CHAPTER 2

PROFESSIONAL AND
CORPORATE ETHICS

Mai Phuong Thao

Faculty of Accounting and Auditing
University of Economics and Law
 Contents
2.1. Chapter overview
2.2. “Profession” versus “professionalism”
a. “Profession” versus “professionalism”
b. The public interest
c. Accountants’ role and influence
2.3. Corporate ethics
a. Corporate ethics
b. Corporate and professional codes
2.4. Professional codes of ethics
a. Conflicts of interest and ethical threats
b. Conceptual framework and safeguards
2 c. Ethical dilemmas and conflict resolution.
Ethics in Accounting
Real-life scenarios
 Accountants may struggle with long work hours
and work-life balance
 Pressures to hit deadlines and ‘adjust things’ if
necessary
 Pressures from the clients to be creative with
classification to minimise tax
 Pressure to adjust the time taken to perform tasks
 Offers of financial incentives to make certain
‘favourable’ decisions
Common ethical issues
Ethical issues %
1. Clients proposal for tax evasion 47
2. Clients proposal to manipulate financial statements 50
3. Presenting information improperly (for deception purpose) 44
4. Conflict of interest 52
5. Instructions by superior to carry out unethical act 34
6. Failure to maintain technical competence 32
7. Using inside information for personal gain 11
8. Maintaining confidentiality 29
9. Lack of integrity in admitting mistakes 37
10. Receiving unreasonable gifts, favours and entertainment 11
2.2. Profession vs Professionalism
Profession
 A body of theory and
knowledge which is
used to support the
public interest

Professionalism
 Taking action to support
public interest
What is ‘the public interest’?

 The public interest can be defined as the welfare

or well-being of the general public that supports
the good of society as a whole

 For an accountant, acting in the public interest is

acting for the collective well-being of the
community people and institutions that it serves.
The public interest

The accountancy’s profession public includes:

Governments Investors
Clients

Credit providers
Employees Employers
Accountants and the public
interest
 Accountants do not generally act against the
public interest

 The concept of acting in the public interest tends

to apply to providing information that society as a
whole should be aware of
Public interest - Disclose or not?

 In some situations, lack of disclosure may be

against the public interest

 In other situations, disclosing information may be

against the public interest. Such information
should be kept confidential to avoid harm to the
society
Accountant’s role and influence
Accountant’s role
and influence (cont.)
1. Influence on organisations
The influence of the accountancy profession on
organisations is very significant. This is due to the
range of services that accountants can provide,
including:
- Financial/management accounting
- Audit/consultancy
- Taxation advice
Accountant’s role
and influence (cont.)
Limitation on influence
The influence is limited regarding ethical and other
areas by the following factors:
- Extent of organisational reporting
- Conflicts of interest in selling additional services
- Long-term relationship with clients
- Overall size of accountancy firms
- Focus on growth and profit
Accountant’s role
and influence (cont.)
2. Influence on society
Accountancy can be seen as a profession involved
with social accountability
Accountant’s role
and influence (cont.)
3. Influence on power and wealth distribution
 Accountants have specialist skills and knowledge
which can be used in the public interest.
 Society may have the objective of obtaining a
more equal distribution of power and wealth.
 Given their abilities, accountants can probably
advise on how that power and wealth can be
distributed.
2.3. Corporate Ethics
Relating to the application of ethical values to
business behaviour
Effectiveness of corporate and
professional codes
The effectiveness of the code will be limited due to factors
such as
 The code can be imposed without communication to
explain what it is trying to achieved, this will only lead to
resentment, particularly amongst employees
 Some codes are written, launched and then forgotten as it
is now ‘in place’. Unless there are reminders that the code
is there, then it will not be effective in promoting ethical
decision making.
 Codes that are implemented, and then breached by senior
management without apparent penalty are not going to be
followed by more junior staff.
Effectiveness of corporate and
professional codes
Effectiveness of corporate and
professional codes
Effectiveness of corporate and
professional codes
Effectiveness of corporate and
professional codes (cont.)
To be effective, the code must have:

 Participation from all groups as the code is

formed
 Disciplinary actions for breach of the code
 Publicity of breaches and actions taken, as this is
effective in promoting others to follow the code
 Communication and support from top-down to
ensure that the code is embedded into company
culture.
2.4. Professional code of ethics
Professional codes of ethics -
Principles
Group discussion
Explain why each of the following actions
appears to be in conflict with fundamental ethical
principles

