3. Objectivity & the resolution of ethical conflict Flashcards
The code of ethics says accountants should take a principles-based approach rather than a rules-based approach.
This involves …
Identify, evaluate and address
threats to her compliance with
the fundamental princilpes.
example principles based rather than rules based
Client didn’t register for VAT:
Rules-based - Report him to HMRC
Principles-based - Advise him he needs to report himself.
don’t rely on complying with regulations only eg
Statutory Maternity pay for lower grade & enhanced for higher grade staff.
It follows the rule but not necessarily ethical.
OBJECTIVITY (more detail)
goes hand in hand with..?
Goes hand in hand with need for independence.
(Freedom from control or influence of others)
To be independent the accountant must not be influenced by:
Pressure
Threats
MUST stick to principles and trust your boss to back you.
OBJECTIVITY & Independence
Accountants must be:
- INDEPENDENT OF MIND:
Only take into account points & issues relevant to the job in hand.
In addition he must exercise a certain amount of PROFESSIONAL SKEPTICISM which is an attitude encompassing:
- A QUESTIONING mind. Don’t take what’s said face value; ask questions until satisfied
- Being ALERT to conditions indicating possible misstatement due to error or fraud. (exper & training)
- Making CRITICAL assessment of evidence that is provided.
- INDEPENDENCE IN APPEARANCE:
Ensuring that to a third party the actions taken by the accountant appear to be objective and free from the influence of others
- EG. The accounting firm you work for could take on your hubby’s business as a client and just not have you involved on that account… BUT actually they cant because an the relationship means an OUTSIDER could justifiably QUESTION the Independency and Objectivity of the firm
Factors that will influence an accountant and safeguard his independence and objectivity..
- Accountancy training - identify situations that could compromise and know how to deal with
- Awareness of possibility of legal action if gives in to pressures and allows independence to be compromised.
- Members of bodies AAT, CIMA are aware of possibility of professional disciplinary procedures against them
- If accountant found to have compromised his objectivity/independence it could potentially damage their reputation which could lead to loss of clients and earnings
Objectivity
Fraud & Bribery
FRAUD can be defined as:
‘wrongful or criminal deception intended to result in financial or personal gain’
An accountant who accepts a gift or inducement benefits financially and/or personally. If this is seen by a third party to affect the accountants objectivity it could result in the accountant being accused of fraud.
BRIBERY can be defined as:
‘giving or receiving something of value with the intention of influencing the recipient to do something favourable to the giver of the bribe.
A person who offers an iniducement to another person for the improper performance of a function or activity is guilty of the offense of bribery. Equally a person who is willing to accept that inducement can also be prosecuted
Objectivity
The Fraud Act 2006 defines 3 classes of fraud
1) Fraud by FALSE REPRESENTATION
Where a person makes any representation which they know to be misleading
2) Fraud by FAILING TO DISCLOSE information
Where a person fails to disclose any information to a third party which he has a LEGAL DUTY to disclose.
3) Fraud by ABUSE OF POSITION
Where a person occupies a position where they are expected to safeguard the financial interest of another person, and abuses that position.
Objectivity
The Bribery Act 2010 covers the criminal law relating to bribery.
The 4 key Bribery Act offenses are:
The penalty is:
1) Bribing another
2) Receiving a bribe
3) Bribing a foreign official
4) Failing to prevent bribery
Max penalty if guilty is 10 years and/or unlimited fine.
There is also potential for property to be confiscated.
ETHICAL CONFLICT - 1
ethical conflict between interests of diff clients
(Accountant has 2 clients same sector, competitors)
The 2 fundamental principle issues are?
The 2 potential problems accountant may face:
The risk can be reduced how?
OBJECTIVITY and CONFIDENTIALITY
1) May provide services and give professional advice to one client where he knows this will have an adverse effect on another client (OBJECTIVITY)
2) Information gained about one client could potentially be beneficial to another and vice versa (CONFIDENTIALITY)
Compartmentalising the responsibilities and knowledge by using different members of staff.
However if this safeguard does not reduce the threat to the fundamental principles to an acceptable level then the accountant should not accept or continue one of the appointments.
Clients should be fully informed so they can make informed decision.
When taking new client or where there are changing circumstances of existing client, accountant must take all reasonable steps to identify whether conflict of interest exists or could arise. The process should be documented
ETHICAL CONFLICT - 2
conflict of loyalties for an accountant
(between loyalty to employer and to accounting body)
Loyalty can be defined as ‘Being firm and not changing in your support for a person or an organisation, or in your belief in your principles’
May face pressure from employer to:
- Break the law
- Breach rules & standards of their profession.
- Be part of plan for unethical or illegal earnings.
- Lie or mislead incl. by silence) auditors or regulators.
- Put name to / be associated w/ misleading statement.
Possible actions:
* If law broken try to persuade to stop and rectify.
* If diff of opinion regarding accounting/ethical issue involve senior staff, formal dispute resolution process.
* If cannot resolve and all avenues exhausted may have to offer to resign. Explain to employer why and maintain confidentiality.
Worth noting code of ethics recommends obtaining advice from prof body/lawyer as may be protected from dismissal for whistle-blowing.
Resolution steps for an ethical conflict
1) Gather all the facts relating to the situation
2) Assess all the ethical principles involved
3) The fundamental principles that are involved by the ethical conflict to the matter in question
4) Decide what procedures (formal.informal) are available within org for resolution of ethical conflicts and if so how they can be applied. (Could be reporting to a senior member of staff, or if there are legal issues may require external advice)
5) Decide what alternative courses of action are available and the consequences of each. (Could involve explaining to client and getting authority to disclose something to another client)
6) Seek advice and Document discussion and course of action. Ensure any decision does not compromise fundamental principles
Failure to resolve an issue
If cant be resolved an accountant may have to:
- Consider obtaining professional advice from his professional accounting body or taking legal advice.
(This would have to be done on a confidential basis and to ensure that there was no breach of confidentiality)
An example of where the confidential issue might arise is in the case of suspecting fraud may have been committed by a colleague, employer or client.
In this case he may need to discuss confidential information with advisers from prof body/lawyer to confirm whether justified. It should be noted in this case the accountany may have to consider submitting report to NCA or to his employers MLRO
Ultimately if the accountant is unable to resolve the ethical conflict he may have to dissociate himself from the issue. This could be by withdrawing from the engagement team working on client assignment or resigning altogether from the engagement, the firm he works for or the employer.
When assessing a gift situation watch out for
Whether it is available to all members of staff - ie not preferential treatment
Do I need to thrash out the diff between Inducement and bribe?
Inducement - something offered to encourage or motivate a person to do something,
Bribery - Giving or receiving something of value with the intention of influencing the recipient to do something favourable to the giver of the bribe
