PROFESSIONAL ETHICS Chapter 1.

2 – Fundamental Principles

Chapter 1.1 – Introduction to business ethics The Code of Ethics for Professional Accountants
 published by The International Federation of Accountants
Ethics- moral principles that govern a person’s behaviour or the (IFAC)
conducting of an activity”. — The Oxford English Dictionary
 the basis for the ethical codes of many accountancy bodies
Business ethics- application of ethical principles to the problems (AAT, ICAEW, ACCA, and CIMA)
typically encountered in a business setting  principles-based approach; it adopts a value system,
focusing on fundamental professional and ethical
Ethical influences principles which are at the heart of proper professional
 our own set of values and beliefs (through education, behaviour
experiences, and upbringing)
Five key principles:
 our own ideas of what is right and what is wrong, vary
(a) Integrity
between individuals and cultures
 “Integrity requires members to be straightforward and
honest in all professional and business relationships. It
factors that affect ethical obligations:
implies fair dealing and truthfulness. Accountants must
(i) The law- Legislation makes it very clear what is acceptable as a
present financial information fully, honestly, and
minimum standard. However, ethics is more than just obeying the
professionally within its context.”
law.
 follow laws, regulations, and legal documents, letters and
(ii) Government regulations- Rgulations set standards on issues such verbal agreements.
as unfair competition, unsafe products, etc. Failure to comply lead to  act fairly, respect cultural differences, and avoid breaking
criminal charges, or fines etc. promises to maintain trust and cooperation

(iii) Ethical codes- codes that clearly state the ethical standards and Responsibilities to Maintain Integrity:
principles. Generally, written codes clarify the ethical issues and
principles but leave the resolution to the individual’s conscience. It is
usually followed if written down and enforced – say by disciplinary procedures. However,
many companies have ‘unwritten’ codes of practice and/or have no method of
enforcement.

(iv) Social pressure- people draw their values from what they see
other people doing, whether on the news or people they know. This
can change, just as society changes.

(v) Corporate culture - "the sum total of all the beliefs, attitudes,
norms and customs that prevail within an organization" or "the way
we do things around here". Of particular importance is the example
set by senior management (‘tone at the top’). (b) Objectivity
The costs and benefits of business ethics  “Objectivity means that a member must not allow bias,
 the primary purpose of a business is to try and earn a conflict of interest, or undue influence of others to
profit; directors have been employed in order to earn the owners override professional or business judgments.”
of the business a return on their investment  ‘the state of mind which has regard to all considerations
 going beyond the legal minimum standard of behaviour is relevant to the task in hand but no other.’
contrary to the directors’ and that behaving ethically Independence of mind is the state of mind that permits
increases costs and reduces profits the provision of an opinion without being affected by influences that
compromise professional judgment, allowing an individual to act with
However, there can be commercial benefits to firms from acting
integrity and exercise objectivity and professional skepticism.
ethically:
Independence of appearance is the avoidance of facts
 Having good ethics can attract customers (enhance a and circumstances that are so significant that a reasonable and informed
company’s reputation and therefore its brand) third party, having knowledge of all relevant information, would reasonably
 Good ethics can result in a more effective workforce (there conclude that a firm’s or a member’s integrity, objectivity, or professional
is good working conditions for employees, attracting a higher skepticism had been compromised.
calibre of staff; without discrimination leads to access to a wider
human resource base)
(c) Professional competence and due care
 Ethics can give cost savings (avoiding pollution)
 Professional competence ---a member has a continuing
 Ethics can reduce risk (many firms have failed due to unethical
duty to maintain professional knowledge and skill at the
practices within them)
level required to ensure that a client or employer receives
The Institute of Business Ethics – Simple test competent professional service based on current
developments in practice, legislation, and techniques
Transparency Do I mind others knowing what I have decided?
 Due care- a member must act diligently and in accordance
Effect Does my decision affect or hurt anyone? with applicable technical and professional standards when
providing professional services
Fairness Would my decision be considered fair by those affected?  there is a level of competence necessary to perform those
services and that his or her knowledge, skill, and
 experience will be applied with reasonable care and (ii) Professionalism – there is a need to be clearly
diligence identified by employers, clients and other interested
Professional competence may be divided into two separate parties as a professional person in the accountancy field.
phases: (iii) Quality of services –services obtained are carried out
1. Gaining professional competence – for example, by to the highest standards of performance.
training to gain the AAT qualification. (iv) Confidence – users of the services should be able to
2. Maintaining professional competence –keep up to date feel confident that there is a framework of professional
with developments in the accountancy profession, ethics to govern the provision of services.
including relevant national and international  most important privilege conferred on professionals is the
pronouncements on accounting, auditing, and other right to a ‘professional opinion’
relevant regulations and statutory requirements.  ‘professionalism’ It should include:
Professional/client relationship:
(d) Confidentiality o the client presumes his or her needs will be met
 Respect the confidentiality of information and not disclose without having to direct the process
any such information to third parties without proper and o the professional decides which services are
specific authority unless there is a legal or professional actually needed and provides them
right or duty to disclose. o the professional is trusted not to exploit his or
 Confidential information must not be used for the personal her authority for unreasonable profit or gain
advantage of the member or third parties. Professional courtesy – this is a bare minimum
requirement of all business communication.
Expertise – professionalism implies a level of
competence that justifies financial remuneration.
Incompetence is bad PR.
Marketing and promoting services – accountants
should not make exaggerated or defamatory claims in
their marketing. This is covered in more detail in
Chapter 5.

