IFAC's and ACCA's guidance is very similar.
5.1 The public interest
Organisations sometimes issue codes of conduct to employees. Many employees are bound by
professional codes of conduct.
The International Federation of Accountants’ (IFAC's) Code of Ethics gives the key reason why accountancy bodies produce ethical guidance: the public interest.
Exam focus
point
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'A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore, a professional accountant's responsibility is not exclusively to satisfy the needs of an individual client or employer.
The public interest is considered to be the collective well-being of the community of people and
institutions the professional accountant serves, including clients, lenders, governments, employers, employees, investors, the business and financial community and others who rely on the work of professional accountants.'
The key reason that accountants need to have an ethical code is that people rely on them and their expertise.
Accountants deal with a range of issues on behalf of clients. They often have access to confidential and sensitive information. Auditors claim to give an independent view. It is therefore critical that accountants, and particularly auditors, are, and are seen to be, independent.
As the auditor is required to be, and seen to be, ethical in his dealings with clients, ACCA publishes guidance for its members, the Code of Ethics and Conduct. This guidance is given in the form of fundamental principles, specific guidance and explanatory notes.
IFAC also lays down fundamental principles in its Code of Ethics. The fundamental principles of the two Associations are extremely similar.
5.2 The fundamental principles
ACCA
Integrity. Members should be straightforward and honest in all professional and business
relationships.
Objectivity. Members should not allow bias, conflict of interest or undue influence of others to
override professional or business judgements.
Professional Competence and Due Care. Members have a continuing duty to maintain professional
knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional service based on current developments in practice, legislation and
techniques. Members should act diligently and in accordance with applicable technical and professional standards when providing professional services.
Confidentiality. Members should respect the confidentiality of information acquired as a result of
professional or business relationships and should not disclose any such information to third parties
without proper and specific authority unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships
should not be used for the personal advantage of the professional accountant or third parties. Professional Behaviour. Members should comply with relevant laws and regulations and should
avoid any action that discredits the profession.
5.3 Ethical framework
The ethical guidance discussed above is in the form of a framework. It contains some rules, for example, ACCA prohibits making loans to clients, but in the main it is flexible guidance. It can be seen as being a
framework rather than a set of rules. There are a number of advantages of a framework over a system of
ethical rules. These are outlined in the table below.
Advantages of an ethical framework over a rules based system
A framework of guidance places the onus on the auditor to actively consider independence for every
given situation, rather than just agreeing a checklist of forbidden items. It also requires him to
Advantages of an ethical framework over a rules based system
The framework prevents auditors interpreting legalistic requirements narrowly to get around the ethical
requirements. There is an extent to which rules engender deception, whereas principles encourage compliance.
A framework allows for the variations that are found in every individual situation. Each situation is likely
to be different.
A framework can accommodate a rapidly changing environment, such as the one that auditors are
constantly in.
However, a framework can contain prohibitions (as noted above) where these are necessary as
safeguards are not feasible.
6 Practical situations
12/07 – 6/14
Exam questions may ask you to think about what should be done if breaches of laws, regulations or ethical guidelines occur. Close relationships between the parties or other conflicts of interest are often a
complication.
6.1 Examination questions
Examination questions will expect you to be able to apply your understanding of ethical issues to practical problems arising in organisations. Later in this chapter we are going to suggest an approach that you may find helpful in dealing with such questions, but first we are going to take the bare bones of a situation and see how it might be built up into the kind of scenario you will have to face.
6.2 The problem
The exam may present you with a scenario, typically containing an array of detail much of which is potentially relevant. The problem, however, will be one or other of two basic types.
(a) A wishes B to do C which is in breach of D where
A = A situation, person, group of people, institution or the like
B = You/a management accountant, the person with the ethical dilemma C = Acting, or refraining from acting, in a certain way
D = An ethical principle, quite possibly one of the ACCA's fundamental principles
(b) Alternatively, the problem may be that A has done C, B has become aware of it and D requires some kind of response from B.
6.3 Example: the problem
An accountant joined a manufacturing company as its Finance Director. The company had acquired land on which it built industrial units. The Finance Director discovered that, before he had started at the company, one of the units had been sold and the selling price was significantly larger than the amount which appeared in the company's records. The difference had been siphoned off to another company – one in which his boss, the Managing Director, was a major shareholder. Furthermore, the Managing Director had kept his relationship with the second company a secret from the rest of the board.
The Finance Director confronted the Managing Director and asked him to reveal his position to the board. However, the Managing Director refused to disclose his position to anyone else. The secret profits on the sale of the unit had been used, he said, to reward the people who had secured the sale. Without their help, he added, the company would be in a worse position financially.
