Ethical Conflict

Lecture-07:
The relationship between ethics and the law:

Ethics is a system of moral principles which is concerned with what is good for individuals and society.

Ethics could be stated as answering the question, what can I do for the best?

On the other hand, Law is a system of rules and guidelines which are enforced through social institutions to oversee
behavior.

Similarities between ethics and laws:

Laws represent the minimum standards of human behaviors, that is, ethical behavior. Besides, both laws and ethics
are systems which maintain a set of moral values and prevent people from violating them. They both provide people
guidelines of what may do or what may not do in certain situations. In a word, they exist in a purpose of making
people benefit from being members of a well-regulated society.

Differences between ethics and laws:

There are many distinctions between ethics and laws. Some aspects of professional conduct are regulated not by the
profession, but by law. If the problem is too big or the temptations are t0o great or the professional body is too weak,
then the law steps in.

Ethics comes from people’s awareness of what is right and what is wrong while laws are written and approved by
governments. It means that ethics may vary from people to people because different people may have different
opinions on a certain issue, but laws describe clearly what is illegal no matter how people arguing. To some extent,
ethics is not well defined but laws are defined and precise. Ethics can also be distinguished by looking at whether
people are being punished after they violate the rules. Nobody will be punished when they violate ethics; but
whoever violates laws is going to receive punishment carried out by relevant authorities.

In Conclusion, ethics and laws and closely related since laws represent minimum ethical behaviors of human
beings; but they are distinct from many aspects. Ethics provides people guidelines on how to behavior in order to
create a peaceful society; but laws carry out restrictions through punishment. Sometimes ethics and laws do not
necessarily have any overlap, but these two combined define how people should behavior in the society. If there is a
conflict between a professional duty, such as confidentiality, and statute law, the ICMAB code explicitly states that
the law is to be preferred. In the hierarchy of obligations, law overrides everything.

The distinction between ethical code and contracts:

The contract you sign with your employer is a legal obligation and the contracts with clients have legal effects? Of
course this is true. You have a choice not comply with a contractual obligation and tale instead the penalty for
breach of the contract. This might be the appropriate course of action when performing the contract would bring you
into serious breach of the ICMAB Code.

From a purely ethical standpoint, if you are confronted by a choice of breach of professional ethics and a breach of
your contract of employment, you are ultimately supposed to favor your profession over your employer. Resolving
ethical conflict seldom has much more reward to the individual than the feeling that you know you have done the
right thing. However, the accountant is not on his or her own. ICMAB provides support for individuals faced with
ethical conflict situations and the law ‘helps’ accountants and employers to make the right choice, often by imposing
personal liability for the individual who acts unprofessionally or forces another to do so.

Corporate governance:

Corporate governance is the system by which companies are directed and controlled. Boards of directors are
responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors
and the auditors and to satisfy themselves that an appropriate governance structure is in place.

The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them
into effect, supervising the management of the business and reporting to shareholders on their stewardship.

Corporate governance is therefore about what the board of a company does and how it sets the values of the
company, and it is to be distinguished from the day to day operational management of the company by full-time
executives.

The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can
deliver the long-term success of the company.

Social responsibility:

Social responsibility is another newly popular term in management. It refers to how an organization manages its
relationships in the wider community. The range of issues is broad and encompasses many aspects of the current
political agenda. For instance: How ‘green’ is the organization? How much recycling of waste and paper is
undertaken? Is low energy lighting used in the offices? Does organization support the local community in providing
mentors or reading assistants at the local school, for instance? There are many possibilities. Social responsibility is
an ethical theory, in which individuals are accountable for fulfilling their civic duty; the actions of an individual
must benefit the whole of society. In this way, there must be a balance between economic growth and the welfare of
society and the environment. If this equilibrium is maintained, then social responsibility is accomplished.

