Codes of conduct and organisational values

Transcription

1 7 Codes of coduct ad orgaisatioal values this chapter covers... This chapter first looks at what is meat by operatioal risk ad explais the six key classificatios of operatioal risk: reputatioal; process; people; systems; legal ad evet risks. It will the cover the busiess ethics ad coducts of coduct ad practice that busiesses put i place ad the effect that the toe at the top i a orgaisatio has o the ethical coduct of its staff. It the covers the key ethical orgaisatioal values that should be icluded i a busiess s code of practice to esure that it complies with the spirit of the regulatios it must comply with. The chapter will also look at the cosequeces of ot complyig with orgaisatioal values, codes of practice ad regulatios icludig the iteral discipliary procedures a accoutat may face. It will also highlight the opportuity for a accoutat to cosider iteral whistleblowig if he or she believes that a employer, colleague or cliet has acted illegally or uethically There is a detailed sectio lookig at the moey lauderig offeces ad the professioal accoutat s duty to report moey lauderig. The fial sectio of the chapter looks at iappropriate cliet behaviour ad how to deal with it ad also the particular threats ad safeguards a accoutat faces to his/her fudametal ethical priciples whe dealig with cliets.

2 c o d e s o f c o d u c t a d o r g a i s a t i o a l v a l u e s o p e r at i o a l r i s k A operatioal risk is a risk that arises from the way i which a orgaisatio operates its busiess fuctios. It is a very broad cocept which focuses o risks arisig from the people, systems ad processes ad the ethical attitude of the orgaisatio. It is importat that the correct approach is take to maagig operatioal risks. Most orgaisatios realise that othig is perfect ad completely free from risk. People make mistakes, processes will have imperfectios ad there are certai exteral factors that caot be cotrolled. The key issue here is the size of the loss that a busiess is prepared to accept. Sometimes the cost of reducig or elimiatig the risk is much higher tha the cost of the loss that may be icurred. Although failures i the systems ad ucotrollable exteral factors affect operatioal risk it ca also result from improper practice. We will ow look at the six key classificatios of operatioal risk: reputatioal risk process risk people risk systems risk legal risk evet risk r e p u t a t i o a l r i s k Somethig that threates the good ame of a busiess or its reputatio is kow as a reputatioal risk. This ca result from a umber of differet factors, the direct actios of the busiess, the actios of oe or more of its employees, or the actios of a third party that is liked to the busiess such as a parter i a joit veture or a supplier. Damage to the reputatio of a busiess ca have a sigificat detrimetal effect o the busiess causig loss of sales ad profit, employees to resig ad reluctace o the part of suppliers, customers ad ivestors to be associated with the busiess. A recet example of this is the damage to the reputatio of the coffee chai Starbucks, which was hit by allegatios of (legally) avoidig tax i the UK. To avoid reputatioal risk busiesses must have good codes of coduct, strog goverace ad be trasparet i its dealigs with customers, suppliers, employees ad all other exteral parties. I additio to this the orgaisatio eeds to be socially resposible ad evirometally coscious.

3 1 1 6 p r o f e s s i o a l e t h i c s i a c c o u t i g t u t o r i a l p r o c e s s r i s k There will be risks of loss iheret to the processes of a busiess. Most orgaisatios will have iteral cotrols built ito their systems ad processes. For example most compaies carry out a bak recociliatio o a regular basis to esure that the cash book reflects what is actually held i the bak accout oce timig differeces have bee take ito accout. If this cotrol was ot carried out the risk that moey could be frauduletly take from the busiess without detectio is sigificatly icreased. p e o p l e r i s k Whe a orgaisatio recruits ew members of staff it is commo practice to ask prospective employees to give ames of refereces who the compay ca cotact to cofirm the idividual s idetity, qualificatios ad experiece ad also obtai opiios o his/her persoality. If a orgaisatio does ot bother to take up refereces there is a icreased risk that the people that it employs may ot be competet ad i the worst cases may ot be hoest. This ca result i the risk that employees do ot follow the orgaisatio s procedures. s y s t e m s r i s k Most orgaisatios are heavily depedet o computer systems i all aspects of their operatios. Uless these systems have strog cotrols built i there are icreased risks that the systems could be used to process fraudulet trasactios. A example of this would be a payroll system. A lack of cotrols over access to the payroll system could result i fictitious employees beig set up o the system ad moey beig frauduletly paid to the perso who set them up. l e g a l r i s k The risk of loss resultig from a orgaisatio ot beig able to legally eter ito a cotract is kow as a legal risk. This could be the busiess itself or a customer or supplier that the busiess cotracts with. If a cotract is ot eforceable the there is a risk of loss o the part of the orgaisatio. Aother legal risk relates to regulatory risk. This could be as a cosequece of a trasactio that a orgaisatio eters ito coflictig with a regulator's policy or that legislatio has chaged durig the life of a cotract. e v e t r i s k s Other categories of operatioal risks are evet risks which may be preset due to a exteral factor or evet that affects the busiess. The causes of these evet risks ca be split ito four mai categories, examples of which are show o the ext page.

4 c o d e s o f c o d u c t a d o r g a i s a t i o a l v a l u e s Physical evet risks the risk of fire or flood which could damage documets or assets, or could iterrupt busiess are examples of physical risks. Social evet risks as the public is becomig icreasigly socially aware, a busiess that uses iexpesive labour i certai parts of the world could be exposed to a social evet risk if this was reported i a egative fashio as slave labour. Political evet risks whe govermets make political decisios such as icreasig rates of taxatio or itroducig evirometal legislatio this will have a effect o orgaisatios. These are examples of political risks. Ecoomic evet risks if the Bak of Eglad raises iterest rates this has a impact o the iterest rates charged by leders. This would be a example of a ecoomic evet risk for a busiess that has to pay iterest o loas. r i s k o f u e t h i c a l b e h a v i o u r The sectio above highlighted the risks that arise from the way i which a busiess operates. I additio to this there are risks that the orgaisatio will face due to uethical behaviour o the part of its maagemet ad employees. The implemetatio of a strog code of coduct i the orgaisatio ad a positive toe at the top that ecourages ethical behaviour from employees will help miimise the risks associated with uethical behaviour. However, accoutats must be vigilat i their work to prevet ad detect istaces of uethical behaviour. The followig example is a illustratio of where a accoutat could idetify uethical behaviour i the workplace. example spottig uethical behaviour Joe is a accoutat workig i the Accouts Payable Departmet of Webbey Ltd. As part of his resposibilities he processes the expese claims for all members of staff. He had just received two expese claims which he is cocered about. The first is from oe of the salesme. He has claimed for a 400 mile roud trip to visit a cliet whe Joe kows that the jourey is less tha 40 miles. The secod is from the Fiace Director who is claimig 575 for cliet etertaimet for a roud of golf ad dier at the local golf club. Joe kows that there were o cliets ivolved i the golf day ad it was the Fiace Director ad his three sos who were playig. Joe has ow doe some research ad foud that this is ot the first time the Fiace Director has claimed for a family evet o his expeses, although i previous cases Joe has ot bee ivolved i processig the expese claim. What are the issues for Joe ad what should Joe do i these circumstaces?

