Professional Development Programme on Enriching Knowledge of the Business, Accounting and Financial Studies (BAFS) Curriculum

Transcription

1 Professional Development Programme on Enriching Knowledge of the Business, Accounting and Financial Studies (BAFS) Curriculum Course 1 : Contemporary Perspectives on Accounting Unit 6 : Ethical Issues in Accounting Technology Education Section, Curriculum Development Institute Education Bureau, HKSARG August Learning Objectives On completion of this unit, you should be able to: 1. Identify and analyze ethical issues in accounting activities; 2. Apply ethical decision-making model in handling ethical issues in accounting activities; and 3. Understand the relationship between accounting and corporate governance. 2

2 Organisation of Unit 6 What is Ethics? What is Corporate Governance? Factors influencing ethical behavior Code of Ethics for Professional Accountants Most common ethical issues Ethical decisionmaking model in handling ethical issues in accounting activities Relationship between accounting and corporate governance External auditors Enron case Sarbanes-Oxley Act Audit committee 3 What is Ethics? (1) Ethics is the system of beliefs that supports a particular view of morality. Ethics involves the study of the tendency to do right or wrong, or.. beliefs about what s right and wrong, good and bad (Beauchamp & Bowie, 2007). 4

3 What is Ethics? (2) What is Ethics? Simply speaking, ethics is a set of general moral belief, normative rules of conduct, a code, a standard or set of standards that governs what one ought to do when the well-being and right of, or duties to oneself, others or institutions are at stake (Beauchamp & Bowie, 2007). 5 Factors Influencing Ethical Behavior (1) What are the factors influencing ethical behavior? 6

4 Factors Influencing Ethical Behavior (2) Social Environment Factors influencing ethical behavior Click the circle for detail explanation 7 Factors Influencing Ethical Behavior (3) Social Environment Government / Legal Environment Factors influencing ethical behavior 8

5 Factors influencing Influencing ethical Ethical behavior Behavior (4) Social Environment Government / Legal Environment Factors influencing ethical behavior Working Environment 9 Factors Influencing Ethical Behavior (5) Social Environment Government / Legal Environment Factors influencing ethical behavior Working Environment Decision Processes 10

6 Factors Influencing Ethical Behavior (6) Social Environment Government / Legal Environment Factors influencing ethical behavior Working Environment Individual Attributes Decision Processes 11 Factors Influencing Ethical Behavior (7) Social Environment Government / Legal Environment Factors influencing ethical behavior Working Environment Personal Environment Individual Attributes Decision Processes 12

7 Factors Influencing Ethical Behavior (8) Social Environment Government / Legal Environment Professional Environment Factors influencing ethical behavior Working Environment Personal Environment Individual Attributes Decision Processes 13 Social Environment It refers to the set of humanistic, religious, cultural and societal values generally shared by the members of his or her society. It creates social pressure upon individuals to behave according to societal norms. 14

8 Government / Legal Environment Laws can be seen as the institutionalised values of the society in which the government exists. Most people feel compelled to refrain from committing law-breaking behaviors and have strong social stigma towards illegal behaviors. 15 Work Environment It consists of three major components: corporate goals, stated policies, corporate culture and work peers. The different orientations (short-term versus long-term), and emphasis (profitability versus corporate social responsibility) together with the constraints of the corporate goals and policies generate different behaviors. Corporate culture is reflected in the attitudes and values, management styles and problem. 16

9 Professional Environment This environment refers to the institutionalised professional context within which a manager practises. Fields of activity are properly designated professions only if they are characterised by professional associations and /or established licensing procedures. Professional associations demand ethical behavior via formal codes of ethics. 17 Personal Environment This environment refers to the influences coming from family and peer groups outside the organisation. It is generally believed that an individual s home environment and peers significantly guide his moral development. 18

10 Individual Attributes These attributes include moral level, personal goals, motivation mechanisms, social status, self concept, life experiences, personality and demographic variables. They are related to the level of moral reasoning. 19 Decision Processes These processes in the decision making model function as a central processing unit working under the - potential constraints of limited information processing capacity; - limited cognitive abilities; - various biases in perception, information processing and evaluation of decision alternatives. 20

11 Most Common Ethical Issues (1) According to a survey by Hong Kong Institute of Certified Public Accountants (HKICPA), the most common ethical issues encountered by accountants are: Non-practising sector 1. Pressures from the superiors instructions to project the desired financial performance to the outside world; 2. Transfer pricing and overseas market; 3. Instruction to provide inflated management accounting data; 21 Most Common Ethical Issues (2) Non-practising sector 4. Pressures from the superiors to pass their private or illegitimate business expenses through the accounts of the organisation; 5. Use of confidential information for personal gains / insider dealings; 6. Under-declaration of taxable profits / underpayment of taxes; 7. Dealings with customers or suppliers with dubious reputations; 22

