PROPOSED GOOD PRACTICE GUIDANCE: DEFINING AND DEVELOPING AN EFFECTIVE CODE OF CONDUCT

16th February 2007 Our ref: ICAEW Rep 03/07 Technical Manager Professional Accountants in Business Committee International Federation of Accountants 545 Fifth Avenue, 14 th floor New York, NY 10017 U.S.A By email: Edcomments@ifac.org Dear Sir PROPOSED GOOD PRACTICE GUIDANCE: DEFINING AND DEVELOPING AN EFFECTIVE CODE OF CONDUCT The Institute of Chartered Accountants in England and Wales ( The Institute ) is pleased to respond to your request for comments on the Proposed Good Practice Guidance: Defining and Developing an Effective Code of Conduct. Please contact me or Anne Davis (anne.davis@icaew.com) should you wish to discuss any of the points raised in the attached response. Yours sincerely/faithfully Martyn Jones Chairman, Ethics Standards Committee Email: mjones@deloitte.co.uk Chartered Accountants Hall PO Box 433 Moorgate Place London EC2P 2BJ www.icaew.com T +44 (0)20 7920 8100 F +44 (0)20 7920 0547 DX DX 877 London/City

ICAEW Representation ICAEW REP 03/07 PROPOSED GOOD PRACTICE GUIDANCE: DEFINING AND DEVELOPING AN EFFECTIVE CODE OF CONDUCT Memorandum of comment submitted in February 2007 by the Institute of Chartered Accountants in England and Wales, in response to the International Federation of Accountants consultation paper on Defining and Developing an Effective Code of Conduct published in November 2006. Contents Paragraph Introduction 1 Who we are 2 3 Overall comments 4 12 Responses to specific questions 13 28 Detailed comments 29 48 Chartered Accountants Hall PO Box 433 Moorgate Place London EC2P 2BJ www.icaew.com T +44 (0)20 7920 8100 F +44 (0)20 7920 0547 DX DX 877 London/City

INTRODUCTION 1. The Institute of Chartered Accountants in England and Wales (the Institute or ICAEW ) welcomes the opportunity to comment on the proposed good practice guidance Defining and Developing an Effective Code of Conduct published by the International Federation of Accountants ( IFAC ). WHO WE ARE 2. The Institute operates under a Royal Charter, working in the public interest. Its regulation of its members, in particular its responsibilities in respect of auditors, is overseen by the Financial Reporting Council. As a world leading professional accountancy body, the Institute provides leadership and practical support to over 128,000 members in more than 140 countries, working with governments, regulators and industry in order to ensure the highest standards are maintained. The Institute is a founding member of the Global Accounting Alliance with over 700,000 members worldwide. 3. Our members provide financial knowledge and guidance based on the highest technical and ethical standards. They are trained to challenge people and organisations to think and act differently, to provide clarity and rigour, and so help create and sustain prosperity. The ICAEW ensures these skills are constantly developed, recognised and valued. OVERALL COMMENTS 4. In general, we welcome guidance on defining and developing codes of conduct at an international level. The development and implementation of codes of conduct is an area of increased importance to individuals, organisations and countries yet guidance in this area tends to be limited to certain disciplines and local jurisdictions. 5. We also welcome the incorporation of a significant number of our comments on the previous consultation of this draft and, in particular, the change towards a principles-based approach. The Institute was instrumental in the development of the principles-based threats and safeguards approach in its Code of Ethics some years ago, firmly believing it to be a robust but proportionate means of regulation, allowing for the almost infinite variations in circumstances that arise in practice but preventing the use of legalistic devices to avoid compliance. This approach has since been accepted as the most appropriate by a wide range of regulators and other bodies, including the Fédération des Experts Comptables Européens, the European Commission and IFAC itself. 6. However, whilst the guidance is useful we remain concerned about a number of areas which are summarised below and detailed in the next sections. 7. The draft guidance has been issued as good practice guidance. As a member body of IFAC, it is unclear to us as to what our obligations are for adopting or furthering this type of guidance nationally within the UK. For example, should professional bodies actively promote the existence of this guidance and encourage members to comply with it? It should be clarified that the adoption of this guidance by professional bodies is not mandatory. - 3 -

