LECTURE 2 – SOLVING ETHICAL DILEMMAS
Ethics: Understanding and Meeting Ethical Expectations
Strong Governance and High Ethical Standards
• Companies with strong corporate governance and high ethical standards generally perform better than those
with weak governance and low ethical expectations.
• The key is the tone set by top management.
o A well-managed organisation will have and enforce a code of ethics /or a conflict of interest policy
o Ethics should be part of the organisational culture created by internal control.
Accepting a Public Trust
• To maintain the public’s trust, public accountants must act with professional integrity
o The new APESB Code of Conduct
• APES 110-150: Principles of Professional Conduct
Resolving ethical dilemmas – framework for utilitarianism and rights theories
1. Identify ethic issues
2. Determine who is affected and their rights
3. Determine the most important rights
4. Identify alternative courses of action
5. Identify the likely consequence of each alternative
6. Assess consequences against rights
7. Determine if rights would recommend elimination of some actions
8. Decide the appropriate action
• Independence is fundamental to compliance with the principles of integrity and objectivity.
o Independent does not = internal auditors
• To be perceived as creditable, auditors must be independent in fact and appearance.
o ‘In fact’ means the member must be unbiased and objective.
o ‘In appearance’ means that knowledgeable users of financial statements must believe the auditor is
Major Threats to Independence
• Independence is a state of mind that can be impaired by a number of potential threats.
1. Compensation schemes
• Partners’ compensation in many audit firms based on attracting and keeping clients.
• Partners may feel pressure to accede to client wishes in order to keep them happy.
2. Who is the client?
• Although the client has the authority to hire and fire the auditor, audit firms must reinforce that
maintaining the public trust is more important than retaining a client, where it might appear
that objectivity could be compromised.
• The client is the shareholders
3. Familiarity with the client • Auditors serving a client for several years may develop relationships that cause the auditor to
be less sceptical
o Audit partner has to change every 5 years
o Some suggestion of having to change audit firms completely – can result in a lack of
competence though in understanding the firm
4. Time pressures
• Audits are evaluated on quality, but also on the ability to complete within time budgets.
• May create situations where auditors do not investigate potential problems thoroughly in order
to save time.
o Tendering = lowest bid wins
5. Ability to rationalise
• It takes time to investigate potential misstatements. To save time, an auditor may rationalise
that the misstatement is not likely to be material.
6. Auditing your own work.
• Auditors may provide certain services to non-public companies that put auditor