Business Management and Strategy (BMS): Chapter Summary Chapter No.

Chapter No. 19: Conflict of Interest and Ethical Conflict Resoution

CHAPTER NO. 19
CONFLICTS OF INTEREST AND ETHICAL CONFLICT RESOLUTION
1 Ethical threats and safeguards
1.1 Ethical conflicts
An ethical conflict (also known as an ethical dilemma) is when two ethical principles demand opposite
results in the same situation.
In order to resolve the conflict a choice must be made that by definition will leave at least one of the ethical
principles compromised.
A key reason behind many ethical conflicts is a conflict of interest between taking decisions in one’s own
self-interest versus making decisions in the best interest of a client.
Professional codes of ethics are employed in the accountancy profession in order to establish consistent
behaviour and a robust ethical conflict resolution process.
1.2 Rules-based and principles-based approaches to ethical conflicts
When accountants are faced with an ethical conflict they need to know what to do. If there is a threat to their
compliance with the fundamental principles of the ethical code, how should they ensure their compliance
and deal with the threat? There are two possible approaches that the professional accountancy bodies
could take, a rules-based approach and a principles-based approach.
(i) A rules-based approach is to identify each possible ethical problem or ethical dilemma that
could arise in the work of an accountant, and specify what the accountant must do in each
situation.
(ii) A principles-based approach is to specify the principles that should be applied when trying to
resolve an ethical problem, offer some general guidelines, but leave it to the judgement of the
accountant to apply the principles sensibly in each particular situation.
The main reason for taking a principles-based approach is that it is impossible to identify every ethical
dilemma that accountants might face, with differing circumstances in each case.
The nature of a principles-based approach
(i) Identify threats to compliance with the fundamental principles.
(ii) Evaluate the threat: Qualitative factors as well as quantitative factors
(iii) Respond to the threat: If it is ‘not insignificant’, the accountant should apply appropriate
safeguards, if he can, to eliminate the threat or reduce the threat to an insignificant level.
(iv) If suitable safeguards cannot be applied, more drastic action will be needed, such as refusing
to carry out a professional service, ending the relationship with a client or resigning from the
job.
1.3 Nature of ethical threats
Threats to compliance with the fundamental ethical principles are grouped into five broad categories:
(i) Self-interest threats, or conflicts of interest.
These occur when the personal interests of the professional accountant, or a close family member, are (or
could be) affected by the accountant’s decisions or actions.
(ii) Self-review threats
This type of threat occurs when a professional accountant is responsible for reviewing some work or a
judgement that he was responsible for originally.
(iii) Advocacy threats
This type of threat can occur when an accountant promotes the point of view of a client
(iv) Familiarity threats.
A familiarity threat arises from knowing someone very well, possibly through a long association in business.
The risk is that an accountant might become too familiar with a client and therefore becomes more
sympathetic to the client and more willing to accept the client’s point of view.
(v) Intimidation threats
A professional accountant might find that his objectivity and independence is threatened by intimidation,
either real or imagined.

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Business Management and Strategy (BMS): Chapter Summary Chapter No. 19: Conflict of Interest and Ethical Conflict Resoution