The theory of social responsibility and ethics applies in both individual and group capacities. It should be
incorporated into daily actions/decisions, particularly ones that will have an effect on other persons and/or the
environment. In the larger, group capacity, a code of social responsibility and ethics is applied within said group as
well as during interactions with another group or an individual.

Figure: Interrelationship between ethics, governance, law and social responsibility in an organization.

Legal Environmrnt

Values and code of ethics

Governance
Social responsibility policies

Financial Interested/ influntial

stakeholders Parties
Shareholders

Customers NGO

Media Competitors
Employee Suppliers

Government

Environmrnt Community Philanthropy

Unethical behavior:

Compliance with professional ethics is likely to be greater when that behavior is encourage, or when unethical
behavior is punished.

Unethical behavior is an action that falls outside of what is considered morally right or proper for a person, a
profession or an industry. Individuals can behave unethically, as can businesses, professionals and politicians.

In fact, unethical behavior in the form of low-level "incivility," which includes rude behavior, condescending tone of
speech, rough language and/or a lack of regard for others, is now seen as having reached a crisis level in our society.

If you turned to ask an individual who was engaged in uncivil dialogue, and ask why they are behaving that way,
they would probably say, "Well, everyone does it!"

There is evidence of other types of unethical behavior all around us, including personal, professional and corporate
behavior.

Unethical behavior has serious consequences for both individuals and organizations. You can lose your job and
reputation, organizations can lose their credibility, general morale and productivity can decline, or the behavior can
result in significant fines and/or financial loss.

Individual consequence:

For the individual, a loss of reputation may result in loss of

 Earning potential
 Job
 Professional Status.
 Reputation as someone who behaves ethically.
 Your relationship partner.
 The respect of your friends and family
 Position in the community and so forth.

As you can see, it’s all about losing. As an extreme consequence of unethical behavior, you can be sued, lose a lot of
money, and even go to prison if the unethical behavior is also criminal.

Profession consequence:

For a professional body, a significant loss of reputation, if it were brought into disrepute, would undermine its
credibility and, ultimately, potentially its loss of Institute status. For a corporation, loss of public confidence is likely
to result in the failure and dissolution of the organization.

Consequence of the Society:

In the wider contest, when such unethical behavior is identified there is a greater damage, as trust is undermined not
only in the people and organizations directly affected but also in similar bodies or institutions on the fear that they
also may be targeted or affected by scandal. This is the trust that society bears for its organizations.
Ethical Dilemma:

An ethical dilemma or ethical paradox or moral dilemma is a problem in the decision-making process between two
possible options, neither of which is absolutely acceptable from an ethical perspective. Although we face many
ethical and moral problems in our life, most of them come with relatively straightforward solutions.

On the other hand, ethical dilemmas are extremely complicated challenges that cannot be easily solved. Therefore,
the ability to find the optimal solution for ethical dilemmas is critical to everyone.

Every person can encounter an ethical dilemma in almost every aspect of his life, including personal, social, and
professional.

All individuals need to be able to recognize an ethical dilemma and deal with it appropriately. Pressures challenge
personal integrity as well as business skills, which is why ethical acumen is an essential ingredient for a professional
accountant.

Ethical dilemmas in business

Ethical dilemmas are especially significant in professional life as they frequently occur in the workplace. Some
companies and professional organizations (e.g., CFA) adhere to their own codes of conduct and ethical standards.
Violation of the standards may lead to disciplinary sanctions.

Almost every aspect of the business can become a possible ground for ethical dilemmas. It may include the
relationships with the co-workers, management, clients, and business partners.

The people’s inability to determine the optimal solution for ethical dilemmas in the professional setting may result in
serious consequences for businesses and organizations. The situation may be common in companies that value
results the most.

In order to solve ethical problems, companies and organizations should develop strict ethical standards for their
employees. Every company must demonstrate its concerns regarding the ethical norms within the organization. In
addition, the companies may provide ethical training for their employees.