5 1 1 8 p r o f e s s i o a l e t h i c s i a c c o u t i g t u t o r i a l It is likely that i the case of the salesma it may be a geuie error with the salesma completig his expese claim icorrectly ad claimig for 400 miles whe he should have claimed for 40. Joe should poit out the error to the salesma ad ascertai whether this was a geuie mistake. He should the explai to the salesma the importace of beig careful with expeses claims ad the risk of beig accused of uethical behaviour if he makes iaccurate claims. The secod situatio is more difficult. I these circumstaces Joe appears to have idetified uethical behaviour o the part of the Fiace Director. Due to his seiority i the orgaisatio this puts Joe i a difficult positio. Ideally i this case Joe should gather together all the iformatio relatig to the claim ad preset it to aother director of the busiess explaiig his cocers regardig the ethical dilemma he faces i processig the claims. If the other director does ot deal with the issue the Joe should cosider takig advice from his professioal accoutig body as to what further actio he should take. B U s i e s s e t H i C s a D C o D e s o F C o D U C t a D p r a C t i C e We have already itroduced the ethical code i previous chapters for accoutats ad looked at how it is desiged to guide accoutats to behave ethically. It also sets out the required stadards of professioal behaviour that accoutats should maitai ad gives them guidace o how to achieve these stadards. Each professioal accoutig body i the UK has based its ow ethical code o that issued by IESBA ad this cosistet approach to professioal ethics meas that the public iterest will be protected together with the reputatio of the professioal accoutig bodies. I additio to the guidace o professioal ethics published by professioal bodies, may orgaisatios will have their ow code of busiess ethics. These set out guidace o the coduct ad values that gover decisios ad actios withi that idividual orgaisatio. This code is desiged to help a idividual i a orgaisatio, faced with a ethical dilemma, to make the right choice betwee alterative courses of actio. It also esures that there is cosistecy i the coduct of all employees withi the orgaisatio. The code of ethics for accoutats prescribes a priciple-based approach, ie idetifyig, evaluatig ad addressig threats to fudametal priciples rather tha a rules-based approach. Similarly, a priciples-based approach should be adopted whe applyig a code of coduct or practice ad these should be used as a guide rather tha a set of rules. Each compay will iclude differet elemets which it cosiders are importat i its code of busiess ethics. Examples of areas o which they may give guidace iclude:

6 c o d e s o f c o d u c t a d o r g a i s a t i o a l v a l u e s compliace with the law competig fairly how to act with itegrity i all busiess dealigs treatig suppliers, parters ad customers properly treatig co-workers respectfully cotributig to a healthy, safe ad secure workplace respectig the eviromet ad cotributig to the commuity respectig huma rights maitaiig high stadards of fiacial record-keepig ad reportig If you research busiess ethics, codes of coduct or codes of practice i your orgaisatio you may well fid a writte policy that icludes some of these poits together with other areas relevat to your idustry. l e g a l s t a t u s o f c o d e s o f c o d u c t Where a compay itroduces a ethical code of coduct this is ot legally eforceable ad crimial sactios caot be imposed o employees who do ot comply with the code. However, there may be elemets withi the code that are based o laws, which could result i a crimial prosecutio. For example i the list above oe of the poits is cotributig to a healthy, safe ad secure workplace. Although this could be icluded i a firm s code of coduct this is also regulated by the Health ad Safety at Work Act. t h e i s t i t u t e o f B u s i e s s e t h i c s The Istitute of Busiess Ethics (IBE) was established i 1986 to ecourage high stadards of busiess behaviour based o ethical values. They raise public awareess of the importace of doig busiess ethically ad collaborate with other UK ad iteratioal orgaisatios with iterests ad expertise i busiess ethics. The IBE has produced a Simple ethical test for a busiess decisio. This test has three elemets or questios to ask whe faced with a busiess decisio. These are: Trasparecy do I mid others kowig what I have decided? Effect who does my decisio affect or hurt? Fairess would my decisio be cosidered fair by those affected? By cosiderig these three questios a idividual withi a orgaisatio will cosider the ethical implicatios of the decisio he/she makes. Members of the accoutig professio must always behave ethically whe workig with others, whether it is cliets, suppliers, colleagues or ay other idividual they come ito cotact with.

7 1 2 0 p r o f e s s i o a l e t h i c s i a c c o u t i g t u t o r i a l t h e l e d i g c o d e Oe example of a code of practice is the ledig code. This is a volutary code of practice which sets stadards for fiacial istitutios to follow whe they are dealig with their persoal ad small busiess customers i the Uited Kigdom. The ledig code provides valuable protectio for customers ad explais how firms are expected to deal with them day-to-day ad i times of fiacial difficulties. t o e a t t h e t o p Toe at the top refers to the ethical atmosphere that is created i the workplace by the orgaisatio's leadership. Maagemet s attitude to ethics will have a trickle-dow effect o the employees of the compay. If the toe set by maagers upholds ethical values ad itegrity, employees will be more iclied to uphold those same values. If, o the other had, seior maagemet appear ucocered with actig ethically, employees will be more likely to feel that ethical coduct is ot a focus withi the orgaisatio. Employees pay close attetio to the behaviour ad actios of their bosses, ad they follow their lead. The followig example illustrates a situatio where the toe at the top is importat i a orgaisatio. example Joatha works for Excelsior limited, a compay that supplies ad fits curtais ad blids. Durig a sales team meetig the compay s sales maager, Rebecca Grey preseted her method for maximisig sales reveue. She explaied that whe she visits customers she assesses how much moey she thiks they have ad chages the price that she will charge them accordigly. She also icreases the price to certai customers so that she ca offer them big discouts ad still make a profit. She ecouraged all her team to do the same. Rebecca s sellig techiques are ot ethical but as she is the boss she is settig the toe at the top withi Excelsior ad her sales team are likely to follow her lead ad sell i the same uethical maer. o r G a i s at i o a l a D p r o F e s s i o a l Va l U e s I Chapter 2 we looked at legal cosideratios for a professioal accout. However, i additio to complyig with the law ad with regulatios orgaisatios should also comply with the spirit of the regulatios ie how these regulatios are expected to work i practice. Key ethical orgaisatioal values that would be icluded i a busiess s code of practice are show below.

