19. Professional Ethics in Accounting and Business

7/28/2019 19. Professional Ethics in Accounting and Business

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In general, ethics mean.

What God commands What our society or group says is right or

wrong

What a persons conscience says is right orwrong

The behavioral science of discerning right andwrong

Ethics Morality

Concerned with the norms, values and beliefsembedded in social processes which define

right and wrong for an individual or acommunity. (Crane and Matten).

Ethics is concerned with the study of morality the analysis of what is right and wrong andthe development of rules and principles thatdetermine right and wrong for any situation(ethical theories).

ETHICS

The science of right and wrong.

That branch of philosophy dealing with values

relating to human conduct, with respect to

the rightness and wrongness of certain actions

and to the goodness and badness of the

motives and ends of such actions.

Ethics: a set of moral principles to guide

behaviour

Why ethics is important

As ethical issues become more important to

society in general, and an organizations

customers in particular; organizations need to

recognize the value of ethics.

An organization failing to appreciate the

importance of ethical issues will be out synch

with its customers.

Re-assuring the outside world, that as

accountants think ethic is important

The unethical behaviour of a firm could harm

many stakeholders

Management accountability

Fiduciary responsibility: Duty of faithful

service to serve some external purpose and

their managers have a duty to run them in a

way that serves that purpose, whether it be to

relieve distress (a charity), to keep the peace

and manage the economy (a government), to

promote the interests of its members (a trade

union) or to make a profit (a business).


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Business objectives and management

discretion

The stakeholder view of company objectives isthat many groups of people have a stake orlegitimate interest in what the company does.

The consensus theory of companyobjectiveswas developed by Cyert and March. They arguedthat managers run a business, but do not own it,and they do not necessarily set objectives for thecompany, but rather they look for objectiveswhich suit their own inclinations. Objectivesemerge as a consensus of the differing views ofdifferent stakeholders, but they are not allselected or controlled by management.

Ethical code of conduct

Duty of managers to act in the interest of all

the stakeholders

Safety issues

Avoid bribery, corruption, excessive gifts

Confidentiality of customers, suppliers, and

employees

Should not misuse the authority for personal

gain

Approaches to ethics

Ethics

Stakeholder view

The moral view

Shareholder view

Enlightened self-

interest

Ethics is bad for business

Comply with the law

Provide employment

Generate wealthEthics is good for business

Competitive advantage

Wider investor base

Ethics is right thing to do

Above and beyond the law

Moral duty

Leave the world better place

Ethical Principles

Ethical absolutism (dogmatic) one set of rights andwrong which never changes.

Right and wrong are objective qualities that can berationally determined and do not change regardless ofthe person/culture/environment/time/situation.

Ethical relativism (pragmatic) context dependentand subjective.

wide variety of ethical beliefs and practices

what is correct in any given situations will depend on

the conditions at the time. What is morally unacceptable by one person, culture,

environment may be totally acceptable by a differentperson, culture, environment.

Ethical Principles

Pluralism accepts that whilst different views

exist on morality, a consensus on basic principlesand rules in a certain context can, and should, bereached.

Pluralists pursue consensus (agreement) in orderto accommodate the needs of both the majorityand the minority

The pluralist solution is to cater for the needs ofmore than one stakeholder group withoutseriously compromising the interests of anyindividual group.

Ethical Principles

Deontology (non-consequential) based on the

concept of duty, principles of obligation, irrespective ofthe consequences that will follow.

Many philosophers have argued that certain coreduties are imperatives, and as such will always apply,regardless of circumstances.

They often have their foundations in religion or deeplyembedded values, universally accepted by society.

Teleology (consequential) whether a decision is rightor wrong depends on the consequences or outcome ofthat decision. The end result of the action is the soledetermining factor of its morality. (ends justify themeans)


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Ethical Principles

Egoism

Sometimes thought of as the view 'what is best

for me?'. An action is morally right if the decisionmaker freely decides in order to pursue either

their short-term desires or longer-term interests.

The egoist will also do what appears to be right

in society because it makes them feel better.

Egoism does not always work because actions on

all members of society cannot be determined.

Ethical Principles

Utilitarianism

Sometimes taught as the idea of 'what is best for

the greatest number?'. An action is morally rightif it results in the greatest amount of good for thegreatest number of people affected by thataction.

It applies to society as a whole and not theindividual.

It is valuable in business decisions because itintroduces the concept of utility or theeconomic value of actions.

It is highly subjective.

