Fundamentals of Ethics, Corporate Governance and Business Law

Module: 01

Ethics in Business

2

1. Ethics

In Ancient Greece, ethics was considered an inseparable aspect of human

life, and as such was treated with much reverence and consideration. What is

right and what is wrong? How should humans conduct themselves? How

should we treat others? These were the grand questions that inspired

answers from Socrates, Plato, and Aristotle, some of the most well-known

Greek philosophers.

But in the modern world, the idea of ethics and morality has become more

tangled and confused, and there are even movements that denounce the

existence of moral truths altogether. We've somehow managed to separate

ethical issues from life and treat it as a separate subject of its own.

So, we are going to back track a few thousand years and take another look at

what the Greeks were trying to do. How should an individual act with

regards to themselves and their community? What behaviour is

morally acceptable and unacceptable? But rather than looking at abstract

notions of morality, we will be applying these principles to the real world of

accounting and business.

The law

In order to live and work together we have developed frameworks of rules to

regulate behaviour. Without these frameworks things would spiral out of

control. Laws have evolved to protect society from illicit conduct. The law

represents the minimum standard of behaviour required within a

particular society.

Financial statements, for example, often have specific legal requirements in

terms of their content and structure. In the UK these are set out in the

Companies Act.

Regulations

Regulations are standards set by professional bodies and organisations

within particular contexts. Most organisations expect their members to

abide by its regulations. For instance, as a member of CIMA you should

follow its code of conduct.

For financial reporting, accounting standards are clear sets of regulations applicable

to the accounting industry which should be followed.

3

Ethical behaviour

Ethical behaviour goes further than meeting laws and regulations. Ethical

behaviour is the highest level of conduct.

In financial reporting, this might, as an example, include providing useful

information beyond the law and regulation if that transparency would help

investors understand the information better. This could be through a strategic

review, or an explanation of changes in the financial performance.

Ethics would also involve applying general principles above and beyond the

law such as objectivity, honesty and openness.

Professional ethics: sources

Professional ethics are standards of conduct agreed by a profession,

such as accountancy or medicine. In the case of CIMA, the professional

ethics required of accountants are specified in the CIMA code of ethics.

However, other sources should be applied based on the principle of what is

morally right and wrong. These could include ethical standards set down by an

employer, those commonly expected in society, or simply an individual’s own

personal moral standards.

So, beyond laws and regulations, ethics describes a code of moral

principles that people follow with respect to what is considered right or

wrong. The question of ethics is wholly down to the individual. It is about

how an individual conduct themselves. An organisation will set out

principles. If an individual chooses to act in violation of the principles, of

their enforcer and of expected conduct, then they must take responsibility

for their personal conduct. Conversely, if something proposed by an

organisation seems unethical, it is up to the individual to respond

accordingly.

Jerome Kerviel allegedly observed an institutional culture at the bank

SocGen of extremely high-risk investment involving giant sums of money:

unethical because it placed money entrusted to the bank by normal

customers in unreasonable danger that customers were not aware of. His

response was to join in and, when he got caught after losing billions of Euros

for the bank and its customers, he blamed an unethical culture for his own

actions. Those prosecuting him, however, say he alone was responsible for

his own actions.

Examples of common areas of concern for business ethics might include:

Treatment of workers: not subjecting them to unreasonable working

hours, pay, conditions or demands.

Avoiding bribery: a manufacturer pays a politician to vote their way,

for example.

4

Good professional conduct and honesty: avoiding

misleading advertising or sales practices, respecting refunds

and so on.

Respecting people’s personal data: don't sell it on for profit if you

promise not to, or without consent; respect people's privacy and keep

personal details safe from hackers and cyber criminals.

Appropriate and fair advertising: should you market sugary drinks

directly to children, for example?

Safety at work: implement and independently audit a health and

safety policy, for example.

Why is ethics important in business?

If it comes down to making a business case for ethics, then first and

foremost, this is about reputation. An organisation trades on its reputation; that

is to say, what others say about it. The way others think and talk about us

gives us our licence to do business. So, if an insurance company gains a

reputation for sneaky practices such as hidden charges and small-print

loopholes that avoid pay-outs, then customers will avoid that company when

choosing insurance.

But there are two ways to look at ethics. You can look at the subject through

the lens of risk. Or you can view it through the lens of competitive advantage.