12 Most Common Ethical Issues (3) Non-practising sector 8. Offering and accepting of advantages; 9. Whistle-blowing; 10. Instructions to perform unethical or illegal acts; and 11. Conflict of interest situations. 23 Most Common Ethical Issues (4) Practising sector 1. Fee problem; 2. Personal relationship with clients; 3. Financial information manipulation by clients; 4. Clients proposal for tax evasion or fraud; 24

13 Most Common Ethical Issues (5) Practising sector 5. Opinion shopping by clients; 6. Unethical solicitation of professional work; 7. Use of clients confidential information for personal gain; 8. Offering and accepting of advantages; 25 Most Common Ethical Issues (6) Practising sector 9. Whistle-blowing; 10. Instructions to perform unethical or illegal acts; and 11. Conflict of interest situations. 26

14 Code of Ethics for Professional Accountants (1) A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore, an accountant s responsibility is not exclusively to satisfy the needs of an individual client or employer. 27 Code of Ethics for Professional Accountants (2) To act in the public interest, an accountant should observe and comply with the ethical requirement of the Code of Ethics for Professional Accountants issued by HKICPA. 28

15 Code of Ethics for Professional Accountants (3) A professional accountant is required to comply with the following fundamental principles of ethics: 29 Code of Ethics for Professional Accountants (4) A professional accountant is required to comply with the following fundamental principles of ethics: Integrity Click the circle for detail explanation 30

16 Code of Ethics for Professional Accountants (5) A professional accountant is required to comply with the following fundamental principles of ethics: Integrity Objectivity Click the circle for detail explanation 31 Code of Ethics for Professional Accountants (6) A professional accountant is required to comply with the following fundamental principles of ethics: Integrity Objectivity Professional Competence and Due Care Click the circle for detail explanation 32

17 Code of Ethics for Professional Accountants (7) A professional accountant is required to comply with the following fundamental principles of ethics: Integrity Objectivity Professional Competence and Due Care Professional behavior 33 Code of Ethics for Professional Accountants (8) A professional accountant is required to comply with the following fundamental principles of ethics: Integrity Objectivity Professional Competence and Due Care Professional behavior Confidentiality 34

18 Integrity A professional accountant should be straightforward and honest in his professional and business relationships. A professional accountant should be fair dealing and truthful. A professional accountant should not be associated with reports, returns, communications or other information where they believe that the information: contains a materially false or misleading statement; contains statements or information furnished recklessly; or omits or obscures information required to be included where such omission or obscurity would be misleading. 35 Objectivity A professional accountant should not compromise his professional or business judgment because of bias, conflict of interest or the undue influence of others. A professional accountant may be exposed to situations that may impair objectivity such as close personal relationship and financial interest involvement. Relationships that bias or unduly influence the professional judgment of the professional accountant should be avoided. 36

19 Professional Competence and Due Care A professional accountant has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. A professional accountant should act diligently and in accordance with applicable technical and professional standards when providing professional services. 37 Confidentiality A professional accountant should not disclose any of professional and business information, that are derived from business, to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose. Confidential information should not be used for the personal advantage of the professional accountant or third parties. 38

20 Professional behavior (1) A professional accountant should comply with relevant laws and regulations and avoid any action that may bring discredit to the accountancy profession. This includes actions which a reasonable and informed third party would conclude negatively and affect the good reputation of the profession. A professional accountant should not bring the profession into disrepute in any marketing and promotional activities. 39 Professional behavior (2) A professional accountant should be honest and truthful and should not: make exaggerated claims for the services they are able to offer, the qualifications they possess, or experience they have gained; or make disparaging references or unsubstantiated comparisons to the work of others. 40

21 Ethical decision-making model in handling ethical issues in accounting activities (1) As the business environment changes rapidly, the possibilities of facing ethical dilemmas invariably increase. This calls for an urgent need for accounting staff to develop the necessary skills for making sound judgments in handling ethical dilemmas in their work 41 Ethical decision-making model in handling ethical issues in accounting activities (2). An ETHICS PLUS decision making model developed by the Independent Commission Against Corruption (the ICAC ) is a helpful tool for tackling and resolving ethical issues. The decision making model is a thinking process to help accounting practitioners reach a chosen course of action in a structured and systematic way. 42