A Conceptual Framework
 When such disclosure may be appropriate:
 Professional accountants may face various threats to
(a) permitted by law and is authorised by the client
complying with fundamental principles.
or the employer
 Since every situation is unique, different safeguards must
(b) required by law
be applied.
(c) there is a professional duty or right to disclose,
 A conceptual framework helps identify, evaluate, and
which is in the public interest, and is not
address these threats instead of relying on rigid rules.
prohibited by law
 If threats are significant, appropriate safeguards should be
 points to use deciding whether to disclose information:
applied to ensure compliance.
o interests of all parties
o accuracy and substantiation of information Compliance with Ethical Codes
o purpose and audience
o appropriateness of the communication  Accountants must act not only in the interest of clients or
employers but also in the public interest.
(e) Professional behaviour  Compliance with the IFAC Code ensures adherence to
 ”A professional accountant should comply with relevant fundamental ethical standards.
laws and regulations and should avoid any action that  AAT members may face disciplinary action for non-
discredits the profession.” compliance, especially if their conduct damages the
reputation of the profession.
 When members belong to multiple professional bodies,
the stricter ethical standard should be followed.
 Unethical behavior leads to legal consequences and
damages the profession’s reputation.

Chapter 1.3 – Threats and Safeguards

The objectives of the accountancy profession are to work Threats

to the highest standards of professionalism, to attain the General categories of threats to the principles :
highest levels of performance and generally to meet the 1. The self-interest threat –may stem from a financial or
public interest requirement. These objectives require four other self-interest conflict
basic needs to be met: o from a direct or indirect interest in a client
(i) Credibility – there is a need for credibility in information o from fear of losing an engagement or
and information systems. employment terminated
 o a consequence of undue commercial pressure  Internal escalation – is there someone within the
from within or outside the firm organisation who could/should be approached to discuss
2. The self-review threat – if any product or judgment of the the matter further –BOD
member or the firm needs to be challenged or re-  If the matter is still unresolved, seek professional advice
evaluated by him or her subsequently. without breaching confidentiality
3. The advocacy threat –if he or she becomes an advocate for  External escalation – should you report the matter
or against the position taken by the client or employer in externally?
any adversarial proceedings or situation.  Ultimately, consider resigning from the assignment.
4. The familiarity or trust threat –member may become
influenced by his or her:
a. knowledge of the issue PROFESSIONAL CONSIDERATIONS
b. relationship with the client or employer
c. judgment of the qualities of the client or Chapter 2.1- the role of professional accountant
employer to the extent that he or she becomes
too trusting. Responsibility to the public
5. The intimidation threat –member may become public interest- the collective well-being of the community of people
intimidated by threat, by a dominating personality, or by and institutions the professional accountant serves.
other pressures, actual or feared, applied by the client or
employer or by another party. accountancy profession’s public: employers, creditors, clients,
governments, employees, investors, the business and financial
Safeguard community, and others. For example:
 eliminate or reduce such threats to an acceptable level  Financial managers serve in various financial management
 two broad categories: capacities in organisations and contribute to the efficient and
(i) safeguards created by the profession, legislation or effective use of the organisation’s resources.
regulation  Internal auditors provide assurance about a sound internal control
system which enhances the reliability of the external financial
information of the employer.
 Independent auditors help to maintain the integrity and efficiency
of the financial statements presented to financial institutions in
partial support for loans and to shareholders for obtaining capital.
 Tax experts help to establish confidence and efficiency in the tax
system.
(ii) safeguards in the work environment.  Management consultants have a responsibility toward the public
interest in advocating sound management decision-making.

