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Professional Accountancy Services Pocket Notes

SECTION F : PROFESSIONAL ETHICS IN ACCOUNTING AND

BUSINESS

There are three main sources of rules that regulate behaviour of individuals and businesses:

 The law: The law is the minimum level of behaviour required. Any standard of behaviour
below it is considered illegal and warrants punishment by society.

 Non-legal rules and regulations: By meeting non-legal regulations (such as the rules of
your workplace), you meet a higher level of behaviour than just the legal requirements.

 Ethics: Ethical behaviour is seen as the highest level of behaviour that society expects. Your
behaviour goes further than just meeting your legal and non-legal obligations.

Corporate governance concepts:

Fairness: The directors' deliberations and also the systems and values that underlie the company
must be balanced by taking into account everyone who has a legitimate interest in the company,
and respecting their rights and views.

Transparency: It means open and clear disclosure of relevant information to shareholders and
other stakeholders, also not concealing information when it may affect decisions. It means open
discussions and a default position of information provision, rather than concealment.

Probity/honesty: It relates not only to telling the truth but also not misleading shareholders and
other stakeholders. Lack of probity includes not only obvious examples of dishonesty such as taking
bribes but also presenting information in a slanted way that is designed to give an unfair
impression.

Accountability: Corporate accountability refers to whether an organisation (and its directors)

are answerable in some way for the consequences of their actions.

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Reputation: Directors' concern for an organisation's reputation will be demonstrated by the

extent to which they fulfil the other principles of corporate governance. There are commercial
reasons for promoting and protecting an organisation's reputation.

Judgement: Judgement means the board making decisions that enhance the prosperity of the
organisation. This means that board members must acquire a broad enough knowledge of the
business and its environment to be able to provide meaningful direction to it.

Integrity: Integrity can be taken as meaning someone of high moral character, who sticks to
principles no matter the pressure to do otherwise. In working life this means adhering to principles
of professionalism and probity. Straightforward dealing in relationships with the different people
and constituencies whom you meet is particularly important.

Fiduciary responsibility(Duty of faithful service):

Organisations are not autonomous; that is to say, they do not exist to serve their own purposes or
those of their senior managers. They exist to serve some external purpose and their managers have
a duty to run them in a way that serves that purpose. Managers have a duty of faithful service in this
respect and their behaviour must always reflect it.

Business objectives and management discretion

 The stakeholder view of company objectives: Management plays an active role
here. They set the tone by taking every stakeholder interest,in a balance manner.

 The consensus theory of company objectives: This was developed by Cyert and
March (1992). Objectives emerge as a consensus of the differing views of shareholders,
managers, employees, suppliers, customers and society at large.Management don’t play an
important role here.

The ethical environment:

Ethics based on consequences(Teleology): This approach states that a decision is right or wrong
depending on the consequences or outcomes of that decision. As long as the outcome is right, then
the action itself is irrelevant. This approach can be broken down into three further perspectives:

 Utilitarianism
 Egoism
 Pluralism

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Utilitarianism: It is propounded by Jeremy Bentham (1823), is the best-known version of this

approach and can be summed up as choosing the action that is likely to result in the greatest good
for the greatest number of people.

Egoism(Ethics of thief/Short-termist): It is states that an act is ethically justified if decision

makers freely decide to pursue their own short-term desires or The subject to all ethical decisions
is the self. It produces a desired outcome for society where free competition and perfect
information exits.

Pluralism: It accepts that different views may exist on morality, but suggests a consensus may be
able to be reached in certain situations. A pluralist viewpoint is helpful in business situations where
a range of perspectives have to be understood in order to establish a course of action. It emphasises
the importance of morality as a social phenomenon. However, a consensus may not always be
possible, and this is a key message of this section of the text

Ethics based on duty(Deontology): an individual must look at the action being considered and
deciding if it is inherently right or wrong. It ignores the consequences of the decision being made.
This approach can be broken down into two further perspectives:

 Absolutism
 Relativism

Absolutism(Dogmatist): It is similar with the view of Immanuel kant who said that, “Certain rules
must be obey in every situation whatever the outcome is”. Absolutist approaches to ethics are built
on the principle that objectivity and universally applicable moral truths are exist.

