Ethics for Accountants

Ethics for
Accountants
AC2091 FINANCIAL REPORTING

▪ Appreciate ethics in relation to accounting

Learning ▪ Explain the way ethics for accountants
Objectives have been articulated in practice, based
partly on issues deemed to arise
▪ Appraise the potential ethical implications
of professional and managerial decisions in
the preparation of financial reports
▪ Identify and recommend an appropriate
course of action arising from ethical
dilemmas in financial reporting

1
 Ethics for Accountants

Teleological theories
Ethical
▪ Viewpoint that one must take account of
theories what the consequences will be when
taking ethical decisions [consequentialism]
▪ Requires definition of best possible
consequences
Deontological theories
▪ Viewpoint that one must follow certain
ethical rules, no matter the consequences
▪ Examines the decision and/or action in
terms of morality (i.e. what is the right
thing to do?)

Teleological ethics
Ethical ▪ Make moral judgements about courses of
theories action by reference to their outcomes or
consequences
Utilitarianism
▪ Proposed by Jeremy Benthem
▪ ‘Greatest good' principle  make the
choice that is likely to result in the good for
the greatest number of people
▪ ‘Right‘ or 'wrong' can vary between
situations and over time according to the
greatest happiness of the greatest number
▪ Promotes operation of free market

2
 Ethics for Accountants

Teleological ethics
Ethical
Utilitarianism: criticisms
theories ▪ Raises question of how can we define what
is good for people
▪ Outcomes that may in fact be beneficial
but are not recognised as such
▪ Doubts about potential effect on minorities

Teleological ethics
Ethical
Egoism
theories ▪ Action is ethically justified if decision-
makers freely decide what is in his/her best
interests
▪ Individual is subject of all ethical decisions
Egoism: criticisms
▪ Encourages people to prioritise short-term
selfish desires equivalent over longer-term,
more beneficial, interests
▪ Individuals seek self-benefit at the expense
of that of others

3
 Ethics for Accountants

Deontological ethics
Ethical
▪ Application of absolute, universal ethical
theories principles in deriving the rules of conduct
Kantianism [Immanuel Kant, 1964]
▪ Action is morally right if it is motivated by a
good will that stems from a sense of duty
▪ Action taken because it is right to do so,
i.e. right conduct is an end in itself
Kantianism: criticisms
▪ Inability to act in a vacuum without regard
for its consequences
▪ People failed to apply Kant's duties to
themselves despite their expectations of
others to do so
7

Handbook of the Code of Ethics for

Code of
Professional Accountants [2016]
Ethics for ▪ Issued by International Federation of
Professional Accountants [IFAC]
Accountants ▪ Aims to serve public interest by setting
high-quality ethics standards for
professional accountants
▪ Contains three parts [A to C]
 Fundamental principles of professional
ethics and conceptual framework [A] and
application of framework to professional
accountants in public practice [B] and
professional accountants in business [C]

4
 Ethics for Accountants

Fundamental Principles [100.5]

Code of ▪ A professional accountant’s responsibility is
Ethics for not exclusively to satisfy the needs of an
Professional individual client or employer but to act in the
Accountants public interest.
▪ A professional accountant shall comply with
the following fundamental principles:
a) Integrity
b) Objectivity un bias
c) Professional Competence and Due Care
d) Confidentiality security
e) Professional Behaviour be compliant

▪ Professional accountants employed or

Professional engaged in an executive or nonexecutive
Accountants capacity in such areas as commerce,
in Business industry, service, the public sector,
education, the not for profit sector,
regulatory bodies or professional bodies, or a
professional accountant contracted by such
entities
▪ May be salaried employees, partners,
directors (whether executive or non-
executive), owner managers, volunteers or
others working for one or more employing
organisation [300.3]

10

5
 Ethics for Accountants

Professional accountants in business may be:

Professional ▪ solely or jointly responsible for the
Accountants preparation and reporting of financial and
in Business other information, which both their
employing organisations and third parties
may rely on.
▪ responsible for providing effective financial
management and competent advice on a
variety of business-related matters
[300.2]

11

Integrity [110]
Fundamental ▪ Obligation to be straightforward and honest
in all professional and business relationships
Principles
▪ Also implies fair dealing and truthfulness
▪ Not knowingly be associated with reports,
returns, communications or other
information where it is believed that the
information:
a) Contains a materially false or misleading
statement;
b) Contains statements or information furnished
recklessly; or
c) Omits or obscures information required to be
included where such omission or obscurity
would be misleading
▪ To be disassociated from such information
12

6
 Ethics for Accountants

Objectivity [120]
Fundamental ▪ Obligation not totocompromise
not compromise their
Principles professional or business judgement
judgement because
of bias, conflict of interest or the undue
influence of others
▪ Not to perform a professional activity or
service if a circumstance or relationship
biases or unduly influences the accountant’s
professional judgement with respect to that
service