Statutory regulated functions

Chapter 1.3 – Dealing with Ethical Conflicts

Process of resolving ethical conflicts:

Step 1: Gather information
 do not rely on rumour and hearsay
 seek to gather further information to clarify the situation
Step 2: Analysis
 analyze by considering the legal perspective – have any
laws been broken?
 look for fundamental principles to apply and whether Preparing financial statements
there is an ethical issue to resolve  When preparing fs and filing to regulatory bodies: make
Step 3: Action full, fair, accurate, timely, and understandable disclosure
If it is clear that there is a problem to resolve, the accountant should  when doing their duties: act in good faith, responsibly, with
weigh up the different courses of action: due care, competence, and diligence, without
 Is behaviour dictated by law? misrepresenting material facts or allowing their
 Who are the affected parties? independent judgment to be subordinated
 ---do this to ensure that to the best of their knowledge, the  responsible for developing, setting, and promoting
books, records, accounts, and financial statements are International Financial Reporting Standards (IFRS).
maintained accurately and in reasonable detail---- The Financial Reporting Council (FRC)
 UK’s independent regulator
Internal audit  responsible for promoting high-quality corporate
“an independent, objective assurance and consulting activity governance and reporting to foster investment
designed to add value and improve an organisation’s operations”  oversees the regulatory activities of the professional
 provide assurance about a sound internal control system, accountancy bodies and operates independent disciplinary
which enhances the reliability of the external financial arrangements for public interest cases involving
information of the employer. accountants and actuaries.
 accountants should not develop and install procedures, The Conduct Committee
prepare records, or engage in any other activity which they  part of the FRC
would normally review or assess/ could reasonably be  provides independent oversight of professional disciplinary
construed to compromise their independence. issues, together with oversight of the regulation of
accountants and actuaries in the UK and the Republic of
Financial management services Ireland
 advisory in nature and are generally performed at the
specific request of an engagement client
Chapter 2.4- AAT’s sponsors and other industry-related bodies
Chapter 2.2- the objectives of the profession Sponsoring bodies
AAT Guidelines 1. CIPFA – The Chartered Institute of Public Finance and Accountancy
2. ICAEW – The Institute for Chartered Accountants in England and
Wales
3. CIMA – The Chartered Institute of Management Accountants
4. ICAS – The Institute for Chartered Accountants in Scotland

The Consultative Committee of Accountancy Bodies (CCAB)

 provides a forum in which matters affecting the profession
can be discussed and enables the profession to speak with
a unified voice in the UK and ROI
1. ICAEW
2. ICAS
3. CAI – Chartered Accountants Ireland
4. ACCA – The Association of Chartered Certified Accountants
5. CIPFA

