CHAPTER 1: FUNDAMENTAL ETHICAL

AND PROFESSIONAL PRINCIPLES

EXAM CONTEXT:

This is usually examined as the second question in Section A, worth 20 marks and will require
candidates to consider the accounting implications and the ethical implications of specific events in a
contemporary scenario.

Two professional marks will be awarded for answering the ethical implications related the question.
Chapter Overview

1.1 PROFESSIONAL BEHAVIOUR AND COMPLIANCE

Introduction

Importance of Ethics
Ethics, is a set of moral principles and standards of correct behaviours that people follow, with respect to
deciding what is right or wrong. Their application often involves complex issues, judgement and
decisions. This principle can be seen to apply to society as a whole, the business community and the
accounting profession.

Ethics in Business
Business life involves ethical dilemmas in decision making, strategy, reporting and disclosure of financial
statements because its main purpose is the making of profit. Success in business requires a constant
search for potential advantage over others and business people are under pressure to do whatever yields
such an advantage. As a result, organisations have become increasingly under pressure to act ethically
and in recent years many companies and professional bodies have demonstrated this by publishing
ethical codes, setting out their values and responsibilities towards stakeholders.

1.1.1 Ethics and the Accounting Profession

Learning Outcome (ACCA Study Guide Area A)

A1b: Assess and discuss the consequences of unethical behaviour by management in carrying out
their responsibility for the preparation of corporate reports.

The International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants
(IESBA Code) states:

'A distinguishing mark of the accountancy profession is its acceptance of the

responsibility to act in the public interest.'

The
public interest is considered to be the 'collective well-being of the community of people and institutions
the professional accountant serves'. These include the many users of financial statements:

 Clients
 Governments
 Employers
 Employees
 Investors
 The business and financial community
 Others (e.g., creditors and lender)
For the work of the accountant in practice or in business to maintain its value the accountant must be
respected and trusted. The individual professional accountant therefore has a duty and a responsibility
to maintain the reputation of the profession and the confidence of the public.

The educational standards and guidelines set out by the International Federation of Accountants (IFAC)
state that:

 Professional accountants should first acquire ethics knowledge;

 Then develop ethical sensitivity;
 Then use ethical judgement to evaluate situations; and
 Finally, should demonstrate ethical behaviour through implementing decisions appropriately.

Ethics is difficult to define, but it is principally concerned with human character and conduct. Ethical
behaviour goes beyond obeying laws, rules and regulations; rather it is about doing the ‘right thing’ which
is not an easy absolute assessment and its application may give rise to ethical dilemmas.

Professional accountants make a bargain with society in which they promise to serve the public interest.
Accountants, as professionals and members of the profession have a responsibility to present the truth in
a fair and honest fashion (Reference from CF 2018 - faithful representation / IAS 1 - True and fair view)
and in a spirit of public service.

Accountants in Practice
Auditors have a duty to ensure that financial information has been prepared in accordance with the
relevant accounting standards and that it shows a true and fair view. It is important for auditors to remain
independent and ensure that they are not pressured into accepting an accounting treatment they do not
agree with.

Example: The code of ethics for professional accountants, issued by the IFAC, states that a person
cannot accept an external audit if he has an interest in the financial statements, i.e. the external
auditor should be independent. Robert, who holds 20% of the shares in Ropeway Co., has just
accepted an external audit of Ropeway Co. This clearly violates the code of ethics. Robert cannot
argue that he was not aware of the code of ethics and, therefore, is not guilty of professional
misconduct.

Commentators believe that auditors cannot be independent as they are performing a service, which the
client pays for.

Accountants in Business (SBR focus)

In addition, auditors take on non-audit work such as taxation advice, management consultancy and due
diligence for acquisitions. This work is often very lucrative and worth more than the value of the audit.

Accountants in business need to ensure that they do not prepare financial information in a way that is
misleading and misrepresent the financial position of the entity’s operation.
1.1.2 Ethical Principles in Corporate Reporting

Learning Outcome (ACCA Study Guide Area A)

A1a: Appraise and discuss the importance of ethical and professional behaviour in complying with
accounting standards and corporate reporting requirements.

