Lesson 18: Ethics Flashcards
(10 cards)
Note:
When answering questions/case studies on business ethics, you are required to:
- Identify the ethical issue and related accounting principle/qualitative characteristic violated
- Identify the stakeholders involved, their role/needs
- Explain the financial effect of the issue and implications on users
- Identify the alternative courses of action
- Assess the possible outcomes of each course of action
- Make a decision
Note:
The qualitative characteristics of accounting information make it easier for both company management and stakeholders to utilise a company’s financial statements to make well-informed decisions
What are the fundamental qualitative characteristics?
i) Relevance - financial information is regarded as relevant if it is capable of influencing the decisions of users and is timely
i.e. not to be so out of date that they have become irrelevant for decision making purposes.
This characteristic presupposes the incorporation of the materiality concept because information that is not helpful for decision making is irrelevant.
ii) Faithful representation - Financial information must be reliable for users to rely on the information contained within the statements.
This means that financial information must represent faithfully what it is supposed to represent, to be free from bias, neutral and free from material error.
It must be compatible with the substance of transactions and not simply just because it is lawful.
REMAINING POINTS FOR FUNDAMENTAL QUALITATIVE CHARACTERISTICS
It should be complete, provided that it is material, and a prudent approach should be adopted when it is unclear how a particular transaction should be accounted for.
So materiality, prudence, and objectivity are all inherent in this characteristic.
Business operates in an environment of economic change and uncertainty. In the case of uncertainty, the accountant strives to choose data that is as reliable and objective as possible. The term ‘objectivity’ relates to data that can be independently verified and is not influenced by any other personal feelings or judgements of the accountant or any other person within the firm.
What are the Enhancing qualitative characteristics of financial information?
iii) Comparability - it should be possible to compare an entity over time and with similar information about other entities.
This is in line with consistency principle.
iv) Verifiability - If information can be verified (e.g. through an audit) this provides assurance to the users that it is both credible and reliable.
This is in line with objectivity principle.
v) Timeliness - information should be provided to users within a timescale suitable for their decision making purposes.
Ensuring that regular reporting (accounting period principle) ensures timeliness of financial information
vi) Understandability - information should be understandable to those that might want to review or use it.
This can be facilitated through appropriate classification, characterisation and presentation of information.
These are ensured when all accountants internationally strive to follow the set of standardised accounting principles.
What are Ethics?
Ethics are a set of moral principles that guide behaviour.
What are the 5 fundamental ethical principles?
i) Integrity
- Straightforward, honest, implies fair dealing and truthful
ii) Objectivity
- Uncompromised by bias, conflict of interest or the undue influence of others
iii) Professional competence and due care
- Maintain professional knowledge and skill and act diligently
iv) Confidentiality
- Refrain from disclosure of confidential information, and from using such information for personal (or third party) advantage
v) Professional behaviour
- Comply with relevant laws and regulations, and avoid any action that may bring the profession into disrepute
What will these ethical principles guide accountants to?
i) Uphold honesty and fairness
-Honesty requires one to be truthful and not mislead/deceive others. While, fairness requires treating others equally.
ii) Avoid conflicts of interest
-A conflict of interest is a situation in which a person’s self-interest may interfere with his duty to make a decision in the public interest.
iii) Avoid fraudulent reporting and misappropriation of assets
- Adhering to these ethical principles will ensure that the financial information prepared and reported by accountants are relevant and reliable.
What are the common ethical issues in Business?
i) Manipulation of accounts
e.g. Changing depreciation method to increase depreciation expense, paying off debts at the end of the financial year
ii) Accepting gifts in return for unethical practices
iii) Independence related issues
e.g. Performing both accounting and auditing/other consulting work for the same client
