Acting within the law, and behaving in accordance with these fundamental professional ethics, you may encounter situations when a further choice exists. Figure 1: Professional behaviour decision filter
Once behaviour complies fully with the law and is consistent with fundamental principles of professional behaviour, further choices are still available, but the scope becomes much narrower. For example there may be a choice to do something in one way or another, such as how to communicate with someone, or whether to act immediately or delay a decision. The choices that you make at this level of the filter require you to consider your personal values and use your own individual judgement. This is where your personal ethical values come in. The figure opposite can also be presented as a simple flow chart to guide your decision-making.
The decision flowchart below is a systematic way of thinking about how you act and behave at work and the sequence in which you, as a professional, should normally filter your decisions.
Figure 2: Flowchart of the professional and ethical decision-making process
The Foundations in Professionalism module will help you put this decision-making filter into practice. Now complete this quick quiz to test your current understanding.
2.1 WHAT IS A PROFESSIONAL? There are many different definitions of a ‘professional’. Relevant factors include academic qualifications, specialist knowledge, heightened ethical standards, and others. However, a professional is someone who has knowledge and expertise which are recognised and valued by society. Doctors, lawyers and accountants are commonly thought of as professionals. They have trained in their fields to develop the highest levels of specialist skills and knowledge. They are trusted and respected by the public and their peers. Professionals are expected to behave at work in accordance with minimum standards, often set out in professional and ethical codes of conduct. A professional has a duty to their employer, clients, colleagues and themselves, but should always put the public interest above all, in guiding their behaviour and decision-making at work. Becoming a professional involves passing examinations, gaining relevant experience and updating knowledge periodically. It also involves developing the attitudes of a professional and behaving in a way that their profession demands and society expects. Professionals are required to know what they can and cannot do, they must decide on the right course of action and they must carry out their work to the best of their ability. The concept of professionalism is summarised by the following unattributed quote, ‘It’s not the job you do – it’s how you do the job’
Professionalism concerns how you conduct yourself, behave, are perceived by others, and whether you are technically competent at work. The key attribute of a professional is to exhibit a sense of trustworthiness. This provides the client or employer and the public with the assurance that the professional will always perform to a consistently high standard, and do what is expected of them.
2.2 CHARACTERISTICS OF A PROFESSION Theoretical knowledge: Professionals are assumed to have extensive theoretical knowledge and skills, and the ability to apply these in practice. Professional association: Professional bodies are intended to enhance the status of their members. They have carefully controlled entrance requirements, including work-based practical experience, and being able to demonstrate ‘good character’. Extensive period of education: Passing a number of examinations and demonstrating a technical knowledge of their subject. Continuing professional development (CPD): The updating and development of knowledge and skills is essential. Licensed practitioners: Professions seek to establish a register of membership. This provides recognition for the professional, but also helps to protect the public. Work autonomy: Professionals should retain control of their performance at work through the skills they possess, which may be unique within the organisation.
Code of professional conduct or ethics: Professional bodies usually have codes of conduct or ethics for their members, and disciplinary procedures for those who infringe the ethical code. Self-regulation: Professional bodies usually benefit from a measure of self-regulation and independence from government although this may vary. High status and rewards: Successful professions achieve high status, public prestige and rewards for their members. Mobility: The skills, knowledge and authority of a professional belong to the professional, and not the organisation for which they work. Professionals are therefore occupationally mobile.
2.3 PROFESSIONALISM AND YOU AS A TRAINEE ACCOUNTANT As a trainee working within a profession, you will not be able to display all of the badges of a professional. However, in order to be accepted into a professional body, you will need to be able to demonstrate professionalism, as well as gain theoretical knowledge and practical experience. Professionalism involves the following: Carrying out your responsibilities to the best of your ability Keeping your skills and knowledge up to date Thinking about the impact of what you do, or fail to do Behaving honestly and with integrity Meeting your deadlines
Treating clients, managers, colleagues and other employees with respect To achieve these things you should: Study effectively and revise thoroughly for your examinations Practise what you learn at work Take pride in your work and enjoy doing something well Learn from your mistakes and continuously improve Know your limitations and act accordingly Recognise that there is always more to learn than you already know
2.5 THE ACCOUNTANCY PROFESSION TODAY Globally the accountancy profession continues to flourish with more people training to become accountants. The development and growth in popularity of accounting as a profession continues today, despite its reputation being damaged by the corporate scandals of the early part of the 21st century. With the demise of companies like Enron, Worldcom, Parmalat and more recently Lehman Brothers, the role of accountants in providing a 'true and fair' view of the performance and position of these companies has often been brought into question. The profession has had to become even more vigilant and responsible for the behaviour and reputation of its members. Through its education and training programmes, it has had to ensure that professional accountants develop a greater ethical and responsible attitude to their
work. ACCA and other professional bodies recognise their members' duty to act in the public interest, as well as the interests of identified stakeholders.
2.6 ACTING IN THE PUBLIC INTEREST Accountants, like other professionals, must 'act in the public interest'. 'Acting in the Public interest’ is a difficult phrase to define exactly. The public is everyone who is affected or could potentially be affected by the work or shortcomings of accountants and auditors, including third party institutions. The interest is the potential impact of accountants’ work on the public, whether that be beneficial or harmful. What actions are the public interested in as far as accountancy is concerned? For the purposes of this module we will assume that they have an interest in: Financial transactions being recorded accurately and completely Financial statements and reports portraying a true and fair view of the financial position and performance of an organisation Performance and financial positions of organisations being reliably and objectively compared for the purpose of making investment decisions Fraud, theft and error being kept to a minimum In order to achieve a high level of confidence, the public perception should be that accountants / auditors are:
Qualified and trained to consistently high standards Maintaining a high level of technical knowledge and competence Acting diligently Behaving with integrity and objectivity, and are ethical Subject to independent regulation
3.1.1 THEFT Globally theft is a crime. All countries have laws on theft, although how it is defined and the penalties available will vary quite considerably. Theft can be defined as follows (from the Theft Act 1968 in the UK): 'A person is guilty of theft if he dishonestly appropriates property belonging to another with the intention of permanently depriving the other of it.' Theft can take many forms, from openly stealing money or property from another person or organisation (such as a bank), to overcharging a customer for a product, getting on a bus without paying, or over-claiming business expenses.
