Unit 1 Ethics and Professionalism

Branches of Ethics

Over centuries of philosophical debate, ethics has developed several schools of thought. In other
words, philosophers and others have developed different ethical theories, different ways of thinking
about ‘doing the right thing.’

These theories reflect scholarly differences between professional philosophers, but they also reflect
differences in style of moral reasoning that can be observed in everyday moral reflection.

As a professional working with people, it will be important for you to become aware of your own
ethical way of thinking and to understand that other people may think about doing the right thing in a
different way from you.

The accounting examples included here are only used to illustrate new concepts in terms that you will
already be familiar with.

When making any decision as a professional, you must be sure that you are following the laws of your
country, the particular rules that govern you, and the IFAC (IESBA) fundamental principles. While
these are ethical principles for the accounting profession, they would equally apply to any profession.

1. Our duty to others

One way to think about ethics is to acknowledge that there are things that someone just does not do
as part of a duty to others. A limitation of this principle is that you have to decide what those things
are. One philosopher, Immanuel Kant, defined those duties by saying
‘act according to principles that everyone could follow.’
To offer an example, if you disobey traffic lights, you should consider what would happen if everyone
did so. In other words, we should recognise everyone as equals, and not assume that the rules are
any different for you personally than they are for other people.

As an accounting example, a professional accountant would not deliberately issue false or inaccurate
financial statements. If everyone did so, no statements could be trusted and as a consequence not
only would the whole accountancy profession be brought into disrepute, but all financial statements
would have no value to their users.

Ultimately the need for accountants and for financial reports would be called into question.

2. Consequences

Another way of thinking about ethics is through the consequences to different people. Briefly,
consequentialism encourages you to make decisions based on the consequences - both positive and
negative - for those involved.

This category of thinking is the branch of ethics known as utilitarianism. This states that an action is
right if it leads to the most beneficial outcomes and the least bad outcomes, for the greatest number of
people.

One limitation of thinking about ethics in terms of consequences is that you have to agree on which
consequences matter: for example, should you be trying to promote pleasure and avoid causing pain,
or should you instead focus on promoting people’s actual well-being, regardless of whether doing so
makes them happy?

A modern application of this point of view is the cost-benefit analysis, which involves assigning values
to the costs and benefits of an action and seeing how they add up. This practice is often used in
evaluating new projects.

As an accounting example, an accountant thinking in terms of consequences would consider

preparing an Integrated Report because doing so would provide more holistic information and
potentially the most benefit to the greatest number of people. In other words, stakeholders inside and
outside the organisation would be able to make more informed decisions as a result.

3. Virtue theory

In virtue theory, the emphasis is on deciding what sort of person one should try to be, and to define
the virtues such a person would embody i.e. you decide what makes a good person, instead of what
makes a good action, and act accordingly.

One limitation of this way of thinking is that what constitutes a virtue must be agreed upon, and it can
vary according to culture and over time. For example, the qualities of good financial reports were once
considered to be completeness, historical accuracy, reliability and strict adherence to the legal form in
disclosing business transactions.

More recently, the qualities of good financial reports have come to be relevance for decision-making,
reference to a wider conceptual framework, and presenting the broader economic substance of
business transactions.

As an accounting example of the use of virtue theory, in deciding whether to agree to a client’s
request to use a questionable method for valuing inventory, an accountant would ask:

‘What would a conscientious accountant do in such a situation? What would one of my

respected mentors do?’
4. Social contract theory

The social contract theory of ethics advises you to think about ethics as embodying a set of rules
agreed upon by reasonable people to bring order to social living. So when making an ethical decision
you ask yourself:

‘What rule would reasonable, unbiased people agree to?’

You then follow such rules, regardless of whether they benefit you in particular situations.

One criticism of this theory points out that the agreement referred to by social contract theory is
entirely imaginary. Why consider yourself bound by an agreement that never happened?

An accounting example of social contract thinking might be seen in a situation where an accountant
has to decide between loyalty to a client in terms of mitigating their tax liability and presenting a true
and fair assessment of financial statements.

Both of those options involve important social values. Thinking in social contract terms, the
accountant might ask:

‘What sort of rule for guiding my decision would unbiased people without such loyalties
agree to?’

5. Confucian ethics

Confucian ethics seeks to provide harmonious relationships within society, the family, and the
individual. Looking at yourself and learning from experienced people are seen as the main roads to
wisdom and self-harmony. The emphasis on experience leads to respect and reverence for the past,
the aged, and for one’s ancestors.

One of the criticisms of this model is that in a society where relationships are considered more
important than the laws themselves, corruption and nepotism may be tolerated.