8 c o d e s o f c o d u c t a d o r g a i s a t i o a l v a l u e s Beig trasparet with colleagues, customers ad suppliers eg ot hidig thigs i the small prit of cotracts, or tellig customers that you ca provide them with a product or service that is ot available Reportig fiacial ad regulatory iformatio clearly ad o time eg producig maagemet accouts promptly ad accurately for use by colleagues i the busiess Beig ope ad hoest by idetifyig whe it is appropriate to accept ad give gifts ad hospitality eg defiig icludig specific policies i the orgaisatio s code of practice that gift, ca oly be accepted if they are less tha 20 i value Payig suppliers a fair price ad o time eg esurig that all suppliers regardless of size are paid to terms, eg withi a 30 day period of receivig a ivoice Providig fair treatmet, decet wages ad good workig coditios for employees eg esurig that a regular review is carried out for staff who work o computer termials to esure their workstatios comply with health ad safety regulatios o C o M p l i a C e As we have see, i additio to complyig with regulatios busiesses itroduce codes of practice ad orgaisatioal values to try ad esure that its employees work ethically. But what happes if orgaisatios ad idividuals do ot comply with these values, codes ad regulatios? We will ow look at the cosequeces of o-compliace. o c o m p l i a c e b y a o r g a i s a t i o It is oe thig to produce a set of ethical orgaisatioal values however, these are oly of ay use if the orgaisatio actually follows them. It is o use simply payig lip service to a code of practice. The image ad reputatio of a busiess will be adversely affected if it does ot comply with its values ad codes. We will ow look at each of the key ethical values highlighted i the previous sectio to see examples of the cosequeces of failig to comply to each of these orgaisatioal values. Beig trasparet with colleagues, customers ad suppliers if a orgaisatio hides ureasoable terms i the small prit of a cotract that they later try ad eforce this will put customers off tradig with that busiess i the future. Similarly, if a busiess is ot clear i its dealigs with suppliers these suppliers will be reluctat to deal with the busiess i the future.

9 1 2 2 p r o f e s s i o a l e t h i c s i a c c o u t i g t u t o r i a l Reportig fiacial ad regulatory iformatio clearly ad o time failure to produce accurate ad timely fiacial iformatio may lead to poor decisios beig made by the maagemet of the busiess. Failure to produce regulatory iformatio such as fiacial statemets o time ca lead to the busiess beig fied. Beig ope ad hoest by idetifyig whe it is appropriate to accept ad give gifts ad hospitality a busiess that gives gifts or hospitality to customers could be see as tryig to ifluece the customer s decisios or eve to bribe the customer. Similarly acceptig gifts from a supplier could ifluece the decisio-makig of the orgaisatio. The cosequece of ot havig clear polices regardig gifts ad hospitality could be to adversely affect the image of the busiess ad potetially lead to accusatios of uethical busiess dealigs. Payig suppliers a fair price ad o time a busiess that tries to squeeze the lowest price out of a supplier ad delays paymet ca adversely affect the relatioship with that supplier. Recetly some of the large supermarkets have received some very egative publicity i the press for their cotrol over small farmers ad demadig very low prices. Providig fair treatmet, decet wages ad good workig coditios for employees if a busiess does ot treat its employees well they will leave the orgaisatio which will lead to high staff turover. Also poor workig coditios will affect staff morale ad affect the quality of work ad the commitmet of the busiess s staff. Orgaisatioal values ad codes of practice are implemeted withi the orgaisatio ad are ot legally eforceable, however; if a busiess fails to comply with regulatios it could be subject to fies. For example if a orgaisatio is foud i court to have breached the Health ad Safety at Work Act ad its relevat statutory provisios, the court ca impose sigificat pealties o the busiess. i t e r a l d i s c i p l i a r y p r o c e d u r e s b y a e m p l o y e r Like ay employee if a professioal accoutat fails to adhere to the employer s orgaisatioal values or iteral codes of practice the employer may brig discipliary procedures agaist him/her. These discipliary procedures should be formally documeted but will ormally iclude some or all of the followig stages. a verbal warig a writte warig a discipliary hearig the opportuity to appeal

10 c o d e s o f c o d u c t a d o r g a i s a t i o a l v a l u e s suspesio from work dismissal The extet of the discipliary actio that is take will deped o the seriousess of the breach. For example acceptig a crate of wie from a cliet may result i the accoutat receivig a verbal warig, particularly if it is the first time that he/she has doe so. If, o the other had, the accoutat has committed a illegal act such as fraud this is likely to result i dismissal. d i s c i p l i a r y a c t i o b y p r o f e s s i o a l a c c o u t i g b o d i e s The professioal accoutig bodies i the UK expect their members to comply with the code of ethics ad to uphold the high stadards that are expected of the accoutig professio. Failure by a accoutat to comply with applicable regulatios ad codes of practice may result i the accoutat beig disciplied. Discipliary actio for miscoduct ca be take by the idividual accoutig bodies ad also by the Fiacial Reportig Coucil (FRC), which is the idepedet discipliary body for accoutats, accoutacy firms ad actuaries i the UK. Miscoduct fails ito two mai categories: brigig the accoutig professio ito disrepute actig i breach of the rules ad regulatios of the accoutat s professioal body Idividual accoutig bodies i the UK have published discipliary regulatios, which set out the processes ad sactios that the accoutig body will carry out if a member is guilty of miscoduct. The procedures will ivolve a discipliary ivestigatio followed by a decisio as to whether the accoutat is guilty of miscoduct. Depedig o the severity of the miscoduct the accoutat could face ay of the follow pealties (listed i order of severity) be required to give a writte udertakig to refrai from cotiuig or repeatig the miscoduct i questio be fied a sum of moey ot exceedig a maximum figure set by the professioal accoutig body be reprimaded or severely reprimaded be declared ieligible for a practicig licece have his/her practicig licece withdraw have his/her membership suspeded be expelled from the professioal accoutig body

