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CIMA C05 Course Notes
Chapter 1
Ethics in Business
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The Importance of Ethics
What are ethics?
Ethics are a set of moral standards or norms, which guide human behaviour.
They are concerned with what is right and wrong. Ethics differ from morals
in being less individual and without specific religious connotations. There is
no one standard answer for ethical questions.
Professional ethics reflect the views and rules of the professional
organisation. As an accountant you are expected to abide by the ethical
practices and procedures outlined in the CIMA code of Ethics.
A code of ethics:




Defines accepted/acceptable behaviours
Promotes high standards of practice
Provides a benchmark for members to use for self evaluation
Establishes a framework for professional behaviour and
responsibilities
By following the CIMA code you will practice the good virtues embodied in
this code. Studying the code will give you a good sense of what is considered
ethically right and wrong behaviour.
The fundamental principles of this code will be fully explained in chapters
one and two.
Tips when studying this section
It is important that you do not see ethics as a topic distinct from other areas
of business. You will be expected to understand how ethical ideas affect
every decision you make as an accountant.
The syllabus expects you to distinguish between:

Law (criminal and civil)

Regulations

Codes of conduct

Personal ethics/beliefs
All these areas will be covered in the following chapters.
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Laws, regulations and ethical behaviour
The Law
In order to live and work together humans 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.
Breaking the law is illegal and therefore a punishable offence.
What is considered unlawful however, will vary from society to society.
Even within the same society not everyone agrees with every law.
Regulations
Regulations are standards set by 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.
In some businesses, regulations can also applied by external regulators. This
is common amongst old state owned industries such as energy,
telecommunications, water and railways. In the UK, for example, OFCOM
regulate the telecommunications industry controlling the way the companies
run and manage operations to ensure they operate fairly.
Ethical behaviour
Ethical behaviour goes further than meeting laws and regulations. Ethical
behaviour is the highest level of conduct.
Aristotle identified fundamental virtues in a person, e.g honesty and
integrity, and these create ethical conduct. The ethical code of CIMA is
based on similar fundamental virtues. This code is examined at the end of
this chapter.
Professional ethics are standards of conduct agreed by a profession, such
accountancy or medicine. In the case of CIMA, the professional ethics
required of accountants are specified in the CIMA code of ethics.
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Trust Issues in business
The business world is fraught with ethical dilemmas. Nevertheless, the
public expects businesses to conduct their work in an ethical manner.
In the past many businesses were family concerns. People with an interest in
the business, such as suppliers, customers and investors (known as
stakeholders) were expected to trust that business would be conducted
honestly and ethically. This is an example of a ‘trust me’ business model;
where decisions are accepted at face value.
The family-style business model has largely been replaced by a more
managerial system where the key stakeholders expect to be informed about
the business’ progress and are involved in business decisions. This ensures
that the business meets their needs. This is referred to as a ‘involve me’
business model. The approach here is to interact and collaborate with
stakeholders, for instance inviting staff to meetings concerning new
procedures, or asking shareholders to regular meetings to discuss the
company’s position and strategy.
As a result of business failures and scandals, both stakeholders and the
general public are no longer as trusting. Accountability and independent
verification in business has become more critical. This is sometimes referred
to as the ‘show me’ or ‘prove to me’ business model.
For example, external auditors are required to review the accounts of most
large businesses, thus assuring shareholders of the validity of the
information being presented to them.
The final resort is the ‘obey me’ business model, where laws are made to
prohibit businesses from unethical behaviour and protect the interests of
financial stakeholders. For example, after the 2008 financial crisis, banks
are now coming under increasing regulation to help prevent a recurrence.
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The last few years have highlighted the cost of acting unethically. A spate of
business failures and financial misdemeanours led to severe public mistrust
in the financial world. It is therefore essential that members of CIMA not
only uphold the code but act as role models for correct professional
behaviour.
3.
Why ethics are important in accountancy
Since the 1980’s, a number of high profile business scandals (e.g. Enron,
Worldcom) resulted in decreasing public confidence in the accountancy
profession. This highlighted the need for ethical strategies and policies,
and increased regulation, training and guidance.
Case example: The Enron scandal
The rise of Enron, based in Texas, seemed too good to be true. In a
relatively short space of time Enron became the seventh largest company in
the USA. However this expansion was fuelled by huge debts.
By using subsidiary companies, Enron was able to hide it’s loses from its
balance sheet and its shares on the stock market rose rapidly. In 2001,
Enron was forced to disclose that its accounting practices had been very
creative, and failed to follow generally accepted accounting principles.
Enron filed for bankruptcy with debts of $3 billion. Legal investigations
uncovered criminal offences include money laundering and fraud.
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The Enron scandal led to the collapse of the Enron Corporation and the
dissolution of a huge auditing and accountancy corporation, Arthur
Andersen.
4.
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.
Accountancy requires making decisions often based on personal judgment.
While these decisions may not be illegal, they may be deemed to be against
the public interest.
Accountants should behave ethically because

