Osborne Books Tutor Zone

Ethics forAccountantsChapter 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 Which global body issues a code of ethics on which all the professional accounting bodies in theUK base their ethical codes?

1.2 List the fundamental principles of professional ethics.

1

2

3

4

5

1.3 Complete the following sentence by selecting the appropriate option from the list below:

‘When a member of the accounting profession is straightforward and honest in performing professional work he/she is complying with the fundamental ethical principle of ……………………….’

• Professional behaviour• Professional competence and due care• Integrity

Principles of professional ethics1

1.4 Simone is a qualified accountant who works for a medium-sized accounting practice. The firm hasrecently taken on a new client that is planning to build a large supermarket directly oppositeSimone’s house and needs professional help completing its business plan for submission to thebank. Simone has actively campaigned against permission being given to build the supermarket.If Simone is part of the team that provides advice to this client which of her fundamental ethicalprinciples will be most threatened?Select one option.

(a) Integrity(b) Professional competence and due care(c) Objectivity(d) Professional behaviour

1.5 Which one of the following is not one of the fundamental ethical principles?Select one option.

(a) Confidentiality(b) Objectivity (c) Diligence(d) Professional behaviour

c h a p t e r a c t i v i t i e s 3

2.1 Brian is a professional accountant who works for a small accounting practice in Rochester. Apotential new client, Overten Ltd, has recently asked him to provide professional advice on thepossible take-over of Undernine Ltd. Overten Ltd are not aware of the fact that Undernine Ltd is aclient of the firm that Brian works for. (a) Explain which two of Brian’s fundamental ethical principles are most threatened by this

situation.

1

2

(b) Explain whether, in these circumstances, Brian should agree to provide the professionaladvice to Overten Ltd?

2.2 Lydia is a qualified accountant who works for Ariel & Arthur. She has recently returned from aninheritance tax training course to find the following note on her desk from Jacob Ariel, one of thepartners at the firm.

Hi Lydia,I hope the training course was useful and that you enjoyed the opportunity to learn new skills. Asyou are now the most up-to-date member of staff on inheritance tax planning I have decided togive you sole responsibility for a new client, John Reynolds. You will be expected to complete hispersonal tax return and also provide him with specific advice on inheritance tax planning.I have every faith in you, Lydia, and if you do a good job there may be a promotion for you in thenear future. If you need any further guidance there are several tax books on the shelf in my officethat you are welcome to use.ThanksJacob

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

Threats and safeguards tofundamental ethical principles2

The course that Lydia attended on inheritance tax did not cover inheritance tax planning and Lydiahas never previously done any work of this type.(a) If Lydia takes on the sole responsibility for John Reynolds explain which of her fundamental

ethical principles is most threatened by this situation.

(b) What type of threat does Lydia face to her fundamental ethical principles?

2.3 Grace is a professional accountant who works in practice. One of her clients, Morden Ltd, hasrecently launched a new product which they claim reduces the amount of washing powder neededfor each washing cycle by 20%. The client has decided that initially it will market this new productlocally and if it proves to be a success it will then advertise nationally. The owner of Morden Ltd hasoffered Grace a year’s supply of the product for her and her family in return for a written testimonialfor the company’s website, recommending the product. (a) Explain the two threats that Grace faces to her fundamental ethical principles.

1

2

(b) If Grace agrees to write the testimonial for the website explain which of her fundamentalprinciples is most threatened by this situation.