Either way, there can be a number of hard, clear business advantages of

practising good ethics:

• It avoids legal action. For example, while hiding unfair clauses in

incomprehensible small print may be technically legal in terms of

contract law, it is considered unethical not to be transparent and so

the organisation could be challenged in the courts for misleading

customers or for mis-selling a service or product. An ethical

organisation tends to go above and beyond legal minimums and so

reduces the over risk of legal action.

• Reputation. There is also the unofficial Court of Public Opinion.

Acting ethically avoids bad publicity and the potential damage

to reputation which might result. Without reputation, we have no

licence to do business.

• It generates good feeling amongst staff. If practices create cognitive

dissonance among staff - that is, if they oblige staff to go against their

own personal moral codes - workers will be unhappy or stressed.

Unhappy workers are less productive, or simply leave, creating HR

cost. Stressed workers go sick, creating cost and productivity

shortfalls.

• It can be used as a source of competitive advantage. For

example, The Body Shop used the ethical treatment of animals as

its main marketing message for 30 years. Its refusal to use

ingredients that had been tested on animals is its key point of

difference in the beauty products market. Similarly, Malongo Coffee

uses Fair Trade sourcing as its key point of difference.

5

So, whether you approach it from the risk angle or not, it can be said that

having happy, productive workers, a great reputation and low risk of legal

action are all competitive advantages.

Example: chicken wars

A few years ago, many UK supermarkets got into a price war on chickens.

When Asda got the price down to £3 a bird, Tesco bowed out of the war and

told the press: “It isn't possible to raise and sell a healthy chicken for £3.”

Although it lost the price war, Tesco used its own code of ethics to

differentiate. The implication in the statement (though nothing explicit was

said) was that Asda's cost leadership strategy was unethical since it

suggested sourcing chickens in a way that treated suppliers and animals

poorly and, possibly, put consumers at risk. Tesco took the higher ground

ethically, and in so doing justified a higher price point for its chickens.

It is vital then that one aspect of strategic decision making involves reviewing

the decision to ensure it is ethically the right thing to do.

Ethical control over staff

How do we ensure that the decisions being made throughout an organisation

are ethical? There are three key ways to control ethics:

1. Personal ethics

These are the moral principles held by individuals. By employing directors

who have proven strong moral values, strategic decisions are likely to

incorporate ethics as a natural part of their personal decisions.

2. Organisational culture

The culture is the combination of the beliefs, values and standards of

behaviour inherent in an organisation. Often behaviours are influenced by

what is seen to be right or wrong within the group of employees or directors.

A group “ethical stance” may well develop which is adhered to by its members

and perpetuated through others learning what is acceptable within the group.

Control can be exercised through:

• Statement of values outlining what the organisation stands for

possibly as part of a mission statement.

• Communication of ethical expectations.

• The Chairman and CEO leading the way by behaving ethically

themselves and supporting ethical behaviour in other directors when it comes to making strategic decisions.

• Organisational systems – Ethics can be included in the procedures

of review and analysis as part of making decisions, which means that

it is always considered prior to key decisions being made.

6

3. Ethical code

An ethical code is a clear set of guidelines given to staff tell them what

they should and should not do ethically.

To be effective a code needs to be well communicated so all staff are

aware that it exists. That might be during induction training (when staff first

join an organisation), by training for existing staff, or making it available

either in printed format or on a company's intranet.

In some accountancy firms staff are required to sign off that they have

reviewed the code and are abiding by it each year. That's another way of

ensuring that people do know what is expected of them.

When an ethical code is broken it is important that disciplinary action is

applied. Otherwise staff will think they can break the code without consequences.

7

2. Legal Frameworks

Professional foul

Imagine, for a moment, that you are playing in a football match, and in the

closing minutes of a goalless game, you have the ball and are moving quickly

towards the goal posts. You are on track to score, and you aren't offside. It

looks like you are going to win the game for your team! But then, before you

can get a shot on goal, your legs are swept out from beneath you by the last

defender who was chasing you. The crowd cry 'foul!' and the referee blows

his whistle.

Rather than a series of random and meaningless events on a field, there is

an interpretation of those events that gives them coherence. This

interpretation is shaped by the rules and allowed the referee, and everyone,

else to realise it was a foul.

Let's break it down: Given the rules of the game of football, you were on

track to score, which would put your team ahead. Your opponent, who is on

the other team, wants to stop that. Since you weren't breaking any rules

yourself (you were onside!), he had no choice but to intervene and tackle

you. And, rather than tackle you fairly, and risk not getting the ball from

you at all, he took you down illegally, that is, against the rules of the game, to

make sure that you didn't score.

