0452 · 7.2Ethical considerations

Why accountants need ethics

0:00Nia, the owner of Nia’s Repairs, wants a bank loan and asks her accountant Sam to conceal information that could affect the bank’s decision. The figures might persuade the bank to lend money, but the decision would depend on a misleading picture. This video covers the need for an ethical framework, the five fundamental principles, and their significance to stakeholders and society. Financial statements are summaries that show a business’s profit or loss for a period and what it owns and owes at a date.

0:26Accounting uses book-keeping records to prepare financial statements, and classifies, summarises, analyses and interprets the information so that users can make decisions. Those users often cannot inspect every underlying record themselves. They therefore depend on the accountant to present information honestly and accurately. An ethical framework is a set of principles that guides decisions about right and wrong professional conduct. It gives accountants standards to apply when personal interests or pressure could affect their work.

0:56Technical rules explain how information should be recorded and presented. Ethical principles guide the accountant’s conduct when applying those rules, especially when someone requests a misleading result. The need for an ethical framework arises because accounting information influences decisions involving other people’s money. An owner might pressure an accountant to overstate profit, hide losses or help the business pay less tax than is legally due. Personal rewards can create pressure too, especially when a payment depends on reported performance.

1:25Shared principles provide a reason to refuse such requests, even when the person making them has authority. Ethical conduct also extends beyond obeying the law. A situation can create unfair influence before anyone has broken a legal rule. For example, an expensive gift could affect how carefully an accountant checks a supplier’s records. An ethical framework requires the accountant to consider that influence before accepting the gift, not only after a problem appears.

Integrity and objectivity

1:52Integrity means being straightforward and honest in all professional and business relationships. At Nia’s Repairs, Sam discovers that a report for the bank contains information he knows is misleading. He should raise the problem and seek its correction before the report is used. Honesty applies to what the report leaves out as well as to the statements it contains. A deliberately incomplete report can mislead someone even when each sentence is individually true.

2:16Suppose a report describes money received but leaves out amounts the business still owes to suppliers. The reader could reach a conclusion that a complete report would not support. Integrity requires Sam not to be associated with information he knows is misleading. Objectivity means not allowing bias, conflict of interest or undue influence of others to override professional judgement. A conflict of interest arises when a personal interest could interfere with a professional responsibility.

2:44Sam might receive a reward if Nia’s Repairs obtains its loan. That reward must not influence his judgement about the information supplied to the bank. Integrity concerns honesty, while objectivity concerns the influences behind a decision. Sam could honestly believe that Nia is trustworthy and still give her explanations less scrutiny than they deserve. Personal friendship could make his judgement biased. He should assess the evidence with the same care regardless of whether the person involved is a friend, relative or unfamiliar customer.

Competence, confidentiality and behaviour

3:13Professional competence and due care means keeping knowledge and skills up to date and acting diligently, in line with technical and professional standards. Competence is the ability to do the work properly, while due care is the attention and thoroughness used when doing it. An accountant needs both, because knowledge alone does not prevent mistakes caused by rushed or careless work. At Nia’s Repairs, Sam is asked to complete work involving an unfamiliar reporting requirement.

3:39He should obtain appropriate guidance or help from someone with the necessary expertise before completing it. When he checks the records, he must also investigate unexplained differences and meet relevant deadlines. An honest guess about an unfamiliar requirement can still produce misleading financial statements. Confidentiality means not disclosing information gained at work without proper authority, unless there is a legal or professional duty to disclose it. It also means not using that information for personal advantage.

4:07Proper authority usually comes from the client or employer the information belongs to. Having access to records for the work never gives permission to share them. Sam can see employee pay details and private plans for Nia’s Repairs. A friend asks him about those plans because they could help a competing business. He should keep the information private, because Nia has not authorised its disclosure. If tax authorities use their legal powers to request the pay records, Sam has a legal duty to provide them.

4:33The same responsibility continues after he stops working for Nia’s Repairs, because leaving the job does not make the information public. Professional behaviour means complying with laws and regulations and avoiding any action that discredits the profession. Sam must follow applicable legal requirements when carrying out his work. If asked to help conceal income illegally from tax authorities, he should refuse. Making false claims about his qualifications to win work would also discredit the profession.

