Violation of Ethics for Professional Accountants - Research Paper Example

I. Identify and discuss the sections of APES110 that John’s behaviour has violated. Make sure you explain why John’s behaviour does represent a violation of each of these sections. A. Fundamental principles violated i. Integrity Integrity is one of the five fundamental principles in the code of ethics for professional accountants. According to the APES 110, “the principle of integrity imposes an obligation on all Members to be straightforward and honest in professional and business relationships. Integrity also implies fair dealing and truthfulness (2006, 8).” This principle of integrity has been violated by John when he has agreed to modify the financial statements in order to make it look impressive to the bank. Johns breach of this fundamental principle in the code is apparent in Section 110.2 of the APES 110, whereas “a Member should not be associated with reports, returns, communications, or other information where they believe that the information: [a] contains a materially false or misleading statement. (2006, 8).” When John has agreed to misrepresent the real financial position of Armidale Hardware, he has produced financial statements that are materially false or misleading to the bank. If the bank grants the business the loan, and the business does not have enough ability to repay it, the bank will find out that the information that the business has sent is not correct, and there is some fraud related in the case. If the bank does not find out, John has still acted not in an honest way, as he is required by Anne to blatantly misrepresent the companys real financial position. In this case, John has not exercised fair dealing and truthfulness in his professional engagement. ii. Objectivity Aside from the principle of integrity, John has also breached the fundamental principle of objectivity. According to APES110, “the principle of objectivity imposes an obligation on all Members not to compromise their professional or business judgement because of bias, conflict of interest or the undue influence of others (2006, 9).” John has violated this principle by compromising his professional judgement. The reason for his compromise includes, bias, conflict of interest and undue influence of others. Johns partiality arises from the fact that he is a close family member to Anne – John is Annes sister. This family relationship serves as a threat to independence to John, since he is personally connected to Anne, and it would be his duty to help his sister – one situation that impairs Johns objectivity. Aside from this, his objectivity arises from conflict of interest on his part, as an investor in Armindale Hardware. John has his only savings at stake in Armindale Hardware. The public interest that he carries to serve with his profession is in conflict with his own private interest. If John were not Annes brother in this case, but he had a huge personal stake such as his only savings in a certain client, he would still be in breach with the fundamental principle of objectivity; self-interest threatens his independence as an accountant in this engagement. The undue influence in this case comes from Annes instructions to John to modify the financial statement in order to make it impressive from the banks point of view. What distinguishes this from bias and conflict of interest is that, John could have committed this fraud according to his own discretion: by being Annes brother who wants to help her in the business--bias, or conflict of interest that arises from his direct financial interest in Armindale Hardware. Therefore, John has also acted under undue influence of others, which has impaired objectivity when it comes to the practice of his profession. iii. Professional behaviour Johns actions in this case has breached three of the five fundamental principles of APES110. Aside from integrity and objectivity which have been discussed previously, John has also breached professional behaviour. According to APES110 Section 150, “The principle of professional behaviour imposes an obligation on Members to comply with relevant laws and regulations and avoid any action or omission that may bring discredit to the profession. This includes actions or omissions which a reasonable and informed third party, having knowledge of all relevant information, would conclude negatively affects the good reputation of the profession (2006, 13).” The informed third party in this case is the bank, which would find out the relationship between Anne and John, with John as the accountant that has prepared the financial statement that is provided. Since the bank will find out the relationship between Anne and John, the bank may conduct some investigation with regard to the accuracy of the financial statements. If it has been found out that John fabricated the companys financials in order to trick the bank into providing it a loan, John will have to face significant legal charges as well as negative publicity as an accountant. This will bring discredit to the profession. John, in this case has violated the fundamental principle of professional behaviour. B. In reference to the specific situations where