Ethics Flashcards
Lucy Cavendish was appointed as finance director of Sunnyday Ltd two years ago, shortly after qualifying as a professional accountant. She received a substantial pay increase on her appointment. She was not a suitable candidate for the post, but her application form exaggerated her experience.
Lucy has recently resigned. This followed her disclosure to the board of directors of errors in the corporation tax return for the year ended 31 March 2021 that she had prepared, and the refusal by Sunnyday Ltd’s bank to process payment of the corporation tax liability, due to insufficient available funds.
It was Lucy’s sole responsibility to prepare the corporation tax return and arrange payment of the tax.
The issues which arose were due to Lucy’s lack of understanding of some technical issues and her inexperience rather than any dishonesty on her part. The corporation tax errors came to light when preparing for a meeting with the company’s bankers.
The board of Sunnyday Ltd has now engaged Darwin LLP, a firm of ICAEW Chartered Accountants, to prepare corporation tax returns in future. The directors are keen to understand the safeguards in place to protect the company in case of any future problems with Darwin LLP’s work
Identify the threats to fundamental principles that Lucy Cavendish faced on her appointment and in her role as finance director and explain which fundamental principles were threatened.
State the safeguards available to reassure clients in relation to the work of ICAEW Chartered Accountants.
On appointment Lucy suffered a self-interest threat, as she received a substantial increase in pay on her appointment.
During her time as finance director, she faced a self-review threat as her earlier judgements in relation to the corporation tax return needed to be re-evaluated.
The fundamental principles threatened by her accepting the job were:
Professional competence and due care – as Lucy had not attained sufficient professional competence before accepting the job.
Objectivity – the fact that she was still willing to undertake the job despite insufficient experience suggests that her objectivity was compromised by self-interest.
Professional behaviour – as Lucy made exaggerated claims about the experience that she had previously gained.
Integrity – it appears she was knowingly associated with a corporation tax return that was furnished recklessly.
The safeguards that should reassure the directors in relation to the work of Darwin LLP are:
- continuing professional development requirements
- ICAEW professional standards
- regulatory monitoring
- ICAEW complaints procedure which will be detailed in the engagement letter
- ICAEW also requires members to hold professional indemnity insurance.
You work for Geiger LLP, a firm of ICAEW Chartered Accountants, which has been engaged by Mallory Ltd for many years to perform accounting and corporation tax work. Geiger LLP has also just agreed to perform all payroll functions for Mallory Ltd.
In your review of Mallory Ltd’s current payroll practices you have discovered that, on the instruction of the managing director, the company has recently started incorrectly paying the directors as consultants rather than employees. The amounts paid meet the definition of employment income. This has resulted in PAYE being understated.
Mallory Ltd is a valuable client of Geiger LLP, and the engagement partner is a close friend of the managing director of Mallory Ltd.
Explain the types of threat to fundamental ethical principles faced by Geiger LLP and identify which of the fundamental ethical principles are most threatened.
State the actions to be taken by Geiger LLP in relation to the issue you have discovered.
Geiger LLP suffers a self-interest threat as Mallory Ltd is identified as a ’valuable client’.
There is also a familiarity threat as the partner is a close friend of the managing director.
The three fundamental principles that are threatened by this situation are integrity, objectivity and professional behaviour.
- Geiger LLP should ask the directors to treat the payments correctly going forward.
- Geiger LLP should check whether the engagement letter allows them to disclose the issue to HMRC.
- If the engagement letter does not give the power to disclose, the directors should be asked to advise HMRC of the incorrect treatment and pay the PAYE due.
- If the directors refuse to disclose this matter, Geiger LLP should cease to act for Mallory Ltd.
- Geiger LLP should inform HMRC that they are ceasing to act but give no reason.
- A written record of all advice given to Mallory Ltd should be kept by Geiger LLP.
- As this amounts to tax evasion, it falls within the definition of money laundering, Geiger LLP’s MLRO should consider completing a SAR and submitting it to NCA.