13

Professional Competence and Due Care [130]

Fundamental ▪ Obligation to maintain professional
professional
Principles knowledge andskill
knowledge and skill at the level
required to ensure that clients or employers
receive competent professional service
a) Attainment of professional competence; and
b) Maintenance of professional competence
▪ To act diligently in accordance with
applicable technical and professional
standards when performing professional
activities or providing professional services

14

7
 Ethics for Accountants

Confidentiality [140]
Fundamental ▪ Obligation to refrain from:
Principles a) Disclosing outside the firm or employing
organisation confidential information
acquired as a result of professional and
business relationships without proper and
specific authority or unless there is a legal or
professional right or duty to disclose; and
b) Using confidential information acquired as a
result of professional and business
relationships to their personal advantage or
the advantage of third parties

15

Professional behaviour [150]

Fundamental ▪ Obligation to comply with relevant laws
Principles and
regulations and avoid any action that the
professional accountant knows or should
know may discredit the profession
 Includes actions that a reasonable and
informed third party, weighing all the specific
facts and circumstances available to the
professional accountant at that time, would be
likely to conclude adversely affects the good
reputation of the profession

16

8
 Ethics for Accountants

Conceptual Framework
Code of
A professional accountant shall use
Professional professional judgement in applying the
Conduct & conceptual framework in order to:
Ethics ▪ Identify threats to compliance
with the fundamental principles;
▪ Evaluate the significance of the threats
identified considering qualitative and
quantitative factors ; and
▪ Apply safeguards , when
necessary, to eliminate the threats or
reduce them to an acceptable level

17

Self-interest threat – threat that a financial

or other interest will inappropriately
Categories
influence the professional accountant’s
of Threats judgement or behaviour;
▪ Examples of circumstances that may create
self-interest threats include:
 Holding a financial interest in, or receiving a loan
or guarantee from the employing organisation
 Participating in incentive compensation
arrangements offered by the employing
organisation
 Inappropriate personal use of corporate assets
 Concern over employment security
 Commercial pressure from outside the
employing organisation

18

9
 Ethics for Accountants

Self-review threat – the threat that a

professional accountant will not appropriately
Categories
evaluate the results of a previous judgement
of Threats made, or activity or service performed by the
professional accountant, or by another
individual within the professional accountant’s
firm or employing organisation, on which the
accountant will rely when forming a
judgement as part of performing a current
activity or providing a current service;
▪ An example of a circumstance that creates a self-
review threat is determining the appropriate
accounting treatment for a business combination
after performing the feasibility study that
supported the acquisition decision

19

Advocacy threat – the threat that a

professional accountant will promote a
Categories
client’s or employer’s position to the point
of Threats that the professional accountant’s objectivity
is compromised
▪ Professional accountants in business may
promote their employing organisations’
position when furthering their legitimate
goals and objectives. Such actions
generally would not create an advocacy
threat if any statements made are neither
false nor misleading

20

10
 Ethics for Accountants

Familiarity threat – the threat that due to a

long or close relationship with a client or
Categories
employer, a professional accountant will be
of Threats too sympathetic to their interests or too
accepting of their work
▪ Examples of circumstances that may create
familiarity threats include:
 Being responsible for the employing
organisation’s financial reporting when an
immediate or close family member employed
by the entity makes decisions that affect the
entity’s financial reporting
 Long association with business contacts
influencing business decisions
 Accepting a gift or preferential treatment,
unless the value is trivial and inconsequential
21

Intimidation threat – the threat that a

professional accountant will be deterred
Categories
from acting objectively because of actual or
of Threats perceived pressures, including attempts to
exercise undue influence over the
professional accountant
▪ Examples of circumstances that may create
intimidation threats include:
 Threat of dismissal or replacement of the
professional accountant or a close or
immediate family member over a
disagreement about the application of an
accounting principle or the way in which
financial information is to be reported
 A dominant personality attempting to
influence the decision making process
22

11
 Ethics for Accountants

Safeguards created by the profession,

legislation or regulation [100.14], including
Categories
▪ Educational, training and experience
of requirements for entry into the profession;
Safeguards ▪ Continuing professional development
requirements;
▪ Corporate governance regulations;
▪ Professional standards;
▪ Professional or regulatory monitoring and
disciplinary procedures;
▪ External review by a legally empowered
third party of the reports, returns,
communications or information produced
by a professional accountant

23

Safeguards in the work environment of

professional accountants in business [300.14],
Categories
including
of ▪ The employing organisation’s systems of
Safeguards corporate oversight or other oversight
structures
▪ The employing organisation’s ethics and
conduct programs
▪ Recruitment procedures in the employing
organisation emphasising the importance of
employing high calibre competent staff
▪ Strong internal controls
▪ Appropriate disciplinary processes
▪ Leadership that stresses the importance of
ethical behaviour and the expectation that
employees will act in an ethical manner 24