3.1.2 FRAUD Fraud is a branch of theft. No succinct legal definition of fraud exists. Many of the offences referred to as fraud are covered by laws on theft that exist under the national legislation of various countries. However, in a report by the UK Law Commission in 2002, fraud was defined as:
‘where a person dishonestly makes a false representation, or wrongfully fails to disclose information, or secretly abuses a position of trust with intent to gain or to cause loss or expose another to the risk of loss.’ For practical purposes fraud may be regarded as the use of deception with the intention of obtaining an advantage, avoiding an obligation or causing loss to another party. Fraud is increasing in most countries. It can take various forms, from claiming benefits from the authorities to which one is not entitled, to travelling on public transport without a ticket, or being an employee abusing their position of trust and authority to illegally divert business funds for private gain. Fraud requires the following pre-requisites to occur: Dishonesty Motivation Opportunity Businesses should attempt to reduce or prevent fraud by ensuring that these pre-requisites are minimised. This can be achieved by adopting the following measures to tackle the above pre-requisites: Dishonesty – Checking that employees have no previous record of dishonesty before they are appointed is a means of preventing the recruitment of dishonest employees. This can be achieved by requesting details of any criminal convictions and other misconduct, and seeking appropriate references (if permitted to do so). In some cases, the potential employees will need to provide further evidence of their honesty, and checks with the relevant authorities, including the police will be required.
Motivation - Employees are motivated by receiving fair levels of remuneration for their roles and ensuring, as far as possible, that they have fulfilled roles within the organisation. Employees are often better motivated by having access to necessary training and development and the potential to advance within the organisation – thereby offering greater rewards for more responsibility. It is not possible to identify all those who are capable of dishonesty, or to be familiar with individuals’ personal circumstances which may motivate them to commit fraud. Organisations should not readily present opportunities (or temptations) to commit fraud. Opportunity – Implement systems to ensure that employees do not have the opportunity to commit fraud. This can be achieved by having appropriate internal controls within the organisation. Managers checking and authorising expenses and other payments should ensure that there is appropriate segregation of duties (e.g. ensuring that the person who takes cheques and cash to the bank is not also responsible for processing the associated receipts in the sales
3.2.1 What are bribery and corruption? In the UK, the Bribery Act 2010 sets out offences relating to bribing and offences relating to being bribed. The latter offences are often referred to as ‘corruption’, although the act does not use this term. The Act was finally implemented from 1 July 2011, its purpose being to reform the criminal law of bribery to provide for a new consolidated scheme of bribery offences to cover bribery both in the United Kingdom and abroad. The extra territorial provisions mean that the Act applies to the conduct of UK companies and partnerships overseas, and to overseas companies and partnerships which conduct business in the UK. The offences include bribing another person, being bribed, bribing of foreign officials (directly or indirectly), and failure (of an organisation) to prevent bribery. A person will be guilty of bribery if they offer, promise or give a financial or other advantage to another person, intending to induce another person to do something improper, or to reward someone for behaving improperly. These are actions where the intention is to corrupt the receiver. The receiver will be guilty of being bribed if they:
Request, agree to receive, or accept an advantage, intending that they, or another person, should in consequence behave improperly
Requests, agree to receive, or accept an advantage as a reward for improper performance
Behave improperly in anticipation or in consequence of requesting, agreeing to receive, or accepting an advantage
Request, agree to receive, or accept an advantage and the request, agreement or acceptance in itself constitutes improper behaviour
In most countries, bribery and being bribed are considered to be extremely serious offences. Both involve taking unfair advantage of the circumstances, and can damage public confidence and trust in business and commerce. Within an organisation, bribery and corruption may have a negative impact on commercial activities.
3.2.2 Examples of bribery The partner of an audit firm takes the company accountant of a potential client company out to dinner. During the evening, he offers them the use of his holiday property situated in an expensive resort in another country. Two weeks later, on the advice of the company accountant, the audit firm is appointed as the external auditors of the company. Issues: (a) The link between the company accountant being offered the use of the property and his recommendation that the firm be appointed as auditors is not proven. However, in such a situation as this, a well-informed third party may easily be able to present the case that the offer of the use of the property was a bribe. (b) To accept that the act of offering the use of the property was a bribe, then by offering that bribe, the audit partner was putting pressure on the company accountant to act against the wider interests of the company, its stakeholders, and possibly themselves. (c) The client company could be paying more for their external audit than they would have needed to had they appointed another audit firm. They may not be the best firm for the assignment.
3.2.2 Examples of bribery Example 2: A construction company is tendering for a contract with a government in another country. The tender has to be submitted by post to the overseas contract manager with a completed proposal form. Inside the proposal form is a banker's draft payable to the contract manager to whom the letter is addressed. Despite the bid not being the lowest or of the best specification, the contract is awarded to this bidder. Issues: (a) The government is paying more than is necessary for a contract with an inferior specification, leading to a waste of tax payers’ money.
(b) The officer received a prison sentence of four years for committing this offence.