1.4 Nature of ethical safeguards

When there are threats to compliance with the fundamental ethical principles, the accountant should assess
the safeguards against the threat.
(i) There might already be safeguards in place that eliminate the possibility that the risk will ever
materialise, or that reduce the risk to an acceptable level.
(ii) If the safeguards that exist are not sufficient, the accountant should try to introduce new
safeguards to eliminate or reduce the risk to an insignificant level.
Ethical safeguards can be grouped into two broad categories:
(i) Safeguards created by legislation, regulation or the accountancy profession
(ii) Safeguards in the work environment
Safeguards created by legislation, regulation or the accountancy profession
Safeguards that are created externally, by legislation, regulation or the profession, include the following.
(i) The requirements for individuals to have education and training and work experience
(ii) The continuing professional development (CPD) requirements for qualified members
(iii) Corporate governance regulations
(iv) Professional standards
(v) Monitoring procedures and disciplinary procedures.
(vi) External review by a legally-empowered third party.
Safeguards in the work environment
A variety of safeguards can be applied within the work environment. These can be categorised into:
(i) safeguards that apply across the entire firm or company, and
(a) a code of ethics for the company or firm
(b) sound system of internal control
(c) the application of appropriate policies and procedures
(d) policies that limit the reliance of the firm on the fee income from a single client
(e) procedures for identifying personal interests and family relationships
(f) whistle blowing procedures
(ii) safeguards that are specific to a particular item of work.
(a) keeping individuals away from work where there might be a threat to their
compliance with the fundamental principles
(b) in the case of audit firms, rotating the audit partner
(c) the application of strong internal controls
(d) using another accountant to review the work that has been done by a colleague
(e) discussing ethical issues with authority
1.5 Ethical threats to accountants in business
Accountants who work in business can be placed under serious pressure by an employer to act in an
unethical way. Accountants might therefore be asked to:
(i) break a law or regulation: illegal activity is always unethical
(ii) ignore technical standards, such as financial reporting standards or auditing standards
(iii) lie to the external auditors or regulators
(iv) issue a report that is misleading and misrepresents the facts.
When an accountant is put under pressure to act in this way, the threat comes from:
(i) self-interest threats
(ii) intimidation threats
(iii) familiarity threats
There is a threat to the accountant’s compliance with the fundamental principles of:
(i) integrity
(ii) objectivity
(iii) professional competence and due care
(iv) professional behaviour

2 A model for resolving ethical conflicts

2.1 A model based on threats and safeguards
ICAP’s Code of Ethics sets out a model for dealing with ethical conflicts, and using judgement to decide
how the conflict should be resolved is set out below.

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Business Management and Strategy (BMS): Chapter Summary Chapter No. 19: Conflict of Interest and Ethical Conflict Resoution

Stage 1 Recognise and define the ethical issues.

Stage 2 Identify the threats to compliance.
Stage 3 Assess the significance of the threats.
Stage 4 If the threats are ‘not insignificant’, consider the additional safeguards that could be used.
Stage 5 Re-assess the threats to compliance after additional safeguards. Do the additional safeguards
eliminate the risk or reduce it to an insignificant level?
Stage 6 Make the decision about what to do.
2.2 The mirror test
To carry out a mirror test, you have to answer a basic question about the ethics of a course of action.
Can you justify the decision you have taken from an ethical perspective?
Three questions that you can ask when carrying out the mirror test are as follows.
(i) Is it legal? If it is not legal, you should not be doing it.
(ii) What will other people think? Think about the opinion of people whose views matter to you,
such as close family members (a parent, spouse, or close friend) or the media.
(iii) Even if the action is legal, it is ethically correct?
2.3 Applying the model in practice
The aim should be to find a sensible solution to each ethical problem. The solution can often be reached
through agreement with other people, and through discussions. It is not always necessary to opt for an
extreme solution, such as reporting a problem to an external authority, resigning from a job or declining to
work for a client.

3 Bribery and corruption

3.1 Bribery and corruption
Corruption involves behaviour on the part of officials in the public and private sectors, in which they
improperly and unlawfully enrich themselves and/or those close to them, or induce others to do so, by
misusing the position in which they are placed.
3.2 Bribery and corporate governance
Bribery and corruption result in conflict of interest between a person’s selfinterest and that person’s duty to
perform a task. A bribe that secures a course of action that a person would not necessarily have taken is
against the interests of those on behalf of whom a person should be acting.
3.3 Societal impact of bribery
(i) Political costs
(ii) Economic costs
(iii) Social costs
(iv) Environmental costs
3.4 Measures to reduce and combat bribery
There is no single way to combat bribery. The fight against bribery is built on a wide foundation. Bribery will
fail to distort the fair running of business and society when there is:
(i) a strong sense of fairness in participants in transactions;
(ii) fair reward for job performance;
(iii) transparency of decision making;
(iv) strong leadership;
(v) clear policies and procedures;
(vi) strong candidate selection procedures with good education and training processes;
(vii) strong and enforceable laws
3.5 Anti-bribery legislation
OECD Anti-Bribery convention
Many countries around the world have introduced specific anti-bribery legislation. For example:
(i) UK: the UK Bribery Act 2011
(ii) USA: the Foreign Corrupt Practices Act
(iii) Canada: Corruption of Foreign Public Officials Act
Pakistani law relating to bribery and corruption
There arestill a number of relevant laws that address bribery and corruption in Pakistan including:
(i) The prevention of corruption act 1947
(ii) The national accountability bureau ordinance 1999

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