You work as a trainee ICAEW Chartered Accountant for SM & Co, where you are currently working on the tax affairs of Pear Ltd.
You have just been approached by one of Pear Ltd’s finance staff. He tells you that the company recently received a VAT refund of £63,000 from HMRC.
He reported this immediately to the finance director, who told him to forget about it. He is concerned because Pear Ltd was not due any refund of VAT
Identify actions that your firm should take in line with the guidance given in ‘Professional Conduct in Relation to Taxation’.
Assuming the refund is not repaid to HMRC, explain whether anti-money laundering legislation applies and identify any potential further steps that may be necessary for you and SM & Co to take in order to comply with that legislation.
Identify two defences against a charge of failure to report a suspicion of money laundering.
3.1
Your firm should check the engagement letter to ensure that it gives authority to advise HMRC of the error.
As the amount involved is not immaterial your firm should refer the matter to the client and the client should be:
- asked to advise HMRC of the error (or to authorise the firm if authority is not given in the engagement letter)
- asked to return the money to HMRC
- warned of the possible legal consequences of refusal to give authority (including interest and penalties and possible criminal prosecution)
- advised that if consent is not given or HMRC are not advised by the client, the firm will cease to act for the client
- A written record of all advice given to Pear Ltd should be kept by the firm.
- 2
- If the VAT refund is not returned it amounts to theft, and the refund becomes proceeds of crime.
- You should report this to your firm’s money laundering reporting officer (MLRO) on an internal report.
- The MLRO, taking all matters into account, should decide whether to report his suspicions to the National Crime Agency (NCA) using a suspicious activity report (SAR).
- Both you and other members of your firm must take care not to tip off members of staff at Pear Ltd.
3.3
Any two from:
- I did not actually know or suspect money laundering had occurred and I had not been provided by my employer with the training required.
- The privilege reporting exemption:
An accountant who suspects or has reasonable grounds for knowing or suspecting that another person is engaged in money laundering is exempted from making a money laundering report where his knowledge or suspicion comes to him in privileged circumstances (the privilege reporting exemption).
- I had a reasonable excuse for not making a report. - — Although there is no money laundering case law on this issue, it is unlikely to apply here as it is anticipated that only relatively extreme circumstances, such as duress and threats to safety, might be accepted.
- It is known, or reasonably believed that the money laundering is occurring outside the UK and is not unlawful under the criminal law of the country where it is occurring.
You work as a trainee for PPA & Co, a firm of ICAEW Chartered Accountants. You have been asked to review part of a new client’s file:
I work for X plc as a director. A few years ago, X plc set up a new payment scheme for the members of the senior leadership team. The scheme involves a complicated series of transactions designed to reduce our tax bills. Basically, the senior team are paid 75% less than we were previously via PAYE.
We then receive various non-UK loans in Romania’s currency, the lei, which give rise to non-taxable gains. Initially I was a bit worried about the whole non-taxable gains thing.
However, the overall effect in cash terms for me is that I have reduced my liability to income tax and NIC by at least £100,000 pa for the past 10 years. I was assured that each step in the scheme is in itself legal, so I’m happy that my tax returns have been completed accurately.
Explain the difference between tax evasion and tax avoidance
Explain whether the legality of each step in such a ‘tax avoidance’ scheme would be sufficient for the scheme to be held as valid by the courts.
If the scheme were held to be tax evasion, outline what the legal consequences for both you and your client would be if the underpaid tax were not promptly disclosed and paid to HMRC
4.1
Tax evasion takes place where information is suppressed (hiding), or false information is provided (lying).
Tax avoidance is any legal method of reducing one’s tax burden.
- 2
- Tax avoidance is not illegal, but it does not necessarily mean that it will work to successfully reduce a tax bill.
- The courts have struck down certain tax avoidance schemes which have no commercial purpose or effect.
- This has been done by ignoring the elements of the scheme which have no commercial purpose.
