Topic: Regulatory Framework and Ethics

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  • 6 Marks

CR – May 2019 – L3 – Q5c – Regulatory framework and ethics

The question asks for four reasons why the IASB found it necessary to revise the conceptual framework, as part of its effort to improve financial reporting.

The Framework for the Preparation and Presentation of Financial Statements was originally issued in 1989. In 2004, the IASB and the FASB decided to review and revise the conceptual framework. However, this decision changed priorities and the slow progress in the project led to the project being abandoned in 2010. This was after only Phase A of the original joint project was finalized and introduced into the existing framework as Chapters 1 and 3 in September 2010.
The current form of the conceptual framework as at May 2018 provides a revised and complete version of the framework.

Required:
Explain FOUR (4) primary reasons why the IASB believed it was necessary to revise its conceptual framework. (4 marks)

Four Primary Reasons Why the IASB Revised the Conceptual Framework:

  1. Gaps and Outdated Concepts in the Original Framework:
    The original conceptual framework, issued in 1989, was incomplete in several areas, and many of its concepts were outdated. The revised framework was necessary to fill these gaps, ensure consistency, and address new developments in financial reporting, such as emerging issues related to fair value accounting, measurement uncertainties, and more complex financial instruments.
  2. Need for Clearer Guidance on Key Areas:
    There was a growing demand from users of financial statements, preparers, and standard-setters for clearer and more comprehensive guidance on fundamental areas like the definition of assets and liabilities, recognition criteria, and measurement bases. The revised framework aimed to clarify these key elements, which are crucial for the consistent application of financial reporting standards.
  3. Improving Consistency Across Standards:
    The IASB recognized that certain inconsistencies had emerged between the conceptual framework and some IFRS standards. The revision sought to ensure that the framework is consistent with existing and future standards, thus helping to avoid conflicts and provide a solid foundation for developing new standards and interpreting existing ones.
  4. Enhancing Decision-Usefulness for Users of Financial Statements:
    The primary objective of financial reporting is to provide information that is useful to investors, creditors, and other users in making decisions. The revision of the framework aimed to strengthen the focus on decision-usefulness by refining the qualitative characteristics of useful financial information (such as relevance and faithful representation) and ensuring the framework remains aligned with the evolving needs of financial statement users.
  • 10 Marks

CR – May 2019 – L3 – Q5b – Regulatory framework and ethics

The question requires identifying and discussing the ethical issues arising from conflicts of interest, board dynamics, and related party transactions within Bolgatanga Ltd and how to address them appropriately.

Bolgatanga Ltd (Bolgatanga), currently operating in the biotechnology research and healthcare sector, is a Ghanaian listed company which prepares financial statements in accordance with International Financial Reporting Standards (IFRS) up to 31 December each year. On 1 January 2015, Bolgatanga acquired 80% interest in Wa Ltd (Wa). You are a newly qualified accountant at Bolgatanga and report directly to Mr. Dominic Atubiga, the Financial Controller (FC). Early 2017, Bolgatanga acquired Sissala Ltd (Sissala), a private company, and has recently had an application for additional funds rejected from its current bankers on the basis that there are insufficient assets to offer security.

You have been reviewing the minutes of Bolgatanga’s last board meeting, dated 28 December 2017. The minutes indicate that the sales director resigned on 1 December 2017. In her resignation letter to the board, the sales director states that she can no longer work with Dominic Atubiga, who is dominating the board and allowing a close friendship with, and advice from, Salifu Adams (Managing Director of Sissala) to compromise his judgement.

The Human Resources department is currently in the process of recruiting a new sales director. Dominic Atubiga tells the board that, in the interim, the marketing department will just have to cope until a replacement sales director is appointed. Speaking to other staff in Bolgatanga, you have become aware that the wife of the Managing Director of Bolgatanga is a partner in Brother and Co., a firm of solicitors which the company uses to provide legal advice in relation to the market development activities of Wa. However, Brother and Co. has confirmed that the FC’s wife works in a different division and that she has no involvement in the services provided. It is your understanding that legal fees of GH¢500,000 (included in administration expenses) were paid by Bolgatanga to Brother and Co. during the year ended 31 December 2017.