The Code of Ethics and Conduct is set out in ACCA Rulebook

Professional accountants and members of ACCA are expected to follow the guidance contained in the
fundamental principles in the ACCA Code in all of their professional and business activities. However, he /
she should be guided not just by the terms but also by the spirit of the Code.

Code of Ethics and Conduct

Professional ethics is an inherent part of the profession. ACCA’s Code of Ethics and Conduct requires its
members to adhere to a set of fundamental principles in the course of their professional duty, such as
confidentiality, objectivity, professional behaviour, integrity and professional competence and due care.
The main aim of professional ethics is to serve as a moral guideline for professional accountants. By
referring back to the set of ethical guidelines, the accountant is able to decide on the most appropriate
course of action, which will be in line with the professional body’s stance on ethics.

The presence of a code of ethics is a form of declaration by the professional body to the public that it is
committed to ensuring the highest level of professionalism amongst its members.

Diagram 1.1.2: Ethical principles in Corporate Reporting

The ACCA publishes a code of conduct which members are expected to comply with. It sets out five
fundamental principles which should be complied with. These are:

1. Integrity
This requires members to be straightforward and honest in their business & professional relationships.
Members should not be associated with any reports or information where they feel it contains
materially false or misleading statements or omits or obscures information that must be included for a
proper understanding of situations.

Example: An accountant is not expected to accept the external audit of a company if he is the
director of the same company or his judgement is expected to be influence by his interest in the
company.

2. Objectivity
This requires that members do not compromise their professional judgement because of bias, conflict
of interest or the undue influence of others. Members may be exposed to situations that impair their
objectivity and they should try and avoid such situations.

Example: The internal auditor cannot rate the internal controls of a particular department as
‘weak’ only because he does not get along with the head of that department.

3. Professional competence and due care

This requires members to ensure they maintain professional knowledge and skill at the level required
to ensure clients or employers receive competent service. They must also act diligently in accordance
with technical and professional standards when providing professional services.
This principle is of key importance as accountants must ensure they are capable and have the ability to
deal with a situation. If not, then the information that is produced will be inferior quality and reflects
badly not only on the accountant preparing the information but on the profession as a whole.

Example: A tax accountant who specializes in preparing and filing tax returns for individuals must
ensure that he, as well as his staff, is kept informed to all the latest updates to tax law. He devotes
sufficient time and attention to each tax return.

Professional competence is clearly a key issue when decisions are made about accounting treatments
and disclosures. Company directors and their advisers have a duty to keep themselves up to date with
the latest developments in accounting standards and other regulations.
Situations that may threaten the professional competence and due care includes:
 Insufficient time
 Incomplete, restricted or inadequate information
 Insufficient experience, training or education
 Inadequate resources
4. Confidentiality
 This requires members to refrain from disclosing any confidential information acquired in a business
or professional setting without the authorization to do so, unless there is a legal or professional right
or duty to disclose. Additionally, members should not use confidential information acquired through
business or professional relationships to make personal gain or gain for third parties.

Confidentiality does not end at the end of the relationship with the client. Members should use their
prior experience but not use the confidential information.

Example: During the course of her audit, Shay, S Company’s auditor, chances upon information
regarding the launch of a new product that will cause S Company’s stock prices to soar. However,
Shay cannot pass on this information to a third party unless the announcement is made publicly.

Passing on material, non-public information is referred to as trading on the basis of insider

information and is illegal in many countries.

5. Professional behaviour

This requires members to comply with relevant laws and regulations and shall avoid action that could
bring discredit to the profession. Members should also behave with courtesy and consideration to
those they meet in a professional capacity.

Example: Nick is a partner with a mid-sized accounting firm. He has been approached by Tough
Corp, a large manufacturer of tyres, to discuss whether he would consider taking on some audit
assignments for the business. Nick has heard through unsubstantiated rumours that Tough Corp is
unhappy with its current auditor. Nick is eager to take on Tough as a client but has had no
experience of auditing manufacturing firms. During his discussions with Tough, Nick cannot:

 Claim to have any specialized expertise in auditing manufacturing organizations.

 Slander or unduly criticize Tough’s current auditors.