We can see this in the flow chart above. The light blue boxes show when a

rule comes into question. You can see that if a rule is broken it affects the run

of play. This stops the game from getting out of control and people cheating.

Not only was the tackle against the rules of the game, but it was against the

conceptual framework, or principles, of the game. One of the key

principles of football, and of most sports, is a sense of sportsmanship. That

8

means that you play the game fairly rather than for your own self-interest.

This underpins many of the ideas that become rules in the game of football.

Why am I talking about football? Because it is a game that only functions

meaningfully with a set of basic principles that everyone can agree

upon. This is a conceptual framework for football, upon which the rules

are based. Fairness to both sides, player safety, and entertaining football

might be other core principles in the footballing 'conceptual framework'. There

is a conceptual framework for almost everything. And there is most certainly

one for accounting that you are moments away from learning about.

What is a conceptual framework?

Generally, the process of developing accounting standards occurs against

the backdrop of a conceptual framework for accounting. These outline

broad principles to be used in accounting.

Now, this framework may not be in the form of a set of rules or guidelines but

are closer to the underlying goals that give rise to good accounting

standards.

For example, consider any set of rules. Let's take the common rules we see

at a swimming pool: no running, no bombing, no diving in the shallow end,

no shouting, etc. Now, what all these rules have in common is a guiding

principle that the pool owner has in mind when drawing up the rules: to

keep people safe. This is what we might call their framework for the pool

rules.

So, a conceptual framework is just a collection of rules that aims to

ensure consistent application of principles to achieve the goals of

financial statements.

Think of it as a collection of core accounting practices that give rise to the

individual accounting standards. The conceptual framework can guide the

standard setters in deciding how these technical issues are dealt with.

Why is a conceptual framework necessary?

Some people question whether a conceptual framework is really needed to

produce reliable financial statements. However, we need only look at a fairly

recent history of standard setting throughout the world to see how important

it is.

Without a central conceptual framework, accounting standards were

often produced that had serious problems:

Internal inconsistency: Standards were not internally consistent. They

would often prioritise the effect of a transaction in the statement of financial

position over the income statement, for example.

External inconsistency: Many standards were not consistent with each

other across various jurisdictions. For example, some countries recognise a

transaction upon the receipt of payment, while others recognise it upon the

initial purchase.

9

Fire-fighting approach: A number of standards were developed on the back

of some corporate or accounting scandal. While this prevented further

issues, this approach does not lend itself to principled, pro-active standard-

setting.

For instance, a rule was made saying that people had to get their managers

approval to sign off on expenses because employees were being too

generous to themselves. However, expenses are still high because the

managers are actively allowing too generous expenses. You would need to

create yet another rule to prevent this. However, if you had a conceptual

framework stating honesty in finances was crucial, then any expenses that

were too generous would be punishable.

Bias: Some standard setting bodies were not fairly representative of all

groups involved, which led to single standards that could potentially benefit

one company and simultaneously be detrimental to another company.

For example, imagine if one of standard setters worked for a bank or loan

company. They might make the standards unfairly favourable to those

companies offering loans and against those seeking loans.

Inconclusive: Often the same issue would be revisited numerous times in

successive standards, without any final resolution, leaving the issue open to

interpretation. A principles-based approach provides additional direction that

can pick up the slack of inconclusive rules. As a very simple example, let's

say you had rules that listed all the things people couldn't steal, you're bound

to miss something out, but if you add the principle that it is wrong to steal then

it doesn't matter that the rules don't cover everything

Rules-based vs. Principles-based

The lack of a conceptual framework for accounting helped to promote what is known as a 'rules-based' system, in which the accounting is done

according to prescribed rules. The problem here is that the accounting is

then inflexible and bureaucratic.

On the other hand, having a core conceptual framework could allow for a

'principles-based' approach, where the majority of accounting and standard

setting is done based on one shared foundation.

Standards are not a framework!

It is important to understand that a set of standards does not constitute

a full regulatory framework. As we have discussed, the thing that holds the

standards together is the common conceptual framework, which will be

made up of basic principles. Without this framework, the standards lack

focus and coherence.

