Reflecting on accounting

contexts: a question of
ethics
Lecture 4

Lecture objectives
Identify the professional standards asked of
accountants, to act ethically, as per APES110
Code of Ethics for Professional Accountants.
Identify threats to the maintenance of ethical
behaviour.
How can accounting help, after an ethical breach
occurs? Consider auditing in a new space!
Propose a framework for tackling ethical problems
Apply ethics in context 3 problem areas!
Demonstration example EMI music (a
hypothetical scenario based on a real world
accounting problem)

The unethical accountant and

real world consequences!

Unfortunately, they are not

alone...
Nugan Hand Bank (1980) Concerns over the bank's
questionable accounting processes
began to circulate by the late 1970s
as investors attending the AGM were
prevented from asking questions by
the bank.

Unfortunately, they are not

alone...
HBOS - Concerns
over senior
executive management (skill and
ethics)

http://www.guardian.co.uk/busines
s/2013/apr/04/bankers-broughtdown-hbos

APES110 What is it?

Released by the Accounting Professional
and Ethical Standards Board (APESB)
A code of ethics to which members of
the CPA, ICAA and IPA subscribe to.
Penalties for breaching APES standards
include loss of membership to
professional bodies and possible
prosecution if unethical conduct is also
fraudulent and illegal.

Accountants are expected to

act in the public interest...
A distinguishing mark of the accountancy profession is
its acceptance of the responsibility to act in the
public interest.
Therefore, a Members responsibility is not
exclusively to satisfy the needs of an individual
Client or employer. In acting in the public interest a
Member should observe and comply with the ethical
requirements of this Code.
What is the public interest?
Defined as the collective well-being of the community of
people and institutions that the Members serve. The
accountancy professions public consists of Clients, credit
providers, governments, employers, employees, investors,
the business and financial community, and others who rely
on the objectivity and integrity of Members to assist in
maintaining the orderly functioning of commerce.

Fundamental principles of
accounting ethical conduct (as
per APES)

5 principles:
1.Integrity
2.Objectivity
3.Professional competence and due
care
4.Confidentiality
5.Professional behaviour

Principle 1: Integrity
110.1
The principle of integrity imposes an obligation on all Members
to be straightforward and honest in professional and
business relationships. Integrity also implies fair dealing and
truthfulness.
110.2
A Member should not be associated with reports, returns,
communications or other information where they believe that
the information:
(a) Contains a materially false or misleading statement;
(b) Contains statements or information furnished
recklessly; or
(c) Omits or obscures information required to be
included where such omission or obscurity would be
misleading.

Principle 2: Objectivity
120.1
The principle of objectivity imposes an obligation
on all Members not to compromise their
professional or business judgement because of
bias, conflict of interest or the undue influence of
others.
120.2
A Member may be exposed to situations that may
impair objectivity. It is impracticable to define and
prescribe all such situations. Relationships that
bias or unduly influence the professional judgment
of the Member should be avoided.
Basically, if you think you shouldnt, then dont!

Lets consider accounting

ethics applications in new
spaces auditing and rugby
league!
Salary cap auditing and crisis

management
How the auditing of player
financial payments plays a role
in helping a sustainable
competition, and the
management of crises when
there is a breach considering
the positive aspect of
accountability practices
Consider the NRL (National
Rugby League)

National Rugby League

The premier rugby league competition
in Australia (from a quality perspective,
arguably worldwide)
16 teams, spread across the Eastern
Seaboard of Australia and New
Zealand.
Competition is governed by the NRL
body, which, till 2012 was 50% owned
by News Limited, and 50% owned by
the ARL (Australian Rugby League)

What is a salary cap

auditor?
All clubs can only spend up to a maximum
of $5.85 million on their top 25 players (as
at 2013).
Purpose is to keep the competition even, so
that it will remain interesting and appealing
to the widest range of fans, ensuring the
long term sustainability of the game.
The salary cap auditor polices the 16
clubs spending on player payments,
ensuring it stays below the limit, or cap.

News Limiteds vested

interests in the NRL (till Feb
2012)

Ian
Schubert
salary
cap
auditor

What independence issues

might there exist here?
What are the pressures on Ian Schubert to
keep all stakeholders happy?
Schubert does a wonderful job, and rises
above the independence pressures to
discharge his duties responsibly. He is
widely respected in the communitybut how
long will he be there?
What do we learn here, about the
responsibilities of accountants/auditors to
discharge their duties with professional care?