22 The ETHICS process Six major steps to follow (1) Step 1 Establish the relevant facts and identify the ethical issues involved Step 2 43 The ETHICS process Six major steps to follow (2) Step 1 Establish the relevant facts and identify the ethical issues involved Step 2 Take stock of all stakeholders or parties involved Step 3 44

23 The ETHICS process Six major steps to follow (3) Step 1 Establish the relevant facts and identify the ethical issues involved Step 2 Take stock of all stakeholders or parties involved Step 3 Have an objective assessment for each stakeholder s position Step 4 45 The ETHICS process Six major steps to follow (4) Step 1 Establish the relevant facts and identify the ethical issues involved Step 2 Take stock of all stakeholders or parties involved Step 3 Have an objective assessment for each stakeholder s position Step 4 Identify viable alternatives and their effects on the stakeholders Step 5 46

24 The ETHICS process Six major steps to follow (5) Step 1 Establish the relevant facts and identify the ethical issues involved Step 2 Take stock of all stakeholders or parties involved Step 3 Have an objective assessment for each stakeholder s position Step 4 Identify viable alternatives and their effects on the stakeholders Step 5 Compare and evaluate the likely consequences of each alternative with reference to the standards expected (PLUS factors below) Step 6 47 The ETHICS process Six major steps to follow (6) Step 1 Establish the relevant facts and identify the ethical issues involved Step 2 Take stock of all stakeholders or parties involved Step 3 Have an objective assessment for each stakeholder s position Step 4 Identify viable alternatives and their effects on the stakeholders Step 5 Compare and evaluate the likely consequences of each alternative with reference to the standards expected (PLUS factors below) Step 6 Select the most appropriate course of action 48

25 The PLUS standards Four key factors to consider (1) Factor 1 Professional / Trade related / Company s code of conduct Factor 2 49 The PLUS standards Four key factors to consider (2) Factor 1 Professional / Trade related / Company s code of conduct Factor 2 Legal requirement; e.g. Are there any breaches of the laws such as the prevention of Bribery Ordinance, etc. Factor 3 50

26 The PLUS standards Four key factors to consider (3) Factor 1 Professional / Trade related / Company s code of conduct Factor 2 Legal requirement; e.g. Are there any breaches of the laws such as the prevention of Bribery Ordinance, etc. Factor 3 Uncompromising self values; e.g. honesty, fairness, trustworthiness, etc. Factor 4 51 The PLUS standards Four key factors to consider (4) Factor 1 Professional / Trade related / Company s code of conduct Factor 2 Legal requirement; e.g. Are there any breaches of the laws such as the prevention of Bribery Ordinance, etc. Factor 3 Uncompromising self values; e.g. honesty, fairness, trustworthiness, etc. Factor 4 Sunshine test; i.e. Whether the issue can be discussed openly and the decision disclosed without misgivings 52

27 Challenging Corner 1 (1) How we can use the ETHICS PLUS decision making model to resolve an ethical dilemma.. 53 Challenging Corner 1 (2) Peter joined ABC International Co., Ltd recently, a large trading company in Hong Kong as Financial Controller. His colleague, Mary, is a qualified professional accountant and the accounting manager of the company as well as the sister of his wife. Susan, had access to cash held by the company and was responsible for preparing both the receivable and payable accounts. During the year Peter discovered a serious financial problem. 54

28 Challenging Corner 1 (3).. When reviewing the company s financial statements, Peter discovered that Mary had manipulated accounting records and been involved to delay the recording of receipts from debtors and sped up the recording of payments to creditors. This was to conceal the fact that she had withdrawn the money for her private use. When Peter discussed this with Mary, she was asked to keep the secret as the disclosure would affect her career. 55 Challenging Corner 1 (4).. When Susan knew of the case, she asked Peter to help her sister and promised that she would repay all the money to the company on behalf of Mary immediately. Should Peter disclose Mary s misconduct? 56

29 Challenging Corner 1 (5) Use ETHICS PLUS decision making model to resolve this ethical dilemma 57 Challenging Corner 1 (6) Establish the relevant facts and identify the ethical issues in the case: Mary, his sister-in-law, had fraudulently withdrawn money from the company. Susan promised to repay money for Mary immediately. Probably no one would know Mary s act. As a financial controller, Peter s duty is to oversee the operation of the accounting department. Ethical issue: Whether Peter should keep the secret for Mary? 58