10

3. Characteristics of useful information

One key thing that a conceptual framework should do is establish what

exactly makes for good quality financial information. Specifically, how the

information should be provided to ensure it meets the requirements of the

users of the financial statements. The International Accounting Standards Board (IASB) provide the following list of the 6 qualitative characteristics

of useful information:

Fundamental Relevance

Faithful representation

Enhancing

Understandability

Verifiability

Comparability

Timeliness

The fundamentals are the basis for the qualitative characteristics, while the

enhancements help to enforce and maintain the application of those basic

characteristics.

Relevance

This means that the information in the financial statements must be

relevant to the users. It is considered to be relevant if it helps the users to

make investment decisions or other economic decisions.

If you are an investor, this means two things:

• Don't include anything I don't need – including detailed information

on the production methods of the company’s products isn't really

going to mean much to an investor. They want financial information,

not management information.

• Don't leave out anything important – if you don't include the basic

shareholder ratios, such as earnings per share, or return on capital,

then an investor really has nothing to go on! You need to ensure that

all relevant information is included.

Faithful representation

'Faithful representation' is another way of saying reliable. Do the statements

paint an accurate picture of the business? The financial information is reliable if it is a faithful reflection of the financial transactions and events

that have occurred during the accounting period.

On top of that, the information should not contain any errors or any biased

assumptions. It should therefore be presented in a neutral and impartial

way.

Think here of the difference between a model, and a photo-shopped and

airbrushed photograph of the model. The reality is the model, but does the

image faithfully represent the real person? If it has been edited and

11

manipulated, then it cannot be faithful. The same principle applies to

businesses and their financial statements!

Faithful representation and compliance

If a requirement of financial statements is that they are a faithful

representation, then does this constitute more than compliance with

accounting standards? Or in other words, is it possible to follow standards,

and not give a faithful representation?

The answer is yes and no. Following regulation should give a faithful

representation, but it may be possible to make it clearer by doing more.

Following regulations, therefore, isn't just about compliance. There is an

aspect to accounting standards that requires a little bit more than 'following the

rules' and pushes for accountants to go that extra mile to ensure that the

statements are a faithful representation.

Understandability

Obviously, the accounting information provided must be easy for the user

to understand. However, the users are assumed to have a reasonable

business and accounting knowledge and to be prepared to study the

financial information carefully.

Therefore, the preparer of financial statements should not shy away from

including complex information if this is what is necessary to understand the financial position. The preparer should not exclude information from the

accounts on the grounds that users will have difficulty in

understanding it.

Verifiability

Verifiability helps to assure users that the provided information actually

shows what it claims to show. If the information provided lends itself to

verification by an external source, such as an audit, then it is verifiable.

Financial information is generally supported by real evidence, such as

invoices and purchase orders, and independent individuals can check one

against the other to see whether the information is faithfully represented.

Comparability

The decision to invest in the shares of one company rather than another

requires the ability to compare the financial performance of one company

to another. The financial statements must therefore enable the user to make

comparisons between entities and also to make comparisons over time

of the performance of the same entity.

When a user compares the financial statements of two entities the accounting policies used must be clear, so that any difference between the

12

accounting policies of the two entities are apparent to the user and

appropriate conclusions can be drawn.

The disclosure of accounting policies is therefore an important feature of

financial statements. It is also essential to include comparative figures from

the prior period.

Timeliness

This refers to the need for financial statements to be produced according

to standard time schedules. Timeliness means providing information to

decision-makers in time to be capable of influencing their decisions. It

shouldn't be significantly delayed or else it will be of little or no value.

13

4. Regulatory frameworks

The need for a framework

Since accounting has been around for almost as long as civilization itself,

different practices crop up in different parts of the world. Over time, these

practices turn into full regulatory regimes, and so they can differ from

country to country. Here are a few of the key reasons for this:

Differences in law and tax

Differences in national laws give rise to some differences in the way financial statements are put together. Each country can have its own company law

or tax regimes, meaning that each country will need a different

regulatory approach. The more complex the tax system, the more regulation

would be needed to ensure consistency of treatment and fair disclosure.

For example, corporation tax can vary significantly from country to country.

Most countries will have a corporate tax rate between 10% and 30%, but

some places around the world, such as the Bahamas and the Cayman

Islands, have a 0% corporate tax rate!

The nature of the political system may affect the degree of control

exerted by the government over accounting information and the extent

to which different factors need to be disclosed. For example, policies

pursued by the government on the environment may lead to a requirement

for companies to disclose the impact of their business on the countryside or

to make detailed disclosures regarding their carbon emissions.