Strengths of absolutism

 Fundamentally the statement that absolute truth does not exist is flawed. If it does not
exist, then the statement that it does not exist cannot be true.

 Absolutism lays down certain unambiguous rules that people are able to follow, knowing
that their actions are right.

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Criticism of absolutism

 Absolutist ethics takes no account of evolving norms within society and the development of
'advances' in morality

 From what source should absolutist ethics be derived? Should it be religion, universal laws,
human nature? Whatever source is used, it isn’t possible that everyone follow only one
source.

 What happens when two absolutist positions appear incompatible? For example, is it
permissible to tell a lie in order to save an innocent life?

 A theory can be true according to a relative framework as well as true according to an

absolute framework. What differs is the nature of the framework and not the truth of the
statement.

Relativism(Pragmatist): It is the view that a wide variety of acceptable ethical beliefs and
practices exist. The ethics that are most appropriate in a given situation will depend on the
conditions at that time. The relativist approach suggests that all moral statements are essentially
subjective and arise from the culture, belief or emotion of the speaker.

Strengths of Relativism:

 Relativism highlights our cognitive bias in observing with our senses (we see only what we
know and understand) and our notational bias (what we measure without using our senses
is subject to the bias of the measurement methods used.

 Relativism also highlights differences in cultural beliefs. For example, all cultures may say
that it is wrong to kill innocents, but different cultures may have different beliefs about who
innocents actually are

 In the global economy, where companies conduct businesses in many different countries and
cultures, adopting a relativist approach presumes more flexibility and therefore greater
success.

 It can be argued that differing absolutist beliefs result in moral conflict between people.
(Relativist) ethics should act to resolve such conflicts.

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Criticisms of relativism:

 Put simply, strong relativism is a based on a fundamental contradiction. The statement that
'All statements are relative' is itself an absolute, non-relative statement.

 A common criticism of relativism is that it leads to a philosophy of 'anything goes',

denying the existence of morality and permitting activities that are harmful to others.

 Ideas such as objectivity and final truth don’t exist.

 If it's valid to say that everyone's differing opinions are right, then it's equally valid to say
that everyone's differing opinions are wrong.

Ethics based on Rights and virtues: The idea about “right ethics” is that individuals have natural
inherent rights that should not be abused by our action.The idea about “virtue ethics” is that if
people cultivate virtue, their behaviour is likely to be inherently ethical.

Ethical problems facing managers:

Extortion: Foreign officials have been known to threaten companies with the complete closure of
their local operations unless suitable payments are made.

Bribery: This refers to payments for services to which a company is not legally entitled.

Grease money: Multinational companies are sometimes unable to obtain services to which they are
legally entitled because of deliberate stalling by local officials

Gifts: In some cultures gifts are regarded as an essential part of civilised negotiation.

Ethics in organisations: There are two approaches to managing ethics.

 Compliance based ethics

 Integrity based ethics

Compliance based ethics: A compliance-based approach is primarily designed to ensure that the
company acts within the letter of the law and that violations are prevented, detected and punished.

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Integrity based ethics: Integrity-based approach suggests a wider remit, incorporating ethics in
the organisation's values and culture. It combines a concern for the law with an emphasis on
managerial responsibility for ethical behaviour.

Whistleblowing: Whistleblowing is the disclosure by an employee of illegal, immoral or

illegitimate practices on the part of the organisation. This may appear to be in the public interest.
But confidentiality is very important in the accountants' code of ethics. Whistleblowing frequently
involves financial loss for the whistleblower. Whistleblowers may lose their jobs.

A corporate code of ethics:

Corporate codes of ethics are published by organisations in order to communicate values to

stakeholders. As well as stating the core principles governing how their commercial objectives are
to be pursued, such codes might include statements specifically in relation to:

 Customers: whose purchases may be influenced by ethical considerations

 Shareholders: whose investment decisions may be influenced by ethical factors
 Employees: who need to know what is expected of them
 Suppliers: who need to understand the expectations of their customers, and who also
should be treated ethically
 Lobby groups:who may have an interest in organisational practices
 Local communities:which may need reassurance that the organisation will act as a ‘good
citizen’

The Seven Principles of Public Life(HASILOO):

Selflessness: Individuals should act solely in the public interest and not for personal gain or that of
friends and family.

