9.2 Understand the need for accountants to be ethical and independent
Rina Dhillon
One of the key traits of a professional accountant is the adherence to a rigorous set of ethical guidelines. Accounting ethics refers to following specific rules and principles set by governing bodies that every person associated with accounting should follow to prevent misuse of the financial information or their management position. Before we present these ethical guidelines and principles that relate to the practices of an accountant, let’s first define what ethics is.
Defining ethics
The Oxford Dictionary definition of ethics is:
“NOUN – [USUALLY TREATED AS PLURAL] moral principles that govern a person’s behaviour or the conducting of an activity”. Thus when we speak about ethics in the context of business, we can look at business ethics as the application of this ethics definition to business behaviour.
According to the Chartered Institute of Management Accountants (CIMA), “ethics is all about right and wrong, and the systems of belief which drive our moral compasses”. They define ethics as “taking decisions for the right moral reasons, taking into account the wider needs of all stakeholders”.
In some cases, ethics can be black and white, in that it can be clear from the onset that a particular conduct is ethically wrong and most times, that behaviour is illegal as well. For example, if an accountant steals from the business that employs him/her, it would ethically wrong and illegal to do so.
Keeping It Real: ING takes a $30m hit in accountancy fraud case
The multinational insurance and finance company ING suffered a $30 million net loss from the massive fraud committed by its senior accountant, Rajina Subramaniam, court documents reveal.
Files released after Subramaniam was sentenced to at least seven years’ jail last week, show the company has recovered only a third of the $45.3 million the 42-year-old stole over five years. While most of the incredible haul of luxury goods and property purchased with the money – including $16 million worth of Paspaley Pearls jewellery and eight waterfront apartments – has been recovered and resold by the company, it has taken a substantial hit. ‘There is no realistic possibility that the full cost of those items can be fully recovered,’ documents tendered by the prosecution state.
This is due, in part, to the fact that Subramaniam paid well above market rates for the properties she purchased. The court documents also paint a less-than-flattering picture of internal security at the section of ING where Subramaniam worked, ING Australia Holdings. During her interview with police shortly after being arrested, Subramaniam said: ‘My manager is so slack, he didn’t care, so I was sort of doing it to see when I would get caught [but] you know, he just left it open for me.’ She said the manager – who cannot be named – would come in at 10 am and appeared not to be interested in the job.
It is understood Subramaniam did not have any formal accounting qualifications but had worked her way up from the position of assistant accountant. As a senior accountant she made 200 illegal transfers into her personal accounts or directly to shops and real estate agents. She then used the computer log-ins of former staff to delete the records or alter them so the transactions appeared legitimate.
Source: ‘ING takes a $30m hit in accountancy fraud case’, by Paul Bibby from The Sydney Morning Herald
However, in most cases ethics is ‘grey’, whereby acceptable, legal actions may not be ethical, or on rare occasions, ethical actions may be illegal! Illegal refers to breaking laws (e.g. fraud) and unethical refers to (be it legal or illegal) acts where the accountant avoids reporting the most accurate information (e.g. reporting lower expenses whether due to omission or underestimation), even though it is still following the accounting rules (e.g. earnings management). For example as we recently learnt picking the reducing balance depreciation method can maximise tax savings in the short run (more expenses in the early years of an asset’s life) and is certainly within the accounting rules. However if an asset is used evenly throughout its useful life, the straight-line depreciation method would be a more appropriate accounting decision as it would more accurately suit the spread of the asset’s cost consistent with its usage, as per the rationale behind depreciation. An accountant who knows this but still chooses a depreciation method that saves short-term taxes would be said to be acting unethically even though he or she has not acted illegally.
At the end of the day, the duty of an accountant is, critically, towards the public interest. This is a distinguishing mark of the accountancy profession – its acceptance of the responsibility to act in the public interest. In accounting, the public interest is generally defined as the collective well-being of people and institutions the profession serves and to protect the economic interests of third parties by facilitating an efficient and effective economic decision making process through the provision of relevant and reliable accounting information. This community of people rely on the objectivity and integrity of members to assist in maintaining the orderly functioning of commerce. Thus a member’s responsibility is not exclusively to satisfy the needs of an individual client or employer. Why is accounting important to the public? Superannuation funds and investors use accounting information to evaluate investments with the goal of increasing their wealth and accurate numbers allow for better decision making in meeting this goal.
The premise underlying the accountants’ duty to protect the public interest is based on accountants being independent so as to avoid being influenced to make inappropriate choices. In order to provide more directions to accountants, the Accounting Professional and Ethical Standards Board (APESB) developed professional and ethical principles that bind the conduct of accountants and sets out the requirements for ethical behaviour – known as APES 110 – Code of Ethics for Professional Accountants. This code are applicable to all members (professional accountants) of Certified Practising Accountants (CPA), Chartered Accountants Australia and New Zealand (CAANZ), Institute of Public Accountants (IPA) and Association of Chartered Certified Accountants (ACCA). These standards guides the conduct of most practising accountants in Australian businesses and penalties for breaching these standards include loss of membership to professional bodies, fines and possible prosecution if unethical conduct is also fraudulent and illegal.
In the next section, we will discuss the five APESB ethical principles, followed by the five threats that illustrate why an accountant may not behave according to the ethical principles in Section 9.4.