Her Majesty’s Revenue and Customs (HMRC)

 formed in 2005, following the merger of the Inland
Revenue and HM Customs and Excise
 They ensure the correct tax is paid at the right time.
Chapter 2.3- the role of professional bodies
 They collect and administer direct (e.g., Income Tax) and
The International Federation of Accountants (IFAC) indirect tax (e.g., VAT), and pay child benefit and tax
 international body representing all major accountancy credits.
bodies across the world
The Financial Conduct Authority (FCA)
 to protect the public interest by developing high-quality
 regulates the financial services industry in the UK.
international standards, promoting strong ethical values,
 The aim of the FCA is to:
and encouraging quality practice
 Protect consumers
IFAC’s International Ethics Standards Board for Accountants (IESBA)
 Ensure the financial services industry remains
 independent standard-setting board that develops and
stable, and
issues, in the public interest, high-quality ethical standards
 Promote healthy competition between financial
and other pronouncements for professional accountants
services providers.
worldwide.
 develops the Code of Ethics for Professional Accountants, The Prudential Regulatory Authority (PRA)
(ethical requirements for professional accountants)
The International Audit and Assurance Standards Board (IAASB)  part of the Bank of England
 a division of IFAC  responsible for the prudential regulation and supervision
 responsible for developing, setting, and promoting of banks, building societies, credit unions, insurers and
International Standards on Auditing (ISAs) major investment firms
The International Accounting Standards Board (IASB)
The Serious Organised Crime Agency (SOCA)
 independent body
  national police unit that tackles serious organised crime 1. Structured CPD – Learning with guidance from an expert
that affects the UK and its citizens (e.g., lecturers, trainers, conference speakers, experienced
 Class A drugs, People smuggling, Human trafficking, Major practitioners). Examples:
gun crime, Fraud, Computer crime and Money laundering 2. Unstructured CPD – Independent learning without
interaction or assessment. Examples:
Key Principle: A single repetitive activity should not make up the entire CPD
requirement. Members must stay updated with professional and industry
Chapter 2.5- keeping up to date developments through a mix of structured and unstructured learning.
Why is keeping up to date important?
 professional accountant can act with technical and
professional competence in providing services to clients
and service to an employer
 failure is thus a breach of ethical principle of professional
competence, which states:
A member has a continuing duty to maintain professional knowledge and skill
at the level required to ensure that a client or employer receives competent
professional service based on current developments in practice, legislation
and techniques.

How to keep up to date

 Reading professional journals
 Enrolling on update courses
Chapter 2.6- AAT disciplinary process
 Complying with continuing professional development (cpd)
requirements for qualified professional accountants Grounds for disciplinary action- ground for disciplinary action if a
member is guilty of misconduct.
Continuing Professional Development (CPD)
'the continuous maintenance, development and enhancement of the Misconduct- a member having conducted him/herself in such a
professional and personal knowledge, skills and ability, often termed manner as would in the opinion of the association, prejudice his/her
competence, which members of certain professions require status as a member or reflect adversely on the reputation of the
throughout their working lives'. Association; or having acted in serious or repeated breach of the
Articles or of any rules, regulations or bye-laws.
Continuing- learning never ceases, regardless of age or seniority
Professional- focused on personal competence in a professional role Disciplinary action
Development- to improve personal performance and enhance career
progression and is much wider than just formal training courses

There are two strands to CPD:

(i) update CPD- ensures professional competence and prevents
technical obsolescence within the member's field of work
(ii) developmental CPD- provides new knowledge, broadens skills
and opens up new career opportunities

The CPD cycle (four stages):

1. Assess- identify the skills and knowledge that you already have
work experience and previous education and study
2. Plan- consider where you are heading in your career, identify the
'gap' and plan how to achieve your objectives
career goals and aspirations, job roles , and the skills, knowledge and attributes they
require
3. Action-undertake CPD activities
implementation of the plan
4. Evaluate
reflect whether or not you have experienced personal or business benefits from your
efforts
The AAT CPD policy requires you to complete a CPD cycle twice
annually.

What counts as CPD?