History and culture

The general culture of the country, and in particular the business culture,

may also affect disclosure requirements. Countries with highly developed

stock markets may require more information that will be useful to potential

investors on those markets. This information will need to be made publicly

available to satisfy the demands of potential investors and to provide

sufficient information to enable them to make realistic investment decisions.

Chinese accounting standards are an interesting example, because they

originated in a socialist culture in which the state was the sole owner of

industry. Therefore, unlike Western accounting standards, they were less a

tool of profit and loss, but an inventory of assets available to a company.

In contrast to Western standards, Chinese accounting standards did not

include an account of the debts that a corporation held, ultimately making

them suitable for accounting for tax purposes, but less suitable for

management control.

The nature of the shareholding public

Different countries tend to have different types of shareholders. In

countries like the UK or US the majority of shareholders are large

14

institutions, while elsewhere there can be more concentrated ownership

with more owner involvement in management.

In many Spanish speaking countries and many parts of Asia more large

companies are owned by families or individuals. There may be greater

requirements for accountability where a company is owned by a large

number of investors rather than by a family or a small group of individuals. As

such, these countries are likely to require a higher level of regulation. This

is because more people are at risk and they will have less of an influence

on how the company is run.

Problems with differences in accounting requirements

Now, as we have seen, accounting policies can differ quite a bit across the

globe. This can lead to very different accounting results, which makes it

difficult for investors to interpret and compare results.

The differences are also an obstacle to trade because they make it more

difficult for companies to begin trading in other countries. A multinational

group of companies has a much greater administrative burden owing to this

disparity between national accounting requirements. The multinational must

produce reports in different countries on the basis of different requirements.

15

Local regulatory frameworks

The regulatory framework within a particular country is governed by 3 main

factors:

1. The accounting requirements of the national law.

2. The accounting standards applying in that jurisdiction, as set by

and monitored by the local accounting regulators.

In the UK the independent regulator is the Financial Reporting Council

(FRC). The Professional Oversight Board for Accountancy (POBA) is part

of the FRC and focuses on accounting, auditing and actuarial jobs, to ensure

regulations are being followed so that investors and the public have

confidence in the financial governance of businesses.

The Auditing Practices Board Limited (APB) was originally established in

1991 to set the standards for auditing in order to enhance the public's

confidence in the audit process and the quality and relevance of audit

services in the public interest. In 2002 the APB's remit was extended to

include responsibility for setting standards for auditors' integrity, objectivity and

independence.

3. Accounting requirements laid out by that country's stock exchange

as required for companies that want to be listed on that stock exchange.

These requirements may aim to help potential investors make

comparisons between different companies listed on the exchange.

There may also be requirements in respect of disclosure of the performance

of past years so that potential investors can look at the performance of the

same company over a number of years.

International regulation

In addition to local regulation there will be an international dimension

consisting of:

• The requirements of relevant international accounting bodies, e.g.

International Federation of Accountants (IFAC).

• International financial reporting standards, e.g. the International

Financial Reporting Standards (IFRS) Foundation.

• A conceptual framework developed at an international level, The

Organisation for Economic Co-operation and Development (OECD)

provide principles for businesses to help them operate ethically.

The extent of use of international accounting standards varies from

country to country. In some countries certain international accounting

standards such as OECD, IFAC or IFRS, have been adopted as the local

standards. In others a choice can be offered, and often larger companies

may elect to use international accounting standards.

16

For example, in the UK the local framework is set by the Financial Reporting

Council (FRC), whereas they also have to abide by the international

standards set by the International Financial Reporting Standards (IFRS)

Foundation.

Countries such as the UK also have to take account of international

organisations and their regulatory requirements. The European Union (EU)

for example, issues directives that must be implemented by its member

states.

Requirements in respect of companies listing on a stock exchange are

influenced by the International Organization of Securities Commissions

(IOSCO).

The influence of international accounting standards is increasing, and

this is due to the convenience of having one standard for all, making

international trade much less cumbersome. Most standards across the globe

are becoming more and more in line with international standards, and this

can mean significant changes in current practice.

17

5. Managing responsible businesses

What do companies need to be aware of?

Sometimes simply having an ethical code of some description is not enough. Many businesses have an ethical code but is there may be room for

improvement.

