ETHICS
In the last lesson we discussed GAAP and the importance of GAAP in the Accounting profession.
Increasingly we see companies being questioned for their interpretation of GAAP and their accounting
policies. In this lesson you will look closer at ethics and use a five step approach to solving ethical issues.
Finally, we will look at how technology has affected accounting and how this relates to ethics.
What You Will Learn
After completing this lesson, you will be able to [minor]
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define ethics
describe why ethical behaviour is important to all accounting professionals
describe what an audit is and how it relates to ethics
explain and apply the Five step approach to solving ethical issues
describe how technology has affected accounting and relate it to ethics
Ethics defined
According to Merriam-Webster, the word Ethic is from the Latin word Ethice, and it gives the following
meanings:
1. The discipline of dealing with what is good and bad and with moral duty and obligation
2. a) a set of moral principles: a theory or system of moral values
b) the principles of conduct governing an individual or a group
c) a guiding philosophy
d) a consciousness of moral importance
Source: http://www.m-w.com/dictionary/ethics
As you work through this lesson you will be able to relate the lesson to the definition above. In particular,
look at 2b) does that sound like GAAP?
How Does This Link to Accounting Ethics?
In Canada accountants are ethically or morally expected to follow rules or GAAP set out by the CICA, and
their professional associations: the CMA, CGA and CA’s. Accounting students are being introduced early
in their studies to courses that address ethics in Accounting. In Waterloo Ontario, the University of
Waterloo has opened a Centre for Accounting Ethics which endeavours to teach and encourage a high
standard of ethics and professional standards to students and financial professionals.
Accounting Ethics
A Martian lands to plunder, pillage, and burn. The Martian goes up to the owner of the first house he sees
and says, “I’m a Martian just arrived from the other side of the solar system. We’re here to destroy your
civilization, pillage, and burn. What do you think of that?” The owner replies, “I cannot express an opinion
based on hearsay evidence, I am a chartered accountant.”
While the above scenario is fictional, the message of how a chartered accountant would handle
the situation is real. All accountants must be as objective as possible and base their opinions on
objective evidence.
Accounting is not a closed system or a fixed set of rules, but a constantly evolving body of
knowledge. In Canada, the CICA, through the CICA Handbook, has developed a number of
recommendations on accounting standards. These accounting standards are the ground rules with
which accountants must comply when quantifying and reporting financial events.
GAAP enables accountants to consistently prepare financial statements that are comparable because
they have been prepared under the same rules. Businesses, bankers, investors, and financial analysts
can make fair comparisons of current financial statements with previous statements of the business
and the statements of other companies because the statements are all formulated on the same set of
ground rules.
Like all professionals, accountants owe duties not just to their employers and clients but also to the public.
Accountants produce information on the financial situation of the business that is unbiased and accurate.
Accounting practices and standards of financial reporting are there to ensure the information is relevant,
reliable, understandable, and comparable.
The accounting profession’s public consists of clients, credit grantors (such as banks), governments,
employers, interested businesses (such as suppliers and clients), and members of the financial
community. All these parties use the financial statements prepared by the business and rely on their
objectivity and integrity. This reliance forms the basis of the orderly functioning of the business world.
Failure to adhere to the professional accounting associations’ rules results in a member’s expulsion from
the association, making it illegal for him or her to provide accounting services to the public.
Source: CartoonStock Ltd.
Support Questions
1.
From the following description/word list, fill in the characteristics of an ethical accountant in the chart
provided below.
Description/Word List
Concerned with public interest
Puts professional interest ahead of self-interest
Has professional pride
Honourable and mature
Disciplined in action
Thorough in action
Will not bow to pressure
Stands on convictions
Has integrity
Has a healthy skepticism
Dignified
Magnanimous
Generous
Persistent
Courageous
Alert
Resourceful
Determined
Diligent
Objective
Principled
Sensitive Farsighted
Enlightened
Steadfast
Honest
Sincere
Truthful
Reliable
Dependable
Trustworthy
Independent
The Audit
An audit is a thorough investigation of every material item on the Income Statement and Balance
Sheet and all of the disclosures that appear in the note section of an annual report that relate to
the financial statements.
An audit report is issued by a registered chartered accountant or a firm of public accountants, and
expresses an opinion as to the fairness and accuracy of the financial statements. It also states whether
the financial statements were prepared in accordance with GAAP.
An ethical auditor is one who, despite personal consequences, fulfills his or her professional
obligation. For example, an auditor may face the possibility of the loss of a client due to a
disagreement regarding the fair representation of the client’s financial position. If an auditor believes
that material misstatements exist in the client’s financial statements, an ethical auditor will refuse to
sign these financial statements—even if that means losing the client and the audit fee. Remember
back to lesson three and the article about Nortel. The article talks about Deloitte (Nortel’s auditors)
and the straining of their relationship with Nortel due to the “buy and hold” transactions and the
resulting report of fourth-quarter revenues for 2000.
