Professional Ethics Paper 1 7127-1 AQA Accounting

0:00 professional ethics so what we're going to look at today is the basic knowledge that you need in order to tackle these professional ethics questions the five fundamental principles of professional ethics the five threats to those thunder thunder fundamental principles and five steps you can take to solve ethical dilemmas in the exam primarily we're going to be talking about the 25 marks section c from paper one questions so you should have a knowledge of the accounting Concepts I'm not going to go through these in any detail safe to say that the first three here are the Gateway Concepts that apply to everything so they could well come up in some form or other and then these three consistency prudence and accruals are most likely to be the ones that are going to have an impact when it comes to professional ethics so if you don't know

0:47 the accounting Concepts you need to go back to the year one material and look at those accounting regulations as well your studies of limited Company accounts so in year one smaller limited companies in the year two the plc's should give you an awareness of the company's act 2006 the FRS 102 so financial reporting standard that's used by smaller limited companies the International Accounting Standards and the ifrs's you don't need any detailed knowledge of those but an awareness of is one presentation of financial statements and is7 which relates primarily to the the layout of your statement of cash flows you should know about the role of the professional accounting body so we've got the ccab which is an umbrella Organization for the chartered bodies that are concerned

1:34 with financial accounting and therefore external audits so that's your akka sit for ICA wcaa and the icas there's also the chartered Institute of Management accountants which aren't concerned with external audits because they have a focus on management accounting but all of those will have their own ethical codes of conduct to give you guidance based on the five fundamental principles and how to identify threats to those principles as I said I'm not going through any of that in detail you can look that up elsewhere the other thing you need to know about is directors and Auditors responsibilities remember the directors are the ones that are responsible for preparing the financial statements it's the Auditors that Express an opinion on those financial statements as to whether they show a true and Fair View but directors and the

2:20 Auditors are both appointed by the shareholders and you may also have internal Auditors so those are part of the finance team working within the company which would have their own kind of safeguards in place to help make sure that fraud doesn't occur and things are count are accounted for properly okay so on to the five fundamental principles there so these apply equally to accountants that are working within the business directors that are running the business and Auditors who are responsible for expressing that opinion as to whether the accounts show a true and fair views there are five that we need to learn first one is integrity these are in no particular order objectivity is another one professional competence and due care confidentiality and professional Behavior now you need to learn these five you need to know

3:06 what they're called you need to know what they mean and you need to be able to identify potential threats to these fundamental principles so I'm going to suggest maybe using mnemonic um so I've got some ideas here I PCP so that's the order I've listed them in there so in Oxford Penguins can party or we could go picop people in cars often Park however you want to try and remember it if you find mnemonics helpful then then that might be a good thing to do but those are the five that you need to learn so we're going to go through each of them one by one bearing in mind that these will apply in different circumstances to accountants directors of the company and Auditors the first one Integrity so Integrity is about being straightforward and honest in all your professional and business relationships so not lying or not

3:53 withholding information that could lead to people making the wrong decision so you mustn't be associated with any reports returns or Communications or other info that contain false or misleading statements so contain statements or information furnished Reckless or recklessly I hardly say it anything that omits or obscures information so as to be misleading it's often about what you don't say other than what you do so any issues with any of that the action that you're required to take whether you're an accountant or director is to disassociate from that information okay the second one objectivity so this is about not allowing bias conflict of interest or undue influence of others to override professional or business judgments so we

4:40 need to do things for the right reasons not the wrong reasons we need to maintain our objectivity as accountants as Auditors and as directors so in should avoid situations and relate and relationships that compromise objectivity so it wouldn't be appropriate for someone to audit a company's accounts if they are married to the managing director of that company that's just too close so don't carry out Professional Services if you're an accountant or an auditor if a relationship or circumstances mean that you can no longer remain objective so there are lots of examples where that might apply competence so professional competition and due care it's up to you to maintain Professional Knowledge and Skills at a level to ensure competence so keep up

5:26 with current developments in practice in legislation and in techniques to undertake CPD continuing professional development so that's like training when you're working as an accountant and ensure that professional staff receive training and supervision so if you're responsible for a team if you're the finance director it's down to you to make sure that those staff are properly updated ensure that you've got sufficient time as well to carry out work carefully thoroughly and on a timely basis so if we rush we're far more likely to make mistakes not come up with the right answer so don't undertake work for which you're not properly trained or qualified and do not rush to meet unrealistic deadlines on the napkin there on the picture it shows you some things experience knowledgeability attitude and behavior that would all lead to professional competence that