Society expects professional accountants to behave ethically as they
hold positions of responsibility and status

The professional bodies expect it of their members, to uphold the
reputation of the profession

Accountants need to build confidence in the profession so that it is
respected and can grow. Unethical behaviour tarnishes the reputation
of the profession

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
Understanding and applying ethics
CIMA recognises that being ethically aware of and understanding the ethical
context in which business decisions are made, runs through everything
accountants do in their working lives. Ethics is integral to the entire CIMA
syllabus and any question in any paper could have an ethical dimension to
it. You will be expected to apply your knowledge of ethics to a range of
different contexts and dilemmas.
5.
Regulations and Legal frameworks
Legal frameworks
There are two basic theoretical approaches that can be followed when
developing a code of ethics. They are


A rules-based approach
A framework-based approach
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Rules-based or compliance-based approach
In a rules-based approach the governing body lays down the rules by which
members of that body must comply. Hence it is also known as the
compliance-based approach.
The governing body produces a code in which every ethical situation is
anticipated and covered by specific rules. In effect, members are legally
bound to follow this ethical code, so following the code is mandatory.
This is sometimes referred to as a ‘tick box approach’ because ‘correct’
behaviour can be checked or ticked off by oneself or others.
Advantages of the rules-based approach include:
Employees can consult a rule-book if necessary, helping them be clear
what is or is not accepted behaviour

Employees clearly know what is expected

It encourages consistent application of rules

It is easier to identify when a rule has been broken
Disadvantages include:

Not all guidelines can be covered by legislation, as this is costly and
time consuming, creating uncertainty and doubt in some instances

It is difficult to expect members of an organisation to memorise every
rule by rote

It does not allow members of the organisation to think for themselves
Legislative example
The US Sarbanes-Oxley Act is an example of the ‘rules-based’ approach.
Also known as the ‘Public Company Accounting Reform and Investor Act’,
this act set out new and enhanced standards for all public company boards,
management and public accounting businesses. This bill was enacted as a
result of high profile business scandals including the Enron scandal. It
became a federal law.
Critics of this bill argue that has hindered business by producing an overly
complex regulatory system. Others regard its as a blessing for reestablishing confidence in fund managers investors.
Voluntary or ethical framework
If a voluntary ethical framework is used, the organisation does not impose
legally binding rules on its members. Instead the fundamental values that
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members are expected to follow are set out as principles and general
guidelines.
In the UK there are many examples of voluntary frameworks.
Case Example 1. The Combined Code is the main source of corporate
governance in the UK. This code is not a legal requirement. However all
companies listed in the stock exchange are encouraged to follow it and
could face pressure from stakeholders if they fail to do so.
Case Example 2. The CIMA code of ethics is also a value-based framework,
based on key standards and best practice.
Advantages of voluntary frameworks include:

Allowing individuals to decide for themselves what is appropriate
encouraging people to take their own responsibility for what is right
and wrong

It is flexible and can be easily adapted to suit changing times and
different scenarios

It avoids restrictive, costly rule-based legislation (such as the
Sarbanes-Oxley Act)
Disadvantages:
6.

Having no rule -book to follow means that members of the
organisation must sometimes make ethical decisions based on their
discretion and judgement, and which can be subjective in nature. It
may then be difficult to argue whether a decision made was right or
wrong or apply disciplinary procedures.

