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Osborne Books Tutor Zone
Ethics forAccountantsAnswers to chapter activities
© Osborne Books Limited, 2016
2 e t h i c s f o r a c c o u n t a n t s t u t o r z o n e
1.1 International Ethics Standards Board for Accountants (IESBA) which is part of the InternationalFederation of Accountants (IFAC)
1.2 • Integrity• Objectivity• Professional competence and due care• Confidentiality• Professional behaviour
1.3 ‘When a member of the accounting profession is straightforward and honest in performingprofessional work he/she is complying with the fundamental ethical principle of integrity.’
1.4 (c) Objectivity
1.5 (c) Diligence
Principles of professional ethics1
2.1 (a) Confidentiality – If Brian provides Overten Ltd with professional advice it will be difficult forhim to keep information about each client confidential. Even if he is able to do so each clientmay perceive that he will use confidential information about it to benefit the other.Objectivity – giving advice to one client regarding the take over of another client would bedifficult for Brian. If he manages to remain independent there is still the possibility that eachclient may perceive that he is favouring the other.
(b) It is unlikely that Brian will be able to overcome the threats to his fundamental ethicalprinciples or reduce them to an acceptable level. Therefore he should not agree to providethe professional advice to Overten Ltd.
Threats and safeguards tofundamental ethical principles2
a n s w e r s t o c h a p t e r a c t i v i t i e s 3
2.2 (a) Professional competence and due care – despite having attended a course on inheritancetax this did not cover tax planning and Lydia has never done any of this type of work. If shetakes on sole responsibility for John Reynolds she will not have the necessary skills to carryout the work to the required standard. This means that her professional competence anddue care will be threatened.
(b) Self-interest threat – Jacob has indicated that if Lydia does a good job for John Reynoldsshe may gain a promotion. Therefore, it is in her interest to take responsibility for hisinheritance tax planning.
2.3 (a) Advocacy threat – if Grace agrees to provide the testimonial for Morden Ltd’s website shewould be actively promoting the client’s product and so would be facing an advocacy threatto her fundamental ethical principles.Self-interest threat – the offer of a year’s supply of the product for Grace and her familymeans that Grace could personally benefit if she provides the testimonial for Morden Ltd.
(b) If Grace agrees to provide Morden Ltd with the testimonial her independence and henceobjectivity will be most threatened.
(c) There are no fixed rules on whether a professional accountant can or cannot accept a giftfrom a client. Grace will be expected to use her professional judgement to decide whethershe can accept the gift. As it is likely to have a significant value she would probably decidenot to accept it.
2.4 (a) Confidentiality – if Pearce provides his Uncle George with the management accounts of hisclient, Rufus Pet Supplies Ltd, he will be in breach of the fundamental ethical principle ofconfidentiality.Professional behaviour – knowingly providing a third party with confidential informationabout a client breaches accounting regulations and consequently brings the accountingprofession into disrepute.
(b) This is a familiarity threat to Pearce’s fundamental ethical principles. The fact that therequest for the confidential information is being made by his uncle, George Hamersley,makes it very difficult for George to refuse.
2.5 (a) Objectivity – although Damien has completed the assignment for Melissa he must be seento be independent from the client. To an outsider the offer of the season tickets could beseen to compromise Damien’s independence.
(b) The value of the two season tickets is likely to be high. Although there are no strict rules onthe value of gifts that an accountant is permitted to accept from a client it is likely thatDamien will use his professional judgement and decide he is not able to accept them.
3.1 False The Code of Ethics issued by IESBA does not set out strict rules that professional accountants mustfollow. It provides guidance on taking a conceptual framework based approach to ethical decisions,that identifies, evaluates and addresses threats to compliance with the fundamental ethicalprinciples.
3.2
3.3 (a) Dan is offering Toni two gifts. In this situation her objectivity may be threatened which couldinfluence any future decisions that she makes in relation to her client, Dan Seagrave, andaffect her independence.
(b) Toni must use her professional judgement to decide whether she can accept either of thesegifts from Dan.• The offer of a complimentary meal is being made to all of the team who worked on
Dan’s accounts so she can probably accept this gift without compromising herobjectivity.
• The offer of a 50% reduction on the price of her wedding reception, should shechoose to have it at Dan’s restaurant, is very generous. This would not be somethingDan would normally offer during the normal course of business. Toni should decidethat she cannot accept this gift and therefore thank Dan for his kind offer but politelydecline.
3.4 (a) Objectivity – acting for two clients that both wish to acquire the same premises would bedifficult for Sandeep. Even if he is confident that he can remain independent there may be aperception by each of the two clients that he is favouring the other.Confidentiality – it will be difficult for Sandeep to keep information about each clientconfidential. Even if he does manage to maintain confidentiality each client may still perceivethat he will use confidential information about it to benefit the other.