30 Challenging Corner 1 (7) Take stock of all stakeholders or parties involved: Peter Mary Susan ABC International Co., Ltd and other staff Accountancy profession 59 Challenging Corner 1 (8) Have an objective assessment of each stakeholder s position: If Peter does not report, he will compromise his professionalism of not being independent and objective. he does not fulfil his responsibilities as a financial controller. the company may suffer financial loss. If Peter reports Mary s misconduct, the personal relationship with Mary and Susan will be destroyed. 60

31 Challenging Corner 1 (9) Have an objective assessment of each stakeholder s position: If Peter reports Mary s misconduct, Mary may face disciplinary action taken by the professional body. may even face prosecution. may have her career prospects being destroyed. may change for the better if Peter gives Mary a chance. 61 Challenging Corner 1 (10) Have an objective assessment of each stakeholder s position: If Peter reports Mary s misconduct, Susan will have her feelings being hurt. may react strongly and break her engagement with Peter. 62

32 Challenging Corner 1 (11) Have an objective assessment of each stakeholder s position: If Peter does not report Mary s misconduct, financial loss may incur to ABC International Co., Ltd. reputation of ABC International Co., Ltd may be impaired for having dishonest staff. tolerance to Mary s act will be unfair to other honest staff. 63 Challenging Corner 1 (12) Have an objective assessment of each stakeholder s position: If Peter does not report Mary s misconduct, it may taint the reputation of the accountancy profession as Mary have breached the professional code and even the law. it may affect public confidence in the accountancy profession and its members. 64

33 Challenging Corner 1 (13) Identify viable alternatives and assess their effects on the stakeholders: 1. Keep the secret and do nothing. 2. Keep the secret and help Mary cover up her act by manipulating the accounting records. 3. Keep the secret and let Susan pay back the company as soon as possible. 4. Keep the secret, ask Mary to resign and review the accounting procedures to prevent similar incidents from happening again.. 65 Challenging Corner 1 (14) Identify viable alternatives and assess their effects on the stakeholders: 5. Refuse Mary s request and report to the management and / or regulatory bodies. 6. Resign from the company. 66

34 Challenging Corner 1 (15) Compare and evaluate the likely consequences of each alternative with reference to the four PLUS standards. PLUS - Professional Accountants Code of Ethics / Company Rules: 1. A professional accountant is required to comply with fundamental principles including integrity; objectivity; professional competence and due care; confidentiality and professional behavior. 2. No professional accountant s objectivity should be affected by personal relationships. 67 Challenging Corner 1 (16) PLUS - Professional Accountants Code of Ethics / Company Rules: 3. Are there company rules requiring Peter, as financial controller, to maintain complete and accurate accounting records and act on behalf of the company with good faith and fidelity? 4. Are there company rules advising Peter what he should do if he discovers wrongdoings committed by other company staff? 68

35 Challenging Corner 1 (17) PLUS - Legal requirements: Mary may have breached the Theft Ordinance (false accounting) If Peter helps Mary cover up the matter, will Peter commit an act of conspiracy under the common law? 69 Challenging Corner 1 (18) PLUS - Uncompromisable self values: Peter should ask himself whether a particular alternative is commensurate with his personal values, such as loyalty to his company and to the profession, honesty, integrity, fairness, care for his family. Which values are important to him? 70

36 Challenging Corner 1 (19) PLUS - Sunshine test Can Peter disclose his decision to any parties, including the company, family, friends and colleagues without misgivings? 71 Challenging Corner 1 (20) Select the most appropriate course of action: After comparing and evaluating each alternative against the PLUS standards, select an appropriate course of action which can maximise the important values and interests of all stakeholders. Make a commitment to the choice and implement it. 72

37 Challenging Corner 1 (21) If you are Peter, what course of action will you take? 73 Challenging Corner 1 (22) After considering different point of views, it is suggested that Peter should blow the whistle and disclose Mary s misconduct to the company and professional accountancy body. Do you agree? 74

38 Corporate Governance (1) Corporate governance is the system by which companies are directed and controlled. It establishes the relationship among various participants in determining the direction and performance of corporation. The primary participants are: the shareholders; the management; and the board of directors. (Monks, 2001) 75 Corporate Governance (2) Good Corporate Governance is important in improving a company s competitiveness, better corporate performance and better relationship with all stakeholders. 76

39 Relationship between Accounting and Corporate Governance (1) One of the responsibilities of the Board of Directors as stated in the Hong Kong Code of Corporate Governance Practice is to present a balanced, clear and comprehensible assessment of the company s performance, position and prospects. It is suggested that financial statements are very important in corporate governance. Do you know why? 77 Relationship between Accounting and Corporate Governance (2) Financial statements report on: the financial performance of the company over the previous financial year; and the financial position of the company as at the end of that year. 78

