CIMA C05 Course Notes

Transcription

1 CIMA C05 Course Notes Chapter 1 Ethics in Business by CIMA under the CIMA code of ethics 5

2 1. The Importance of Ethics What are ethics? Ethics are a set of moral standards or norms, which guide human behaviour. They are concerned with what is right and wrong. Ethics differ from morals in being less individual and without specific religious connotations. There is no one standard answer for ethical questions. Professional ethics reflect the views and rules of the professional organisation. As an accountant you are expected to abide by the ethical practices and procedures outlined in the CIMA code of Ethics. A code of ethics: Defines accepted/acceptable behaviours Promotes high standards of practice Provides a benchmark for members to use for self evaluation Establishes a framework for professional behaviour and responsibilities By following the CIMA code you will practice the good virtues embodied in this code. Studying the code will give you a good sense of what is considered ethically right and wrong behaviour. The fundamental principles of this code will be fully explained in chapters one and two. Tips when studying this section It is important that you do not see ethics as a topic distinct from other areas of business. You will be expected to understand how ethical ideas affect every decision you make as an accountant. The syllabus expects you to distinguish between: Law (criminal and civil) Regulations Codes of conduct Personal ethics/beliefs All these areas will be covered in the following chapters. by CIMA under the CIMA code of ethics 6

3 2. Laws, regulations and ethical behaviour The Law In order to live and work together humans have developed frameworks of rules to regulate behaviour. Without these frameworks things would spiral out of control. Laws have evolved to protect society from illicit conduct. The law represents the minimum standard of behaviour required within a particular society. Breaking the law is illegal and therefore a punishable offence. What is considered unlawful however, will vary from society to society. Even within the same society not everyone agrees with every law. Regulations Regulations are standards set by organisations within particular contexts. Most organisations expect their members to abide by its regulations. For instance, as a member of CIMA you should follow its code of conduct. In some businesses, regulations can also applied by external regulators. This is common amongst old state owned industries such as energy, telecommunications, water and railways. In the UK, for example, OFCOM regulate the telecommunications industry controlling the way the companies run and manage operations to ensure they operate fairly. Ethical behaviour Ethical behaviour goes further than meeting laws and regulations. Ethical behaviour is the highest level of conduct. Aristotle identified fundamental virtues in a person, e.g honesty and integrity, and these create ethical conduct. The ethical code of CIMA is based on similar fundamental virtues. This code is examined at the end of this chapter. Professional ethics are standards of conduct agreed by a profession, such accountancy or medicine. In the case of CIMA, the professional ethics required of accountants are specified in the CIMA code of ethics. by CIMA under the CIMA code of ethics 7

4 Trust Issues in business The business world is fraught with ethical dilemmas. Nevertheless, the public expects businesses to conduct their work in an ethical manner. In the past many businesses were family concerns. People with an interest in the business, such as suppliers, customers and investors (known as stakeholders) were expected to trust that business would be conducted honestly and ethically. This is an example of a trust me business model; where decisions are accepted at face value. The family-style business model has largely been replaced by a more managerial system where the key stakeholders expect to be informed about the business progress and are involved in business decisions. This ensures that the business meets their needs. This is referred to as a involve me business model. The approach here is to interact and collaborate with stakeholders, for instance inviting staff to meetings concerning new procedures, or asking shareholders to regular meetings to discuss the company s position and strategy. As a result of business failures and scandals, both stakeholders and the general public are no longer as trusting. Accountability and independent verification in business has become more critical. This is sometimes referred to as the show me or prove to me business model. For example, external auditors are required to review the accounts of most large businesses, thus assuring shareholders of the validity of the information being presented to them. The final resort is the obey me business model, where laws are made to prohibit businesses from unethical behaviour and protect the interests of financial stakeholders. For example, after the 2008 financial crisis, banks are now coming under increasing regulation to help prevent a recurrence. by CIMA under the CIMA code of ethics 8

5 The last few years have highlighted the cost of acting unethically. A spate of business failures and financial misdemeanours led to severe public mistrust in the financial world. It is therefore essential that members of CIMA not only uphold the code but act as role models for correct professional behaviour. 3. Why ethics are important in accountancy Since the 1980 s, a number of high profile business scandals (e.g. Enron, Worldcom) resulted in decreasing public confidence in the accountancy profession. This highlighted the need for ethical strategies and policies, and increased regulation, training and guidance. Case example: The Enron scandal The rise of Enron, based in Texas, seemed too good to be true. In a relatively short space of time Enron became the seventh largest company in the USA. However this expansion was fuelled by huge debts. By using subsidiary companies, Enron was able to hide it s loses from its balance sheet and its shares on the stock market rose rapidly. In 2001, Enron was forced to disclose that its accounting practices had been very creative, and failed to follow generally accepted accounting principles. Enron filed for bankruptcy with debts of $3 billion. Legal investigations uncovered criminal offences include money laundering and fraud. by CIMA under the CIMA code of ethics 9

