Inside ICAS: Ethics
In applying the ICAS Ethical Code, students often confuse the issue of “Conflicts of Interest” with the five fundamental principles. A conflict of interest is an example of an underlying or systematic matter.
The nature of the conflict can affect the ability of the professional accountant to comply with the fundamental principles. Yet the conflict itself is not necessarily a matter which cannot be managed.
The guidance in the Ethical Code lays out the premise that subject to specific provisions, there is nothing improper in having two clients whose interests are in conflict. In choosing to endorse this approach, ICAS had a choice. It would, in theory, be perfectly competent to allow conflicts of interest, offer no guidance and follow the legal principle of Caveat Emptor (let the buyer beware).
At the opposite end of the policy spectrum, ICAS could have taken a hard line and forbidden any business relationships where there is a conflict of interest. Instead, we find ourselves in the middle, considering each set of circumstances independently.
The Code of Ethics
It is essential that students read and understand the complete Code of Ethics, in relation to both practical experience recorded in the achievement log and for examinations. This statement is an instruction. You “shall” read the Code. So, wherever you read "shall' in the Code, it is intended to be interpreted as an absolute or a must do.
However, you will see that most of the Code is written using the instruction "may" rather than "shall”. This is deliberate and is indicative of an approach founded on a conceptual framework. You might find this an odd distinction but there are a significant number of areas within the Code which students typically conclude are illegal or forbidden. In most cases this is incorrect.
For example, it is possible to advise both clients that are in dispute. A firm can lend staff to an audit client. Gifts can be accepted from an assurance client. Many individuals in a firm can hold shares in an audit client. In every case, however, a conflict of interest affecting one or more of the fundamental ethical principles may exist.
The must-do "shall' requirement is the evaluation of the significance of any conflict to being able to comply with the principles.
In carrying out this evaluation, ICAS introduces the perception test. Actual conflicts of interest, where all the contracting parties see and agree about the negative effect of the arrangements, are fairly easy to resolve. But, you are required by the Code to go further and consider perceived conflicts.
Would “a reasonable and informed observer perceive that the objectivity of professional accountants or their firm is likely to be impaired?” The perception test extends consideration to third parties including, of course, the wider public interest.
Would a reasonable and informed observer perceive that the objectivity of professional accountants or their firm is likely to be impaired?
We will return to safeguards and solutions to conflicts of interest in a future article but this is not an issue solely affecting accounting.
An example of a 'conflict of interest'
In December 2015, Lord Coe resigned his paid consultancy role with Nike Corporation. Lord Coe was recently elected president of the International Athletics Federation and a story developed on the awarding of a future world championship to a city in the US.
That city was Eugene, which also happened to be the Worldwide Headquarters of Nike. Lord Coe was accused of a conflict of interest and as a high profile individual, not least because of the current drugs allegations in athletics; he was forced into resigning his paid consultancy role.
It is interesting to consider that the conflict of interest existed for a long time (Lord Coe has been paid for over 30 years by Nike), yet only when the matter became public was there a concern about conflict of interest. It is highly likely that many of those involved in the decision to award the event to Eugene were aware of Lord Coe’s involvement.
In many cases the professional accountant or their firm might well decide that the conflicts of interest are just not capable of being managed.
Without knowing the facts behind the case, it is difficult to conclude, but one could suspect that there had been consideration of the potential for an actual conflict of interest during the awarding process, but it was only when a perceived conflict became a public matter that action was taken.
The contracting parties may well have been happy that safeguards were in place, but public perception through the media will be less inclined to such technicalities.
In many cases, the professional accountant or their firm might well decide that the conflicts of interest are just not capable of being managed. Resigning from, or not tendering for, an assignment will often be the safest course of action. Remember though it is not the only course.