaelwest.com.au/oligarchs-of-the-treasure-islands/)

It is an interesting article to read in your spare time.

ISCAs Code of Professional Conduct and Ethics

3 parts to the code:
Part A: General Application of the Code ** (we will look briefly at part A)
Part B: Professional Accountants in Public Practice
Part C: Professional Accountants in Business

What are the 5 fundamental principles?

There are 5 fundamental principles that a professional accountant must
comply with:
Fundamental Principles 100.5 A professional accountant shall comply with the
following fundamental principles:
(a)
(b)
(c)
(d)
(e)

Do you think that a Code of Conduct and Ethics can prevent unethical
behaviors?

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Fraud Triangle

Question: How can a company protect itself against this?

Case Studies Practice : Caselets will be given in class

Briefing for Field Trip

Meet at the taxi stand at LKS Library Queen Street at 8.35 am (G1) and 12.05
pm (G2) (Be punctual, please.)
Will board the bus back at 11.10 am (G1) and 2.40 pm (G2) sharp.
Wear comfortable clothing and foot wear (flat footwear is the best).
Bring an umbrella in case of rain.
Leave any unnecessary bags at school.
Bring insect repellant for extra precaution.
Be prepared for an interactive tour, including Q&A.
Each project group to prepare a thank you card and address it to the
person(s) leading you on the tour. (That means you have to find out their
names.)

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