3.2.2 Examples of bribery Example 3: Following a price war in oil supplies in Country A, the marketing director of a major supplier of oil invited their counterparts in the other two main oil-supplying businesses to a meeting at a luxury hotel. Following the meeting, the price of oil from all three suppliers was raised by an average of 10%, and their prices were equalised. Issues: (a) This is a ‘price fixing’ issue, where normal competition is being suspended. Each oil company has agreed to maintain a certain price level in order to allow the other companies to do the same. Although the arrangement is mutually beneficial, it is nevertheless an inducement, and a form of bribery. (b) While the suppliers within the ‘cartel’ are making greater profits through eliminating the pressures of competition, costs to all the businesses to whom they supply oil become artificially high, leading to higher prices being charged to their customers, and contributing to inflation within the economy.
3.2.3 Sanctions against bribery and corruption Bribery,( where there is an offer to bribe, even if the offer is not taken up), and corruption are offences punishable in many countries by imprisonment, a large fine, or both. The following case is offered by way of illustration: An officer in a local authority was convicted of accepting payments and preferential services over a period of six years in return for putting companies’ names on the authority’s contracts list, so that they could tender for large contracts with the authority. The officer received a prison sentence of four years for committing this offence.
3.2.4 International Bribery: Conventions and instruments The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and Revised Recommendation (1997) The OECD Convention obliges Parties to make it a crime to bribe foreign public officials in international business transactions which should be punishable by effective, proportionate and dissuasive criminal penalties. Council of Europe Criminal Law Convention on Corruption (1998) and additional Protocol (2005)
The Convention requires states to establish as criminal offences, the active and passive bribery of domestic and foreign officials. It also covers private sector corruption, trading in influence, money laundering and accounting offences connected with corruption offences. The UN Convention against Corruption (2003) The Convention obliges State Parties to implement a wide and detailed range of anti-corruption measures affecting their laws, institutions and practices. These measures aim to promote the prevention, detection and punishing of corruption, as well as cooperation between State Parties. EU instruments against Corruption There are two EU instruments on corruption: A Convention on the Fight against Corruption involving Officials of the Member States of the EU (1997), and a Framework Decision on Corruption in the Private Sector (2003). The latter requires the criminalisation of both active and passive corruption (giving and receiving a bribe), and stipulates that legal persons may be held accountable.
3.2.5 Insider trading Insider trading is another form of corruption. This is making investor decisions based on confidential information. Insider trading is a criminal offence in most countries, although the effectiveness of enforcement varies. The reasons it is usually illegal are:
It is unfair on investors who do not have access to the information
It may deter investors from participating in the market at all, undermining the basic purpose of markets, which is to allow companies to raise capital
It may destabilise markets by encouraging the trading of stock based on rumours
It involves profiting from a breach of confidence, at the expense (at least partially) of people to whom the insider has a duty (such as their employer, and their employer's shareholders)
Defenders of insider trading claim that it improves market efficiency by allowing confidential information to influence prices more quickly. However, in most situations insider trading is considered to be highly damaging. Because insider trading is usually illegal, insiders who wish to benefit personally from price sensitive information will collaborate with others who cannot easily be traced to themselves, both to exploit the trading opportunities and make it harder to trace the transactions back to the original insider information and its source. This is known as an ‘insider trading ring’.
Not all information that is not publicly available is likely to be defined as insider information, but anything that can reasonably be expected to have a significant effect on a company's share price is. The source of the information and the way in which it is acquired also affects the legality of trading on it. Investors, especially employees of companies who benefit from acquiring confidential information, likely to affect share prices, should be cautious about using any information that is not publicly available. Not only may they be prosecuted but they could be jailed. Investors can sometimes legally obtain advantage over others by ensuring that they make use of all possible sources of information. Information that is not technically price sensitive may be useful, but not well circulated. A frequently useful example is information of a technical nature rather than related to finance or sales. However, those who possess or gain access to confidential information are well advised to be cautious and to get appropriate professional advice when in doubt, particularly when that information has commercial sensitivity and where that information is obtained as a result of employment and access to privileged sources.
3.2.6 Why bribery and corruption are against the wider commercial and public interest Considerable (unfair) commercial or financial advantage can be obtained by individuals and / or organisations who distort the normal market mechanism through bribery, corruption or insider trading. These practices are completely against the wider stakeholder and public interest and prevent fair competition. They also destroy trust in the market mechanism. If bribery, corruption and insider trading are generally accepted in society or accepted as a normal way of doing business, then commercial transactions between organisations become highly distorted and shareholder value in these organisations can be seriously damaged. For example, if a company’s procurement officer accepts a bribe to order an inferior and more expensive component from a supplier, the consequences will be that the company purchasing these components will lose profitability through higher input costs, potentially greater waste or returns, or higher after sales service costs. The company which offers the lower cost and higher quality product will therefore lose business which is a perverse economic outcome. The normal market mechanism should ensure that the most efficient organisations are rewarded. They offer products and services of greater quality and better value for money; this encourages efficiency and effectiveness in the economy. Such companies should make the greater profits and enjoy the highest share prices. Bribery and corruption badly interferes with this process. It makes it difficult for those who refuse to engage in such practices to compete with those who do. Potential investors and customers will also be deterred from investing or purchasing from organisations under these circumstances. They fear that the markets may not be as efficient as they should be. Countries where bribery, corruption and insider trading become endemic (and are accepted) become very unattractive for most individuals, companies or other countries to invest in. This is where a lack of confidence and trust in capital markets develops and investor confidence is undermined.
3.3.1 What is money laundering?
The term ‘money laundering’ was invented in the 20th century and had its origins in organised crime such as found in the United States in the 1930s. Those who may have obtained their wealth illegally have often tried to find ways to conceal or disguise the source of this wealth. Money laundering may well have been taking place as long as 4,000 years ago. There are various definitions available for ‘money laundering’. The European Communities (EC) Money Laundering Directive (2005/60/EC) says that the following will be regarded as money laundering:
‘the conversion or transfer of property, knowing that such property is derived from criminal activity or from an act of participation in such activity, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such activity to evade the legal consequences of his action’; and
‘the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from criminal activity or from an act of participation in such activity’.