(b) The process Sandeep should go through is:• Consider the relevant facts and ethical issues that this situation raises• Consider whether Passandra & Co has an established procedure for dealing with
4 e t h i c s f o r a c c o u n t a n t s t u t o r z o n e
Objectivity and the resolution ofethical conflict3
Example of behaviour by Upwell Ltd’smanagement
Freddie’s personalvalue
Is there a conflict toresolve?
Management are given two weeks extraholiday compared to other staff.
Fairness Yes
Customers can view the supply chain forall products sold on Upwell Ltd’s website.
Transparency No
conflicts of interests between clients• Decide the alternative courses of action that are available to him• Select the course of action that is most consistent with his fundamental ethical
principles• Discuss the issue with senior management at Passandra & Co• Document the facts relating to this ethical issue and any discussion he has had with
senior management
(c) It is very unlikely that the threats to his fundamental ethical principles can be eliminated orreduced to an acceptable level. However, in the unlikely event that Sandeep decides he isable to act for one of the clients he must consider what safeguards he can put in place sothat his relationship with the other client does not affect his professional judgement andobjectivity. These safeguards must also ensure that he does not breach the other client’sconfidentiality.
3.5 (a) • Bribing another • Receiving a bribe • Bribing a foreign official • Failure to prevent bribery(b) 10 years imprisonment and/or an unlimited fine
3.6 (a) Boyd is employed by Whizzy Interactive Ltd and therefore is expected to be loyal to hisemployer; however he also has a duty of loyalty to his profession. There is a significant riskthat the business is acting illegally by engaging in industrial espionage. This would becontrary to Boyd’s fundamental ethical principles of integrity and professional behaviour.
(b) • Boyd should try and discuss this issue with Lloyd to clarify what he has been askedto do, although this may be difficult without involving Josh
• Boyd should also consider discussing the issue with a more senior member of staffat Whizzy Interactive Ltd. If they are aware of the possible espionage Boyd shouldtry and persuade them not to act illegally
• If Whizzy Interactive Ltd has a formal dispute resolution process Boyd shouldconsider using this to escalate the issue although this may be difficult as Josh is apartner in the business
• Boyd can also consult with his professional accounting body and take legal advice • Ultimately if there are no other options open to Boyd and he feels that the threats to
his fundamental ethical principles cannot be eliminated he may have to offer to resignfrom Whizzy Interactive Ltd
a n s w e r s t o c h a p t e r a c t i v i t i e s 5
4.1 • Reading professional journals • Enrolling on updating courses• Complying with continuing professional development requirements (CPD) for professional
accountants
4.2 Two of the following:• Obtain additional advice or training• Ensure that she has adequate time to carry out the work • Obtain assistance from someone with the necessary expertise• Consult with a more senior member of staff at Realgo Ltd, independent experts or her
professional accounting body
4.3 • Breach of contract• Professional negligence
4.4 (a) Rhiannon and her staff must ensure that they are up-to-date with the following (twoanswers):
• Accounting regulations • Tax legislation • Money laundering regulations • Financial reporting standards
Rhiannon’s practice primarily provides services to sole traders and partnerships; thesebusinesses must comply with requirements for accurate accounts preparation and taxreturns. Rhiannon must also protect herself and her practice against the risk of moneylaundering.Other areas such as auditing, company legislation, changes in ethical codes and changesin other areas of criminal law such as bribery and fraud are not critical areas for Rhiannon’sbusiness.
6 e t h i c s f o r a c c o u n t a n t s t u t o r z o n e
Professional and technical competence4
(b) Pettini & Floyd must ensure that its staff keep up-to-date in the following (two answers): • Changes in auditing standards • Changes in accounting regulations • Money laundering regulations • Financial reporting standards • Changes in company legislation
Pettini & Floyd provides auditing services to its clients and prepares financial statements;therefore staff must be kept up-to-date on these critical areas. They must also be up-to-dateon money laundering regulations. All firms of accountants have a duty to stay up-to-datewith money laundering regulations. As Pettini & Floyd do not provide taxation services it isnot critical for staff to receive regular taxation training.
4.5 Professional indemnity insurance
a n s w e r s t o c h a p t e r a c t i v i t i e s 7
5.1 (a) This information is personal to Lorna so it is her choice as to whether she explains herreasons for leaving Oldroyd & Vaughn.
(b) Lorna has a duty of confidentiality to her former employer and its clients that extends beyondthe end of her working relationship. Therefore she cannot disclose this information to hernew manager. Also, this type of behaviour would be contrary to her ethical principles ofintegrity and professional behaviour.