As an accounting example, in deciding whether to agree to a client’s request to use a method for
valuing inventory, an accountant thinking in Confucian terms might consider agreeing to a method
which most benefit’s the interest of the client, because doing so would create greater harmony with
that client.

6. The golden rule

In addition to scholarly branches of philosophy, some other ways of looking at right and wrong have
developed.

The classic golden rule is to:

‘do unto others as you would have them do unto you.’

In other words:

‘I will not cheat that person because I do not want them to cheat me.’
The golden rule is a simple and useful tool, but it does have some limitations. Also, the whole rule is
based on your own feelings of how you yourself would want to be treated. But your own needs and
preferences might not be typical. For example, the fact that you personally do not value privacy does
not mean that you don’t owe others an obligation to respect their privacy.

As an accounting example, this rule of thumb could be applied to mean that you disclose all
information that may be relevant in financial reports because, if you were the reader of those financial
statements, you would expect to receive all the information, and disregard any that is not relevant to
you.

7. Mirror test

Another rule of thumb is the mirror test. This is a quick way to evaluate a decision that you are about
to make, and reinforces the notion that you are responsible for your own actions. Imagine you’re
looking in a mirror and ask yourself:

Is it legal?
If it is not legal, don't do it.
What will others think?
Others, meaning a friend, a parent, a spouse, a child, a manager, the media, or someone else whose
opinion is particularly important to you.

As an accounting example, in deciding whether to agree to a client’s request to use a questionable

method for valuing inventory, an accountant thinking in terms of this rule of thumb would consider how
a story about this action would look on the front page of the local newspaper.

Ethics and Religion

For some people, religion plays an important role in their moral beliefs and moral reasoning. If you
belong to a faith-based community, you may have learned ethical behaviour from the religious leader
in your church, temple, mosque, synagogue, or other place of worship.

That experience provides you with another point of view to approach decision-making at work. Even if
you do not belong to a faith-based community, you should be aware that some people do, and may
bring their religious beliefs to a business discussion of ethics.

It is important to remember that secular ethical perspectives such as those discussed in this unit need
not always conflict with religious beliefs.

Most, if not all, religions contain some direction about treating other people fairly, and that is also the
premise of most ethical models. It is also seen as good business practice.
Ethics and Maturity

Stage One

People are concerned with obedience and punishment and the immediate results to themselves. The
question they ask themselves is,

‘Will I be punished if I do this?’

Stage Two

People are still concerned about the consequences, but have moved on to thinking about what else is
in it for them. They think:

‘You do a favour for me and I’ll do a favour for you.’

Stage Three

People begin thinking about their social relationships. They want to be a good person so that they can
seek approval from others.

Stage Four

A functioning society is paramount, and people seek to obey laws and social conventions. If one
person violates a law, perhaps everyone would, so there is an obligation to uphold the law.

Stage Five

People think in terms of inalienable rights and liberties. Laws are seen as embodying social contracts,
and such contracts are open to criticism. People at this level are interested not just in what society’s
rules are, but in what makes a good society.

Stage Six

Moral reasoning is based on using universal ethical principles. This involves a person imagining what
they would do in another’s shoes, if they believed what that other person imagines to be true or right;
whether or not it happens to comply with the law. In this way action is never a means, but always an
end in itself.
At this stage the individual acts because it is right, and not because it avoids punishment, is in their
best interest, or an agreed social custom or practice. While Kohlberg included stage six, he found it
difficult to identify individuals who consistently operated at this highest level as it can imply great
personal sacrifice and high risk.

Although this theory of moral development has been criticised for being overly concerned with
abstract principles such as justice, and not enough with care, it is still a useful framework for
investigating your personal ethics.

Ethics and the Professions

Historically, most professions for example, medicine and law had codes of ethics and members were
required to swear an oath to uphold those codes, thereby ‘professing’ to a higher standard of
responsibility.

In modern times, membership of a profession is usually restricted and regulated by one or more
professional associations, and rigorous training and additional schooling is required.

Professionals typically proclaim an obligation to society beyond their client relationship, and point to a
code of ethics that they follow. Therefore, as a professional accountant with a code of ethics, you will
form part of a long tradition of people who ‘profess’ to a higher standard of accountability.

You will also enjoy a position of trust and responsibility. This is perhaps most obvious in the role
accountants play in auditing publicly traded companies. Although the client company pays the bills,
your highest obligation is to the public good, and in particular to the investing public that will be relying
on the accuracy and integrity of your work.

Summary

Morality is a set of rules concerning right and wrong behaviour. Ethics is the branch of philosophy that
attempts to provide clear arguments about which moral rules are best, and how those rules ought to
be interpreted.