Required:
Discuss the ethical issues arising from the information provided, and the appropriate steps to address them.

Ethical Issues Arising:

  1. Conflict of Interest (Friendship Influence on Board Decisions):
    The relationship between the Financial Controller, Dominic Atubiga, and Salifu Adams, the Managing Director of Sissala Ltd, raises a potential conflict of interest. The sales director’s resignation letter suggests that Atubiga’s judgment may be compromised due to his close friendship with Adams. The conflict arises because decisions regarding Sissala might be influenced by personal relationships rather than what is best for Bolgatanga Ltd.

    Step to Address:

    • The board should review the governance structure to ensure decisions are made objectively, free from personal biases. A formal policy on conflicts of interest should be implemented or strengthened, requiring disclosure of personal relationships that may affect decision-making.
  2. Leadership and Board Governance Issues:
    The resignation of the sales director indicates governance issues, particularly with how Dominic Atubiga’s leadership is perceived. His statement that the marketing department will have to “cope” until a new sales director is appointed suggests a lack of strategic leadership and disregard for potential operational risks due to the vacancy.

    Step to Address:

    • The board needs to ensure that leadership changes are handled strategically to avoid operational disruption. An interim plan for marketing leadership should be devised until the position is filled, with clear responsibilities assigned to maintain smooth operations.
  3. Related Party Transactions (Legal Services Provided by Brother and Co.):
    The legal fees paid by Bolgatanga to Brother and Co., where the wife of Bolgatanga’s Managing Director is a partner, constitutes a related party transaction. Although the FC’s wife works in a different division of the firm, the relationship still creates a perception of bias or undue influence, which should be addressed to ensure transparency and fairness.

    Step to Address:

    • The related party transaction must be disclosed in accordance with IAS 24 to ensure transparency in financial reporting. The company should ensure that all related party transactions are conducted at arm’s length and are fully disclosed in the financial statements.
  4. Corporate Governance and Professional Ethics (Board Dominance):
    The dominance of the Financial Controller, as mentioned in the sales director’s resignation letter, suggests poor governance practices where one individual exerts too much control over board decisions. This undermines the principle of collective decision-making and could lead to poor judgment or biased decisions, which is against good corporate governance practices.

    Step to Address:

    • The board should ensure that its governance structures promote balanced decision-making. Implementing formal governance guidelines and independent oversight would help distribute power and prevent any one individual from dominating decisions. An audit or governance review could help identify weaknesses in the board’s operation.
  5. Lack of Clear Strategic Response to Bank Rejection:
    Bolgatanga Ltd had its request for additional funds rejected due to insufficient assets to offer as security. This could indicate underlying financial issues or poor asset management, suggesting that the company may not have a strong financial position.

    Step to Address:

    • The company should re-evaluate its financial strategy, including exploring other financing options or improving asset management. Additionally, clearer communication with stakeholders, including the banks, might help in securing future funding. Strategic financial planning should be prioritized to address asset management concerns.

Conclusion:

The ethical issues identified relate to conflicts of interest, board governance, leadership, and related party transactions. To address these, Bolgatanga Ltd should implement formal governance structures, disclose related party transactions transparently, and ensure that leadership changes and financial strategies are aligned with ethical standards and good corporate governance practices.

  • 10 Marks

CR – May 2018 – L3 – Q5b – Regulatory Framework and Ethics

Identify the ethical issue related to inventory adjustment and explain the Finance Manager’s course of action.

