Global Shifts in Ethics  

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Added emphasis on adopting ethical practices means new responsibilities for accountants.

FROM: NOV-DEC 2007 ISSUE | BY GUNDI JEFFREY

Prompted by the shocking financial scandals of the past decade, the world’s standard setters have firmly set their sights on ethics, asking members to always aim for the higher ground. The skullduggery has taken its toll on shareholders, employees, and corporate viability, but it has also resulted in statutory reform, new policies on financial reporting, and stricter regulatory requirements for auditors.

“Globalization, intensified competition, technological advancements, and increased regulation have created a complex environment in which to do business – making the professional judgment of accountants within an ethical framework even more crucial,” says Allen Blewitt, CEO of the Association of Chartered Certified Accountants (ACCA), the world’s largest international accounting body. “Organizations are now expected to report on far more than ‘the financials’ – and issues such as executive remuneration, pension funds, corporate and social responsibility, and, of course, ethical policies all impose new responsibilities on finance professionals.”

For Michael McDonald, who holds the Maurice Young Chair in the W. Maurice Young Centre for Applied Ethics at the University of British Columbia, trustworthiness is the lead issue in the current swing to higher ethics. “My intuitive sense is that, as a whole, we are much less trusting of business and political leaders. There is a fair amount of skepticism and even cynicism. The answer is not to make the public more trusting through marketing and public relations; it is for professionals and business people to actually become more trustworthy – in other words, to honestly merit the trust of clients, associates, and the public.”

Evidence of Ethics

Several recent studies and surveys provide evidence that ethical concerns are, indeed, now one of the key drivers of corporate strategy.

For example, one of the latest surveys by the Business Roundtable Institute for Corporate Ethics in the United States found that the business community is preoccupied with five corporate ethics issues: 1) regaining the public trust; 2) effective company management in the context of today’s investor expectations; 3) ensuring the integrity of financial reporting; 4) fairness of executive compensation; and 5) ethical role-modelling of senior management.

Most of the CEOs polled believed that standards for corporate ethics had risen and many indicated that, since 2002, their companies had made changes in how they handle ethics. Specific changes include: enhanced internal reporting, ethics hotlines, improved compliance procedures, and greater board oversight.

A late 2006 study carried out by CFO Asia Research Services and ACCA – which interviewed more than 160 CFOs in Asia – found that:

• More than half the respondents believe they are responsible for promoting an ethical culture in their companies.
• Many CFOs acknowledged that a good ethical culture has become a requirement in business, particularly for a company’s overall reputation and impact on a company’s brand.
• Sixty per cent of the CFOs cited time and effort as the greatest barrier to establishing ethical best practices in their companies.
• Juggling regulations and codes with the realities of doing business is a struggle.
• More than half the respondents said their companies had processes in place to assess adherence to their ethics policies.

Blewitt said he was surprised that half the CFOs surveyed believed the 2002 Sarbanes-Oxley Act had a positive global effect on business ethics despite the red tape it created. Some respondents felt there should be an even more stringent ethical framework.

Blewitt also quoted an internal auditor respondent who said he actively welcomed Sarbanes-Oxley because, until its introduction, no one senior in his company had the time to speak to him, but now the board wants to receive regular reports from him on internal controls.

“Global shifts in standards are facilitating – and adding pressure to – the adoption of ethical practice everywhere,” the CFO Asia study concluded. “The convergence or harmonization with International Accounting Standards has been a positive step towards uniformity and improved controls in territories such as Hong Kong, Malaysia, and Singapore. These accounting reforms have been accompanied by new ethical codes.”

Ethics Standard Setting

The ethics efforts of standard setters around the world are being led by IFAC’s International Ethics Standards Board for Accountants (IESBA), which recently proposed a new strategic plan for 2008-09. The plan includes finishing two major projects currently in the pipeline: revising the independence requirements related to the provision of internal audit services to audit clients, economic dependence on assurance clients, and the independence implications of contingent fees; and dealing with the exposure draft released in December 2006 proposing revisions to the IFAC Code of Ethics for Professional Accountants.

That exposure draft’s proposals include expanding the applicability of partner rotation requirements; updating requirements for the provision of non-assurance services, including setting out additional guidance on the provision of tax services to audit clients; and extending the independence requirements to the audits of a wider range of entities, including entities of significant public interest.