Identifying ethical dilemmas:

In identifying ethical dilemmas, it is important to understand how they arise. Ethical dilemmas can exist between
differing sources of values:

 Society, through the legislative process

 Individuals, through their personal values
 Professional bodies and the norms they set; and
 Companies themselves, which lay dow codes of ethics for their staff to follow.

How to identify an ethical dilemma?:

Dilemmas arise when the boundaries of right and wrong are not clear; when an individual is faced with two options-
the choice between making a better choice, or the least wrong. The individual must choose what to do. What makes
ethical decisions hard is that they often are such unpalatable choices.
It is clear that what is not an ethical dilemma is when there is a choice between what is good for me and what is
prescribed by professional standards. Doing what I want for my own reasons is not a professional choice but a
personal preference, and therefore has no place in ethical reasoning.

Some examples of dilemmas which might occur:

 My brother has just got a great job as managing director of a successful business, which also happens to be
one of my biggest clients. Does it matter?

 Our firm has taken out an advert in the local paper to promote our services. However, it says that we are
experts in tax and none of the partners have that expertise. I feel uncomfortable, but what can I do?

 I have had a client for many years who has always taken me for dinner after his year end to celebrate and
say thank you. This year he says he’s done rather well so he’s offered to take me golfing for the weekend in
Saint Martin. Should I accept?

In response to each of these instances, the IFAC code gives guidance on how to avoid conflict of interest and threats
to independence, and how to deal with confidential issues.

The professional should always:

 Take his ow preferences out of the equation (think objectivity);

 Seek guidance from the code of practice and IFAC (act professionally);

 Reflect on the situation, what brought it about and its consequences (continue to learn and develop).
Lecture-08:
Conflict of Interest:

Individuals can often find that they face a conflict of interest between their professional and business lives. In such
instances, it is important to follow guidelines laid down in the Code of Ethics.

A conflict of interest creates threats to compliance with the principle of objectivity and might create threats to
compliance with the other fundamental principles. Such threats might be created when:
a) A professional accountant undertakes a professional activity related to a particular matter for two or more
parties whose interests with respect to that matter are in conflict; or
b) The interest of a professional accountant with respect to a particular matter and the interests of a party for
whom the accountant undertakes a professional activity related to that matter are in conflict.

A party might include an employing organization, a vendor, a customer, a lender, a shareholder, or another party.
A professional accountant shall not allow a conflict of interest to compromise professional or business judgment.
Examples of circumstances that might create a conflict of interest include:

(a) Serving in a management or governance position for two employing organizations and acquiring
confidential information from one organization that might be used by the professional accountant to the
advantage or disadvantage of the other organization.
(b) Undertaking a professional activity for each of two parties in a partnership, where both parties are
employing the accountant to assist them to dissolve their partnership.
(c) Preparing financial information for certain members of management of the accountant’s employing
organization who are seeking to undertake a management buy-out.
(d) Being responsible for selecting a vendor for the employing organization when an immediate family
member of the accountant might benefit financially from the transaction.
(e) Serving in a governance capacity in an employing organization that is approving certain investments for the
company where one of those investments will increase the value of the investment portfolio of the
accountant or an immediate family member.
(f) Facing a conflict of interest when being responsible for selecting a vendor for the firm when an immediate
family member of the accountant might benefit financially from the contract. The requirements and
application material set out in Section 210 apply in these circumstances.
(g) Preparing or presenting financial information for the accountant’s client or firm. The requirements and
application material set out in Section 220 apply in these circumstances.
(h) Being offered an inducement such as being regularly offered complimentary tickets to attend sporting
events by a supplier of the firm. The requirements and application material set out in Section 250 apply in
these circumstances.
(i) Facing pressure from an engagement partner to report chargeable hours inaccurately for a client
engagement. The requirements and application material set out in Section 270 apply in these circumstances.