12
 Ethics for Accountants

Safeguards in the work environment of

professional accountants in business
Categories
▪ Policies and procedures to implement and
of monitor the quality of employee performance
Safeguards ▪ Timely communication of the employing
organisation’s policies and procedures,
including any changes to them, to all
employees and appropriate training and
education on such policies and procedures
▪ Policies and procedures to empower and
encourage employees to communicate to
senior levels within the employing
organisation any ethical issues that concern
them without fear of retribution
▪ Consultation with another appropriate
professional accountant 25

▪ If a professional accountant in business

Threats & believes that unethical behaviour or
Safeguards actions by others will continue to occur
within the employing organisation, the
professional accountant in business may
consider obtaining legal advice
▪ If all available safeguards have been
exhausted and it is not possible to reduce
the threat to an acceptable level, a
professional accountant in business may
conclude that it is appropriate to resign
from the employing organisation
[300.15]

26

13
 Ethics for Accountants

▪ Ethical conflict resolution may be required

Threats & to comply with fundamental principles
Safeguards ▪ Factors to be considered include:
 Relevant facts
 Ethical issues involved
 Fundamental principles related to the matter
in question
 Established internal procedures
 Alternative courses of action
 Conflict resolution shall be done in
consultation with the appropriate parties
 It may be in the best interests of the
professional accountant to document the
issue, any discussions held, and the
decisions made [100.22]
27

▪ Creates a threat to objectivity and may

Conflicts of create threats to the other fundamental
Interest principles. These may be created when:
a) The professional accountant undertakes a
professional activity related to a
particular matter for two or more parties
whose interests with respect to that
matter are in conflict; or
b) The interests of the professional
accountant with respect to a particular
matter and the interests of a party for
whom the professional accountant
undertakes a professional activity related
to that matter are in conflict

28

14
 Ethics for Accountants

▪ When identifying and evaluating the interests

and relationships that might create a conflict
Conflicts of
of interest and implementing safeguards,
Interest when necessary, to eliminate or reduce any
threat to compliance with the fundamental
principles to an acceptable level, a
professional accountant in business shall
exercise professional judgement and be
alert to all interests and relationships that a
reasonable and informed third party,
weighing all the specific facts and
circumstances available to the professional
accountant at the time, would be likely to
conclude might compromise compliance
with the fundamental principles
29

▪ Factors in identifying whether a conflict of

interest exists or may be created [310.6]:
Conflicts of a) The nature of the relevant interests and
Interest relationships between the parties involved; and
b) The nature of the activity and its implication for
relevant parties
▪ Factors in evaluating conflicts [310.7]:
a) The significance of relevant interests or
relationships; and
b) The significance of the threats created by
undertaking the professional activity or activities.
In general, the more direct the connection
between the professional activity and the matter
on which the parties’ interests are in conflict, the
more significant the threat to objectivity and
compliance with the other fundamental principles
will be
30

15
 Ethics for Accountants

▪ When addressing a conflict of interest, a

Conflicts of professional accountant in business is
Interest encouraged to seek guidance from within
the employing organisation or from others,
such as a professional body, legal counsel
or another professional accountant
▪ When making disclosures or sharing
information within the employing
organisation and seeking guidance of third
parties, the professional accountant shall
remain alert to the fundamental principle
of confidentiality

31

▪ Safeguards should be applied to eliminate the

Conflicts of threat or reduce threats created by a conflict
Interest of interest to an acceptable level [310.5]
▪ Examples of safeguards [310.8] include:
a) Restructuring or segregating certain
responsibilities and duties
b) Obtaining appropriate oversight, for
example, acting under the supervision of an
executive or non-executive director
c) Withdrawing from the decision-making
process related to the matter giving rise to
the conflict of interest
d) Consulting with third parties, such as a
professional body, legal counsel or another
professional accountant
32

16
 Ethics for Accountants

▪ If safeguards cannot reduce the threat to an

Conflicts of acceptable level, the professional accountant
Interest shall decline to undertake or discontinue the
professional activity that would result in the
conflict of interest; or shall terminate the
relevant relationships or dispose of relevant
interests to eliminate the threat or reduce it
to an acceptable level

33

▪ Prepare or present such information fairly,

Preparation honestly and in accordance with relevant
& Reporting professional standards so that the information
of will be understood in its context [320.1]
Information ▪ Maintain information that [320.3]:
a) Describes clearly the true nature of business
transactions, assets or liabilities
b) Classifies and records information in a timely
and proper manner; and
c) Represents the facts accurately and
completely in all material respects