Integrity: Individuals should avoid actions which would place them under financial or other
obligations whereby the person holding their obligation could influence their public duties.

Objectivity: All choices, especially those regarding awarding contracts, rewarding or providing
benefits to others and making public appointments must be made purely on merit.

Accountability: Individuals are responsible for their own actions and are accountable to others.

Openness/Transperecy: Individuals must be open about their decisions and actions. Information
regarding the reasons for their decisions must be freely available. Restrictions on information are
only permitted when it is in the wider public interest.

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Honesty/Probity: Where individuals have private interests which relate to their public ones, they
should declare them and seek to resolve any conflict to protect the public interest..

Leadership: Individuals must promote and respect the other six principles through leadership.

Differnce between profession and occupation:

 the mastering of specialised skills during a period of training

 governance by a professional organisation
 compliance with an ethical code
 acting in the public interest
 a process of certification before being allowed to practise.

ACCA code of Ethics: Fundamental Principles

1. Confidentiality – Information obtained in a business relationship is not to be disclosed to third
parties without specific authority being given to do so, unless there is a legal or professional
reason to do so. This information should not be used for the personal advantage of the accountant.
2. Objectivity – Accountants must ensure that their business or professional judgement is not
compromised because of bias or conflict of interest.
3. Integrity – This implies fair dealing and truthfulness. Accountants should not be associated with
any false, misleading or recklessly provided.
4. Professional Competence and Due Care – Accountants are required to have the necessary
professional knowledge and skills required to carry out work for clients and must follow all
applicable technical and professional standards when carrying out that work.
5. Professional Behaviour – Accountants must comply with all relevant laws and regulations and
must avoid any actions that would bring the profession into disrepute.

Personal qualities expected of an accountant (RRRCT)

Reliability: When taking on work, you must ensure that it gets done and meets professional
standards.

Responsibility: In the workplace you should take 'ownership' of your work

Timeliness: Clients and work colleagues rely on you to be on time and produce work within a
specified time frame.

Courtesy: You should conduct yourself with courtesy and consideration towards clients and
colleagues.

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Respect: As an accountant, you should respect others by developing constructive relationships and
recognising the values and rights of others.

Professional qualities expected of an accountant(ISAS’S)

Independence: You must be able to complete your work without bias or prejudice and you must also
be seen to be independent.

Scepticism: You should question information given to you so that you form your own opinion
regarding its quality and reliability.

Accountability: You should recognise that you are accountable for your own judgements and
decisions.

Social responsibility: Accountants have a public duty as well as a duty to their employer or client.
“Social responsibility action is likely to have an adverse effect on shareholders' interests.”

Conflicts of interest:
conflict between members' and clients' interests might arise if members compete directly with a
client, or have a joint venture with a company that is in competition with the client. The rules state
that members and firms should not accept or continue engagements in which there are, or are likely
to be, significant conflicts of interest between members, firms and clients. Members should evaluate
the threats arising from a conflict of interest and, unless they are insignificant, they should apply
safeguards. Disclosure (ie informing all known relevant parties of the possible conflict of interest) is
the most important safeguard. There are other solutions depending on the situation, such as using a
separate team of people or signing confidentiality agreements.

Ethical threats and dilemmas:

 Self-interest threat – this could occur where a financial or other interest influences an
accountant's judgement and causes a conflict of interest. For example, by overstating the
profits of a company they work for, an accountant may receive higher pay or bonuses. It can
be arises from various sources like: Financial interests , Close business relationships,
Employment with client, Partner on client board, Family and personal relationships,
Loans and guarantees, Overdue fees, Percentage or contingent fees, High percentage
of fees, Lowballing, Recruitment

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 Self-review threat – this may occur when an accountant is required to re - evaluate their
own previous judgement. For instance, if an accountant was asked to review and justify a
business decision they made, it would be difficult for them to remain objective. It may arises
from many sources like : Recent service with assurance client, Preparing accounting
records and financial statements, Valuation services, Internal audit services, Tax
services

 Advocacy – An advocacy threat arises in certain situations where the assurance firm is in a
position of taking the client's part in a dispute or somehow acting as their advocate. The most
obvious instances of this would be when a firm offered legal services to a client and, say,
defended them in a legal case or provided evidence on their behalf as an expert witness. An
advocacy threat might also arise if the firm carried out corporate finance work for the
client; for example, if the audit firm was involved in advice on debt reconstruction and
negotiated with the bank on the client's behalf.