Ethical problems facing managers

Extortion. Foreign officials have been known to threatencompanies with the complete closure of their localoperations unless suitable payments are made.

Bribery. This refers to payments for services to which acompany is not legally entitled.

Grease money. Multinational companies are sometimesunable to obtain services to which they are legally entitledbecause of deliberate stalling by local officials. Cashpayments to the right people may then be enough to oilthe machinery of bureaucracy.

Gifts. In some cultures (such as Japan) gifts are regarded as

an essential part of civilized negotiation, even incircumstances where to Western eyes they might appearethically dubious. Managers operating in such a culturemay feel at liberty to adopt the local customs.

Social responsibility and businesses

Social responsibility action is likely to have an

adverse effect on shareholders' interests:

(a) Additional costs such as those of environmental

monitoring

(b) Reduced revenues as a result of refusing to

supply certain customers

(c) Diversion of employee effort away from

profitable activities(d) Diversion of funds into social projects

Specific environmental responsibilities

Environmental auditing: waste treatment,

emissions Economic action: charges for environmental

damage would be an incentive for mangers toavoid it.

Accounting action: environmental reporting

Ecological approach

Quality management is applied using theprinciple of continuous improvement inenvironmental performance.

Production is managed to minimize inputs ofmaterials and energy.

Examples of social and ethical

objectives

Employees:

A minimum wage

Job security

Good conditions of work

Job satisfaction

Promotion of diversity and equal opportunities

A healthy and safe workplace


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Customers may be regarded as entitled toreceive a safe product of good quality at areasonable price.

Suppliers may be offered regular orders and

timely payment in return for reliable deliveryand good service.

Society as a whole

Control of pollution and use of sustainableresources

Provision of financial assistance to charities,sports and community activities

Not producing undesirable goods

CORPORATE CODES OF ETHICS

Corporate codes of ethics are published by private sectororganizations in order to communicate their values andbeliefs to stakeholders. These include:

customers, whose buying decisions may be influenced by ethicalconsiderations

shareholders , whose investment decisions may be influenced byethical factors

employees, who have to know the standards expected of them

suppliers, who need to understand the expectations of theircustomers and also that they will be treated ethically during thecourse of the commercial relationship

lobby groups, who may have specific interests in certainpractices of the organisation

the community in which the organisation is situated, which mayseek reassurance that the organisation will act in its interest asan employer and as a good corporate citizen.

Contents of a code of ethics

Business ethics

The study of business situations, activities and

decisions where (moral) issues of right and

wrong are addressed (Crane and Matten)

It is the application of ethical values to

business behaviour.


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Personal ethics deriving from a person's

upbringing, religious or non-religious beliefs,

political opinions, personality and so on.

Professional ethics (e.g. ACCA's code of ethics,

medical ethics).

Organisation cultures (e.g. 'customer first'). We

discussed culture in an earlier chapter; culture, in

denoting what is normal behaviour, also denotes

what is the right behaviour in many cases.

Organisation systems. Ethics might be contained

in a formal code, reinforced by the overall

statement of values.

Importance - Business

Increasing power and influence on society of

organizations

Stakeholder demands for greater accountabilityand ethical practice.

Lack of formal business ethics training results in

an inability to recognize ethical dilemmas and

how to correctly manage the associated risks.

Ethical practice must be seen as a driver for

organizational and stakeholder wealth,

profitability and resource management.

Importance - Business

Suggests a well run business.

Ethical investment and fund management

companies will only invest in ethically sound

companies.

Enhanced public profile.

Easier to recruit and retain staff if they are

working in an environment of good ethical

behaviour.

Easier to manage risk if ethics are top driven

Importance - Individual

Consumer and employee expectations have

evolved over recent years

Consumers may chose to buy ethical items

even if they are not the cheapest

Employees will not blindly accept orders to act

in a manner that they personally believe to be

unethical

Leadership practices and ethics

Openness: Being full and complete in the

provision and disclosure of information andreasoning behind decisions

Trust: Relying on the judgments and informationprovided by other professionals, and embracingvalues that encourage others to rely on our

judgments

Honesty: Not only telling the truth, but beingprepared to give complete information on whichothers can fully depend

Respect: Treating others with dignity and

adopting a professional manner

Empowerment: Ensuring that those who are

entrusted with responsibilities have the

authority to carry out the tasks necessary to

fulfill their duties

Accountability: Taking full responsibility for

the outcomes of our work, including work

carried out on our behalf by others


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The seven principles of public life

Selflessness

Integrity

Objectivity

Accountability

Openness

Honesty

Leadership

Managing Ethics

Compliance-based approach: primarily designed

to ensure that the company acts within the letter

of the law, and that violations are prevented,detected and punished.

