Ethics Can Help Prevent Industry Car Crashes

Recent audit and accounting failures have rocked the industry, but many of these ‘car crashes’ could have been avoided if practitioners had maintained higher ethical standards, Merica’s ‘Ethics in the Profession’ webinar heard.

In response to these incidents, institutes around the world are now prioritising ethics.

Mercia Technical Consultant Gavin Leake explained the principles of ethics to delegates and discussed some of the challenges around maintaining good practice in the profession.

Fixated on revenue

Broadly speaking, ethics means doing the right thing. For professionals in the accounting and audit industries, they should be aligned with strategic goals and tied in with vision and values. Ethics should be part of the process of accepting or rejecting clients. They will also ensure practitioners have adequate training and qualifications and maintain fair billing of clients.

Leake said:

Is it ethically right what we’re doing? Does it comply with ethical standards? How do we mean to safeguard, or at least consider, the challenges we could be facing? Rather than be fixated on the revenue with ethics an afterthought down the track. Before you know it, you’ve got ethical issues to deal with.

When things go wrong

Ethical issues have been at the heart of some recent high-profile industry failures.

An investigation into PwC Australia earlier this year found that the firm had ignored ethics and given too much power to its top earners. These were known as ‘rainmakers’ and ‘untouchables’ as revenue was prioritised at the expense of other issues.

Also this year, Deloitte Canada was fined a seven-figure sum after computer clocks were altered in order to backdate reports. Meanwhile, in the most irony-laden incident, E&Y in the US was given a $100 million fine in 2022 for cheating on an ethics exam.

Straightforward and honest

Professional accountants play an important role in society and are often required to make judgement calls that have the potential to affect the livelihoods of many people and are therefore held accountable for their actions.

When acting with integrity, accountants should be straightforward and honest in all professional and business relationships and should not compromise their integrity.

Fundamental principles

The international Code for ethics, which is the basis for local codes, is maintained by IESBA. In the UK, both the ICAEW and ACCA have mandatory codes of ethics, while the Financial Reporting Council’s (FRC’s) Ethical Standard is mandatory for audit work.

There are five fundamental principles to ethical behaviour within audit and accountancy.

• Integrity – to be straightforward and honest in all professional and business relationships. Integrity also means that members must not knowingly be associated with misleading information.
• Objectivity – not to compromise professional or business judgements because of bias, conflict of interest or undue influence of others. If undertaking an assurance engagement, members must also be and appear to be independent.
• Professional competence and due care – to attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organisation receives competent professional service, based on current technical and professional standards and relevant legislation, and act diligently and in accordance with applicable technical and professional standards.
• Confidentiality – to respect the confidentiality of information acquired as a result of professional and business relationships. Confidential information must not be disclosed outside the organisation without authority, unless there is a duty or right to disclose, or disclosure is in the public interest and permitted by law.
• Professional behaviour – to comply with relevant laws and regulations and avoid any conduct that the professional accountant knows or should know might discredit the profession.

Common ethical challenges facing accountants

Accountants may face a number of ethical challenges in their working lives. These include the pressure to engage in misleading reporting or the temptation to enable tax evasion or fraud on behalf of clients. They may face pressure from clients or have a desire to keep the client ‘happy’, which can distort professional judgement.

They may also face conflicts of interest and must be careful not to breach confidentiality obligations.

There will also be internal pressures within the organisation a professional accountant works for, such as pressure to meet performance targets.

Deal with ethical challenges

Accounting and audit professionals must be aware of pressure and be able to resist it by being confident enough to say ‘no’ when necessary.

They should seek advice from senior professionals or industry bodies when necessary. They should educate clients or other stakeholders about their professional obligations.

Finally, they must report any issues to management or professional bodies.

Everything we do

Leake concludes:

We need to be thinking more in terms of ethical standards, the ethics around everything we do. We need to have them at the front end rather than the back end. If we can do that then ethics will be relevant and valuable to us.

Mercia’s Ethics Update and Refresher course

Mercia’s Ethics Update and Refresher course covers the ethical rules governing the range of work performed in practice and suggest suitable approaches to tackle the risks. 

This course looks at both the technical requirements and the practical implementation, including the risks of accidental breach of the requirements. It considers sources of guidance for ethics, fundamental ethical principles and the threats and safeguards approach.