There are several different ethical theories or frameworks for ethical decision-making, each of which
has been advocated by prominent moral philosophers. Some philosophers, for example, advocate
thinking about ethics entirely in terms of consequences: what action will produce the best outcomes
overall?

Others have argued in favour of thinking solely in terms of duties, and absolute principles of behaviour
– such as ‘Always tell the truth’ – that could be adhered to by all. Others have advocated thinking
about ethics in terms of hypothetical contracts, asking us to imagine what rules of behaviour
reasonable, unbiased people would agree society should live by.

And finally, some have argued that we ought not to think about ethics in terms of rules, but rather to
think about what kinds of virtues good people embody, and what kinds of people we think it best to
emulate.

Many different factors affect ethical reasoning, including age, sex, religion, and professional
affiliations.

It is preferable that your ethical decisions are based on good reasoning and careful consideration of
the relevant laws and principles, but it is also necessary to be aware of the various personal factors
affecting your own decision-making, and those of other people.
Accountant’s Dilemma Test

Feedback

How did that feel?

Did some of the arguments make more of an impression on you than others?

We’re all different, and people can behave well for a number of different reasons. For many people, it
makes a big difference whether they behave well because they feel in the mood to do so, or expect to
get a reward, or are compelled to do so by outer forces, or because they want to comply with their
moral conscience.

The questionnaire that you have just completed was adapted especially for this Professional Ethics
module from a model developed by Professor Lind and his team from the University of Konstanz in
Germany.

Professor Lind is known for developing a standard test called the Moral Judgement Test (MJT), which
is a rigorous and scientifically validated psychological test that has been taken by thousands of people
around the world.

This is a new test adapted from the MJT for those in the accounting field, which is still in development.
Over time, as thousands of learners complete this test, the data will be evaluated and standard
ranges of scores will become available so we can analyse how learners think and learn more about
their ethical perspectives. For now, you can think of it as a warm-up exercise to get you thinking about
the way you make difficult decisions.
Moral Reasoning Theory

Theory about moral reasoning

The MJT is based on the works of the psychologists Jean Piaget and Lawrence Kohlberg. In the
1930s, Piaget studied moral development by observing children playing games.

He argued that morality is not only about good moral intentions but involves the development of
fundamental cognitive capacities, or schemata of action, by individuals as they grow.

Inspired by the work of Piaget, Lawrence Kohlberg elaborated the notion of moral judgement
competence beginning in the 1950s. Kohlberg argued that moral reasoning developed through stages
of different moral orientations.

Academic References

Kohlberg, L. (1981)
Essays in moral development: The philosophy of moral development (Vol. 1). San Francisco: Harper
& Row.

Kohlberg, L., & Candee, D. (1984)

On the relationship of moral judgment to moral action. In W. M. Kurtines & J. L. Gewirtz (Eds.),
Morality, moral behavior, and moral development (pp. 52–73). New York: Wiley.

Lind, G.
The meaning and measurement of moral judgment competence revisited - A dual-aspect model. In: D.
Fasko & W. Willis, Eds., Contemporary Philosophical and Psychological Perspectives on Moral
Development and Education. Cresskill. NJ: Hampton Press.

Piaget, J. (1965)
The moral judgment of the child. New York: The Free Press. (Original work published 1932)

Some differences between rules and principles

One of the differences between the two approaches is that in a rules-based approach, you look for a
rule that prohibits you from doing whatever it is you are considering. In a principles-based approach,
you have to think more widely and consider whether or not a principle is being violated or even
threatened.

In many ways the principles-based approach is more reliable. If an action is planned, its
appropriateness is assessed. If it goes against the principles of professional behaviour and values,
then the action should be avoided, even if no rules exist concerning this specific action.

Another difference is the onus of responsibility. In a rules-based approach, someone in authority has
to create a list of prohibited activities for you to obey. In a principles-based approach, the
responsibility is on you, as a professional, to decide if, in each specific case, a principle is being
violated.
It is difficult to have a written rule that covers every possible situation. Furthermore, in a rules-based
approach, people sometimes start looking for loopholes. They look for situations that are not
prohibited and use them to their advantage. This is what happens in taxation where tax rules are
established and some accountants look for loopholes in order to avoid tax.

A principles-based framework is a more flexible approach, and can cover new situations that might
not have been thought of. It can sometimes seem more difficult, however, because you need to
carefully think through every situation.

As a professional accountant, you will be called upon to make many decisions. Remember that (IFAC)
recommends that professional accountants follow a principles-based approach.

It is important to put principles into context. You must always obey the laws of your country. Then you
must consider the more detailed rules laid down by your governing body regarding a specific situation,
such as promoting your practice, charging fees, accepting new clients, or handling clients' monies.