The Finance Manager of Integrity Sports, a Takoradi-based manufacturer and retailer of sporting goods, prepares quarterly accounts for his boss, the Finance Director. At the end of the first quarter of 2017, the Finance Manager identified that net assets were below the level required by a bank covenant that the company had entered into with Unique Bank. He therefore alerted the Finance Director to this. The following week, the Finance Manager identified that amended quarterly accounts had been sent to the bank by the Finance Director, in which the inventory figure had been increased. The same issue arose at the end of the second quarter of 2017, and again the Finance Manager noted that the accounts sent to the bank included a different inventory figure from those that he had prepared the previous week. The Finance Manager is sure that cut-off procedures and valuation were correctly adhered to and this was done under his supervision. He therefore asked the Finance Director why the figures had changed, and the Finance Director responded:

“The adjustment is just for some goods held at one of our customer’s retail premises – we missed it out from the stock count. Don’t worry, I’ve got it all in hand!”

The Finance Manager then reviewed the contract with the customer in question and noted that it clearly states that the customer will be supplied with goods as ordered and has no right of return in the case of unsold goods. He also noted that Integrity Sports has sold goods to this customer for a number of years on the same terms, and no adjustment has ever been made before. Both the Finance Manager and Finance Director are Chartered Accountants.

Required:
i) Explain why the inventory adjustment suggests an ethical issue. (6 marks)
ii) Explain FOUR courses of action that the Finance Manager should take in respect of the issue that he has identified. (4 marks)

i) Ethical Issue in Inventory Adjustment:
The inventory adjustment made by the Finance Director raises a significant ethical concern because it appears to violate accounting principles and ethical standards. Here’s why:

  1. Violation of Revenue Recognition Principles:
    Under IAS 18, revenue is recognized when the significant risks and rewards of ownership are transferred to the buyer, which in this case, happens when the goods are delivered. The Finance Manager reviewed the contract and found that the customer had no right of return on unsold goods. This implies that the goods had been sold, and any inventory adjustment is inappropriate since it would inflate the closing inventory figure and reduce the cost of sales. This misrepresentation results in an artificially increased profit.
  2. Breach of Bank Covenant:
    The inventory adjustment seems to have been made deliberately to meet the net asset requirement of the bank covenant. Inflating inventory to avoid breaching the covenant is a form of financial manipulation and misrepresentation, which is unethical and could lead to legal consequences if discovered.
  3. Professional Integrity and Objectivity:
    As both the Finance Director and Finance Manager are Chartered Accountants, they are bound by the Code of Ethics for Professional Accountants (issued by IFAC), which requires accountants to act with integrity and objectivity. Manipulating inventory values to meet external covenants compromises the integrity of financial reporting and misleads stakeholders, including the bank, shareholders, and regulators.
  4. Potential Personal Gain:
    The Finance Director may be attempting to manipulate the financial statements to present a healthier financial position for personal or corporate gain, such as avoiding penalties from the bank or preserving the company’s credit facilities. This type of action is in direct conflict with ethical standards and fiduciary responsibilities.

(6 marks for explaining the ethical issues)

ii) Courses of Action for the Finance Manager:
As a qualified Chartered Accountant, the Finance Manager is obligated to act ethically and professionally. Here are four courses of action he should take:

  1. Gather All Relevant Facts:
    The Finance Manager should first ensure that he has all the facts regarding the inventory adjustment. This may involve reviewing contracts, invoices, and the original stock count to confirm that the adjustment is indeed improper. It is essential to have a clear understanding before taking further steps.
  2. Discuss the Issue with the Finance Director:
    The Finance Manager should have a direct conversation with the Finance Director to express his concerns about the ethical and financial reporting implications of the inventory adjustment. This discussion should emphasize the professional and legal consequences of manipulating financial statements, including potential breaches of accounting standards and bank covenants.
  3. Escalate the Issue to a Higher Authority:
    If the Finance Director does not respond appropriately, the Finance Manager should escalate the issue to a higher authority within the company, such as the Board of Directors or the Audit Committee. These parties have oversight responsibilities and can intervene to ensure that the financial statements are prepared in accordance with ethical standards and accounting principles.
  4. Consult External Auditors or Regulatory Bodies:
    If internal escalation fails to resolve the issue, the Finance Manager should consider informing the company’s external auditors or relevant regulatory bodies. External auditors have a duty to ensure that financial statements are fairly presented and may take corrective action if they discover financial manipulation. In extreme cases, regulatory bodies may need to be informed of the unethical practices.
  • 10 Marks

