How did that feel? Did some of the arguments make more of an impression on you than others? We’re all different, and people can behave well for a number of different reasons. For many people, it makes a big difference whether somebody behaves well because they feel in the mood to do so, or expect to get a reward, or are compelled to do so by outer forces, or because they want to comply with their moral conscience. Ethics is a branch of philosophy that studies the difference between right and wrong. As professional accountants, you will have many opportunities to choose between right and wrong. And as you have seen in the business press, making the wrong choice can lead to serious consequences including corporate failure, loss of reputation, fines, and even jail sentences. Perspectives on ethics In very broad terms, there are three ways of looking at ethics that have developed over time: rules conformance, good intentions, and competence. One way of thinking about ethics is in terms of conformity to rules. From this perspective, ethics is understood as a list of things to do and to not do. Sometimes the list gets very long and complicated and needs to be interpreted by a whole institution of people. The ethical person, from this perspective, is the one who conforms to the rules. A second way of thinking about ethics is in terms of good intentions. From this perspective, a behaviour is considered ethical if it is based on good intentions. Good behaviour then follows from good thinking. The third perspective thinks of ethics in terms of competence. From this perspective, the ethical person is one who can make decisions based on principles and then act on them. This perspective is thought of as looking at competence, because ethics is thought of in terms of an ability rather than an attitude. Branches of ethics As a subject of scholarly study, ethics sits among other branches of philosophy like metaphysics (the study of the nature of reality), epistemology (the study of what can be known and how we know about it), aesthetics (the study of concepts like art, music and beauty) and logic (the study of reasoning and methods of arguing). Over centuries of philosophical debate, ethics has developed several schools of thought. In other words, philosophers and others have developed different ethical theories, different ways of thinking about ‘doing the right thing.’ These theories reflect scholarly differences between professional philosophers, but they also reflect differences in style of moral reasoning that can be observed in everyday moral reflection. As a professional accountant working with people, it will be important for you to become aware of your own ethical way of thinking, and to understand that other people may think about doing the right thing in a different way from you. Some of the better known ways of thinking about ethics follow, in no particular order. The accounting examples included here are only used to illustrate new concepts for you using familiar terms. When making any decision as a professional accountant, you must be sure that you are following the laws of your country, the particular rules that govern you, and the ACCA fundamental principles. our duty to others One way to think about ethics is to acknowledge that there are things that someone just does not do, as part of a duty to others. A limitation of this principle is that you have to decide what those things are that someone should not do.
At least one philosopher (Immanuel Kant) has defined those duties by saying ‘act according to principles that everyone could follow.’ For example, if you disobey traffic lights, you should consider what would happen if everyone did so. The point is that we should recognise everyone as equals, and not assume that the rules are any different for ourselves than they are for other people. As an accounting example, a professional accountant would not deliberately issue false or inaccurate financial statements. If everyone did so, no statements could be trusted and as a consequence not only would the profession be brought into disrepute, but all financial statements would have no value to their users. Ultimately the need for accountants and for financial reports would be called into question. Consequences Another way of thinking about ethics is based on thinking about the consequences to different people. Briefly, consequentialism encourages you to make decisions based on the consequences — both positive and negative — for those involved. This category of thinking is the branch of ethics known as utilitarianism. This states that an action is right if it leads to the most good outcomes and the least bad outcomes for the greatest number of people. One limitation of thinking about ethics in terms of consequences is that you have to agree on what sorts of consequences matter: for example, should you be trying to promote pleasure and avoid causing pain, or should you instead focus on promoting people’s actual well-being, regardless of whether doing so makes them happy? A modern application of this point of view is the cost-benefit analysis, which involves assigning monetary values to the costs and benefits of an action and seeing how they add up. This practice is often used in evaluating new projects. As an accounting example, an accountant thinking in terms of consequences would prepare ‘true and fair’ financial statements because doing so would bring the most benefit to the greatest number of people. In other words, stakeholders inside and outside the organisation would be able to make more informed decisions as a result.
In virtue theory, the emphasis is on deciding what sort of person one should try to be, and to define the virtues such a person would embody. You decide what makes a good person, instead of what makes a good action, and act accordingly. One limitation of this way of thinking is that what constitutes a virtue must be agreed upon, and it can vary by culture and over time. For example, the qualities of good financial reports were once considered to be completeness, historical accuracy, reliability and strict adherence to the legal form in disclosing business transactions. More recently, the qualities of good financial reports have come to be relevance for decision-making, reference to a wider conceptual framework, and presenting the economic substance of business transactions. As an accounting example of the use of virtue theory, in deciding whether to agree to a client’s request to use a questionable method for valuing inventory, an accountant would ask, ‘What would a conscientious accountant do in such a situation? What would one of my respected mentors do?’ social contract theory The social contract theory of ethics advises you to think about ethics as embodying a set of rules agreed upon by reasonable people to bring order to social living. So when making an ethical decision you ask yourself, ‘What rule would reasonable, unbiased people agree to?’ You then follow such rules, regardless of whether they benefit you in particular situations. One criticism of this theory points out that the agreement referred to by social contract theory is entirely imaginary. Why consider yourself bound by an agreement that never happened?