11 1 2 4 p r o f e s s i o a l e t h i c s i a c c o u t i g t u t o r i a l F r C s d i s c i p l i a r y s c h e m e The FRC s discipliary scheme operate idepedetly of the professioal bodies. The FRC deals with cases of potetial miscoduct, which raise or appear to raise importat issues affectig the public iterest i the UK. All other cases of potetial miscoduct cotiue to be dealt with by the professioal bodies above. i t e r a l w h i s t l e b l o w i g We have looked at the cosequeces for a busiess or a idividual accoutat of breachig ethical codes. But what does a employee do if he/she suspects a employer, a colleague or a cliet has committed, or may commit, a act which is illegal or uethical? He/she must decide the appropriate reportig procedures to follow. The employee may decide to blow the whistle to expose the miscoduct that he/she believes has or may occur. So what do we mea by the term whistleblowig? A whistleblower ca be defied as: a perso who tells someoe i authority about miscoduct, alleged dishoesty or illegal activity that has or may occur i a orgaisatio. The miscoduct could be breakig the law for example committig a fraud, cotraveig regulatios such as health ad safety regulatios or somethig that is cotrary to public iterest such as corruptio. The allegatios of miscoduct made by a whistleblower ca be made iterally withi the orgaisatio or exterally to regulators or to the police. Most whistleblowers are iteral whistle blowers, who report miscoduct o the part of a colleague to someoe more seior i the orgaisatio. It is a big decisio to iterally blow the whistle o a employer or colleague. This actio ca have a serious impact o the idividual s future employmet with the busiess ad could ultimately force him/her to resig. If he/she decides whistleblow the followig poits should be cosidered: esure that he/she kows all the facts surroudig the issue ad has evidece to support the facts follow the employer s iteral procedures for reportig suspected miscoduct i order to disclose the malpractice esure that the situatio is fully explaied to maagemet icludig the cocers that he/she has ad how the orgaisatio could be affected if they are ot addressed. A idividual is advised to raise cocers iterally before goig outside of the busiess. However if he/she feels that the issue is ot beig addressed or that the matter is so serious that it caot be raised iterally he/she should

12 c o d e s o f c o d u c t a d o r g a i s a t i o a l v a l u e s cotact a appropriate regulator such as the FRC. If the idividual is i ay doubt about what actio to take he/she should seek cofidetial advice from his/her professioal accoutig body, ormally via its helplie. M o e Y l a U D e r i G a d e f i i t i o o f m o e y l a u d e r i g I Chapter 6 we looked at the disclosure of cofidetial iformatio where there has bee a ifrigemet of the law. The example we used for this was moey lauderig which was defied as: to move illegally acquired cash through fiacial systems so that it appears to be legally acquired. Put simply, this meas usig moey gaied illegally eg through terrorist fudig, drug dealig or other crimial activities so that the moey is laudered or washed ad the appears to be clea ad legally obtaied. Activities related to moey lauderig iclude: acquirig, usig or possessig crimial property hadlig the proceeds of crime such as theft, fraud ad tax evasio beig kowigly ivolved i ay way with crimial or terrorist property eterig ito arragemets to facilitate lauderig crimial or terrorist property ivestig the proceeds of crime ito other fiacial products ivestig the proceeds of crime ito the acquisitio of property/assets trasferrig crimial property Crimial property is property which was kowigly obtaied as a result of crimial coduct. It may take a umber of forms icludig moey, security, tagible or itagible property. Terrorist property is moey or property likely to be used for terrorist purposes, or the process of commissioig or carryig out terrorist acts. A accoutat will be guilty of a moey lauderig offece if he/she provides accoutacy services while 'turig a blid eye' to the cliet's suspect dealigs. This would be viewed as facilitatig the cliet's illegal activities as detailed i the fourth poit above. The value of the crimial property will have o bearig o whether or ot a accoutat should report a moey lauderig offece as there is o de miimis exceptios or lower limit i relatio to moey lauderig or terrorist fiacig offeces. Similarly, a professioal accoutat i busiess must be vigilat i prevetig ad detectig moey lauderig i the orgaisatio he/she works for.

13 1 2 6 p r o f e s s i o a l e t h i c s i a c c o u t i g t u t o r i a l The example below illustrates a situatio where a accoutat has to cosider moey lauderig. example Your cliet Eric has bee give some compay shares by his aut, who bought them with moey that she did ot declare to the tax authorities (ie tax evasio). By acceptig these shares is Eric guilty of moey lauderig? Are you as his accoutat guilty of a moey lauderig offece? The shares will oly be crimial property as far as Eric is cocered if he kows or suspects that they had origially bee acquired as a result of crimial coduct o the part of his aut. He will the commit a moey lauderig offece if he deals i them. Coversely if he has o kowledge or suspicio regardig the fuds that his aut used to purchase the shares the he will ot be committig a offece. As his accoutat you are i a similar positio i that you will oly be committig a moey lauderig offece if you kow or suspect that the shares are crimial property. As Eric's accoutat you ca still be foud guilty of moey lauderig if you kew about the crimial property eve if Eric is iocet as your cliet's state of mid has o bearig o your obligatios. m o e y l a u d e r i g r u l e s The legislatio ad regulatios relatig to moey lauderig, or ati-moey lauderig legislatio ca be foud i the followig laws ad regulatios: The Proceeds of Crime Act 2002 (POCA): this sets out the pricipal moey lauderig offece ad the requiremets to report suspicious trasactios. The Terrorism Act 2000 (TA): this sets out the pricipal terrorist fiacig offeces ad reportig obligatios i similar terms to POCA. The Moey Lauderig Regulatios 2007 (the Regulatios): these require sole traders ad firms to establish procedures iteded to detect ad prevet activities relatig to moey lauderig ad terrorist fiacig. m o e y l a u d e r i g p e a l t i e s Uder the laws ad regulatios above a idividual foud guilty of moey lauderig, or the orgaisatio that he/she works for, ca be pealised. Depedet o the severity of the offece this could be a ulimited fie ad/or a priso setece of up to fourtee years. t h e a c c o u t a t s d u t y t o r e p o r t m o e y l a u d e r i g The Proceeds of Crime Act 2002 (POCA) ad the Terrorism Act 2000, require accoutats as idividuals i the regulated sector to report ay suspicio that a cliet is ivolved with crimial property to the Serious Orgaised Crime Agecy (SOCA) i a suspicious activity report (SAR). If the accoutat is workig i a practice which, due to its size, has appoited a Moey Lauderig Reportig Officer (MLRO), the matter should be