CR – April 2022 – L3 – Q3b – Regulatory framework and ethics

Explain the ethical principles involved in the given scenario and recommend the appropriate actions based on the IFAC Code of Ethics.

b) You are a newly qualified accountant in your fifth year of employment in a limited liability company. Your immediate supervisor has been on sick leave, and you are due for study leave. You have been told by the Finance Director that, before you go on leave, you must finish a task that should have been completed by your immediate supervisor. The deadline suggested to complete the task appears unrealistic, given the complexity of the task.

You feel that you are not sufficiently experienced to complete the task alone and would need additional supervision to complete it to the required standard. The Finance Director appears unable to offer the necessary support in this regard. Should you try to complete the work within the proposed timeframe but fail to meet the expected quality, you could face repercussions on your return from study leave. You feel slightly intimidated by the Finance Director and also feel pressure to do what you can for the company in these challenging times.

Required:

i) Using the IFAC Code of Ethics as a guide, explain the ethical principles that apply in the above scenario. (5 marks)

ii) Recommend the possible actions that you should take as a member of the Institute of Chartered Accountants, Ghana (ICAG), in dealing with this ethical dilemma. (5 marks)

i) Ethical Principles:

  1. Integrity:
    You need to be open and honest about the situation with your Finance Director. You need to be straightforward with your Finance Director since it will not be right to attempt to complete work that is technically beyond your abilities, without proper supervision.
    In the first instance, you should attempt to resolve the issue with your Finance Director, although it may be necessary to involve the person responsible for training within the practice. You might, at an appropriate stage, suggest that the client be involved.
  2. Objectivity:
    The short period of time given to perform the work puts undue pressure on the trainee accountant, which breaches the principle of objectivity. There may be an element of bias towards the trainee accountant by his or her Finance Director.
  3. Professional Competence and Due Care:
    You are not technically competent in the complicated work given to you and while you will be learning on the job, the timeline is too tight to be able to exercise due diligence. It is virtually impracticable to complete the work within the time available and still act diligently to achieve the required quality of output. Discuss with the Finance Director supervisory arrangements and support to avoid doing poor work.
  4. Professional Behaviour:
    The practice firm that employs you is small and under pressure due to the sickness of a member of staff. However, the work you are being asked to perform is beyond the usual ability of a trainee at your level. Determine whether the deadline can be extended; when your colleague is expected to return from sick leave; and what other resources might be available to the practice. Consider the policies and procedures of the practice, as well as your professional body’s code of ethics. You cannot refuse to do the work as this will damage your reputation, and the reputation of the firm will also suffer if you attempt to perform the work without sufficient knowledge and support. Therefore, avoid discrediting yourself, the practice firm you work for, and the accountancy profession in general.

(4 points @ 1.25 marks each = 5 marks)

ii) Possible Actions:

