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October 28, 2015

Ethics – stick to the principles

A defining characteristic of a profession is its code of ethics. They express the vision, ideals and duties of professionals and the promises they make to their stakeholders.

The Code of Ethics for Professional Accountants (Code) of the International Ethics Standards Board for Accountants (IESBA) is referred to by IESBA and others as a principles-based code. This is its strength. It represents a global code for the accounting profession that relies on accountants acting in the public interest and in accordance with the principles of the profession in all circumstances by making professional judgements.

The current IESBA chairman, Dr Stavros Thomadakis, has recently said that the objectives of the Code "can only be achieved by remaining principles based" – a reassuring commitment.

However, for all the rhetoric and general agreement on a principles-based approach, we are seeing increasing pressure for a move to prescription, rules and compliance.

In the exposure draft that IESBA issued late last year on Improving the Structure of the Code of Ethics for Professional Accountants, for example, it is mentioned that ‘various stakeholders’ asked that responsibility for compliance with the Code in particular circumstances be clarified to facilitate compliance and enforcement.

This represents a challenge to the Code as we know it.

While professions are regulated by international and national standards and regulations, codes of ethics provide the means of self-regulation and discipline, along with a system that reflects and communicates the values of the profession. The Code should not be developed independently of the profession but by the profession.

Our Code’s focus is on the outcome of acting in the public interest and in accordance with the principles of the accounting profession. Unfortunately, it has already showed signs of veering towards prescriptive rules, particularly in relation to auditor independence. For example, the Code specifies the number of years that an auditor can be a key audit partner in public interest entities and the number of ‘cooling off’ years.

This level of prescription may be necessary, however there are other standard setters and regulators that can prescribe and proscribe such actions and behaviours. It’s not something that needs to be in the Code. In fact, including it not only contradicts the espoused approach but may also erode the professional standing of accountants, without necessarily offering more effective means for ethical behaviour.

This is not a principles-based approach. There is also a threat that such rules could be seen as inadequate when certain jurisdictions, for specific reasons, impose stricter requirements within their regulations.

As some jurisdictions considered or imposed stricter rules, IESBA responded with the Long Association of Senior Personnel (Including Partner Rotation) with an Audit Client project, to ensure that the Code does not appear inadequate. A principles-based approach would not have created this situation. Further, there is no evidence that it would make the Code less effective. And in relation to this specific issue, there is no conclusive research that points to auditor rotation increasing audit quality.

IESBA is currently working on a project to restructure the Code and is considering the use of the term ‘standard’ instead of ‘Code’ and distinguishing requirements from application and other explanatory material.

Rules and regulations are necessary for the accounting profession, as they are for every profession, however these are best expressed in standards, laws and regulations and not in the Code of Ethics, which should focus on behaviour that goes beyond legal compliance.

Specific rules are about a point in time for a specific circumstance. Codes are about ethical principles and behavioural expectations that transcend specific contexts and times. The Hippocratic oath still guides the conduct of the medical profession.

And further, the focus should also be on positive ethics: what should professional accountants be doing so that their judgements are always in the public interest and in line with the principles?

To sustain trust in the profession and reinforce the ethical core at the heart of our professional identity, we need to focus on moral awareness and continuously evaluate threats to compliance with the profession’s principles. This is the realm of codes, and can’t truly be captured in regulations.

We should also be focussing on building safeguards that can serve our members and help them to develop the capabilities and habits for ethical behaviour in every context and issue. This is beyond the scope of rules-based approaches.

I would urge IESBA to continue to focus on the purpose and utility of the Code and ensure an ongoing emphasis on ethical principles and professional judgement. While rules and regulations are in the purview of others, let’s keep our Code of Ethics as the foundation of our principles and public interest commitment.

Alex Malley is chief executive of CPA Australia

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