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1 Professional Skills – Basis of the award of marks

1 Professional Skills – Basis of the award of marks

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Chapter Roundup

Corporate governance has been important in recent years and in the current syllabus it is important in the

context of ethical behaviour.

The 1989 Framework for the Preparation of Financial Statements was replaced in 2010 by the Conceptual

Framework for Financial Reporting. This is the result of a joint project with the FASB. In 2015 an ED was

issued with proposals for a revised Conceptual Framework.

Revenue recognition is straightforward in most business transactions, but some situations are more


IFRS 15 Revenue from contracts with customers is concerned with the recognition of revenues arising

from fairly common transactions.

The sale of goods

The rendering of services

The use by others of entity assets yielding interest, royalties and dividends

Generally revenue is recognised when the entity has transferred promised goods or services to the

customer. The standard sets out five steps for the recognition process.

Marks are awarded for professional skills.

Quick Quiz



What is corporate governance?


Why is a conceptual framework necessary?


What are the disadvantages of a conceptual framework?


What are the seven sections of the IASB's Framework?


Which concept will be reintroduced in the Conceptual Framework under the proposals in the May 2015

Exposure Draft?


Revenue is generally recognised; under IFRS 15, as earned at the …………. …………. ………….

(fill in the blanks).


How is revenue measured?


How should revenue be recognised when the transaction involves the rendering of services?

1: Financial reporting framework  Part A Regulatory and ethical framework

Answers to Quick Quiz


Corporate governance is the system by which companies are directed and controlled.


To provide a theoretical basis for financial reporting.





A single conceptual framework may not suit all users

Different standards, based on a different framework, may be needed to meet the needs of different


It is not clear that a conceptual framework does in fact facilitate the preparation of financial










The objective of financial statements

Underlying assumptions

Qualitative characteristics of financial statements

The elements of financial statements

Recognition of the elements of financial statements

Measurement of the elements of financial statements

Concepts of capital and capital maintenance




Time when the performance obligation is satisfied, which is when the customer obtains control of the

promised good or service.


At the fair value of the consideration received.


By reference to the progress towards complete satisfaction of the performance obligation.

Now try the question below from the Practice Question Bank













Part A Regulatory and ethical framework  1: Financial reporting framework



1: Financial reporting framework  Part A Regulatory and ethical framework

Professional and

ethical duty of the


Topic list

Syllabus reference

1 Ethical theories


2 Influences on ethics


3 The social and ethical environment


4 Ethics in organisations


5 Principles and guidance on professional ethics


6 Practical situations


7 Examination questions: an approach



Ethics are an important aspect of the ACCA qualification. They need to be

applied in all aspects of managerial behaviour. An attempt to massage profit

figures, or non-disclosure of a close relationship may amount to unethical

behaviour. However, it is the nature of ethics to deny easy answers;

furthermore, in the context of business, ethical prescriptions have to be

practical to be of any use. This chapter focuses on the professional integrity of

the accountant and director, but you will also consider ethics in the context of

off balance sheet finance.


Study guide

Intellectual level


Ethical requirements of corporate reporting and the consequences of

unethical behaviour


Appraise the potential ethical implications of professional and managerial

decisions in the preparation of corporate reports



Assess the consequences of not upholding ethical principles in the

preparation of corporate reports


Exam guide

Ethics are most likely to be considered in the context of the accountant's role as adviser to the directors.

A question on the Pilot Paper asked you to explain why a deliberate misrepresentation in the financial

statements was unethical. A scenario question at the end of this Study Text asks for a discussion of why

directors might have acted unethically in adopting accounting policies to boost earnings.

1 Ethical theories


A key debate in ethical theory is whether ethics can be determined by objective, universal principles.

How important the consequences of actions should be in determining an ethical position is also a

significant issue.

1.1 An introduction to ethics

In this chapter you will encounter various philosophical, academic terms. We have to use this terminology

as the examiner will use it in questions. However provided that you focus on certain basic issues, you will

be able to negotiate this chapter successfully.

1.1.1 Do ethics change over time and place?

One viewpoint is that ethics do vary between time and place. Slavery for example is now regarded as

wrong, whereas in Roman times slavery was acceptable. The view that ethics vary between different ages

and different communities is known as ethical relativism and is discussed in Section 1.3.