Auditors assure the users of financial statements of the reliability of the accounting information so
presented representing the true financial position of the organization. Billions of dollars are put at
stake based on the auditor’s opinion. As a result, in addition to maintaining the highest ethical
standards mentioned above, an auditor is also expected to be independent, i.e. be free from any
interest in the client, both financial and otherwise when providing auditing services to a client.

There is a very fine line between consenting to the client’s accounting policies so that the client is not
lost, and allowing the client to influence his opinion so that the client can get away with unscrupulous
accounting policies which eventually defraud its investors.

Exam focus: In case study questions, students should look out for the recommended accounting
treatment and decide if it complies or not, based on the requirements of the accounting standards.

IAS 1 Presentation
It requires that entity must ‘present fairly’ (faithful representation) in its financial position, financial
performance, and cash flows the effect of transactions. The departures from international standards are
only allowed either in extremely rare cases, or where compliance with IFRS would be so misleading as to
conflict with objectives in Conceptual Framework.

IAS 1 also requires that compliance with IFRS to be disclosed and financial statements only be described
as complying with IFRS if it complies with all the IFRS requirements. The inappropriate accounting
policies usage cannot be rectified either by disclosure or explanatory material.

IFRS Conceptual Framework

Chapter 3 of the framework states two fundamental qualitative characteristics of useful financial
information to be relevant and faithful representation and four enhancing characteristics which are
comparability, verifiability, timeliness, and understandability.

Reading Material 2

Tesco Scandal – the

Perils of Aggressive
Accounting.
1.1.3 Framework for Decisions

Learning Outcome (ACCA Study Guide Area A)

A1a: Appraise and discuss the importance of ethical and professional behaviour in complying with
accounting standards and corporate reporting requirements.

1.1.3.1 Threats

Diagram 1.1.3(ii): Types of ethical threats

Compliance with the fundamental principles may potentially be threatened by a broad range of
circumstances. Many of these threats can be categorised as follows:

Circumstances

Examples of circumstances that may create self-interest threats for a professional

accountant in business include:
 Holding a financial interest in or receiving a loan or guarantee from the employing
organisation.
Self-interest  Participating in incentive compensation arrangements offered by the employing
organisation.
 Inappropriate personal use of corporate assets.
 Concern over employment security.
 Commercial pressure from outside the employing organisation.

Self-review Self-review threats may occur when a previous judgement needs to be re-evaluated by
members responsible for that judgement.
Circumstances that may give rise to self-review threats include, but are not limited to:
 • Business decisions or data being subject to review and justification by the same
person responsible for making those decisions or preparing the data.

Advocacy threats may occur when members promote a position or opinion to the point
that subsequent objectivity may be compromised.

It is natural for a member to advocate their employer’s position, and there is nothing
Advocacy improper in this provided it does not result in misleading information being given.
There could be circumstances, however, where this may not be acceptable, and these
include, but are not limited to:
• Commenting publicly on future events in particular circumstances, having made
assertions without sufficient support.
• Advocating a position with such tenacity that objectivity may be compromised.

Familiarity threats occur when, because of a close relationship, members become too
sympathetic to the interests of others.

Circumstances that may create familiarity threats include, but are not limited to:
Familiarity
• Being responsible for the employing organisation’s financial reporting when an
immediate or close family member employed by the entity makes decisions that
affect the entity’s financial reporting.

Intimidation threats may occur when members may be deterred from acting objectively
by threats, actual or perceived.

Intimidation Circumstances that may create intimidation threats include, but are not limited to:
• Threat of dismissal or replacement of the member, or a close or immediate family
member, over a disagreement about the application of an accounting principle or
the way in which financial information is to be reported.

1.1.3.2 Safeguards

Safeguards that may eliminate or reduce threats to an acceptable level fall into two broad categories:

Safeguards

Examples of safeguards created by the profession, legislation or regulation

include, but are not restricted to:
• Educational, training and experience requirements for entry into the
(a) Safeguards created by profession.
the profession, • Continuing professional development requirements.
legislation or regulation • Corporate governance regulations professional standards.
• Professional or regulatory monitoring and disciplinary procedure.
• External review by a legally empowered third party of the reports,
returns, communications or information produced by a member.
 Safeguards in the work environment include, but are not restricted to:
• The employing organisation’s ethics and conduct programmes.
• Recruitment procedures emphasising the importance of employing
(b) Safeguards in the work
high-calibre, competent staff.
environment.
• Strong internal controls.
• Appropriate disciplinary processes.
• Leadership that stresses the importance of ethical behaviour.
• Consultation with another appropriate professional accountant.