Expressed in simpler terms, money laundering is: 'the process by which illegally obtained funds are given the appearance of having originated from a legitimate source'. If successful, the practice of money laundering allows criminals to maintain control over and access to their illicit proceeds. It can provide a legitimate cover for the illegal source of their income. Money laundering can help protect drug traffickers, terrorists, organised criminals, insider dealers, and tax evaders from justice and hide their illicit assets from the authorities or the victims of the criminal activities. In some countries, any conduct which would lead to a sentence of imprisonment is regarded as a crime from which any proceeds could be ‘money laundered’. In other countries, only offences appearing on a prescribed list are regarded as crimes from which the proceeds are subject to money laundering legislation. Some countries will allow a person to be prosecuted for laundering the proceeds of criminal conduct in another country, provided the conduct would have been regarded as criminal conduct in both jurisdictions. Some countries also have anti-money laundering laws where individuals, such as accountants, may be responsible for implementing procedures, in order to increase the probability of identifying criminal acts and proceeds, and to report to the relevant authorities. ACCA members and students have a responsibility to familiarise themselves with the law that applies to them, and ensure that they act within the law.
3.3.2 Measures to prevent and punish money laundering Laws in many countries require certain individuals and organisations to report to the authorities, not just actual knowledge that a crime has taken place, but also any suspicion of such crime. Failure to make a relevant report is itself a criminal offence, and the person who fails to make the report can, depending on the precise circumstances, face a lengthy prison sentence.
A person may be guilty of an offence if there was ‘reasonable cause for suspicion’ of criminal activity, and they failed to make a report. Therefore, a person could be punished if they knew, suspected, or ought to have known or suspected, that there had been criminal activity resulting in some benefit (or proceeds). Money laundering can be viewed as a continuing offence. So long as a crime goes unreported, the proceeds of that crime are being concealed. The date of the original crime is irrelevant. Ignorance of the law is no defence; therefore, it is important that organisations and employees at risk are aware of their obligations under legislation in their country. Onerous obligations are placed on companies and their staff to report any suspicions and the penalties can be severe for ignoring these obligations. In response to mounting concern over money laundering, the Financial Action Task Force on Money Laundering (FATF) was established by the G-7 Summit that was held in Paris in 1989. The FATF was set up as an intergovernmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing. It currently has in excess of 30 member countries. The FATF has driven the effort to adopt and implement measures designed to counter the use of the financial system by criminals. It established a series of recommendations in 1990 (revised in 1996 and in 2003) that set out the basic framework for anti-money laundering efforts and are intended to be of universal application. Legitimate businesses can unwittingly be the vehicle or ‘host’ for money laundering activities, unless there are processes and procedures in place to prevent and detect such activities. The accountant or bookkeeper is, in many jurisdictions, required to play an important and responsible role in preventing this. One of the main responsibilities of an accountant or bookkeeper is to be vigilant in their role to detect unusual patterns, volumes or frequencies of sales or receipts, and to report such unusual transactions or events where appropriate.
3.3.3 The day to day responsibilities of a business under common money laundering regulations A business should have anti-money laundering policies and procedures to prevent it being used for money laundering and terrorist financing. These policies and procedures include:
Customer due diligence and ongoing monitoring of customers
Reporting
Record keeping
Internal controls
Monitoring and managing compliance with the regulations
Effectively communicating policies and procedures within your business and to external parties
A business is also expected to apply a risk-based approach to ensure their policies and procedures are capable of preventing any potential money laundering. The key issues that the business and its staff need to consider are:
What type of customers do they have?
Are there any particular types of customer behaviour that pose a risk?
Does the method or frequency of contact with the customer increase risk?
What risk is posed by the products or services the customer is using?
3.3.4 Customer due diligence When a relevant business (which would include a firm of accountants) establishes a business relationship, it must undertake due diligence procedures (acting prudently and with caution), by identifying the customer and verifying their identity. This is also required when:
Carrying out occasional transactions above a certain threshold
There is a suspicion of money laundering
There is doubt regarding the authenticity of previously obtained customer identification data
A customer’s identity should be verified by means of photographic evidence (such as a passport). Other customer due diligence measures include:
Identifying the beneficial owner of an entity, and verifying that person’s identity
Obtaining sufficient information regarding the purpose and intended nature of the business relationship
There are also customer due diligence recommendations in respect of politically exposed persons and cross-border relationships.
3.3.5 Reporting of suspicious transactions If a relevant business suspects, or has reasonable grounds to suspect, that funds are the proceeds of a criminal activity, the FATF Recommendation is that it should be required to report promptly its suspicions to the financial intelligence unit or other appropriately established authority. Relevant businesses should develop programmes against money laundering. These programmes should include:
The development of internal policies, procedures and controls, including appropriate compliance management arrangements, and adequate screening procedures to ensure high standards when hiring employees
An ongoing employee training programme
An audit function to test the system
3.3.6 Record-keeping According to FATF Recommendation 10, relevant businesses should maintain, for at least five years, all necessary records on transactions to enable them to comply swiftly with information requests from the competent authorities. Such records must be sufficient to permit reconstruction of individual transactions so as to provide, if necessary, evidence for prosecution of criminal activity. Relevant businesses should keep records on the identification data obtained through the customer due diligence process (for example copies or records of official identification documents like passports, identity cards, driving licences or similar documents), account files and business correspondence for at least five years after the business relationship has ended.
3.4.1 General Principles The main principles of data security have been embodied in legislation in many countries. Generally, an organisation needs to consider several broad questions:
What information is it holding / processing?
As a result, what level of responsibility attaches to that information?
How valuable or sensitive is the information?
Should the subjects of the data have access to that data?
