Sustainability and the ICAS Code of Ethics: Preparation and presentation of information
Ann Buttery, Head of Ethics, ICAS Policy Leadership, highlights the second in a series of extracts from ICAS’ new guidance paper ‘Guidance to the ICAS Code of Ethics: Sustainability’ in relation to the ‘Preparation and presentation of information’.
Sustainability, the CA and The Power of One
Society is changing. There is an ever-growing emphasis on sustainability, and Environmental, Social and Governance (ESG), at government and regulatory level as well as increased societal expectations for organisations to behave responsibly.
Whilst the “E” is clearly important, sustainability is not just about climate change - the importance of societal matters (the “S”) as well as governance and ethical corporate cultures (the “G”) are of equal significance. Organisations need to be thinking about the impact of sustainability/ESG on their organisation and the impact of their organisation on the environment and society.
The accountancy profession has a responsibility to act in the public interest. Ethics is the conscience of organisations, it is at the core of driving behaviours, and is the key to long-term thinking and trust. The golden thread of ethics and The Power of One weaves through sustainability and ESG. There is a need for all CAs to be aware that sustainability/ESG is not a niche topic that they can ignore. Every CA has their part to play in their own sphere of work around ethics and sustainability.
CAs must always ensure their obligations to the five fundamental ethics principles enshrined within the Code of Ethics (the “Code”) are met: integrity; objectivity; professional competence and due care; confidentiality; and professional behaviour. The new guidance to the Code seeks to assist CAs by signposting a number of areas of the Code where provisions could relate to sustainability related matters.
This extract is the second of a series from the guidance and highlights how the provisions within the Code in relation to the ‘Preparation and presentation of information’ could apply to sustainability. Links to the other extracts are provided below.
Preparation and presentation of information – integrity and objectivity
CAs shall not knowingly be associated with misleading information
CAs may be responsible for the preparation and reporting of non-financial information, including sustainability reporting, on which investors, creditors, employing organisations, governments, regulators and the general public might rely. However, it is recognised that the current sustainability reporting landscape is extremely fragmented which is a source of confusion when identifying the most appropriate choice of reporting framework. CAs might also find themselves under pressure from others regarding the way in which non-financial information is to be reported. CAs need to be aware of such threats and ensure they are adhering to the fundamental ethics principles when it comes to their organisation’s non-financial reporting.
Subsection 111 of the Code provides the requirements and application material in relation to the fundamental ethics principle of Integrity. Paragraph R111.2 contains the following requirement:
“A professional accountant shall not knowingly be associated with reports, returns, communications or other information where the accountant believes that the information:
(a) Contains a materially false or misleading statement;
(b) Contains statements or information provided recklessly; or
(c) Omits or obscures required information where such omission or obscurity would be misleading.”
CAs therefore need to be mindful that, in accordance with the principle of integrity, they cannot knowingly be associated with misleading information and must address any threats accordingly.
Following on from the provisions in Subsection 111, Section 220 of the Code sets out specific requirements and application material in relation to the “Preparation and presentation of information” including provisions in relation to using discretion in preparing or presenting information; relying on the work of others; and addressing information that is or might be misleading (this is discussed further under “Speak Up? Listen Up? Whistleblow? at “Pressure to breach the fundamental principles ”).
In addition, where threats to compliance with the fundamental principles arise from pressure, the requirements and application material set out in Section 270 apply (this is discussed further in “Pressure to breach the fundamental principles ”).
The Code recognises that threats to compliance with the fundamental principles might be created by a broad range of facts and circumstances. Paragraph 200.7 A3 of the Code states the following:
“The professional accountant’s evaluation of the level of a threat might be impacted by the work environment within the employing organisation and its operating environment. For example:
- Leadership that stresses the importance of ethical behaviour and the expectation that employees will act in an ethical manner.
- Policies and procedures to empower and encourage employees to communicate ethics issues that concern them to senior levels of management without fear of retribution.
- Policies and procedures to implement and monitor the quality of employee performance.
- Systems of corporate oversight or other oversight structures and strong internal controls.
- Recruitment procedures emphasizing the importance of employing high calibre competent personnel.
- Timely communication of policies and procedures, including any changes to them, to all employees, and appropriate training and education on such policies and procedures.
- Ethics and code of conduct policies.”
CAs need to be cognisant that the provision of non-financial information in relation to sustainability is relatively new and therefore the controls are unlikely to be as mature as their organisation’s financial reporting controls. Non-financial information is often kept in a lot of different areas in organisations - it is often not clear who owns the data - and it is not necessarily finance professionals that are pulling together the data. The individuals that are providing this information might not always understand the importance of the trustworthiness of the data and that people will be relying on the information. There is therefore a need to increase skills in internal controls and processes around sustainability related data.