  1. Explain to the Finance Director:
    You should explain to your Finance Director that you do not have sufficient time and experience to complete the work to a satisfactory standard. However, you should demonstrate a constructive attitude and suggest how the problem may be resolved. (Your professional body is available to advise you in this respect.) For example, you might suggest the use of a subcontract bookkeeper, or contacting the client to inquire if the deadline might be extended so that the work may be performed when you return from study leave or when your colleague returns from sick leave. You might also explore the possibility of assigning another member of staff to supervise your work.
  2. Seek support from a supervisor:
    If you feel that your Finance Director is being unsympathetic or simply fails to understand the issue, you should consider how best to raise the matter with the person within the practice responsible for training. It would be diplomatic to suggest to your Finance Director that you raise the matter together and present your respective views. This would have the added advantage of involving a third party.
  3. Avoid unethical action:
    It would be unethical to attempt to complete the work if you doubt your competence. However, simply refusing to, or resigning from your employment, would cause significant problems for both you and the practice. You could consult your professional body. If you seek advice from outside the practice (for example, legal advice), you should be mindful of the need for confidentiality as appropriate.
  4. Document all steps taken:
    You should document, in detail, the steps that you take in resolving your dilemma, in case your ethical judgment is challenged in the future.

(4 points @ 1.25 marks each = 5 marks)

  • 6 Marks

CR – Nov 2018 – L3 – Q5c – Regulatory framework and ethics

Evaluate the finance director's suggestion to early adopt a revised accounting standard for Navrongo Ltd’s 2018 financial statements.

You are the financial controller of Navrongo Ltd (Navrongo), a company that experienced a relatively difficult trading during the year ended 30 September 2018. Reporting deadlines for the 2018 financial statements are rapidly approaching, and you have a number of matters to finalize. The finance director made the following suggestion in an email:

“A revised accounting standard that is relevant to Navrongo is expected to be issued by the IASB during the 2019 calendar year. Based on the content of the corresponding exposure draft, the revisions to the accounting standard would be beneficial to Navrongo in the year of adoption. The 2018 Navrongo financial statements should be prepared using the proposed new accounting standard on the basis of voluntary early adoption of the new standard.”

Required:
Explain to the finance director, justifying whether you agree or disagree with the suggestion above

  • General Rule on Adoption of New Accounting Standards:
    • The International Accounting Standards Board (IASB) typically issues new or revised standards with a specific effective date, which is often in a future reporting period. Until the standard is formally issued, it remains in exposure draft form, which is not authoritative and cannot be applied in financial statements.
    • Based on this, it is generally not appropriate to adopt an exposure draft or a proposed standard that has not yet been finalized or issued by the IASB for use in the 2018 financial statements.
  • Voluntary Early Adoption:
    • IFRS allows for voluntary early adoption of a standard, but this applies only when the standard has been officially issued and an effective date is specified. In this case, the standard is expected to be issued in 2019, and until it is formally published, Navrongo Ltd cannot apply the provisions of the exposure draft to its 2018 financial statements.
    • Therefore, the finance director’s suggestion to apply the proposed new standard in the 2018 financial statements is not valid as the standard is not yet in force.
  • Impact on Comparability and Credibility:
    • Applying an exposure draft would affect the comparability of the financial statements with other companies that are following the current applicable standards. Users of the financial statements may find it difficult to understand the financial statements if an unofficial standard is used.
    • Additionally, this could impact the credibility of Navrongo Ltd’s financial reporting, as it would be seen as using unapproved standards, which could lead to questions from auditors and regulators.
  • Ethical and Professional Considerations:
    • As a professional accountant, it is important to adhere to the regulatory framework and ensure compliance with approved accounting standards. Any deviation from this could be considered an ethical violation of the principles of integrity and professional competence.
    • Peter should advise the finance director that adopting an exposure draft would not be in line with IFRS, and they should instead continue to prepare the 2018 financial statements using the existing, approved standards until the new standard is officially issued and applicable.
  • Conclusion:
    • I disagree with the finance director’s suggestion to early adopt the proposed new accounting standard in the 2018 financial statements. The exposure draft does not yet hold the authority of an issued standard, and applying it prematurely would lead to non-compliance with IFRS and undermine the reliability of the financial statements.
  • 10 Marks

CR – Nov 2018 – L3 – Q5b – Regulatory Framework and Ethics

Appraise the ethical issues arising from the email received by Peter Anokye regarding liquidity challenges and lease accounting implications in Nanton Ltd

You are Peter Anokye, a newly qualified accountant and have recently been appointed as the deputy financial controller in Nanton Ltd (Nanton). You report directly to the finance director, Maria Wakasu. Just last week, you received the following email from Maria.