What damage or distress could be caused to individuals if there was a security breach?
What effect would a security breach have on the organisation, in terms of cost and reputation?
If a business only holds information that is publicly available, then security measures will merely focus on protecting the premises and equipment, and having an appropriate disaster recovery plan. In other words, data security is only important in respect of any interruption of business that a security breach could cause. Where sensitive data is being maintained, there will usually be a requirement for documented procedures to ensure security of the data and access to the data where appropriate. Such procedures should include staff training and monitoring compliance. As an ACCA accountancy trainee, you are required to observe the fundamental principle of confidentiality. In addition, you should ask yourself the following questions:
Are you familiar with the security policy and procedures of your organisation?
Have you received adequate training regarding your responsibilities for the personal information the organisation holds or processes?
Can you recognise when information is confidential?
3.4.2 Physical Security Many security incidents relate to the loss or theft of laptops, briefcases, storage media, etc. Physical security is very important, and as an employee you should consider the following questions:
How secure are the premises in which you work?
Are you required to lock away personal information at night?
Are you required to lock away your laptop at night?
Does your laptop / computer screen lock automatically if it is left unattended for a certain length of time?
Are you required to dispose of waste paper securely, for example by shredding?
Are you aware of where to find the organisation’s policies and procedures regarding security?
3.4.3 Practical computer security measures
Computer security at work should be appropriate to the system used. For example, a networked system will need more controls than a stand-alone computer. A stand-alone computer that is connected to the internet will need more protection than one that is not. An organisation you might be working for should address the following questions:
Is there adequate protection against the possible loss of information because the power supply fails?
Is the equipment of the organisation properly maintained to reduce the risk of loss of, or interruption to, work due to hardware failure?
Are there proper controls over access to the computer systems?
Does each member of staff have their own user name and password, and are they prompted to change this periodically?
Is there a hierarchy of privileges controlling access to certain parts of the network?
Does the organisation regularly obtain security software updates?
Are laptops and portable media (such as memory sticks and disks) only allowed to leave the premises if transported securely and with a manager’s authority?
Are there procedures to securely delete information held on computer when appropriate?
Are computer back-ups taken? If so, how often, and how are they stored? Is there a clear procedure for taking back-ups and archiving data?
Does the organisation test the recovery of information from back-ups to see if it is effective?
If employees use the internet or email, are there adequate security measures to detect and protect against malicious software that could be downloaded onto the system? Is the firewall and virus protection up-todate?
Does the organisation have appropriate disaster recovery procedures?
3.5.1 What is health and safety? Most countries have legislation relating to health and safety in the work environment. This legislation will vary considerably by country, and you need to know the law in your country, and understand your rights and responsibilities.
3.5.2 Employee rights Your rights as an employee to work in a safe and healthy environment are normally given to you by law, and generally cannot be changed or removed by your employer. However, the law varies by country, and in some countries is less well developed or may not be enforced. The most important rights usually available to an employee under health and safety legislation are:
As far as possible, to have any risks to health and safety properly controlled
To be provided with the necessary personal protective and safety equipment
To be able to stop work and leave your work area, without being disciplined, if you have reasonable concerns about your safety, or if working conditions are poor
To be able to tell your employer about any health and safety concerns you have
To be able to contact the presiding health and safety inspectorate, government department or local authority, if your employer will not listen to your concerns, without fear of being disciplined
To be able to take rest breaks during the working day, and to have annual paid leave
3.5.3 Employee responsibilities Your most important responsibilities as an employee are:
To take reasonable care of your own health and safety
To consider the health and safety of people who may be affected by your actions
Practical measures that you can take include:
Avoiding poor posture, and ensuring that any equipment you use is safe, including, for example, positioning your monitor and keyboard so as to avoid eyestrain or repetitive strain injury
Cooperating with your employer, making good use of the training available, and understanding and following the company's health and safety policies
Not interfering with or misusing anything that has been provided for your health, safety or welfare
Reporting any injuries, strains or illnesses you suffer as a result of doing your job (your employer may need to change the way you work)
Telling your employer if something happens that might affect your ability to work (for example becoming pregnant or suffering an injury)
Informing your line manager or employer of any potential health and safety risks that you identify that could have an impact on you or your colleagues
3.5.4 Reporting health and safety issues Firstly, discuss your concerns with your employer or line manager. Alternatively, your company may have appointed a health and safety representative, who might be your first point of contact. If you have an employee representative, such as a trade union official, they may be able to help you. Your employer should not expose you to avoidable risks at work, and must respond if you have pointed out legitimate health and safety risks. Health and safety inspectors or officers in many countries have powers to enforce the law. If you have reported your company for potential breaches of health and safety legislation, your employer should not normally discipline you or put you at a disadvantage in your job. However, if you are unaware of the extent of employee protection available in your country under the precise circumstances, it is advisable to seek legal advice.
3.6.1 General filing requirements In most countries there is a legal obligation on businesses and particularly on limited companies to record financial data, to keep financial records and to file or submit financial information to the relevant authorities at appropriate times. They are also required under law to have their accounts audited unless they are exempt. This will vary between countries but the main requirements are:
Preparing and filing accounts. There are deadlines by which statutory accounts must be prepared and delivered to the relevant registration body. In many countries, there is an automatic penalty for late submission, without exception. Accountants and auditors need to be aware of the filing deadline.
Content of accounts. The accountant must have specialist knowledge of this from minimum disclosure requirements under relevant company law and from financial reporting standards that apply in your country.
Audit requirements. In most countries, companies that are not exempt must have their accounts audited for each accounting period, and the accounts submitted must have the signature of the auditor included to verify that they represent the true and fair financial performance and position of that company.