Finally, if a particular ethical dilemma is not covered by your organisation or your professional body's
rules, you must consider the fundamental principles, and whether they might be breached or
threatened by the proposed course of action.

IFAC’s Five Fundamental Principles

What the fundamental principles actually mean

1. Integrity

You should
‘be straightforward and honest in all professional and business relationships’.

In other words

Do not lie and do not issue false or misleading information.

2. Objectivity

You should
‘not allow bias, conflict of interest or undue influence of others to override professional
or business judgements’.

In other words

Your professional and business judgement should be based on fact and on what is in the best
interests of stakeholders or others. Judgement should not be based on what is in your own personal
interest, or in the interests of those who have power or influence over you.

3. Professional competence and due care

You should
‘maintain professional knowledge and skill at the level required to ensure that a client
or employer receives competent professional services based on current developments
in practice, legislation and techniques’;
And members should

‘act diligently and in accordance with applicable technical and professional standards’
when providing professional services.

In other words

Only perform work if you are competent to do so. Keep up to date with accounting matters. Do not
forget that as an ACCA member, you will have continuing professional development (CPD)
responsibilities – and you must ensure that you are keeping up to date.

4. Confidentiality

You should
‘respect the confidentiality of information acquired as a result of professional and
business relationships and, therefore, not disclose any such information to third
parties without proper and specific authority, unless there is a legal or professional
right or duty to disclose’
and confidential information acquired as a result of professional and business relationships should not
be used

‘for the personal advantage of the professional accountant or third parties.’

In other words

Do not talk about your clients, or use information that you have learned about them for your personal
gain or for the gain of others. Maintain your silence even after the professional relationship with the
client ends.

5. Professional behaviour

You should
‘comply with relevant laws and regulations and avoid any action that discredits the
profession’.

In other words

Be courteous and considerate to people, and always behave so that a ‘reasonable and informed third

IFAC's Fundamental Principles

Summary

The fundamental principles of integrity, objectivity, professional competence and due care,
confidentiality, and professional behaviour are international standards that accountants who are
members of IFAC professional bodies agree to follow through implementation of the IFAC Code of
Ethics.

Professing to higher standards of behaviour is something that professionals do. And these are the
standards that professional accountants must follow. As a learner, it is important for you to become
familiar with them and to know that they also apply to you.
The 4 Step Process

Let’s now look at each of the four steps in more detail.

Step one

What is the real issue here?

Sometimes the real issue is obvious. Sometimes, the issue is not obvious and you have to ask a lot of
questions before you find out what the issue really is. As a start, you can ask yourself these
questions:

 Is this my problem, or does it belong to someone else?

 Is it the real problem or part of a larger one?

 Is this a real problem or am I only avoiding a difficult task?

 Do I need more information?

For example

You are the accountant at a pharmaceuticals company. Your finance director asks you to contact the
marketing director about the implications of a significant and unexpected price increase of a generic
drug you produce for thinning the blood in heart patients. The request follows a pricing agreement
drawn up between the three main companies supplying these drugs to the national health service of a
country, and so, the impact of the price increase on the volume of sales will be lessened, due to the
other companies in the cartel also raising their prices.

Is this your problem?

You might think ‘no’, because you have not been involved in the company’s decision to fix the drug
price, nor brokered the agreement with its main competitors. Another view is it could be your problem,
since doing this could be seen as condoning a potentially illegal arrangement. If not strictly illegal, the
agreement could be considered to be unethical as it is detrimental to the tax payers of the country
who finance the national health service through taxation.

Is being asked to discuss the price increase with the marketing director the real problem?

No. It is part of a larger problem – namely coming into possession of knowledge of a wider conspiracy
of a serious nature, in other words, that a cartel is being operated and that price-fixing is taking place
which you are being asked to help implement. The problem you face is that if you go along with it you
are aiding and abetting an illegal process, or if you do not go along with it there may be career
implications or other problems for you in the future.

Is this a real problem or am I avoiding a difficult task?

The problem certainly exists in this case, but rather than just helping to implement the price change
and ignoring the wider issue, or refusing to do so, you should sit down to discuss the larger problem
with your finance director. You should try and establish the reason for the price-fixing arrangement
and question its legality as well as its ethics.
If the situation gets difficult, there may be a need for you to find out more about your options. Where
you feel pressured to act against your professional judgement or feel you should act on information
that you have about illegal or unethical behaviour, you might need to discuss this with your solicitor or
your professional accounting association. You may need to consider alerting appropriate authorities
about this arrangement, in other words to consider the act of ‘whistleblowing’ and all its wider
implications for you, your organisation, and its stakeholders.

Step two

Are the fundamental principles threatened?