“As you are aware, I have to present some financial information at the board meeting scheduled in two days’ time and I need your help. I should be grateful if you could give me some advice on this issue. I don’t know whether you heard the news that Mamprugo Ltd (Mamprugo), an important customer of ours, is having some liquidity challenges. I think it is a case of not being able to manage their working capital cycle effectively. I know the financial controller of Mamprugo well, and he has mentioned that they have approached Yendi Ltd (Yendi) for credit. Of course, if they are successful, we should have no problems in getting paid. Today, I have received a request from Yendi asking for a credit reference for Mamprugo. I think if you check their credit history you will find they were good payers. Do you think I should mention anything about the liquidity issue to Yendi?

As I mentioned to you yesterday, over coffee, the Chief Executive Officer (CEO) regards leasing as an important method of financing the company. However, you are probably more up to date with the existing accounting requirements than me. The current accounting standard has some significant deficiencies and no longer meets the needs of users of financial statements. On 1 January 2016, we entered into a sale and finance leaseback transaction with our bank. The arrangement involved the sale, at fair value, of a building for GH¢8 million. The book value of the building in the financial statements at that date was GH¢6 million. I know that the CEO is particularly concerned that showing the lease as a finance lease could be detrimental to any loan applications that we might make over the next twelve months. Between you and I, we need to keep him happy: my year-end bonus could be in jeopardy if we get this area wrong. In the medium term, I am worried about the implications of the introduction of IFRS 16: Leases, particularly the effects on the statement of financial position, statement of profit and loss and other comprehensive income, and our key financial ratios. Surely our gearing ratio will be higher. Maybe we can get round the problem of including leases on the statement of financial position by classifying some of them as short-term (i.e., less than twelve months).

Peter, I should be grateful if you could give me some advice on this issue.”

Required:
Appraise the ethical issues arising from the information provided in the mail sent by Maria, and propose and justify appropriate steps that Peter Anokye should take to address them.

  1. Confidentiality of Information (Mamprugo’s Liquidity Issues):
    • The email raises the ethical issue of confidentiality regarding the liquidity challenges of Mamprugo Ltd. Peter is being asked whether to disclose this information to Yendi Ltd, which is requesting a credit reference. Under the ICAG’s Code of Ethics, Peter should maintain confidentiality and not disclose any non-public information unless required by law or with proper authority.
    • Peter should advise Maria not to disclose the liquidity issues of Mamprugo to Yendi Ltd. Disclosure without proper authority or necessity could damage Mamprugo’s reputation and could be considered unethical.
  2. Integrity and Objectivity (Lease Accounting under IFRS 16):
    • Maria’s suggestion to possibly manipulate lease classifications to avoid showing them on the statement of financial position by classifying them as short-term leases (less than twelve months) raises serious ethical concerns regarding integrity and objectivity. This could be seen as an attempt to misrepresent financial information and deceive users of financial statements, particularly lenders.
    • Peter should explain to Maria that IFRS 16 requires the correct classification of leases and any attempt to classify leases incorrectly would be in violation of the standard and could result in penalties or reputational damage to the company. Peter must uphold professional integrity and ensure that the financial statements are true and fair.
  3. Pressure to Mislead (Impact on Bonus):
    • Maria’s comment that her year-end bonus could be in jeopardy if they do not handle the lease issue in a way that satisfies the CEO’s wishes suggests that she may be under pressure to mislead in order to achieve personal gain. This raises ethical concerns about self-interest and pressure to compromise professional standards.
    • Peter should resist any pressure to compromise his ethical standards for personal or organizational gain. He should advise Maria to prioritize ethical behavior and compliance with accounting standards over personal incentives.
  4. Gearing Ratio and Financial Reporting Transparency:
    • The concern over the gearing ratio increasing due to the new lease accounting standard highlights a potential attempt to manipulate financial ratios to present a healthier financial position to lenders. This could be misleading to stakeholders who rely on transparent financial information for decision-making.
    • Peter should emphasize the importance of accurate financial reporting and transparency. He should explain that while the gearing ratio may increase, stakeholders would prefer honest financial statements that comply with IFRS 16 rather than manipulated figures that could damage the company’s credibility.

