A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. A professional accountant’s responsibility is not solely to satisfy the needs of an individual client or employing organisation. In recognition of this fact, the International Ethics Standards Board for Accountants (IESBA) has issued a Code of Ethics for Professional Accountants (‘The Code’). The code is publicly accessible on the IFAC website. The IESBA is one of the standard setting boards of the International Federation of Accountants (IFAC). The Code:
- Contains a general requirement that all accountants should act in the public interest in their professional lives.
- Sets out five fundamental ethical principles that accountants should follow in carrying out their work.
- Identifies specific threats to those ethical principles that might arise in practical situations.
- Suggests appropriate actions that accountants might take in responding to the threats.
Candidates who are sitting the DipIFR examination are expected to have a general appreciation of the contents of the code together with a specific knowledge of section 100, sections 110-115, and section 120. This knowledge and understanding will be tested in question 2 of the DipIFR examination from December 2021.
In question 2, candidates would be faced with a scenario where they are required to identify and explain the financial reporting treatment of a series of issues. Embedded within the scenario would be a situation where one or more of the fundamental ethical principles were in danger of being breached. In addition to addressing the underlying financial reporting issues presented in the question, candidates would also be asked to identify the fundamental ethical principles that could potentially be breached in the question scenario. Candidates could also be asked to suggest appropriate actions that could be taken in order to address the relevant ethical threats. With effect from the December 2021 examination sitting, question 2 of the DipIFR paper will always include an ‘ethical component’ with a maximum mark allocation of five marks.
The five fundamental principles outlined
The five fundamental principles are:
- Integrity. Accountants should be straightforward and honest in all professional and business relationships. In particular accountants should not be associated with any reports containing information which the accountant believes to be misleading in any way.
- Objectivity. Accountants should not compromise professional or business judgements because of bias, conflict of interest or the undue influence of others.
- Professional competence and due care. Accountants should attain and maintain professional knowledge and skill at an appropriate level and act diligently and in accordance with applicable technical and professional standards.
- Confidentiality. Accountants should respect the confidentiality of information acquired as a result of professional or business relationships. There are very few circumstances when it would be appropriate to disclose confidential information. The most obvious circumstance would be when disclosure was a legal requirement.
- Professional behaviour. Accountants should comply with relevant laws and regulations and avoid any conduct that might discredit the profession.
Threats to compliance
The circumstances in which professional accountants operate might create threats to compliance with the fundamental principles. The Code identifies these threats and contains guidance on addressing them. The identified threats are:
- Self-interest threat. Where a financial or other interest could inappropriately influence a professional accountant’s judgement or behaviour.
- Self-review threat. Where the accountant will not appropriately evaluate the results of a previous judgement made by themselves or by another individual within their employing organisation.
- Advocacy threat. Where an accountant may promote a client’s or employing organisation’s position to the extent that the accountant’s objectivity is compromised.
- Familiarity threat. Where an accountant has a long-term or close relationship with a particular client or employing organisation that means that they may be too sympathetic to their interests or too accepting of their work.
- Intimidation threat. Where an accountant is deterred from acting professionally because of actual or perceived pressures, including attempts to exercise undue influence over the accountant.
When a threat to compliance is identified, the accountant should assess the significance of the threat. In particular the accountant should consider whether or not the level of the threat is acceptable. A threat would be acceptable if there was no significant risk that one or more of the fundamental ethical principles could be breached. If the level of threat were assessed as not acceptable the accountant could take one or more of the following actions:
- Eliminate the circumstances that are creating the threats.
- Apply safeguards to reduce the threats to an acceptable level.
- Decline or terminate the relevant assignment.
A practical example
A trainee accountant [X] is responsible for preparing the first draft of the financial statements of the company she works for. She has received the following E mail from the finance director:
‘It’s very important that the upcoming set of financial results shows a favourable financial performance and position. If the results are good then potentially there are big bonuses available for all staff, including you! I know that many of the numbers in financial reports are based on estimates. When you are preparing the financial statements I want you to choose estimates that will produce the maximum acceptable reported profit. I hope you will comply with my request. I will be carrying out your annual staff appraisal shortly and this will certainly be a factor in the grading I give you’.
X is concerned about this request and has approached a friend, Z, who is also a trainee accountant, for advice. Z works for another company.
The examination requirement accompanying a scenario like this might be to identify the ethical issues/threats that X might face in this situation. These would include threats to the fundamental principles of:
- Integrity – X might be tempted to use inappropriate accounting estimates in the financial statement preparation in order to maximise the reported profit.
- Objectivity – X has a financial interest in the level of reported profits and her annual assessment has been linked to compliance with the finance director’s wishes. She faces both a self-interest threat and an intimidation threat in these circumstances.
- Professional competence and due care – it is not clear whether X, as a trainee accountant, has the necessary expertise to prepare the financial statements. Any threat here could be reduced if the drafts are reviewed by a more experienced and appropriately qualified member of the accounting staff. This would be an example of a safeguard to reduce the threat.
- Confidentiality – in seeking advice from her friend Z there is a danger that X will share confidential information that should not be revealed to a third party.
- Professional behaviour – producing financial statements that are lacking objectivity would potentially bring discredit on the accountancy profession.
With effect from December 2021, ethical issues will always be examined in DipIFR. Candidates should ensure that they are familiar with the relevant paragraphs from The Code and are able to apply them in practical situations. However not every examination scenario will require identification of all five fundamental principles, or all of the above threats and candidates must tailor their answer accordingly to only include those that are relevant to ensure credit is given.