Professionalism, ethical codes and the public interest
1 Professionalism
The Marriam-Webster dictionary defines ‘professionalism’ as:
“the conduct, aims, or qualities that characterise or mark a profession or professional person”
and it defines a ‘profession’ as:
“a calling requiring specialist knowledge and often long-term and intensive academic preparation’.
Certain attributes are implied or required by these definitions:
Competence (specialist knowledge is worthless if it is wrong, out-of date or a mystery)
Honesty and integrity (to apply knowledge and competence properly)
Reliability (clients expect to have their requirements met on time)
Flexibility (for example, staying late, working weekends to meet deadlines)
Respect for others (for example, recognising that others might have valid but different views)
Self-control (no matter how much provoked, professionals should remain calm and business-like
2 Public interest
IFAC (The International Federation of Accountants) defines public interest as:
“The net benefits derived for, and procedural rigour employed on behalf of, all society in relation to any action, decision or policy”
The ‘public’ includes investors, shareholders, employees, pensioners consumers, suppliers, tax payers, electorates and citizens.
Although the impact of accountants varies amongst these groups, there is a fundamental obligation for the accountancy profession to act in the public interest.
‘Interests’ include:
increased economic certainty in the marketplace
sound decision-making
sound and transparent financial information
comparability across different organisations and jurisdictions
sound corporate governance
Effective performance management
Increased efficiency and better resource utilisation
Accountancy professionals play a vital role in delivering the public interests shown above and they should:
Provide sound financial and non-financial reporting to shareholders, investors, taxpayers and all parties in the market place directly and indirectly impacted by financial and non-financial reporting from all organisations - including public sector organisations.
Provide truthful, effective communication with parties (boards, shareholders management and others) directly and indirectly related to the corporate government processes for which they are responsible.
Essentially, acting in the public interest can be viewed as accountants exercising social responsibility. Their duties do not simply rest with their clients of employers and they are encouraged or required to make positive impacts on all stakeholders.
3 Professional ethics
The ACCA Code of Ethics and Conduct (‘the Code’) is based on the IFAC Handbook of the Code of Ethics for Professional Accountants, of the International Ethics Standards Board of Accountants (IESBA).
If a member cannot resolve an ethical issue by following this Code or by consulting the ethics information on ACCA’s website he or she should seek legal advice as to both his or her legal rights and any obligations he or she may have.
The Code sets out certain fundamental principles about how its members should behave. It also recognises how its members could be subject to certain threats which would compromise their behaviour and suggests ways in which members can safeguard themselves against the operation of those threats.
The guide applies to all members of ACCA working in industry, commerce and public practice. It also applies to all ACCA students. Note that its operation is not restricted to auditors and covers ACCA members working in industry and commerce.
The ethical framework recognises that there are:
Ethical principles to be followed
These are subject to risks
Accountants should use safeguards to avoid or to respond to risks.
4 Fundamental professional ethical principles
The fundamental principles are as follows:
First, integrity. This means that members should be honest, straightforward. If they see something is amiss, they should say so; they shouldn’t try to conceal it; they shouldn’t ‘turn a blind eye’; they shouldn’t try to be ambiguous, they should state things plainly.
Secondly, objectivity, members should be influenced by the facts and the facts only. They must avoid bias, conflict of interest and undue influence.
Third, members should exercise professional competence and due care. They must keep themselves up-to-date with legislation and recent developments. They shouldn’t take on work which they are not qualified for or for which they have no skills. They must be diligent, they must be careful.
Fourth, confidentiality. Members, particularly perhaps those who are auditors, have access to information which is highly confidential and which is price sensitive. That information must be held confidentially. Members should not disclose confidential information unless they have a legal or professional duty to do so. An example of a legal duty to disclose information can arise if a member thinks that a client or the person they are working for is involved in money laundering. Many countries have very strong regulations nowadays that money laundering suspects should be reported to the authorities.
Finally, members should show professional behaviour. They should comply with the law and they should avoid any actions which discredit the profession. So, for example, when they are trying to advertise their services they shouldn’t say that other members are bad or poor. They should confine themselves to promoting what they are good at; they shouldn’t rubbish other professionals.
5 Threats to professional ethics
Threats to professional ethics arise from
Self-interest
Self review
Advocacy
Familiarity
Intimidation.
Note also management threats where the auditor performs managerial functions for the client. This is not listed by the IESBA, but covered under several of the above, such as self-interest and familiarity.