New ARL Commission to

replace current NRL structure
Since Feb 10 2012, ARL Commission
now oversees the game, and is made
up of 10 independent members, not
formally linked to News Limited.
News Limited still owns two clubs,
and has a strong media influence on
the game, but conflict of interest risk
is now significantly lower as they
dont run the game.

How do organisations manage

crises, and where are the
ethical boundaries?

Benoit identified a range of crisis

management responses:
Reducing
Denial
offensiveness of event
Simple Denial
Bolstering
Shift the Blame
Minimisation
Evasion of Responsibility
Differentiation
Provocation
Transcendence
Defeasibility
Attack Accuser
Accident
Compensation
Good intentions
Corrective Action
Mortification

Explaining each
First, they may engage in Denial that is, say they did not
do it (simple denial) or argue that the act was performed
by another (shift the blame). Second, they may try
Evasion of Responsibility. This can be done by saying they
were responding to anothers actions (provocation), Lacked
information or the ability to prevent the act (defeasibility),
argue that the act was a genuine mishap (accident) or that
they actually meant well (good intentions). Third, they
might try Reducing the Offensiveness of the Event. A
range of options are available in this category. They might
stress their good traits (bolstering), argue that the act was
not serious (minimisation), argue that the act was less
offensive than portrayed (differentiation), present that
there are much more important considerations to reflect
upon (transcendence), reduce the credibility of the accuser
(attack accuser), simply reimburse victims
(compensation), or actually try to solve the problem or
prevent its future occurrence (corrective action). Finally,
organisations might accede to their responsibility and simply
apologise for the act (mortification).

Qns to discuss in your tutorials

(pg 8 of case study)
Read the case study on UTS Online, and please
answer the following questions:
1.Until Feb 9 2012, discuss the possible ethical issues
that might arise from the structural connectedness
between the News Limited and the NRL competition.
Consistent with the APESB, what ethical principles
and threats might be relevant here?
2.How does the salary cap audit ensure the
maintenance of ethical behaviours by clubs in
relation to player salary payments?
3.How did the NRL use the salary cap audit to
manage the crisis at the Melbourne Storm? Consider
Benoits crisis management strategies in discussing
your response.

Principle 3: Professional
competence and due care
To maintain professional knowledge and skill at the level required
to ensure that:
(a) Clients or employers receive competent professional service;
and
(b) To act diligently in accordance with applicable technical and
professional standards when providing their services.
130.2
Professional competence may be divided into two separate phases:
(a) Attainment of professional competence; and
(b) Maintenance of professional competence.
130.3
The maintenance of professional competence requires a
continuing awareness and an understanding of relevant
technical professional and business developments.
Continuing professional development develops and maintains the
capabilities that enable a Member to perform competently within
the professional environments.

Principle 4: Confidentiality
The principle of confidentiality imposes an
obligation on Members to refrain from:
(a) Disclosing outside the Firm or employing
organisation confidential information acquired
as a result of professional and business
relationships without proper and specific
authority from the Client or employer or unless
there is a legal duty to disclose; and
(b) Using confidential information acquired as a
result of professional and business relationships
to their personal advantage or the advantage
of third parties.

Principle 5: Professional
Behaviour
Members to comply with relevant laws and regulations

and avoid any action or omission that may bring discredit

to the profession. This includes actions or omissions
which a reasonable and informed third party, having
knowledge of all relevant information, would conclude
negatively affects the good reputation of the profession.

In marketing and promoting themselves and their work,

Members should not bring the profession into disrepute.
Members should be honest and truthful and should not:
(a) Make exaggerated claims for the services they are able
to offer, the qualifications they possess, or experience
they have gained; or
(b) Make disparaging references or unsubstantiated
comparisons to the work of others.

Threats to ethical conduct?

APES 110 specifies a series of threats
to ethical conduct:
(a) Self-interest;
(b) Self-review;
(c) Advocacy;
(d) Familiarity; and
(e) Intimidation

Threat 1: Self Interest

A Financial Interest in a Client.

Jointly holding a Financial Interest with a Client.
Undue dependence on total fees from a Client.
Having a close business relationship with a Client.
Concern about the possibility of losing a Client.
Potential employment with a Client.
Contingent Fees relating to an Assurance
Engagement.
A loan to or from an Assurance Client or any of its
Directors or Officers.