 Familiarity threat – A familiarity or association threat is where independence is jeopardised

by the audit firm and its staff becoming overfamiliar with the client and its staff. There is a
substantial risk of loss of professional scepticism in such circumstances. Senior members of
staff at an audit firm having a long association with a client is a significant threat to
independence

 Intimidation threat(Association ) – An intimidation threat arises when assurance client try

to harash or bully auditor. The most obvious example of an intimidation threat is when the
client threatens to litigation or sue the assurance firm for work that has been done
previously. The firm is then faced with the risk of losing the client, bad publicity and the
possibility that they will be found to have been negligent, which will lead to further problems.
This could lead to the firm being under pressure to produce an unqualified audit report when
they have been qualified in the past

 Second opinions- Another way that auditors can suffer an intimidation threat is when the
audit client is unhappy with a proposed audit opinion, and seeks a second opinion from a
different firm of auditors. In such a circumstance, the second audit firm will not be able to
give a formal audit opinion on the financial statements – only an appointed auditor can do
that. However, the problem is that if a different firm of auditors indicates to someone else's
client that a different opinion might be acceptable, the appointed auditors may feel under
pressure to change their opinion

 Assurance client – The organization where we are going to do audit.

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Safeguards against ethical threats(professional bodies):

professional bodies In response to the ethical threats outlined above, the ACCA, along with other
professional bodies, have put in place several safeguards to try to reduce or eliminate such threats.
These include:

 Ethics training for all professional accountants – both as part of their initial training
and on an ongoing basis

 Creation of corporate governance requirements

 Professional or regulatory monitoring and disciplinary procedures

 Setting of professional standards

Safeguards against ethical threats(Business):

Organisations can also help to reduce the threat of ethical breaches by their employees by, amongst
other things, having an effective internal complaints procedure that enables the reporting of
unprofessional and unethical behaviour. They can also create a culture that makes it as easy as
possible for employees to follow their professional codes and behave ethically. There are six values
that organisations can apply in order to accomplish this. They can be easily remembered using the
acronym HOTTER. These are Honesty, Openness, Trust, Empoerment, Respect

Ethical dilemmas and conflicts of interest:

Ethical dilemmas: This is the situation where two ethical values or requirements seem to be
incompatible. They can also arise where two conflicting demands or obligations are placed on an
individual.

A conflict of interest: This arises where an individual has a duty to two or more parties. While
working, information or other matters may arise that mean they cannot continue work for one party
without harming another. Conflicts of interest are not wrong in themselves but they will become a
problem if a professional continues with a course of action while being aware of, and not declaring,
them.

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Resolution of ethical conflicts:

We have seen there are many situations that could cause ethical conflicts, ranging from the trivial to
the very serious (such as fraud or illegal acts).The method of resolving them that ACCA sets out for
its members and students is laid down in its ethical code Individuals should ask themselves:

 Transparency: Do I feel comfortable with others knowing about my decision, is my decision

defensible?
 Effect : Have I considered all parties who may be affected by the decision and have all factors
been taken into account such as mitigating circumstances?
 Fairness: Would a reasonable third party view the decision as fair?

Ethical conflicts may arise from:

 Pressure from an overbearing colleague or from family or friends
 Members asked to act contrary to technical and/or professional standards
 Divided loyalties between colleagues and professional standards
 Publication of misleading information
 Members having to do work beyond their degree of expertise or experience they possess
 Personal relationships with other employees or clients
 Gifts and hospitality being offered

DEALING WITH UNETHICAL OR ILLEGAL CONDUCT:

If an accountant uncovers unethical or illegal conduct within the organisation they work for, there is
a series of steps that they should take to deal with the issue

(1) The accountant should first consult with whoever is responsible for governance or ethics within
the organisation. This may be a Compliance Office, or the Board of Directors themselves.

(2) If the problem remains unresolved, the accountant should take legal advice and/or advice from
their professional body (e.g. ACCA).

(3) If the situation still cannot be resolved, the accountant should consider reporting to the relevant
authorities (if there is a legal or professional obligation to do so) and withdrawing from the
engagement.

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