14 c o d e s o f c o d u c t a d o r g a i s a t i o a l v a l u e s reported to the MLRO i a iteral report. The MLRO will the report to SOCA usig a Suspicious Activity Report (SAR). t e r r o r i s t f i a c i g Terrorist fiacig is the provisio or collectio of fuds from legitimate or illegitimate sources with the itetio or i the kowledge that they should be used i order to carry out ay act of terrorism, whether or ot those fuds are i fact used for that purpose. Like moey lauderig the maximum pealty for this offece is a ulimited fie ad /or up to 14 years i priso. The followig example highlights a situatio where a accoutat may suspect moey lauderig. example terrorist fiacig Julia is a qualified accoutat who works as a sole practitioer. She has recetly started work o the year-ed accouts for her cliet Michael. Durig her work she discovers a umber of paymets that have bee made to a overseas compay that she does ot recogise. There is o detailed supportig documetatio for these paymets. Julia suspect that these paymets may relate to terrorists activities. What should Julia do i these circumstaces? As Julia is a sole practitioer she will ot have a Moey Lauderig Reportig Office (MLRO) to whom she ca report her cocers. She should, therefore, report her cocers to SOCA usig a Suspicious Activity Report (SAR). Failure to do this could result i Julia beig charged with terrorist fiacig offeces. She should ot iform Michael of her suspicios. r e q u i r e d d i s c l o s u r e There are two circumstaces where a required disclosure i a iteral report or a SAR must be made by a accoutat: whe the accoutat wishes to provide services to a cliet i relatio to property which is kow or suspected to relate to moey lauderig or terrorist fiacig. I such circumstaces, the perso makig the report must idicate i the report that he/she is askig for coset to provide such services. He/she caot provide the services util coset is received whe the accoutat actually kows or suspects, or there are reasoable objective grouds for kowig or suspectig that aother perso is egaged i moey lauderig or terrorist fiacig, regardless of whether or ot he/she wishes to act for that perso. The perso i questio could be a cliet, colleague or a third party As a miimum the stadard report or SAR must cotai: the idetity of the suspected perso (if kow), such as, full ame, address, telephoe umbers, passport details, date of birth, accout details

15 1 2 8 p r o f e s s i o a l e t h i c s i a c c o u t i g t u t o r i a l the iformatio o which the suspicio of moey lauderig is based the whereabouts of the laudered property if it is kow details of the perso makig the report which will ormally be the MLRO or sole practitioer Oe particular area where this must be cosidered is where, despite advice from his/her accoutat, the cliet has failed to disclose a omissio or error i his/her tax affairs. Although it would seem logical to report this to HMRC, a accoutat should report this to the firm s MLRO or if he/she is a sole practitioer, to SOCA. If a accoutat believes that a fraud had bee committed the he/she also has a duty to report this to the police. Practices ad employers must also have traiig ad iteral procedures i place to esure that they comply with the reportig requiremets above. If these procedures are ot i place the accoutat may be liable for a fie or imprisomet or both. Clearly this is a importat legal issue that the accoutig professio takes very seriously. Professioal accoutats ad studets must esure that they are familiar with their employer s iteral procedures for reportig suspicios of moey lauderig. Employers must esure that all their staff have bee provided with adequate traiig o their legal obligatios i respect of moey lauderig ad the firms ati-moey lauderig procedures. p r o t e c t e d a d a u t h o r i s e d d i s c l o s u r e Where ay perso, ot just a accoutat, submits a report providig a required disclosure of a suspicio of moey lauderig this is a protected disclosure. This meas that the perso is protected agaist allegatios of breach of cofidetiality regardless of how the restrictio o the disclosure of the cofidetial iformatio was origially imposed. For example, as we saw i Chapter 6, a accoutat has a ogoig duty of cofidetiality to his/her cliet. If, however, the accoutat has had to iclude cofidetial iformatio about the cliet i a SAR that he/she submits, the accoutat is protected agaist ay allegatios of breaches of cofidetiality that the cliet might make. Ay perso, ot just a accoutat, who realises that they may have egaged or are about to egage i moey lauderig, should make a authorised disclosure to the appropriate authority. The disclosure should be made before the act is carried out (ad he/she has obtaied coset for the act from SOCA, see required disclosure above), or as soo after the act is doe with good reaso for the delay. This may the provide him/her with a defece agaist charges of moey lauderig.

16 c o d e s o f c o d u c t a d o r g a i s a t i o a l v a l u e s e x c e p t i o s t o t h e d u t y t o r e p o r t There are certai circumstaces where a accoutat is ot obliged to report kowledge or suspicios of moey lauderig. These are: whe the iformatio that forms the basis of the kowledge or suspicio was obtaied other tha i the course of the accoutat s busiess, for example durig a social occasio whe the iformatio came about i privileged circumstaces, that resulted from the accoutat beig asked to provide legal advice, expert opiio or services i relatio to legal proceedigs. A example of this would be if a accoutat foud out iformatio about possible moey lauderig whilst explaiig the cliet s tax liability. However, a report would have to be made if the advice sought from the accoutat was to eable the cliet to commit a crimial offece or to avoid detectio whe there is a reasoable excuse for ot reportig straightaway. I this case the report must be made as soo as reasoable i the circumstaces. There is curretly o moey lauderig case law relatig to reasoable excuse ad it is aticipated that would oly be accepted i relatively extreme circumstaces, such as duress ad threats to safety f a i l u r e t o d i s c l o s e We have already discussed the requiremet for a accoutat to report his/her suspicio of moey lauderig to the firm's MLRO or directly to SOCA. However, it is worth otig that it is a offece of failure to disclose uder the POCA if a accoutat does ot report his/her suspicio. This offece carries a maximum pealty of five years imprisomet ad/or a fie. p r e j u d i c i g a i v e s t i g a t i o A further moey lauderig offece may be committed where ay perso, ot just a accoutat, kows or suspects that a moey lauderig ivestigatio is beig coducted or is about to be coducted ad either: makes a disclosure which is likely to prejudice the ivestigatio; or falsifies, coceals or destroys documets relatig to the ivestigatio, or causes this to happe. The perso makig the disclosure does ot have to ited to prejudice a ivestigatio for the offece to apply. However, it is worth otig that there is a defece available if the perso makig the disclosure did ot kow or suspect the disclosure would be prejudicial, did ot kow or suspect that the documets were relevat, or did ot ited to coceal facts from the perso carryig out the ivestigatio.