An accounting example of social contract thinking might be seen in a situation where an accountant has to decide between loyalty to a client and candid assessment of financial statements. Both of those options involve important social values. Thinking in social contract terms, the accountant might ask, ‘What sort of rule for balancing these values would unbiased people agree to?’ Confucian ethics Confucian ethics seeks to provide harmonious relationships within society, the family, and the individual. Looking within yourself and learning from experienced people are seen as the main roads to wisdom and self-harmony. The emphasis on experience leads to respect and reverence for the past, the aged, and for one’s ancestors. One of the criticisms of this model is that in a society where relationships are considered more important than the laws themselves, corruption and nepotism may be tolerated. As an accounting example, in deciding whether to agree to a client’s request to use a questionable method for valuing inventory, an accountant thinking in Confucian terms might consider agreeing to it because doing so would cause harmony with the client. Rules of thumb In addition to scholarly branches of philosophy, some other ways of looking at right and wrong have developed. The golden rule The classic golden rule is to ‘do unto others as you would have them do unto you.’ In other words, ‘I will not cheat that person because I do not want them to cheat me.’ The golden rule is a simple and useful tool, but it does have some limitations. We don’t really know how babies or animals want to be treated, for example, so the golden rule can’t tell us much about how to treat them. Also, the whole rule is based on your own feelings of how you yourself would want to be treated. But your own needs and preferences might not be typical. For example, the fact that you personally do not value privacy does not mean that you don’t owe others an obligation to respect their privacy. As an accounting example, this rule of thumb could be applied to mean that you disclose all information that may be relevant in financial reports because, if you were the reader of those financial statements, you would expect to receive all the information, and disregard any that is not relevant to you. Mirror Test Another rule of thumb is the mirror test. This is a quick way to evaluate a decision that you are about to make, and reinforces the notion that you are responsible for your own actions. Imagine you’re looking in a mirror and ask yourself: Is it legal? If it is not legal, don't do it. What will others think? Others meaning a friend, a parent, a spouse, a child, a manager, the media, or someone else whose opinion is particularly important to you. As an accounting example, in deciding whether to agree to a client’s request to use a questionable method for valuing inventory, an accountant thinking in terms of this rule of thumb would consider how a story about this action would look on the front page of the local newspaper.
Ethics and morality It is worth noting that two different words – ethics and morality – tend to arise when ethical issues are discussed. Morality, like ethics, is about the principles we use to judge the right and wrong of our actions. The technical difference is that while morality consists of the various principles that guide our decisions, ethics is the careful, methodical, and scholarly study of which principles should guide our actions. For most purposes, the words can be used interchangeably so we can speak of having either ‘ethical obligations’ or ‘moral obligations’. Ethics and religion For some people, religion plays an important role in their moral beliefs and moral reasoning. If you belong to a faith-based community, you may have learned ethical behaviour from the religious leader in your church, temple, mosque, synagogue, or other place of worship. That experience provides you with another point of view to approach decision-making at work. Even if you do not belong to a faith-based community, you should be aware that some people do, and may bring their religious beliefs to a business discussion of ethics. It is important to remember that secular ethical perspectives such as those discussed in this unit need not always conflict with religious beliefs. Most, if not all, religions contain some direction about treating other people fairly, and that is also the premise of most ethical models. It is also seen as good business practice.
ethics and maturity There is a theory of moral development which says that people move through six stages. This theory was popularised by Lawrence Kohlberg based on his research studies conducted at Harvard’s Center for Moral Education. His theory of moral development was dependent on the thinking of the Swiss psychologist Jean Piaget and the American philosopher John Dewey. These men said that human beings develop philosophically and psychologically in a progressive fashion as they grow up. In stage one, people are concerned with obedience and punishment and the immediate results to themselves. The question they ask themselves is, ‘Will I be punished if I do this?’. In stage two, people are still concerned about the consequences, but have moved on to thinking about what else is in it for them. They think, ‘You do a favour for me and I’ll do a favour for you.’ In stage three, people begin thinking about their social relationships. They want to be a good person so that they can seek approval from others. In stage four, a functioning society is paramount, and people seek to obey laws and social conventions. If one person violates a law, perhaps everyone would, so there is an obligation to uphold the law. In stage five, people think in terms of inalienable rights and liberties. Laws are seen as embodying social contracts, and such contracts are open to criticism. People at this level are interested not just in what society’s rules are, but in what makes a good society. The theory says that people rarely reach stage six. If they did, they would show respect for universal principles and the demands of individual conscience, acting because it is right, not because it was legal or expected of them. Although this theory of moral development has been criticised for being overly concerned with abstract principles such as justice, and not enough with care, it is still a useful framework for investigating your personal ethics
ethics and the Professions Historically, most professions like medicine and law had codes of ethics and members were required to swear an oath to uphold those codes, thereby ‘professing’ to a higher standard of responsibility. In modern times, membership of a profession is usually restricted and regulated by one or more professional associations, and rigorous training and additional schooling is required. Professionals typically proclaim an obligation to society beyond their client relationship, and point to a code of ethics that they follow. So as a professional accountant with a code of ethics, you will form part of a long tradition of people who ‘profess’ to a higher standard of accountability. You will also enjoy a position of trust and responsibility. This is perhaps most obvious in the role accountants play in auditing publicly traded companies. Although the client company pays the bills, your highest obligation is to the public good, and in particular to the investing public that will be relying on the accuracy and integrity of your work.
WHAT IS ETHICS?
Summary Morality is a set of rules concerning right and wrong behaviour. Ethics is the branch of philosophy that attempts to provide clear arguments about which moral rules are best and how those rules ought to be interpreted. There are several different ethical theories or frameworks for ethical decision-making, each of which has been advocated by prominent moral philosophers. Some philosophers, for example, advocate thinking about ethics entirely in terms of consequences: what action will produce the best outcomes overall? Others have argued in favour of thinking solely in terms of duties, and absolute principles of behaviour – such as ‘Always tell the truth’ – that could be adhered to by all. Still others have advocated thinking about ethics in terms of hypothetical contracts, asking us to imagine what rules of behaviour reasonable, unbiased people would agree society should live by. And finally, some have argued that we ought not to think about ethics in terms of rules, but rather to think about what kinds of virtues good people embody, and what kinds of people we think it best to emulate. Many different factors affect ethical reasoning, including age, sex, religion, and professional affiliations. It is preferable that your ethical decisions be based on good reasoning and careful consideration of the relevant laws and principles, but it is also necessary to be aware of the various personal factors affecting your own decision-making, and those of other people. Rules vs principles The objective of this unit is to introduce you to the two major approaches to solving ethical dilemmas: one based on rules, and one based on principles. ACCA follows a principles-based approach, and that is the approach we recommend that you take as a professional accountant. An example The following simple example is used only to illustrate the use of a rule and the use of a principle. If you were following a rules-based approach and you were asked to act for two clients who are in competition with each other, you would check the rulebook to see if what you were planning to do was prohibited. If there was no specific rule against it, you could go ahead and act for both of them. On the other hand, if you were following a principles-based approach and you were asked to act for two clients who are in competition with each other, you would first think of the governing principles. You would determine if any of them would be threatened if you did what you were asked to do. If no principle would be threatened, you could go ahead and act for both of them. Alternatively, if threats were identified, you would have to assess the significance of those threats, and then consider whether any measures could be put in place to address them.