- Ignoring the artificial elements of the transaction, the courts could infer that the loans were in substance income from employment which is subject to income tax and NIC.
- HMRC could also use the GAAR as a means to challenge the scheme - 3
- Failure to disclose underpaid tax to HMRC may result in the payment of penalties to HMRC in addition to the unpaid tax and interest thereon.
- If it is deemed sufficiently serious, tax evasion can lead to criminal prosecution resulting in fines and/or imprisonment.
- Tax evasion may also have money laundering implications. If I fail to report a suspicion of money laundering to the firm’s MLRO then I may be guilty of failure to disclose which can result in a custodial sentence of up to five years.
- For such dishonest behaviour I could face being disqualified as a member of ICAEW.
Amy is an ICAEW Chartered Accountant working in practice as the owner of a small accountancy practice.
Amy has a vague awareness of anti-money laundering requirements and remembers that she did register with ICAEW as her supervisory body about eight years ago.
However, Amy has never implemented any specific procedures to ensure compliance with the regulations. Amy has been notified that ICAEW, as her supervisory body, will be conducting a monitoring visit.
Requirement
Prepare brief notes which set out the anti-money laundering procedures which Amy should implement in order to ensure compliance with anti-money laundering regulations.
more points available than marks
Amy should do the following to ensure compliance with anti-money laundering regulations:
- Appoint a Money Laundering Reporting Officer (MLRO).•
- Implement internal reporting procedures.•
- Train staff and herself to ensure that they are aware of the relevant legislation, know how to recognise and deal with potential money laundering, how to report suspicions to the MLRO, and how to identify clients.
- Establish appropriate internal procedures relating to risk assessment and management to deter and prevent money laundering and make relevant individuals aware of the procedures.
- Carry out customer due diligence on any new client and monitor existing clients to ensure the client is known and establish areas of risk.
- Verify the identity of new clients and maintain evidence of identification and records of any transactions undertaken for or with the client
- Report suspicions of money laundering to the National Crime Agency (NCA), using a suspicious activity report (SAR).
Kath, one of your clients, has just disclosed to you in your role as her tax adviser that she misrepresented some of the figures relating to her business and her personal income in her 2020/21 return. She admits that she has charged her son’s school fees of £12,000 as a
business expense. In addition, she has not disclosed the fact that whenever she is away, she rents out her home to tourists. For 2020/21 this generated rental income of £8,000
Requirement
Briefly explain what action you should now take in accordance with ICAEW’s guidance as set out in Professional Conduct in Relation to Taxation
Misrepresenting income and expenses:
- Explain to Kath that she should disclose these figures to HMRC or give authorisation for you to disclose and she will then be required to pay the tax due.
- Disclose via an amendment to Kath’s 2020/21 self-assessment return as the deadline for this
has not passed (31 January 2023).
- Check if engagement letter gives automatic authority to disclose.
- Set down in writing: the likely consequences of the failure to disclose (including interest, penalties and possible criminal prosecution).
- Do not inform HMRC yet as no duty to disclose.
If Kath refuses to authorise full disclosure, you should:
> cease to act for Kath
> inform Kath in writing•
> inform HMRC that no longer act for the taxpayer (without disclosing why)
> consider disclosure under anti-money laundering regulations
Lyra is an ICAEW Chartered Accountant working as a sole practitioner.
One of Lyra’s clients, Hat plc, has just received a tax repayment of £1 million from HMRC in error. The finance director of Hat plc has told Lyra that he will only repay the £1 million if HMRC realises its mistake.
Requirement
State and explain the steps Lyra should take in this situation to deal with HMRC’s error. Your answer should include an explanation of Lyra’s duty of confidentiality to Hat plc.
Despite the finance director’s statement, Lyra should advise him to disclose the error to HMRC and pay back the £1 million.
Lyra should also:
- check whether the engagement letter gives her authority to disclose the error to HMRC (or ask Hat plc for authority to disclose).