The opposing view is that ethics are unchanging over time and place; some courses of action are always

right, others are always wrong. A simple example would be saying that it is always wrong to steal. The

view that there are certain unchanging ethical rules is known as ethical absolutism and is discussed in

Section 1.4.

1.1.2 Should you consider the consequences of your actions when making ethical


One view is that society is best served by everyone following certain ethical rules, and obeying them no

matter what the results are. The argument is that people will undermine society if they disobey the ethical

rules, even if they do so with the intention of avoiding adverse consequences. This viewpoint, known as

deontological ethics, was developed by Kant.

The opposing viewpoint is that you cannot divorce an action from its consequences, and when taking

ethical decisions you must take account of what the consequences will be. This viewpoint is known as

teleological ethics. If you take this viewpoint, that implies that you have to define what the best possible

consequences are. The different variations of the teleological viewpoint try to do this.


2: Professional and ethical duty of the accountant  Part A Regulatory and ethical framework

1.1.3 What thought processes do people use when making ethical decisions?

What the theories are aiming to do is to complete the following sentence:

‘You should act ethically because …

In Section 2 we shall look at the work of Kohlberg who supplied various examples of thought processes,

depending on the degree of ethical development of the individual.

People who are less ethically developed may think: 'You should act ethically because you'll be

punished if you don't.’

People who have more advanced ethical development may think: 'You should act ethically because

your country's laws say you should.’

People at the highest level of ethical development may think: 'You should act ethically because it's

always right to do so, no matter what the consequences and costs are to you personally.’


Ethical issues

Briefly explain the main ethical issues that are involved in the following situations.





Dealing with a repressive authoritarian government abroad

An aggressive advertising campaign

Employee redundancies

Payments or gifts to officials who have the power to help or hinder the payees' operations



Dealing with unpleasantly authoritarian governments can be supported on the grounds that it

contributes to economic growth and prosperity and all the benefits they bring to society in both

countries concerned. This is a consequentialist argument. It can also be opposed on

consequentialist grounds as contributing to the continuation of the regime, and on deontological

grounds as fundamentally repugnant.


Honesty in advertising is an important problem. Many products are promoted exclusively on image.

Deliberately creating the impression that purchasing a particular product will enhance the

happiness, success and sex-appeal of the buyer can be attacked as dishonest. It can be defended

on the grounds that the supplier is actually selling a fantasy or dream rather than a physical



Dealings with employees are coloured by the opposing views of corporate responsibility and

individual rights. The idea of a job as property to be defended has now disappeared from labour

relations in many countries, but corporate decisions that lead to redundancies are still deplored.

This is because of the obvious impact of sudden unemployment on aspirations and living

standards, even when the employment market is buoyant. Nevertheless businesses have to

consider the cost of employing labour as well as its productive capacity.


The main problems with payments or gifts to officials are making distinction between those that

should never be made, and those that can be made in certain cultural circumstances.


Extortion. Foreign officials have been known to threaten companies with the complete

closure of their local operations unless suitable payments are made.


Bribery. This is payments for services to which a company is not legally entitled. There are

some fine distinctions to be drawn; for example, some managers regard political

contributions as bribery.


Grease money. Multinational companies are sometimes unable to obtain services to which

they are legally entitled because of deliberate stalling by local officials. Cash payments to the

right people may then be enough to oil the machinery of bureaucracy.

Part A Regulatory and ethical framework  2: Professional and ethical duty of the accountant



Gifts. In some cultures (such as Japan) gifts are regarded as an essential part of civilised

negotiation, even in circumstances where to Western eyes they might appear ethically

dubious. Managers operating in such a culture may feel at liberty to adopt the local


One of the competences you need to fulfil Objective 1 of the Practical Experience Requirement (PER) is to

demonstrate the application of professional ethics, values and judgement. So although you should read

through the theory, the application is more important. You will be faced with ethical dilemmas in your

working life.

1.2 Role of ethical theory

Ethics is concerned with right and wrong and how conduct should be judged to be good or bad. It is about

how we should live our lives and, in particular, how we should behave towards other people. It is

therefore relevant to all forms of human activity.

Business life is a fruitful source of ethical dilemmas because its whole purpose is material gain, the

making of profit. Success in business requires a constant, avid search for potential advantage over others

and business people are under pressure to do whatever yields such advantage.