RULES VS PRINCIPLES
some differences between the two One of the differences between the two approaches is that in a rules-based approach, you look for a rule that prohibits you from doing whatever it is you are considering. In a principles-based approach, you have to think more widely and consider whether or not a principle is being violated or even threatened. In many ways the principles-based approach is more reliable in that if an action is planned, its appropriateness is assessed. If it goes against the principles of professional behaviour and values, then the action should be avoided, even if no rules exist concerning this specific action. Another difference is the onus of responsibility. In a rules-based approach, someone in authority has to create a list of prohibited activities for you to obey. In a principles-based approach, the responsibility is on you, as a professional, to decide if, in each specific case, a principle is being violated. It is difficult to have a written rule that covers every possible situation. Furthermore, in a rulesbased approach, people sometimes start looking for loopholes. They look for situations that are not prohibited and use them to their advantage. This is what happens in taxation where tax rules are established but accountants look for loopholes in order to avoid tax. A principles-based framework is a more flexible approach, and can cover new situations that might not have been thought of. It can sometimes seem more difficult, however, because you need to carefully think through every situation. summary As a professional accountant, you will be called upon to make many decisions. Remember that ACCA follows a principles-based approach. It is important to put principles into context. You must always obey the laws of your country. Then you must consider the more detailed rules laid down by your governing body (ACCA) regarding a specific situation such as promoting your practice, charging fees, accepting new clients, or handling clients’ monies. Finally, if a particular ethical dilemma is not covered by ACCA’s rules, you must consider the fundamental principles, and whether they might be breached or threatened by the proposed course of action.
ABOUT ACCA'S FUNDAMENTAL PRINCIPLES
About ACCA's fundamental principles The objective of this unit is to introduce you to ACCA’s fundamental principles:
• • • • •
Integrity Objectivity Professional competence and due care Confidentiality Professional behaviour
As a human being, you and your ethics are shaped by your upbringing and your experience. As a professional accountant or student accountant, you are bound by the laws of your country, and all
regulations that flow out of them. As an ACCA member, student, or affiliate, you are also bound by the fundamental principles of ACCA. Section 3.2 of the ACCA Rulebook contains the full text of these principles. These principles are based on standards from IFAC, the International Federation of Accountants which apply to accountants around the world. What follows is an explanation of these principles. integrity What the rulebook says You 'should be straightforward and honest in all professional and business relationships.' In other words Do not lie and do not issue false or misleading information objectivity What the rulebook says You ‘should not allow bias, conflicts of interest or undue influence of others to override professional or business judgements.’ In other words Your professional and business judgement should be based on fact and on what is in the best interests of stakeholders or others. Judgement should not be based on what is in your own personal interest, or in the interests of those who have power or influence over you. professional competence and due care What the rulebook says You ‘have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques.’ and ‘Members should act diligently and in accordance with applicable technical and professional standards when providing professional services.’ In other words Only perform work if you are competent to do so. Keep up to date with accounting matters. Do not forget that as an ACCA member, you will have continuing professional development (CPD) responsibilities – and you must ensure that you are keeping up to date. confidentiality What the rulebook says You ‘should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority or unless there is a legal or professional right or duty to disclose.’ and ‘Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of members or third parties.’ In other words
Do not talk about your clients, or use information that you have learned about them for your personal gain or for the gain of others. Maintain your silence even after the professional relationship with the client ends. professional behaviour What the rulebook says You ‘should comply with relevant laws and regulations and should avoid any action that discredits the profession.’ In other words Be courteous and considerate to people, and always behave so that a ‘reasonable and informed third party’ who knows all the facts would also think you are acting professionally. Summary The fundamental principles of integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour are international standards that accountants who are members of IFAC professional bodies agree to follow through implementation of the IFAC Code of Ethics. Professing to higher standards of behaviour is something that professionals do. And these are the standards that ACCA accountants must follow. As a student, it is important for you to become familiar with them and to know that they also apply to you.
The objective of this unit is to introduce you to the framework for using ACCA’s fundamental principles for solving ethical dilemmas. Because it would be difficult to create a rule for every possible situation that you might encounter, and even more difficult to remember the right rule at the right moment, ACCA uses a principlesbased approach, and has developed a framework to help you address those principles. The ACCA framework is based on the model from the International Federation of Accountants (IFAC). It consists of a series of steps that you go through when confronted with an ethical dilemma. You should ask and answer these questions in this order: 1. 2. 3. 4. What is the real issue here? Are the fundamental principles threatened? Is the threat significant? Are there safeguards that can eliminate the threat, or reduce it to an acceptable level?
You will explore each of these steps in more detail.
Step one: what is the real issue here? Sometimes the real issue is obvious. Sometimes, the issue is not obvious and you have to ask a lot of questions before you find out what the issue really is. As a start, you can ask yourself these questions:
• • • •
Is this my problem, or does it belong to someone else? Is it the real problem or part of a larger one? Is this a real problem or am I only avoiding a difficult task? Do I need more information?
For example You are the accountant at a pharmaceuticals company. Your finance director asks you to contact the marketing director about the implications of a significant and unexpected price increase of a generic drug you produce for thinning the blood in heart patients. The request follows a pricing agreement drawn up between the three main companies supplying these drugs to the national health service of a country, and so the impact of the price increase on the volume of sales will be lessened, due to the other companies in the cartel also raising their prices. Is this your problem? You might think ‘no’, because you have not been involved in the company’s decision to fix the drug price, nor brokered the agreement with its main competitors. On the other hand it could be your problem, since doing this could be seen as condoning a potentially illegal arrangement. If not strictly illegal, the agreement could be considered to be unethical as it is detrimental to the tax payers of the country who finance the national health service through taxation. Is being asked to discuss the price increase with the marketing director the real problem? No. It is part of a larger problem – namely coming into possession of knowledge of a wider conspiracy of a serious nature, in other words, that a cartel is being operated and that price-fixing is taking place which you are being asked to help implement. The problem you face is that if you go along with it you are aiding and abetting an illegal process, or if you do not go along with it there may be career implications or other problems for you in the future. Is this a real problem or am I avoiding a difficult task? The problem certainly exists in this case, but rather than just helping to implement the price change and ignoring the wider issue, or refusing to do so, you should sit down to discuss the larger problem with the finance director. You should try and establish the reason for the price-fixing arrangement and question its legality as well as its ethics. If the situation gets difficult, there may be a need for you to find out more about your options. Where you feel pressured to act against your professional judgement or feel you should act on information that you have about illegal or unethical behaviour, you might need to discuss this with your solicitor or your professional accounting association. You may need to consider alerting appropriate authorities about this arrangement, in other words to consider the act of ‘whistleblowing’ and all its wider implications for you, your organisation, and its stakeholders.