8. The wording of the principles and of the guidance itself is more relevant for large, international organisations than small and medium sized ones. This point is discussed further in paragraph 14. 9. Although this guidance is aimed at professional accountants in business, professional accountants in practice may also find the guidance helpful since they may also be involved in developing and implementing codes of conduct for use within their firms. It would be helpful to include a paragraph to this effect. 10. The explanatory memorandum ( memorandum ) refers to the importance of ethics for an organisation s reputation and trust. However, the link between ethics and codes of conduct is not made clear. The Committee might like to consider providing a definition of ethics and how this relates to codes of conduct. For example, ethics is about values and principles which are socially acceptable to society. Some of these values and principles are incorporated into an organisation s codes of conduct. 11. The objectives for the good practice guidance referred to in paragraph 4 of the memorandum could be clarified further. It is our view that the guidance would be useful to organisations which are reviewing their existing codes of conduct as well as organisations which are developing codes for the first time. 12. The guidance should refer to the role of professional accountants in encouraging an ethical culture in an employing organisation (paragraph 300.5 from the IFAC Code of Ethics) rather than specific adherence to the values included in the IFAC Code of Ethics (paragraph 5 of the memorandum). Whilst we do not disagree with the general point that professional accountants must adhere to IFAC s Code of Ethics, this misses the point. As mentioned in the draft guidance, professional accountants may have an important role in promoting the organisation s code of conduct. However, there cannot be an automatic presumption that IFAC s values contained in the Code of Ethics are included in an organisation s code of conduct, even if these organisations are involved in the financial reporting supply chain. IFAC member bodies only have jurisdiction over their members and member firms, not other commercial or charitable organisations. RESPONSES TO SPECIFIC QUESTIONS Q1: Do the principles cover all the fundamental areas in developing and defining a code of conduct? 13. The principles broadly cover all the areas that an organisation should consider when defining and developing a code of conduct. However, the Committee might like to consider the points set out below. 14. The wording of the principles contained in the guidance makes it more relevant for large, international organisations than small and medium sized ones. For example, reference is made to a values-based organisation in principle A, to ethics and values program in principle B and a multidisciplinary and cross-functional group in principle D. Furthermore, principle E is only of relevance to international organisations. Whilst we are a strong advocate of the principles based approach, the wording used in the suggested principles is not robust enough to provide a framework for all organisations since it is biased towards larger, international organisations. - 4 -

15. Whilst it is commendable that IFAC suggests that an organisation should develop a value-based organisation and a values driven code (principle A), such a statement could be misinterpreted by an international audience. The term value has different meanings. From the perspective of shareholders, value commonly refers to a company s worth rather than ethical values. Therefore, we suggest that the guidance refers to principles rather than values. 16. Principle A could contradict principle B which states that a code of conduct should reflect the organisational context. It is our view that an organisation s code of conduct should reflect the organisation s strategy, objectives, operational framework, polices and procedures, culture as well as the industry and geographical context in which it operates. To require organisations to develop a values-driven culture and values-driven code seems unduly inflexible. 17. It is our belief that organisations should be able to choose their own approach for developing a code of conduct. The Committee might like to consider rewording and perhaps combining principle A with principle B as follows: The design, content, implementation and review of an organisation s code of conduct should reflect the organisation s needs and the culture that it wishes to promote. This would acknowledge that different organisations have different requirements of codes of conduct. 18. Principle E should refer to establishing a process for reviewing a code of conduct as well as defining and reviewing a code. Principle E should encourage organisations to review their code to ensure it is still relevant and appropriate to the organisation. 19. Whilst we are of the view that a code should apply across all jurisdictions (principle F), perhaps this should be amended to acknowledge that the different legal and regulatory requirements of different jurisdictions may override standard requirements. The Committee might like to consider amending principle F as follows: A code should apply across all jurisdictions, unless contrary to local laws and regulations. Such an amendment would be in line with IFAC s own Code of Ethics for Professional Accountants. Q2: Is the application guidance for each principle adequate to guide good practice? 20. In general, the guidance supports each principle. However, in certain areas it could be improved. 21. As part of principle A and/or B, it would be beneficial to reintroduce the content in the previous draft on different approaches to developing a code of conduct, namely, managing for compliance and managing for stakeholder relations. This would ensure that the guidance is more balanced and relevant to all types of organisations. For example, developing a values-based code of conduct for small, start-up organisation may be too stretching as opposed to a large, international organisation with significant resources. If IFAC is of the view that creating a values-driven organisation is preferable and desirable, this should be stated as such rather than prescribing that all organisations should follow such an approach. - 5 -