For some it's a simple case of neglecting to create a rule surrounding a new

issue or one that has been given more significance recently. Environmental

issues, for example, have always been around, but have become more of an

ethical focus point for businesses in the past few decades.

For others it may be that their codes are brilliant, but they don't have good enough

ways of ensuring that they're followed.

How can companies improve?

At the moment accountants mostly manage and analyse the financial data

for businesses. In the course of doing their job they may reveal fraud or

dishonest finances, and an ethical accountant would report any wrongdoings

discovered.

However, CIMA also states that companies could improve their ethics

by using accountants to form and analyse ethical management

information more that they do.

A survey conducted by CIMA and the Institute of Business Administration

(IBA) found that most companies lacked a comprehensive way of analysing their ethical performance. By formulating detailed information on ethical

management businesses could improve their ethical behaviour simply

by being able to see how they were performing, where they were doing well

and where new actions needed to be taken.

Personal and Organisational Values

We do not live in a perfect in world. If we did our personal and

organisational values would be identical. So, unless you run every aspect

of your own business yourself there are bound to be some conflicts of values.

This brings us back to the fact that ethics are not black and white. What

may seem right to the individual may be wrong in the eyes of the company

they work for and vice versa.

It is beneficial for companies to reduce the tension caused by ethical

differences in opinion. The main way to do this is to make the views of the

person and of the company more similar. There are two ways to do this,

either change the companies code of ethics or change those of the

individual.

It is extremely unlikely that a company would change its ethics because of

one employee! For instance, a restaurant wouldn't only serve vegetarian

18

food because serving meat made Betty, one of the waitresses, feel

uncomfortable. But if a company was struggling to keep their employees or

employ new staff because of their ethics they may change them to be more in

line with their employees.

Much more likely, companies will try to make the views of the individuals

who work for them match the companies. Here are some ways employers

can do this:

19

6. Values and attitudes for professional accountants

To qualify as a Chartered Management Accountant, you will be expected to

maintain correct ethical behaviour as set out in CIMA’s fundamental

principles (we will look at those soon).

Accountancy requires making decisions often based on personal judgement.

While these decisions may not be illegal, they may be deemed to be against

the public interest. All of this makes accountants accountable for their

actions and behaviour.

Accountants should behave ethically because:

• Society expects professional accountants to behave ethically as they hold positions of responsibility and status. Accountants serve a

role as the bridge between the public and the world of business, with many people dependent upon the honesty and legitimacy of their

reporting.

• The professional bodies expect it of their members, to uphold the

reputation of the profession. Accountants also expect one another

to uphold the reputation of the profession, and to not degrade it.

• Although not all are legally binding, breaking a professional ethical

code can lead to a disciplinary procedure, or in the case of CIMA, to

expulsion. So, if you have no personal compulsion at all to act

ethically, do it because there are real consequences for your career.

Professional Values

Not only does CIMA demand strictly ethical behaviour from their accountants

they also look for four professional values, which particularly apply to

those of us working in the accountancy profession.

20

Personal Development

CIMA also value the attitude of self-improvement or personal

development. Otherwise known as continual professional development

(CPD). What this means is that once you have completed your CIMA

qualification you are not actually finished! You must prove year after year

that you have kept abreast of changes to the profession and ethics too as

part of CIMA’s commitments to personal development and lifelong learning.

Now if you're taking this course then you probably know all about personal

development already, but there may be aspects specific to accounting you don't know. In accountancy personal development is very important because

accountants have duties and responsibilities to members of the public and to

the profession as a whole.

There is a public expectation that accountants will perform their work with

competence and due care. Businesses and consumers rely on them to do so.

In particular CIMA accountants are expected to develop and display the

following qualities:

21

CIMA’s professional development cycle

In 2006 CIMA introduced its own professional development cycle.

The aim of this cycle is to encourage professional development and

lifelong learning in its members.

As part of this cycle members are expected to:

22

7. CIMA ethical principles

Now with so much crime and corruption in the world, you could be forgiven

for thinking that the law itself is not clear, let alone ethics! Or perhaps

people know it but just don't care? With so many individuals with different

moral compasses, how can you be sure what 'correct' ethical behaviour is?

Fortunately for you the IFAC has some suggestions for you!

The IFAC code

Firstly, let's say a bit about where the code comes from. IFAC is the

International Federation of Accountants, and is the global organisation for

the accountancy profession. The CIMA ethical principles have been

adopted based on those suggested by IFAC. These suggestions are also

a good guide to the standards of behaviour which can be applied to external

auditors when reviewing financial statements.

