9.4 Define and describe the threats to ethical conduct
Rina Dhillon
This section is largely based on APES 110 Code of Ethics for Professional Accountants. Students should take some time to read the relevant sections within APES 110 so as to better understand each of the five ethical threats summarised in this section. These threats indicate why accountants may not behave according to the ethical principles: ‘When a relationship or circumstance creates a threat, such a threat could compromise, or could be perceived to compromise, a Member‘s compliance with the fundamental principles. A circumstance or relationship may create more than one threat, and a threat may affect compliance with more than one fundamental principle.’ (Section 100.12)
APES 110 specifies a series of threats to ethical conduct:
- Self-interest
- Self-review
- Advocacy
- Familiarity
- Intimidation
Self-interest
Section 110.12a defines self interest as ‘…the threat that a financial or other interest will inappropriately influence the Member‘s judgement or behaviour’. Accountants who place personal gain at the expense of the broader organisational objectives put themselves in positions where they might act unethically – these gain is usually in the form of a Financial (or other) Interest in a client (individual/company). Some examples include undue (financial) dependence on total fees from a Client; financial concern about the possibility of losing a Client; potential employment with a Client; and a loan to or from a Client or any of its Directors or Officers.
Self-review
The self review threat exists when ‘… a Member will not appropriately evaluate the results of a previous judgement made or service performed by the Member, or by another individual within the Member‘s Firm or employing organisation, on which the Member will rely when forming a judgement as part of providing a current service’ (Section 100.12b). It is only natural when evaluating our own work, or making judgements surrounding aspects of a decision that involved our prior contribution, that we might be inclined to evaluate more loosely, without being as stringent as we ordinarily might (i.e. the bias inherent in judging one’s own work). This threat would arise when an accountant/auditor having undertaken professional work that is directly related to subject matter (i.e. financial statements) are also directly involved in independently evaluating. Some examples include independently verifying the quality of a client’s financial reporting control system after working with the client to develop the system or auditing the financial statements of a client after being involved in the preparation of the client’s accounting.
Advocacy
The advocacy threat is defined in Section 100.12c as ‘the threat that a Member will promote a client‘s or employer‘s position to the point that the Member‘s objectivity is compromised’. This threat would result from an accountant/auditor portraying a positive viewpoint of a client that may compromise their ability to provide an independent evaluation of the subject matter relating to these parties. For example when the auditor promotes a position or opinion to the point where subsequent objectivity on the financial statments may be compromised, promoting the shares in a Listed Entity when that entity is a Financial Statement Audit Client and acting as an advocate on behalf of an Assurance Client in litigation or disputes with third parties. This threat could also be linked to the self interest threat whereby an accountant might push the agenda of a related entity, as it furthers the positive perception of the accountant.
Familiarity
The threat of familiarity is defined in Section 100.12d as ‘the threat that due to a long or close relationship with a client or employer, a Member will be too sympathetic to their interests or too accepting of their work’. It includes circumstances where an accountant/auditor may have a close relationship or connection with a client/superior that may undermine their ability to act objectively. As in the case of the Domino’s accountant where both his family and himself benefited from $960000 through insider trading (discussed in Section 9.3), this threat exists when an accountant acts in a way that benefits another individual or institution that is familiar to the accountant. Examples include a close or immediate Family relationship with a client who is in a position to exert direct and significant influence over the subject matter, accepting gifts or preferential treatment from a Client, unless the value is clearly insignificant and long association of senior personnel with the Assurance Client. The familiarity threat is also related to the objectivity principle, in that the presence of familiarity in our dealings with another party can compromise our ability to act impartially, hence causing us to compromise our ethical choices.
Intimidation
The last threat is intimidation, which is defined by Section 100.12e as ‘the threat that a Member will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the Member’. This threat arises in instances in which an accountant/auditor is subject to undue influence by a superior/client and encouraged to engage in unethical or illegal behaviour. This threat is also concerning, in that it might manifest as an unsafe or undesirable work environment for the accountant. Senior management might pressure an accountant to act unethically, such that the company benefits at the expense of the broader public interest. Even though the accountant knows the behaviour is unethical, he/she is pressured to do so by intimidation. Examples of this include the threat of dismissal or replacement in relation to a Client Engagement, being threatened with litigation and being pressured to ignore specific accounting issues identified with a significant material impact.
An interesting question to ask – if the victim of intimidation acts in a manner that is undesirable and illegal, because he or she felt intimated, is that act unethical? A grey area…
Having considered the threats provided in APES 110, the next section discusses safeguards that accountants and businesses can use or put in place to ensure that threats are less likely to arise or influence ethical principles.