6. THE FRAMEWORK
Step two: are the fundamental principles threatened? You already know the fundamental principles of:
• • •
Professional competence and due care Confidentiality, and Professional behaviour
Is one or more of these principles being compromised, and in what manner? Sources of threats The threats to these principles can come from a number of different directions. Self-interest threats These come about if you or a close family member stands to gain (or not lose) something from the incident. Usually your integrity or objectivity would be at risk. Self-review threats These may be significant when you are in a position of having to review your own work. This could put your objectivity at risk. Advocacy threats These threats exist if you are promoting a position that compromises your integrity, or promoting a position or opinion to the point that subsequent objectivity may be compromised. Familiarity threats These can arise if you have a close personal relationship with someone and cannot be objective. Several of the fundamental principles may be threatened. Intimidation threats These can become significant if you put yourself in a position where you could be pressurised by physical or verbal threats, or if there is an implied threat to your career or prospects. For example, you may be bullied into doing work which you are not competent to perform. Any of the principles could suffer under this type of threat. Step 3: is the threat significant? Determining the significance of a threat depends on the individual situation. Only you or a ‘disinterested third party’ who knows all the facts can decide whether the threat is significant. You must always consider what others would make of the position and your actions. The ‘disinterested third party’ is a phrase that is often used in these situations. It is the theoretical voice of reason you would consult to help you gain perspective on an issue Step four: are there safeguards that may be put in place? If a threat is significant, you will want to put safeguards in place or use the ones that already exist. For example, safeguards can range from government regulations and professional standards, to people or policies in your workplace. If you look around, you will see that many safeguards are already in place to help you. First, there are the safeguards created by laws and regulations in your country and by your own accounting profession. These are designed to ensure that all accountants work in line with the fundamental principles, that compliance with the fundamental principles is regulated, and that sanctions are imposed on those professional accountants who do not comply. The next safeguards are the education and training you undergo before entering the profession and the continuing professional development requirements you face after you qualify as an accountant. This training teaches you current practices and helps keep you up-to-date with accounting standards and regulations.
These safeguards can be reinforced by controls established in the work environment. These can include the introduction of organisational ethics policies and procedures and the development of training for all employees to ensure their compliance; strong internal controls; appropriate disciplinary procedures; and a culture that encourages employees to communicate to senior levels about ethical issues without fear of retribution. Finally, there are safeguards you can create for yourself such as complying with continuing professional development requirements; keeping records of contentious issues and how the individual addressed them; using an independent mentor; and using the services of legal advisors and professional bodies. When you make a decision on a course of action you propose to take, you should be able to point to the principle or principles being threatened and the nature of the threat. You should also be able to point to the safeguards in place to reduce the threat to an acceptable level and allow the proposed course of action to go ahead. If you cannot recognise an existing safeguard, or implement an appropriate safeguard, you should refuse to carry out the activity in question.
6. THE FRAMEWORK
An example Let’s work through a simple example. Suppose your manager asks you to claim expenses under a code other than that relating to the expenses incurred, on the grounds that this budget code is under spent and the original code was overspent. Use the framework. Step one: What is the real issue? It is not that you are claiming expenses fraudulently, because these were legitimately incurred and so you are not benefiting financially. The issue is whether financial and budget information and variance analysis are reliable when managers are manipulating the use of budget codes. The incorrect allocation of the expense could result in senior management being deliberately misled. Step two: Are any fundamental principles threatened? You remember the five principles of integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. The fundamental principles threatened here are integrity and objectivity – deliberately using a wrong code to protect your personal and business interests. Step three: How significant is the threat? Since you have not acted dishonestly for personal gain, you might decide that the threat is not very significant. However, you are thinking about the consequences and not the threat. You are also ignoring the possible consequence that senior management may be deliberately misled as a result of your actions. If the amount being allocated to the incorrect code is considered material, the risk of this happening is significant, unless appropriate safeguards are put in place. Step four: What safeguards would ensure that the threat to your integrity is sufficiently low and that budgetary codes are not dishonestly manipulated? One safeguard that might allow the proposed action to go ahead is to discuss the situation and seek assurances that the treatment of the expenses claim will be disclosed to the users of the information. You may decide to obey your manager’s request and use an incorrect budget code, whilst striving to protect the budget holder’s position. That is you may do so because you have received assurances that the proposed action will not result in the senior management being misled. On the other hand, you may feel that as a professional accountant, it is your duty to report expenses as they are, because you feel that the proposed course of action could only mislead senior management. What is your decision? Do you have sufficient assurance that the first course of action may be followed, or do you have to refuse the manager’s request?