And this does not just apply to larger organisations. Whilst smaller organisations are not necessarily caught by the scope of sustainability reporting now, they likely will be in the future as a result of both supply chain expectations and increased regulatory requirements, and so they too need to be considering this now.
All CAs, and especially those in senior positions, have a key role to play in establishing and embedding an ethical culture in an organisation. This is recognised by the Code in paragraph 200.5 A3 and discussed further in “Organisational culture ”: “The more senior the position of a professional accountant, the greater will be the ability and opportunity to access information, and to influence policies, decisions made and actions taken by others involved with the employing organisation.”
Stakeholders need to be able to trust the information being provided by organisations. CAs have a role in ensuring that the appropriate protocols – the controls and procedures, monitoring and oversight - for the data are in place, acting as the gatekeepers of the integrity of the information. CAs also have a role to play in assisting organisations embed strong internal controls for non-financial reporting.
There is a requirement at paragraph R120.5 for all professional accountants to have an ‘inquiring mind’ when identifying, evaluating and addressing threats to the fundamental principles. This represents the need to consider the source, relevance and sufficiency of information obtained taking into account the nature, scope and outputs of the professional activity being undertaken and being open and alert to a need for further investigation or other action.
Reliance on the work of others or on the output of technology
There is a risk that if the non-financial information, such as carbon emission data, is received from a third party ‘expert’, or produced by technology, there might be an assumption that the information is accurate; however, in reality, this might not necessarily be the case.
The fundamental ethics principle of Objectivity highlights the risk that “Undue influence of, or undue reliance on, individuals, organisations, technology or other factors” could impair a professional accountant’s objectivity. Application material is provided in paragraphs 120.12 A1 to 120.12 A3 to highlight the importance of being aware of conscious or unconscious bias when applying the conceptual framework. The Code includes a list of helpful examples to assist professional accountants recognise when bias could be a threat to their professional judgement, including in relation to technology (‘automation bias’).
Section 220 also discusses “Relying on the work of others” (as does Section 320 “Professional appointments” for those working in public practice):
“R220.7 A professional accountant who intends to rely on the work of other individuals, either internal or external to the employing organisation, or other organisations shall exercise professional judgement to determine what steps to take, if any, in order to fulfill the responsibilities set out in paragraph R220.4.
220.7 A1 Factors to consider in determining whether reliance on others is reasonable include:
- The reputation and expertise of, and resources available to, the other individual or organisation.
- Whether the other individual is subject to applicable professional and ethics standards.
Such information might be gained from prior association with, or from consulting others about, the other individual or organisation.”
In its Exposure Draft ‘Proposed Technology-related Revisions to the Code’ (February 2022), the IESBA is proposing additional application material in Sections 220 and 320 detailing further factors to consider in determining whether reliance on, or use of, the output of technology is reasonable. At this time, it is anticipated that such additional content will be included within the finalised provisions.
Financial interests, compensation and incentives
Section 240 notes that having a financial interest or knowing of a financial interest held by an immediate or close family member might create a self-interest threat to compliance with the principles of objectivity or confidentiality.
Paragraph R240.3 states the following requirement: “A professional accountant shall not manipulate information or use confidential information for personal gain or for the financial gain of others.”
It is recognised that the alignment of individuals’ objectives and remuneration with their organisation’s values, long-term purpose and strategy is a key component to improving behaviour and could therefore assist organisations meet their long-term sustainable goals (the “G” of ESG).
As more organisations make commitments towards net zero greenhouse gas emissions, and are being required to report on progress towards sustainability goals, investors might increasingly look for directors’ and senior employees’ remuneration to be linked to sustainability commitments to ensure the pledges are met. CAs may find themselves being rewarded based on performance on sustainability matters, or could face explicit or implicit pressure from superiors or colleagues in relation to compensation or incentive arrangements, and will therefore need to ensure that they maintain their objectivity regarding such financial interests.
Find out more
The guidance signposts the following other areas of the Code where provisions could relate to sustainability related matters (please note that these areas are provided by way of example and should not be considered an all-inclusive list):
- Sustainability and the ICAS Code of Ethics
- Professional competence and due care, confidentiality and professional behaviour
- Acting with sufficient expertise
- Non-compliance with laws and regulations (NOCLAR)
- Organisational culture, including responsibilities with regard to values of equality, diversity and inclusion
- Professional appointments
- Pressure to breach the fundamental principles
- Having the strength of character to act appropriately
- Speak Up? Listen Up? Whistleblow?
ICAS ethics resources
Find out more about the ethics resources ICAS provides to support its Members below.