It is important to understand that if ethics is applicable to corporate behaviour at all, it must therefore be a

fundamental aspect of mission, since everything the organisation does flows from that. Managers

responsible for strategic decision making cannot avoid responsibility for their organisation's ethical

standing. They should consciously apply ethical rules to all of their decisions in order to filter out

potentially undesirable developments. The question is however what ethical rules should be obeyed. Those

that always apply or those that hold only in certain circumstances?

Ethical assumptions underpin all business activity as well as guiding behaviour. The continued existence

of capitalism makes certain assumptions about the 'good life' and the desirability of private gain, for

example. As we shall see in Chapter 10, accountancy is allegedly not a value-neutral profession. It

establishes and follows rules for the protection of shareholder wealth and the reporting of the performance

of capital investment. Accordingly accounting, especially in the private sector, can be seen as a servant of

capital, making the implicit assumptions about morality that capitalism does.

1.3 Ethical relativism and non-cognitivism

Key term

Relativism is the view that a wide variety of acceptable ethical beliefs and practices exist. The ethics

that are most appropriate in a given situation will depend on the conditions at that time.

The relativist approach suggests that all moral statements are essentially subjective and arise from the

culture, belief or emotion of the speaker.

Non-cognitivism recognises the differences that exist between the rules of behaviour prevailing in different

cultures. The view that right and wrong are culturally determined is called ethical relativism or moral

relativism. Ethical rules will differ in different periods within the same society, and will differ between

different societies. Acceptance of ethical relativism implies that a society should not impose moral

imperatives strictly, since it accepts that different ethical and belief systems are acceptable.

This is clearly a matter of significance in the context of international business. Managers encountering

cultural norms of behaviour that differ significantly from their own may be puzzled to know what rules to



2: Professional and ethical duty of the accountant  Part A Regulatory and ethical framework



What can be said about the morality of a society that allows abortion within certain time limits in certain

circumstances, or which allows immigration if immigrants fulfil certain requirements (will benefit the local



The suggested treatment of these issues implies that the society is a non-cognitivist, ethically relative

society. Banning abortion would be one sign of an ethically absolute society.

1.3.1 Strengths of relativism


Relativism highlights our cognitive bias in observing with our senses (we see only what we know

and understand) and our notational bias (what we measure without using our senses is subject to

the bias of the measurement methods used).


Relativism also highlights differences in cultural beliefs; for example all cultures may say that it is

wrong to kill innocents, but different cultures may have different beliefs about who innocents

actually are.


The philosopher Bernard Crick argued that differing absolutist beliefs result in moral conflict

between people; (relativist) ethics should act to resolve such conflicts.


In the global economy, where companies conduct businesses in many different countries and

cultures, adopting a relativist approach presumes more flexibility and therefore greater success.

1.3.2 Criticisms of relativism


Put simply, strong relativism is based on a fundamental contradiction; the statement that 'All

statements are relative' is itself an absolute, non-relative statement. However it is possible to argue

that some universal truths (certain laws of physics) exist, but deny other supposedly objective



A common criticism of relativism, particularly by religious leaders, is that it leads to a philosophy

of 'anything goes', denying the existence of morality and permitting activities that are harmful to



Alternatively, some critics have argued for the existence of natural moral laws (discussed below).

These are not necessarily religious laws; the atheist scientist Richard Dawkins has argued in favour

of natural laws.


Ideas such as objectivity and final truth do have value – consider for example, the ethical principle

that we shall discuss later for accountants to be objective.


If it's valid to say that everyone's differing opinions are right, then it's equally valid to say that

everyone's differing opinions are wrong.

1.4 Ethical absolutism and cognitivism

Key term

Absolutism is the view that there is an unchanging set of ethical principles that will apply in all situations,

at all times and in all societies.

Absolutist approaches to ethics are built on the principle that objective, universally applicable moral

truths exist and can be known. There is a set of moral rules that are always true. There are various

methods of establishing these:


Religions are based on the concept of universally applicable principles.

Part A Regulatory and ethical framework  2: Professional and ethical duty of the accountant



Law can be a source of reference for establishing principles. However, ethics and law are not the

same thing. Law must be free from ambiguity. However, unlike law, ethics can quite reasonably be

an arena for debate, about both the principles involved and their application in specific rules.


