8. Ethical Considerations Flashcards
Give three examples of where the judgement of different people may vary in accounting.
- Valuation of buildings in times of changing property prices.
- Research and development (R&D): is it right to treat this only as an expense? In a sense it is in an investment to generate future revenue.
- Brands such as Nike or Apple. Are they assets in the same way as a forklift truck is an asset?
What would be the consequences if judgement in accounting was completely unregulated? (2)
There would be no comparability between financial statements of different organisations.
This will be all the more significant in cases where deliberate manipulation occurs, in order to present financial statements in the most favourable light.
How can the issue of unregulated judgement in accounting be mitigated? (2)
The exercise of judgement should always be underpinned by ethical principles.
To this end, both the International Ethics Standards Board for Accountant (IESBA) and the ICAEW have produced codes of ethics that state the fundamental ethical principles that all professional accountants should adhere to.
What is the IESBA?
The International Ethics Standards Board for Accountants (IESBA) develops ethical standards and guidance for use by professional accountants.
The IESBA code applies to all professional accountants, whether in public practice, in business, education and the public sector.
It serves as the foundation for codes of ethics developed and enforced by member bodies.
The IESBA Code of Ethics for Professional Accountants and the ICAEW Code of Ethics describe five fundamental principles of professional ethics that accountants must adhere to.
What are the 5 fundamental principles of professional ethics that accountants must adhere to according to IESBA and ICAEW?
- Integrity
- Objectivity
- Professional competence and due care
- Confidentiality
- Professional behaviour
Explain the fundamental principle of professional ethics as defined by IESBA and ICAEW of integrity.
Integrity - A professional accountant should be straightforward and honest in all professional and business relationships.
Explain the fundamental principle of professional ethics as defined by IESBA and ICAEW of objectivity.
Objectivity - A professional accountant should not allow bias, conflict of interest or undue influence of others to override professional or business judgements.
Explain the fundamental principle of professional ethics as defined by IESBA and ICAEW of professional competence and due care.
Professional competence and due care - A professional accountant 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 development in practice, legislation and techniques. A professional account should act diligently and in accordance with applicable technical and professional standards when providing professional services.
Explain the fundamental principle of professional ethics as defined by IESBA and ICAEW of confidentiality.
Confidentiality - A professional accountant 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 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.
Explain the fundamental principle of professional ethics as defined by IESBA and ICAEW of professional behaviour.
A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits that profession.
Which organisation provides the structure ad processes that support the IESBA?
The structures and processes that support the IESBA are facilitated by the International Federation of Accountants (IFAC).
IFAC is the global organisation for the accounting profession. It aims to ensure that the global accountancy profession is valued in the development of strong and sustainable organisations.
Why is the professional ethics principle of professional competence and due care of particular relevance to the preparers of financial statements.
Professional accountants have a duty to achieve a level of professional knowledge and skills and must ensure that they do not operate beyond their current level of competence.
In order to continue offering services in a a particular field, the professional accountant must maintain their competence. This can be achieved through a continued awareness of the relevant technical, professional and business developments.
As part of the requirement for diligence, the professional accountant should do what is required to deliver the agreed service, should ensure that any staff working under their authority are competent and adequately trained and supervised and where appropriate, should ensure that the client or employer understands the limitations of the services that are being provided.
In terms of professional ethics, what are the advantages of a principles-based system over a rules-based system? (5)
Give a disadvantage of a principles-based system.
- A principles-based system places the onus on the individual to actively consider independence for every given situation, rather than just agreeing a checklist of forbidden items. Even if something is not expressly stated in the guidance, professional accountants are required to follow the spirit as well as the letter of the guidance.
- A principles-based system prevents individuals interpreting legalistic requirements narrowly to get around the ethical requirements. There is an extent to which rules engender deception, whereas principles encourage compliance.
- A principles-based system allows for the variations that are found in every individual situation. Each situation is likely to be different.
- A principles-based system can accommodate a rapidly changing environment, such as the one professional accountants regularly face.
- A principles-based system can contain prohibitions where these are necessary as safeguards are not feasible.
- Critics would argue that the principles-based system may allow individuals to get away with non-compliance unchallenged, as they apply their own individual interpretation to the guidance.