22. It would also be helpful to define what is meant by a values-based organisation and managing for compliance (see also paragraph 15 and 21) since this is not very clear in the guidance. 23. Some of the guidance in Principle D which refers to an organisation s risk assessment (paragraph 3.24) and the organisation s processes and activities (paragraph 3.25) might be more appropriately included as part of the guidance in Principle B since both are important considerations for developing a code of conduct which is appropriate to the organisation. 24. It is our opinion that guidance on presentation and content of specific codes referred to in the previous draft should be reintroduced in support of principle E. In particular, organisations are likely to find guidance in relation to precision and clarity and the use of plain, positive language particularly helpful. 25. The Institute endorses the Committee s views that training and awareness programs (paragraph 3.47) are important for the successful implementation of codes of conducts in organisations. However, it might be helpful to expand further what areas should be included in such training, for example, different frameworks for resolving ethical dilemmas as well as what type of training is most suitable, for example, ethical dilemma case studies, e-learning modules and so on. This would also provide an opportunity to link to the Ethical Conflict Resolution framework included in Part A of IFAC s Code of Ethics. The need for ongoing training and follow up should also be highlighted. 26. The guidance included in paragraph 3.58 under principle F should be relocated as part of principle E which focuses on issues to be considered when defining and developing a code of conduct. Q3: Are the appendices useful? Could they be expanded or should they be removed? 27. Although we prefer brevity, we endorse the retention of the appendices A-C and E which provide useful information on different approaches to codes of conduct. Appendix A seems to be a mixture of values, issues and stakeholder approaches to Code of Ethics. The Committee should consider clarifying this point. Appendix E should include ISBN numbers where possible. Appendix D should be incorporated in the guidance in an appropriate place to explain the stakeholder approach to developing codes of conduct (see also paragraph 21). 28. Furthermore, it would be helpful to have appendices illustrating other approaches to codes of conduct such as managing for compliance and managing for stakeholder relations referred to in the previous draft. The Committee might like to refer specifically to the different approaches highlighted in Institute of Business Ethics publication Developing Codes of Business Ethics (www.ibe.org.uk) as part of Appendix E as well as the ICAEW s Finance and Management website pages (www.icaew.com/fmfac) which includes some useful reference material in this area. - 6 -

DETAILED COMMENTS Unless otherwise stated, initial numeric references below after the paragraph number are to paragraph numbers in the proposed good practice guidance. Why the topic is important 29. 1.1-1.6 Whilst the benefits associated with codes of conduct are discussed in this guidance, we do not believe the explanation in this area to be powerful enough since it lacks structure and clarity. The Committee might like to consider structuring this section in terms of benefits to individuals, organisations and society. From an individual s perspective, recruitment surveys suggest that individuals would like to work for organisations which have codes of conduct which are consistent with their own personal values. 30. 1.1-1.6 At an organisational level, codes of conduct provide guidance to employees as to the values and standards of behaviour which are expected of them. In addition they help to: reduce risk to the organisation; guard an organisation s reputation; improve stakeholder relations and may create opportunities for that organisation; secure long-term shareholder value; and enhance trust. 31. 1.1-1.6 We do not believe there is universal agreement on how codes of conduct are perceived by existing and potential employees, suppliers, customers, investors and other stakeholders. There is evidence that some stakeholders will only do business with firms who have a code of conduct; others will contract simply on the basis of need a price. However, absence of a code puts an organisation more at risk of litigation or damage to the brand value. Recognition of these realities would enhance the business case of why this topic is important. 32. 1.1-1.6 From a maco-economic perspective, the existence of codes of conducts in organisations influences market mechanisms and the efficient allocation of resources. For example, the effective implementation of codes of conduct may help to reduce the risk of corporate scandals and minimise the potential for the introduction of additional regulation and/or legislation which may result from such scandals. 33. 1.7-1.8 The business case for developing codes of conduct should be incorporated into the section on Why the topic is important, as suggested above. The role of the professional accountant in business 34. 1.9 The reference to the statement in the last sentence of paragraph 300.5 of the IFAC Code, whilst relevant and important, is not strictly factually correct. Paragraph 300.5 refers to the position and the role of senior management in - 7 -