As a consequence of responsibilities to an employing organisation, a professional accountant in business

may be under pressure to act or behave in ways that could create threats to compliance with the
fundamental principles.

Such pressure may be explicit or implicit; and it may come from a supervisor, manager, director or
another individual within the employing organisation.

A professional accountant in business may face pressure to:

 Act contrary to law or regulation.
 Act contrary to technical or professional standards.
 Facilitate unethical or illegal earnings management strategies.
 Lie to others, or otherwise intentionally mislead (including misleading by remaining silent)
others, in particular:
 The auditors of the employing organisation; or
 Regulators.
Issue, or otherwise be associated with, a financial or non-financial report that materially
misrepresents the facts, including statements in connection with, for example:
 The financial statements;
 Tax compliance;
 Legal compliance; or
 Reports required by securities regulators.

The significance of any threats arising from such pressures shall be evaluated and necessary safeguards
applied to eliminate or reduce them to an acceptable level. In exercising their judgement, members
should consider what a reasonable and informed third party, having knowledge of all relevant
information, including the significance of the threat and the safeguards applied, would conclude to be
unacceptable.

In circumstances where a professional accountant in business believes that unethical behaviour or actions
by others will continue to occur within the employing organisation, the professional accountant in
business may consider obtaining legal advice.

Examples of such safeguards include:

 Obtaining advice, where appropriate, from within the employing organisation, an independent
professional advisor or ACCA (Code of Ethics).
 Using a formal dispute resolution process within the employing organisation.
 Informal discussions with fellow professional accountants in business* or in practice may assist in
clarifying the steps needed to be taken.

In those extreme situations where all available safeguards have been exhausted and it is not possible to
reduce the threat to an acceptable level, a professional accountant in business may conclude that it is
appropriate to disassociate from the task and / or resign from the employing organisation.

Reading Material 3

Guidance on Ethical
Matters for Members in
Business.

1.1.3.3 Whistle-blowing

A whistle-blower (also written as whistle-blower or whistle blower) is a person (an employee) who
exposes any kind of information or activity that is deemed illegal, unethical, or not correct within an
organization that is either private or public. There are laws that protect whistle-blowers from being fired
or mistreated for reporting misconduct. One of these laws is the Whistle-blower Protection Act.

Whistle-blowers are protected from employer retaliation under the Whistle-blower Protection Act.
1.1.4 Ethical and Professional Issue in Corporate Reporting

Learning Outcome (ACCA Study Guide Area A)

A1a: Appraise and discuss the importance of ethical and professional behaviour in complying with
accounting standards and corporate reporting requirements.
A1b: Assess and discuss the consequences of unethical behaviour by management in carrying out
their responsibility for the preparation of corporate reports.

I) Professional Accountant in the Role of an Employee

Professional accountants in business could be with the employing organisation, if any, has no
engaged in various position such an executive or bearing on the ethical responsibilities incumbent
non-executive in commerce, industry, public and on the professional accountant in business.
service sectors, education, non-profit
Hence, a professional accountant in business
organisation, regulatory bodies or professional
shall not knowingly engage in any business,
bodies.
occupation, or activities that may impair
A professional accountant in business may also integrity, objectivity or the good reputation of
be a salaried employee (i.e. financial reporting, the profession and as a result would be
management accounting), a partner, director incompatible with the fundamental principles.
(executive or non-executive), an owner manager He is to encourage an ethics-based culture in the
of an entity. The legal form of the relationship organisation that he is employed in.

II) If the Professional Accountant is Also a Director

The nature of the responsibility of the directors
requires a high level of ethical behaviour.
Directors are bound by their stewardship role as
highlighted in CF 2018. Shareholders, potential
shareholders, and other users of the financial
statements rely heavily on the financial
statements of a company as they can use this
information to make an informed decision about
investment. They rely on the directors to
present a true and fair view of the company.