1. An advertisement for a firm of accountants states that their audit

services are cheaper and more comprehensive than a rival firm
2. An accountant prepare a set of accounts prior to undertaking the
audit of those accounts
3. A director discusses an impending share issue with colleagues at a
golf club dinner
4. Two police officers ask to see the files for one of your clients.
5. A financial accountant confirms that a report on his company is
correct, even thought the report omits to mention some important
liabilities
Which approach is IFAC Code
based on?
There are two theoretical approaches:

 Compliance-based (or Rules-based)

 Principles-based (Ethics-based or Framework-

based)
Conflict of interest and
ethical threats
Conflict of interest and
ethical threats (cont.)
The potential threats may lead to conflicts of
interest and lack of independence.
These are 5 categories of threats:
 Self-interest (Conflict of interest)
 Self-review
 Advocacy
 Familiarity
 Intimidation
Questions
Explain your response to the following threats

A. Your employer ask you to suggest to a junior manager

that they will receive a large bonus for working overtime
on a project to hide liabilities from the financial
statements.
B. An accountant is threatened with dismissal for failing to
agree to the demands of management colleagues
C. The accountant discovers a significant error on checking
some work, and he was responsible for making the
original error
Questions (cont.)
D. The senior personnel in an audit team have a long
association with the client company
E. The accountant is involved in providing a professional
opinion in support of a client, in a case involving a
dispute with a third party.
F. You have been asked to prepare the management
accounts for South America. In response to your
comment that you do not understand the accounting
requirements of South America, your supervisor
states “No problem, no one will notice a few thousand
dollars error anyway”. There is the risk that the
accountant might loss his job.
Ethical conflict resolutions
1. Gather all relevant facts
2. Establish ethical issues involved
3. Refer to relevant fundamental principles
4. Follow established internal procedures
5. Investigate alternative courses of action
6. Consult with appropriate persons within the firm
7. Obtain advice from professional institute
8. If the matter is still unresolved, consider
withdrawing from the engagement team
Ethical conflict resolutions -
Example
1. The energy company Enron fraudulently modified its
income statement to appear as if the company was
performing better than it actually was
2. Taking office supplies from the company supply closet is
unethical behavior
3. It is unethical if a company recruiter tells you that you will
make $100,000 per year with the company but does not
tell you that it takes 10 years to reach that salary.
4. An employee is frequently playing computer games at
work instead of focusing her attention on a project.
Ethical threats and safeguards

Ethical threat is a situation Ethical safeguard provides

where a person or guidance or a course of action
corporation is tempted not to which attempts to remove the
follow their code of ethics ethical threat
Conceptual framework and
safeguards
 It provides an initial set of assumptions values and
definitions which are agreed upon and shared by
all those subject to the framework
 It is stated in relatively general terms so that it is
easy to understand and communicate
 It recognises that ethical issues may have no
‘correct’ answer and therefore provides the
generalised guidelines and principles to apply to
any situation.
Conflict safeguards

Safeguards seek to reduce or eliminate threats.

They fall into three categories by:
1. Profession
2. Work environment
3. Individual
Conflict safeguards (cont.)

1. Profession
 Education and training, include “Continuing
professional development” (“CPD”)
 Corporate governance regulations and
professional standards
 Monitoring professional work including
disciplinary proceeding
Conflict safeguards (cont.)

2. Work environment
 Internal control systems
 Review procedures
 Disciplinary procedures
 Organisational codes of ethics
 Separate review and reporting for key
engagements
Conflict safeguards (cont.)

3. Individual
 Complying with professional standards
 Maintaining records of contentious issues
 Mentoring
 Contacting professional bodies with queries
Ethical dilemmas and conflict
resolution

 Most professional bodies use principle-based

approach to resolving ethical dilemmas
 Rules-based approach is normally inappropriate
Rules-based vs
principles-based approach
Approach Benefits Disadvantages
Rules- Easy to check compliance as List of rules may not be
based based on fact complete
Easy to amend rule set as There is no room for decision
required making
Principles- Recognises that every threat It may be difficult to confirm that
based cannot simply be ‘listed’ the compliance action was
appropriate

Allows for subjective judgement, Two people may make different

so the member can apply the and valid decisions based on
principles in accordance with the same threat and
their specific situation and nature circumstances
of the threat
Chapter summary
Q&A

Thank you!