(c) If Grace uses the product and finds that it does reduce the amount of washing powderrequired, explain whether she should accept the gift of the year’s supply of the product.

c h a p t e r a c t i v i t i e s 5

2.4 Pearce works for Root & Branch, a medium-sized firm of accountants. He is currently away on athree-week holiday cycling across China. A colleague has been monitoring his emails while he isaway and has found one marked as high priority.The email is as follows:

Hi Pearce,I haven’t heard from you since our discussion about the possibility of you providing me with themanagement accounts for one of your other clients, Rufus Pet Supplies Ltd. As you know we arein direct competition with Rufus Pet Supplies Ltd and this would be very useful information tohave. The family business is not looking very healthy at the moment and your Auntie Gill and Iare relying on you to help us with this so that we will have a better idea of what we are competingwith.Will we see you on Sunday for lunch at your Mum and Dad’s house? Auntie Gill sends her love.Best wishes(Uncle) GeorgeGeorge HamersleyOwnerPerfect Pets Ltd

(a) Explain which two of Pearce’s fundamental ethical principles are most threatened by thesituation detailed in George Hamersley’s email.

1

2

(b) Identify what type of threat Pearce faces to his fundamental ethical principles.

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

2.5 Damien King works for Travis & Vaughn, a medium-sized accounting practice in Westtown. Damienhas recently completed an assignment for one of the firm’s clients, Melissa, who is delighted withthe work he has carried out. Melissa’s husband is the chairman of the local football club and as athank you to Damien for all his hard work Melissa has offered Damien two season tickets to watchWesttown United. (a) Explain which of Damien’s fundamental principles is most threatened in this situation.

(b) Explain whether Damien should accept the offer of the two season tickets from his client,Melissa.

c h a p t e r a c t i v i t i e s 7

3.1 ‘The Code of Ethics issued by the International Ethical Standards Board for Accountants (IESBA),which is followed by all the professional accounting bodies in the UK, sets out strict rules thatgovern the ethical decisions made by professional accountants.’Explain whether this statement is true or false.

3.2 Nadine is an accountant who works for Upwell Ltd. She is currently training Freddie who hasrecently joined the firm as a trainee accountant. Nadine explains to Freddie that on occasions theremay be a conflict between his own personal values and the way in which Upwell Ltd acts. Nadineasks Freddie what particular personal values he has. He replies fairness and transparency.For each of the following examples identify whether there is a conflict between the behaviour ofUpwell Ltd’s management and Freddie’s personal values.

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

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/No

Customers can view the supply chain forall products sold on Upwell Ltd’s website.

Transparency Yes/No

3.3 Toni is a professional accountant who works for Maddox & McGarry, a medium-sized firm ofaccountants. She has recently finished an assignment for a client, Dan Seagrave, who owns a veryexpensive restaurant in the local town. Toni has received the following email from Dan:

Hi Toni,I hope all is well with you and that you have recovered from all your hard work on our end of yearaccounts; as you know the bank was very keen to get those figures.I would like to offer you and your team at Maddox & McGarry a complimentary meal at therestaurant as a thank you. If you enjoy the meal then perhaps we can have a chat about whetheryou would like to have your wedding reception here. As I said I would happily offer you a 50%reduction on the price in recognition of our excellent business relationship.I look forward to seeing you at the restaurant soon.Best wishes,Dan

(a) Explain which of Toni’s fundamental ethical principles may be threatened by these offers.

(b) In this situation explain the best course of action for Toni to take.

c h a p t e r a c t i v i t i e s 9

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

3.4 Sandeep is a professional accountant who has worked for Passandra & Co for several years.Sandeep is generally seen as the firm’s expert on the retail sector and is the manager of theassignments for several retail businesses in the local area. A large retail premises in a primelocation on the high street has recently become vacant and two of Sandeep’s clients are keen toacquire it. Each client has asked Sandeep to advise on the acquisition. They are each aware of thefact that the other is interested in the premises. Neither of the clients are happy for Sandeep toadvise both firms in relation to the bid and each one is prepared to pay a premium for exclusiveadvice.(a) Explain which two of Sandeep’s fundamental principles are most threatened by the fact that

both clients wish to acquire the vacant premises.

1

2

(b) Explain what process Sandeep can go through to resolve the ethical conflict he has indeciding how to deal with this situation.

(c) If Sandeep decides to act for one of the clients explain two issues that he must considerwhen carrying out the assignment.

c h a p t e r a c t i v i t i e s 1 1

3.5 (a) List the four key Bribery Act 2010 offences.

