Lecture 12
Professional Ethics
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1. SOCIAL AND ETHICAL ENVIRONMENT
 INTRODUCTION:
 Ethics are very important aspect for every accountant
which need to be applied in all aspects of managerial
behaviour.
 An attempt to massage profit figures, or non-disclosure of a
close relationship may amount to unethical behaviour.
However, it is the nature of ethics to deny easy answers.
Furthermore, in the context of business, ethical
prescriptions have to be practical to be of any use.
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ETHICS
 WHAT IS IT?
 It is a set of moral principles to guide behaviour.
 Whereas the political environment in which an
organisation operates consists of laws, regulations and
government agencies,
 the social environment consists of the customs, attitudes,
beliefs and education of society as a whole, or of different
groups in society.
 Ethics and morality are about right and wrong behaviour.
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Ethical Environment
 The ethical environment consists of a set (or sets) of well-
established rules of personal and organisational behaviour.
 The ethical environment refers to justice, respect for the
law and a moral code. The conduct of an organisation , its
management and employees will be measured against
ethical standard by the customers, suppliers and other
members of the public with whom they deal.
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Examples of Social and Ethical Objectives.
 Employees: A Minimum Wage, Job Security, Good
conditions of work, Job Satisfaction.
 Customers: Produce of good quality at a reasonable
price.
 Suppliers: Offered regular orders and timely payment
in return for reliable delivery and good service.
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Examples of social and ethical objectives.
 Society: Control of pollution, Provision of financial
assistance to charities, sports and community
activities. Co-operation with government authorities
in identifying and preventing health hazards in the
products sold.
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Ethics in Organizations.
 Ethics is a code of moral principles that people follow
with respect to what is right or wrong. Ethical
principles are not necessarily enforced by law,
although the law incorporates moral judgements
(murder is wrong ethically, and also punishable by
law).
 Ethics in organizations relates to social responsibility
and business practice.
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Ethical systems in organisations
 (a) Personal ethics deriving from a person’s
upbringing, personality, religious beliefs etc.
 (b) Professional ethics (eg ACCA’s code of ethics,
medical ethics)
 (c) Organizational cultures eg customer first.
 (d) Organizational systems. Ethics might be
contained in a formal code, reinforced by overall
statement of values.
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Managing Ethics
 Two approaches to managing Ethics:
 Compliance-based
 Integrity-based
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Compliance-based approach.
 A compliance-based approach is primarily
designed to ensure that the company acts within
the letter of the law, and that violations are
prevented, detected and punished.
 Some organizations, faced with the legal consequences
of unethical behaviour take precautions such as those
below.
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Compliance-based
 Compliance procedures to detect misconduct.
 Audits of contracts.
 Systems for employees to inform superiors about
criminal misconduct without fear of retribution.
 Disciplinary procedures to deal with transgressions.
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Integrity-based approach.
 An integrity-based approach combines a concern for
the law with an emphasis on managerial
responsibility for ethical behaviour. Integrity
strategies strive to define companies’ guiding values,
aspirations and patterns of thought and conduct.
 Integrity-based approach to ethics treats ethics as an
issue of organization culture.
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Reasons why accountants should
behave ethically.
 (a) Ethically issues may be a matter of law and
regulation and accountants are expected to apply
them.
 (b) The profession requires members to conduct
themselves and provide services to the public
according to certain standards in order to protect the
profession’s reputation and standing.
 (c) The accountant’s ethical behaviour serves to
protect the public interest.
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Fundamental Principles and Guidance on
Professional Ethics.
 THE PUBLIC INTEREST: (IFAC’S CODE).
 A distinguishing mark of the accountancy profession is
its acceptance of the responsibility to act in the public
interest. Therefore, a professional accountant’s
responsibility is not exclusively to satisfy the needs of
an individual client or employer.
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Public Interest.
 The public interest is considered to be the collective
well-being of the community of people and
institutions the professional accountant serves,
including clients, lenders, governments, employers,
employees, investors, the business and financial
community and others who rely on the work of
professional accountants.
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The Fundamental Principles of the (ACCA) Code
of Ethics and Conduct
 INTEGRITY:
 Members shall be straightforward and honest in all
professional and business relationships.
 OBJECTIVITY:
 Members shall not allow bias, conflict of interest or
undue influence of others to override professional or
business judgements.
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The Fundamental Principles (ACCA)
 PROFESSIONAL COMPETENCE AND DUE CARE:
 Members have a continuing duty to maintain
professional knowledge and skill at a level required to
ensure that a client or employer receives the advantage
of competent professional service based on current
developments in practice, legislation and techniques.
