ACCY305 Financial Accounting III Autumn Session 2012

Tutorial Solutions Week 2

Short Answer Questions: Dellaportas (2005) 1.1, 1.2, 1.4, 1.7 1.1 What is meant by ethics and how to ethics relate to an accountant s role? Refer Dellaportas et al(2005, p5), Gaffikin (2008, Ch8). Ethics is not easy to define, and there are numerous theories of ethics (Gaffikin provides a very good overview of these). Very simply, Ethics is about how people behave and live, and involves a consideration of principles, values, duties and norms. Ethics are shaped by our contexts communities, religions, education, workplaces, professional bodies etc. Ethics involves making decisions between often competing alternatives, and balancing the interests of the individual and society. As accountants are professionals, they have a responsibility to act ethically. Anyone who uses the services of an accountant has the expectation that the accountant will act in a professional and ethical manner. The responsibility to act ethically is entrenched in various ethical codes of conducts, and is often related to the notion of acting in the public interest. However, ethical behaviour cannot be forced by such codes, and it involves consideration of issues well beyond black and white rules. Accountants are in a position of power, and make choices about what, how, and when to report various phenomena (as well as what not to report). Accountants decisions have implications far beyond the financial, so acting ethically involves a consideration of actions and their implications. Accountants have to make choices between self, client and public interests, and in our complex business world, these choices are not always easy. In our contemporary society, the public demands much greater attention to ethics and corporate governance than they have in the past probably as a result of the corporate collapses in the early 2000s and the actual and perceived roles of accountants and auditors in these collapses.

ACCY305 Financial Accounting III Autumn Session 2012

Tutorial Solutions Week 2

1.2 Explain the relationship between governance and accountability. Refer Dellaportas (2005, p5). Governance refers to how an organisation is managed the strategies, methods and manner in which the directors and key executives undertake to run the business. These people have the authority to do what is necessary to direct the governance of an organisation, and the responsibility to account for how they have gone about this that is they need to be accountable for what they have done. They need to be accountable to the stakeholders of an organisation (and this extends beyond shareholders to employees, communities, creditors, regulators etc). Without accountability the executives would have free reign to do what they wanted, often at the expense of other parties.

1.4 Discuss the role of regulation in corporate governance. The term Corporate governance has gained a much higher profile in the last decade or so. Dellaportas (2005, p5) suggests that it was traditionally defined as the way a corporation is directed and controlled to maximise shareholder value, however it now demands a consideration of issues beyond shareholder value. It extends to the nature of directors, how boards are structured, relationships between key parties, management of risks, transparency of processes and reporting, consideration of multiple stakeholders, and ethical, compliance and cultural issues within organisations. The Australian Stock Exchange (ASX) introduced corporate governance regulation for all listed companies in 2003, and later revised it in 2008 - Corporate Governance Principles and Recommendations. Companies must disclose in their annual reports the extent to which they have followed these recommendations, and where not followed, disclose reasons. Refer: http://asx.ice4.interactiveinvestor.com.au/ASX0701/Corporate%20Governance%20Principle s/EN/body.aspx?z=1&p=-1&v=1&uid=

ACCY305 Financial Accounting III Autumn Session 2012

Tutorial Solutions Week 2

The Corporations Act also regulates corporate governance by outlining the duties and responsibilities of directors. For example, directors have a responsibility to ensure that the financial statements present a true and fair view of the performance and financial position of the company on which they are reporting (Section 296, 297).

1.7 What is the current state of the accounting professions credibility? Why is credibility important to the profession? The credibility of the accounting profession suffered enormously with recent corporate collapses. Accountants were blamed for engaging in creative accounting and for providing misleading financial statements of companies which had failed, and auditors were blamed for not identifying problems or for covering up misleading reporting. The profession was seen to be motivated by money and the client interest. Conflicts of interest were apparent and perceived. Credibility is one of the cornerstones of any profession without this the public does not have trust in the profession and is unwilling to grant the associated status and privileges. Notions of credibility and trust are inherently tied into ethics how people behave and how they consider the implications of what they do. Regulators and professional bodies acted decisively in the wake of corporate collapses to try to restore the lost credibility (refer Dellaportas, 2005, p20-223).

