E. Professional values and ethics CORPORATE CODE OF ETHICS An ethical code typically contains a series of statements setting out the organization s values and explaining how it sees its responsibilities towards stakeholders. Codes of corporate ethics normally have features including: Codes regulating employees behaviour Cover specific areas Includes third party codes such as from regulators Mixed moral and technical imperatives Used to shift responsibility Rather legalistic documents May require signature that they will comply Purpose of the code of ethics include: Establishing organization s values Promote stakeholder s responsibilities Control individuals behaviour Promote company objectives Conveying values to stakeholders Merely issuing a code of conduct is not enough The commitment of senior management to the code needs to be real Staff need to be persuaded of expectations The code needs to be communicated as being in the best interest of the organization The code cannot be perceived as limiting employees earnings or restricting their freedom to do their job Problems with codes of conduct include: Inflexible e.g. code prohibiting accepting gifts from customers Ambiguous i.e. it is impossible to word completely unambiguous codes Irrelevant o Fail to say anything about the sort of ethical problems that employees encounter o People pay no attention to them o May be inconsistent with the prevailing organizational culture o Senior managers behaviour may not be see as promoting ethical codes
PROFESSIONAL CODE OF ETHICS Professional codes of ethics apply to the individual behaviour of professionals and are often based on principles, supplemented by guidance on threats and safeguards. Contents of professional codes include: The responsibility for professionals to act in the public interest Fundamental principles of ethics Conceptual framework that identifies, evaluates and addresses threats to compliance Safeguards to eliminate the threats to compliance or to reduce them to acceptable levels Advantages of principles- based guidance include: No guidance can cover every situation where there is a potential threat. The framework of guidance places the onus on the professional to consider actively relevant issues in a given situation. Prevents professionals interpreting legalistic requirements narrowly in order to get around the ethical requirements i.e. rules engender deception whereas principles encourage compliance. A framework can accommodate a rapidly changing environment. A framework can contain prohibitions where there are necessary when principles are not enough. Codes prescribe the minimum standards of behaviour Code can include examples to illustrate how principles are to be applied Disadvantages of principles- based guidance include: Codes cannot include all circumstances and dilemmas therefore accountant need a very good understanding of the underlying principles International codes cannot fully capture regional variations in beliefs and practice Illustrative examples mentioned in the code can be mistakenly taken as rules Breach of code is difficult to enforce unless it is blatant Fundamental principles (PICCO): Professional behaviour Integrity Competence and due care Confidentiality Objectivity
Ethical threats (SIRFAIM): Self- interest o Financial interests o Close business relationships o Employment with client o Partner on client board o Family and personal relationships o Gifts and hospitality o Loans and guarantees o Overdue fees o Percentage or contingent fees o High percentage of fees o Lowballing o Recruitment Self- review o Recent service with an assurance client o General services o Preparing accounting records and financial statements o Valuation services o Taxation services o Internal audit services o Corporate finance o Other services IT services Temporary staff cover Litigation support Legal services Familiarity o Long association of senior personnel with assurance clients Advocacy o Taking the client s part in a dispute (litigation wise) o Somehow acting as their advocate o Negotiating on behalf of the client (banking wise) Intimidation o Actual and threatened litigation o Client seeks second opinions (!) o Conflicts of interest Members and clients interest Interest of different clients Management Safeguards created by the profession, legislation or regulation include: Educational training and experience requirements for entry into the profession Continuing professional development requirements Corporate governance regulations
Professional standards Professional or regulatory monitoring and disciplinary procedures External review by legally empowered third party Ethical safeguards in the workplace for accountants in business include: The employer s oversight systems The employer s ethics and conduct programs Recruitment procedures Strong internal controls Appropriate disciplinary process Leadership that stresses ethics Policies and procedures that promote and monitor employee performance Timely communication of the employer s policies and procedures to all employees Training and education of employees Whistleblowing provisions Consultation with another professional accountant Self- interest threats safeguards: Disposing of the interest Removing the individual from the team if required Keeping the client s audit committee informed of the situation Using an independent partner to review work carried out if necessary Self- review threats safeguards: Second partner review If the valuation is immaterial then: o Confirming that the client understands the valuation and the assumptions used o Ensuring the client acknowledges responsibility for the valuation o Using separate personnel for the valuation and the audit Advocacy threats safeguards: Using different departments Making disclosures to the audit committee Withdraw from the engagement Familiarity threats safeguards: Disposing of the interest Removing the individual from the team if required Keeping the client s audit committee informed of the situation Using an independent partner to review work carried out if necessary Intimidation threats safeguards:
Disclosing to the audit committee the nature and extent of the litigation Removing specific affected individuals from the engagement team Involving an additional professional accountant on the team to review work (!) Second opinion, seek permission to communicate with the existing auditor (!) Conflicts between the interests of different clients o Not be the principal advisers to either party o Nor issue reports assessing the accounts of either party o Use separate engagement teams o Procedures to prevent access of information o Clear guidelines for the respective teams on issues of security and confidentiality o The use of confidentiality agreements o Regular review of the safe guards by an independent partner o Advising clients to obtain additional independent advice Ethical guidance stresses that a professional accountant should normally support the legitimate and ethical obligations established by the employer. Unless these act contrary to law, regulation, technical or professional standards; aid unethical or illegal earnings management strategies; mislead auditors and/or regulators; issue or being associated with a report that misrepresent the facts. Professional behaviour imposes an obligation on professional accountants to comply with relevant laws and regulations and avoid any action that may bring discredit to the profession. Accountants need to act in the public interest for the welfare of society at large not just to satisfy the needs of an individual client or employer. The public interest is considered to be the collective well- being of the community of people and institutions the professional accountant serves, including clients, lenders, governments, employers, employees, investors, the business and financial community and others who rely on the work of the professional accountant. (IFAC) Problem with definition public interest : Most jurisdictions lack a robust definition of what the public interest is that is backed by enforcement mechanisms CRITICISM OF THE ACCOUNTANCY PROFESSION Critics of the view that accountants act in the public interest have focused on the alleged closeness between accountants definition of the public interest and the profession s own self- interest. Critics claim that accountants insistence on self- regulation indicates where their priorities lie.
Lee s history of the accountancy profession in the nineteenth century commented that the most obvious feature of the UK accountants pursuit of professionalization and their institution is their economic self- interest in the name of a public interest. Much accounting literature assumes that accountants are producing information for individuals or corporations seeking to maximize their personal wealth. The impact of accounts include: Accounts are used to judge the performance of a company or its directors Accounts influence the judgement of their users Liberal economic democracy is the idea that individuals should be free to exercise their economic choices and is equally able to do so. By providing the information that supports the present systems, accountants are complicit in perpetuating its flaws. Criticisms of liberal economic democracy: Lack equality o Individuals are not equal economically o Individuals are not able to make economic choices that will benefit themselves o Accountants perpetuate social inequality Role of institutions o Individuals do not exercise the real power but institutions do Failure to increase social welfare o The pursuit of individual self- interest does not imply that wealth will be fairly distributed o The pursuit of individual self- interest does not guarantee that social welfare will be maximize such as the quality of life and health o Economic growth widens the gap between rich and poor Environmental problems o The pursuit of growth has been at the expense of environmental degradation o By aiding the promotion of economic growth accountants are complicit in supporting activity that harms the environment Ethical viewpoint o Accountants are complicit in a version of utilitarianism Criticism of the accountancy profession: Accountancy decisions inevitably have political consequences Difficult to see how accountants could hold position that are not influenced by wider values Accountants are not free to determine their own stance instead they are constrained by politicians attitudes expressed in legislation
Accountants are complicit in their clients paying less than their fair share of tax. Critics suggest that accountants should no be involved in helping their clients legally avoid tax. The rules that the accountancy profession follow o Are too passive allowing too great a variety of accounting treatments, and failing to impose meaningful responsibilities on auditor (such as to detect and report fraud) o Emphasise the wrong principles (such as giving priority to confidentiality over disclosure in the wider public interest) o Encourages long- term relationships with clients rather than forcing them to maintain a distance o Allow the creation of too small a number of large firms who dominate the audit of major listed companies THE END.