Ethics

Question 1

Professional Behaviour

What is professional behaviour according to the CIMA Code of Ethics (4)

Answer 1

What is professional behaviour according to the CIMA Code of Ethics?

• Complying with relevant laws and regulations
• Avoiding any conduct that the accountant knows or should know might discredit the profession
• Not engaging in any business, occupation or activity that impairs or could impair the integrity, objectivity or good reputation of the profession
• Ensuring behaviour remains compatible with the fundamental principles

Question 2

Fraud

What is fraud (5)

What is the fraud triangle (3)

Answer 2

Fraud

What is fraud

• The deliberate act of gaining an advantage by knowingly breaking the law
• Ghost employees
• Falsifying invoices
• Inflating expense claims
• Stealing assets and manipulating financial statements for personal or corporate gain

What is the fraud triangle

• Opportunity
• Financial pressure
• Rationalisation

Question 3

Example 1: Norland

Norland Technologies plc is a listed company preparing its financial statements for the year ended 31 December 2025.
The company has experienced a difficult trading year due to an economic slowdown. Sales growth has been lower than expected, and profits are projected to fall below market expectations.
The Finance Director (FD) receives:
A bonus based on reported profit, and
Share options whose value depends on the company’s share price.
Financial analysts have indicated that if Norland reports profits below a key threshold, the share price is likely to fall significantly.

During the year-end financial reporting process, management is reviewing several accounting estimates and judgements:

Allowance for irrecoverable debts

• Some customers are experiencing financial difficulty. The FD suggests reducing the allowance for irrecoverable debts on the basis that “most customers eventually pay.”

Depreciation of non-current assets

• The FD proposes extending the useful life of certain equipment from 5 years to 8 years, arguing that improved maintenance means the assets will last longer than originally expected.

Impairment of assets

• Market conditions indicate that the value of one of Norland’s cash-generating units may have declined. However, the FD believes the downturn is temporary and suggests delaying recognition of any impairment loss until next year.

Requirement:
Using the information in the scenario, discuss how the situation creates a risk of earnings management. In your answer, apply the fraud triangle framework and explain how financial reporting judgements relating to:

• the allowance for irrecoverable debts
• depreciation of non-current assets, and
• impairment of assets

could be influenced.

Answer 3

The situation at Norland shows a clear risk of earnings management, which can be analysed using the Fraud Triangle (pressure, opportunity, rationalisation). While no fraud has yet occurred, the conditions exist that could lead to biased financial reporting.

1. Pressure

• There is significant performance and personal financial pressure on the Finance Director:
• Profits are expected to fall below market expectations
• Analysts predict a share price drop if targets are missed
• The Finance Director’s bonus depends on reported profit
• The Finance Director also holds share options, linking personal wealth to share price
• This creates a strong incentive to increase current-year profits or avoid recognising losses.

2. Opportunity

Opportunity arises because financial reporting involves judgement and estimation, particularly in the areas identified:

• Allowance for irrecoverable debts
• Requires estimation of customer recoverability
• Management could make overly optimistic assumptions to reduce expenses
• Depreciation (useful life of assets)
• Useful lives are based on estimates
• Extending from 5 to 8 years reduces annual depreciation expense, increasing profit
• Impairment of assets
• Requires forecasts of future cash flows and discount rates
• Management could assume the downturn is “temporary” to avoid recognising a loss
• These are all subjective areas where management has discretion, creating the opportunity to influence reported profit without immediately breaching accounting rules.

3. Rationalisation

Management may justify aggressive accounting choices through rationalisation, for example:

• “Most customers eventually pay”
• “improved maintenance means the assets will last longer than originally expected”
• “the downturn is temporary and suggests delaying recognition of any impairment loss until next year”

This combination creates a significant risk of earnings management, where accounting estimates may be intentionally biased to improve reported performance. While this may not yet constitute fraud, it represents the early stage of financial misreporting risk.

Question 4

Bribery and Corruption

What is bribery (1)

What is corruption (4)

Answer 4

Doing thw wrong thing - Bribery and Corruption

What is bribery

• Influencing someone to behave inappropriately by offering money, goods or services

What is corruption

• Deviation from prescribed behaviour, usually for some form of gain
• Abuse of a system for improper purposes
• Bid rigging
• Cartel or influence peddling

Keyword Bank

Bid rigging – Colluding with others to manipulate the bidding process so a predetermined party wins.

Cartel – A group of independent businesses that secretly agree to act together (often fixing prices or limiting competition).

Influence peddling – Using one’s position or connections to improperly influence decisions in exchange for personal gain.