Where such threats exist, the ACCA member must put in place safeguards that eliminate them or reduce them to clearly insignificant levels. Safeguards apply at three levels: safeguards in the work environment, safeguards that increase the risk of detection, and specific safeguards to deal with particular cases. If a member is unable to implement fully adequate safeguards, then the member must not carry out the work.
Some of the following threats are likely to apply predominately to members in public practice, but many apply to all types of employment
5.1 Self-interest threats
Self-interest threats are the following:
Financial: For example, if an auditor owns shares in the client or employer. The member could be accused of wanting the company profits to look good, so that the share price rises thereby enriching the member.
Close business relationships are also threats. For example, if a partner retired from an audit partnership and then immediately went to work for a client, they could be accused for having lined themselves up for a job and to do that they perhaps did not do their audit rigorously. A period of at least two years should pass before an ex-partner takes up an appointment with a client. Having a partner on the client board is also unacceptable.
Close family and personal relationships between the ACCA member and owners or directors of the company they are working with create the possibility of suggestions that the member’s work has been neither objective nor independent, and that the accountant did not show the proper degree of integrity.
Loans and guarantees to the ACCA member should be looked at carefully. If the other party is a bank and it makes a loan on normal business terms, for example a mortgage, this would normally be regarded as acceptable. Certainly, no loans or financial relationships should exist between a client and the member if it is not normal business for the client to make loans.
Overdue fees, for example, for consultancy work, put the ACCA member some risk as there is a possibility that client will never pay those fees. This could lead to accusations any work performed (such as preparing a cash-flow forecast) will try to ensure that the company survives so that the fee will be paid. If there are overdue fees the member should not make the situation worse and should not incur any more chargeable time until those fees have been settled.
Contingent fees are obviously dangerous. A contingent fee, for example, would be where the ACCA member is paid is paid a small fee if a report being prepared is unfavourable, but a large fee if it is favourable.
High percentage fees. If the auditor earns a high percentage of total income from one audit client, then the auditor will rely too much on that client and can’t afford to lose them. This can give the client too much leverage over the auditor. Generally, the auditor should not earn more than 10% of total fees from any single public interest audit client.
Low-balling refers to the practice of quoting a very low audit fee to a client and then hope that profits would be made another work awarded by the client. This means really that the audit does not pay for itself so how, therefore, could a proper audit be done? Winning an audit is a competitive business and the audit fee is an important factor to clients. However, an auditor could find it difficult to claim that a proper audit has been carried out if a loss was made on the audit. Fees should be profitable for the auditor.
Recruiting staff on behalf of a client should not be done. The danger here is that if members of staff are recruited by the auditor, particularly financial staff, then subsequently the auditor might be reluctant to criticise the performance of those staff members as the advice they gave on recruitment looks bad. Similar considerations should be taken into account when the auditor performs any management function for the client.
5.2 Self review threats
Self review threats arise when an auditor does work for a client and that work may then be subject to checking during the subsequent audit. For example, if the auditor prepares the financial statements, and then has to audit them, or the auditor performs internal audit services and then has to check that the system of internal control is operating properly. Auditors could obviously be reluctant to criticise the work which their own firms have earlier undertaken, and this could interfere with independence and objectivity. Generally, auditors must be very careful when undertaking such work. Certainly it is common for auditors to do other work, what is important that the work is done by an entirely different team from the audit firm.
Really, checking your own work is a waste of time.
5.3 Advocacy threats
Arise if promoting a position or opinion to the point that subsequent objectivity is compromised. An example would be where you represent a company at a meeting with a bank to raise a loan.
5.4 Familiarity threats
Familiarity threats arise because of the close relationship between members and a client or employer so that independence is compromised. The close relationship can arise by friendship, family or through business connections. There is no general definition of what’s meant by close relationships, but if you were a consultant and your brother was the Finance Director of a client firm then there probably is a close relationship! If, however, the finance director was a remote cousin of yours, there might not be a close relationship. Note that there does not have to be any family or legal relationship: friendship can threaten independence and integrity.
5.5 Intimidation threats
The final groups of threats are intimidation threats. These can deter ACCA members from acting properly. Examples could be threatened litigation, blackmail, bad staff assessments, no promotion, or there might even be physical intimidation, though it is to be hoped that that is rare. Blackmail could be more subtly applied and might relate back for example to a period where the ACCA member was not acting in accordance with the required ethical standards.