the APES110 conceptual framework has been applied i. Financial interests John violated the fundamental principles by exposure to certain specific situations. One of these include having financial interest in Armindale Hardware. Under Section 290.104 of APES110 – Financial Interests , “a financial interest in an Assurance Client may create a self-interest threat. In evaluating the significance of the threat or reduce it to an example the nature of the Financial Interest. This includes evaluation of the role of the person holding the Financial Interest, the materiality of the Financial Interest and the type of Financial Interest (Direct or Indirect) (2008, 46).” Clearly, Johns interest in the company is material because of its amount relative to John, which is whole personal savings. This threat to independence that arises from self-interest has resulted in a breach in the code of ethics. This has made John violate the three fundamental principles in the code of ethics. ii. Family and personal relationships Johns violations of the three fundamental principles in the code of ethics do not only arise from his direct financial interest in the business, but also from his family and personal relationship with Anne, who is his sister. According to Section 290.137 Family and Personal Relationships, Johns being Annes brother creates a threat to independent to his practice as an accountant in charge of the businesss financial statement (2008, 53). This is apparent in APES110, 290.136 – Immediate Family member influences subject matter information, where John is “in a position to exert direct and significant influence over the subject matter information of the Assurance Engagement (2008, 53),” and he is instructed by Anne to personally prepare the financial statements which misrepresent the businesss real financial position. II. Would John’s behaviour be acceptable (ethical) according to any of the normative theories that were introduced in Topic Two of this unit? Make sure you provide a brief explanation. Ethical egoism. Johns actions can be considered acceptable or ethical if it is viewed from the theory of ethical egoism – one of the theories in consequentialism where the focus is not on the nature of the act but the goals and consequences of the act (Hooker 1996). Under the ethical egoism, the goal or the consequence of the act is the long-term self-interest. In this case, John has acted in pursuit of his long-term self-interest. The only savings he has personally is the $200,000 which he has invested in his sister Annes business. When he has agreed to what Anne has instructed him, which is to misrepresent the real financial position of the company, his goal is to protect his interest in the company. If the company does not get the loan, there will be no cash flow in the business which will sustain its ongoing operations. If this happens, the operation will stop and the business will be forced to shut down. John is not sure if he is still able to recoup his original investment when this happens. Because Johns long-term interest is at stake, he only acted in order to protect this. Therefore, Johns action can be considered ethical, only from the point of view of egoism. However, there is a caveat in this kind of reasoning, when it comes to Johns case. Aside from Johns personal savings, what can be considered a long-term self-interest to him which should be promoted through this act is hard to establish. If John has to consider the long-term consequences of his action, the apparent consequence is losing his investment in the business if he does not do what Anne instructs him to do. However, the act has another consequence especially if John gets caught, and this consequence can come in the form of a punishment that can range from revocation of his license, to certain legal actions against his part and Annes that the bank may resort to due to fraud. If John is found out, this act has not promoted his long-term self-interest and therefore, becomes unethical. Kants moral theory. There is another set of normative theories, which is called nonconsequentialist theories. These theories are in contrast with the consequentialist ones which focus is on goals and consequences. Deontology is one of these; where it differs from teleological ethics when it comes to the focus on which is ethical. Kants moral theory, which is a form of deontological ethics focuses more on the nature of the act, the duty behind the act, and the duty to act the duty (Alexandre & Moore 2007). While Johns duty ranges from the different societal roles he play, such as his duty to the public as an accountant, John has a duty to help Anne as he is her brother. The familial ties between them imposes on him a duty to help his sister, by helping her secure the bank loan that is needed in order to save the operations of the business. In this case, the loan can only be secured by using Johns authority as a professional accountant. Under Kants moral theory which rests on fulfilment of duties, Johns act is considered ethical. III. If John had asked for your advice before he provided the financial statements, what would you have advised him to do? Make sure you provide reasons for your answer. A. Step 