34

17
 Ethics for Accountants

▪ Threats to compliance with fundamental

Preparation principles are created with pressure to prepare
& Reporting or report information in a misleading way or to
of become associated with misleading information
Information through the actions of others [320.4]
▪ Self-interest or intimidation threats may be
posed to the principles of integrity, objectivity,
or professional competence and due care
▪ Safeguards that can be applied include
consultation with [320.6]:
 Superiors within the employing organisation
 Audit committee or those charged with
governance of the organisation
 Relevant professional body

35

▪ Where it is not possible to reduce the threat to

Preparation an acceptable level, a professional accountant
& Reporting in business shall refuse to be or remain
of associated with information the professional
Information accountant determines is misleading [320.7]
▪ In determining whether there is a requirement
to report the circumstances outside the
organisation, the professional accountant in
business may consider obtaining legal advice. In
addition, the professional accountant may
consider whether to resign.

36

18
 Ethics for Accountants

▪ Application of fundamental principle of

Acting with professional competence and due care [330.1]
Sufficient ▪ Only undertake significant tasks for which the
Expertise professional accountant in business has, or can
obtain, sufficient specific training or experience
 Not to intentionally mislead an employer as
to the level of expertise or experience
possessed
 To seek appropriate expert advice and
assistance when required

37

▪ Threat to professional competence and due

Acting with care may exist when there is [330.2]:
Sufficient a) Insufficient time for properly performing or
completing the relevant duties
Expertise
b) Incomplete, restricted or otherwise inadequate
information for performing the duties properly
c) Insufficient experience, training and/or education
d) Inadequate resources for the proper performance
of the duties
▪ When threats cannot be eliminated or reduced
to an acceptable level, professional accountants
in business shall determine whether to refuse
to perform the duties in question and, if refusal
is appropriate, clearly communicate the reasons
for doing so [330.4]
38

19
 Ethics for Accountants

▪ Self-interest threats to objectivity or

Financial confidentiality may be created through the
Interests, existence of the motive and opportunity to
Compensation, manipulate price sensitive information in order
and Incentives to gain financially [340.1]
 Self-interest threats arising from compensation or
incentive arrangements may be further
compounded by pressure from superiors or peers
in the employing organisation who participate in
the same arrangements [340.2]
▪ A professional accountant in business shall not
manipulate information or use confidential
information for personal gain or for the
financial gain of others [340.3]

39

▪ Safeguards applicable include [340.4]

a) Policies and procedures for a committee
Financial independent of management to determine the level
Interests, or form of remuneration of senior management
Compensation, b) Disclosure of all relevant interests, and of any plans

and Incentives to exercise entitlements or trade in relevant shares,

to those charged with the governance of the
employing organisation, in accordance with any
internal policies
c) Consultation, where appropriate, with superiors
within the employing organisation
d) Consultation, where appropriate, with those charged
with the governance of the employing organisation
or relevant professional bodies
e) Internal and external audit procedures
f) Up-to-date education on ethical issues and on the
legal restrictions and other regulations around
potential insider trading 40

20
 Ethics for Accountants

▪ Include gifts, hospitality, preferential treatment

Inducements and inappropriate appeals to friendship or
loyalty. May lead to threats such as [350.2]:
 Self-interest threats to objectivity or
confidentiality when an inducement is made in
an attempt to unduly influence actions or
decisions, encourage illegal or dishonest
behaviour, or obtain confidential information
 Intimidation threats to objectivity or
confidentiality are created if such an
inducement is accepted and it is followed by
threats to make that offer public and damage
the reputation of either the professional
accountant in business or an immediate or
close family member
41

Applicable safeguards include [350.4]:

Inducements  Informing higher levels of management or
those charged with governance of the
employing organisation immediately when
offers of inducement have been made
 Informing third parties of the offer (e.g.
professional body or employer of the individual
who made the offer), though a professional
accountancy in business may consider seeking
legal advice before taking such a step
 Advising immediate or close family members of
relevant threats and safeguards where they are
potentially in positions that might result in
offers of inducements, for example, as a result
of their employment situation
42

21
 Ethics for Accountants

Applicable safeguards include [350.4]:

Inducements  Informing higher levels of management or
those charged with governance of the
employing organisation where immediate or
close family members are employed by
competitors or potential suppliers of that
organisation

When the threats cannot be eliminated or

reduced to an acceptable level through the
application of safeguards, a professional
accountant in business shall not accept the
inducement

43

▪ A professional accountant in business may be in

Inducements a situation where the professional accountant
in business is expected, or is under other
pressure, to offer inducements to influence the
judgement or decision-making process of an
individual or organisation, or obtain confidential
information [350.5]
▪ A professional accountant in business shall not
offer an inducement to improperly influence
professional judgement of a third party

44

22
 Ethics for Accountants

Thank You
45

Pls attempt the question available on MeL

23