However, it is likely that any unethical behaviour

by the directors will cause a degree of mistrust
between the directors and shareholders unless
there is a logical business reason for their
actions. Shareholders in most jurisdictions who
receive an unlawful dividend are liable to repay
it to the company.
 1.1.4.1 Factors That Contribute to Financial Statement Manipulation

There are three primary reasons why management manipulates financial statements.

(a) Compensation of corporate executive

The compensation of higher management is directly tied to the financial performance of the
company. Hence, management has a direct incentive and pressure to paint a rosy picture of the
company’s financial position in order to meet established performance expectations and bolster their
personal compensation.
(b) Latitude in interpretation of International Accounting Standards Board
As the International Accounting Standards Board provides a significant amount of flexibility to
interpret accounting provisions that are available to be used by corporate management, this has
made it relatively easy for corporate management paint a favorable picture of the financial condition
of the company.
(c) Relationship between independent auditor and corporate client
While independent auditor may be deemed independent, it may not be the case as they are directly
compensated by the client that they audit. This has resulted in conflict of interest where auditor may
be prone to compromise by bending accounting rules in order to please their client.

1.1.4.2 How Financial Statements Are Manipulated

There are two general approaches to manipulating financial statements.

Table 1.1.4: Approaches to manipulating financial statements

Inflate current period earnings Deflate current period

This is done by artificially inflating revenue This approach is the exact opposite whereby expenses are
and gains, or by deflating the expenses. This inflated and earnings is deflated. The reason behind this
approach improves the financial condition approach may not be obvious as it is a counterintuitive to
of the company in order to meet the worsen financial condition.
established expectations.
However, there are many reasons for this approach as
company may use this approach as a reason to dissuade
potential acquirers, pulling all bad financial information into
one period so that company will look stronger going forward
(“cookie jar accounting”), pulling all bad financial information
into current period to attribute poor performance to the
current macroeconomic environment or to postpone good
financial information to future period.

Dr. Howard Schilit, in his book "Financial Shenanigans" (2002) states that there are seven primary ways in
which corporate management manipulates the financial statements of a company.
  Recording Revenue Prematurely or of Questionable Quality.
 Recording Fictitious Revenue.
 Increasing Income with One-Time Gains.
 Shifting Current Expenses to an Earlier or Later Period.
 Failing to Record or Improperly Reducing Liabilities.
 Shifting Current Revenue to a Later Period.
 Shifting Future Expenses to the Current Period as a Special Charge.

Investors should understand that there are various techniques that are at management's disposal. While
most of these techniques pertain to the manipulation of the income statement, there are also many
techniques available to manipulate the balance sheet, as well as the statement of cash flows.

Moreover, even the semantics of the management discussion and analysis section of the financials can be
manipulated by softening the action language used by corporate executives from "will" to "might,"
"probably" to "possibly," and "therefore" to "maybe."

1.1.4.3 Preparation and Reporting of Information

Accountants will often be involved in the preparation and reporting of information that may be:
 Made public; or
 Used by others inside or outside the employing organisation.

The accountant should:

(a) Prepare or present such information fairly, honestly and in accordance with relevant professional
standards

(b) Present financial statements in accordance with applicable financial reporting standards

(c) Maintain information for which (s)he is responsible in a manner which:

 Describes clearly the true nature of the business transactions, assets or liabilities
 Classifies and records information in a timely and proper manner
 Present the facts accurately and completely in all material respects

1.1.4.4 Ethical Dilemma and Consequence of Unethical Behaviour under Corporate Reporting

The ethical dilemmas that accountants sometimes face include conflicts of interest, payroll
confidentiality, illegal or fraudulent activities, pressure from management to inflate earnings, and clients
who request manipulation of financial statements.

The impact of scandals can directly affect:

(a) The reporting accountant

The violation of ethical code of conduct by member
of professional bodies may result in:
 Penalties
 Suspension of membership
  Expel from professional body
 Publication of members’ name in journal or magazine

The regulatory bodies, e.g. the ministry of finance, may prosecute the accountant and it will result in:

 Penalties or fines
 Imprisonment or both of the above
 Negative publicity of the accountant

(b) The reporting entity

The unethical behaviour of regulatory bodies will result in penalties or fines on the entity, and as in
many cases, the directors will be charged.
(c) The investors
Investors rely on corporate reports for their investment decisions. In case of corporate failure, they
may lose their investments.