17 1 3 0 p r o f e s s i o a l e t h i c s i a c c o u t i g t u t o r i a l t i p p i g o f f POCA has created a crimial offece of tippig off. This is where a accoutat who kows, or thiks they kow that, a report of moey lauderig has bee made to a MLRO, SOCA, HMRC or the police, wars (or tips off ) the perso(s) suspected. Where this happes the perso who tips off the suspect is liable to be prosecuted as well as the perso who is carryig out the moey lauderig. The perso who tips off does ot have to ited to prejudice a ivestigatio for this offece to apply. A accoutat who discovers that a employer or a cliet is potetially moey lauderig must report his/her suspicios to the Moey Lauderig Reportig Officer or SOCA. They must esure, however, that they do ot make the employer or cliet aware of this as this would be cosidered tippig off. Although tippig off is a offece, a accoutat is etitled to advise his/her cliets i geeral terms about the issue of moey lauderig. The maximum pealty for tippig off is 5 years imprisomet ad/or a fie. The followig example illustrates the serious implicatios of moey lauderig. example a case of moey lauderig Wilfred Joyce is a accoutat i public practice. Oe of his cliets is a atiques dealer called Louis Kas. Oe Friday Wilfred receives a telephoe equiry from Louis, who says that a customer is i the shop askig to buy a piece of furiture for 11,000. The customer is offerig to pay Louis i cash. What should Wilfred advise i this situatio? Louis has bee offered a large amout of cash but does ot really kow where it has come from. Although the customer may have good reasos for havig such a large amout of cash there is a risk that it may ot have bee gaied through legal meas. As Wilfred s objective i this situatio is to esure that his cliet does ot breach the Moey Lauderig Regulatios 2007, he should advise Louis to idetify the customer ad verify the source of the cash before acceptig it, thus satisfyig himself that the cash is ot the proceeds of some crime. If despite Wilfred s advice Louis the goes o ad deals with the customer o a cash basis the Wilfred will have o optio but to report him to SOCA.

18 c o d e s o f c o d u c t a d o r g a i s a t i o a l v a l u e s c u s t o m e r d u e d i l i g e c e Before providig services to a cliet, accoutats must cosider whether their services could be used to facilitate moey lauderig or to fiace terrorist activities. The Moey Lauderig Regulatios 2007 state that customer due diligece (CDD) must be applied i the followig situatios: whe establishig a busiess relatioship whe carryig out a occasioal trasactio with a cliet ivolvig 15,000 euros or more where there is a suspicio of moey lauderig or terrorist fiacig where there are doubts about customer idetificatio iformatio that has previously bee obtaied at appropriate times to existig cliets o a risk-sesitive basis Where the above criteria are applicable the accoutat must carry out sufficiet due diligece. Oe defiitio of due diligece is: the process of evaluatig a prospective busiess decisio by ivestigatig relevat fiacial, legal, ad other importat iformatio about the other party. Therefore, the accoutat must have a detailed look at the cliet ad the way it operates to decide whether he/she ca eter ito a professioal relatioship with the cliet, cofidet that there are o ethical issues or ay risk that they may be ivolved i moey lauderig. Due diligece should iclude: verifyig the cliet s idetity by lookig at documets, data or other iformatio obtaied from a reliable source where the perso who ows the busiess is ot the perso who rus it, the accoutat should esure that he/she fully uderstads who ay beeficial owers are; a beeficial ower is geerally a idividual who ows 25% or more of the busiess. The accoutat should also carry out the same sort of verificatio of the idetity of the ower the accoutat should also fid out what the cliet wats from the relatioship or the purpose ad ature of the trasactio Where the accoutat is uable to carry out adequate CDD he/she must declie the assigmet. If, havig carried out due diligece, the accoutat has a suspicio that the cliet may be ivolved i moey lauderig or terrorist fiacig, the accoutat must submit a report to the Moey Lauderig Reportig Officer or submit a Suspicious Activity Report to the Serious Orgaised Crime Agecy (SOCA). It is the resposibility of the accoutat to esure that they are familiar with ati-moey lauderig ad terrorist fiacig legislatio. The followig example illustrates how due diligece would be carried out i practice.

19 1 3 2 p r o f e s s i o a l e t h i c s i a c c o u t i g t u t o r i a l example Gill Gardeer is a parter i Garder & Shah, a firm of accoutats. She has bee approached by Mike McGa, the maager ad co-ower of a small chai of local fish ad chips shops, to act as his accoutat. What does Gill have to do before she ca eter ito a professioal relatioship with Mike? Gill must verify Mike s idetity. The best way to do this is to ask Mike if she ca see his passport, makig sure that she fully explais to him why she eeds to do this. She should also verify the idetity of Mike s co-ower i the same way. Fially, she should discuss with Mike exactly what he wats from the professioal relatioship with Garder ad Shah. I practice these discussios will probably take place durig the egotiatios betwee Gill ad Mike ad details will be icluded i the letter of egagemet. Provided Gill carries out sufficiet due diligece ad she is happy with the idetity of Mike ad his parter she ca eter ito a professioal relatioship with Mike. k e e p i g r e c o r d s o f c u s t o m e r d u e d i l i g e c e The Moey Lauderig Regulatios are very clear about the circumstaces where it is ecessary for customer due diligece (CDD) to be carried out. The regulatios also require that records of CDD that has bee performed should be maitaied to assist i ay future law eforcemet ivestigatig relatig to cliets. These records will also demostrate that the accoutat has complied with his/her statutory obligatios. Records of CDD carried out should iclude: copies of or referece to the CDD evidece that was used to verify the cliet s idetity, for example passport details. These records must be kept for five years startig with the date o which the accoutat s relatioship with the cliet eds copies or origials of documets relatig to trasactios that have bee subject to CDD or to ogoig moitorig, for example a ivoice supportig a cliet receipt of a large cash paymet from a customer. These must be kept for five years startig from the date o which the accoutat completed the cliet s istructios i a p p r o p r i at e C l i e t B e H av i o U r We have looked i detail at the offeces of moey lauderig ad terrorist fiacig ad the eed for a accoutat to be vigilat i idetifyig ad reportig potetial or actual istaces of this. These offeces could be o the part of a employee, colleague or cliet. We are ow goig to summarise the specific issues facig a accoutat i practice whe he/she idetifies iappropriate cliet behaviour.

