ACC202

Ethical behaviour and implications

for accountants
 Main Issues

Ethical behaviour by accountants is to complement

the various accounting and audit standards issued
by
• the International Accounting Standards Board
(IASB);
• the International Auditing and Assurance
Standards Board (IAASB); and
• other professional accounting bodies.
 Individual ethical guidelines

• Parents
• Family
• Social group
• Peer group
• Religion
• Culture
• Professional
 The accounting standard-setting
process and ethics
• Can standards provide an objective measure of reality?
• Profit is a very subjective attribute which has
traditionally omitted public costs such as
environmental and social costs.
• The criteria of fairness has been seen as satisfied by
preparing profit statements on principles such as going
concern and accrual. As well as neutrality when
presenting the profit statement.
 The IFAC Code of Ethics for
Professional Accountants
The IFAC Fundamental Principles are
• Integrity
– To be straightforward and honest in all professional and business relationships/conduct.

• Objectivity
– Not permit bias, conflict of interest or undue influence of others to override professional or business

judgements .
• Professional competence and due care
– To maintain professional knowledge and skill at the level required to ensure that a client or employer receives

competent professional services and to act in accordance with applicable technical and professional standards .
• Confidentiality
– To respect confidentiality of information acquired as a result of professional and business relationships and not disclose
any such information to third parties without proper specific authority unless there is a legal and professional right or
duty to disclose nor use the information for personal advantage

• Professional behaviour.
 The IFAC Code of Ethics for
Professional Accountants
The IFAC Fundamental Principles are
• Professional behaviour.
– To comply with relevant laws and regulations and avoid any action that discredits the profession

• Finally that:
– ‘A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the
public interest..’
 Problems arising for accountants
in practice
• Appointments
– Before accepting appointment accountants should consider desirability of accepting client given nature of business.EG QUESTION
OF LEGALITY
– If size of fee will threaten independence.
– Why previous accountants do not want to get involved any further.
– Whether already doing other jobs for the client might compromise independence of audit.

• Second opinions
– One must be careful before providing second opinion when asked for. It might be used to undermine an accountant who is trying to
be ethical.
– Ask for full information before supplying second opinion.

• Remuneration
– Adequate REMUNERATION REQUIRED TOALLOWFOR PROFFESSIONAL WORK

• Marketing
– Marketing should not exaggerate or make negative comments about other professionals.

• Independence
• Accountants and relatives should not accept gifts from clients, independence of mind and appearance.
 Problems arising for accountants
in business
Financial pressures which arise from
• substantial financial interests in the form of shares, options,
pension plans; and
• dependence on employment income to support themselves
and their dependents.
• when these depend on reporting favourable performance it is
difficult to withstand pressure.
• Misrepresentation and the omission of additional significant
material which would change the assessment of the financial
position of the firm is not acceptable.
• Accountants must use internal steps to report pressure to act
unethically and if that fails to produce results they need to
willing to resign.
 Threats to compliance with the
fundamental principles
• Self-interest threat
– The threat that a financial or other interest will inappropriately influence the
accountant’s behaviour or judgement. Where an accountant has a beneficial interest in a
client’s performance

• Self-review threat
– The threat that a professional accountant will not appropriately evaluate the results of previous judgement made or service performed by
another individual within the professional accountant firm.

• Advocacy threat
– The threat that a professional accountant will promote a client’s or employers position to the point that accountant’s
objectivity is compromised.

• Familiarity threat
– The threat that due to a long or close relationship with a client or employer, a professional accountant will be
sympathetic to their interest or too accepting of their work

• Intimidation threat
– the threat that a Member will be deterred from acting.
 Implications of ethical values for the
principles- versus rules-based approaches to
accounting standards
Business people should maximise profits within the norms of
society (Milton Friedman). While
• Adam Smith assumed the existence of the conditions
necessary to facilitate fair and equitable exchanges.
• Accountants can apply rules and standards to the
letter of the law but fail to report the commercial
substance.
 Principles based

• Fewer standards is referred to as principles based.

• Greater reliance on the application of the ‘true and
fair’ override to
– report unusual situations; and
– provide a fair picture.
• HOWEVER: override can be used to mislead.
 Are principles linked to accounting standards?
• The current conceptual framework assumes that we
need to produce general-purpose financial accounts
using understandability, relevance, reliability and
comparability as guiding criteria.
• However, the individual standards do not demonstrate
how those principles lead to the standards which have
been produced.
 Are principles linked to accounting standards?
(Continued)
• Also, the way in which principles are used will not lead
to good outcomes unless the accountants preparing
and reviewing accounts have high moral standards.
• An accountant, in preparing accounts, will always have
a potential clash between what his employer and
superior wants and what is best from an ethical or
community perspective.
 Are principles linked to accounting standards?
(Continued)
• Ethics are an integral part of the formulation of accounting
principles.
• Does this mean different accounting being applicable to
different countries?
• Will principles differ if some countries place greater
emphasis on the impact on the community?
• How will cultural norms and religion affect ethics?
• Is it correct to assume that shareholders in every country
have identical information needs and apply identical
ethical criteria in assessing a company’s operations?
Implications of unethical behaviour for financial
reports
• Increased cost of capital
• Hidden liabilities
 Requests that raise ethical issues

Requests to
– manipulate tax returns by employers;
– produce figures to mislead shareholders;
– conceal information;
– manipulate overhead absorption rates to extort more
income from customers (an occurrence in the defence
industries);
– authorise and conceal bribes to buyers and agents, a
common request in some exporting businesses;
– produce misleading projected figures to obtain additional
finance.
 Requests that raise ethical issues (Continued)
Requests to
– conceal improper expense claims put in by senior
managers;
– over- or undervalue assets;
– misreport figures in respect of government grants;
– requests to redefine bad debts as ‘good’ or vice versa.
 Negative pressures on standard setters

• Standard setters have been under pressure, which

could result in lower quality or expedient accounting
• Pressure from industry and commerce both directly,
and indirectly through threats from the legislators
who are beholden to industry.
• Proposals to replace the certain bodies in standard
setting is common.
 Company codes of ethics

• Level 1 – Comply with all the laws

• Level 2 – Focuses on ensuring fair and equitable
relations with all parties with which the company has
direct relations
• Level 3 – Where the companies take a global
perspective and recognise their responsibility to
contribute to a favourable global environment
– It is argued for example that European firms are more
likely than US firms to have a level-three orientation.
 Conflict between codes and targets

Accounting scandals
• Reflection of a deficient corporate climate
• Concentration on setting unrealistic targets
• Promoting competition between the staff
• Pressure not unethical standards of managers.
 Multinationals face special problems

• Transactions are often extremely large, so that there

are greater pressures to bend the rules to get the
business.
• Ethical values in some of the countries may be
different from those in the group head office.
• What if wages paid to public officials are too low to
support a family?
 Whistle-blowing

• Immunity to the first party to report

• Anonymous whistle-blowing
• Proportionate response
• Government support
• Whistle-blowing – protection
• Whistle-blowing – company policies.
Money laundering – implications for accountants
• Auditors in some jurisdictions (e.g Practices Board
(APB) in the UK) are required to
– take the possibility of money laundering into account
when carrying out their audit; and
– report to the appropriate authority if they become
aware of suspected laundering.
A future role for accountants in ethical assurance
• Ethical policing role as internal auditors
– Assessing managers’ compliance with the ethical code of
the organisation.
• Conflicts of interest are often highlighted by internal audits
and comments raised on managerial practices.