Ethical Insights: Just because it is legal does not make it ethical

In this series of conversations about ethical leadership, we speak with high profile ICAS members who have reflected on what it means to do the right, or ethical thing throughout their careers. It is hoped that the conversations provide practical guidance to help anyone in a challenging professional situation where they are required to seek the truth and then act.

As well as interviewing these ICAS members individually, under Chatham House rules, we also surveyed our members in a quantitative survey during 2024, conducted by Dodds & Law Research Associates. We received 710 responses from a survey of 10,000 members and we have taken some of the results and findings and used them in this report to highlight the wider views of members.

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Insight six

In this sixth instalment of our ethical insights series, we discuss the responsibility that a Chartered Accountant has to maintain ethical standards and report any behaviour that doesn't meet these. As with all ethical dilemmas, the simple question "what's the right thing to do?" and how you respond to that is often the best place to start. Do you use legality as a way to avoid your ethical duties? Or do you ensure that ethics are at the forefront of everything you do?

There is a tension that exists between a technically or legally accurate course of action and what constitutes the right thing to do. The temptation to hide behind a legal or financial treatment, even when this can produce perverse outcomes, can be strong and should be resisted.  

“I remember a period when there were so many (tax avoidance) schemes that were being marketed as legal, and we were under pressure to advise on them as our competitors were doing. I also remember some difficult conversations with partners where we had to say we don't want to get involved in those sorts of arrangements.  In the end we changed all our engagement letters for tax clients to say that we were not obligated to bring them every possible idea that might work in the marketplace. I think the words we used were that we were not obliged to bring clients’ ideas which could bring either of us into disrepute.”   

“I've got a huge respect for lawyers. They are experts in what is legal and what is not. But to put it bluntly, I feel I am more qualified on ethics. And so, I say to lawyers ‘thank you for your legal advice. I appreciate that. And clearly the company wants to operate legally, but I am more interested in what you think the ethical dimensions may be here? If you don't feel able to opine on the ethics, that's fine. But then we need to be clear that you have only advised us on the legal aspects of the question which may not be the same as what is the right course of action.” 

One of the challenges that was described here was the conflict that arises when you pit a rules-based system against a principles-based one:  

“Last year we published a book on the old Accounting Standards Board - its first ten years - underneath it all were these standards which, because they were short and principles based, would probably deal with 80% of the ethical and technical challenges we faced. The Americans took a different approach – they would say ‘here is an issue – let’s fix it’. I used to call this ‘search engine accounting’ (which even they would despair of on occasion). I remember being in New York - this US lawyer got up and held out a piece of paper and said ‘this is a facsimile of the first constitution of the United States. On this single page is the Government's relationship to its Citizens, its States and to overseas countries’. And then he pointed to a pile of books roughly half his height and said – ‘here are the US Financial Accounting Standards Board rules on financial instruments - which do you think I'd rather defend?’.  

However, it was also recognised that even under a principles-based system there are occasions where you need an ethical override.   

“A company where I was working announced a rights issue. Between announcing the issue and its completion, the share price rose. At the time the accounting standard said that effectively we were now issuing undervalued shares because we had agreed to sell them at a price where these had then risen, and we needed to book a loss equivalent to that number and take an equivalent credit to our reserves. So, you're going to create a £2 billion loss and a £2 billion credit to reserves for transacting with your own shareholders.  We went back to first principles here (by invoking the true and fair override) and took the view that the rights issue raised a certain amount for the company - what happened to the share price thereafter was irrelevant - we recorded the issue price of the share and therefore the funds received by the company.   This was about professional judgement.”  

There is also concern that the sheer complexity of financial regulation has now got to a point where markets are crying out for simpler explanations of the underlying performance of a business:  

“I think that company accounts are almost indecipherable these days for anyone but technical experts. I can hardly think of a single company that doesn't produce alternative measures to IFRS numbers. The profession needs to think very carefully about this. If people are constantly producing alternative measures because legitimately and ethically, they believe that the IFRS number is technically correct, but doesn't give the underlying picture of the business, that means there is something wrong with the way we do accounting these days.”  

In all of this however, it is also recognised that the application of accounting standards could still be a good proxy for how ethical the entity is.  

“Good companies agonise over accounting standards and try and apply them, as correctly as they can. Bad companies either do not read them properly or do so only to see how they can be manipulated.  You can't blame the accounting standards for the fact that people don't follow them. People will always do bad things.”  

 Stay tuned for more of our Ethical Insights over the coming months

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