1

2

3

4

(b) What is the maximum penalty if a person is found guilty of the criminal offence of bribery?

3.6 Boyd is a professional accountant who works in the finance department of Whizzy Interactive Ltd,a firm that develops and copyrights innovative interactive computer games for children. Due to amix up with names, Boyd has been copied in on an email conversation between Josh, one of thepartners in the business, and another member of staff, Lloyd. In the emails Josh appears to beencouraging Lloyd to carry out industrial espionage with the intention of copying a very successfulnew game that is being developed by a competitor. (a) Explain the conflict of loyalties that Boyd faces in this situation.

(b) Explain what options Boyd has to deal with this conflict of loyalties.

4.1 State the three main ways that a professional accountant can keep up-to-date with technicalchanges.

1

2

3

4.2 Charmaine has recently qualified as a professional accountant. She works in the accountsdepartment of Realgo Ltd. She has been asked by the financial controller to prepare some complexgoodwill calculations on a recent takeover that the business has carried out. Charmaine has notcarried out work like this before.State two safeguards that Charmaine should consider to reduce the threats to her fundamentalethical principle of professional competence and due care.

1

2

1 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

Professional and technical competence4

c h a p t e r a c t i v i t i e s 1 3

4.3 Lucy is a professional accountant in practice. Her client, Hughie, believes that Lucy has actedoutside her professional competence when providing him with specific accounting advice. Hughiebelieves that as a direct result of this advice he has incurred significant costs that could have beenavoided had he been advised correctly.If it is proved that Lucy has acted outside her professional competence, Hughie may be able to sueLucy for this loss.State the two grounds on which Hughie can sue Lucy.

1

2

4.4 (a) Rhiannon is a professional accountant with her own small accounting practice. She employstwo additional members of staff. The practice has a wide range of small clients that aremostly sole traders and partnerships. Rhiannon’s accounting practice prepares sets ofaccounts and tax returns for these clients.

Given her practice’s client profile, explain two areas of technical knowledge that Rhiannonand her staff must keep up-to-date.

(b) Pettini & Floyd is a large firm of accountants in Salttown. Its main business is providingexternal auditing services and preparing financial statements for medium and largecompanies in and around Salttown.

Given its client profile, explain two critical areas of technical knowledge in which the staff atPettini & Floyd must keep up-to-date.

4.5 State the type of insurance that a professional accountant should have to cover against legalliability to compensate a client who has sustained a loss through a breach in the accountant’s dutyof care.

1 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

c h a p t e r a c t i v i t i e s 1 5

5.1 Lorna is a professional accountant who works for Oldroyd & Vaughn, a small firm of accountants inGreentown. She has recently received the offer of a new role working for Bell & Bosen, a muchlarger firm of accountants in the town.For each of the following explain whether Lorna can disclose the information requested:(a) One of the partners at Oldroyd & Vaughn asks Lorna if she can explain why she has decided

to move to Bell & Bosen.

(b) Lorna’s new manager at Bell & Bosen asks her to provide him with a list of the clients sheworked on at Oldroyd & Vaughn.

(c) While working at Oldroyd & Vaughn Lorna was responsible for preparing the accounts ofclients in the building industry which required specific specialist technical knowledge. Thepartners at Bell & Bosen have asked Lorna to run a training course on this area for the staff.

5.2 List the three circumstances when it is acceptable for a professional accountant to discloseconfidential information.

1

2

3

Confidentiality 5

5.3 José is a junior member of the accounting staff at a small firm of accountants in Towstone. Whileopening the post he finds a letter addressed to his manager from a local printing firm. The letterasks for financial information about one of the firm’s clients who has requested to trade on creditterms with them. José is aware that the information they have requested is confidential howeverhis manager is on holiday so he will have to make the decision as to whether to provide theinformation himself.Explain what José should do in these circumstances.