1. APES 110 Provision: Remove the member of the Assurance Team from the Assurance Engagement First of all, John should quit and step aside as the accountant in charge of Armindale Hardware. He should not use the authority of his profession in order to tinker with the companys financial statements and provide a guarantee of the accuracy of the information that will be sent to the bank, in order for the bank to grant a decision when it comes to lending cash to the business. This is the first step that John should do before he provides the financial statements. Under Section 290.106 of the APES110 – Provisions Applicable to All Assurance Clients, John can be considered having a Direct Financial Interest in the company, with the threat of self-interest in his independence as an accountant (2008, 47). In order to eliminate the threat, the provision gives three options, where John has a choice between two: “[a] dispose of the direct financial interest prior to the individual becoming a member of the Assurance Team; or [c] remove the member of the Assurance Team from the Assurance Engagement (APES110 2008, 47).” If John chooses provision A, he has to sell his interest in the business. Since the business is not in a good financial shape, this is not feasible on his part. His only choice is to quit, step aside or be removed from the engagement. While this is applicable in Johns case by having a direct financial interest in Armindale Hardware, under Section 290.136 – Immediate Family member influences subject matter information, this is the course of action that John should follow as well (APES110 2006, 53). B. Step 2: Hire an additional professional accountant who did not take part in the engagement to review the work of John After he has stepped aside as the accountant of the business, the business has to hire an external accountant in order to prepare the financial statements. According to Section 290.142 – Immediate Family member influences subject matter, some provisions in order to address the threat to independence include “involving an additional professional accountant who did not take part in the Assurance Engagement to review the work done by the member of the Assurance Team (APES110 2008, 55).” If the business is to proceed and take a chance with the loan application, after assessing the possible conditions that the bank may impose because of its real financial position, the business should hire another accountant to do Johns work – an accountant who is not related to John or Anne, does not have any interest in the business, and has not helped John in preparing the financial statements before. C. Step 3: John must be excluded from any substantive decision-making regarding the engagement In order to totally diminish the threat to independence in this case, John should also step aside in participating in decision-making when it comes to the engagement. According to Section 290.142 – Immediate Family member influences subject matter, some provisions in order to address the threat to independence, aside from the one mentioned in the previous section includes “excluding the individual from any substantive decision-making concerning the Assurance Engagement (APES110 2008, 55).” D. Additional advise and certain implications John has to talk to his sister Anne that doing what she wants him to do will create potential harm to his practice as an accountant; if the ethics of the act is assessed by egoism, if John is found guilty, he will not be promoting his long-term interest in the act as he will have to receive punishment that can range from revocation of his license, to certain legal actions against his part and Annes that the bank may resort to due to fraud. This is the major consequence to John with regard to his act. He should talk to his sister and tell her to find other ways to raise cash for the business, such as getting higher-interest rate loans secured by the companys fixed assets in order to compensate the bank for the riskiness in the businesss financial position, or revising its business strategy in order to convince equity capital providers to invest in the business with reference to its future growth. Resorting to fraud, while using his authority as a professional accountant will not only put him to peril, but also his sister and the business. The point of saving the companys operations will be pointless if that happens. References Accounting Professional and Ethical Standards Board. 2008. “Compiled APES 100 Code of Ethics for Professional Accountants.” APESB.org.au. Accessed on May 9, 2010 from http://www.apesb.org.au/Document/Issued_Standards/Compiled%20APES%20110-%20July%2007.pdf Alexander, L. & Moore, M. (2007 November 21). “Deotological Ethics.” Stanford.edu. Accessed on May 6, 2010 from http://plato.stanford.edu/entries/ethics-deontological/ Australian Professional & Ethical Standards Board. 2006. “APES 110, Code of Ethics for Professional Accountants pp. 1-13..” CPAAustralia.com.au. Retrieved 5 January 2009 from http://www.cpaaustralia.com.au/cps/rde/xbcr/SID-3F57FEDF-8B27D88/cpa/APES_110.pdf. Hooker, Richard. 1996. “Teleology.” WSU.edu. Accessed on May 9, 2010 from http://www.wsu.edu:8080/~dee/GLOSSARY/TELE.HTMs Read More