Ethics

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1 Introduction

Ethics is a branch of philosophy that involves examining, categorising, justifying and recommending concepts of right and wrong behaviour. Ethics also deals with the moral principles that govern a person's decisions and behaviour.

Ethical standards within business have become very important and poor ethics often leads to fines, loss of trust and falls in shareholder value.

Ethical standards for accountants are vital and represent professional accountants’ “unique selling proposition”. What’s the point in paying an accountant unless their work is competent, honest and impartial? It is vitally important that accountants are trusted and believed: that implies high ethical standards.

2 Absolute v relative

There is a clear distinction between ethical theories based on absolute values and those based on relative values

Absolute value theorists

• Assume that there is only one set of moral rules that are unchanging and always true.

• But truth in one culture must be different from the truth in another. Consider the different truths behind Christianity and Islam.

• So most of the “absolute school” now accepts that each separate culture has its own truths.

• But, even then, some truths are international and intercultural – for example, unprovoked murder by one person of another must surely be a basic unacceptable anti–social act, whatever the culture, religion, geographical location.

Relative value theorists

• Accept that there are many moral/ethical codes each of which evolves over time and each could be different from every other.

• As a result they are more openly accepting of differing codes of ethics: the relative theorists do not believe in the “one moral truth”.

• They accept the need for evolution of moral codes.

• They accept also the idea of different races, religions, sects… having their own codes of ethics.

• Auditors in one country may well accept as normal an activity by a client which would be seen as abnormal by auditors in other countries.

3 Schools of ethics

Those who study ethics attempt to classify the ways in which ethics lead to decisions. The classifications are known as “ethical schools”. Summaries of the main schools are:

Ethics in accountancy primarily uses the virtue ethics approach.

4 The consequences of poor ethics in business

Irrespective of which school of ethics you adopt, or whether you are an absolutist or relativist, being ‘ethical’ is good for profits, particularly because most unethical behaviour will be discovered and then the consequences are serious.

• An ethical organisation will suffer less from legal penalties and damages. For example, paying employees below legal minimums is likely to give rise to fines. Under-declaring profits for tax will lead to large penalties. Concealing the harmful side effects of a product can lead to huge damages.

• An ethical approach reduces risk for investors and this will reduce the return they require. Cheaper finance means higher profits.

• Better people are likely to be attracted to become employees of ethical companies.

• Customers might boycott and abandon unethical companies.

• Ethical companies will find other companies more eager to cooperate (eg a joint venture). No one wants to be tainted by a company with a poor reputation.

• Ethical companies will be trusted to deliver what they promised in the way they promised.

5 Business and professional ethics

Carrying on a business or being part of the accountancy professions means that you will be continually faced with decisions that have ethical consequences. For example:

• You are a pharmaceutical company developing new drugs. How much testing should be carried out before the drugs can be marketed? More testing might identify unwanted side-effects, but more testing will delay treatment for people who are very ill.

• Your factory is old and inefficient and you are thinking of moving to a new one with more efficient use of energy, in another area of the country with better transport connections. The factory’s carbon footprint will be reduced, but existing employees will lose their jobs.

• You run an airline. You transport passengers for business and leisure and to visit overseas family members. However, airlines also cause noise and air pollution.

• House builders create accommodation for families, but they might build over attractive land and displace wild-life.

• You are an accountant reporting to a lender on the prospects of a client. A poor report will lead to business closure and redundancies but an optimistic report might lead to the lender losing their investment.

6 Accountants and the public interest

The “public” includes all users of financial information and decisions: corporate boards, shareholders, auditors, suppliers, consumers, governments, and financial industries (e.g., banking, insurance, legal, and investment services). It also includes citizens and taxpayers, who are affected by the fiscal decisions of governments for public expenditure and the distribution of public resources.

“Interest” describes the responsibilities that professional accountants have to society. Examples of these responsibilities include:

• Providing sound financial and business reporting to investors and all stakeholders affected by that reporting.

• Promoting the comparability of financial reporting and auditing across different countries.

• Reducing economic uncertainty throughout the economy.