Professional ethics and your personal VALUES You have now examined your own personal values and learned about ACCA’s fundamental principles. At this point you may well be wondering how the two fit together. This section will attempt to explain. In any situation, you must begin with the laws of your country. The law generally deserves our respect, with very few exceptions. The situations in which it might be ethically permissible to break the law generally involve matters of life and death, and are not likely to occur in the professional work of accountants. Next you look to the specific rules that govern the situation. For example, if you are an auditor, you will be bound by the relevant auditing standards in your jurisdiction. Then as a professional, whether an auditor or not, you must consider the principles of your professional body which form the basis of your professional ethics. Remember that professional ethics is really about an obligation to the public. As a professional -whether a doctor, a lawyer, an engineer, or an accountant -- you will have been tested and accepted by your profession. The public will place their trust in you simply because you are a professional, a member of a trusted professional body. The public is not expected to know how to assess either the ability or the ethics of a doctor, a lawyer, or an accountant, for example. They trust that the professional bodies will have done this for them. This means that as a professional you owe the public a certain level of integrity and objectivity -- as well as professional competence and due care, confidentiality, and professional behaviour. In other words, you must uphold the ACCA fundamental principles simply because you are a professional and you have professional ethics. Throughout all of this, your own values, interests and experiences are the filter through which you unavoidably view any situation. It is important for you to be aware of those filters because they could influence your professional judgement. That is why this module has exposed you to different kinds of ethical thought, so that you may be better able to recognise your own personal ethical perspective when you exercise your professional ethics. For example, suppose you tend to make decisions based on the consequences to other people and would generally consider yourself a utilitarian. If you were asked to do something that was legal and did not violate the fundamental principles, but had unpleasant consequences for a large number of people, you might not want to do it. For example, you may not wish to advise a client that a lossmaking division of the business should be closed, making several workers redundant. It would violate your preferred ethical framework. But it would not violate your professional ethics. It is important to be able to know the difference between the two. As a professional accountant, you should strive to maintain objectivity by being mindful of the fact that your personal values are just that – personal and unique to you. Summary ACCA has a framework for ethical decision making. It consists of four steps. First you determine the real issue. Then you determine if any of the fundamental principles are threatened. Next you determine if the threats are significant. And finally you see if you can put safeguards in place. You should think of ACCA’s fundamental principles as your professional ethics. As an accountant you have an obligation to the public, as do other professionals, and the obligation consists of upholding those fundamental principles. It is important to know yourself and your ethics, so that you are better able to distinguish your personal ethics in a business situation.
A framework for making decisions
Ethics and gender Some researchers have questioned whether men and women approach ethics in a different way. There is considerable debate over such an idea. See what you think by taking this quiz. Ethical style questionnaire: please answer the following 9 questions... 1. Which is worse? hurting someone's feelings by telling the truth telling a lie and protecting their feelings 2. Which is the worse mistake? to make exceptions too freely to apply rules too rigidly 3. Which is it worse to be? unmerciful unfair 4. Which is worse? stealing something valuable from someone for no good reason breaking a promise to a friend for no good reason 5. Which is it better to be? just and fair sympathetic and feeling 6. Which is worse? not helping someone in trouble being unfair to someone by playing favourites 7. In making a decision you rely more on hard facts personal feelings and intuition 8. Your boss orders you to do something that will hurt someone. If you carry out the order, have you actually done anything wrong? yes no
9. Which is more important in determining whether an action is right or wrong? whether anyone actually gets hurt whether a rule, law, commandment, or moral principle is broken To view your score, click here.
CASE STUDY - IAIN'S DECISION
Feedback for making the adjustments Your choice You agree to make the adjustments and to try to justify them without proper evidence. Feedback The key problem with this choice is that it violates ACCA’s fundamental principles. By making these unsubstantiated adjustments, you would not be living up to the standard of integrity, objectivity, and professional competence expected of a professional accountant. You have violated your professional ethics. Reasons behind your decision Your decision to make the adjustments may be rooted in a simple desire to avoid conflict and protect your own interests. Such desires are quite natural, but a conscientious professional needs to guard against letting such desires override his or her judgement. In the present case your own interests conflict with the ethical obligation to uphold the technical and ethical standards of the accounting profession. You should recognize that making these adjustments without proper evidence is not good accounting practice, and likely falls below the standard of honesty expected of you. Your choice to make the adjustments might have been rooted in ethical principles. In particular, you may have chosen to make the adjustments because of a well-intentioned desire to reduce conflict and to show your loyalty to the company. Loyalty is indeed a virtue, as is being a team player. But it’s important to remember the limits of those virtues. Being loyal is important, but managers like Margaret should know that accountants are professionals, with special obligations that go beyond loyalty to the company. Thus, loyalty to the company must be balanced against loyalty to the profession and the need to uphold ACCA’s fundamental principles. Also, it is important for you in this situation to consider what the consequences of making these adjustments would have in the long run. Making the adjustments may not seem like a big deal in the present case, but going along with the request now may open the door for being pressured to engage in further violations of ACCA principles in the future. The bigger picture Of course, in real life Iain would have more choices available to him than to simply make the adjustments or refuse to make them. It may have been useful for him to explain to his manager in greater detail why making the adjustments would be problematic, and the implications that doing so could have for him in terms of professional censure. He might also have considered speaking to a more senior accountant either within the company or, with due caution and attention to confidentiality, outside the company. The kind of pressure Iain is facing is not uncommon, and the advice of a more experienced accountant might help him find a creative alternative. It is also worth considering whether past behaviour on Iain’s part led Margaret to think he would be willing to go along with her plan in the present situation.
Feedback for not making the adjustments Your choice You refuse to make the adjustments and argue a case for valuing the various assets on the basis of your professional judgement. You uphold your professional ethics. Feedback You are upholding the fundamental principles of integrity and objectivity. You are not allowing your judgement to be clouded by peer pressure, by your own personal interests, or by the short term interests of your company. Reasons behind your decision Hopefully, you decided to do this because you know it is the right thing to do as a professional. Or perhaps there has been pressure from your manager on other occasions to make decisions that make you uncomfortable. This time you have decided that you will not go along with her request. In this case, your choice to make the adjustments could have been rooted in ethical principles. For example, you may have made your decision thinking of your duty to others. If everyone adjusted and re-adjusted financial statements without regard to valid evidence, then the whole idea of financial statements would be invalidated. However it is interesting to note that if you relied on other ethical viewpoints, you might not have made this decision. For instance, some would argue that it fails from the utilitarian perspective, because your decision might seem not to have produced the most pleasure for the greatest number of people. In fact, it seems likely to make most stakeholders unhappy. The bigger picture Your decision does not make people happy, and it would have personal, professional, and career consequences for Iain. His career prospects at Bexall’s may be damaged, he may have a difficult performance appraisal from his manager, and he may even need to look for a job elsewhere. The only parties happy with his decision, aside from himself, would be the bank who would otherwise be misled, and the potential shareholders. Outside of the black-and-white choice presented in this learning exercise, Iain might have been able to consider even more options and might have dealt with the situation differently. For instance, he could have decided to be even more courageous and persuasive with his boss and articulated more forcefully the dangers to her and to the directors of trying to mislead the auditors. He could have argued that as a professional, he has an overriding obligation to act in accordance with accounting standards and the fundamental professional principles and therefore could not possibly agree to these adjustments. He could also speak confidentially to his professional association’s advisory help line for advice. The help line would confirm that he should not go against fundamental accounting principles and would remind him of his professional obligations.