20 c o d e s o f c o d u c t a d o r g a i s a t i o a l v a l u e s r e p o r t i g i a p p r o p r i a t e c l i e t b e h a v i o u r A accoutat i practice will report actual or suspected moey lauderig to the Moey Lauderig Reportig Officer (MLRO), if the busiess has oe, or directly to SOCA. A accoutat may also idetify other iappropriate cliet behaviour, icludig fraud or other illegal acts. I these circumstaces the accoutat must esure that this is reported to the appropriate perso or the relevat authority. I the case of fraud or other illegal acts the matter must be raised with the police. If the accoutat is ot sure how to proceed, he/she should raise the issue with a more seior member of staff i the firm. Larger accoutig practices will have dedicated helplies that their staff ca cotact if they eed further advice o dealig with iappropriate cliet behaviour that the accoutat feels could be illegal or uethical. If the accoutat works for a small firm or is a sole practitioer, advice is available from his/her professioal accoutig body s helplie. A example of this is the AAT Ethics Advice lie. Failure to act appropriately i respose to iappropriate cliet behaviour ca result i the accoutat beig accused of offeces such as of tippig off or failure to disclose. t h r e a t s a d s a f e g u a r d s I Chapter 3 we looked at the types of threats that a accoutat faces to his/her fudametal ethical priciples. These were categorised as follows: self-iterest threats self-review threats familiarity threats itimidatio threats advocacy threats Whe dealig with cliets, a accoutat i practice must be particularly midful of familiarity, itimidatio ad advocacy threats ad esure that safeguards are i place to mitigate these threats. Familiarity threats may occur where the relatioship betwee the accoutat ad the cliet is too close or familiar. This could be because of a actual relatioship or friedship or as a result of the accoutat workig for the cliet for a umber of years ad becomig friedlier ad more sympathetic to the iterests of the cliet. A professioal accoutat must esure that he/she safeguards his/her objectivity Itimidatio threats may occur if the cliet or a member of the cliet s maagemet is a domiat persoality. The cliet may threate to dismiss the accoutat or ot award work to the accoutat if he/she does ot do what the cliet demads. If the accoutat works for a larger firm of

21 1 3 4 p r o f e s s i o a l e t h i c s i a c c o u t i g t u t o r i a l accoutats this should be reported to more seior maagemet i the firm. They ca the decide what actio to take, icludig the possibility of replacig the accoutat with a stroger persoality to couter the itimidatio threats. A sole practitioer will have to be firm with the cliet, however, if the threats caot be elimiated or reduced to a acceptable level the the sole practitioer may have to resig from the assigmet. Advocacy threats result from a accoutat supportig the positio or opiio of a cliet to the poit that his/her objectivity may be compromised. Accoutats must be careful ot to be pressurised ito supportig or promotig a cliet s positio ad refuse if they feel their fudametal priciples are beig threateed. Examples of safeguards agaist these types of threats are detailed i Chapter 3. Chapter Summary A busiess faces operatioal risks from the way i which it operates its busiess processes. These ca be classified ito: Reputatioal risk Process risk People risk Systems risk Legal risk Evet risk May busiesses have their ow codes of coduct ad codes of practice which help idividuals i the orgaisatio to make the right choice whe faced with a ethical dilemma. Idividuals who work i a orgaisatio will be iflueced by the maagemet s attitude to ethics; the toe at the top will have a trickledow effect o the people who work i it. Orgaisatios should comply with the spirit of regulatios ad should iclude key ethical orgaisatioal values i its code of practice. These are: Beig trasparet with colleagues, customers ad suppliers Reportig fiacial ad regulatory iformatio clearly ad o time Beig ope ad hoest by idetifyig whe it is appropriate to accept ad give gifts ad hospitality Payig suppliers a fair price ad o time Providig fair treatmet, decet wages ad good workig coditios for employees

22 c o d e s o f c o d u c t a d o r g a i s a t i o a l v a l u e s Failure to comply with a employer s orgaisatioal values or codes of practice ca result i a accoutat beig disciplied by his/her employer or professioal accoutig body. Accoutats ad other employees may decide to report illegal or uethical behaviour o the part of a employer, colleague or cliet through the process of iteral whistleblowig. If a accoutat has kowledge or a suspicio that a cliet or a employer is moey lauderig they must report this to the Serious Orgaised Crime Agecy (SOCA), or to the firm s Moey Lauderig Reportig Officer. The moey lauderig rules are set out i the Proceeds of Crime Act 2002, The Terrorism Act 2000 ad the Moey Lauderig Regulatios The maximum pealty if covicted of moey lauderig is 14 years imprisomet. A required disclosure of a suspicio of moey lauderig is a protected disclosure, which meas the perso is protected agaist allegatios of breach of cofidetiality. There are certai exceptios to the duty to report kowledge or suspicio of moey lauderig. Failure to disclose a suspicio of moey lauderig carries a maximum pealty of 5 years imprisomet or a fie. It is a offece for a idividual to make a disclosure which is likely to prejudice a ivestigatio ito moey lauderig or to falsify, coceal or destroy documets relatig to the ivestigatio. It is a crimial offece to tell someoe that they may be ivestigated for possible moey lauderig. This is the offece of tippig off ad carries a maximum pealty of 5 years imprisomet ad/or a fie. Accoutats should carry out customer due diligece before providig services to a cliet to esure there are o legal or ethical reasos why they should ot eter ito a professioal relatioship with the cliet. I particular the accoutat should esure that his/her services are ot beig used to facilitate moey lauderig. Where a accoutat idetifies istaces of iappropriate cliet behaviour he/she should raise the issue with a more seior member of staff i the firm or cotact his/her professioal accoutig body s helplie.