(c) Lorna is allowed to use general knowledge and experience gained from previousemployment but not specific information covered by her duty of confidentiality to theemployer or clients. Therefore she can run a training course for the staff at her newemployers provided she does not use specific information about previous clients.
5.2 • When authorised by a client or employer• When disclosure is required by law• Where there is a professional duty to disclose
5.3 José cannot provide the information without first requesting authority from the client. Althoughwritten authority would be best, verbal authority is acceptable. Provided he receives this authorityhe can then give information to the printing firm. He should include a disclaimer making it clear thatthis is only for use by the printing firm and is given purely to help them to make a decision aboutwhether or not to supply goods on credit to the client. He should also explain that the informationis given without any financial responsibility on the part of his firm of accountants.
5.4 Notification
8 e t h i c s f o r a c c o u n t a n t s t u t o r z o n e
Confidentiality5
6.1 Nigel appears to have identified possible unethical behaviour on the part of the Sales Director ashe is providing the client with a very large discount and does not wish the Managing Director toknow about it. Nigel is in a difficult position as the Sales Director holds a more senior position thanhim at Toross Ltd. Nigel must ensure that he has all the relevant information relating to the SalesDirector’s request. He should then discuss his concerns with another director of the business, forexample the Finance Director or the Managing Director.If Nigel does not believe that the director has dealt with the issue appropriately then Nigel shouldconsider taking advice from his professional accounting body as to what further action he shouldtake. In this situation Nigel should not simply re-issue the invoice with the additional discount, as thiswould be contrary to his fundamental ethical principles.
6.2 (a) • Bringing the accounting profession into disrepute • Acting in breach of the rules and regulations of the accountant’s professional body(b) • The individual accountant’s professional accounting body • The Financial Reporting Council (FRC)
6.3 (a) Seth must tell the Managing Director that unless the business declares the error to HMRChis practice can no longer work for Coxpenny Ltd as the money that has not been paid toHMRC constitutes criminal property. By retaining this money Coxpenny Ltd could becharged with money laundering. Due to the size of Seth’s practice he will not have a MoneyLaundering Reporting Officer (MLRO). Therefore he must submit a Suspicious ActivityReport (SAR) to the National Crime Agency (NCA).
(b) If Seth continues to act for Coxpenny Ltd then he is facilitating its retention of the moneythat should have been paid to HMRC. In this situation he will be engaged in moneylaundering. He may also be guilty of the crime of failure to disclose.
(c) Once Seth becomes aware of the error he should report to the National Crime Agency thathe suspects Coxpenny Ltd of money laundering. In these circumstances he will be protectedfrom a claim by the client of breach of confidentiality. As Seth is aware that he may also havebeen involved in money laundering he needs to make an authorised disclosure regardingCoxpenny’s refusal to disclose the error to HMRC.
6.4 (a) • The Proceeds of Crime Act (POCA) • The Terrorism Act 2000 • The Money Laundering Regulations 2007(b) (1) National Crime Agency (NCA) (2) Money Laundering Reporting Officer (MLRO)(c) An unlimited fine or a prison sentence of up to 14 years
a n s w e r s t o c h a p t e r a c t i v i t i e s 9
Codes of conduct and organisationalvalues6
7.1 (a) ‘Development that meets the needs of the present without compromising the ability of futuregenerations to meet their own needs.’
(b) • Economic growth • Environmental protection • Social equality
7.2 (a) An organisation will give details of its success in supporting and promoting sustainability ina Corporate Social Responsibility (CSR) Report
(b) The public and investors are keen to know a business’s attitude to sustainability and the wayit affects how the organisation operates. They tend to look more favourably on organisationsthat have set sustainability targets and have made progress towards achieving their CSRgoals.
(c) ‘Reputational risk’ is the risk of loss resulting from damage to an organisation’s reputation.An organisation will include its sustainability targets in its Corporate Social Responsibility(CSR). When it produces a CSR report this will show its progress towards these targets.There is a risk to an organisation’s reputation if it reports negative results. However the factthat a business is prepared to report its progress towards its sustainability targets and CSRwill have a positive effect on its reputation.
7.3 (a) This relates to the three areas of sustainability highlighted in the Brundtland report thatencourages organisations to take economic, environmental and social factors into accountwhen making short and long-term decisions.
(b) Professional accountants have a responsibility to act in the public interest. This includessupporting sustainability and sustainable development and considering the risks to societyas a whole in not acting sustainably.
1 0 e t h i c s f o r a c c o u n t a n t s t u t o r z o n e
Sustainability7