Ethical Framework (Cambridge International A-Level Accounting)
Spec point — the need for an ethical framework in accounting the fundamental principles of: – integrity – objectivity – professional competence and due care – confidentiality – professional behaviour how the ethical behaviour of accountants and auditors impacts the business and other stakeholders the social implications of decision-making
Ethical framework
What is the ethical framework in accounting?
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The ethical framework sets out the fundamental principles of how people working in accounting roles must behave
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The principles of professional ethics apply to all roles and functions related to accounting
- Payroll
- Reporting
- Auditing
- Bookkeeping
- Accountants
What are the five principles of the ethical framework?
- There are five principles of professional ethics
| Principle | Explanation | Example |
|---|---|---|
| Integrity | - Accountants must be honest - Accountants must be straightforward and trustworthy | An accountant cannot agree to withhold information from the financial statements so that the business looks better. |
| Objectivity | - Accountants must be fair and free from bias - Accountants must make their own judgements - Accountants must not work for businesses where there is a conflict of interest | An accountant cannot produce financial statements for a relative. |
| Professional competence and due care | - Accountants must be suitably qualified - Accountants must **keep up to date **with changes to international accounting practices | An accountant should know the most recent terminology and accounting practices. |
| Confidentiality | - An accountant must not share information without the permission of a business unless there is a legal requirement - An accountant must not use confidential information for purposes besides accounting | An accountant cannot share information about wages with the employees of a business. |
| Professional behaviour | - An accountant must** follow the laws and regulations** of the profession - An accountant must not harm the reputation of the profession | An accountant must be truthful about their qualifications when advertising their services. |
Why is it important to apply the ethical framework?
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The framework enables stakeholders to have trust and confidence in the work performed by accountants
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The framework makes sure that the reputation of the profession is maintained
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The framework allows stakeholders to make informed and valid decisions
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There can be severe consequences if professional ethics are not followed
- Unethical practices can damage an accountant's reputation
- Businesses will refuse to hire accountants if they are unethical
- There can be legal repercussions for unethical practices, such as fines or, in serious cases, imprisonment
What is the impact of ethical accounting on stakeholders?
| Stakeholder | Impact of ethical accounting |
|---|---|
| Shareholders | - Reliable financial statements allow informed investment decisions - It gives confidence that directors are acting in their interests |
| Lenders and banks | - Accurate financial data enables proper credit risk assessment |
| Employees | - Transparency reduces fear of job security threats from hidden financial problems |
| Suppliers | - Honest reporting of liabilities ensures suppliers are paid appropriately |
| Government and tax authorities | - Accurate reporting ensures correct tax is paid |
| Public | - Prevents large-scale corporate failures that damage the wider economy |
What are the social implications of decision-making with accounting information?
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Accounting decisions have social consequences which extend beyond financial results
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Manipulating profits can lead to false confidence
- This can cause investors to lose savings if the business collapses
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Overstating assets or understating liabilities can lead to risk across financial markets
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Accountants have a public interest duty
- They have to act in the public's best interest, not just their client's
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Unethical decisions can damage public trust in the business
- Such as tax avoidance schemes and inflated bonuses
Worked Example R Limited is a successful retail business. During the preparation of the financial statements for the year ended 31 December 2023, the directors discovered an issue concerning their chief accountant, Tariq.
Tariq had deliberately excluded several large purchase invoices from the draft financial statements to artificially increase the draft profit. He later admitted this was done to ensure that the business met its performance targets so that he and the directors would receive their annual cash bonuses.
Discuss Tariq’s actions with reference to the fundamental principles of the ethical framework for accounting.
Answer:
By deliberately altering the profit figure to benefit himself, Tariq has infringed the principle of integrity. This principle requires accountants to be straightforward and honest in all professional and business relationships, which he has failed to do.
His actions also breach the principle of professional behaviour because deliberately manipulating financial statements brings discredit to the profession and the business.
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