From: [email protected]
Sent: Mon 14 Aug 2006 9.55 To: [email protected]
Cc: [email protected]
Subject: Remuneration Committee PRIVATE AND CONFIDENTIAL Dear Berndt, In my role as Audit Manager for the Bexall audit, and as part of our responsibilities regarding disclosure of director and executive remuneration, I wanted to check something out with you regarding executive share options. I would therefore like some details regarding the following if possible:
What and how many share options are held by the CEO and any other directors? How do these work and when do they expire?
I would appreciate your cooperation on this enquiry. Regards, Gail Li (Audit Manager, Putnam Rhodes)
From: [email protected]
Sent: Mon 14 Aug 2006 10.35 To: [email protected]
Cc: Subject: RE: Remuneration Committee Dear Ms Li, The CEO and the CFO hold share options on 50,000 shares and 30,000 shares respectively. These were all offered to these executives in 2003 subject to a strict waiting period lasting until 1st January 2006. From that date a two-year vesting period, during which the executives could exercise their options began, which will end on 31st December 2007. These share options were originally approved by the committee in 2002 in order to align executives’ interests with the interests of the shareholder. The grant or ‘strike’ price for all of these shares was set at $7.50 and the current share price is $8.25. Unsurprisingly, none of these options have as yet been exercised, presumably in the hope that the share price might rise to a point where it’s worth their while to exercise the options. There is of course a link between profit or EPS and the share price, and a lower reported profit or EPS than the market expects could cause a severe mark down in the share price and might seriously devalue these options, or make them worthless. I hope this is helpful, Regards Berndt Bremen (Chair, Remuneration Committee, Bexall Pharmaceuticals)
7. CASE STUDY - GAIL'S DECISION
Feedback for refusing to sign Your choice You refuse to sign the paperwork. This means that you do not agree to the compromise that was reached between Preston Mondal and Eric Manning. Feedback You have upheld the fundamental principles of integrity, objectivity, and professional competence and due care. You acted objectively all the way through the audit process, up to and including your refusal to agree to the compromise. You acted with integrity in accordance with your professional values and did not let your judgement be clouded by peer pressure or by your own personal interests. In addition, your professional competence is seen to be intact. You identified and understood technical issues regarding the financial accounts and communicated your views effectively to your managers and to the client. Reasons behind your decision Presumably you have chosen this course of action because you knew it was the professional thing to do. Or perhaps you decided to take a stand against a course of action that you knew could have unpleasant consequences for you as you continued your career in other organisations. Whatever the reason, you showed courage in standing up to your manager. If your choice was rooted in ethical principles, you may have reached this decision by thinking of the social contract viewpoint - following the accounting rules means holding up your end of the bargain, meeting society’s reasonable expectations of accounting professionals.
The bigger picture In the real world, this would have been a difficult decision, and could have led to an unpleasant scene. Gail’s job may have been jeopardised, or she may have been made to feel very uncomfortable in her role. She may even have been asked to look for work elsewhere. However, in the real world, Gail might also have had additional options, such as speaking to the other partners in the audit firm and enlisting their support. There is probably a mechanism to resolve such disputes within the firm. Even if such a mechanism does not exist, she should have been capable of discussing the situation with the other partners, and if necessary, consulting the technical advisory service offered by her professional body. This would have provided her with some support when discussing her decision with the audit partner.
8. APPLYING WHAT YOU HAVE LEARNED
Financial accounting and reporting
You are an accounts manager in a medium sized company. A day before the auditors are due to audit the company's accounts, your manager asks you to capitalise some research expenditures, so that they don't get expensed in the current year's income statement in order to boost profit. What do you do? Agree reluctantly, but ask for a reason so that you can explain it to the auditors. Refuse politely, explaining why. Agree reluctantly, but when asked about it by the auditors, explain that although you were aware of IAS 38, you were asked to expense the items by your manager. Ask your manager why, and make your decision based on the reason given. 2.
You are a tax adviser to a corporate client, a multinational corporation which is thinking of significantly reducing the transfer price of a product produced in the country of Hi-tax by its manufacturing division and sold to its selling division in the country of Lo-tax. The price change is not related to any change in the cost base of the manufacturing division, but triggered by the recent increase in the corporate income tax rate in the country of Hi-tax. Apart from the price change reducing the tax liability of the company in Hi-tax, the change in price will also affect the corporate after-tax profit related bonuses of the executives of the two divisions. What would you do? Advise that this is a good idea and suggest that a further cut in price could be considered to save even more tax for the group. Advise that this decision is tax efficient but suggest that the bonus scheme for executives should be based on profits before tax and after a notional adjustment. Advise that without a change in the cost base, it is difficult to justify any price change as the consequences would be that the tax authorities in Hi-tax and the beneficiaries of these transfer payments would lose out and those in the other country would gain as a result.
Advise that this is a good idea, but suggest that the resulting overall tax savings to the group should be shared more equitably amongst the executives of both companies. 4.
As audit manager to a client supplying lifts, you notice that payments are made to a person who you know to be the Procurements Officer of a local authority which regularly purchase lifts and lift equipment from your client. What should you do? Discretely contact the Procurements Officer of the local authority and ask for an explanation for these payments. Seek permission from the local authority to contact the direct line manager of the Procurements Officer to ask him to investigate these payments with the Procurements Officer and report back. Ask your client what these payments are for and ask to see all the originating documentation before taking matters further. Discuss the discovery with your line manager and ask their advice about this, in case you do something inappropriate to damage your client and risk losing the audit contract or other associated contracts in the future. 6.
