Ethical dilemma 7: Research and development

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In 2008, ICAS Research published the report "What do you do now? Ethical Issues Encountered by Chartered Accountants" by Dr David Molyneaux containing 28 true life case studies of ethical dilemmas faced by accountants either in practice or business.

In recognition of this work, in 2009 the ICAS Technical Policy Board then published "Shades of Grey" containing a further series of case studies, one of which is reproduced below.

The views expressed in these respective case studies are those of the Ethics Committee and do not necessarily represent the views of the Council of ICAS.

This case study gives general guidance only and should not be relied on as appropriate or comprehensive in respect of any particular set of circumstances. It is recommended that users consider seeking their own professional advice.

The authors or the publisher can accept no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication.


You are the Finance Director of Kaka Radiators Limited, a large private company. Kaka Ltd, has a long established accounting policy for the treatment of any expenditure on research and development, on which it spends £1m to £2m each year. The company's policy effectively splits expenditure on research and development into one of two categories.  

  1. Long-term research funding - undertaken for the general strategic benefit of the organisation (which may develop into ideas for specific products, although this cannot be assumed; and
  2. Specific research funding - undertaken in order to develop new products or enhance existing products which is reasonably expected to result in material revenue streams in the short-term.

In the former case, this is budgeted as revenue expenditure each year. In the latter case, the process has been successful in recent years and the auditors have been content with the company's accounting - to defer the relevant expenditure and include it as an asset on the balance sheet and to then subsequently amortise it (usually over a period of 2 to 3 years) against the associated revenue stream.

For audit purposes, the auditors would want to see hard evidence of an appropriate business case (with all the relevant assumptions) having been approved by the management team and budgeted for in the new financial year.  

Recently, you have become aware that an investment of £0.5m made in each of the last two years in relation to a new research and development programme has not been properly assessed. Although in aggregate £1m has been committed and spent, your enquiries are leading you to conclude that there are little or no success criteria against the investment, that the project management of the research has not really been thought through and that there will be little to show for this investment. When you challenge the director of the relevant team, Ronaldo, he says:  

"Don't worry. We'll knock up some numbers to keep the auditors happy."  

Deep down, you are aware that it is most unlikely that there will be any revenue stream in practice and that any business case which was concocted for the purposes of satisfying the auditors would be wildly optimistic at best.

However, the financial year-end is only two months away and a £1m in write-off at this late stage in the financial year would cause you real difficulties with your chief executive and the board. It would also compromise severely your professional relationship with your fellow director, Ronaldo, who would then be put in a very exposed position with the board.  

You come to the conclusion that you have three options:  

  1. (a)You can probably convince the auditors that the costs are an asset and leave them on the balance sheet to buy yourself 12 months to write them off over the next financial year.
  2. (b)You can sit down with your other directors to explain your reading of the situation and work through together how this is to be handled.
  3. (c)By making the most advantageous use of available provisions and reserves, you can just about cover the right-off in a low key way: i.e. without a Board-level discussion. The balance sheet will be compromised somewhat, but not in a fundamental way and you believe that this can be put right quietly over the subsequent year.

What do you do now? 

Scenario Analysis

What are the readily identifiable ethical issues for your decision?  

For you personally  

  • Can you retain your integrity by not bringing this matter to the board's attention?
  • Should you discuss the matter with Ronaldo prior to taking the matter to the board?
  • What information will you disclose to the auditors?

For the Company  

  • Is there a supportive environment for open discussion of practical dilemmas without a recriminatory, or 'blame', culture?
  • Is this matter evidence of a wider breakdown in company internal controls in relation to the correct treatment of expenditure on research and development? Is this an isolated incident?
  • Has there been any commercial pressure put on Ronaldo to treat revenue expenditure items as deferred expenditure items?

Who are the key parties who can influence, or will be affected by, your decision?  

  • You
  • Ronaldo
  • The other directors
  • The company's employees
  • The shareholders (if different from the directors)

What fundamental ethical principles for accountants are most applicable and is there an apparent conflict between them?  


The need to be honest, not just with yourself, but with the rest of your board and the auditors.  


The need to remain objective as to the true nature of the costs and their proper accounting treatment.  

Professional competence and due care  




Professional behaviour  

The need to ensure that your behaviour befits that of a chartered accountant. The company should only recognise assets on the balance sheet which satisfy the requirements of applicable accounting standards.  

Is there any further information (including legal obligations) or discussion that might be relevant?  


Is there a conflict between the 'Guardian' and 'Commercial' strands of an accountant's responsibilities? 

In this scenario there may well be a conflict. There may be commercial pressures on you to defer expensing this expenditure, but the 'Guardian' responsibility would require transparent reporting of the economic substance of the transactions.

Based on the information available, is there scope for an imaginative solution?


Are there any other comments?  



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