You already know the fundamental principles of:

 Integrity

 Objectivity

 Professional competence and due care

 Confidentiality

 Professional behaviour
Is one or more of these principles being compromised, and in what manner?

Sources of threats

The threats to these principles can come from a number of different directions.

Please remember to read the content contained within each of these containers. To reveal the
content, simply select the relevant heading.

Self-interest threats
These come about if you or a close family member stands to gain (or not lose) something from the
incident. Usually your integrity or objectivity would be at risk.

Self-review threats
These may be significant when you are in a position of having to review your own work. This could put
your objectivity at risk.

Advocacy threats
These threats exist if you are promoting a position that compromises your integrity, or promoting a
position or opinion to the point that subsequent objectivity may be compromised.

Familiarity threats
These can arise if you have a close personal relationship with someone and cannot be objective.
Several of the fundamental principles may be threatened.

Intimidation threats
These can become significant if you put yourself in a position where you could be pressurised by
physical or verbal threats, or if there is an implied threat to your career or prospects. For example, you
may be bullied into doing work, which you are not competent to perform. Any of the principles could
suffer under this type of threat.

Step three
Is the threat significant?

Determining the significance of a threat depends on the individual situation. Only you or a ‘reasonable
and informed third party’ can decide whether the threat is significant.

You must always consider what others would make of the position and your actions. The ‘reasonable
and informed third party’ is a phrase that is often used in these situations. It is the theoretical voice of
reason you would consult to help you gain perspective on an issue.

Step four

Are there safeguards that may be put in place?

If a threat is significant, you will want to put safeguards in place or use the ones that already exist. For
example, safeguards can range from government regulations and professional standards, to people or
policies in your workplace. If you look around, you will see that many safeguards are already in place
to help you.

First, there are the safeguards created by laws and regulations in your country and by your own
accounting profession. These are designed to ensure that all accountants work in line with the
fundamental principles, that compliance with the fundamental principles is regulated, and that
sanctions are imposed on those professional accountants who do not comply.

The next safeguards are the education and training you undergo before entering the profession and
the continuing professional development requirements you face after you qualify as an accountant.
This training teaches you current practices and helps keep you up-to-date with accounting standards
and regulations.

These safeguards can be reinforced by controls established in the work environment. These can
include the introduction of organisational ethics policies and procedures and the development of
training for all employees to ensure their compliance, strong internal controls, appropriate disciplinary
procedures, and a culture that encourages employees to communicate to senior levels about ethical
issues without fear of retribution.

Finally, there are safeguards you can create for yourself such as:

 Complying with continuing professional development requirements

 Keeping records of contentious issues and how the individual addressed them; using an
independent mentor

 Using the services of legal advisors and professional bodies.

When you make a decision on a course of action you propose to take, you should be able to point to
the principle or principles being threatened and the nature of the threat. You should also be able to
point to the safeguards in place to reduce the threat to an acceptable level and allow the proposed
course of action to go ahead. If you cannot recognise an existing safeguard, or implement an
appropriate safeguard, you should refuse to carry out the activity in question.

An Ethical Dilemma

Let’s work through an example. Suppose your manager asks you to claim expenses under a code
other than that relating to the expenses incurred, on the grounds that this budget code is under spent
and the original code was overspent. Use the framework.

Step one
What is the real issue?

It is not that you are claiming expenses fraudulently, because these were legitimately incurred and so
you are not benefiting financially.

The issue is whether financial and budget information and variance analysis are reliable when
managers are manipulating the use of budget codes. The incorrect allocation of the expense could
result in senior management being deliberately misled.

Step two

Are any fundamental principles threatened?

You remember the five principles of integrity, objectivity, professional competence and due care,
confidentiality, and professional behaviour.

The fundamental principles threatened here are integrity and objectivity – deliberately using a wrong
code to protect your personal and business interests.

Step three

How significant is the threat?

Since you have not acted dishonestly for personal gain, you might decide that the threat is not very
significant.

However, you are thinking about the consequences and not the threat. You are also ignoring the
possible consequence that senior management may be deliberately misled as a result of your actions.

If the amount being allocated to the incorrect code is considered material, the risk of this happening is
significant, unless appropriate safeguards are put in place.

Step four

Which safeguards would ensure that the threat to your integrity is sufficiently low and that budgetary
codes are not dishonestly manipulated?

One safeguard that might allow the proposed action to go ahead is to discuss the situation and seek
assurances that the treatment of the expenses claim will be disclosed to the users of the information.

An Ethical Dilemma

Summary

You may decide to obey your manager’s request and use an incorrect budget code, whilst striving to
protect the budget holder’s position. That is you may do so because you have received assurances
that the proposed action will not result in the senior management being misled.