3.6.2 Accounting reporting periods Every company has a duty to keep accounting records and must prepare annual accounts that report on the performance and activities of the company during the year. In most countries there are deadlines by which accounts must be filed with the relevant registration authority and there are usually penalties for late or non-submission. Which records should be kept? Trainee accountants are often responsible for the recording and processing of financial transactions and inputting of financial data into accounting systems. In many countries national company law prescribes certain accounting information or records that must be kept for statutory purposes, including for taxation. Examples of such records are listed as follows:
Sales
Purchases
Expenses
Amounts owing to suppliers (purchases ledger)
Amounts owing from customers (sales ledger)
Balances of cash
Balances at the bank
Non-current asset registers
Long-term liabilities
Inventories
Capital account
What is a financial period? The period reported on in the accounts (usually a year) is called a financial period. This starts on the day after the previous financial period ended or, in the case of a new company, on the day of incorporation. The financial period or ‘accounting reference period’ as it is sometimes called, ends on a specific date known in some jurisdictions as the ‘accounting reference date’ (ARD) or at a date within a short window either side of the ARD, if this is more convenient.
3.6.3 Preparing and signing off FINANCIAL STATEMENTS This section explains the basic rules on preparing financial statements. It applies to all company financial statements irrespective of whether any filing requirements or audit exemptions apply. Do all companies have to keep accounting records? Yes, in most countries, all limited and unlimited companies, whether or not they are trading, must keep accounting records. What does a set of financial statements include? Generally, financial statements must include:
An income statement (profit and loss account or income and expenditure account if the company is not trading for profit)
A statement of financial position (balance sheet) usually signed by a director
A statement of cash flows
A statement of retained earnings
An auditor's report signed by the auditor (if appropriate)
A director's report (if appropriate) signed by a director or the secretary of the company
Notes to the financial statements
Group financial statements (if appropriate)
Who can approve and sign financial statements? The financial statements must be approved by those responsible for governance of the organisation (usually the company's board of directors) and signed before they are sent to the relevant registration body.
The statement of financial position must usually be signed by a director, with any commentary about accounting or filing exemptions appearing above the director's signature
The directors' report, if one is required, must be signed by a director or the company secretary
If an auditors' report, special auditors' report or accountants' report is attached to the financial statements, then it must state the names of the auditors or accountants and be signed and dated by them. It cannot be
signed and dated before the directors have approved the financial statements, as evidenced by their signing of the statement of financial position.
3.6.4 Reporting exemptions What exemptions are available? In some countries companies classed as small or medium-sized, under particular criteria such as turnover, gross assets or number of employees, for example, may prepare and deliver abbreviated accounts to the registration authorities and may claim audit exemption. Are annual accounts required if a company is not trading? It is usually a requirement that all limited companies, whether they trade or not, must deliver accounts to the registration authority of the country. However, a limited company may claim exemption from audit as a 'dormant company' if it has not traded during a financial year, and provided it meets certain other criteria.
3.6.5 The auditor or reporting accountant Most countries require at least their larger companies (defined under law) to have their accounts audited by an external and independent auditor, in order to enhance stakeholder confidence in those accounts. The auditor may be an individual, a firm or, in some cases, a government body. To ensure independence, auditors must be external to the company and should not be or include an officer or employee of the organisation being audited. Who can be an auditor? The auditor is normally a qualified accountant recognised by company legislation in the country. An auditor is either:
A member of a body approved by statute who, under the rules of that body, is entitled to engage in public practice, and who is eligible for appointment as auditor, or
An individual (whether or not a member of any such body), who is eligible for appointment as a company auditor by direct authorisation from government, or
In some cases, a government department (eg when the audited entity is a public body).
4.1 Introduction A framework of professional principles can guide behaviour where the law is not applicable, not clear, or remains silent. Behaving legally is the minimum standard of behaviour expected of the ‘ethical’ accountant. Some behaviour, while legal, may still be regarded as ‘unethical’. Many aspects and decisions within accounting roles, at all levels, are not covered by the law. Therefore, in many different situations, the law is not sufficient to guide a professional’s behaviour, but a professional is also expected to behave in accordance with accepted professional principles
4.2 Codes of ethics for accountants As mentioned in Section 2.2 of the module, when examining the characteristics of a profession, one feature is that professions usually operate under ethical codes. ACCA's Code of Ethics and Conduct, which incorporates the Code of Ethics for Professional Accountants of the International Ethics Standards Board for Accountants (IESBA), contains five fundamental principles of professional ethics:
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behaviour
Compliance with these fundamental principles is essential. But in addition, the professional accountant should avoid situations where compliance with the fundamental principles may be threatened. Each of the fundamental principles will now be considered.
4.2.1 Integrity The principle of integrity requires all professional accountants to be straightforward and honest in professional and business relationships. Integrity also implies fair dealing and truthfulness. A professional accountant should not be associated with reports, returns, communications or other information where they believe that the information:
Contains a materially false or misleading statement;
Contains statements or information furnished recklessly
Omits or obscures information required to be included, where such omission or obscurity would be misleading
4.2.2 Objectivity The principle of objectivity imposes an obligation on professional accountants not to compromise their professional or business judgement because of bias, conflict of interest or the undue influence of others. An accountant may be exposed to situations that may threaten objectivity. It is then necessary to recognise the situation and consider measures to address the threat. It is impractical to define and prescribe all such situations. In
particular, relationships may be established that could bias or unduly influence professional judgement. Situations that threaten the objectivity of the professional should be avoided.