Question 5

Bribery and Corruption – UK Bribery Act

What does the UK Bribery Act 2010 require from organisations (1)

When is an organisation liable for bribery committed by an employee or associate (1)

What must an organisation demonstrate regarding anti‑corruption procedures (1)

Answer 5

Bribery and Corruption – UK Bribery Act

What does the UK Bribery Act 2010 require from organisations

• Introduce sufficient controls to prevent bribery

When is an organisation liable for bribery committed by an employee or associate

• When it cannot show that adequate procedures were in place to prevent bribes being paid

What must an organisation demonstrate regarding anti‑corruption procedures

• That its procedures are sufficient to stop employees, agents and third parties from committing bribery on its behalf

Keyword Bank

Adequate procedures – Internal systems designed to prevent bribery and protect the organisation

Question 6

Conflicts of Interest

What is a conflict of interest when one party benefits (1)

What is a conflict of interest when objectives clash (1)

Answer 6

Conflicts of Interest

What is a conflict of interest when one party benefits

• When someone benefits personally from actions or decisions taken in an official capacity

What is a conflict of interest when objectives clash

• When one party’s actions or objectives are incompatible with those of another party

Keyword Bank

Official capacity – Acting in a role where decisions affect an organisation

Question 7

Resolving Ethical Conflicts

What factors influence how ethical conflicts are resolved (6)

Answer 7

Resolving Ethical Conflicts

What factors influence how ethical conflicts are resolved

• The attitude of the leader and board toward ethical matters, including the tone at the top
• Management or leadership style, such as autocratic vs participative
• Organisational culture and the presence of an ethical code of conduct
• Laws or regulations governing behaviour
• Professional guidelines relevant to the work being performed
• The power and legitimacy of stakeholder groups involved in the conflict

Keyword Bank

Tone at the top – The ethical example set by senior leaders
Leadership style – How managers direct and involve employees
Ethical culture – Shared values and behaviours that guide decisions
Regulations – Legal rules that govern conduct
Professional guidelines – Standards set by professional bodies
Stakeholder power – The influence different groups have over decisions

Question 8

Professions and the Public Interest

What does professional behaviour require from accountants (1)

What are the most important obligations of a professional accountant (2)

What is the public interest in the context of professional accounting (1)

Answer 8

Professions and the Public Interest

What does professional behaviour require from accountants

• Complying with relevant laws and regulations and avoiding conduct that could discredit the profession

What are the most important obligations of a professional accountant

• Maintaining confidentiality
• Upholding ethical standards, including acting in the public interest

What is the public interest in the context of professional accounting

• The collective wellbeing of the community and institutions served, including clients, lenders, governments, employers, employees, investors, and the wider business and financial community

Question 9

Fundamental Ethical Principles

What are they and what do they mean (1,3,2,3,1)

Answer 9

Fundamental Ethical Principles

What is confidentiality

• Respecting the confidentiality of information obtained through professional or business relationships

What is objectivity

• Exercising judgement without being compromised by bias
• Avoiding conflicts of interest
• Avoiding undue influence or reliance on individuals, organisations, technology or other factors

What is professional competence and due care

• Maintaining the knowledge and skill needed to provide competent service based on current standards and legislation
• Acting diligently and in accordance with applicable technical and professional standards

What is professional behaviour

• Complying with relevant laws and regulations
• Acting in a manner consistent with the responsibility to serve the public interest
• Avoiding conduct that could discredit the profession

What is integrity

• Being straightforward and honest in all professional and business relationships

Remember COPPI

Question 10

Threats to Fundamental Principles

What are they and what do they mean (1,1,1,1,1)

Answer 10

Threats to Fundamental Principles

What is the familiarity threat

• Becoming too sympathetic or accepting due to a long or close relationship with the client

What is the advocacy threat

• Promoting a client or employer’s position so strongly that objectivity is compromised

What is the self‑interest threat

• Allowing financial or other personal interests to inappropriately influence judgement or behaviour

What is the self‑review threat

• Failing to properly evaluate work or judgements previously made by oneself or the organisation, then relying on that work again

What is the intimidation threat

• Being deterred from acting objectively due to actual or perceived pressure or undue influence

–

Remember FASSI

Question 11

Safeguards

What types of safeguards help eliminate or reduce ethical threats (3)

Answer 11

Safeguards

What types of safeguards help eliminate or reduce ethical threats (3)

• Safeguards created by the profession, legislation or regulation (e.g., corporate governance requirements)
• Safeguards within the client or accountancy firm’s internal systems and procedures
• Educational training, professional experience and ongoing CPD requirements

Keyword Bank

Corporate governance – Systems and rules that guide how organisations are controlled
CPD (Continuing Professional Development) – Ongoing learning to maintain professional competence

Question 12

Ethical Considerations in Financial Reporting

What is professional competence in financial reporting (1)

What factors can reduce professional competence and due care (4)