On the other hand, you may feel that as a professional accountant, it is your duty to report expenses
as they are, because you feel that the proposed course of action could only mislead senior
management.

What is your decision? Do you have sufficient assurance that the first course of action may be
followed, or do you have to refuse the manager’s request?
Further considerations

Professional ethics and your personal values

You have now examined your own personal values and learned about IFAC's fundamental principles.
At this point you may well be wondering how the two fit together. This section will attempt to explain.

In any situation, you must begin with the laws of your country. The law generally deserves our
respect, with very few exceptions. The situations in which it might be ethically permissible to break the
law generally involve matters of life and death, and are not likely to occur in the professional work of
accountants.

Next you look to the specific rules that govern the situation. For example, if you are an auditor, you
will be bound by the relevant auditing standards in your jurisdiction.

Then as a professional, whether an auditor or not, you must consider the principles of your
professional body which form the basis of your professional ethics.

Remember that professional ethics is really about an obligation to the public. As a professional -
whether a doctor, a lawyer, an engineer, or an accountant - you will have been tested and accepted
by your profession. The public will place their trust in you simply because you are a professional, a
member of a trusted professional body.

The public is not expected to know how to assess either the ability or the ethics of a doctor, a lawyer,
or an accountant, for example.

They trust that the professional bodies will have done this for them. This means that as a professional
you owe the public a certain level of integrity and objectivity, as well as professional competence and
due care, confidentiality, and professional behaviour. In other words, you must uphold the IFAC
fundamental principles simply because you are a professional and you have professional ethics.

Throughout all of this, your own values, interests and experiences are the filter through which you
unavoidably view any situation. It is important for you to be aware of those filters because they could
influence your professional judgement.

That is why this module has exposed you to different kinds of ethical thought, so that you may be
better able to recognise your own personal ethical perspective when you exercise your professional
ethics.

For example, suppose you tend to make decisions based on the consequences to other people and
would generally consider yourself a utilitarian. If you were asked to do something that was legal and
did not violate the fundamental principles, but had unpleasant consequences for a large number of
people, you might not want to do it.

For example, you may not wish to advise a client that a loss-making division of the business should
be closed, making many workers redundant. It would violate your preferred ethical framework. But it
would not violate your professional ethics.

It is important to be able to know the difference between the two. As a professional accountant, you
should strive to maintain objectivity by being mindful of the fact that your personal values are just that
– personal and unique to you.

Summary

Professional accountants can use a framework for ethical decision-making. It consists of four steps:
 1. Determine the real issue

2. Determine if any of the fundamental principles are threatened

3. Determine if the threats are significant

4. You see if you can put safeguards in place

You should think of the fundamental principles as your professional ethics. As an accountant you
have an obligation to the public, as do other professionals, and the obligation consists of upholding
those fundamental principles.

It is important to know yourself and your ethics, so that you are better able to distinguish your
personal ethics in a business situation.

Introduction

The objective of this unit is to give you the opportunity to practise making decisions as a character in
an ethical dilemma.

Your ability to make good decisions as a professional accountant can improve with practice. In this
online environment, you have the opportunity to make a decision, get feedback, and even change
your mind – something you cannot do in real life.

Overview of the case

Bexall Pharmaceuticals Co. is a case concerning the closing stages of an audit assignment and the
issues surrounding a disagreement between the view of the corporate accountants and the audit team
on the recognition and measurement of various assets.

The discussions around these accounting adjustments have wider implications for the company, its
senior management and their remuneration, the relationship with their bank, and the exposure of the
company to the risk of a take-over. The case sets the background against which the deliberations and
actions of the audit team finalising the annual audit and those of the accounting department of the
company can be analysed.

Iain Morton is a financial accountant reporting to the CFO at Bexall Pharmaceuticals. Gail Li is a
senior manager at Putnam Rhodes and is the Audit Manager of the Bexall Pharmaceuticals audit. Her
audit team raises some issues during the audit and the company is asked to make some adjustments.

All of the characters are qualified accountants, and they are reporting under International Financial
Reporting Standards (IFRS®).

Iain's Story

Iain's Decision

Issues
Take some time to reflect on what you have seen. Here are some things to consider:
 1. What are the facts of the case, as you now know them?
2. What is the real issue? Have the fundamental principles been threatened?
3. What are the ethical issues and who are the stakeholders?
4. What are the norms, principles, and values related to the case?
5. What course of action is most consistent with these norms?
6. What are the consequences of each possible course of action?
7. What is your decision?

Remember that you can always consult the IFAC Rulebook for guidance.