6:12 would apply whether you're an accountant an auditor but also directors of the company have a duty of care towards the shareholders of that company and the public at large so yeah those things would apply to them as well breach of confidentiality pretty much common sense with this one confidentiality do not disclose information to third parties unless proper authorization has been given or if there's a legal or professional duty to disclose that information don't use information for personal advantage or pass to third parties those would be things like Insider share dealings that sort of thing so unless you've got authorization you can only disclose confidential information when it's required by law so hm revenue and Customs investigations money laundering anti-terrorism National

6:59 Crime agency that kind of thing so the last one of the five is about professional Behavior so accountants behavior and Auditors and directors must comply with relevant laws and regulations and avoid bringing the profession into disrepute so you must make exaggerated claims for your services your qualifications your experience and don't make disparaging references or unsubstantiated comparisons to the work of others so you shouldn't be defaming other people making derogatory comments that's not good not a professional way to carry on so let's check your learning then at this point can you remember the five fundamental principles you might want to pause the video use your mnemonic so did you go for um in Oxford what was it Penguins can

7:45 party or people in cars often Park whichever one it is can you remember the five so pause the video jot them down can you remember what they mean if not perhaps go back and review the previous slides but you should have got IOP CP if we do it in that order integrity the O is objectivity the first P professional competence and you care C is confidentiality and the P the last p is professional Behavior okay so those are the five fundamental principles that we need to add here to and we're now going to look at five potential threats to those fundamental principles so things that might happen to compromise these principles to make us act in a way that's not ethical okay so the threat then just to Define

8:32 that it's a personalized thing likely to cause damage or danger so there are five threats to those fundamental principles one is self-interest so that's acting in your own best interest rather than the best interest of the client that you're auditing or the um the company that you're running as a director self review so it's about checking your own work and largely coming to the same conclusions be thinking about segregation of Duty familiarities this is relationships that might compromise those uh those fundamental principles intimidation so this could be either something that you imagine or something that really is um happening and advocacy okay so these are the potential threats to the fundamental principles

9:18 okay so let's look at those potential threats in a little more detailed self-interest this is where a financial or other interest inappropriately influences the accountant's Behavior so you've been asked to make an adjustment to the accounts and perhaps one of the directors has a villa in Spain and they're offering you the chance to use that Villa if you make the adjustment okay so self-interest there would be the use of the Villa so that might lead you to make a decision that's not wholly appropriate self-review this is where the accountant has to reevaluate re-evaluate a judgment or some data that she or he has previously made or produced so generally you're going to come to the same conclusion as you did the first time so really we need to look at somebody else reviewing work rather than you looking over it so

10:03 familiarities where close personal relationships can make the accountant too sympathetic to the interests of others and often self-interest plays A Part there so it goes alongside familiarity intimidation so this could be real or perceived threats so where the accountant is deterred from acting objectively due to real or perceived threats so a real threat you've been told that you know if you don't do is asked you're going to lose your job or a perceived threat you might just kind of think well actually if I don't do this my life's going to be hell or I'm not going to be looked at for promotion that kind of thing um and then advocacy this is where the accountant promotes a position or an opinion of a client to the point that his or her objectivity may be compromised in the future or actually at the moment so self-interest again could play A Part there so you're trying to

10:50 encourage you know the company to do something that you think might increase the price of a company that you've got shares in for example so we need to watch out for that trying to remain neutral trying to remain objective um so when we've got these ethical dilemmas I think often we can look at the theory but the easiest way to get a handle on this is to look at some potential ethical dilemma so we've got a couple here um to look at and five steps that we can take to help solve them so the first one we need to establish what are the facts so sometimes it will tell you that something is rumored to be happening or it's been suggested or somebody overheard something but what are the actual facts let's get those straight before we start let's think about which ethical principles are potentially going to be compromised think of your five is it Integrity is it objectivity

11:36 professional competence to do care it's confidentiality or is it professional behavior and then what are the threats to those ethical principles is it something to do with self-interest self-review familiarity intimidation advocacy and remember it could be a combination it could be a combination of ethical principles that are compromised and it could be more than one threat to those principles um are there any internal procedures or safeguards in place to reduce or mitigate the risks so is there an internal procedure so internal audit for example that would help to pick up any problems at a later date and can you think of any alternative courses of action that could be taken so is there a better way around this you know to what you're being asked to do so let's look at the first dilemma and