- warn Hat plc of the possible legal consequences of refusal to allow her to disclose the error, including interest and penalties.
- advise Hat plc that if it refuses to allow her to advise HMRC of the error then she will have to resign.
- document the advice given to Hat plc.•
A deliberate attempt to benefit from an error made by HMRC may constitute a criminal offence under
UK law. For example, the client may face a prosecution under the Theft Act 1968.
If a crime is committed it brings the non-disclosure of the error into the scope of anti-money laundering legislation. This may then require Lyra to make a SAR to the NCA.
The fundamental principle of confidentiality prevents Lyra from disclosing confidential information acquired as a result of professional or business relationships.
However, client information may be disclosed without the client’s consent if there is an express legal or professional right or duty to disclose:
If Lyra ceases to act, she may not disclose to HMRC why she has ceased to act.
However, if a crime has been committed then it is not a breach of her duty of confidentiality as anti-money laundering legislation is in point
Teresa is an ICAEW Chartered Accountant working as a sole practitioner with no employees. Anthony is one of Teresa’s tax clients and is a sole trader.
In January 2022, while preparing Anthony’s personal tax return, Teresa noticed a £50,000 tax repayment from HMRC on Anthony’s bank statement. At the time Anthony explained that this related to a period before he became one of Teresa’s clients. Teresa had not been made aware of this by Anthony’s previous accountant, so she advised Anthony to check with HMRC whether this was an error.
He refused to do so, stating that he was certain it was correct. Teresa reluctantly accepted his explanation and took no further action, although it should have been apparent to her that HMRC had made a mistake. Anthony has since been charged with money laundering offences in relation to events leading up to the repayment.
- State the possible consequences for an ICAEW Chartered Accountant of failure to disclose money laundering.
- State two potential defences available to an ICAEW Chartered Accountant who is charged with failure to disclose.
- Explain what actions Teresa should have taken regarding the HMRC error.
- If found guilty of a failure to disclose an ICAEW Chartered Accountant could face an unlimited fine and a custodial sentence of up to five years.
In addition, the accountant is likely to face disciplinary action by ICAEW and could face further
fines, or a possible striking off. - The possible defences for failure to disclose are:
- the accountant did not know or suspect that money laundering had occurred.•
- the accountant has a suspicion or reasonable grounds for knowing/suspecting that the client was engaged in money laundering, but the knowledge came to them in privileged circumstances (the privilege reporting exemption).
- there is reasonable excuse for not making a report (extreme circumstances such as a threat to personal safety).
- it is known or believed that the money laundering is occurring outside of the UK and is not unlawful under the criminal law of the country where it is occurring - Teresa should have checked her engagement letter to see whether she has permission to contact HMRC directly, without a breach of confidentiality. If so, she should have contacted HMRC to check whether the repayment was correct.
Otherwise, she should have asked the client’s permission to contact HMRC.
All of her conversations with her client and her advice to him should have been documented.
If she was not given permission to disclose then she should have resigned.
To avoid a charge for failure to disclose under POCA 2002 Teresa, as the money laundering reporting officer, should have submitted a suspicious activity report (SAR) to the National Crime Agency (NCA).
Lucy works in the tax department of DB LLP, a firm of ICAEW Chartered Accountants. Johanna has been one of DB LLP’s clients for many years, and Lucy prepares Johanna’s VAT returns.
Johanna disagrees with Lucy’s treatment of some items in her most recent VAT return. Johanna is refusing to allow Lucy to submit the VAT return, which is now late, and Johanna has not paid the VAT Lucy has calculated.
The following is an extract from an email sent by Johanna to Lucy:
‘I don’t think that you have spent enough time on my return, and I am seriously considering reporting your firm to ICAEW. If there are problems with HMRC I expect you to sort these out as you are responsible for my VAT.’