Natural law approaches to ethics are based on the idea that a set of objective or 'natural' moral

rules exists and we can come to know what they are. In terms of business ethics, the natural law

approach deals mostly with rights and duties. Where there is a right, there is also a duty to respect

that right. For those concerned with business ethics there are undeniable implications for

behaviour towards individuals. Unfortunately, the implications about duties can only be as clear as

the rights themselves and there are wide areas in which disagreement about rights persists.


Deontological approaches (see below).

Many absolutists would accept that some ethical truths may differ between different cultures.

However they would also believe in certain basic truths that should be common to all cultures (for

example, 'thou shall not kill').

1.5 Deontological ethics

Key term

Deontology is concerned with the application of absolute, universal ethical principles in order to arrive at

rules of conduct, the word deontology being derived from the Greek for 'duty'.

Deontology lays down criteria by which actions may be judged in advance, the outcomes of the actions

are not relevant. The definitive treatment of deontological ethics is found in the work of the eighteenth

century German philosopher, Immanuel Kant.

Kant's approach to ethics is based on the idea that facts themselves are neutral: they are what they are;

they do not give us any indication of what should be. If we make moral judgements about facts, the criteria

by which we judge are separate from the facts themselves. Kant suggested that the criteria come from

within ourselves and are based on a sense of what is right; an intuitive awareness of the nature of good.

Kant spoke of motivation to act in terms of 'imperatives'. A hypothetical imperative lays down a course of

action to achieve a certain result. For instance, if I wish to pass an examination I must study the syllabus.

A categorical imperative, however, defines a course of action in terms of acting in accordance with moral

duty without reference to outcomes, desire or motive. For Kant, moral conduct is defined by categorical

imperatives. We must act in certain ways because it is right to do so – right conduct is an end in itself.

Kant arrived at three formulations of the categorical imperative.


'So act that the maxim of your will could hold as a principle establishing universal law.'

This is close to the common sense maxim called the golden rule found in many religious teachings,

for example the bible:

In everything do to others what you would have them do to you, for this sums up the Law and the

Prophets (Matthew 7:12).

The difference between Kant's views and the golden rule is that under the golden rule, one could

inflict harm on others if one was happy for the same harm to be inflicted on oneself. Kant however

would argue that certain actions were universally right or wrong, irrespective of the personal,

societal or cultural conditions.

Kant went on to suggest that this imperative meant that we have a duty not to act by maxims that

result in logical contradictions. Theft of property for examples implies that it is permissible to steal,

but also implies the existence of property; however if theft is allowed there can be no property, a

logical contradiction. Kant also argued that we should act only by maxims that we believe should

be universal maxims. Thus if we only helped others when there was advantage for ourselves, noone would ever give help to others.


2: Professional and ethical duty of the accountant  Part A Regulatory and ethical framework


'Do not treat people simply as means to an end but as an end in themselves.'

The point of this rule is that it distinguishes between people and objects. We use objects as means

to achieve an end: a chair is for sitting on, for instance. People are different.

We regard people differently from the way we regard objects, since they have unique intellects,

feelings, motivations and so on of their own: treating them as objects denies their rationality and

hence rational action.

Note, however, that this does not preclude us from using people as means to an end as long as we,

at the same time, recognise their right to be treated as autonomous beings. Clearly, organisations

and even society itself could not function if we could not make use of other people's services.


'So act as though you were through your maxims a law-making member of the kingdom of ends.'

Autonomous human beings are not subject to any particular interest and are therefore only subject

to the universal laws which they make for themselves. However, they must regard those laws as

binding on others, or they would not be universal and would not be laws at all.

1.5.1 Criticisms of Kant


Critics have pointed out a dualism in Kant's views; he sees humans as part of nature whose actions

can be explained in terms of natural causes. Yet Kant also argues that human beings are capable

of self-determination with full freedom of action and in particular an ability to act in accordance

with the principles of duty. Man is therefore capable in effect of rising above nature, which appears

to conflict with the view that man is a natural animal.


It is argued that you cannot take actions in a vacuum and must have regard for their

consequences. The Swiss philosopher Benjamin Constant put forward the 'enquiring murderer'

argument; if you agree with Kant and hold that Truth telling must be universal, then one must, if

asked, tell a known murderer the location of his prey. Kant's response was that lying to a murderer

denied the murderer's rationality, and hence denied the possibility of there being free rational

action at all. In addition, Kant pointed out that we cannot always know what the consequences of

our actions would be.