CIMA’s five fundamental ethical principles

Summarised below, then, are the five fundamental principles that form the

basis of the code:

23

1. Integrity

This is about being straightforward and honest in all professional and

business relationships. The accountant should not be associated with

information they believe contains a false or misleading statement, or which is

misleading by omission. Integrity also means acting consistently.

For example, an accountant should not misstate information because they

have been asked to do so by a superior if that information is not correct.

2. Objectivity

This means being unbiased and acting in an impartial manner. There

should be no conflicts of interest or illicit relationships that might influence

members in their professional or business judgements.

For example, an accountant should not accept (or offer) excessive

hospitality from the people whose work they have to review as this could

lead to bias or feelings of embarrassment, which might prejudice their

impartiality.

3. Professional Competence and Due Care

It is important that one’s professional knowledge, skills and technical

standards are maintained at the level required to practice with full

competence. Keeping up to date with developments in practice, legislation

and techniques. Any limitations in technical and professional standards

should be disclosed and remedied. For example, attending professional

courses to update knowledge of the latest accounting rules. Due care refers

to doing work diligently and carefully so it is done correctly.

4. Professional Behaviour

This means avoiding actions that could discredit the profession, and

complying with relevant laws and regulations. They should be honest and

truthful.

For example, the accountant should not make exaggerated claims about their

qualifications or the services they offer and should not make disparaging

references to the work of others or say anything dishonest or untrue.

5. Confidentiality

Respecting confidentiality and safeguarding information obtained through

professional and business relationships. The accountant should not use

information for their personal advantage. They should not disclose

unauthorised information, acquired from professional relationships, to others

outside the company or employing organisation. This includes breeching

confidentiality in a social situation.

For example, you should not discuss a colleague’s financial information with a

family member.

24

The principle of confidentiality continues even after a business relationship

has been terminated.

Disclosure

The exception to maintaining confidentiality is when there is a legal or

professional right or duty to disclose. CIMA’s code of conduct lists the

particular circumstances in which confidential information could be

disclosed. They are:

Where disclosure is required by law, such as in a case of legal

infringement.

Where disclosure is permitted by law, such as during a legal

investigation where one is protecting one’s professional interests.

Where disclosure is authorised by a client or employer.

Where disclosure is professionally permissible.

Example

So, here's an example. As you read through, see if you can identify where

there is a breach of the code of ethics....

Paschal has just passed his CIMA certificate exams and on doing so

joined Un-Ethi-Cal Ltd for his first accountancy role. Upon arrival he was

been asked to do his company's corporation tax return, and not wanting to

seem as if he was not keen in his first week, tells them he knows what to do

and so goes online to find out how to do it. He's got to go to a party that

night, so although he can't work it out properly he fills in the form as best he

can so he can get out on time.

Hoping to save Un-Ethi-Cal Ltd some money, wherever he's not quite sure

what the right answer is he always chooses the option that will keep tax

down to a minimum – after all – he needs to keep his new employers happy!

He heads off to the party where he proceeds to tell everyone about his

amazing first day at work and the huge profits his new company are making

and how much he's already saved them. “My future is bright” he tells

everyone!

Well, perhaps not! Let's take a look through the ethical code and see where

Paschal might have issues:

Integrity – Paschal should not have lied about knowing how to do a

Corporation Tax Return. This was dishonest and it undermines the trust he

has with his employer. More specifically he is now unable to the job he has

been assigned because of his lie.

Objectivity – Showing bias towards Un-Ethi-Cal Ltd is indeed unethical!

Accountants should apply the rules without any bias whatsoever even if it

means there are negative consequences.

25

Professional Competence and due care– Paschal should not have done a

Corporation Tax return if he didn't know how to do it. Even after he started he

should still take 'due care' to do it as best he could and not just go to the party

before working out how it should be done.

Professional behaviour – He has not applied the tax rules properly and is

potentially committing a crime on behalf of his organisation.

Confidentiality – Paschal should not have disclosed the profitability of his

company at the party because it was confidential information, and the

people at the party were not privy to the information.

Paschal has been a very naughty boy! He risks being brought up in front of

CIMA's ethics committee, being fined and potentially being thrown out of the

Institute.

His actions have also put his company at risk as he may have done the tax

returns improperly which could put the company in violation of tax laws as

well as damage their reputation.