The Essential Role of Ethics to Public Trust and a More Sustainable World

What goes around comes around.

“Corporate reporting is the most relevant element supporting the economic decisions of all stakeholders.”

Living in an Age of Transparency

We have watched as the call for companies to adopt ethical behaviours has increased dramatically recently. The rapid and pervasive growth of sustainability goals, framed by the United Nations Sustainable Development Goals (SDG), has been pushing this trend. More widely, though, there is an increasing scrutiny among stakeholders regarding self-interested management, biased and short-term-focused results (namely to serve management remuneration purposes), and corruption, bribery, and fraud in the business and financial sector.

The systematic need for governments and the state budget to bail out the losses also rebounds negatively on citizens as taxpayers, users and beneficiaries of public goods and services. We are living in an age of transparency and the public is becoming more aware of the high (short and long-term) costs of wrongdoing in the corporate sector, for the individual citizen, and the entire system.

Subjectivity of Ethics & The Role of Guideposts

Ethics is mostly an individual choice, and subjective in nature, even when there are some indisputable ethical principles, inherent to the basic organization of the companies, economy, and society. The natural subjectivity of ethical values, therefore, requires the guideposts of robust ethics standards by which all professional accountants must abide.

Companies per se do not make choices or distinguish between right and wrong, nor are they able to make ethical judgments and assessments. Companies’ actions and culture are by nature defined by the ethical or unethical choices and decisions of those individuals responsible for the companies’ operations, management, or governance. But the individual ethical or unethical performance of accountants is strongly influenced by the culture of the companies and firms in which they work. Accountants are at the same time important transformation agents of the companies and firms culture.

Reputational Risks Hovering Over Accounting Firms

The trust crisis has also been affecting accounting firms. There is a concerning reputational risk hovering over the firms, with concerning impacts also on their ability to be, and be seen to be, stimulating and dynamic places to work for the purpose-driven younger generations.

The Five Fundamental Principles of the Code

• Integrity: Being straightforward and honest in all professional and business relationships.
• Objectivity: Not compromising professional or business judgments because of bias, conflict of interest, or undue influence.
• Professional Competence and Due Care: Attaining and maintaining professional knowledge and skill, and acting diligently in accordance with applicable standards.
• Confidentiality: Respecting the confidentiality of information acquired as a result of professional and business relationships.
• Professional Behaviour: Complying with relevant laws and regulations and avoiding any conduct that the accountant knows or should know might discredit the profession.

Navigating Everyday Decisions and Acute Ethical Dilemmas

The fundamental principles provide a robust framework against which professional accountants may and should make decisions:

• Day-to-day decisions: The rigor of analysis, the inquiring mind applied, the search for additional information, and the courageous challenge of management-provided information.
• Confidentiality vs. Public Duty: Balancing the professional duty of confidentiality against the ethical duty to report suspected illegal actions by the company or client (subject to applicable law).
• The Decision to Quit: Deciding to resign or withdraw after having exhausted all avenues to resolve an acute ethical dilemma.
• Tax Planning Perplexities: Navigating complex tax planning services against the public interest dimension of clients paying tax dues according to the law’s intent.
• Auditor Independence: Resolving independence dilemmas in firm governance, work organisation, or in providing Non-Assurance Services (NAS) to audit clients.

Remaining Agile: The Landmark NOCLAR Standard

An example of the improvements in the Code is the NOCLAR standard (Non-compliance with Laws and Regulations). NOCLAR is a ground-breaking response by IESBA to provide auditors and other professional accountants with a robust framework to guide them in what actions to take in the public interest when they become aware of a suspected NOCLAR committed by a client or employer.

The IESBA is also working resolutely to “future-proof” the Code. The rapid and deep transformations in the external environment can’t be disregarded. The remaining relevant situation requires IESBA to respond appropriately and in a timely fashion to the changing needs and demands of the end-users of financial and non-financial information.

Advances in the use of digital and technological innovations across the financial sector (e.g., artificial intelligence, blockchain, crypto-assets, digital reporting) are already impacting financial reporting and approaches to accounting. Emerging technologies are changing the financial reporting environment substantially, creating great opportunities, but also new risks and responsibilities in preparing and assuring financial information, namely on the ethical dimension of the work.

Being conscious of the need to respond to the challenges arising from technology, IESBA is working on a project to address the ethical implications of technological innovations on the accounting, assurance and finance functions. Important revisions to the Code are being considered to address many of these developments, including in the areas of professional competence and due care, confidentiality, dealing with complex circumstances involving technology, using or relying on the output of technology, and auditor independence. Specifically, about the latter, some areas such as Non-Assurance Services (NAS), close business relationships, and data hosting are under analysis.

Sustainability is another critical element of challenge and transformation for the accountancy profession. In recent years, investors have been increasingly focused on information that provides a better understanding of a company’s long-term value creation and enables them to allocate capital to businesses perceived as more sustainable. As a response, financial markets have seen accelerated growth in the disclosure of sustainability information, a demand-driven regulatory euphoria in this respect, and an increasing call for assurance to be provided. As this information is increasingly used in capital allocation decisions, it must be as reliable as existing financial information, so that there can be justifiable public confidence in what is reported.

Responding to the rapidly changing landscape and recent developments, as well as to the need to promote trust through a robust and unequivocal ethical approach, the IESBA has identified sustainability reporting and assurance as a strategic and urgent focus area. Alongside awareness-raising activities to explain how extant provisions in the Code apply when preparing, presenting, or assuring sustainability information, the IESBA is already addressing deeper ethical implications arising from the production, reporting, and assurance of sustainability information, anticipating a likely need for standard-setting in this area in the near future.

Another innovative area of focus for the IESBA is tax planning. While it is not a new topic, heightened public attention in recent years―including discussions on the G20 agenda―has focused on the topic of “aggressive” tax avoidance in the light of revelations of stark tax avoidance cases linked to alleged or actual unethical tax planning services, with strong negative impacts on the reputation of professional accountants and in the trust of the community in businesses.

At the same time, there is a significant shift in investor concerns, as well as societal expectations, for companies to pursue more sustainable business models, and an increasing recognition that there is greater value in the notion of companies pursuing “profitable solutions for the people and the planet” than in serving exclusively the interests of shareholders. In this regard, tax planning has become an important part of the increasing focus among investors and other stakeholders regarding the impact of businesses on the environment and the citizens.

Additionally, there is both a greater awareness among stakeholders as well as a shift in perceptions regarding what it means for a professional accountant to act in the public interest. What may have been regarded as creative and skilful tax planning in the past may now be perceived differently. The IESBA is sensitive to these changes and is working on a new ethics standard in tax planning to provide accountants with a strong baseline of ethical principles to perform tax planning services, set against the backdrop of evolving societal perceptions and novel thought-leadership proposals for companies not to make profit at the cost of the citizens.

The existence and continued improvement of robust ethics standards, namely the IESBA’s international Code of Ethics, provides the accounting firms with the necessary support to ensure an ethical approach to accountancy and assurance performance, fostering confidence in their work.

“Ultimately, the IESBA’s International Code of Ethics is the profession’s reputational shield and armour, a beacon to capturing and retaining the valuable talent that will sustain its growth and vitality, and the unmistakable ensign of the public trust it has laboriously earned throughout its existence and must continue to reinforce and protect.”