Question Tag: Ethical Dilemmas

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  • 5 Marks

FR – April 2022 – L2 – Q5c – Professional and Ethical Issues in Financial Reporting

Discuss safeguards for mitigating threats to ethical behavior in the context of tax compliance.

Question:
Michael Onipa, a Chartered Accountant, is under pressure from his employees to under declare sales for the year ended 2021 to save the company from paying the due tax for the year. He has evaluated the threat to his professional obligations to comply with the fundamental principles of good ethical behavior, as significant. He has therefore considered safeguards to eliminate or reduce the threat to an acceptable level.

Required:
Discuss TWO (2) safeguards Michael Onipa could consider to either eliminate or reduce the threats to an acceptable level.
(5 marks)

    1. Self-Interest Threats:
    Self-interest threats may occur as a result of Mr. Onipa’s financial interest. This might be his only source of employment, and he might have concerns about employment security. Such financial interests might cause Mr. Onipa to be reluctant to take actions that would be against his own financial interests.

  • Safeguards: Consultation with superiors within the employing organization, for example, the audit committee or other body responsible for governance, or with ICAG.

    • 2. Advocacy Threats:
    Mr. Onipa as an employee is expected to promote the employer’s position by providing financial information as long as information provided is neither false nor misleading. Any false or misleading information might create an advocacy threat.

  • Safeguards: Mr. Onipa should refuse to remain associated with information that may be misleading. If the pressure is persistent, he should consider informing appropriate authorities in line with the guidance in the code of ethics. He may also wish to seek legal advice or resign.

    • 3. Intimidation Threats:
    Intimidation threats occur when Mr. Onipa entertains fears that there is aggressive and dominating pressure from his employer to act unethically. There might be threats of dismissal or replacement over a disagreement about the application of an accounting principle or the way in which financial information is to be reported.

  • Safeguards: Consultation with the audit committee, if they have one, the board, or with ICAG. He may also wish to seek legal advice or resign.

    • (Total: 5 marks)

  • 10 Marks

CR – Nov 2019 – L3 – Q3c – Regulatory framework and ethics

Identify ethical challenges for a finance director in finalizing financial statements and recommend actions in compliance with IFAC’s Code of Ethics.

c) Fiagja Ltd is a retail trading company in Ghana. Nana Yaw Kawula (member of ICAG) is the finance director and has been in this role for many years. Fiagja Ltd has a year-end of 30 June each year. Nana Yaw Kawula is finalizing the financial statements for the year ended June 30 2019.

On one hand, the warehouse manager of Fiagja Ltd has recently advised Nana Yaw Kawula of a significant level of slow-moving inventory, and that the inventory in question is now more than seven months old and per the company policy would usually have been written down some months previously.

On the other hand, the shareholders of Fiagja Ltd are trying to sell the company, and the Chief Executive Officer (CEO) who happens to be the majority shareholder of Fiagja Ltd has told Nana Yaw Kawula that it is not necessary to write down the inventory values in the year-end financial statements.

Nana Yaw Kawula is sure that the CEO wants the financial statements to carry an inflated inventory valuation because he has found a prospective buyer for the company. The CEO has indicated to Nana Yaw Kawula that, if the proposed deal is indeed successful, all employees will keep their jobs (including Nana Yaw Kawula) and the finance director (Nana Yaw Kawula) will receive a pay rise.

Required:
i) Explain how the finance director could potentially act in order not to breach the fundamental principles of the IFAC’s code of ethics. (5 marks)
ii) Recommend the possible actions that the finance director should take as a member of the Institute of Chartered Accountant (Ghana) in dealing with this ethical dilemma. (5 marks)

i) Avoiding Breach of Fundamental Principles (5 marks):

The IFAC Code of Ethics outlines several fundamental principles that the finance director, Nana Yaw Kawula, must uphold:

  1. Integrity:
    • The principle of integrity requires Nana Yaw Kawula to act with honesty and transparency. Misrepresenting the inventory value to meet the CEO’s desire would violate this principle. He should ensure that the financial statements present a true and fair view, without misleading information.
  2. Objectivity:
    • Nana Yaw Kawula must remain unbiased and independent in his judgment. The promise of a pay rise and the CEO’s influence may create a self-interest threat. He must reject any pressure to manipulate financial information for personal or corporate gain.
  3. Professional Competence and Due Care:
    • The inventory should be written down in accordance with company policy and IAS 2 (Inventory), which states that inventory should be carried at the lower of cost and net realizable value. Nana Yaw Kawula has the professional responsibility to apply this standard without deviation.
  4. Confidentiality:
    • Nana Yaw Kawula should ensure that any discussions about the financial misrepresentation remain confidential and follow proper channels within the organization.
  5. Professional Behaviour:
    • As a professional accountant, Nana Yaw Kawula must avoid any actions that could discredit the profession. Misstating financial information could harm his reputation and that of Fiagja Ltd. He should ensure that his actions uphold the ethical standards expected of him as a member of ICAG.

ii) Possible Actions to Address the Ethical Dilemma (5 marks):

Nana Yaw Kawula should take the following steps to resolve the situation ethically:

  1. Discuss the Matter with the CEO:
    • Nana Yaw Kawula should communicate his concerns to the CEO, explaining the ethical and legal implications of misstating the inventory value. He should emphasize the importance of adhering to accounting standards (IAS 2) and the potential consequences of providing false financial information.
  2. Involve Other Senior Management or the Board:
    • If the CEO persists in pressuring him, Nana Yaw Kawula should escalate the issue to the board of directors or an audit committee. He should ensure that his concerns are documented to protect himself and the company.
  3. Seek Advice from ICAG:
    • Nana Yaw Kawula can seek advice from the Institute of Chartered Accountants, Ghana (ICAG), to ensure that his actions are consistent with the IFAC Code of Ethics and professional standards.
  4. Consult the Company’s External Auditors:
    • Nana Yaw Kawula could consult the external auditors to provide an independent perspective on the matter. The auditors can offer guidance on how to handle the situation without breaching ethical principles.
  5. Document the Issue:
    • It is crucial for Nana Yaw Kawula to document all discussions and decisions related to the inventory valuation issue. This record will provide protection if the matter escalates or if regulatory bodies investigate the situation.
  6. Consider Resignation as a Last Resort:
    • If the CEO insists on misstating the financial statements, Nana Yaw Kawula may need to consider resignation as a last resort. Remaining in a situation where he is forced to act unethically could damage his professional reputation and lead to disciplinary actions.

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