Iain's decisionFeedback for not making the adjustments

Your choice
You refuse to make the adjustments and argue a case for valuing the various assets on the basis of
your professional judgement. You uphold your professional ethics.

Feedback
You are upholding the fundamental principles of integrity and objectivity. You are not allowing your
judgement to be clouded by peer pressure, by your own personal interests, or by the short term
interests of your company.

Reasons behind your decision

Hopefully, you decided to do this because you know it is the right thing to do as a professional. Or
perhaps there has been pressure from your manager on other occasions to make decisions that make
you uncomfortable. This time you have decided that you will not go along with her request.

In this case, your choice to make the adjustments could have been rooted in ethical principles. For
example, you may have made your decision thinking of your duty to others. If everyone adjusted and
re-adjusted financial statements without regard to valid evidence, then the whole idea of financial
statements would be invalidated.

However, it is interesting to note that if you relied on other ethical viewpoints, you might not have
made this decision. For instance, some would argue that it fails from the utilitarian perspective,
because your decision might seem not to have produced the most pleasure for the greatest number of
people. In fact, it seems likely to make most stakeholders unhappy.

The bigger picture

Your decision does not make people happy, and it would have personal, professional, and career
consequences for Iain. His career prospects at Bexall’s may be damaged, he may have a difficult
performance appraisal from his manager, and he may even need to look for a job elsewhere. The only
parties happy with his decision, aside from himself, would be the bank who would otherwise be
misled, and the potential shareholders.

Outside of the black-and-white choice presented in this learning exercise, Iain might have been able
to consider even more options and might have dealt with the situation differently.

For instance, he could have decided to be even more courageous and persuasive with his boss and
articulated more forcefully the dangers to her and to the directors of trying to mislead the auditors. He
could have argued that as a professional, he has an overriding obligation to act in accordance with
accounting standards and the fundamental professional principles and therefore could not possibly
agree to these adjustments.
He could also speak confidentially to his professional association’s advisory help line for advice. The
help line would confirm that he should not go against fundamental accounting principles and would
remind him of his professional obligations.

Iain's decision

Feedback for not making the adjustments

Your choice
You confirm your decision to refuse to make the adjustments and argue a case for valuing the various
assets on the basis of your professional judgement. You uphold your professional ethics.

Feedback
You are upholding the fundamental principles of integrity and objectivity. You are not allowing your
judgement to be clouded by peer pressure, by your own personal interests, or by the short term
interests of your company. In fact, the scene you have just seen between Timothy in the audit team
and Preston the Audit partner should only have confirmed that the planned adjustments to Bexhall’s
accounts are unjustified.

Reasons behind your decision

Hopefully, you decided to keep to your original decision because you know it is the right thing to do as
a professional. The scene you have just seen and heard confirms that your fears of raising the
suspicions of the auditors is justified because Timothy has explained to Preston, his boss, that most of
the adjustments go against IFRS principles or are at best unjustifiable based on the evidence
Bexhall’s have made available to the auditors.

Gail's story

On the train

Gail is on the train to Manchester the following Monday, sending an email to Berndt Bremen of the
Remuneration Committee.

gli@putnamrhodes.com
Mon 14/08/XX, 09:55bremen@Bexall.com | CC: tosula@putnamrhodes.com
Subject: Remuneration Committee

PRIVATE AND CONFIDENTIAL

Dear Berndt,

In my role as Audit Manager for the Bexall audit, and as part of our responsibilities regarding
disclosure of director and executive remuneration, I wanted to check something out with you
regarding executive share options. I would therefore like some details regarding the following if
possible:

 What and how many share options are held by the CEO and any other directors?
 How do these work and when do they expire?
I would appreciate your cooperation on this enquiry.

Regards,
Gail Li
(Audit Manager, Putnam Rhodes)

Gail's story

On the train

40 minutes later a message is delivered to Gail's mobile phone.

bremen@Bexall.com
Mon 14/08/XX, 09:55gli@putnamrhodes.com
Subject: RE: Remuneration Committee

Dear Ms Li,

The CEO and the CFO hold share options on 50,000 shares and 30,000 shares respectively. These
were all offered to these executives in 20X3 subject to a strict waiting period lasting until 1st January
20X6. From that date a two-year vesting period, during which the executives could exercise their
options began, which will end on 31st December 20X7. These share options were originally approved
by the committee in 20X2 in order to align executives’ interests with the interests of the shareholder.
The grant or ‘strike’ price for all of these shares was set at $7.50 and the current share price is $8.25.
Unsurprisingly, none of these options have as yet been exercised, presumably in the hope that the
share price might rise to a point where it’s worth their while to exercise the options.