4.2.3 Professional competence and due care The principle of professional competence and due care imposes the following obligations on professional accountants:
To maintain professional knowledge and skill at the level required to ensure that clients or employers receive competent professional service
To act diligently in accordance with applicable technical and professional standards when carrying out professional work
Providing competent professional services to employers or clients requires the exercise of sound judgement in applying both knowledge and skill in the performance of professional work. Professional competence may be divided into three separate phases:
Attainment of professional competence
Maintenance of professional competence
Diligence when applying knowledge and skills
The maintenance of professional competence requires a continued awareness and understanding of relevant technical, professional and business developments. A professional accountant undertakes continuing professional development to maintain and develop their capabilities, enabling them to perform competently. Diligence requires the responsibility to act in accordance with the requirements of the task, thoroughly and on a timely basis. Where appropriate, a professional accountant should make clients, employers or other users of the services, aware of limitations inherent in those services to
4.2.4 Confidentiality The principle of confidentiality imposes an obligation on professional accountants to refrain from:
Disclosing outside the employing organisation, confidential information obtained as a result of professional and business relationships without proper and specific authority, unless there is a legal or professional right or duty to disclose
Using confidential information acquired as a result of professional and business relationships to their personal advantage, or the advantage of third parties
A professional accountant should maintain the confidentiality of information disclosed by a client or employer, a prospective client or employer, or anyone else if the information was disclosed in connection with one’s role as an accountant (or student accountant). Confidentiality should be maintained even in a social or informal environment, and should also be considered within the firm or employing organisation. The need to comply with the principle of confidentiality continues even after the end of a relationship between a professional accountant and a client or employer. When a professional accountant changes employment or acquires a new client, the professional accountant is entitled to use the prior experience gained, but should not use or disclose any confidential information acquired as a result of a past professional or business relationship. The following are circumstances where professional accountants are or may be required to disclose confidential information, or when such disclosure may be appropriate:
Disclosure is permitted by law and is authorised by the client or the employer
Disclosure is required by law, for example:
o
production of documents or other provision of evidence in the course of legal proceedings
Disclosure to the appropriate public authorities of infringements of the law that come to light
There is a professional duty or right to disclose, when not prohibited by law:
o
to comply with the quality reviews of ACCA or other professional body
o
to respond to an enquiry or investigation by ACCA or other regulatory body
o
to protect the professional interests of a member in legal proceedings
o
to comply with technical standards and ethics requirements
4.2.5 Professional behaviour Professional behaviour imposes an obligation on professional accountants to comply with relevant laws and regulations, and avoid any action that may bring discredit to the profession. They should behave with courtesy and consideration towards all with whom they come into contact. Professional accountants should not bring the profession into disrepute. They should not make exaggerated claims for the services they are able to offer, qualifications they possess, or experience they have gained. They should not make disparaging comments about, or unsubstantiated comparisons with, the work of others.
4.3 Threats to the fundamental principles In the previous mini-case studies, the fundamental principles were all threatened in one way or another. Threats fall into one or more of the following categories:
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Threats may be created by a range of circumstances. These circumstances can include relationships between various people such as the following:
Colleagues
Friends
Managers
Clients
Former clients or colleagues
Regulatory or legal agencies
Threats can serve to compromise, or be perceived to compromise, a professional accountant’s compliance with the fundamental principles. Fundamental principles can be threatened in a number of ways depending on the circumstances. Each of the above categories of threat is considered on the next page.
4.3 Threats to the fundamental principles (a) Self-interest threat ─ the threat that a financial or other interest will inappropriately influence the professional accountant’s judgement or behaviour; Example: An audit manager in a small audit firm is persuaded by his audit partner to accept weak explanations about the reliability of several accounting adjustments made by the client’s accountant. The motive for this is that the audit partner doesn’t wish to cause problems for the client and risk losing the contract as external auditor, which is coming up for renewal in the near future.
(b) Self-review threat ─ the threat that a professional accountant will not appropriately evaluate the results of a previous judgement that they have made, or a service performed by themselves, or by another individual within the professional accountant’s firm or employing organisation, on which someone else will rely when forming a judgment or making a decision. Example: A bookkeeper is responsible for the purchase ledger and correctly balancing off all the individual accounts at the end of the month. She is asked by her manager who would normally do the check themselves, to carry out a formal reconciliation of the individual account balances against the supplier statements and then check the accuracy of all the individual ledger accounts, reporting any errors to her manager. (c) Advocacy threat ─ the threat that a professional accountant will promote their position, or that of a client or employer to the point that the professional accountant’s objectivity is compromised. Example: An accountant working for a company offering bookkeeping and financial accounting services is asked to recommend a business to help a potential client with management consultancy services. The accountant offers the services of his own employer without hesitation, despite the presence locally of a competitor specialising in consultancy work with a successful track record of undertaking consultancy assignments with a range of businesses. (d) Familiarity threat ─ the threat that due to a long or close relationship with a client or employer, a professional accountant will be too sympathetic to their interests or too accepting of their work. Example: A tax accountant is asked by a very good friend, who he has heard boast that he pays as little tax as possible, to complete and submit his tax return for him. The accountant agrees and completes the return from information that his client submits on a basic spreadsheet showing 12 months’ income and expenditure, with no supporting documents. (e) Intimidation threat ─ the threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the professional accountant. Example: A trainee accountant is asked to increase the total value of receivables by their manager on the grounds that the previous year’s impairment to the value of receivables had been excessive. When the trainee asks why, he is told aggressively by his manager that it is none of his business and that the adjustment should be made immediately or the manager will have to take matters further.