• Requiring that accounting professionals apply high standards of ethical behaviour and professional judgment.

• Specifying appropriate educational requirements (including continuing professional development) and qualifications for professional accountants.

• Specifying regulatory and disciplinary procedures for the accountancy profession.

• Encouraging governments and public sector organisations to provide sound fiscal information and decision-making.

7 Sources of professional rules and ethics

An accountant's ethical obligations arrive from five directions at once, and a member has to satisfy all five. Where they conflict there is an order of precedence: the law comes first.

• The law. Local law must be complied with, and takes precedence over everything below. But most legal systems say very little about how an accountant should approach an ethical problem, which is why codes exist at all.

• IFAC. The International Federation of Accountants is the global body for the accountancy profession. CIMA is one of its member bodies, and a member body undertakes to meet the standards issued by the boards IFAC supports.

• IESBA. The International Ethics Standards Board for Accountants writes the international ethical code and its supporting guidance. It is an independent standard-setting board, now part of the International Foundation for Ethics and Audit (IFEA); IFAC supports its work but does not own it. Note the name: Ethics, not “Ethical”. The CIMA Code of Ethics is based on the IESBA code.

• National regulators and oversight bodies. See §7.3 below.

• CIMA. CIMA members must comply with local law, with local financial reporting and auditing standards, and with the CIMA Code of Ethics.

7.1 Why a framework of laws, regulations and standards is needed at all

A market only works if the numbers in it can be relied on. Left to itself, every party to a transaction has some incentive to overstate what it is offering and understate what it is asking. Laws set the outer boundary of what is permitted; regulations and standards fill in the detail of how information must be prepared and presented; and ethical codes govern the judgment that neither of the first two can reach. Remove any one layer and the reliability the market is paying for disappears.

It also explains why CIMA and IFAC each have a code rather than leaving ethics to the law. The law is national, slow to change and written after the event. A professional code is international, applies to the member wherever they work, and can require conduct that the law does not compel.

7.2 International bodies: IFAC and IESBA

IFAC's role is to develop and promote international standards, and to co-ordinate the profession so that an accountant's work means the same thing in every country. IESBA, the independent ethics standard-setter that IFAC supports, issues the International Code of Ethics for Professional Accountants, which CIMA has adopted almost in full. Chapter 2 works through what that code requires.

7.3 National oversight bodies — the UK as the illustration

Most developed economies have two national functions sitting between the international standard setters and the individual accountant: a body that oversees the professional bodies themselves (that they admit, monitor and discipline their members properly), and a body that sets national auditing standards. In the UK both functions live inside one organisation, the Financial Reporting Council.

• The Financial Reporting Council (FRC) is the UK regulatory body that promotes good corporate governance and reporting, and is responsible for implementing international financial reporting and auditing standards in the UK.

• The Conduct Committee is one of the FRC board's committees. It oversees the FRC's conduct work: monitoring of the Recognised Supervisory and Recognised Qualifying Bodies (which is what allows members of an accountancy body to carry out audits), audit quality reviews, corporate reporting reviews, professional discipline, and oversight of the regulation of accountants and actuaries. It took over the work of the FRC's former Professional Oversight Board.

• Auditing standards for the UK are set by the FRC itself, through its own board and committee structure. Until July 2012 that was the job of a separate body, the Auditing Practices Board. The APB's work is what the FRC still does: standards and guidance for auditing, for reporting accountants on investment circulars, and for auditors' integrity, objectivity and independence — the object being public confidence in the audit.

Note that CIMA members cannot audit unless they are also members of another appropriate body.

7.4 CIMA

CIMA members must comply with local laws, with local financial reporting and auditing standards, and with the CIMA Code of Ethics, which is based on the IESBA Code of Ethics. The Code binds a member irrespective of their field of activity, of their contract of employment, and of any other professional memberships they hold.

The CIMA Code of Ethics is covered in detail in Chapter 2.