Where there exists an issue on which the auditor must reach a conclusion, the auditor ensures that
research has been done with a full understanding of both sides of the issue, that consultation with peers
has occurred, and that the issue has been discussed with clients. As well, the auditor takes the time to
understand the context of the issue and considers all the implications of the issue at hand before
reaching a decision. These steps are necessary if audit firms and the accounting profession wish to
ensure that auditors exercise ethical professional judgment according to the high moral and professional
standards set by the accounting profession.
The accounting associations all address the issue of ethics. The Institute of Chartered Accountants of
Ontario in conjunction with the Centre for Accounting Ethics at University of Waterloo suggest a five step
approach when making ethical decisions.
Five Step Approach to solving Ethical issues
1. Identify ethical issues
It is important to identify the main or root problem and make sure the issue is based on facts.
2. Identify stakeholders
Who are the main people with interest in the case.
3. Identify alternative courses of action
Brainstorm for as many alternative courses of action as possible. If working alone, consult with others.
Don’t discount a crazy alternative. It may lead to or give you a more workable alternative when you
complete step four.
4. Identify effects/consequences of each alternative
Identify as many consequences as possible for each alternative. For instance: you and your friends know
that a student constantly uses essays “borrowed” from other sources. You don’t think it is fair as the rest
of you spend hours and hours working all night to finish assigned essays. One alternative to this dilemma
may be to ignore it. What would be the consequences of this alternative?
 You and your friends remain frustrated and fester feelings against this person
 Probably eventually the student will get caught. If this person was in University it would
probably result in expulsion. Wouldn’t it be better for that person to learn now that
”borrowing” is not acceptable instead of later when the consequences are greater?
 Your teacher finds out about this person and that you knew about it. They ask you why
you didn’t report him/her?
5. Decision
Once you have identified the consequences of each alternative, chose one of the alternatives and be
prepared to explain how/why you have made the decision.
Source: Institute of Chartered Accountants of Ontario. Teacher Colleague Program (TCP). ICAO. 29 Bloor
Street East, Toronto, ON M4W 1B3. 1-800-387-0735 www.icao.on.ca
Ethical Decisions, Audits and the case of Peter Gunn, Forensic Accountant
PETER GUNN, FORENSIC ACCOUNTANT
Prepared by W. Morley Lemon
Peter Gunn works in the forensic accounting department of a large national public accounting firm-Kraft,
Mulhuland and Brown (KMB). Richmond Corp. is an audit client of KMB and has asked that the forensic
accounting department of KMB do a review of the purchasing procurement area of Richmond. Mary
Thompson, the president of Richmond, advises KMB that the audit committee suggested that the forensic
accounting department be called in to do a normal review of the purchasing procurement area because
several members of the audit committee believe that this particular part of the firm is a fairly high risk area.
Peter Gunn organises a team of two of his staff and sends them in to the review of the purchasing
procurement area of Richmond. In the course of their review, the forensic group observes that certain red
flags seem to be present relating to the tendering process.
In the review of the tendering process, the forensic group discovers that a certain contractor was given a
lot of work although his company was not necessarily always the lower bidder. A review of the files
indicated that the same Richmond company employee, Bob Newton, made the decisions in each of these
contracts. This information suggests a red flag to the forensic group. The next step for the forensic group
was to do a background check on Bob Newton. The forensic group talked to both the KMB and Richmond
staff and found that Bob Newton had worked for Richmond for a long time and was very highly regarded
and respected by his peers and by the audit firm.
Despite this positive information, the forensic group decided to conduct a more extensive and in-depth
background check on Bob. It's important to know at this point that this information search was not public
knowledge; only the forensic group and the forensic partner, Peter Gunn, were aware of the investigation.
This background check included looking into Bob's lifestyle, his financial situation including mortgages,
houses etc., his cars and assets, and running a credit check. As a result of this background check, it was
discovered that there was no mortgage on Bob's house, his Muskoka cottage or his winter property in
Florida. All of these properties had been bought with cash within the last five years. A check of the
company's personnel files indicated that Bob was not receiving a significantly large salary.
Peter Gunn and the forensic group went to the audit partner, Art Went, to indicate that there could be a
potential problem. Art was not very comfortable with their information. For one, Richmond was his biggest
client and represented fifty percent of his billings. In fact, Richmond was large enough to represent seven
and a half percent of the total billings for the office. As a result of these pressures, Art indicated that Peter
Gunn and the audit group should drop their investigation and leave it up to the auditors to find the fraud
during their audit. He indicated he wished to follow this route because he felt that the forensic group had
found a problem that the audit group had missed and Richmond would not be very happy that KMB had to
bring in experts to find this difficulty-a difficulty that the auditors should have found out in the normal
course. The audit partner felt quite strongly that Richmond was at risk and that he would be the one that
would be the big loser if Richmond went to another firm.