You are a newly promoted department manager and the head of your division asks you to submit budget requirements for your department. When you submit your travel expense budget to your head, he asks you to increase it by 25% saying that you need to build in some slack to cover unforeseen additional expenses and to ensure that your travel budget is not exceeded. What do you do? Agree, since your manager thinks this is appropriate behaviour, and it could be unwise to question his judgment. Ask your manager why he suggests such an increase, when you had already calculated your estimated travel needs and then agree, or not, on the basis of his answer. Refuse to do so, on the grounds that it cannot be justified.
Contact the financial controller to tell him what your manager has asked you to do. 8.
You are a treasury manager in a computer equipment exporting business based in the UK. The company and its shareholders are profiled as risk averse. You are setting a pricing strategy for your sales manager. She is negotiating to win a major contract for the export of equipment to the government of a country which has a volatile currency against sterling. The payment will be made out by the government department to your company in the local currency in three months’ time. Your estimates give a 50% probability of a 0-20% devaluation of the local currency against sterling and a 50% probability of a strengthening of 0-20% of the currency against sterling over the next three months. There are also several local and international suppliers bidding for the contract against your company. What do you do? Inflate the normal price to the customer by 20% to compensate approximately for the maximum estimated exchange loss. Price the contract competitively in sterling and stipulate that the customer pays in sterling to protect your company against exchange loss risk. Price the contract competitively in local currency and accept payment in that currency in a year’s time on the grounds that on average the probability is that there will be no net exchange difference over the year. Price the contract competitively in local currency and agree a forward contract to purchase sterling in three months.
APPLYING WHAT YOU HAVE LEARNED
Feedback on your score You scored 15 1. Financial accounting and reporting: You are an accounts manager in a medium sized company. A day before the auditors are due to audit the company's accounts, your manger asks you to capitalise some research expenditures, so that they don't get expensed in the current year's income statement, in order to boost profit. Your response was: Ask your manager why, and make your decision based on the reason given. This is a reasonable approach. It allows you to respond to your manager’s view, but it may indicate that either you don’t know the answer or are not confident enough about your own judgement, bringing into question your professional competence. In other words, you are relying on the opinion of your manager and not on your own professional judgement. If you do know that an accounting error has been made and are waiting for a lead from your manager, you are demeaning your professional reputation by not making this known to your manager in the first instance. 2. Taxation: You are a tax adviser to a corporate client, a multinational corporation which is thinking of significantly reducing the transfer price of a product produced in the country of Hi-tax by its manufacturing division and sold to its selling division in the country of Lo-tax. The price change is not related to any change in the cost base of the manufacturing division, but triggered by the recent increase in the corporate income tax rate in the country of Hi-tax. Apart from the price change reducing the tax liability of the company in Hi-tax, the change in price will also affect the corporate after-tax profit related bonuses of the executives of the two divisions. Your response was: Advise that without a change in the cost base, it is difficult to justify any price change as the consequences would be that the tax authorities in Hi-tax and the beneficiaries of these transfer payments would lose out and those in the other country would gain as a result. This is a decision based on an ethical view of society and of wider societal responsibility, but is the wrong decision from a business ethics perspective, especially for a professional tax planning adviser. From one ethical perspective it is possible to argue that the artificial transfer price change has implications for the tax authorities of the respective countries and for the recipients of transfer payments who may indirectly suffer as a result of the company's decision. However, from a business perspective, with the group's shareholders in mind (who ultimately reward you for acting in their best interests) this decision does not fulfil your obligations. 3. Auditing: As audit manager to a client supplying lifts, you notice that payments are made to a person who you know to be the Procurements Officer of a local authority which regularly purchase lifts and lift equipment from your client. Your response was: Ask your clients what these payments are for and ask to see all the originating documentation before taking matters further. This is the most appropriate approach, as you are professionally obliged to recognise that this may be a situation where a conflict of interest, or something worse, exists. You are right to investigate the payment and seek evidence of its nature through inspecting originating documentation and by questioning your client about this before you report or discuss this with anyone else. 4. Performance Management: You are a newly promoted department manager and the head of your division asks you to submit budget requirements for your department. When you submit your travel expense budget to your head, he asks you to increase it by 25% saying that you need to build in some slack to cover
unforeseen additional expenses and to ensure that your travel budget is not exceeded. Your response was: Ask your manager why he suggests such an increase, when you had already calculated your estimated travel needs and then agree, or not, on the basis of his answer. This is probably the most appropriate response, since you need to give your manager the opportunity to explain his motivation for the request to increase the travel budget. For example, he may have identified additional objectives or contingencies for the department which may have associated travel costs. If you are satisfied that there are genuine business reasons for such an increase you may then feel justified in making the budget change. However, if you are not convinced by your manager’s answer you might need to question his decision further and argue the case for not making the adjustment on wider business grounds. If you are unable to convince your manager you may need to think about taking the matter further. 5. Financial Management: You are a treasury manager in a large multinational business. You are setting a pricing strategy for your sales manager. She is negotiating to win a major contract for the export of equipment produced in the UK to the government of a country which has a volatile currency against sterling. The payment will be made in the local currency in a year's time. Your estimates give a 50% probability of a 0-20% devaluation of the local currency against sterling and a 50% probability of a strengthening of 0-20% of the currency against sterling over the next 12 months. There are also several local and international suppliers bidding for the contract against your company. Your response was: Price the contract competitively in sterling and stipulate that the customer pays in sterling to protect your company against exchange loss risk. This decision protects your company’s shareholders from any exposure to exchange rate risk related to this contract. The problem with this approach however, is the inflexibility of the pricing strategy and the increased risk of the contract being lost, where rival bidders, particularly local suppliers, may not be expecting the customer to carry the whole exchange rate risk themselves. The decision is likely to lose a good business opportunity for the company’s shareholders and to expose employees to a risk of reduced working hours or possibly to a loss of jobs.