12:21 your manager has asked you to claim expenses under a different cost center than is normal on the grounds that the budget is under spent whereas the budget for the correct cost center is already overspent so if you allocated the cost correctly they would cause a further overspend you're being asked to put the expenditure against another budget should you be doing that so what would you do what would you think about I mean um is it the right thing to do let's think about the ethical principles that might be compromised if we do that let's think about the facts first of all so we're not being asked to claim anything fraudulently because these expenses are legitimate we're just being asked to put them into a different cost center so you're not going to be benefiting from this financially you haven't been offered a bribe or anything to do this the issue is whether the

13:06 budget information on your variance analysis when you do expend it to expenditure variances on those budgets will it be reliable if managers have been manipulating the use of budget code so the idea is to identify areas where overspends or underspends have occurred and take remedial action but if you've manipulated the costs going into those budgets that information will be skewed so it says the incorrect allocation of the expense could result in Senior Management being deliberately misled now we're not told about the amount of the expense here so we don't know whether it would be material or not um you might think that you've got no choice because your manager is asking you to do this but should you be taking more responsibility for your actions and should you be seeking more information from your manager about this

13:52 okay so the ethical issues involved obviously it's Integrity you know in your heart of hearts that you're doing something wrong here so clearly Integrity is going to be the main fundamental principle that's being breached but also your objectivity you're not necessarily doing things here for the right reason or your manager certainly isn't and what are the threats so in addition to your integrity and objectivity there's a potential intimidation threat from your manager just the fact that they are your manager is intimidating enough so you want to keep your job and see your career progress so this intimidation threat could be linked to one of self-interest if you don't do as your manager asks you might be passed up for promotion or further training so even if you don't consider your manager to be intimidating

14:37 you might find it difficult to challenge his or her request due to the fact that they are a manager or due to the closeness of your working relationship there could be a familiarity threat there since you're not being asked to act dishonestly for personal gain I mean it is quite dishonest putting this expenditure to the wrong cost center but you might decide the threat to your integrity isn't particularly significant but you're thinking about the consequences and not the risk you're also ignore knowing the possible consequences that Senior Management may be deliberately misled as a result of your actions so the risk of this happening is quite significant and less appropriate safeguards are put in place so do you know that somebody else reviews the budgets before they go further up the line and that might be a suitable Safeguard to help mitigate any

15:23 problems further down the lines so have we got any internal procedures what kind of safeguards would ensure that budgetary con codes aren't misused or manipulated so you might be aware that the analysis of the expense claim will be drawn to the attention of management by way of procedures that already exist so an additional Safeguard to allow the proposed action to go ahead would be to discuss the situation with your manager and seek assurances from him or her the treatment of the expense claim will be disclosed to the users of the information so that somebody else will be told about it you might also discuss the situation if you're really uncomfortable about it discuss it with an independent person you've obviously got to maintain confidentiality about the client or the company so you could talk to your professional bodies technical advisory service most of the

16:09 professional bodies have a telephone helpline so if you're a member of the association of accounting technicians or The Institute of Chartered accountant in England and Wales or a Childhood Institute management accountant management councils they will have a helpline for such a dilemma okay can we think of an alternative course of action is there a way that we can deal with this that will avoid upsetting the manager um we've got a nice picture of a cute cat there looking into a mirror but you know there is this thing called the mirror test can you look at yourself in the mirror after you've taken a particular course of action and be happy with what you see so ask yourself if you're satisfied with the safeguards that exist and or will be put in place are you truly satisfied that the risk of reaching the principle of Integrity is or can be made insignificant whether you

16:57 take steps to ensure that management are made aware of the expense coding or you refuse to carry out the request of your manager you should ask yourself whether you'd pass a mirror test so are you proud of who you see in the mirror after following your actions you may decide to obey your manager's requests and use an incorrect budget code because you want to protect the budget holder's position and because you've received assurances that the proposed action won't result in Senior Management being misled but on the other hand you may feel that as a professional accountant it's your duty to to report expenses as they are because you aren't comfortable the proposed course of action wouldn't mislead Senior Management so which decision feels right for you are you able to look at yourself in the mirror comfortably now something like this could occur in real life but we're really preparing ourselves for an exam scenario so remember with those 25 Mark

17:44 questions it's about getting balanced so it's about saying well you know it might be fairly insignificant because or actually this could be a very serious breach because and then overall coming out with a judgment and often there are a lot of gray areas some of the questions you'll be posed with the dilemmas will be very cut and dried it'll be very obvious that this is fraud that's occurring it's you know really not not good whereas other things like this one you know it's a little bit more of a gray area we're not told the magnitude here so we'd be identifying limitations you know how much we're talking about is it a significant part of the budget or is it fairly insignificant is it going to matter in the long term okay let's look at another one then number two so this is about audit so obviously when we prepare our financial statements at the end of the year as a company we get the external Auditors in