What should Peter Gunn do in this particular situation?
Source: Adapted from information found in Cases in Accounting Ethics, Volume 1, from the Centre for
Accounting Ethics, School of Accountancy, University of Waterloo, Waterloo, ON N2L 3G1
Support Questions
2. identify the first three of the five step approach to solving Ethical issues.
a) The primary ethical issues in the case study are:
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b) The stakeholders that were affected by the alleged fraud were:
c) Alternative courses of action ( at least three)
3. Read the following case and apply the five steps approach to solving ethical issues.
You, Devon James, have recently qualified as a chartered accountant. Brewin Construction has hired you
to prepare its financial statements for the past year. Brewin Construction has been a successful firm for 30
years, and is run by the owner, Miles Wilson. The previous accountant, Marcellus Kaczemarek, has left for
a job in Toronto.
It becomes apparent as you complete your task that Miles feels you are doing something wrong. Miles has
been questioning your judgement, saying, “Marcellus didn’t do it that way.” Finally, just as you are
completing the financial statements, Miles approaches you with a stack of receipts totalling $75 000. “Here
are some improvements we made on the, mmmmmmm, building over the year,” Miles says.
Taking the receipts, you start to question the validity of these expenses. After some research, you find out
that the expenses are not for the building at all. They are for Miles’s house.
You take the receipts and record them into Miles’s Drawings account and finish the financial
statements.
When Miles reads the financial statements, he snaps. “What do you think you are doing? These are
business expenses, not my drawings. Do you have any idea of my tax situation? Make these changes
right now!”
Source: This dilemma is adapted from the Additional Subject Specific Support Materials—Public
Principles of Financial Accounting, developed by the Near North District School Board.
Technology and its impact on the field of accounting [minor]
The impact of technology has been huge in the field of accounting. The actual reporting of financial results
has become more simplified and timely with the advent of information systems and accounting software.
As we saw with Simply Accounting by posting a transaction, we can immediately see the effect on
financial statements. Years ago managers would have to wait a considerable amount of time for the
results to be prepared manually. Large companies often will have their information systems created
especially for them – a custom designed package. For small to medium companies though, accounting
software like Simply Accounting or Quicken can easily be adapted to meet their needs and at an
affordable price.
Accounting software creates a valuable data base of information. Once created, the information is easily
accessed when required. For example: the automated payroll journal and ledger allows for a data base of
all present and previous employees to be stored together with their rate of pay, the number of years
employed, vacation pay, deductions and benefits that are tax benefits. Pay cheques may also be
prepared.
A data base of inventory in large businesses may be tracked using bar codes, a form of optical character
recognition. Each item is tagged with a bar code and when the item is scanned by a reader the sales price
is immediately registered by the cash register. When the purchase is completed the sale is immediately
recorded and the inventory and financial statements are updated.
E-commerce or going on line to conduct business will require an information system if a product is to be
sold. Companies must have a method of recording their revenue and expenses and hopefully the resulting
revenue. Ethically the company must report the resulting income to the CRA for tax purposes. Also, before
a company decides to sell on line they must make sure that they will have enough sales to make the
expense of creating of an accounting system for this cost effective. There is also the issue of payments by
the purchaser and their safety from identity theft.
Source: Adapted from Kermit Larson, Tilly Jensen, Ray Carroll, Financial Accounting Principles (Toronto:
McGaw-Hill Ryerson, 2002) 22-23.
It is beyond the scope of this lesson to list all the other ways technology has affected accounting but here
are a few ways: tax reporting software and software that will adjust for amortization of capital assets
automatically.
Information Technology (IT), ethics and audit
A company’s information systems or computerized method of recording and obtaining their financial
results is important and must meet certain criteria:
 Management should have easy access to information.
 It must be accurate for both internal and external users.
 Is the information safe from intruders both internal and external? Passwords need to be
issued and protected by all employees. It should be decided what information an
employee requires. Only that information should be accessible to them.
 Is the information timely or has too much time passed before costs get out of control?
Various events in the world such as the irregular accounting procedures involving Enron and consequently
the dissolution of the accounting firm Arthur Anderson, the IT failure at AT&T which left credit card users
unable to access funds for almost 18 hours, among others, have resulted in an increased focus on the
importance on ethics, IT and auditing. An international non-profit association has evolved for IT auditing,
called ISACA (Information Systems Audit and Control Association). ISACA has become a “global leader in
IT governance, security, control and assurance”, with a membership of more than 65,000 professionals in
more than 140 countries including Canada, Asia, Europe Africa and all the America’s. You can visit the
ISACA website for more information www.isaca.org
Source: Adapted from information found at the www.isaca.org