Reading Material 4

The Top 10 Worst

Corporate Accounting
Scandal of All Time.

1.1.5 Current Issue: Accounting Ethics in Digital Age1

This article considers a variety of ethical threats which a contemporary accountant working in the
digital age may encounter and considers how these threats might be addressed.

It is widely accepted that accountants require more than merely professional competence because their
actions contribute to the moral and ethical culture of organisations. This is increasingly true in recent
times as accountants are faced with new digital technologies which may impact on the ethical
considerations required.

Ethical dilemmas are not easily resolved as they often involve different perspectives and choices. Often
there are different ethical and moral considerations which may include the environment, wealth
distribution and personal relationships. Consequently, accountants frequently face a range of ethical
dilemmas and recognising and dealing with these dilemmas is a significant part of being a professional
accountant. Some of these issues can be resolved if accountants regularly engage with others as this
engagement is likely to improve the accountant’s ethical thinking by helping to view an issue from
different perspectives. The ultimate decisions and actions an accountant might take can be affected by
culture and social norms.

1
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Strong ethical principles and behaviour are increasingly important in the digital age as there is potential
for an increased range of threats. The threats to ethical behaviour can be categorised as follows:
 Self-interest threat: a financial or other interest (personal / organisational) will inappropriately
influence a professional accountant’s judgement or behaviour.
 Familiarity threat: owing to an established or close relationship with a client or employer, a
professional accountant will be too sympathetic to that party’s interests or too accepting of their
work.
 Intimidation threat: a professional accountant will be deterred from acting objectively because of
actual or perceived pressures, including attempts to exercise undue influence over the professional
accountant.
 Self-review: a professional accountant will not evaluate appropriately the results of a previous
judgement, made earlier in the course of providing a current service.
 Advocacy: a professional accountant will promote a client’s or employer’s position to the point that
the professional accountant’s objectivity is compromised.

A contemporary accountant needs to be aware of these issues to allow him / her to deal with new digital
scenarios. These will include cybersecurity, platform-based business models, big data and analytics,
cryptocurrencies, distributed ledgers and artificial intelligence (AI). Ethical behaviour helps to build trust.
Stakeholders are much more likely to continue investing their trust in the accountant if there is belief that
the accountant will always act ethically.

The ethical principles which are most likely to be compromised by digital developments are professional
competence and due care. Ethical challenges are likely to arise as the digital age can present new
problems that have not been seen before. The accountant needs to understand the situation in depth
and its context before being able to act. A lack of knowledge and expertise will create the risk of
compromising professional competence and due care. It is difficult to apply ethical judgement on the use
of digital technology without an understanding of what it is, and the opportunities and challenges it
poses. To behave ethically and instill trust, professional accountants will need to learn new information
relatively quickly, and to apply their judgement to this information, often in situations they may not have
seen before. In addition to being directly connected to ethical situations that are personally experienced,
it is possible to be indirectly connected to ethical situations by being an observer. In these situations, the
ethical responsibility of the accountant is not diminished in any way.

Data theft is the most immediate and common impact of a breach in cybersecurity. Organisations hold a
lot of valuable data in a variety of systems. The data itself could be internal (Example: employee-related)
or external (Example: customer-related). The effects of data theft include financial loss and reputation /
brand damage. Hackers can expose the vulnerability in an insecure database where commercial
implementations have not been adequately secured.

IT security is a technology issue but the accountant is a custodian of sensitive data and needs to be aware
of the risks. The risk that objectivity may be compromised arises from intimidation from a hacker’s
threats that data will be misused or destroyed. Additionally, the ethical duty of confidentiality, which
would relate to customer or employee data, will also be compromised. Professional accountants need to
know where there is information of value to external parties and should ensure that there are controls to
secure it.
Regulation on data collection and analytics is increasing and organisations need to ensure the
involvement of all relevant stakeholders. The accountant has a responsibility to ensure that regulations
are understood, and properly addressed. The accountant could be accused of failure to act with integrity,
competence and due care if customers’ data is misused. The organisation should be honest in the way it
has obtained consent from customers for using their data and should not compromise customers’
confidentiality.