6 The Enron scandal led to the collapse of the Enron Corporation and the dissolution of a huge auditing and accountancy corporation, Arthur Andersen. 4. Values and attitudes for professional accountants To qualify as a Chartered Management Accountant you will be expected to maintain correct ethical behaviour as set out in CIMA s fundamental principles. Accountancy requires making decisions often based on personal judgment. While these decisions may not be illegal, they may be deemed to be against the public interest. Accountants should behave ethically because Society expects professional accountants to behave ethically as they hold positions of responsibility and status The professional bodies expect it of their members, to uphold the reputation of the profession Accountants need to build confidence in the profession so that it is respected and can grow. Unethical behaviour tarnishes the reputation of the profession Although not all are legally binding, breaking a professional ethical code can lead to a disciplinary procedure, or in the case of CIMA, to expulsion Understanding and applying ethics CIMA recognises that being ethically aware of and understanding the ethical context in which business decisions are made, runs through everything accountants do in their working lives. Ethics is integral to the entire CIMA syllabus and any question in any paper could have an ethical dimension to it. You will be expected to apply your knowledge of ethics to a range of different contexts and dilemmas. 5. Regulations and Legal frameworks Legal frameworks There are two basic theoretical approaches that can be followed when developing a code of ethics. They are A rules-based approach A framework-based approach by CIMA under the CIMA code of ethics 10

7 Rules-based or compliance-based approach In a rules-based approach the governing body lays down the rules by which members of that body must comply. Hence it is also known as the compliance-based approach. The governing body produces a code in which every ethical situation is anticipated and covered by specific rules. In effect, members are legally bound to follow this ethical code, so following the code is mandatory. This is sometimes referred to as a tick box approach because correct behaviour can be checked or ticked off by oneself or others. Advantages of the rules-based approach include: Employees can consult a rule-book if necessary, helping them be clear what is or is not accepted behaviour Employees clearly know what is expected It encourages consistent application of rules It is easier to identify when a rule has been broken Disadvantages include: Not all guidelines can be covered by legislation, as this is costly and time consuming, creating uncertainty and doubt in some instances It is difficult to expect members of an organisation to memorise every rule by rote It does not allow members of the organisation to think for themselves Legislative example The US Sarbanes-Oxley Act is an example of the rules-based approach. Also known as the Public Company Accounting Reform and Investor Act, this act set out new and enhanced standards for all public company boards, management and public accounting businesses. This bill was enacted as a result of high profile business scandals including the Enron scandal. It became a federal law. Critics of this bill argue that has hindered business by producing an overly complex regulatory system. Others regard its as a blessing for reestablishing confidence in fund managers investors. Voluntary or ethical framework If a voluntary ethical framework is used, the organisation does not impose legally binding rules on its members. Instead the fundamental values that by CIMA under the CIMA code of ethics 11

8 members are expected to follow are set out as principles and general guidelines. In the UK there are many examples of voluntary frameworks. Case Example 1. The Combined Code is the main source of corporate governance in the UK. This code is not a legal requirement. However all companies listed in the stock exchange are encouraged to follow it and could face pressure from stakeholders if they fail to do so. Case Example 2. The CIMA code of ethics is also a value-based framework, based on key standards and best practice. Advantages of voluntary frameworks include: Allowing individuals to decide for themselves what is appropriate encouraging people to take their own responsibility for what is right and wrong It is flexible and can be easily adapted to suit changing times and different scenarios It avoids restrictive, costly rule-based legislation (such as the Sarbanes-Oxley Act) Disadvantages: Having no rule -book to follow means that members of the organisation must sometimes make ethical decisions based on their discretion and judgement, and which can be subjective in nature. It may then be difficult to argue whether a decision made was right or wrong or apply disciplinary procedures. Decisions made by different individuals may differ, creating inconsistencies when applying the standards. 6. UK regulation of accountants There are various sources of regulation of accountancy and auditing in the UK. The ones you need to know are: The Financial Reporting Council (FRC) The FRC is responsible for providing an ethical framework for the UK accountancy profession. There are two sub-bodies of the FRC which undertake the accountability of professional accountants: 1. The Professional Oversight Board for Accountancy (POB) by CIMA under the CIMA code of ethics 12