5:00Misconduct can damage confidence in accountants generally, not just the reputation of the individual involved. These fundamental principles work together, so one situation can involve several of them. A dishonest report threatens integrity, while pressure from its owner can threaten objectivity. Careless checking also raises professional competence and due care concerns. An exam answer names the principle most directly involved, but the accountant must still follow all five.

Worked example: misleading profit

5:28Consider a worked example involving the loan application at Nia’s Repairs. Revenue is the income a business earns from its main activity, such as selling goods or providing services. The costs used up in running the business and earning revenue during a period are called expenses. Nia asks Sam to leave a genuine expense out of the financial statements so the bank receives a more favourable report. Profit is the amount by which revenue exceeds expenses for a period.

5:54Suppose the year’s revenue is forty-eight thousand dollars and its genuine expenses are thirty-five thousand dollars. Forty-eight thousand dollars minus thirty-five thousand dollars gives a correct profit of thirteen thousand dollars. Nia wants the electricity expense of four thousand dollars left out. Thirty-five thousand dollars minus four thousand dollars leaves reported expenses of thirty-one thousand dollars. The reported profit would then be seventeen thousand dollars, which is higher than it should be.

6:21Sam should first establish the facts and check the evidence that the expense belongs in the report. This matters because an ethical decision must respond to what actually happened, not merely to an unsupported suspicion. Next, Sam should identify the principles involved. Integrity requires him to be honest about the expense, while objectivity requires him to resist Nia’s pressure. Professional competence and due care requires him to apply the relevant requirements carefully.

6:46The bank could otherwise approve lending on information that gives an inaccurate picture of the business’s performance. Sam should explain why the expense must be included and refuse to prepare information he knows is misleading. He should seek appropriate professional guidance if the pressure continues. Any further disclosure must respect confidentiality and applicable legal or professional duties. The correct response protects the bank’s decision without treating private information as something Sam can freely publish.

Stakeholders, society and exam answers

7:15Stakeholders are people or groups with an interest in a business and its activities. The significance to stakeholders of applying an ethical framework comes from the decisions they make using accounting information. Investors need reliable information before committing money, while lenders assess whether borrowing is likely to be repaid. Honest reporting helps both groups avoid decisions based on concealed financial difficulties. Suppliers may use financial information when deciding whether to allow payment later.

7:42Employees can be affected when hidden difficulties lead to unpaid wages or unexpected job losses. Tax authorities need accurate information to assess the amounts legally due. Applying ethical principles reduces the risk that these groups bear costs created by deliberate deception or careless accounting work. The significance to society extends beyond the people directly involved with one business. Ethical conduct helps prevent fraud and supports public confidence in businesses and financial markets.

8:10Accurate tax information helps public authorities collect the money legally due for public services. Confidentiality also protects people whose private details appear in business records, even when they never read the financial statements themselves. Common examination mistakes involve treating these principles as interchangeable, so connect each answer to its defining responsibility. Integrity concerns straightforward and honest conduct, while objectivity protects judgement from bias and pressure. Professional competence and due care requires current expertise as well as diligent work.

8:44Confidentiality allows disclosure with proper authority or under a legal or professional duty, and professional behaviour requires lawful conduct that preserves confidence in the profession. In Paper One, the forty multiple-choice questions can include a situation in which you identify the relevant principle. Paper Two contains five compulsory structured questions and can require a definition or an explanation linked to a scenario. Identify means name or select, while define means give precise meaning.

9:13Suppose the question says that Sam tells a neighbour how much a customer of Nia’s Repairs still owes. The principle most directly threatened is confidentiality. Explain means give reasons, why and how, supported by evidence. The customer’s debt is private information Sam gained at work, and he had no proper authority or legal duty to disclose it. Applying confidentiality protects the customer’s privacy, so customers can trust the business with their details.

9:40An ethical framework guides conduct when accounting decisions affect other people. Integrity requires honesty, and objectivity protects professional judgement from improper influence. Professional competence and due care combines current expertise with diligent work, while confidentiality protects entrusted information. Professional behaviour requires compliance with laws and regulations, and together these principles support reliable information and public confidence.