Proposed Steps for Peter Anokye:

  • Maintain confidentiality regarding Mamprugo Ltd’s liquidity issues and advise Maria not to disclose this information without proper authority.
  • Ensure compliance with IFRS 16 and advise Maria to classify leases correctly in the financial statements. Any attempt to misclassify leases should be resisted.
  • Communicate clearly with the CEO and Maria that professional ethics and financial integrity must not be compromised, even under pressure related to performance bonuses.
  • Peter should document his advice and, if necessary, escalate the issue to a higher authority within the company, such as the audit committee, if Maria insists on unethical actions.
  • Peter could suggest holding a training session on IFRS 16 and its implications to ensure that all stakeholders, including the CEO, understand the importance of proper lease accounting.
  • 10 Marks

CR – Nov 2021 – L3 – Q3c – Regulatory Framework and Ethics

Assess the ethical principles breached in a workplace scenario and recommend actions in accordance with the IFAC Code of Ethics.

Linda is a junior member of an audit firm and has just returned to work after taking compassionate leave to care for her sick mother. For financial reasons, Linda needs to work full-time. Linda has been having difficulties with her mother’s home care arrangements, causing her to miss several team meetings, which usually occur at the start of each day, and she needs to leave work early as well.

In terms of her capabilities, Linda is very competent at her work, but her frequent absence puts severe pressure on her and her overworked colleagues. Linda’s manager knows that workflow through the practice is coming under intense pressure, and in order that the team’s output is not affected, had a discussion with the audit team on Linda’s circumstances. This has, however, led to some members of the audit team undermining Linda at every given opportunity, putting Linda under even greater stress.

Required:

i) In accordance with the IFAC’s code of ethics, assess THREE (3) possible fundamental ethical principles that might have been breached. (5 marks)
ii) Recommend the possible actions that the manager should take as a member of the Institute of Chartered Accountants, Ghana in dealing with this ethical dilemma. (5 marks)

Part (i): Ethical Principles Potentially Breached

The IFAC Code of Ethics identifies several fundamental ethical principles that professionals are required to uphold. In this case, three possible ethical principles might have been breached:

  1. Integrity:
    • Linda might have compromised her integrity by not fully disclosing her limitations to her employer, especially regarding her ability to meet work commitments while caring for her sick mother. It is important for professionals to be honest and straightforward in their professional and personal dealings.
  2. Professional Competence and Due Care:
    • Although Linda is acknowledged to be competent at her job, her ability to deliver due care and commitment to the role is being impacted by her frequent absences and early departures. This situation might lead to a breach of the principle that requires professionals to maintain the knowledge and skills to ensure that clients or employers receive competent professional service.
  3. Objectivity:
    • The manager’s approach to addressing Linda’s situation could potentially breach objectivity. The discussion with the audit team about Linda’s personal challenges might have resulted in biased treatment of Linda by her colleagues. The principle of objectivity requires that personal bias should not affect professional judgment or actions.
  4. Confidentiality (Additional point):
    • The manager’s discussion of Linda’s personal situation with the audit team might have breached confidentiality. Personal information about employees should not be disclosed without consent unless required by law or professional duty.