The Finance Director then told the Managing Director that unless he reported to the board he would have to inform the board members himself. The Managing Director still refused. The Finance Director disclosed the full position to the board.
The problem is of the second basic type. B is of course the easiest party to identify. Here it is the Finance Director. A is clear, as well: it is the Managing Director. C is the MD's breach of his directorial duties
regarding related party transactions not to obtain any personal advantage from his position of director without the consent of the company for whatever gain or profit he has obtained. D is the principle that requires B not to be a party to an illegal act. (Note that we distinguish between ethical and legal
obligations. B has legal obligations as a director of the company. He has ethical obligations not to ignore his legal obligations. In this case the two amount to the same thing.)
6.4 Relationships
You may have a feeling that the resolution of the problem described above is just too easy, and you would be right. This is because A, B, C and D are either people, or else situations involving people, who stand in certain relationships to each other.
A may be B's boss, B's subordinate, B's equal in the organisational hierarchy, B's husband, B's friend.
B may be new to the organisation, or well-established and waiting for promotion, or ignorant of some knowledge relevant to the situation that A possesses or that the people affected by C possess.
C or D, as already indicated, may involve some person(s) with whom B or A have a relationship – for example, the action may be to misrepresent something to a senior manager who controls the fate of B or A (or both) in the organisation.
Question
Relationships
Identify the relationships in the scenario above. What are the possible problems arising from these relationships?
Answer
The MD is the Finance Director's boss. He is also a member of the board and is longer established as such than B, the Finance Director.
In outline the problems arising are that by acting ethically the Finance Director will alienate the MD.
Even if the problem were to be resolved the episode would sour all future dealings between these two parties. Also, the board may not be sympathetic to the accusations of a newcomer. The Finance Director
may find that he is ignored or even dismissed.
Relationships should never be permitted to affect ethical judgement. If you knew that your best friend
at work had committed a major fraud, for example, integrity would demand that in the last resort you
would have to bring it to the attention of somebody in authority. But note that this is only in the last resort. Try to imagine what you would do in practice in this situation.
Surely your first course would be to try to persuade your friend that what they had done was wrong, and
that they themselves had an ethical responsibility to own up. Your second option, if this failed, might be to
try to get somebody (perhaps somebody outside the organisation) that you knew could exert pressure on
your friend to persuade him or her to own up.
There is obviously a limit to how far you can take this. The important point is that just because you are dealing with a situation that involves ethical issues, this does not mean that all the normal principles of
good human relations and good management have to be suspended. In fact, this is the time when such
business principles are most important.
6.5 Consequences
Actions have consequences and the consequences themselves are quite likely to have their own ethical implications.
In the example given above, we can identify the following further issues:
(a) The MD's secret transaction appears to have been made in order to secure the sale of an asset the proceeds of which are helping to prop up the company financially. Disclosure of the truth behind the sale may mean that the company is pursued for compensation by the buyer of the site. The
survival of the company as a whole may be jeopardised.
(b) If the truth behind the transaction becomes public knowledge this could be highly damaging for the company's reputation, even if it can show that only one black sheep was involved.
(c) The board may simply rubber stamp the MD's actions and so the Finance Director may still find that he is expected to be party to dishonesty. (This assumes that the company as a whole is amoral in its approach to ethical issues. In fact the MD's refusal to disclose the matter to the board
suggests otherwise.)
In the last case we are back to square one. In the first two cases, the Finance Director has to consider the ethicality or otherwise of taking action that could lead to the collapse of the company, extensive
redundancies, unpaid creditors and shareholders and so on.
6.6 Actions
In spite of the difficulties, your aim will usually be to reach a satisfactory resolution to the problem.
The actions that you recommend will often include the following.
Informal discussions with the parties involved.
Further investigation to establish the full facts of the matter. What extra information is needed?
The tightening up of controls or the introduction of new ones, if the situation arose due to laxity in
this area. This will often be the case and the principles of professional competence and due care and of technical standards will usually be relevant.
Attention to organisational matters such as changes in the management structure, improving
communication channels, attempting to change attitudes.
Question
Cunning plan
Your Finance Director has asked you to join a team planning a takeover of one of your company's suppliers. An old school friend works as an accountant for the company concerned, the Finance Director knows this, and has asked you to try and find out 'anything that might help the takeover succeed, but it must remain secret'.
Answer
There are three issues here. First, you have a conflict of interest as the Finance Director wants you to keep
the takeover a secret, but you probably feel that you should tell your friend what is happening as it may affect their job.
Second, the finance director is asking you to deceive your friend. Deception is unprofessional behaviour and will break your ethical guidelines. Therefore the situation is presenting you with two conflicting demands. It is worth remembering that no employer can ask you to break your ethical rules.
Finally, the request to break your own ethical guidelines constitutes unprofessional behaviour by the