4.4 Safeguards against threats to fundamental principles ACCA’s Code of Ethics and Conduct requires members and students to be alert to threats to the fundamental principles; to evaluate them; and consider the safeguards (in the form of actions or other measures) that may be taken in order to eliminate the threats or reduce them to an acceptable level. Possible safeguards fall into two broad categories:
Safeguards created by the profession, legislation or regulation
Safeguards in the work environment
4.4.1 Safeguards against threats to fundamental principles These are deemed to include measures such as:
Educational, training and experience requirements for entry into the profession
Continuing professional development requirements
Corporate governance codes
Requirements to comply with professional standards
Professional or regulatory monitoring and disciplinary procedures
External review by a legally empowered third party of the reports, returns, communications or information
produced by a professional accountant
4.4.2 Safeguards in the work place These might include:
Strong ethical leadership
Strong internal controls, such as review procedures and internal audit
Timely communication of policies and procedures relating to ethical behaviour (and any changes to them)
Policies and procedures to deal with illegal or unethical behaviour, and threats to the fundamental principles
Appropriate and rigorous recruitment procedures
Well-established and understood consultation procedures within the organisation
Effective and well-publicised complaints system
Engagement-specific safeguards, including quality control procedures and the selection of the assignment team
4.4.3 Safeguards created by the individual These might include:
Complying with one’s own training and development requirements
Maintaining a record of ethical dilemmas encountered and steps taken to resolve them
Consulting with colleagues, legal advisers or one’s professional body as appropriate (always being mindful of the fundamental principle of confidentiality)
4.5 Ethical Conflict Resolution In this section the five fundamental principles have been identified, and few people would disagree that these are principles that professional accountants should observe. Through this broad agreement comes a responsibility on the professional accountant to safeguard the fundamental principles, and ensure that any threats to them are adequately addressed by the implementation of safeguards. ACCA's Rulebook sets out a framework to assist in the process of recognising threats to the fundamental principles and addressing them. The ACCA Framework for solving ethical dilemmas is based on the IESBA model. It may be thought of as five steps, in the form of questions to be considered when confronted with an ethical dilemma:
What are the relevant facts?
What are the ethical issues involved?
Which fundamental principles are threatened?
Do internal procedures exist that mitigate the threats?
What are the alternative courses of action?
These five steps will be used in section 7 as a way of considering some real dilemmas that face an accountant at work. Q1 Just before lunch, Sunil, a petty cashier, responsible for the petty cash book was asked by his manager for $30 from petty cash, because he needed to buy some groceries and had no time to get the necessary cash from his bank. To account for this, the manager suggested that Sunil record an entry for office window-cleaning in the petty cash book to match the money taken. They both knew that the window cleaner would be visiting the following morning, and always charged $30 for his work. Therefore, the manager could draw $30 from his bank account that evening, and replace the cash before the window cleaner requested payment. The correct answer was: 'Self-review','Familiarity','Intimidation' Q2 Sally, an accounting technician, works on the sales ledger in Big Foods, a food wholesaler. One of its customers, Fare Foods, is owned by Sally’s brother. Fare Foods has placed a large order and, like all other customers, receives a 2% prompt payment discount on invoices settled within 14 days. The usual practice within the accounts department, which applies to all customers, is that the date recorded in the sales ledger is the date on which the payment is received in the accounts department (which must always be the
same day that payment is received in the post or delivered to the reception desk). However, there are often one or two days between the cheques arriving at Big Foods and their eventual processing. In addition, cheques and cash received by Big Foods are banked only twice per week, on Wednesdays and Fridays. The "14 day" settlement date for the Fare Foods account fell on a Tuesday. It is now 9.15 on the following morning, and Sally has just received the Fare Foods cheque. She decides to record the receipt date in the sales ledger as Tuesday, and she duly processes Fare Foods’ prompt payment discount of 2%. She sees no need to seek authorisation for this, as Fare Foods had the potential to become a very valuable customer. The correct answer was: 'Self-interest','Familiarity' Q3 Yu Xing is a student accountant, who currently spends much of her time on audit work. While at a client’s premises, one of the directors of the client company asks for ‘ten minutes’ of her time to discuss a tax problem he has. He is intending to dispose of his holiday home in the south of the country, as it is too big for him and his wife, and he would like to know the tax implications. Yu Xing studied capital taxes a few months ago, and can remember a little about the treatment of second homes. She believes the client will be impressed if she can give him some advice, and she hopes that her employer will be pleased with her performance also. In order to reassure the client, Yu Xing displays an air of confidence as she sits down to discuss the director’s taxation affairs with him. The correct answer was: 'Self-interest','Self-review','Intimidation' Q4 Solomon works in the finance department of a hospital operated by the country’s national health service. The hospital wishes to expand its radiology department, and has put out to tender the construction of a new wing. Solomon has been given the task of summarising the terms of each tender for consideration by the Board. One evening, at a family dinner party, Solomon learns that his uncle’s construction company is about to tender for the contract. Solomon’s uncle is clearly unaware of how closely involved Solomon is with the tender process, and talks informally with Solomon about the hospital, the quality of his company’s work, and how much his company would benefit from such a prestigious contract. Before being drawn away to socialise with other guests, Solomon’s uncle mentions that the contract, if awarded to his company, would be very profitable and he is very optimistic, as he feels that the contract price at which his company intends to bid is quite low. Solomon is very fond of his uncle, whose business has been struggling over recent years. He realises that his uncle would have a much better chance of winning the contract if he was made aware of the details of the other tenders. The correct answer was: 'Self-interest','Advocacy','Familiarity' Q5 Elena works in the audit department of a practice as an audit administrator. She assists the audit teams by recording and processing audit evidence collected by her colleagues on audit assignments. As she is not one of the operational members of the audit team, she finds it quite difficult to get close to her senior colleagues who sometimes treat her as an ‘outsider’, and often fail to interact with her socially. During a quiet period at work, Elena spends a few hours using the internet to browse job vacancies. She then submits her résumé to a number of prospective employers. Extract of résumé: …… Current post and responsibilities: Part of an external audit team, undertaking audit assignments as part of an audit team, collecting and analysing audit
evidence. …. Reasons for leaving: To gain more responsibility and to be better rewarded. I would also prefer to work with people who are more friendly and sociable than the people I currently work with. The correct answer was: 'Self-interest','Advocacy'