Lucy’s manager, Gordon, has initiated a conflict resolution process. He has followed DB LLP’s internal
procedures and believes that Lucy has acted appropriately throughout but may have been subjected to undue pressure from Johanna to change the return. Gordon has discussed alternative courses of action with Johanna, but the matter is still unresolved.
- Identify one fundamental principle threatened in this situation and explain the nature of the threat.
- Explain who is responsible for the accuracy of Johanna’s VAT return, and who will be liable to HMRC if an incorrect return is submitted.
- Identify any further action that it would be advisable for DB LLP to take in relation to the conflict
1, The fundamental principle of objectivity is threatened.
This is an intimidation threat, arising from the pressure applied by Johanna about reporting the
firm to ICAEW.
- Johanna retains responsibility for the accuracy of her own VAT return DB LLP is acting as an agent rather than a principal when preparing and submitting the VAT
return.
The accountants are responsible to Johanna for the accuracy of the return based on the information provided by her. They are not required to audit the figures provided. However, they must take reasonable care and exercise appropriate professional scepticism.
The accountants would not normally be liable to HMRC if any of the information proves to be incorrect - DB LLP may obtain advice from ICAEW or legal advisors on legal and ethical issues without breaching confidentiality. The firm could contact ICAEW confidential helpline.
Details of any discussions/decisions concerning this issue should be documented in writing.
DB LLP should consider resigning from the engagement.
Mita has been asked to take over as the money laundering reporting officer (MLRO) at her firm of ICAEW Chartered Accountants. She is enquiring about the role before deciding whether to accept.
Requirement
State the responsibilities of the MLRO with regard to reporting.
The money laundering reporting officer (MLRO) receives any internal information/report where there is knowledge or suspicion of money laundering.
The MLRO is then responsible for deciding whether the information contained in an internal report needs to be relayed to the NCA in the form of an external report, a SAR, and if so, for compiling and despatching the SAR.
There are specific offences applying to MLROs failing to make a report where one is needed
Ruth is an ICAEW Chartered Accountant employed by Sparks plc.
Sparks plc is preparing a database of employee qualifications and has asked Ruth to submit her qualifications.
The database will be used to find suitable candidates for a new project team. All team members will receive a 25% pay rise and a two-year secondment to the New York office.
Ruth wants to join the new project team, but she does not have all of the qualifications required. She has decided to submit false information about her qualifications to ensure she gains a place on the new project team.
Sparks plc’s policy is to dismiss employees who misrepresent their qualifications.
Requirement
Explain two of the fundamental principles that are threatened when Ruth submits the false information about her qualifications and identify the threat.
Integrity is threatened if Ruth submits false information.
Ruth should not knowingly be associated with any information that she knows:
- contains a materially false or misleading statement; or•
- omits or obscures information required to be included where such omission or obscurity would be misleading.
Professional behaviour will be breached if Ruth submits false information.
Ruth should not make exaggerated claims for the services she is able to offer, the qualifications she possesses, or the experience she has gained.
The threat here is a self-interest threat which affect’s Ruth’s objectivity because she wants a job/money on the team and the financial reward, but if she tells the truth she may not be given one
Liz is an ICAEW Chartered Accountant and operates as a sole practitioner in London. Liz will retire at the end of June 2022. She intends to cancel her professional indemnity insurance as soon as she retires.
Requirement
Explain what action Liz should take with respect to her professional indemnity insurance in order to comply with the ICAEW’s Professional Indemnity Insurance Regulations.
As a qualified member of ICAEW in public practice and resident in the UK, Liz should maintain cover for at least two years after her retirement, preferably for at least six years.
The minimum recommended level of cover is:
- £100,000;
- 2.5 times fee income if cover then exceeds £100,000; or
- preferably higher if Liz’s recent fee income has exceeded £600,000 pa
Kira is an ICAEW Chartered Accountant employed by a large accountancy firm in London. Kira is being seconded to work for HMRC for a six-month period. After this, Kira will return to work for her employer.
