The impact of ethical considerations flashcards

Topic 18: The impact of ethical considerations

The five fundamental principles, each with its key word

Integrity (honesty); objectivity (independence of judgement); professional competence and due care (skill and diligence); confidentiality (trust); professional behaviour (reputation).

Self-interest and self-review threats: triggers and safeguards

Self-interest: bonus, shares, fee dependence, gifts; remove the person from the decision or use independent review. Self-review: checking your own work; a different person reviews it.

Advocacy, familiarity and intimidation threats: safeguards

Advocacy: separate the advocacy and reporting roles. Familiarity (a long or close relationship): rotate staff. Intimidation: escalate to the audit committee or board.

Unmodified, qualified, adverse and disclaimer audit opinions

Unmodified: true and fair. Qualified: true and fair except for a specific material matter. Adverse: not true and fair (material and pervasive). Disclaimer: no opinion, not enough evidence.

Who sets directors' pay under good governance?

A remuneration committee of independent non-executive directors. No director decides their own pay.

"Comply or explain"

Under the UK Corporate Governance Code, a listed company follows each provision or explains why it has not. The Companies Act allows no such departures.

Role of the FRC

Sets UK accounting standards and the UK Corporate Governance and Stewardship Codes; regulates auditors, accountants and actuaries; investigates misconduct.

CCAB vs CIMA

CCAB is a forum and common voice for ICAEW, ACCA, CIPFA, ICAS and Chartered Accountants Ireland. CIMA, the management accountants' body, is not a member and has its own Code of Ethics.

A sales director wants £30,000 of goods sent on 2 January included in December revenue. Gross margin 40%. Effect and principles?

Revenue overstated £30,000; gross profit overstated £12,000. Breaches integrity and professional competence and due care (realisation). Record it in January and escalate if pressed.

First steps on suspecting an unethical or illegal act

Establish the facts and keep records; name the principle and threat; evaluate significance; apply safeguards; escalate internally (manager, audit committee, board) before seeking external help; refuse to take part.

Integrity vs objectivity

Integrity is honesty. Objectivity is freedom from bias, conflict of interest or undue influence. A biased estimate can be honestly believed.

Corporate social responsibility and section 172 of the Companies Act 2006

CSR: responsibility to employees, customers, suppliers, community and environment, not only shareholders. s172 requires directors to have regard to factors such as these and long-term consequences.