Members shall act diligently and in accordance with
applicable technical and professional standards.
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Confidentiality
 Members shall respect the confidentiality of
information acquired as a result of professional and
business relationships and, therefore 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.
 Confidential information acquired as a result of
professional and business relationships must not be
used for the personal advantage of the professional
accountant or third parties.
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Professional Behaviour.
 Members should comply with relevant laws and
regulations and should avoid any action that discredits
the profession.
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Personal qualities expected of an
accountant
Personal quality
Detail
Reliability
Work must be done well and must meet
professional standards
Responsibility
Accountant should take ‘ownership’ of
his work
Timeliness
Work must be produced within a
specified time frame
Courtesy
Conduct yourself with courtesy and
consideration towards clients
Respect
Respect others by developing
constructive relationship and
recognizing the values and rights of
others.
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Professional qualities expected of
an accountant
Professional quality
Detail
Independence
Work be completed without bias or
prejudice and you must be seen to be
independent.
Scepticism
Question information so that you form
your own opinion regarding its quality
and reliability.
Accountability
Should recognize that you are
accountable for your own judgements
and decisions
Social responsibility
Accountant should have public duty as
well as duty to their employer or client.
Audit work, accountancy work and
investment decisions may all affect the
public.
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Integrity, objectivity and
independence
 Members must behave with integrity and should
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strive for objectivity in all professional and business
judgements.
Objectivity is a state of mind and should be shown by
the maintenance of independence.
Independence and objectivity matter because of;
1. The expectations of those directly affected, and
2. The public interest
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Independence
 Independence of mind:
 The state of mind that permits the provision of an
opinion without being affected by influences that
compromise professional judgement, allowing the
individual to act with integrity, and exercise objectivity
and professional scepticism.
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Independence
 Independence in appearance:
 The avoidance of facts and circumstances that are so
significant that a reasonable and informed third party,
having knowledge of all relevant information,
including safeguards applied, would reasonably
conclude a firm’s, or a member of the assurance team’s
integrity, objectivity or professional scepticism had
been compromised.
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Threats to independence and
objectivity
 Compliance with the fundamental principles of
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professional ethics may potentially be threatened by a wide
range of different circumstances.
Appropriate safeguards must be put in place to eliminate
or reduce such threats to acceptable levels.
The threats are;
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
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Self-interest threat
 This is the threat that a financial or other interest will inappropriately
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influence the professional accountant’s judgement or behaviour. It may
arise due to;
Financial interest,
Close business relationship
Employment with the client
Partner on client board
Family and personal relationships
Gifts and hospitality
Loans and guarantees
Recruitment
Lowballing
% or contingent fees
High % of fees
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Safeguards to self-interest threats
 Financial interest by audit firm, a member of audit
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team and family member of a member of the audit
team.
Safeguards;
Dispose of the interest
Remove the individual from the team
Inform the client’s audit committee
Use independent partner to review work carried out.
Exercise;
Discuss the safeguards to the other factors arising.
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Self-review threat
 This threat arises when a member reviews his or her
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own work or advice as part of an assurance
engagement. Circumstances that may arise include;
Recent service with assurance client
General other services
Preparing accounting records and financial statements
Valuation services
Tax services
Internal audit services
Corporate finance
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Advocacy threat
 This arises in those situations where the audit firm
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promotes a position or opinion to the point that
subsequent objectivity is compromised.
Examples include;
1. Promoting shares in a listed audit client.
2. Commenting publicly on future events
3. Acting as an advocate in litigations
ACCA code does not permit a firm as a counsel for legal
affairs.
Safeguards include using different department for the
work, informing audit committee and making disclosures .
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Familiarity threat
 This is where a firm is on the client for a long period of
time. Factors include;
 How long an individual has been on the audit team.
 How senior the person is
 Whether the client management has changed
 Whether the client’s accounting issues have changed in
nature.
 Safeguards include;
 Rotate the senior personnel off the team, have a senior
member to review work done and quality reviews.
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Intimidation threat
 Intimidation threat arises when members of the audit
may be deterred from acting objectively by threats,
actual or perceived.
 These could arise from family and personal
relationships, litigation or close business relationships.
 Client threatens to sue, or does sue, the audit firm for
work that has been done previously.
 Threat of losing the client compels the firm to produce
unmodified audit opinion.
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Intimidation threat (contd.)
 Factors to consider by the firm if such situations arise
include;
 The materiality of the litigation
 The nature of the audit engagement
 Whether the litigation relates to a prior audit
engagement.
 Safeguards include;
 Disclose to audit committee
 Remove specific affected individuals from the
engagement team
 Involve a senior partner on the team to review work.
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