There is of course a link between profit or EPS and the share price, and a lower reported profit or EPS
than the market expects could cause a severe mark down in the share price and might seriously
devalue these options, or make them worthless.

I hope this is helpful.

Regards,
Berndt Bremen

(Chair, Remuneration Committee, Bexall Pharmaceuticals)

Gail's more information

At the office of the CEO, Eric Manning picks up the phone and contacts Preston Mondal at Putnam
Rhodes, and arranges a lunchtime meeting.

Gail's story

Sign here

The following Monday after Gail comes back from Manchester; she is at the door of Preston Mondal's
office, having been summoned from her desk.

Gail's story

Issues

1. What are the facts of the case, as you now know them?

2. What is the real issue?

 3. Have the fundamental principles been threatened?

4. What are the ethical issues and who are the stakeholders?

5. What are the norms, principles, and values related to the case?

6. What course of action is most consistent with these norms?

7. What are the consequences of each possible course of action?

8. What is your decision?

Remember that you can always consult the IFAC rulebook for guidance.

Gail's decision

Feedback for refusing to sign

Your choice
You refuse to sign the paperwork. This means that you do not agree to the compromise that was
reached between Preston Mondal and Eric Manning.

Feedback
You have upheld the fundamental principles of integrity, objectivity, and professional competence and
due care. You acted objectively all the way through the audit process, up to and including your refusal
to agree to the compromise. You acted with integrity in accordance with your professional values and
did not let your judgement be clouded by peer pressure or by your own personal interests. In addition,
your professional competence is seen to be intact. You identified and understood technical issues
regarding the financial accounts and communicated your views effectively to your managers and to
the client.

Reasons behind your decision

Presumably you have chosen this course of action because you knew it was the professional thing to
do. Or perhaps you decided to take a stand against a course of action that you knew could have
unpleasant consequences for you as you continued your career in other organisations. Whatever the
reason, you showed courage in standing up to your manager.

If your choice was rooted in ethical principles, you may have reached this decision by thinking of the
social contract viewpoint - following the accounting rules means holding up your end of the bargain,
meeting society’s reasonable expectations of accounting professionals.

The bigger picture

In the real world, this would have been a difficult decision, and could have led to an unpleasant scene.
Gail’s job may have been jeopardised, or she may have been made to feel very uncomfortable in her
role. She may even have been asked to look for work elsewhere.

However, in the real world, Gail might also have had additional options, such as speaking to the other
partners in the audit firm and enlisting their support. There is probably a mechanism to resolve such
disputes within the firm. Even if such a mechanism does not exist, she should have been capable of
discussing the situation with the other partners, and if necessary, consulting the technical advisory
service offered by her professional body. This would have provided her with some support when
discussing her decision with the audit partner.
Ethical Perspective

The following is not a test of personal ethics and is not a pass or fail test. It is a self-diagnostic
exercise to help you see what type of ethical perspective (if any) you might more strongly prefer
across several different contexts or scenarios.

Ethical Perspectives (ECUDOR)

Please remember to read the content contained within each of these containers. To reveal the
content, simply select the relevant heading.

Egoism
States that an action is ethical if it promotes the individual's long-term interest.

Care / Confucianism
Constitutes an ethical approach in terms of how involvement, harmonious relations and the
needs of others play an important part in ethical decision-making in each ethical situation.

Utilitarianism
Suggests that an action is right if it leads to the greatest good for the greatest number of people.

Deontology
Philosophy focuses upon universal principles of right and wrong. What is important are the
values and motives underlying actions, and not the means that could justify the end.

Objectivism
Claims that discussing what is right or wrong from an individual or context perspective is not very
useful. One should instead focus upon the avoidance of unethical behaviour against accepted
standards, for instance by imposing or rigidly complying with rules of conduct or ethical codes.

Relativism
Claims that there are no universal rules of good and bad and ethical behaviour depends upon
circumstances and context.

The Personal Ethics Diagnostic and Reflective Exercise Test

Your results

Deontological

You consider ethical situations mostly from a deontological/absolutist ethical perspective suggesting
that you take a mainly principles based approach to problem solving and often see things as being
more definitely right or wrong.
 Score

17

Your score indicates that you demonstrate professional competence within all, or almost all the areas,
and that you are usually sure about the best course of action even when this is not as clear cut as it
might be. In almost all situations you seem to demonstrate acute ethical sensitivity, but can also follow
this through into appropriate ethical judgement and you seem to be aware and can manage threats to
fundamental principles. Your high score also indicates that you always try to think beyond your
immediate personal and professional needs and those of your close colleagues or clients and
anticipate and follow through the impact of your decisions on wider stakeholder groups, both within
your own organisation, and also in respect of other connected or external stakeholders.