Kierkegaard argued that, whatever their expectations of others, people failed to apply Kant's

duties to themselves, either by not exercising moral laws or not punishing themselves if they

morally transgressed.

1.6 Teleological or consequentialist ethics: utilitarianism

There are two versions of consequentialist ethics:

Utilitarianism – what is best for the greatest number

Egoism – what is best for me

The teleological approach to ethics is to make moral judgements about courses of action by reference to

their outcomes or consequences. The prefix telios is derived from the Greek and refers to issues of ends

or outcomes.

Right or wrong becomes a question of benefit or harm rather than observance of universal principles.

Utilitarianism is the best-known formulation of this approach and can be summed up in the 'greatest

good' principle – 'greatest happiness of the greatest number'. This says that when deciding on a course of

action we should choose the one that is likely to result in the greatest good for the greatest number of

people. It therefore contrasts sharply with any absolute or universal notion of morality. The 'right' or

'wrong' can vary between situations and over time according to the greatest happiness of the greatest


Utilitarianism underlies the assumption that the operation of the free market produces the best possible

consequences. Free markets, it is argued, create wealth, this leads to higher tax revenue, this can pay for

greater social welfare expenditures.

Part A Regulatory and ethical framework  2: Professional and ethical duty of the accountant


1.6.1 Problems with utilitarianism

There is an immediate problem here, which is how we are to define what is good for people. Bentham, a

philosopher who wrote on utilitarianism, considered that happiness was the measure of good and that

actions should therefore be judged in terms of their potential for promoting happiness or relieving

unhappiness. Others have suggested that longer lists of harmful and beneficial things should be applied.

Case Study

A connected problem lies in outcomes that may in fact be beneficial but are not recognised as such. The

structural adjustment programmes provided by the International Monetary Fund are a case in point.

They are designed to align a country's economic incentives so that, by improving trade and public

finances, to meet an objective, such as debt repayment. The IMF might argue, therefore, that the pain and

dislocation suffered are short-term difficulties for long-term well-being. Critics of IMF structural

adjustment programmes might suggest the opposite: that they are designed to remove money from the

very poorest. The rights of the poor are more important than those of bondholders and to insist on

repayment is unethical.

The utilitarian approach may also be questioned for its potential effect upon minorities. A situation in

which a large majority achieved great happiness at the expense of creating misery among a small minority

would satisfy the 'greatest good' principle. It could not, however, be regarded as ethically desirable.

However, utilitarianism can be a useful guide to conduct. It has been used to derive wide ranging rules and

can be applied to help us make judgements about individual, unique problems.

Exam focus


The Pilot Paper asked for the consequentialist and deontological approaches to ethics to be contrasted.

1.7 Teleological or consequentialist ethics: egoism

Key term

Egoism states that an act is ethically justified if decision-makers freely decide to pursue their own shortterm desires or their long-term interests. The subject to all ethical decisions is the self.

Adam Smith argued that an egoistic pursuit of individual self-interest produced a desired outcome for

society through free competition and perfect information operating in the marketplace. Producers of

goods for example have to offer value-for-money, since competition means that customers will buy from

competitors if they don't. Egoism can also link in with enlightened self-interest; a business investing in

good facilities for its workforce to keep them content and hence maintain their loyalty.

1.7.1 Criticisms of egoism

One criticism of pure egoism is that it makes short-term selfish desires equivalent to longer-term, more

beneficial, interests. A modified view would give most validity to exercising those short-term desires that

were in long-term interests. A more serious criticism has been that the markets do not function perfectly,

and that some participants can benefit themselves at the expense of others and also the wider

environment – hence the debate on sustainability which we shall consider in Chapter 18. Most

fundamentally egoism is argued to be the ethics of the thief as well as the short-termist.

1.8 Pluralism

Pluralism accepts that different views may exist on morality, but suggests a consensus may be able to be

reached in certain situations. A pluralist viewpoint is helpful in business situations where a range of

perspectives have to be understood in order to establish a course of action. It emphasises the importance

of morality as a social phenomenon; that some rules and arrangements need to be established for us to


2: Professional and ethical duty of the accountant  Part A Regulatory and ethical framework

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