Integrity-based programmes: concern for the law

with an emphasis on managerial responsibility

for ethical behaviour. Integrity strategies strive to

define companies' guiding values, aspirations and

patterns of thought and conduct.

Whistle blowing

Accountants and ethics

A responsibility to influence ethical behaviour

at work.

A duty to act in the public interest.

As an accountant, your values and attitudes

flow through everything you do professionally.

Why should an accountant behave

ethically?

(a) Ethical issues may be a matter oflaw andregulation and accountants are expected toapply them

(b) The profession requires members to conductthemselves and provide services to the publicaccording to certain standards. By upholdingthese standards, the professions reputationand standing is protected

(c) An accountants ethical behaviour serves toprotect the public interest

Profession or occupation?

A profession refers to an occupation (the

principle activity that one does to earn aliving) which involves has the followingcharacteristics:

- Significant period of academic qualification.

- Requirement to pass prescribed examinations.

- Extensive theoretical knowledge and skills.

- Technical training and practical experience.

- Certificate or license to practice.

- Membership to a professional body.

- Code of professional conduct and ethics.

THE ROLE OF REGULATORY AND

PROFESSIONAL BODIES

Have laws at supra-national level

Laws against discrimination in the workplaceand selling high interest consumer loans tovulnerable people.

Most professional bodies set ethical standardsto which all their members are expected toadhere.

Failure to adhere may result in censure oreven removal from membership.

IFAC and ACCA


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Fundamental principles of the ACCA

Code of Ethics and Conduct

Integrity: Members should be straightforward

and honest in all professional and business

relationships.

Objectivity: Members should not allow bias,

conflicts of interest or undue influence of

others to override professional or business

judgments.

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 competent professional service basedon 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 and business

relationships and should not disclose any such

information to third parties without proper

and specific authority, or 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 advantageof members or third parties.

Professional behaviour: Members shouldcomply with relevant laws and regulations andshould avoid any action that discredits theprofession. TheACCA Rulebook goes further,and states that members should behave withcourtesy andconsideration towards all withwhom they come into contact in aprofessional capacity.

Should respect laws and regulations and notdo anything that could discredit the

accountancy profession.

IFAC Code of ethics


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Personal qualities expected of an

accountant

Professional qualities expected of an

accountant

Conflict of interest

A conflict of interest occurs when anindividual or organization is involved inmultiple interests, one of which couldpossiblycorrupt the motivation for an act in the other

Members and firms should not accept orcontinue engagements in which there are, orare likely to be significant conflicts of interestsbetween members, firms and clients.

Should apply safeguards such as disclosureagainst the threat.

Self-interest threat

The threat that auditors act in their own personalinterests (or are believed to be doing so).

This may occur as a result of the financial orother interests of a professional accountant or ofan immediate or close family member

Examples include:

owning shares in their client

receiving excessive gifts or hospitality from clients

receiving excessive fees from a single client

having personal or business relationships with clients

audit fees that are calculated in a way that mightencourage unethical behaviour by the auditor.

Self interest threat

Financial interest

Close business relationships Employment with client

Partner on client board

Family and personal relationships

Gifts and hospitality

Loans and guarantees

Over due fees

High percentage fees

Lowballing

recruitment

Self review threat

When an assurance firm provides services other than

assurance services to an assurance client Recent service with assurance client, general services,

preparing accounting records and financial statements,valuation services, tax services, internal audit services,corporate finance and other services such as IT,temporary staff cover, litigation support, legal servicesetc

Book-keeping, financial information systems designand implementation, appraisal, valuation services,internal audit, actuarial service, managementfunctions, human resource, broker-dealer services,legal services (SOX)


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Advocacy threat

Where the assurance firm is in a position oftaking the clients part in a dispute or

somehow acting as their advocate By taking this position, they may be seen to be

on the client's side, rather than beingindependent

Representing an audit client in a legal case ortax enquiry

Taking legal action against a client, or beingsued by a client

Familiarity threat

Where independence is jeopardized by the auditfirm and its staff becoming over familiar with the

client and its staffs Auditors might deliberately or accidentally put

too much trust in their client and not be skepticalenough, leading to under-auditing