CGA-Canada doesn’t entirely agree with those proposed revisions, says Dawn McGeachy, senior associate, public practice, who helped prepare the CGA response to the exposure draft. “There is insufficient evidence to support a positive cost-benefit to many of the new requirements, and we are concerned that we are adding more stringent requirements without there being a genuine need for them within the assurance sector,” she explains. “The timing for implementation is also a concern as many jurisdictions are still grappling with the implementation of the original requirements and now are faced with a host of new ones.” Finally, she notes, “the new proposals adopt a very rules-based approach even though IFAC has always endorsed a principles-based approach. This is a disturbing trend.”

But McGeachy stresses that CGA-Canada supports IESBA ethics standards overall. “We believe a strong code of ethics facilitates one of the recognized cornerstones of the profession: trust and integrity.”

She describes CGA-Canada’s Code of Ethical Principles and Rules of Conduct as very stringent and notes that the consequences of not meeting it can be severe. The Code of Ethical Principles provides the ethical standards CGAs rely on to make professional judgments, while the Rules of Conduct provide clear statements of required or prohibited behaviour in specific situations. “They are appropriate in areas in which the standard of acceptable behaviour is either vague or sufficiently important to formulate a written standard,” McGeachy says.

McDonald, who created the Ethics Reading Handbook that forms the basis of ethics education for budding CGAs, points out that the code provides a way of articulating a social consensus among CGAs about the meaning of values such as impartiality, independence, and integrity. “By contrast, imagine that we are in a situation where the interpretation of integrity or impartiality was purely an individual matter. In all likelihood, these terms would become meaningless in the eyes of other accountants, clients, employers, and the public. This does not mean there won’t be grey areas in which reasonable people agree to differ, but it does mean there will be consensus about areas that are more black and white.”

“As a professional organization, CGA-Canada has the legal right to control entrance into the profession and to formulate standards of behaviour governing its members,” McGeachy adds. “In return for this right, CGAs are expected to act in the best interest of society and its members. To fulfil this responsibility, professionals must have a number of important character traits, as well as the skill to make expert technical and moral judgments. While we cannot legislate ethical behaviour, we can certainly mandate what is acceptable. If our members fail to act in accordance with established criteria, they are subject to discipline, sanction, or expulsion.”

To ensure ethics become an integral part of a CGA’s mindset, CGA-Canada has incorporated an ethics component into every module of its education program. “This approach is superior,” McGeachy says, “because rather than trying to capture all of the facets of principles, ethics, and integrity into one course, you are encouraged to consider these issues each time you complete a course in the program of professional studies. This improves comprehension, retention of the materials, and also makes you more aware of the issues when you encounter them during your formative professional years.”

ACCA has adopted a similar program. Blewitt notes that ethics is at the heart of ACCA’s new professional qualification, which will be examined for the first time in December. “We’ve adopted a holistic approach, through our exams syllabus – which incorporates ethics into individual topics – as well as our practical experience requirements and a new Professional Ethics module. We’ve aimed to enhance our members’ ethics knowledge, develop their ethical sensitivity, improve their ethical judgment, and help them maintain an ongoing commitment to ethical behaviour.”

Profiting from Ethics

The good news is that behaving ethically is good for business. Blewitt explains that “with the exponential rise in ethical investments, our research shows that businesses with an ethical track record and a commitment to ethics and good governance regularly outperform other listed companies which do not demonstrate the same ethical credentials.”

McDonald agrees. “Firms and organizations that create an ethical culture lower internal transaction costs. They also acquire a justifiable reputation as reliable and responsible business partners. This can significantly reduce external transaction costs.”

The CEOs in the CFO Asia survey also felt that the perception of a good ethical culture improves relationships with banks and institutional investors, and heightens a company’s attractiveness as an employer.

Rock Lefebvre, CGA-Canada’s vice president of research and standards, adds that the association’s recent works on sustainability reporting and corporate social responsibility have turned up similar results. “CGA-Canada findings reveal that Canadian companies have increasingly recognized the importance of communicating good corporate governance to all stakeholders and an augmented penchant for public approval.”

“Evidence of a strong ethical approach within a robust corporate governance system is key to instilling confidence in stakeholders that financial systems and economies are operating effectively and efficiently,” Blewitt concludes. “It is fundamental to building credibility in financial systems and to the development of sound economies.”

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