Identifying Threats:

Threats to compliance with the fundamental principles might be created by a broad range of facts and circumstances.
The following are examples of facts and circumstances within each of those categories of threats that might create
threats for a professional accountant when undertaking a Professional service:

(a) Self-interest Threats:

 A professional accountant having a direct financial interest in a client.
 A professional accountant quoting a low fee to obtain a new engagement and the fee is so low that it might
be difficult to perform the professional service in accordance with applicable technical and professional
standards for that price.
  A professional accountant having a close business relationship with a client.
 A professional accountant having access to confidential information that might be used for personal gain.
 A professional accountant discovering a significant error when evaluating the results of a previous
professional service performed by a member of the accountant’s firm.

(b) Self-review Threats

 A professional accountant issuing an assurance report on the effectiveness of the operation of financial
systems after implementing the systems.
 A professional accountant having prepared the original data used to generate records that are the subject
matter of the assurance engagement.

(c) Advocacy Threats

 A professional accountant promoting the interests of, or shares in, a client.
 A professional accountant acting as an advocate on behalf of a client in litigation or disputes with third
parties.
 A professional accountant lobbying in favor of legislation on behalf of a client.

(d) Familiarity Threats

 A professional accountant having a close or immediate family member who is a director or officer of the
client.
 A director or officer of the client, or an employee in a position to exert significant influence over the
subject matter of the engagement, having recently served as the engagement partner.
 An audit team member having a long association with the audit client.

(e) Intimidation Threats

 A professional accountant being threatened with dismissal from a client engagement or the firm because of
a disagreement about a professional matter.
 A professional accountant feeling pressured to agree with the judgment of a client because the client has
more expertise on the matter in question.
 A professional accountant being informed that a planned promotion will not occur unless the accountant
agrees with an inappropriate accounting treatment.
 A professional accountant having accepted a significant gift from a client and being threatened that
acceptance of this gift will be made public.

Safeguards of threat:

Safeguards vary depending on the facts and circumstances. Examples of actions that in certain circumstances might
be safeguards to address threats include:
a) Assigning additional time and qualified personnel to required tasks when an engagement has been accepted
might address a self-interest threat.
b) Having an appropriate reviewer who was not a member of the team review the work performed or advise as
necessary might address a self-review threat.
c) Using different partners and engagement teams with separate reporting lines for the provision of non-
assurance services to an assurance client might address self-review, advocacy or familiarity threats.
d) Involving another firm to perform or re-perform part of the engagement might address self-interest, self-
review, advocacy, familiarity or intimidation threats.
e) Disclosing to clients any referral fees or commission arrangements received for recommending services or
products might address a self-interest threat.
f) Separating teams when dealing with matters of a confidential nature might address a self-interest threat.

Resolving ethical dilemmas:

A professional accountant may be called upon to resolve a dilemma in the application of the IFAC code of Ethics’
Fundamental principles.
Ethical conflict resolution:
A professional accountant may be required to resolve a conflict in complying with the Fundamental principles.
When initiation either a formal or informal conflict resolution process, the following factors, either individually or
together with others, may be relevant to the resolution process:
a) Relevant facts;
b) Ethical issues involved;
c) Fundamental principles related to the matter in question;
d) Established internal procedures; and
e) Alternative courses of action

As a practical matter, the resolution process entails several stages of investigation.

 The relevant facts need to be established.
 the ethical issues are identified.
 Test the issue against the fundamental principles and code of ethics.

Once the relevant facts have been ascertained, then a course of action will need to be identified. Options would
include:
a) Do nothing
b) Avoidance
c) Modifying behaviors
d) Arbitration

Ethical dilemmas may be raised with a professional accountant through a number of routes:
i) Directly through an enquiry
ii) Via an in-house speak-up/help/whistle blower line
iii) From an external customer, supplier or other agent to the organization
iv) Anonymously.

The ICMAB and IFAC ‘Code of Ethics for Professional Accountants’– Fundamental Principles:

1) Professional Ethics and Code of Conduct issued by ICMAB.

2) Handbook of the International Code of Ethics for Professional Accountants issued by IFAC (latest edition).