Ethics

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Directors are responsible for the preparation of the financial statements. The financial statements are to be prepared following IFRS and must show a true and fair view of the entity, however directors may try to manipulate information to:

• Increase their pay/bonuses

• Deliver specific targets e.g. EPS

• Reduce risk of insolvency e.g. through avoiding breach of loan covenants

• Avoiding regulatory interference

• Improve the appearance of part or all of the business prior to an IPO/disposal

• Understate revenue and overstate expenses to reduce tax liabilities

If the financial statements have not been prepared in accordance with IFRS then this may bring about ethical issues as the directors may not have been acting in a professional manner in accordance with their fiduciary duties.

The way in which directors can do this is as follows:

• Window dress the year-end financial statements

• Exercise judgement in applying accounting standards

• Inappropriate recording of transactions

Ethical issues commonly arise where there is a choice of accounting treatments that could be used in preparation of the financial statements. This could involve deliberate overstatement of assets, understatement of liabilities which may then impact on the performance or profitability.

Areas where ethical issues could arise are:

1 Exam technique for ethics questions

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1. Explain any relevant accounting rules which have been breached.

2. Mention that the directors’ actions are not in line with ACCA Code of Ethics.

3. Explain and apply which PRINCIPLES have been breached. The most likely are:

   1. Integrity – in manipulating financial information, directors have not acted with STRAIGHTFORWARD BUSINESS CONDUCT.

   2. Professional competence – if directors are unaware of a particular accounting rule, they have failed to MAINTAIN PROFESSIONAL KNOWLEDGE.

   3. Professional behaviour – may be relevant if you consider that the directors’ conduct could DISCREDIT PROFESSION.

4. Consider whether there has been an issue with any threats to objectivity. If directors have acted in a particular way in order to maximise their share-based pay, this would present a SELF-INTEREST threat.

5. Explain any relevant actions that should be taken:

   • discussion with those charged with governance / audit committee

   • seeking advice from the ACCA / seeking legal advice

   • resignation etc