Where there are family and personalrelationships between client/firm

Employment with assurance client

Recent services with assurance client

Long association with assurance client

Intimidation threat

When members of the assurance team has

reason to be intimidated by client staff

Close business relationship

Family and personal relationship

Litigation

Assurance staff members move to

employment with client

Self-interest threat - when the auditor on theengagement team could benefit in some way or form(financially for example) with the clientFamiliarity threat - when the auditor has some form ofa close relationship with the client (be it the topmanagement or employees, or the firm) which maycause them to be generous and sympathetic whenassessing the client

Intimidation threat - when the auditor is deterredfrom acting in an objective, professional manner as aresult of threats (real or not) from the client

Self-review threat - when the auditor is hired toreview/evaluate any product or judgment that theythemselves were responsible for preparing (from a

previous engagement) in order to reach a conclusion Advocacy threat - when the auditor promotes the

client (their business, the client themselves, etc) to thepoint that objectivity may be (perceived) to beimpaired

Actual and threatened litigations

When the client threatens to sue or actually

sues the assurance firms for work done

previously. This could result in:

Risk of losing the client

Bad publicity

If they were found negligent would result in more

problems

To avoid such litigations, following factors couldbe considered:

The materiality of litigation

The nature of assurance engagement

Whether litigation relates to a prior assuranceengagement

Safeguards could be:

Disclosing to audit committee nature and extent oflitigation

Removing specific affected members from team

Involving additional professional accountant on theteam to review work


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Second opinions

When the audit client is unhappy with a proposed

audit opinion, and seeks a second opinion from a

different firm of auditors Second audit firm cant give a formal audit opinion

If a different firm of auditors indicates to someone

elses client that a different opinion can be

acceptable, then appointed auditors may be under

pressure to change their opinion

The second firm should ensure they seek

permission to communicate with the existing firm

Conflicts of interest arise from various

sources. The accountant may be asked to:

take a decision on a matter in which the individual

has a personal involvement,

such as where the accountant has a family or

personal relationship with the client

advise a company that is in direct competition

with an existing client

support two clients who are in competition with

one another.

In times of such a conflict:

The ACCA Code provides clear guidance

members should not accept engagements inwhich such conflicts arise, or even wherethere is a possibility of such conflicts arising.

Members should evaluate the threats arisingfrom conflicts and apply relevant safeguardsagainst the threats materializing.

If in doubt, the accountant should disclose theconflict to relevant parties.

Safeguards

Education, training and experience requirements

CPD requirements

Corporate governance codes

Professional standards

Strong internal controls

Disciplinary processes

Quality control procedures

Consultation with another appropriate professionalaccountant

WHY HAVE A CODE OF ETHICS?

to define accepted/acceptable behaviours;

to promote high standards of practice;

to provide a benchmark for members to use

for self evaluation;

to establish a framework for professional

behaviour and responsibilities;

as a vehicle for occupational identity;

as a mark of occupational maturity.


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CONSEQUENCES OF UNETHICAL

BEHAVIORS

Criminal charges and/or fines;

Lawsuits;

Ruined careers;

Injured organization reputation;

Wasted time;

Low morale;

Recruiting difficulties;

Oppressive legislation;

Fraud and scandals.

Ethical dilemmas

These are situations where two ethical values

or requirements seem to be incompatible.

They can also arise where two conflicting

demands or obligations are placed on an

individual

There is no one situation that is ethical or

morally right

Such situations could be very difficult to solve

Ethical dilemmas Ethical dilemmas arise when the accountant has to

consider two or more seemingly incompatible ethicalobligations. For example: he may be asked by a manager to remain silent about

certain matters that would have an adverse impact on thefinancial accounts of an organisation, thereby testing theaccountants loyalty to his manager on the one hand, andhis responsibilities as a professional accountant on theother

he may consider that the policies of his employer areunethical and may find it difficult to reconcile personalvalues with those of the organisation

he may be advising a long-standing client who is also apersonal friend, only to discover that one of the clientsfamily is behaving dishonestly, thereby playing the bond offriendship against the professional duty to give objective,truthful advice.

Reasons for ethical dilemma

As a result of tension between:

Societal values: the law

Personal values: values and principles held by an

individual

Corporate values: values and principles held by

organization

Professional values: values and principles of the

professional body that the individual is a memberof

ACCAs conflict resolution procedures

Under the ACCAs Code of Ethics and Conduct,

professional accountants should consider: The relevant facts

The ethical issues involved

Related fundamental principles

Established procedures of the firm

The action that can be followed and the probablyoutcome

The alternative courses of action and theirconsequences

The internal and external sources of consultation(e.g. ethics partner; audit committee) available

19. Professional Ethics in Accounting and Business

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