40 Relationship between Accounting and Corporate Governance (3) Accordingly, financial statements are important documents for corporate governance as: a means by which the directors are made accountable to the shareholders, and providing a channel of communication from directors to shareholders. 79 Relationship between Accounting and Corporate Governance (4) Financial statements should therefore be: clear and understandable to readers with reasonable financial awareness; and relevant and reliable. 80

41 External Auditors (1) The role of external auditors is an important issue for corporate governance. Shareholders might suppose that they can rely on the external auditors to ensure that the financial statements are relevant and reliable. 81 External Auditors (2) The auditors report serves two main purposes: to provide an expert and independent opinion whether the financial statements give a true and fair view. to give an expert and independent opinion whether the financial statements comply with relevant laws. 82

42 External Auditors (3) An external auditor should be independent of its clients, so that audit opinion will not be influenced by the relationship between the auditor and the clients. In this sense, qualified accountants are expected by their professional body to act with integrity and honesty, and to follow a code of ethics in the work they do. 83 Audit Committee (1) Another important element of corporate governance is the existence of audit committee. For listed companies in Hong Kong, an audit committee must be established as required by the Listing Rules. 84

43 Audit Committee (2) The audit committee has the following functions: 1. Recommend the nomination and remuneration of the external auditors; 2. Review the external audit carried out by the auditors; 3. Discuss with the auditors any problems that arise in the audit; 4. Review the company s accounting policies and the need to make changes; 85 Audit Committee (3) 5. Review the company s internal control procedures; 6. Review reports from the company s internal audit department; 7. Review the financial statements. 86

44 Audit Committee (4) The Listing Rules provide that the audit committee should: comprise non-executive directors only. include a minimum of three members, at least one of whom is an independent* nonexecutive director with appropriate professional qualifications or accounting or related financial management expertise. 87 Audit Committee (5) comprise independent* nonexecutive directors as the majority. be chaired by an independent* non-executive director. *An independent non-executive director is a nonexecutive director that does not hold more than 1% of the total issued share capital of the listed company. (Listing Rules) 88

45 Enron Case Enron case is one of the biggest corporate financial scandals in 21 st century. Enron s major problem was caused by a failure of the board of directors to exercise adequate oversight. The board of Enron allowed the misuse of special purpose entities to manipulate financial reports, mislead investors, and self-remunerate the perpetrators. Arthur Anderson, Enron s external auditor, has essentially disintegrated, and the accounting profession, as well as corporate governance, will be forever altered. 89 Sarbanes-Oxley Act (1) Followed a series of very high profile scandals, such as Enron and World.com, the Sarbanes-Oxley Act was signed into law in U.S. on 30 July It introduced highly significant legislative changes to financial practices and corporate governance regulation. The Act is intended to "deter and punish corporate and accounting fraud and corruption, ensure justice for wrongdoers, and protect the interests of workers and shareholders" (President, Bush, 2002). 90

46 Sarbanes-Oxley Act (2) The most important part of the Act is to establish a new quasi-public agency, the Public Company Oversight Board (PCO). The PCO Board is responsible for overseeing, regulating, inspecting and disciplining accounting firms in their roles as auditors of public companies. The Act also covers issues such as corporate governance, auditor independence, internal control assessment and enhanced financial disclosure. 91 References Beauchamp, T.L. and Bowie N. E. (2007), Ethical theory and Business, Prentice Hall. Monks, R. A. G. (2001), Corporate Governance, Blackwell. Hong Kong Institute of Certified Public Accountants (2005), Code of Ethics for Professional Accountants Members Handbook Volume I. (accessed 5 July 2007) (accessed 5 July 2007) 92

47 Further Readings Hong Kong Ethics Development Centre & Hong Kong Institute of Certified Public Accountants (1997), Ethics in Management: A Practical Guide for Professional Accountants. Professional Ethics Programme for the Securities, Futures and Investments Sectors (1999), Ethics in Practice: A Practical Guide for Financial Practitioners. The Stock Exchange of Hong Kong (2006), Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong. Ohio M. (2004), Business & Professional Ethics for Directors, Executives & Accountants, Thomson / South-Western. Bahram, S. (2007), Auditing An International Approach, Prentice Hall. 93 End of the Unit End-of of-unit Assessment This is the end of Unit 6. Please go to the Unit Assessment before attempting the next unit. 94