Decisions made by different individuals may differ, creating
inconsistencies when applying the standards.
UK regulation of accountants
There are various sources of regulation of accountancy and auditing in the
UK. The ones you need to know are:
The Financial Reporting Council (FRC)
The FRC is responsible for providing an ethical framework for the UK
accountancy profession.
There are two sub-bodies of the FRC which undertake the accountability of
professional accountants:
1. The Professional Oversight Board for Accountancy (POB)
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The role of POB is to regulate specific activities of the accountancy bodies
regarding their members' including training and education, Continuing
Professional Development (CPD), discipline and conduct.
2. The Auditing Practices Board (APB)
An audit is systematic evaluation of data, statements, records and
performance (financial or otherwise) of an individual or organisation.
Auditing is an important aspect of accountancy work.
An external auditor is a professional auditor who can present an unbiased
independent audit report. This report is important to investors and others
with interests in the organisation or company’s performance.
In the UK the Auditing Practices Board was established to oversee the
auditing procedures followed by accountants and others when undertaking
audit work.
The functions of the Auditing Practices Board include

Setting standards of auditing procedures and principles in the UK and
Ireland

Applying these standards in practice

Influencing statute and regulations affecting external auditors

Promoting public awareness of auditing through research and
development
The International Federation of Accountants (IFAC)
The IFAC represents accountancy worldwide. Its mission is to develop the
high standards of professional accountants and enhance the quality of
services they provide. As such UK accountancy bodies respond to rules and
guidance set out by IFAC and incorporate their policies within their own. The
CIMA code of ethics, for example, originate from a set of guidelines
originally laid out by IFAC.
7.
The Seven Principles of Public Life
The UK Committee of Standards in Public Life was established in 1994 in
response to concerns about the unethical behaviour of some politicians.
The committee set out the standards to be followed by holders of public
office, such as ministers, civil servants, MPs.
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These standards are known as ‘The Seven Principles of Public Life.’
The Seven Principles of Public Life are

Selflessness - acting only in the public interest

Integrity - avoiding obligations to outside individuals or organisations
that might seek to influence them in the performance of their duties.
For example not accepting gifts or hospitality of clients

Objectivity - all choices should be made on merit. This includes the
awarding of contracts or recommending individuals for awards and
benefits

Accountability – being responsible for one’s own actions and
accountable to others. For example keeping detailed and accurate
records of all business transactions

Openness – concerning one’s decisions and actions. For example,
letting others know the reasons for one’s decisions

Honesty - truthfulness in all one’s dealings. For example, declaring
one’s private interests

Leadership - promoting and supporting these principles through one’s
own example
Although most accountants do not live a ‘public life’ they are a good set of
principles which professionals such as CIMA members are encouraged to
follow.
8.
Professional values required by CIMA members
Professional organisations such as CIMA have an overriding responsibility to
protect the public interest. To ensure that members are conducting
themselves in a professional and ethical manner they have developed codes
of conduct for members to follow.
In this section we examine the professional values required by members of
CIMA, and explain their importance to members, the organisation and the
public.
Personal Development and Lifelong Learning
Personal development is an essential part of professional life.
It includes development of a wide range of personal and interpersonal
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qualities, such as time management, communication and relationship skills.
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 accountants are expected to develop and display the following
qualities:
Reliability. Accountants should deliver work on time and at the standard
required.
Responsibility. Accountants should take ownership of their work and be
accountable for it. For example, personally fulfilling tasks they have been
assigned by an employer
Respect. Accountants should recognise the rights and needs of others and
respect them. For example, listening to the views of others respectfully
Timeliness. Clients expect accountants to be able to produce work within
an agreed time. This means that accountants should be prompt, organised,
and be able to prioritise tasks
Courtesy. Accountants should have good manners, and conduct themselves
with due consideration and courtesy. For example, speaking politely to
clients on the phone
Professional values of accountants
There are also four professional values, which particularly apply to those of
us working in the accountancy profession.
These four professional values are:
Independence
Accountants should be being able to act with an independent mind.
Examples might include, accepting gifts that might compromise their
judgement, reviewing the work of or auditing an individual or group with
whom they have a close relationship
Skepticism
Accountants should exercise with professional scepticism, and question
information they are given. For example, not blindly accepting a reason for
a difference on a budget given by a department head, but instead looking
for independent evidence or simply applying logic for reason for the
difference.
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Accountability
Accountants should take responsibility for their own actions, judgments and
decisions, and be accountable for them. For example they should not pass
their own poor work off as being done by another individual.
Social Responsibility
As members of society individual accountants are expected to behave in a
socially responsible manner, so for example, recycling stationary and other
materials in an environmentally friendly manner.
Lifelong Learning
Life long learning is the concept that an individual should be open to the
pursuit of learning throughout their personal and professional life.
Accountants are expected to update their technical and practical skills,
keeping pace with changes in the profession and the business world.
It is their duty as professional accountants to do so.
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:

Define their present roles and competences. A competency is
something that the individual must be good at to undertake their role
well

Assess themselves against competencies, including any knowledge
gaps. Filling these gaps will form the basis of the learning outcomes
they hope to achieve

Design a programme of activities with the aim of working towards
their learning objectives

Act out the activity programme

Reflect on their activities – how their learning can be applied or what
further training required, perhaps as part of a formal work appraisal

Evaluate their professional development against these activities and
plan further training as part of the next cycle
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Professional Development activities
Professional Development activities can span a wide range of activities.
Those recognised by CIMA include:





9.
Reading professional publications
Studying for professional or academic qualifications
Computer based training and training colleagues and students
Research and project work
Attendance at CIMA events
IFAC code of Ethics
The IFAC code of ethics was published in 2005 and revised in 2009.
IFAC members across the world must comply with the code. The mission of
the IFAC is to

Develop high standards of professionalism in accountancy

Enhance the quality of services provided by accountants
The code (which CIMA has adopted) has the aim of identifying the
responsibilities that a person employed as an accountant takes on.
The code is in 3 parts:
General Application of the code
This introduces the fundamental principles as outlined in the Code of Ethics
below.
Professional Accountants in Public Practice
This provides guidance on following these principles for accountants working
for an accountancy practice, for example, advice on fees and remuneration,
conflicts of interest, hospitality, objectivity etc.
Professional Accountants in Business
This section is particularly relevant to those working in commerce (business
sector). For example, it gives guidance on preparing information, financial
inducements etc.
10.
Codes of Ethics (2006)
CIMA Code
The CIMA Code of Ethics is based on the IFAC Handbook of the Code of Ethics
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for Professional Accountants, 2010, with some small amendment to reflect
local regulations. The code acts as a foundation for professional judgment,
decision-making, reasoning and practice. It is an ethical framework rather
than a compliance or rules-based code.
Nevertheless the consequences of not following the code can be serious,
especially in the case of complaints.
The Code itself is split into three parts (which you will note are the same as
the IFAC code outlined earlier):
General Application
This section acts as an introduction to the five fundamental principles
Professional Accountants in Public Practice
This section covers issues relevant to public practice including conflicts of
interest, objectivity, fees and gifts.
Professional Accountants in Business
This section covers issues such as preparing and reporting information.
The rationale and importance of a CIMA code
As a Chartered Institute it is imperative that CIMA protects the interests of
the public. The employability and reputation of CIMA members is enhanced
due to the high ethical standards laid out in the CIMA code. A member who
does not follow the code would have no defence if a case of professional
misconduct were brought against them.
Fundamental Principles of CIMA code of Ethics
The CIMA code of ethics identifies 5 fundamental principles to which a
professional accountant should comply:
1. Integrity
This means 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 is that information is not correct.
2. Objectivity
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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 offering) excessive
hospitality from people with whom they might have to review their work as
this could lead to bias creeping in or feelings of embarrassment, which
might prejudice their independence.
3. Professional Competence and Due Care
This means ensuring 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.
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
This means 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.
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:
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
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
Disclosure by law
The disclosure principle in accountancy states that all material information
should be disclosed in financial statements. This includes accounting
policies, balance sheets, details of cash flows and income statements.
In full disclosure any event that might affect financial statements should be
revealed.
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