The accountant needs heightened ethical awareness when it comes to considering what action to take
when there has been a breach of security in either their own organisation, or in one that they are
advising. Given the accountant’s obligation to act in the public interest, it might be necessary to make a
public disclosure, such as informing customers that their personal information has been exposed.

Platform-based businesses create value by bringing together consumers and producers. Examples are
Airbnb, Uber, Google, Facebook, YouTube, eBay, and Alibaba. They have minimum levels of physical
assets or inventory of their own to sell and do not need necessarily an increase in employee numbers to
expand. They simply need to build up a substantial user base and connect them to a list of trusted
specialist suppliers to provide the services. The individuals whose services these businesses offer may be
contracted to work for the business (but are not employees) and this can often raise questions about
employee protection and governance issues. The accountant may need to evaluate whether the supplier
is being unfairly treated by the business, for example whether they are indeed employees and have
specific rights or whether they are suppliers without such legal rights. Preventing unfair treatment of
stakeholders is an issue for the accountant. In this scenario, there is a need to balance the commercial
interests of the business with the interests of the suppliers and customers.

Distributed ledger technology (DLT) is a digital system for recording asset transactions in which the
transactions and their details are recorded in multiple places at the same time. It is a digital database of
records with information relevant to a group of participants. Unlike traditional databases, distributed
ledgers have no central data store or administration functionality. All participants are looking at a
common, shared, view of the records which are updated at the same time for all participants.

For example, in the UK, the Land Registry expects to use DLT to revolutionise the land registration and
property buy-sell process. The reliability of such a system is paramount as is the need to ensure that
sensitive citizen data is not at risk. Such a system will affect a significant proportion of the population and
could result in significant economic consequences if it went wrong. In turn, this may present ethical
challenges to the government’s accountants and auditors. Accountants will therefore require knowledge
of distributed ledgers and be able to assess the risk of hacking or other unauthorised access to data.
Professional accountants must be honest about whether they are comfortable with their knowledge of
DLT and may need to consider the public interest when they are dealing with large volumes of sensitive
information.

The increasing use of big data and AI can enable quicker more consistent, evidence-based and accurate
decisions. AI should be lawful, ethical and robust.

However, the characteristics of AI create questions around the ethical use of the new technologies.
Artificial intelligence and machine learning technologies are rapidly transforming society and will almost
certainly continue to do so in the coming decades. This social transformation will have deep ethical
impacts, with these powerful new technologies both improving and disrupting human lives.
 The accountant should review the governance and assurance needed around AI, so that all stakeholders
can have confidence in its appropriate use. The following ethical issues may arise for the accountant:
 Artificial intelligence, like human intelligence, may be used maliciously.
 There are risks of bias in the system in unexpected and potentially detrimental ways.
 AI will be a threat to certain categories of employment.
 There is the question of technical safety and failure.

The principles embodied in ethical codes will remain highly relevant in the face of big data, and AI.
However, while the ethical principles do not necessarily need to change, compliance is likely to become
more difficult. A challenge is the lack of understanding around the contractual terms regarding the use of
data.

Finally, the list of contexts in which confidentiality can be breached is ever growing, which makes it
unique amongst the fundamental principles. However, the fundamental ethical principles are still fit for
purpose. AI may well remove certain ethical threats, for example intimidation threat, but it may also
complicate demonstration of compliance with the principles.

There are various ways of addressing an ethical issue and one such way is outlined below:
 The accountant must determine the nature of the decision that has to be made by determining the
context of the ethical dilemma.
 The accountant must determine whose rights and interests are affected by the decision.
 The accountant must determine the rules of professional practice, internal and external governance
codes and relevant laws.
 The accountant needs to set out the arguments in for and against taking a particular course of action.
 The accountant needs to formulate a solution that does justice to the arguments for and against the
action to be taken.
 The accountant needs to take into account any negative consequences of taking or not taking the
action.

It can therefore be seen that, although the environment in which an accountant operates may change, in
this case become more digitalised, the basic ethical considerations remain the same. However, there may
be some additional things that the accountant may need to think about if s/he finds herself / himself in
an ethical dilemma that is set in a digital context. These considerations are summarised above and SBR
candidates should have an awareness of these whilst preparing themselves for their forthcoming SBR
exam and professional career.

Written by a member of the Strategic Business Reporting examining team.