What threatens objectivity and integrity in financial reporting (2)

When might accountants be pressured into unethical reporting (1)

When should accountants refuse to be associated with information (4)

Answer 12

Ethical Considerations in Financial Reporting

What is professional competence in financial reporting

• Keeping technical knowledge up to date to make appropriate accounting and disclosure decisions

What factors can reduce professional competence and due care

• Insufficient time
• Incomplete, restricted or inadequate information
• Insufficient experience, training or education
• Inadequate resources

What threatens objectivity and integrity in financial reporting

• Financial interests such as bonuses or share options
• Inducements that encourage unethical behaviour

When might accountants be pressured into unethical reporting

• When pressured externally or for personal gain to be associated with misleading information

When should accountants refuse to be associated with information

• When it contains misleading information
• When statements are furnished recklessly
• When information is prepared with bias
• When information is omitted or obscured in a misleading way

Question 13

IAS 1 and Fair Presentation

What does IAS 1 require regarding fair presentation (1)

When are departures from IFRS permitted (2)

What disclosures does IAS 1 require about IFRS compliance (1)

When can financial statements be described as complying with IFRS (1)

Can inappropriate accounting policies be fixed by disclosure (1)

Answer 13

IAS 1 and Fair Presentation

What does IAS 1 require regarding fair presentation

• Financial statements must present fairly, and fair presentation is assumed when IFRS is fully applied

When are departures from IFRS permitted

• Only in extremely rare cases
• When compliance with IFRS would be misleading

What disclosures does IAS 1 require about IFRS compliance

• Entities must disclose that they comply with IFRS

When can financial statements be described as complying with IFRS

• Only when they meet all IFRS requirements

Can inappropriate accounting policies be fixed by disclosure

• No — inappropriate policies cannot be corrected through disclosure or explanatory notes

Question 14

Framework for Decisions

What should be identified first when making an ethical decision (1)

What should be considered after establishing the facts (1)

What must be assessed regarding ethical principles (1)

What internal support should be checked (1)

What should be evaluated before deciding (1)

What final self‑check should be applied before acting (1)

Answer 14

Framework for Decisions

What should be identified first when making an ethical decision

• The relevant facts

What should be considered after establishing the facts

• The ethical issues involved

What must be assessed regarding ethical principles

• Which fundamental principles are threatened

What internal support should be checked

• Whether internal procedures exist that mitigate these threats

What should be evaluated before deciding

• The alternative courses of action

What final self‑check should be applied before acting

• Whether you can look yourself in the mirror after making the decision and applying safeguards

Question 15

Example: Kelshall

Kelshall is a plc. The current year end is 31 December 2025. The finance director is remunerated with a profit related bonus and share options.
Kelshall owns a number of properties which have been historically held under IAS 16 Property, Plant & Equipment’s revaluation model. Recently, due to an economic downturn, property prices have been falling significantly.
Shortly before the year end, Kelshall’s CEO, who holds a large number of share options, told the Finance Director that he was hoping to retire next year and was keen to maximise Kelshall’s share price by his retirement date.

1. Discuss the view that the board of directors should be remunerated with profit-related pay & share options to align directors’ and stakeholders’ interests.
2. Discuss whether the Finance Director of Kelshall would be acting ethically if he revised the accounting policy for its properties from the revaluation model to the cost model.
3. Discuss whether the CEO’s comment to the Finance Director is ethical and what action, if any, the finance director should take.

Answer 15

Discuss the view that the board of directors should be remunerated with profit-related pay & share options to align directors’ and stakeholders’ interests.

• Directors work agent for shareholders so their interests should be aligned.
• Shareholders interested in profitability & share price.
• Bonuses are based on ST profits – might encourage short term strategies detrimental to LT sustainability
• Share options – tend to be based on longer term company performance less likely to be affected by short termism
• Cash based remuneration no incentive to maximise returns for shareholders

Discuss whether the Finance Director of Kelshall would be acting ethically if he revised the accounting policy for its properties from the revaluation model to the cost model.

• Change of accounting policy only permitted if either required by IFRS or will provide more relevant/reliable information
• Directors need to act with integrity and professional competence (complying with the standards/Framework)
• Unethical behaviour if FD is doing this to maximise his remuneration
• Policy may not improve profits (losses on revalued properties recognised in OCI first then P/L)

Discuss whether the CEO’s comment to the Finance Director is ethical and what action, if any, the finance director should take.

• Both bound by code of ethics. Should be acting in best interest of shareholders.
• CEO pressure is a threat to integrity and objectivity.
  
  • FD should speak to CEO & explain cannot change accounting policies
  • Document everything!!!
  • Raise concerns with other directors/audit committee
• If FD complies with CEO request then this would constitute unethical behaviour.