9 The role of POB is to regulate specific activities of the accountancy bodies regarding their members' including training and education, Continuing Professional Development (CPD), discipline and conduct. 2. The Auditing Practices Board (APB) An audit is systematic evaluation of data, statements, records and performance (financial or otherwise) of an individual or organisation. Auditing is an important aspect of accountancy work. An external auditor is a professional auditor who can present an unbiased independent audit report. This report is important to investors and others with interests in the organisation or company s performance. In the UK the Auditing Practices Board was established to oversee the auditing procedures followed by accountants and others when undertaking audit work. The functions of the Auditing Practices Board include Setting standards of auditing procedures and principles in the UK and Ireland Applying these standards in practice Influencing statute and regulations affecting external auditors Promoting public awareness of auditing through research and development The International Federation of Accountants (IFAC) The IFAC represents accountancy worldwide. Its mission is to develop the high standards of professional accountants and enhance the quality of services they provide. As such UK accountancy bodies respond to rules and guidance set out by IFAC and incorporate their policies within their own. The CIMA code of ethics, for example, originate from a set of guidelines originally laid out by IFAC. 7. The Seven Principles of Public Life The UK Committee of Standards in Public Life was established in 1994 in response to concerns about the unethical behaviour of some politicians. The committee set out the standards to be followed by holders of public office, such as ministers, civil servants, MPs. by CIMA under the CIMA code of ethics 13

10 These standards are known as The Seven Principles of Public Life. The Seven Principles of Public Life are Selflessness - acting only in the public interest Integrity - avoiding obligations to outside individuals or organisations that might seek to influence them in the performance of their duties. For example not accepting gifts or hospitality of clients Objectivity - all choices should be made on merit. This includes the awarding of contracts or recommending individuals for awards and benefits Accountability being responsible for one s own actions and accountable to others. For example keeping detailed and accurate records of all business transactions Openness concerning one s decisions and actions. For example, letting others know the reasons for one s decisions Honesty - truthfulness in all one s dealings. For example, declaring one s private interests Leadership - promoting and supporting these principles through one s own example Although most accountants do not live a public life they are a good set of principles which professionals such as CIMA members are encouraged to follow. 8. Professional values required by CIMA members Professional organisations such as CIMA have an overriding responsibility to protect the public interest. To ensure that members are conducting themselves in a professional and ethical manner they have developed codes of conduct for members to follow. In this section we examine the professional values required by members of CIMA, and explain their importance to members, the organisation and the public. Personal Development and Lifelong Learning Personal development is an essential part of professional life. It includes development of a wide range of personal and interpersonal by CIMA under the CIMA code of ethics 14

11 qualities, such as time management, communication and relationship skills. In accountancy personal development is very important because accountants have duties and responsibilities to members of the public and to the profession as a whole. There is a public expectation that accountants will perform their work with competence and due care. Businesses and consumers rely on them to do so. In particular accountants are expected to develop and display the following qualities: Reliability. Accountants should deliver work on time and at the standard required. Responsibility. Accountants should take ownership of their work and be accountable for it. For example, personally fulfilling tasks they have been assigned by an employer Respect. Accountants should recognise the rights and needs of others and respect them. For example, listening to the views of others respectfully Timeliness. Clients expect accountants to be able to produce work within an agreed time. This means that accountants should be prompt, organised, and be able to prioritise tasks Courtesy. Accountants should have good manners, and conduct themselves with due consideration and courtesy. For example, speaking politely to clients on the phone Professional values of accountants There are also four professional values, which particularly apply to those of us working in the accountancy profession. These four professional values are: Independence Accountants should be being able to act with an independent mind. Examples might include, accepting gifts that might compromise their judgement, reviewing the work of or auditing an individual or group with whom they have a close relationship Skepticism Accountants should exercise with professional scepticism, and question information they are given. For example, not blindly accepting a reason for a difference on a budget given by a department head, but instead looking for independent evidence or simply applying logic for reason for the difference. by CIMA under the CIMA code of ethics 15

12 Accountability Accountants should take responsibility for their own actions, judgments and decisions, and be accountable for them. For example they should not pass their own poor work off as being done by another individual. Social Responsibility As members of society individual accountants are expected to behave in a socially responsible manner, so for example, recycling stationary and other materials in an environmentally friendly manner. Lifelong Learning Life long learning is the concept that an individual should be open to the pursuit of learning throughout their personal and professional life. Accountants are expected to update their technical and practical skills, keeping pace with changes in the profession and the business world. It is their duty as professional accountants to do so. CIMA s Professional Development cycle In 2006 CIMA introduced its own professional development cycle. The aim of this cycle is to encourage professional development and lifelong learning in its members. As part of this cycle members are expected to: Define their present roles and competences. A competency is something that the individual must be good at to undertake their role well Assess themselves against competencies, including any knowledge gaps. Filling these gaps will form the basis of the learning outcomes they hope to achieve Design a programme of activities with the aim of working towards their learning objectives Act out the activity programme Reflect on their activities how their learning can be applied or what further training required, perhaps as part of a formal work appraisal Evaluate their professional development against these activities and plan further training as part of the next cycle by CIMA under the CIMA code of ethics 16

