Chapter 1: Ethical Considerations

Question 1

What is the role of individual judgement in accounting?

Answer 1

Many figures in financial statements are derived from the application of judgement in applying fundamental concepts.

Different people exercising their judgement on the same facts could arrive at very different conclusions.

Question 2

Give three key areas where individual judgement may vary the most?

Answer 2

1. The valuation of buildings in times of changing property prices.
2. Research and development (R&D): is it right to treat this only as an expense? In a sense it is an investment to generate future revenue.
3. Brans such as Nike or Apple. Are they assets in the same way that a forklift truck is an asset?

Question 3

Why are codes of ethics important in accounting?

Answer 3

Working from the same data, different groups of people may produce very different financial statements, but if judgement is completely unregulated, there will be no comparability between the 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.

The exercise of judgement in accounting matters should always be underpinned by ethical principles. To this end both the International Ethics Standards Board for Accountants (IESBA) and the ICAEW have produced codes of ethics that state the fundamental ethical principles that all professional accountants should adhere to.

Question 4

What is the IESBA?

Answer 4

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.

Question 5

What are the five fundamental principles that the IESBA Code of Ethics for Professional Accountants obliges professional accountants to adhere to?

Answer 5

1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behaviour

Question 6

Explain integrity in the IESBA Code of Ethics for Professional Accountants.

Answer 6

A professional accountant should be straightforward and honest in all professional and business relationships.

Question 7

Explain objectivity in the IESBA Code of Ethics for Professional Accountants.

Answer 7

A professional accountant should not allow bias, conflict of interest or undue influence of other to override professional or business judgements.

Question 8

Explain professional competence and due care in the IESBA Code of Ethics for Professional Accountants.

Answer 8

A professional accountant has a continuing duty to maintain professional knowledge and kill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. A professional accountant should act diligently and in accordance with applicable technical and professional standards when providing professional services.

Question 8

Explain confidentiality in the IESBA Code of Ethics for Professional Accountants.

Answer 8

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 or 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 personal advantage of the professional accountant or third parties.

Question 9

Which global organisation support the IESBA?

Answer 9

The structures and processes that support the operations of 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.

Question 9

Explain professional behaviour in the IESBA Code of Ethics for Professional Accountants.

Answer 9

A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession.

Question 10

As opposed to being a set of rules, how might the ethics codes be described?

Answer 10

Rather then containing a set of rules, the ethics codes are principles based.

Question 11

What are the advantages of a principles-based system over a rules-based system? (5)

Answer 11

1. 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.
2. 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.
3. A principles-based system allows for the variations that are found in every individual situation. Each situation is likely to be different.
4. A principles-based system can accommodate a rapidly changing environment, such as the one that professional accountants regularly face.
5. A principles-based system can contain prohibitions where these are necessary as safeguards are not feasible.