Long Response Question: Boyce (2008, p255, p263) argues that it is important for accounting education to transcend the individualised conception of ethics and to examine ethics in the broader context of globalisation. Identify and comment on the arguments presented by Boyce to support his view.

ACCY305 Financial Accounting III Autumn Session 2012

Tutorial Solutions Week 2

The overriding theme of Boyces paper is that the failure of business, accounting and accounting education is to some extent due to the fact that we focus too much on the behaviour of individuals, rather than on the system in which we are operating (ie. capitalism). In section 2 of the paper, Boyce reflects on corporate collapses, the responses to these collapses, and the ethical implications of them. Fundamentally, capitalism and the inherent belief in the market, is the source of unethical conduct. The desire to maximise profits is often manifested in reduced costs (eg. using offshore labour and thus exploiting workers in developing countries, retrenching staff with resultant social costs), or externalising costs (eg. not accounting for environmental costs associated with running a particular business). Corporations which operate within the capitalist system will do almost anything to maximise shareholder wealth (an individualistic notion), often at the expense of other groups within the community. Boyce states (p259) that the market demands and rewards social and environmental irresponsibility and punishes those who do not bend to its will. This imperative to maximise shareholder value has seen corporate officers focus on short term goals and encouraged dubious accounting and financial reporting, sometimes resulting in corporate collapses there was a wave of collapses early in the 2000s. Blame for these collapses was placed squarely with individuals directors, accountants, auditors. Similarly, the responses to these collapses, such as Sarbanes Oxley Act in the US and CLERP (Corporate Law Economic Reform Program) in Australia, were very much focused on correcting the behaviour of individuals eg, independence of directors, auditor rotation, improved accounting disclosure. At no point was the systemic failure of capitalism and financial reporting considered. Boyce moves on to consider the teaching of ethics to accounting students. He notes that traditionally accounting education is connected to the economic (p263), because after all, accounting is the language of business, and business is all about making a profit. This notion of accounting tends to focus on the individual making a profit for shareholders and blaming individuals if something goes wrong. Traditional accounting ethics education tends to use decision models, is shareholder centric, gives attention to ethical codes of conduct
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ACCY305 Financial Accounting III Autumn Session 2012

Tutorial Solutions Week 2

(as if these can prevent poor behaviour), is narrow (based on a particular situation), is focussed on the behaviour of the individual accountant and suggests that solutions to ethical dilemmas are achievable. However, in the real social world in which we live, problems are complex and ethical dilemmas are not always black and white. The actions of corporations and individuals may have significant consequences beyond the corporate boundary and immediate stakeholders. Boyce asks that we consider accounting in a much broader context, particularly that of globalisation. Globalisation has brought benefits to many across the world, but it has also created much inequality and poverty. It has been responsible for the exploitation of many people throughout the world, eg where multi-nationals have used labour in developing countries, have polluted environments in countries with little or no environmental regulations, have disregarded local cultures and sensitivities or overlooked human rights abuses. Accounting is the tool of business, and is thus necessarily implicated in the globalisation of business and markets. So, ethics education needs to transcend the individual and take a much broader perspective. We should consider the roles of accounting and how it impacts beyond the economic eg, social, cultural, historical and political. As accountants, we should think about what we do and how we impact on other people, especially those less fortunate or more vulnerable than us. We should consider that the Western way is not always the best way there is much to learn from other cultures. Ethics education should challenge us to think about the system in which we operate (capitalism) its strengths and weaknesses, and to move beyond our traditional portrayals there is always a better way to do things. As Boyce notes (p284) we need to find ways to meld our personal choices with the micro, meso, and macro contexts within which we are situated, extending the personal to collective and social processes.