Threat 2: Self Review

The discovery of a significant error during a reevaluation of the work of the Member in Public Practice.
Reporting on the operation of financial systems after
being involved in their design or implementation.
Having prepared the original data used to generate
records that are the subject matter of the Engagement.
A member of the Assurance Team, being, or having
recently been, a Director or Officer of that Client.
A member of the Assurance Team being, or having
recently been, employed by the Client in a position to
exert direct and significant influence over the subject
matter of the Engagement.
Performing a service for a Client that directly affects
the subject matter of the Assurance Engagement.

Threat 3: Advocacy
Promoting shares in a Listed Entity
when that entity is a Financial
Statement Audit Client.
Acting as an advocate on behalf of
an Assurance Client in litigation or
disputes with third parties.

Threat 4: Familiarity

A member of the Engagement Team having a Close or

Immediate Family relationship with a Director or Officer of
the Client.
A member of the Engagement Team having a Close or
Immediate Family relationship with an employee of the
Client who is in a position to exert direct and significant
influence over the subject matter of the Engagement.
A former Partner of the Firm being a Director or Officer of
the Client or an employee in a position to exert direct and
significant influence over the subject matter of the
Engagement.
Accepting gifts or preferential treatment from a Client,
unless the value is Clearly Insignificant.
Long association of senior personnel with the Assurance
Client.

Threat 5: Intimidation
Being threatened with dismissal or
replacement in relation to a Client
Engagement.
Being threatened with litigation.
Being pressured to reduce
inappropriately the extent of work
performed in order to reduce fees.

Can we framework ethical

thinking?
Accounting says yes, but only loosely!
Why? - A conceptual framework that
requires a member to identify,
evaluate and address threats to
compliance with the fundamental
principles, rather than merely comply
with a set of specific rules which may
be arbitrary, is, therefore, in the public
interest - APES 100.5

Ethical thinking framework

When initiating either a formal or informal conflict
resolution process, a Member should consider the
following, either individually or together with
others, as part of the resolution process:
(a) Relevant facts;
(b) Ethical issues involved;
(c) Fundamental principles related to the matter in
question, including the identification of threats to
those principles;
(d) Established internal procedures which might
represent safeguards against the identified
threats; and
(e) Alternative courses of action.

Relevant facts
What issues actually affect the
problem at hand?
However large a transaction, to what
extent does it relate to your actions?
Refer to Clive Peeters accounting
conduct the amount doesnt
matter, its the principle!

Ethical issues involved

Following from the Clive Peeters
scenario, what is the ethical issue
involved?
It is the incorrect distribution of funds,
and creation of fake accounts ... this
contextualises the ethical situation

Identification of threats to
principles...
Clive Peeters
Self interest Accountant acting in her own
interest, over that of the firm
Self review No one to check up on her
actions
Familiarity People know who she is, and
trust in her work no one questions that
she might have interest in stealing the funds
Probably no advocacy and intimidation
issues in this scenario

Establish safeguards to
threats
Introducing other senior management
officers
Reducing responsibilities of existing
officers both were fired (Accountant was
fired, but she could have been demoted if
her breach was less severe)
Regulation to enforce stronger penalties
stronger corporate penalties for senior
officers who dont discharge their duties.

Alternative courses of action

Segregate duties, apportion
responsibility (perhaps additional
signatories?)
Tighter financial controls generally

Settings to reflect on....

All extracted from the textbook!
Improper influence inter-company
accounting
Fraud and cash flow from operations
Insider information
Reporting information in proper period
Identifying fixed and variable costs
Passing on rising costs of operations
Under budget or not?

EMI and debt covenants

In 2010, EMI (Music Industry producers for Robbie
Williams, Coldplay, and many more) faced being
taken over by its bankers after breaching its debt
covenants following its failure to clinch a deal with
rival Universal to sell its distribution rights in North
America for around 200m.
What if you could satisfy your debt covenant by
using an accounting technique that increases
revenue recognition or reduces loss recognition?
You might save 4000 jobs if you do the unethical
thing! So what do you do?
Ethics is not black and white, it is often grey! Thats
why we talk about it.... Whatever the situation,
follow the framework discharge your responsibility
to report the real world in financial terms, as
properly as you can!

Conclusion
Ultimately, accounting is an interpretive
social science what does that mean?!
We make it real, with our assumptions!
Accountants make the financial world real
for managers the assumptions we make,
determine the consequences faced by real
managers, in the real world.
That is why we must discharge our duties
responsibly, and ethical behaviour is a
significant component of this responsibility