5.4 State the name of the process by which the person in an organisation who controls data informsthe Information Commissioner’s Office (ICO) about the way in which the organisation handles data.

1 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

c h a p t e r a c t i v i t i e s 1 7

6.1 Nigel is the Finance Manager at Toross Ltd. He is a qualified accountant who has worked for thebusiness for four years. The Sales Director has asked him to re-issue an invoice to one of thebusiness’s larger clients, increasing the discount level the client receives from 20% to 40%. TorossLtd has a policy of never giving more than 25% to any customer and requires any discount of thislevel to be authorised by the Managing Director. Nigel has raised this issue with the Sales Directorwho has told him there is no need for the Managing Director to be involved in this decision.Explain the ethical issues that Nigel faces in this situation and what he should do to address them.

Codes of conduct and organisationalvalues6

6.2 (a) If a professional accountant fails to comply with applicable regulations and codes of practicehe/she may face disciplinary action. State the two main categories of misconduct for whicha professional accountant may be disciplined.

1

2

(b) State two bodies that can bring the disciplinary action identified in 6.2(a).

1

2

6.3 Seth is a professional accountant who has his own accounting practice; he employs one additionalmember of staff. One of the services the practice offers is payroll. The practice has recently takenon a new client, Coxpenny Ltd and Seth personally carried out the appropriate customer duediligence procedures on this client.Seth’s colleague has just started working on an assignment for Coxpenny Ltd and has realised thatthe client has been paying some of the temporary staff in its warehouse in cash. This means thatthe business has not been paying the correct national insurance (NI) or PAYE income tax to HMRC.When Seth raises this issue with the Managing Director of Coxpenny Ltd she tells Seth that this isone of the reasons she has employed him. Seth explains that she must declare the amounts shehas paid to the temporary staff to HMRC and pay the outstanding tax and NI. The ManagingDirector says that she is happy to do this for future payments but does not wish to declare anyprevious amounts.(a) Explain what Seth must do in this situation.

1 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

c h a p t e r a c t i v i t i e s 1 9

(b) Explain what the consequences are for Seth’s practice if he does not take any action in thissituation.

(c) Explain what action Seth should take regarding Coxpenny Ltd’s refusal to disclose the issueto HMRC.

6.4 (a) Money laundering in the UK is covered by three key pieces of legislation and regulations.State these three legislation and regulations.

1

2

3

(b) Money laundering must be reported to two different parties depending on the size of anorganisation.(1) In a small organisation state to whom a suspicion of money laundering should be

reported.

(2) In a larger organisation state to whom a suspicion of money laundering should bereported.

(c) State the maximum penalties that an individual could face if found guilty of moneylaundering.

2 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

c h a p t e r a c t i v i t i e s 2 1

7.1 (a) State the definition of sustainable development as set out in the Brundtland report.

(b) State the three key objectives of sustainability and sustainable development that are set outin this report.

1

2

3

7.2 Organisations publish reports detailing their success in supporting and promoting sustainability.(a) Explain what a business might include in a Corporate Social Responsibility (CSR) Report.

(b) Organisations in the UK are not legally obliged to produce CSR reports. Explain why abusiness might choose to produce one.

(c) Explain what is meant by the term ‘reputational risk’ and how this is potentially affected byan organisation’s attitude to Corporate Social Responsibility.

Sustainability7

2 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

7.3 Syrus works for Prosser & Fitch Ltd, a medium-sized accountancy practice. One of its clients,Edulink Ltd, has contacted Syrus to discuss sustainability and sustainable development. They haveexplained that as part of their Corporate Social Responsibility (CSR) they need to improve theirunderstanding of this area. Increasingly, the businesses that they trade with are insisting that theycan demonstrate a progressive approach to sustainability.(a) Explain what is meant by the phrase ‘the triple bottom line’ in relation to sustainability.

(b) Explain the professional accountant’s obligation to uphold the values of sustainability.