an organisation which provides an important context for the ability of a professional accountant to be able to influence the ethical culture of the organisation. Paragraph 300.5 of the IFAC Code states A professional accountant in business often holds a senior position within an organisation. The more senior the position, the greater will be the ability and opportunity to influence events, practices and attitudes. A professional accountant in business is expected, therefore, to encourage an ethics-based culture in an employing organisation that emphasises the importance that senior management places on ethical behaviour. The wording in this paragraph should be amended accordingly or perhaps combined with paragraph 1.10 which refers to the different roles professional accountants play in business. 35. 1.9 Reference to paragraph 300.6 of the IFAC Code does not appear to be relevant within the context of the role of professional accountants in defining and developing codes of conduct. As detailed in the IFAC Code, safeguards should only be implemented to reduce or eliminate a threat to an acceptable level (assuming this threat is not clearly insignificant.) The link between paragraph 300.6 and codes of conduct is not immediately obvious. The Committee might like to consider clarifying the purpose of this point or removing reference to paragraph 300.6 altogether. 36 1.13 As mentioned in our previous response to this consultation, We would expect most professional accountants, whether they are in business or in public practice, to be able to : recognise potential ethical problems with the organisation they support; apply a framework or a decision-making process for resolving conflicts; articulate the reasons for making particular decisions from the perspective of a code of conduct. 37 1.13 As referred to in paragraph 1.9, we question whether all professional accountants in business, especially those in junior positions, would have the ability and authority to: identify, monitor, and communicate the expectations of stakeholders, as well as the costs, benefits and risks related to meeting those expectations; monitor and report on compliance with their organisation s code of conduct; and assess whether the proposed action on current and future initiatives effectively manages the risks faced by the organisation. 38 1.13 We suggest that the draft discusses the role of accountants at a higher level, without being too prescriptive. For example, as leaders in an organisation a professional accountant in business may be responsible for developing, implementing and demonstrating commitment to the organisation s code of conduct. Alternatively, as internal auditors, professional accountants in business may be responsible for monitoring and reporting on the compliance of the organisation s code of conduct. 39 1.13 One area in which the role of the professional accountant can be more prescriptive is the recommendation that professional accountants in business - 8 -

should support the organisation s code of conduct through their own behaviour. The inclusion of such a suggestion may then also provide a link to the IFAC Code of Ethics referred to in this section. Furthermore, it may be worthwhile exploring and providing guidance on what a professional accountant in business should do if the organisation s code of conduct is in conflict with the principles contained in the IFAC Code of Ethics. 40 1.14 IFAC s Statement of Membership Obligations (SMO 4) requires professional bodies to adopt the same, similar or equivalent requirements to the IFAC Code of Ethics. The wording in this paragraph which refers to the professional bodies obligations as members of IFAC should be amended accordingly. Following on from this point, it seems unlikely that there will be significant differences between the principles of the IFAC Code and the professional body s code of ethics (or equivalent) that is a member body of IFAC. Reference to a professional accountant having to comply with their professional bodies code of ethics (or equivalent) and their employing organisation s code of conduct would seem more pertinent in this paragraph (please see previous comments relating or paragraph 1.13). 41 1.14 We are of the view that it is unrealistic to expect professional accountants to be aware of all other relevant codes and therefore we recommend the deletion of this penultimate sentence. 42 3.20 This paragraph should be broadened and make reference to different types of communication methods which could be used instead of an introductory letter from the CEO for example, e-mails, video, CEO forums and so on. Minor drafting points 43 1.1 We suggest that that the sentence be amended as follows An increasing number of organisations realise the importance and benefits of explicitly communicating their values and guiding principles. since reference to value in this paragraph has a dual meaning. 44 1.2 We do not agree with referring to the U.S. Federal Sentencing Guidelines as an incentive scheme. Perhaps this should be reworded to The increased focus on ethics, corporate governance and corporate responsibility has encouraged organisations to establish and enforce codes of conduct. In some countries this has been achieved through requirements via regulation and legislation whilst in others through market mechanisms such as movements in share price. 45 1.6 Paragraph 1.6 suggests that codes have long been a feature in organisations, particularly larger ones whereas the memorandum notes that codes of conduct have only been a feature for a relatively short period, probably limited to the last twenty years or so. This needs clarifying. 46 1.6 It is unclear as to why the second half of this paragraph which refers to authoritative international guidance and the role of professional accountants in business should be included under this section. We would recommend that these last few sentences of this paragraph be deleted. - 9 -

47 2.1 To improve clarity, the last sentence in this paragraph should be changed to Some organisations have a separate ethics policy and code of conduct. Typically, an organisation s ethics policy would set out the organisation s principles and values whilst an organisation s code of conduct would outline standards of behaviour and practices. 48 3.23 Whilst we realise that this paragraph is not intended to provide a comprehensive list of the representatives of a working group involved in the development of a code of conduct, the Committee might like to include procurement function in this list on the grounds that they are more likely to be involved in areas which gives rise to conflicts of interest such as offering and receiving inducements and hospitality events. (ICAEW Rep 03/07: Proposed Good Practice Guidance: Defining and Developing an Effective Code of Conduct) - 10 -