8 Ethical codes

Many organisations and companies are developing their own ethical codes. Areas covered can include:

• Equal opportunity/discrimination

• Bullying

• Use of the internet

• Reporting wrong-doing

• Bribery

• Money-laundering

• Response to conflicts of interest

Here are extracts from Amazon’s code of ethics:

I. Compliance with Laws, Rules and Regulations

Employees must follow applicable laws, rules and regulations at all times.

II. Conflicts of Interest

…employees are expected … to act … in the best interests of Amazon.com. A "conflict of interest" exists when an employee's personal interest interferes with the best interests of Amazon.com. For example, a conflict of interest may occur when an employee or a family member receives a personal benefit as a result of the employee's position with Amazon.com. … the Legal Department will consider the facts and circumstances of the situation to decide whether corrective or mitigating action is appropriate.

III. Insider Trading Policy

Employees of the Company may not a) trade in stock or other securities while in possession of material non-public information or b) pass on material non-public information to … or recommend to others that they trade in stock or other securities based on material non-public information.

IV. Discrimination and Harassment

Amazon.com provides equal opportunity in all aspects of employment and will not tolerate any illegal discrimination or harassment of any kind…

V. Health and Safety

Amazon.com provides a clean, safe and healthy work environment. Each employee has responsibility for maintaining a safe and healthy workplace by following safety and health rules and practices and reporting accidents…Violence and threatening behaviour are not permitted. …

VI. Price Fixing

Employees may not discuss prices or make any formal or informal agreement with any competitor regarding prices …

VII. Bribery; Payments to Government Personnel

Employees may not bribe anyone for any reason, whether in dealings with governments or the private sector. …

VIII. Record keeping, Reporting, and Financial Integrity

Amazon.com's books, records, accounts and financial statements must be maintained in appropriate detail.

IX. Questions; Reporting Violations

Employees should speak with anyone in their management chain or the Legal Department when they have a question about the application of the Code of Conduct …The Amazon.com Legal Department has developed … reporting guidelines for employees who wish to report violations of the Code of Conduct. … Amazon.com will not allow retaliation against an employee for reporting misconduct by others in good faith…Employees who violate the Code of Conduct will be subject to disciplinary action up to and including discharge.

X. Periodic Certification

The Legal Department will designate certain employees who, based on their level of responsibility or the nature of their work, will be required to certify periodically that they have read, understand and complied with the Code of Conduct.

XI. Board of Directors

With respect to their service on behalf of the Company, Amazon.com's Board of Directors must comply with the relevant provisions of this Code of Conduct…

There are two approaches to formulating and applying ethical codes:

• Rules based

• Framework based

9 Managing a responsible business

Writing a code is the easy part. Running a business responsibly means recognising the ethical issues before they become incidents, and then having somewhere to go when one arises. The issues that most often reach a management accountant are:

• How results are presented — the pressure to smooth, to shift a cost into next period, or to make a forecast more optimistic than the evidence supports.

• Bribery, facilitation payments, gifts and hospitality, especially in overseas operations and in procurement.

• Money laundering, and knowing where a customer's money has come from.

• Conflicts of interest — a relative or a personal investment on the other side of a decision you are taking.

• How the workforce is treated: equal opportunity, discrimination, bullying, health and safety.

• Confidential and personal data — who may see it, and what it may be used for.

• The conduct of suppliers, whose behaviour attaches to the buyer's reputation whether or not it attaches to the buyer's legal liability.

Most of these are covered later in BA4 in their own right — governance in chapters 3 and 4, fraud in chapter 6, corporate social responsibility in chapter 7, and the employment issues in chapter 9.

9.1 What CIMA gives a member to work with

A member facing one of these tensions is not on their own, and the exam expects you to know what is actually available:

• The CIMA Code of Ethics. The obligations themselves, and the framework for working through a threat. Chapter 2.

• CIMA's Ethical Checklist. A published step-by-step route through an ethical conflict — check your facts, is it ethical, is it legal, which principles are affected, who is affected, escalate internally then externally, take advice, and as a last resort refuse to remain associated with it. Set out in full in chapter 2 §6.

• The CIMA ethics helpline. Confidential advice, free to members and registered students.