APPLYING WHAT YOU HAVE LEARNED
Feedback on your score You scored 20 1. Financial accounting and reporting: You are an accounts manager in a medium sized company. A day before the auditors are due to audit the company's accounts, your manger asks you to capitalise some research expenditures, so that they don't get expensed in the current year's income statement, in order to boost profit. Your response was: Refuse politely, explaining why. This is probably the most appropriate decision, although you should be careful how you handle this with your manager. You are demonstrating professional competence in recognising that research expenditure should not be capitalised and you are being assertive in making it clear that as an accounting professional you cannot put your name to recognising such an asset. 2. Taxation: You are a tax adviser to a corporate client, a multinational corporation which is thinking of significantly reducing the transfer price of a product produced in the country of Hi-tax by its manufacturing division and sold to its selling division in the country of Lo-tax. The price change is not related to any change in the cost base of the manufacturing division, but triggered by the recent increase in the corporate income tax rate in the country of Hi-tax. Apart from the price change reducing the tax liability of the company in Hi-tax, the change in price will also affect the corporate after-tax profit related bonuses of the executives of the two divisions. Your response was: Advise that this decision is tax efficient but suggest that the bonus scheme for executives should be based on profits before tax and after a notional adjustment. This is probably the most appropriate decision on a business ethics basis, as there is a professional responsibility on you as a tax adviser to recognise that overall tax savings are available for making this decision and, with a view to the shareholders, your advice will increase the profits available to them. The advice that executive bonuses should be based on adjusted pre-tax profits recognises that you understand the full implications of the tax planning decisions on other areas of the business. You are demonstrating ethical sensitivity in recognising that the amendment of a transfer price in one country is affecting the bonuses paid to executives in another country when the decision is not within their control. 3. Auditing: As audit manager to a client supplying lifts, you notice that payments are made to a person who you know to be the Procurements Officer of a local authority which regularly purchase lifts and lift equipment from your client. Your response was: Ask your clients what these payments are for and ask to see all the originating documentation before taking matters further. This is the most appropriate approach, as you are professionally obliged to recognise that this may be a situation where a conflict of interest, or something worse, exists. You are right to investigate the payment and seek evidence of its nature through inspecting originating documentation and by questioning your client about this before you report or discuss this with anyone else. 4. Performance Management: You are a newly promoted department manager and the head of your division asks you to submit budget requirements for your department. When you submit your travel expense budget to your head, he asks you to increase it by 25% saying that you need to build in some slack to cover unforeseen additional expenses and to ensure that your travel budget is not exceeded.
Your response was: Ask your manager why he suggests such an increase, when you had already calculated your estimated travel needs and then agree, or not, on the basis of his answer. This is probably the most appropriate response, since you need to give your manager the opportunity to explain his motivation for the request to increase the travel budget. For example, he may have identified additional objectives or contingencies for the department which may have associated travel costs. If you are satisfied that there are genuine business reasons for such an increase you may then feel justified in making the budget change. However, if you are not convinced by your manager’s answer you might need to question his decision further and argue the case for not making the adjustment on wider business grounds. If you are unable to convince your manager you may need to think about taking the matter further. 5. Financial Management: You are a treasury manager in a large multinational business. You are setting a pricing strategy for your sales manager. She is negotiating to win a major contract for the export of equipment produced in the UK to the government of a country which has a volatile currency against sterling. The payment will be made in the local currency in a year's time. Your estimates give a 50% probability of a 0-20% devaluation of the local currency against sterling and a 50% probability of a strengthening of 0-20% of the currency against sterling over the next 12 months. There are also several local and international suppliers bidding for the contract against your company. Your response was: Price the contract competitively in local currency and plan to immediately buy sterling futures up to the value of the contract price and sell them for the local currency at the spot rate in a year's time. This is the most professionally competent and efficacious business decision, given the risk appetite of the shareholders of your company, since it gives you a good chance of winning the contract against other tenders as you are pricing the contract in local currency. The customer is not exposed to exchange risk themselves and you are hedging the exchange risk yourself, thus reducing exposure against the possibility of a severe devaluation of the local currency against sterling. This decision would be in the best interests of the customer and all the stakeholders. Successful delivery of the contract would be profitable and may allow further opportunities with that customer.
APPLYING WHAT YOU HAVE LEARNED
Total marks feedback If your score indicates that you might have a problem with ethical decision making, why not review the module About ACCA’s fundamental principles, then take the test again? It is more useful to make mistakes and learn from them while taking an online course, rather than making mistakes in real life. 5 - 10 Your score indicates possible problems with your professional competence in some of the areas, but is more likely to indicate that you may be too diffident, or lack some confidence in handling awkward situations or in dealing with difficult choices, particularly where these are concerned with clients or your immediate manager. You seem susceptible to certain threats to fundamental principles such as self-interest or intimidation. These uncertainties probably mean that you are unsure about where and how to get proper information to help you make effective decisions, or in deciding who to discuss things with and when. You may also be unsure about how you should go about taking unresolved matters further, without damaging your own personal or professional interests, or those of your colleagues, or even those of wider stakeholder groups both within your own organisation and in connected organisations. You may need to develop a greater ethical sensitivity and maturity so that your ethical judgement can be improved for the future. 11 -15 Your score indicates that in most situations you seem to demonstrate ethical sensitivity, if not always the most appropriate ethical judgement in the most difficult of situations. Your score also suggests that you try to think beyond your immediate personal and professional needs and those of
your close colleagues or clients and do try to follow through the impact of your decisions on wider stakeholder groups, both within your own organisation, and on other connected organisations. 16 -20 Your score indicates that you demonstrate professional competence within all, or almost all the areas, and that you are usually sure about the best course of action even when this is not as clear cut as it might be. In almost all situations you seem to demonstrate acute ethical sensitivity, but can also follow this through into appropriate ethical judgement and you seem to be aware and can manage threats to fundamental principles. Your high score also indicates that you always try to think beyond your immediate personal and professional needs and those of your close colleagues or clients and do anticipate and follow through the impact of your decisions on wider stakeholder groups both within your own organisation, and also in other connected organisations. Tell us what you have learned The objective of this unit is to demonstrate what you have learned while working through the Professional Ethics module. Please tell us about that experience and how that might make you a better accountant. We expect between 100 and 250 words, and we will be monitoring your response. Note: After you click Save, your statement will be saved and you will not be able to change what you have written. At the same time, our database will record the fact that you have completed this module. If you want to work on your response over several days, you may want to compose your response offline.
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