Accounting (9615) | The impact of ethical considerations

The Impact of Ethical Considerations: Advanced Study Notes (9615)

Hello future Accounting professional! Welcome to one of the most crucial topics in A-Level Accounting: Ethics. You might think accounting is just about numbers, but the numbers are only useful if people trust them.
This chapter moves beyond calculations and focuses on the moral compass that guides every accountant. Understanding this is vital not only for your exams but for your entire professional career. Don't worry, we'll break down these professional concepts simply and clearly!

Section 1: The Foundation of Trust – The Five Fundamental Ethical Principles

The entire structure of professional accounting relies on a set of five core principles. These are the non-negotiable rules that all accountants must follow, whether they work in a small firm or a large corporation.

Quick Mnemonic: The Five Pillars of Ethics

A great way to remember these five principles is using the acronym C-COPI (or simply visualizing a "copy" of the code):

• Confidentiality
• Competence (Professional Competence and Due Care)
• Objectivity
• Professional Behavior
• Integrity

Detailed Breakdown of the Principles

1. Integrity

What it means: Being straightforward, honest, and fair in all professional and business relationships. You must not knowingly be associated with information that contains false or misleading statements.
Analogy: Integrity is like the foundation of a building; if the foundation is cracked (dishonest), the whole structure (the financial statements) will collapse.

2. Objectivity
What it means: Not allowing bias, conflict of interest, or the undue influence of others to override professional or business judgments. Your professional decision should be based purely on facts.
Common Mistake to Avoid: Letting a client who pays you a large fee influence how you treat their accounts.

3. Professional Competence and Due Care
What it means: Maintaining professional knowledge and skill at the level required to ensure that clients or employers receive competent professional service. "Due care" means acting diligently and applying professional standards.
In simple terms: You must know what you are doing, and you must do it carefully and thoroughly. If you don't know the rules (e.g., new tax laws), you have a responsibility to learn them.

4. Confidentiality
What it means: Protecting sensitive information learned during your professional work. You cannot disclose this information to third parties without proper and specific authority, unless there is a legal or professional duty to disclose.
Example: If you know your client is about to launch a new product, you cannot tell your friends or use that information yourself to buy their company's shares.

5. Professional Behavior
What it means: Complying with relevant laws and regulations and avoiding any action that discredits the profession. This means acting courteously and responsibly.
Did you know? This principle covers everything from responding promptly to correspondence to ensuring you don't use your professional title in connection with misleading marketing.

Section 2: The Practical Impact of Ethical Behaviour

How do these five principles affect the work you actually do, and the structure of the organisations you work in? The impact is widespread, touching every aspect of governance and reporting.

A. Impacts on Accounting Roles

1. The Role of the Accountant in Business

If you work for a company (e.g., as a Management Accountant), ethical principles ensure you provide reliable and unbiased internal reports. You must not inflate inventory values or hide expenses just to make the profit figures look better for your boss or a potential bonus. (This primarily relates to Integrity and Objectivity).

2. The Role of the Accountant in Public Practice (Audit)

If you work for an audit firm, Objectivity and Independence are critical. You must ensure you are free from conflicts of interest (e.g., you cannot audit a company where your spouse is the CEO).

B. Impacts on Corporate Structure and Oversight

1. Corporate Governance

This refers to the systems and rules that govern how a company is directed and controlled. Ethical principles are fundamental to good governance, ensuring the company is run transparently and responsibly for the benefit of all stakeholders.
The Board of Directors (BoD) has the ultimate responsibility for setting the ethical tone. If the BoD is unethical, the whole company structure can fail.

2. The Role of Auditors and the Audit Report

The audit report gives stakeholders (like investors) confidence in the financial statements. The auditor’s opinion must be objective and based on evidence. If the auditor fails to adhere to professional competence or integrity, the audit report is worthless, leading to massive financial failure (as seen in major corporate scandals).

3. Corporate Social Responsibility (CSR)

CSR involves a company considering its environmental and social impacts. Ethical accountants ensure that a company’s non-financial reporting (like sustainability reports) is also prepared with integrity and professional behavior, preventing the company from simply engaging in 'greenwashing' (making false claims about environmental efforts).

Section 3: Legal, Regulatory Frameworks and Codes of Conduct

Being ethical isn't optional; it's required by law and professional standards.

A. Legal and Regulatory Frameworks

Accountants must work within the law. The Legal and Regulatory Frameworks (like Companies Acts, tax laws, and anti-money laundering legislation) provide the basic legal boundaries for practice.
Consequences of failure: If you fail to comply, the consequences are severe: massive fines, criminal prosecution, loss of professional qualifications, and irreparable damage to reputation.

B. The Role of Professional Bodies

Organisations like ACCA or ICAEW are the professional bodies. They establish and enforce the detailed Codes of Conduct and ethics (often based on international standards). These codes define *how* the five fundamental principles should be applied in specific, complex situations. Adhering to these codes is vital for maintaining your professional status.

Section 4: Navigating Ethical Dilemmas and Suspicion

What happens when you encounter a situation where an employer or client asks you to do something unethical, or you suspect wrongdoing? This requires a structured response.

How to Act Ethically (When dealing with clients, suppliers, colleagues)

Acting ethically means understanding and applying the rules consistently.

• Adherence to Organisational Values: Know your firm’s internal policies and stick to them.
• Applying Principles and Codes: When faced with a decision, run it through the five principles (Integrity, Objectivity, etc.). Does the action violate any of them?
• Regulatory Framework: Always ensure the action is legal.

Step-by-Step: Appropriate Courses of Action (If you suspect wrongdoing)

If you suspect that an unethical or illegal act has been, or may be, committed by an employer, colleague, or client, you must follow a defined process to protect yourself and the public interest.

Step 1: Evaluate the Significance of Threats

First, identify the nature and severity of the threat to the fundamental principles. Is it a minor administrative error, or is it potential fraud? Common threats include:

• Self-interest threat: The accountant benefits financially or otherwise from the outcome.
• Intimidation threat: Being pressured by a superior to modify findings.
• Advocacy threat: Promoting the client's position to the point that objectivity is compromised.

Step 2: Ensure Safeguards are in Place

If the threat is minor, you might be able to use safeguards. Safeguards are actions or policies that eliminate the threat or reduce it to an acceptable level.

• Internal Safeguards: Supervision, mandatory rotation of personnel, or involving an independent review team.
• Professional Safeguards: External review by a professional body or regulatory oversight.

Step 3: Resolve Conflicts of Interest (Internal Consultation)

If the threat cannot be eliminated by safeguards, try to resolve the conflict internally. Discuss the matter with your immediate superior or, if they are involved, with the next level of management or the company's audit committee. Document all your conversations and efforts.

Step 4: Seek External/Professional Help When Necessary

If internal efforts fail, or if the suspected act is clearly illegal and senior management is involved, you must seek help outside the organisation. This is often referred to as 'whistleblowing'.

• Consult your professional body for confidential advice.
• Seek independent legal counsel to understand your legal rights and duties regarding disclosure (especially if the activity is illegal, such as money laundering).