Requirement
Explain what should be done to ensure that no conflict of interest arises during or after Kira’s secondment.
Any potential conflict of interest, actual or perceived, should be carefully managed and Kira should be removed from any situation where there is a conflict between HMRC’s and her employer’s interests.
Whilst on secondment Kira needs to be aware that she must serve the interests of HMRC/duty to HMRC/act for HMRC/responsible to HMRC.
Whilst working for HMRC Kira should not be involved in any matters relating to her employer or any of its/her clients.
For a significant period after the end of the secondment, Kira should not be involved in the affairs of any taxpayer she was involved with whilst at HMRC
Jane is an ICAEW Chartered Accountant employed in practice. Jane gave a new client legal advice about the taxation of his offshore income. The client admitted to Jane that he had not been declaring his offshore income to HMRC. Jane advised him to declare the income to HMRC and to pay the tax owed, together with any interest and penalties due.
Jane did not check that the client had followed her legal advice. She did not consider making a report to her money laundering reporting officer.
Jane’s client has now been convicted of money laundering. Jane is concerned that she may face prosecution for failure to report.
Requirement
Explain which defence Jane could use against a charge of failure to report a suspicion of money laundering.
The privilege reporting exemption applies if knowledge or suspicion of money laundering came to Jane in privileged circumstances.
As Jane learnt about the tax evasion whilst giving legal advice the knowledge came to her as legally privileged information which she cannot disclose via a money laundering report.
Flash LLP is a firm of ICAEW Chartered Accountants. Eddie Allen, a professional accountant, is employed by Flash LLP and is currently on sick leave. On a review of Eddie’s correspondence in his absence the following have been found:
An email from Iris West, a client, which includes the following:
When preparing my 2017/18 tax return you said that no tax was payable on the termination payment of £80,000 from my former employer so it was not included in the return. I am extremely stressed as I have just received a ‘discovery assessment’ from HMRC demanding
substantial tax plus interest relating to the termination payment. I cannot afford this, and I hold your firm entirely responsible for paying it.
A letter from HMRC querying a P11D submitted by Flash LLP in July 2022.
Eddie prepares all P11Ds on behalf of the firm and HMRC’s query relates to Eddie’s own P11D.
On review, you discover that Eddie has omitted details of his company car in this P11D and in previous forms, although other employees’ cars are correctly shown on their forms.
Requirements
Explain the steps Flash LLP should take to resolve the issue Iris has raised.
Explain the ethical and legal issues for Eddie surrounding his P11D form, and the actions that the firm should now take.
Iris:
- Flash LLP should immediately contact Iris to inform her that the matter is being investigated.
- The firm should ascertain the relevant facts relating to the termination payment and the advice given at that point in time, and check that HMRC’s demand is correct.
- It is advisable to document the current issue in writing, including any discussions with the client.
- The firm should check the engagement letter for permission to contact HMRC if needed, or if
not ask the client for permission. The firm should contact HMRC to confirm/refute the discovery assessment.
- The firm may wish to obtain professional advice from ICAEW or legal advisors.
- It may be appropriate to contact the firm’s providers of PII to let them know that there may be a claim.
- Flash LLP may be required to pay any penalties or interest
Eddie:
- By preparing his own P11D in this way, Eddie has allowed a self-interest threat to affect his objectivity, integrity and professional behaviour in submitting an incorrect form in order to pay less tax.
- Eddie’s actions amount to tax evasion as he has deliberately withheld information from HMRC/provided HMRC with false information by understating his employment income/omitting his car benefit.
It would not be tax evasion if this was simply a mistake, but it is likely it was deliberate. Eddie could be the subject of a criminal prosecution which may lead to fines and/ or imprisonment.
This could also constitute money laundering
ICAEW may take action against him.
The firm
The firm should contact HMRC immediately to correct the P11D and pay any underpaid employer NICs.
The firm should follow its own internal disciplinary procedures in relation to Eddie’s wrongdoing.