Threats and safeguards to fundamental ethical principles - Lesson 6 Flashcards
A principles-based approach to ethics
Identify and evaluate threats that could prevent them complying with the 5 fundamental principles, instead of applying a set of rules. Safeguards should be put in place to help with this. The advantage of a principles-based approach is that it is applicable to every circumstance as each individual situation should be evaluated.
Examples of self-interest threats in practice
This is when an accountant has FINANCIAL INVOLVEMENT with a client which could threaten their objectivity. E.g concern of losing the client, joint interests in financial projects.
Direct financial involvement in a client example in practice
Where the accountant holds shares in a client company. This financial interest would threaten the accountant’s objectivity as they would want the company to perform well. This would extend to if the accountant’s partner held shares in the company.
Loans to or from a client (financial involvement) A form of self-interest threat in practice
If a client made a loan to the accountant, this could threaten their objectivity because the client would have influence over them because of the money owed.
Substantial Fee Income from one single client. Self-interest threat in practice
If a client provides a large amount of the accountant’s gross income, this could threaten their objectivity because the client has influence over them. Accountants should be aware if a client offers additional work for them as they would be reliant on the client.
Potential threats to the 5 fundamental principles (5) both practice and business
Self-interest threat
Advocacy threat
Familiarity threat
Intimidation threats
Self-review threats
Advocacy meaning
Advocacy means you are seen to support the client’s point of view publicly - even in a court of law.
Advocacy threats in practice
This means the accountant goes beyond the advisory role they should take for the client, but they are actively supporting the client. By supporting the client too strongly, their objectivity could be threatened.
Safeguards against the threats to the principles for accountants in practice.
A strong leadership in practice which stresses how important the fundamental principles are
Strong quality control procedures e.g a senior member of the accounts department to review the clerks work.
Documents of the internal policies which require staff to comply with the principles.
Specific policies and documents to help staff identify the threats and how to reduce them.
Good communication between staff of any changes to the policies
Good working relationships between staff so that the lower levels feel happy to report back to the senior members of staff if they suspect a threat.
Examples of self-interest threats in business
The accountant having a financial interest in the business such as bonuses linked to the financial reports
The accountant having use of a business asset which is not part of their contract
If there are concerns of the accountants security in the business which could threaten their objectivity.
Examples of self-review threats in business
The accountant has been asked to prepare the staff bonus report where this could benefit the accountant.
Examples of familiarity threats in business
when there has been a long-term relationship with a customer or supplier
If the employed accountant is offered a gift by someone in the business like a supplier.
If the accountant has been working for the same manager this could mean a familiarity threat.
Examples of intimidation threats in business
As an employee of the business, the accountant would unlikely be faced with an advocacy threat to their fundamental principles as it would be their role to support the legitimate goals of the business, unless the info was misleading or false.
Safeguards against threats to the fundamental principles in BUSINESS
A good corporate oversight of the business.
The employer’s ethics and conduct programmes
Good internal controls
Strong disciplinary procedures
Good leadership in the business that stresses the importance of following ethical principles.
Good training on the procedures in the business.
Policies that encourage employees to communicate with managers.