• CIMA's responsible-business material. Guidance, cases and research on ethics, anti-bribery, speaking up and sustainability.

CIMA does not do this in isolation. It is a member body of IFAC, which is why the CIMA Code is the IESBA code; and CIMA and the American Institute of CPAs together form the Association of International Certified Professional Accountants, through which they publish jointly on ethics, governance and sustainability reporting. The practical consequence for a member is that the standard being applied to them is an international one, not a local one.

10 Organisational and personal values

There is no reason that an organisation’s values and the personal values of its employees will be the same:

Unless there is some overlap there are going to be difficulties: the ethics and virtues as perceived by employees will be at odds with what the organisation perceives and needs. Successful organisations get as much overlap as they can — the right-hand panel above — because an employee whose own values already point the same way needs supervising far less than one whose do not.

The two sets of values can be brought towards each other by:

• Recruitment: try to ensure that new employees share at least some of the organisation’s values.

• Training: for example courses, group discussions and role play that examine ethical dilemmas.

• Ethical codes: these explain how employees should act and will also set out sanctions if the code is breached.

• Corporate culture: a strong emphasis from the top on how things should be done in the organisation.

10.1 When the two stances pull apart

An organisation has a corporate ethical stance — the standard of behaviour it holds itself to, which may be no more than the law requires or may go well beyond it. Every employee has a personal ethical stance. As a member, you also carry a third: a professional stance, set by the CIMA Code, which follows you from employer to employer.

Those three stances are answerable to different people, and that is what makes a conflict a conflict rather than a simple mistake:

So the overlap the diagram above asks for is not only between the organisation and the individual. A responsible employer also has to be able to live with the professional stance of the accountants it employs — which is exactly why the Code protects a member who refuses an instruction, and why the last step of CIMA's checklist is to walk away.

10.2 The virtues an organisation looks for

The virtues and values that organisations will, in general, like to see in their employees are:

• Reliability: employees should do what they say they will do, both in terms of quality and in meeting deadlines.

• Responsibility: employees should be willing to be accountable for their actions and decisions.

• Timeliness: meet deadlines. Do not have undue delays in carrying out tasks or communicating with others.

• Courtesy: it is important to be courteous to others both inside and outside your organisation. Discourtesy will generate neither friends, concessions nor more work.

• Respect: towards other people and their views – even if you think they are wrong.

11 Lifelong learning and CPD

This can be defined as:

“The provision or use of learning opportunities, both formal and informal, throughout people's lives in order to promote continuous development and improvement of the knowledge and skills needed for employment and personal fulfilment”

It is often described as being:

• ongoing

• voluntary

• self-motivated.

The concept recognises that in many businesses and organisations the pace of change is now often very fast. You only have to think about the impact of information technology and the Internet on most businesses. Unless employees and management keep up-to-date, their organisations will probably fail.

Within the accountancy profession it is important to keep up to date when preparing reports or giving advice. For example, developments in costing, such as activity based costing, might be more effective in producing information on which to base reliable decisions. Obviously it is important to keep up-to-date with tax and accounting standards. In fact, it would be unethical not to keep up to date.

Note that it is not only technical matters that change. Ethical matters also change and indeed the changes in ethics might be backed up by changes in the law. For example, attitudes towards bullying, discrimination, corporate social responsibility, bribery and corporate governance have all changed markedly over the last 20 years or so. Not to keep up to date is liable to lead towards expensive legal action.

This is the ethical duty, not merely a good habit. Chapter 2 sets out the five fundamental principles of the CIMA Code, and one of them is professional competence and due care. A member is required to keep their professional knowledge and skill at the level needed to give a competent service, and to act diligently. Meeting that requirement in practice is what continuing professional development (CPD) is: a planned, recorded cycle of assessing what your role needs, closing the gap, and evaluating whether it worked. Falling behind is not just careerism — it is a breach of the Code.

12 Chapter questions

Work each one before reading the answer.

13 Test your knowledge

Two quick checks before you move on: work through the flashcards to fix this chapter’s key terms and definitions, then sit the objective questions for exam-style practice. Both mark themselves and explain the answers as you go.