18:31 and they're coming to check that everything looks okay they can't possibly check every single transaction so they'll check a sample of transactions and they'll report them whether or not the accounts show a true and Fair View and at the end of the day everybody wants a clean bill of health they want an unqualified audit report if it's qualified it means that problem has been discovered and that could you know set alarm bells ringing amongst employees at the company shareholders of the company the general public at large so with this second ethical case study then we've got a case of non-disclosure to Auditors so this is about not telling the Auditors something so let's read on it says that you're employed as an accounting systems manager in a company that manufactures heavy plant you and

19:18 the financial control are both report to the finance director during your work you overhear the financial controller saying that he has not disclosed certain things to the external Auditors these include the fact that the recent acquisition um has resulted I think this is the recent acquisition of Machinery has resulted in a large piece of Machinery becoming redundant and of very little value you are unsure whether to believe this that you are concerned that the culture within the finance department appears to be one of antagonism that's why deliberately winding up um so antagonism towards the external Auditors who are unreasonably in your opinion seen as adversaries of the company so what's that saying is in plain English that the

20:03 Auditors are seen as is the enemy if you like and people are going out their way to be unhelpful and that's not an uncommon stance um in addition to all of this you heard that a bribe was paid to an overseas company to secure a sales contract you feel uneasy about this situation and you're concerned that the close relationship between the financial controller and the finance director May prevent you from exploring the accuracy of the information so quite a lot going on there with this uh this company so let's think of all first of all what are the facts so is it factor is it opinion is it hearsay most of this does seem to be hearsay can the facts be corroborated can we validate those those facts by looking at documentation or talking to relevant parties so what can we find out

20:50 about this if we are of the opinion that something really bad has taken place or is happening is there an internal process for whistleblowing if those facts are approved what channels of communications and meetings email phone Etc are there between the company and the external Auditors the company's audit committee or an Ethics officer within the company so who can can you tell about this who can you raise the alarm with because obviously the people above you the person that works with you and the person above are both potentially involved um in this so steps two and three we need to think about the ethical issues and which of our principles are being threatened so our integrity generally most of these professional ethics questions are going to involve integrity at some point so can we Overlook the

21:36 financial controller's comments do we just ignore those um do we ignore the culture within the department and the alleged bribe and still demonstrate our own Integrity so are we demonstrating Integrity by just standing by and letting it happen is there an issue with confidentiality so is there any basis on which I'm you must you may or you must make disclosures to the external Auditors or anyone else so it's anything to do with money laundering probably not um professional Behavior how should you proceed in order to comply with the relevant laws and regulations and so as not to bring the profession or itself into disrepute um so step four we need to think about any internal procedures that exist to mitigate mitigate the uh the circumstances we've got a picture here

22:21 of somebody blowing the whistle and lots of people trying to put knives into his um back so is there an internal process for whistleblowing if the facts are approved we might be told about that in the question or might just have to raise that as a potential limitation and then think about the channels of communication that there are between the company and the external Auditors who's responsible for those Communications is there an open communication between the two a possible course of action so we've got to check relevant facts perform Research into Accounting Standards applicable laws regulations anything that may support you in alleviating your concerns okay in particular are there any anti-bribery policies and procedures in place there certainly should be in a

23:07 company um you could discuss the matter with the finance director regardless of the close relationship he has with the financial controller so there's a potential familiarity threat there if his response is unsatisfactory The Next Step would be to take the the matter to the board of directors so maybe the finance director it would be prudent to involve them in this if possible okay we've got suspicions or evidence of criminal activity so the bribe if you've actually found evidence of that you might be obliged to report it check with your professional accountancy body or take legal advice because this is potentially very serious and could be quite career limiting if you get it wrong make sure you document all of the steps you've taken in case your ethical judgment is challenged in the future so you need to

23:53 be able to say why you did all of this okay so let's have a check of your learning then can you still remember the five threats to the fundamental principles so self-interest self-review familiarity intimidation and advocacy if you can't remember them go back and learn them learn how they could impact on the uh the fundamental principles of professional ethics so hopefully that's given you an idea of the main bits that you need to learn and how to apply those in different scenarios I'm going to record a separate video going through a past exam question Jaheen which came from the 2020 paper one which was all about professional ethics but thanks very much for watching if you enjoyed the video don't forget to like And subscribe and I'll see you again soon

24:39 thanks for watching