23 1 3 6 p r o f e s s i o a l e t h i c s i a c c o u t i g t u t o r i a l Key Terms operatioal risk reputatioal risk process risk people risk systems risk legal risk evet risk busiess ethics ad codes of coduct the risk of loss that arises from the way i which a orgaisatio operates its busiess fuctios the risk of loss resultig from damage to a orgaisatio s reputatio, i this chapter from the orgaisatio actig uethically a iheret risk of loss withi the processes of a orgaisatio the risk that people withi a orgaisatio do ot follow the procedures, practices ad rules the risk of failure or lack of cotrols withi a orgaisatio s computer systems the risk of loss resultig from a orgaisatio s ot beig able to legally eter i to a cotract the risks that affect a busiess from a exteral evet, these ca be further split ito physical, social, political ad ecoomic evet risks guidelies draw up by a idividual orgaisatio which set out its values ad govers decisios ad actios i that orgaisatio toe at the top the ethical atmosphere that is created i the workplace by the orgaisatio s leadership discipliary actio processes ad sactios that a professioal accoutig body ca carry out if a member is accused of o-compliace with its regulatios ad the code of ethics iteral whistleblowig tellig someoe more seior withi the orgaisatio about somethig illegal or uethical withi the orgaisatio that the employee works for moey lauderig movig illegally acquired cash through fiacial systems so that it appear to be legally acquired proceeds of Crime act 2002 a statute that sets out the law i relatio to fiacial gais made from illegal acts terrorism act (2000) a statute that sets out the law i relatio to terrorism fiacig

24 c o d e s o f c o d u c t a d o r g a i s a t i o a l v a l u e s Moey lauderig regulatios 2007 soca suspicious activity report required disclosure protected disclosure authorised disclosure failure to disclose prejudicig a ivestigatio tippig off customer due diligece the regulatios goverig the crime of moey lauderig Serious Orgaised Crime Agecy a report submitted to SOCA givig details of suspected moey lauderig disclosure of moey lauderig must be made whe a accoutat kows or suspects moey lauderig o the part of a cliet disclosure of a suspicio of moey lauderig is protected agaist allegatios of breach of cofidetiality disclosure by a perso who realises they may have egaged i moey lauderig or are about to egage i moey lauderig failure to tell relevat authority about a suspicio or kowledge of moey lauderig makig a disclosure that is likely to adversely affect a ivestigatio ito suspected moey lauderig the crimial offece of warig a idividual that he/she is suspected of moey lauderig evaluatig prospective busiess decisios by ivestigatig relevat fiacial, legal ad other importat iformatio about the other party

25 1 3 8 p r o f e s s i o a l e t h i c s i a c c o u t i g t u t o r i a l Activities 7.1 State the SIX categories of operatioal risk that ca arise from the way i which a busiess operates Clearview Ltd has recetly decided to produce a code of practice to use withi its fiace ad payroll fuctio. This is i respose to guidelies produced by its trade orgaisatio. Oce it has bee implemeted explai whether this will be a statutory code of practice. 7.3 List the FIVE key orgaisatioal ethical values that a busiess should iclude i its code of practice

26 c o d e s o f c o d u c t a d o r g a i s a t i o a l v a l u e s Felicity believes that her colleague, Marcus, has acted illegally ad has decided to iterally whistleblow o Marcus s miscoduct. What poits should Felicity cosider before she decides whether to whistleblow? 7.5 (a) State the three key pieces of legislatio ad regulatios that relate to moey lauderig (b) State the maximum pealties that a idividual could face if foud guilty of moey lauderig. (c) What ame is give to the perso i a orgaisatio to whom a suspicio of moey lauderig should be reported? 7.6 Ashleigh is a qualified accoutat who works for Riley & Kha a accoutig practice i Powerbridge. Below are three situatios which have occurred at Riley & Kha this week. For each oe explai whether Ashleigh should carry out customer due diligece (CDD) procedures. (a) (b) (c) Oe of Riley & Kha s cliets, Voltec Ltd has iformed Ashleigh that they eed her help to apply for a permaet licese to sell alcohol olie. Voltec are a busiess that maufactures ad fits double glazed widows ad doors. Riley ad Kha have bee the accoutats for Oscar s a local restaurat i Powerbridge for a umber of years. Oscar Price, the proprietor, has recetly take o a ew parter i the busiess, Simeo Gray, who ow holds a 55% share of Oscar s. Oscar will cotiue ruig the restaurat o a day-to-day basis. Deis James is a cliet of Riley & Kha. Ashleigh has completed Deis s persoal tax retur for each of the last four years, ad always holds the moey i a cliet accout for Deis before payig HMRC o the due date. Deis has ow asked Ashleigh to complete his wife Helea s tax retur ad hold the moey for her to pay HMRC. Ashleigh has met Helea socially o a umber of occasios.

27 1 4 0 p r o f e s s i o a l e t h i c s i a c c o u t i g t u t o r i a l 7.7 Georgia is a qualified accoutat who works as a sole practitioer. She has just started work o a ew cliet, Opio Ltd. Whe she took o Opio Ltd as a cliet she carried out appropriate customer due diligece procedures. Georgia is ow completig the VAT Retur for Opio Ltd for the curret quarter ad has foud a sigificat error i the previous quarter s retur which has resulted i a large uderpaymet of VAT by Opio. This retur was completed by their previous accoutat, Joe. Georgia raises this issue with, Edgar, the ower of Opio who replies Well if HMRC have t oticed we wo t eed to adjust it! I ll tell Joe to keep quiet about it. Despite Ashleigh strogly advisig him to disclose the error to HMRC, he refuses. (a) (b) (c) Explai what Georgia must do i this situatio. What are the cosequeces for Georgia if she does ot take ay actio i this situatio? What actio should Joe take regardig Edgar s refusal to disclose the error to HMRC? 7.8 Jake works for Delaey & Clarke, a firm of accoutats i Sadsville. He has recetly bee workig o the accouts for oe of his cliets Thompso Facilities Ltd that provides security services at large outdoor evets. Jake has oticed some uusual large cash trasactios goig through its accouts for which he caot fid ay supportig paperwork. He strogly suspects that the moey has come from sales o which Thompso Facilities Ltd has ot charged VAT. What are the cosequeces for Jake if he raises the issue of the uusual cash trasactios with the maagemet of Thompso Facilities Ltd?

28 f o r y o u r o t e s c o d e s o f c o d u c t a d o r g a i s a t i o a l v a l u e s 1 4 1