A. FUNDAMENTAL ETHICAL AND PROFESSIONAL PRINCIPLES Flashcards
Accountancy and public interest
The accountancy profession as a whole has accepted the commitment to act ethically and in the public interest. Professional accountants may find themselves in situations where values are in conflict with one another, due to responsibilities to employers, clients, and the public. Where these duties are in contrast to the public interest, then the ethical conduct of the accountant should be in favour of the public interest. This can create problems particularly on an audit, whereby you provide a service for the client, yet may have to make public information which is detrimental to the company but in the public interest.
ACCA’s Code of Ethics and Conduct identifies the fundamental principles:
Integrity – Members shall be ‘straightforward and honest in all professional and business relationships. Integrity implies not merely honesty, but fair dealing and truthfulness.
Objectivity – Members shall not allow bias, conflicts of interest or the undue influence of others to compromise their professional or business judgement.
Professional competence and due care – Members have a continuing duty ‘to maintain professional knowledge and skill at a level required to ensure that clients or employers receive competent professional service’. Members shall ‘act diligently in accordance with applicable technical and professional standards when providing professional services’.
Confidentiality – Members shall respect the confidentiality of information ‘acquired as a result of professional and business relationships’ and shall 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’. Similarly, confidential information acquired as a result of professional and business relationships shall not be used to the personal advantage of members or third parties.
Professional behaviour – Members shall comply with relevant laws and regulations and shall avoid any action that may discredit the profession.
ACCA has developed an overall framework to help its members make ethical decisions in a wide range of circumstances.
What is the real issue?
Are there threats to compliance with fundamental principles?
Are the threats clearly significant (material)?
Are there safeguards that will eliminate the threats or reduce them to an acceptable level?
Can you face yourself in the mirror?
ACCA’s Code identifies the following categories of threats to the fundamental principles:
Self-interest – a financial or other interest may inappropriately influence the accountant’s judgement or behaviour.
Self-review – the accountant may not appropriately evaluate the results of a previous judgment made or activity or service performed by themselves or others within their firm
Advocacy – a threat that the accountant promotes the client’s or employer’s position to the point that their objectivity is compromised
Familiarity – due to a long or close relationship with a client or employer, the accountant may be too sympathetic to their interests or too accepting of their work
Intimidation – the accountant may not act objectively due to actual or perceived pressures.
Appropriate safeguards must be put in place to eliminate or reduce threats to an acceptable level. These include:
Safeguards created by the profession, legislation or regulation (eg corporate governance)
Safeguards within the client/accountancy firm’s own systems and procedures
Educational training and experience requirements for entry into the profession, together with continuing professional development
Assess the consequences of not upholding ethical principles in the preparation of corporate reports.
There are many consequences of unethical behaviour and most of them are very serious.
Accountants are expected to be competent, objective and reliable. If they are not, then action is likely to be taken, leading to loss of reputation. An accountant’s reputation is a very important asset.
Other penalties include prison sentences, fines, and prohibition of holding a director’s position in the future.
Social Responsibility.
Some argue that the only social responsibility of a business is to maximise shareholder wealth because if the business is owned by the shareholders, the assets of the company are, ultimately the shareholder’s property. Therefore it is for the shareholders to determine how their assets should be used, and they would generally wish it to be used to maximise their returns. Also, maximising wealth is the best way that society can benefit from a business’s activities (eg increasing tax revenue).
On the other hand good corporate citizenship may be good for business performance because of the attitude of other stakeholders:
Customers may prefer to buy from the company that is perceived as being socially responsible
Employees may prefer to work for such company
Investors may prefer such company, as shown by the existence of ethical funds
Constructive engagement with the community/country in which business operates may result in it being seen as a good long-term investment
Related party (IAS 24)
A person or entity that is related to the entity that is preparing its financial statements:
Close family members
are those family members who may be expected to influence, or be influenced by that individual. They include: the individual’s partner, children and dependants and children or dependants of the individual’s partner.
IAS 24 Related parties why disclose
A user of financial statements will normally expect the financial statements to reflect transactions that have taken place on normal commercial terms (‘at arm’s length’). Arm’s length means on the same terms as could have been negotiated with an external party in which each side bargained knowledgeably and freely, unaffected by any relationship between them. Even if transaction with a related party is at market value, the shareholders need to know if it is not at arm’s length, because the relationship could influence future transactions.
Examples of entities that are usually not related parties
In considering each possible related party relationship the entity must look to the substance of the arrangement, and not merely its legal form.
Examples of entities that are usually not related parties are:
Two entities simply because they have director or other member of key management personnel in common
Two venturers that simply share joint control over a joint venture
Providers of finance, trade unions, public utilities, government departments and agencies
Customers, suppliers, franchisors, distributors or other agents with whom the entity transacts a significant volume of business.
Disclosure requirements. IAS 24 requires an entity to disclose the following:
The name of the entity’s parent and, if different, the ultimate controlling party irrespective of whether there have been any transactions
Total key management personnel compensation (broken down by category: short-term employee benefits, post-employment benefits, other long-term benefits, termination benefits, share-based payments.)
If the entity has had related party transactions:
o Nature of the related party relationship
o Information about the transactions and outstanding balances including commitments and bad and doubtful debts necessary for users to understand the potential effect of the relationship on the financial statements
No disclosure is required of intragroup related party transactions in the consolidated finance statements
In preparing financial statements or advising on corporate reporting a variety of ethical problems may arise:
Professional competence is a key issue when decisions are made about accounting treatments and disclosures. Company directors and their advisers have a duty to keep up to date with developments in IFRS and other relevant regulations. Circumstances that may threaten the ability of accountants in these roles to perform their duties with the appropriate degree of professional competence and due care include:
o Insufficient time
o Incomplete, restricted or inadequate information
o Insufficient experience, training or education
o Inadequate resources
Objectivity and integrity may be threatened in a number of ways:
o Financial interests such as profit-related bonuses and share options
o Inducements to encourage unethical behaviour
ACCA’s Code of Ethics and Conduct identifies that accountants may be pressurised, either externally or by the possibility of personal gain, to become associated with misleading information. The Code clearly states that members should not be associated with reports, returns, communications or other information where they believe that the information:
o Contains a materially misleading statement
o Contains statements or information furnished recklessly
o Has been prepared with bias, or
o Omits or obscures information required to be included where such omission or obscurity would be misleading
IAS 1 requirement
IAS 1 requires that an entity must present fairly its financial position, financial performance and cash flows. Present fairly is explained as representing faithfully the effects of transactions. In general terms this will be the case if IFRS is adhered to. Compliance with accounting standards is important if the financial statements are to fairly represent the activities of the entity. If accounting standards are not complied with, then it may be that the financial statements are misleading.
IAS 1 expands:
Compliance with IFRS should be disclosed
Financial statements can only be described as complying with IFRS if they comply with all the requirements of IFRS
Use of inappropriate accounting policies cannot be rectified either by disclosure or explanatory material
Related party criteria - person
A person or close member of that person’s family is related to reporting entity if that person:
Has control or joint control over the reporting entity;
Has a significant influence over the reporting entity; or
Is a member of the key management personnel of the reporting entity or of a parent of the reporting entity