Continuous Professional Development (CPD) includes any learning
relevant to your professional role, ensuring significant learning
outcomes. It is often part of daily work activities.
Types of CPD:
  law is a form of private law and involves the relationship
between individual citizens.
 brought by the claimant, who is seeking a remedy, will be
referred to by the names of the parties involved in the
dispute
LEGAL CONSIDERATIONS  ex: breach of contract, negligence and breach of trust

Chapter 3.1- Risk Differences between civil and criminal law

Risk

businesses face risk and uncertainty:

 Political risks: a host government may act against you as a
company
 Economic risks: changing economic conditions (recession)
 Social risks: change in tastes, demography (trends)
 Technological risks: e.g. a product may become obsolete
due to technological advances
 Physical risks: such as climate and geology (earthquake)
 Strategic ricks: such as an aggressive advertising campaign
by rival firms

Definitions of risk
1. The unexpected variability or volatility of future cash flows
and returns.
2. The probability or threat of quantifiable damage, injury,
liability. loss, or any other negative occurrence that is Chapter 3.3- What is money laundering and terrorist financing?
caused by external or internal vulnerabilities, and that may
Money laundering- process by which criminally obtained money or
be avoided trough pre-emptive action.
other assets (criminal property) are exchanged for 'clean' money or
3. The probability of something happening multiplied by the
other assets with no obvious link to their criminal origins. It also
resulting cost or benefit if it does. Risk = probability >
covers money, however come by, which is used to fund terrorism.
impact
4. The effect of uncertainty on objectives. Criminal property - property obtained as a result of criminal conduct
and the person knows or suspects that it was obtained from such
Operational risk? conduct.
'the risk of losses resulting from inadequate or failed internal
processes, people and systems, or external events' Three acknowledged phases to money laundering:
 potential losses that might arise in business operations 1. placement
(risks of fraud or employee malfeasance) 2. layering
 internal control systems manage operational risks 3. integration
specific areas of operational risk to a business:
 Reputational Risk – from the way a company is perceived. Terrorist Financing
 Litigation Risk – from a consequence of legal action.
 Process Rick- from poorly designed business processes.
 People Risk- from human error or deliberate actions.
 Systems risk- from poorly designed systems.
 Event Risk- from one-off incidents such as fire in a factory.

Chapter 3.2- Civil and Criminal Law

legal rules fall into two fundamental categories:

1. Criminal
 Criminal law relates to conduct of which the State
disapproves and which it seeks to control. it is a form of
public law.
 case is brought by the State, in the name of the Crown. A
criminal case will be reported as Regina (or R.) v X (Regina
is Queen in Latin)
 ex: crimes of theft, money laundering, terrorist financing,
bribery and fraud
2, Civil
Chapter 3.6- Customer Due Diligence LEGAL CONSIDERATION II
Chapter 4.1- bribery
AAT ethics guidelines Penalty and Culpability under the Bribery Act (2010)
The Money Laundering Regulations 2007 apply when: a member enters a  Imprisonment: Up to 10 years with unlimited fine.
professional relationship with a client, which the member estimates will have  Company Liability: Companies are liable for bribery done
an element of duration; the member acts in relation to a transaction or series for their benefit by employees or associated persons.
of related transactions amounting to €15,000 or more; or there is a suspicion
 Board-Level Complicity: Companies are culpable for
of money laundering.
board-level complicity and personal liability applies to
When to apply Customer Due Diligence? (CDD) senior officers who ignore bribery.
before services are provided to clients  Third-Party Bribes: Companies are liable for bribes to third
parties aimed at gaining business advantages, even if
Money laundering regulations state that CDD must be applied in the unaware of the actions.
following situations: Defences:
 When establishing a business relationship.  can be guilty if an employee or associate commits bribery,
 When carrying out an occasional transaction (le involving even without management's knowledge or approval
€15,000 or the equivalent in sterling or more).  Defence: Company must prove adequate procedures were
 Where there is a suspicion of money laundering or terrorist in place to prevent bribery.
financing.
 Where there are doubts about previously obtained Chapter 4.2- Fraud
customer identification information. What is Fraud?
 At appropriate times to existing clients on a risk-sensitive  Fraud is an intentional act involving the use of deception
basis. to obtain an unjust or illegal advantage — essentially
'theft by deception'.
Elements of Customer Due Diligence for new clients  Fraud (intentional) vs. Error (unintentional)
 criminal offence, punishable by fine or imprisonment
1. Find out who the client claims to be- name, address, date
of birth - evidence to check that the client is as claim different types of fraud
2. Obtain evidence so the accountant is satisfied that he or Type of Fraud Examples
she knows who any beneficial owners are. Generally, a Misrepresenting the quality of goods;
Crimes against
beneficial owner is an individual who ultimately owns 25% pyramid trading schemes; selling counterfeit
consumers or clients
or more of the client or the transaction property. goods.
3. Obtain information on the purpose and intended nature of Employee crimes against Payroll fraud; falsifying expense claims; theft
the transaction. employers of cash.
If CDD cannot be completed, the accountant must not act for the Crimes against investors,
client - and should consider whether to submit an internal Report or Financial statement fraud.
consumers, employees
Suspicious Activity Report, as appropriate
Crimes against financial Using lost and stolen credit cards; fraudulent
institutions insurance claims.
On-going monitoring of existing clients
 Carry out appropriate and risk-sensitive CDD measures to Crimes against Social security benefit claims fraud; tax
any transaction which appears to be inconsistent with government evasion.
knowledge of the client or the client's business or rick Crimes by professional
Money laundering; advance fee fraud.
profile. criminals
 Keep CDD document, date and information up to date. E-crime (computer
Spamming; copyright crimes; hacking.
crimes)
Chapter 3.7- whistleblowing
Whistleblowing - disclosing information that a worker believes is The Fraud Axt (2006)
evidence of illegality, gross waste, gross mismanagement, abuse of Three distinct offences:
power, or substantial and specific danger to the public health and 1. Fraud by false representation
safety. 2. Fraud by failing to disclose information
The ethics of whistleblowing highlights the matters that you should 3. Fraud by abuse of position
consider before you blow the whistle. It takes a realistic look at the
effectiveness of the protection provided by the Public Interest Fraud Prevention
Disclosure Act 1998.
  An anti-fraud culture- minor unethical practices are
overlooked before it becomes a culture The information commissioner’s office (ICO)- if any part of the data
 Risk awareness – awareness among staff that there is always a controller’s register becomes inaccurate—notify ICO within 28days
possibility of fraud; publicity to fraud a has been expose to be a or criminal offence if not
reminder not to be tempted and as a warning to those responsible for
the management of controls.
Chapter 4.4- Other legal and regulatory requirements
 Whistleblowing-encouraged to raise alarm about fraud
 Sound Internal Control System- monitor fraud
Insider Trading-
 against the law to buy or sell shares or pass on, tip or
Fraud Detection disclosure material, on-public information to others
 Performing regular checks outside the company including family and friends
 Warning signals  important of confidential information—‘inside information’

Fraud Responses Health and safety legislation

Employer’s Duty
Theft – ‘dishonestly appropriates property belonging to another with
the intention of permanently depriving them of it’ (Theft Act 1968)

Employee Malfeasance Risk

Malfeasance- doing wrong or committing an offence
Employee Malfeasance Risk- organisations’ exposure to risks of
actions by employees that result in an offence or crime

Chapter 4.3- Data Protection

Data Protection Act (1998)
 Gives individuals rights to know what information is held Employee’s Duty
about them
 Act works in two ways:
1. Gives rules and principles concerning
the use of data
2. Provides individuals with important
rights concerning data held about
them
Employment protection and equality law
Data Protection Principles
Equality Act (2010)- to consolidate the complicated and numerous
array of Acts and Regulations, which formed the basis of anti-
discrimination law in Great Britain

Rights concerning information

 Right to find out what personal information is held, on
payment of a reasonable fee
 Contact the Information Commissioner’s Office when
access to personal information is denied

Registration
THE ACCOUNTANT IN PRACTICE