Integrity: Being honest and straightforward in all professional relationships.
Objectivity: Not allowing bias, conflict of interest, or undue influence to override professional judgment.
Professional Competence and Due Care: Maintaining professional knowledge and skill at the level required.
Confidentiality: Respecting the confidentiality of information acquired as a result of professional relationships.
Professional Behavior: Complying with relevant laws and regulations and avoiding any action that discredits the profession.
International Ethics Standards Board (IESBA): Issues global ethics standards for accounting professionals.
| Level | Responsibilities | Application |
|---|---|---|
| Public Accountant | Audit, assurance services | International Standards on Auditing |
| Accountant in Business | Financial reporting, management accounting | Corporate code of conduct |
| Public Practitioner | Tax consulting, accounting services | Professional practice laws |
Independence: A state of mind that permits the expression of a conclusion without being affected by influences.
- Independence in Appearance: Avoiding facts and circumstances that would reduce confidence
- Independence in Fact: Mental state of integrity and objectivity
- Threats to Independence:
- Self-interest threat
- Self-review threat
- Advocacy threat
- Familiarity threat
- Intimidation threat
1. Identify threats
2. Evaluate threat level
3. Apply safeguards
4. Withdraw from engagement if necessary
| Threat Type | Examples | Safeguards |
|---|---|---|
| Self-Interest | Financial interests, loans, gifts | Disclosure, supervision, review procedures |
| Advocacy | Promoting client's securities | Separation of duties, clear policies |
| Familiarity | Close family relationships | Rotation, additional supervision |
Confidentiality Principle: Accountants must not disclose confidential information outside the firm.
- Scope of Confidentiality: All information obtained during professional practice
- Confidentiality Exceptions:
- With client consent
- Legal duty to disclose
- To protect public interest
- Self-defense in professional dispute
- Information Protection: Secure documentation, confidentiality policies
Scenario: An accountant discovers financial fraud in a client's entity.
Ethical Dilemma: Between duty of confidentiality to client and duty to report crime.
Solution: Report to appropriate authorities after attempting internal correction.
Continuing Professional Development: Maintaining competence through continuous learning.
| Responsibility | Requirements | Importance |
|---|---|---|
| Continuing Education | Specified annual learning hours | Keeping up with professional developments |
| Standards Compliance | Proper application of professional standards | Quality of professional services |
| Supervision & Training | Developing new generations | Sustainability of the profession |
Advertising and Solicitation: Professional and truthful representation of services.
Prohibited Practices:
- False, misleading, or deceptive advertising
- Making exaggerated claims about services
- Disparaging other professionals
- Offering commissions for client referrals
1. Identify ethical issues
2. Gather relevant facts
3. Identify affected parties
4. Identify alternatives
5. Evaluate consequences
6. Make decision
7. Monitor outcomes
Scenario: An internal accountant discovers financial misstatements.
Protection Mechanisms:
- Confidential reporting channels
- Legal protection against retaliation
- Independent investigation processes
- Preservation of employment rights
| Organization | Standards | Application |
|---|---|---|
| IFAC | International Code of Ethics | Global professional standards |
| AICPA | Code of Professional Conduct | United States accounting profession |
| IESBA | International Ethics Standards | Worldwide ethical framework |
Email Communication: 30 September 20X5
As you will know, we have issued 1.5 million new equity shares at full market value on 1 February 20X5, taking our total number of shares in issue to 6 million shares. It is very important that the upcoming set of financial results of Gamma show a favourable financial performance to impress the new shareholders. There are a couple of relatively complex events which have occurred in the year ended 30 September 20X5 which you may be unsure how to deal with in your preparation of the draft financial statements. These events are described in the two attachments to this email. I have also included the way in which I would like you to deal with them in the financial statements. Assuming you follow my instructions, then the profit for the year (after tax) of Gamma for the year will be $1.8 million. Given that the number of shares in issue at the start of the year was 4.5 million, that would give EPS of 40 cents, which is highly satisfactory. Given you also own shares in Gamma, this should be to your advantage.
You should be aware that your annual performance appraisal, which I am responsible for, is due shortly.
- You are in danger of breaching the fundamental ethical principle of objectivity. You have a personal interest in reporting a favourable profit because you own shares in Gamma and a favourable profit could result in enhanced dividends and shareholder value.
- You face a further danger of breaching the principle of objectivity because of the way the FD has linked your compliance with his instructions to your upcoming staff appraisal (intimidation threat).
- You also may be breaching the fundamental ethical principle of professional competence and due care. The treatments suggested by the FD are clearly inappropriate and not in compliance with IFRS standards. Implementing them would breach your professional duty to conduct yourself in a competent manner.
Power Plant Construction Case
On 1 November 20X4, Gamma commenced the construction of a power plant. The total cost of constructing the power plant was $30 million. Gamma completed the construction of the power plant on 28 February 20X5 and began to use the power plant on 31 March 20X5. The estimated useful life of the power plant is 20 years from the date it is first depreciated.
The construction of the power plant caused environmental damage. The directors of Gamma estimate that, should the damage be rectified at the end of the useful life of the power plant, the cost would be $20 million. There are no legal requirements for such work in Gamma's jurisdiction. However, in the past whenever Gamma has caused environmental damage, the company has always rectified the damage, whether or not legally required to do so.
An appropriate discount rate is 8% per annum. Using this rate at 28 February 20X5, the present value of $1 payable in 20 years' time is approximately 21 cents.
The finance director has requested you not to include any implications of the environmental damage in the financial statements. He stated that Gamma plans on paying a profit-related bonus to all employees and said: "I feel sure you agree with me that we need to report as healthy a profit as possible to ensure our efforts are rewarded with an appropriate bonus."
The situation means that the fundamental principles of objectivity and professional competence and due care are under threat.
- The financial controller faces a self-interest threat because they are due to receive a bonus based on reported profit.
- There is a potential inducement to prepare financial statements in a way that maximizes reported profit.
- Inclusion of an environmental provision would lead to a finance cost and additional depreciation, both of which would reduce reported profits.
- The financial controller also faces an intimidation threat as they report to the finance director and would be accustomed to following directives, even if they breach ethical principles.
Summary of Ethical Breaches
- 1-Breach of objectivity due to personal interest in reporting favorable profit (profit-related bonus and share ownership).
- 2-Breach of objectivity due to intimidation threat (linking compliance to performance appraisal).
- 3-Breach of professional competence and due care by implementing inappropriate treatments not compliant with IFRS.
- 4-Potential breach of confidentiality by discussing issues with unauthorized persons.
- 5-Breach of integrity by potentially colluding in reporting inflated profit figures.