13 Professional Development activities Professional Development activities can span a wide range of activities. Those recognised by CIMA include: Reading professional publications Studying for professional or academic qualifications Computer based training and training colleagues and students Research and project work Attendance at CIMA events 9. IFAC code of Ethics The IFAC code of ethics was published in 2005 and revised in IFAC members across the world must comply with the code. The mission of the IFAC is to Develop high standards of professionalism in accountancy Enhance the quality of services provided by accountants The code (which CIMA has adopted) has the aim of identifying the responsibilities that a person employed as an accountant takes on. The code is in 3 parts: General Application of the code This introduces the fundamental principles as outlined in the Code of Ethics below. Professional Accountants in Public Practice This provides guidance on following these principles for accountants working for an accountancy practice, for example, advice on fees and remuneration, conflicts of interest, hospitality, objectivity etc. Professional Accountants in Business This section is particularly relevant to those working in commerce (business sector). For example, it gives guidance on preparing information, financial inducements etc. 10. Codes of Ethics (2006) CIMA Code The CIMA Code of Ethics is based on the IFAC Handbook of the Code of Ethics by CIMA under the CIMA code of ethics 17

14 for Professional Accountants, 2010, with some small amendment to reflect local regulations. The code acts as a foundation for professional judgment, decision-making, reasoning and practice. It is an ethical framework rather than a compliance or rules-based code. Nevertheless the consequences of not following the code can be serious, especially in the case of complaints. The Code itself is split into three parts (which you will note are the same as the IFAC code outlined earlier): General Application This section acts as an introduction to the five fundamental principles Professional Accountants in Public Practice This section covers issues relevant to public practice including conflicts of interest, objectivity, fees and gifts. Professional Accountants in Business This section covers issues such as preparing and reporting information. The rationale and importance of a CIMA code As a Chartered Institute it is imperative that CIMA protects the interests of the public. The employability and reputation of CIMA members is enhanced due to the high ethical standards laid out in the CIMA code. A member who does not follow the code would have no defence if a case of professional misconduct were brought against them. Fundamental Principles of CIMA code of Ethics The CIMA code of ethics identifies 5 fundamental principles to which a professional accountant should comply: 1. Integrity This means being straightforward and honest in all professional and business relationships. The accountant should not be associated with information they believe contains a false or misleading statement, or which is misleading by omission. Integrity also means acting consistently. For example, an accountant should not misstate information because they have been asked to do so by a superior is that information is not correct. 2. Objectivity by CIMA under the CIMA code of ethics 18

15 This means being unbiased and acting in an impartial manner. There should be no conflicts of interest or illicit relationships that might influence members in their professional or business judgements. For example, an accountant should not accept (or offering) excessive hospitality from people with whom they might have to review their work as this could lead to bias creeping in or feelings of embarrassment, which might prejudice their independence. 3. Professional Competence and Due Care This means ensuring that one s professional knowledge, skills and technical standards are maintained at the level required to practice with full competence. Keeping up to date with developments in practice, legislation and techniques. Any limitations in technical and professional standards should be disclosed and remedied. For example, attending professional courses to update knowledge of the latest accounting rules. 4. Professional Behaviour This means avoiding actions that could discredit the profession, and complying with relevant laws and regulations. They should be honest and truthful. For example, the accountant should not make exaggerated claims about their qualifications or the services they offer and should not make disparaging references to the work of others or say anything dishonest or untrue. 5. Confidentiality This means respecting confidentiality and safeguarding information obtained through professional and business relationships. The accountant should not use information for their personal advantage. They should not disclose unauthorised information, acquired from professional relationships, to others outside the company or employing organisation. This includes breeching confidentiality in a social situation. For example, you should not discuss a colleague s financial information with a family member. The principle of confidentiality continues even after a business relationship has been terminated. Disclosure The exception to maintaining confidentiality is when there is a legal or professional right or duty to disclose. CIMA s code of conduct lists the particular circumstances in which confidential information could be disclosed. They are: by CIMA under the CIMA code of ethics 19

16 Where disclosure is required by law, such as in a case of legal infringement Where disclosure is permitted by law, such as during a legal investigation where one is protecting one s professional interests Where disclosure is authorised by a client or employer Where disclosure is professionally permissible Disclosure by law The disclosure principle in accountancy states that all material information should be disclosed in financial statements. This includes accounting policies, balance sheets, details of cash flows and income statements. In full disclosure any event that might affect financial statements should be revealed. by CIMA under the CIMA code of ethics 20

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