Part (ii): Recommended Actions for the Manager

The manager should follow the guidelines of the IFAC Code of Ethics to resolve the ethical dilemma while protecting Linda’s professional standing and ensuring the audit team’s productivity is not compromised:

  1. Open Communication with Linda:
    • The manager should have a direct and confidential discussion with Linda to fully understand her situation and determine if adjustments can be made to her work schedule, such as offering flexible hours, remote work options, or reducing her workload temporarily.
  2. Confidentiality:
    • The manager must maintain strict confidentiality about Linda’s personal matters and remind the audit team that her circumstances should not be disclosed or discussed inappropriately.
  3. Address Colleagues’ Behavior:
    • The manager should address the undermining behavior of Linda’s colleagues. A meeting with the audit team should emphasize professionalism, respect, and collaboration, and ensure that personal circumstances do not lead to any harassment or inappropriate treatment.
  4. Workplace Adjustments:
    • Where possible, the manager should consider offering workplace adjustments to Linda, such as flexible hours or task reassignments, to help balance her responsibilities at home and work.
  5. Performance Management:
    • The manager should monitor both Linda’s performance and the team’s output to ensure that business needs are met. If Linda’s situation continues to affect her performance significantly, a long-term solution may need to be considered, including potential leave options or reassigning Linda to a less demanding role.
  6. Document All Steps:
    • The manager should document all actions taken to resolve this ethical dilemma, including meetings with Linda and any decisions made, in case there is a need to justify these actions in the future.
  • 10 Marks

May 2016 – L3 – Q3b – Regulatory framework and ethics

Compare compliance-based and integrity-based approaches to ethical issues, and recommend steps to sustain value creation from an ethical culture

As a Professional Accountant, you are regarded as an expert with specialized knowledge acting ethically and influencing others to do what is right whilst working to very high standards. When confronted with an ethical challenge or dilemma in a corporate setting, Lynne Paine suggests two approaches to the management of ethical issues in organizations – the compliance based approach and the integrity based approach.

Required: i) Compare and contrast the compliance based approach and the integrity based approach in the management of ethical issues. (6 marks)

ii) Discuss the steps you would recommend to your company to adopt in order to sustain value creation from an ethical culture. (4 marks)

i) Compare and contrast the compliance based approach and the integrity based approach in the management of ethical issues. (6 marks)

Compliance-based approach A compliance-based approach is primarily designed to ensure that the company acts within the letter of the law and that violations are prevented, detected and punished. Some organizations faced with the legal consequences of unethical behaviour take legal precautions such as those below; Compliance procedures Audits of contracts Whistleblower Opportunities Disciplinary procedures

Corporate compliance is limited in that it refers only to the law but legal compliance is not an adequate means for addressing the full range of ethical issues that arise every day. This is especially the case where voluntary codes of conduct and self-regulation are perhaps more prevalent.

Integrity-based approach An integrity-based approach combines a concern for the law with emphasis on managerial responsibility for ethical behaviour. Integrity strategies strive to define companies guiding values, aspirations and patterns of thought and conduct. When integrated into day-to-day operations of an organization, such strategies can help prevent damaging ethical lapses, while taping into powerful human impulses for moral thought and action. An integrity based approach to ethics treats ethics as an issue of organization culture.

Ethics management has several tasks; To define and give life to an organization’s defining values To create an environment that supports ethically sound behaviour To instil a sense of shared accountability amongst employees

The table below indicates some of the differences between the two approaches;

In conclusion, mere compliance with the law is no guide to exemplary behaviour, an integrity-based approach incorporates ethics into corporate culture and systems.

ii) Discuss the steps you would recommend to your company to adopt in order to sustain value creation from an ethical culture. (4 marks)

The following is a set of key actions required to help organizations maximize the value from ethical performance within an ethical culture.

Make it a strategic priority Set the tone from the top Develop a code of ethics Develop and support routes to report suspected violations Engage and communicate Focus on training Measure effectiveness and revisit regularly

  • 10 Marks

CR – Nov 2023 – L3 – Q3b – Regulatory framework and ethics

Evaluate ethical issues arising from a company's proposal to sell non-controlling interest in a loss-making subsidiary and manipulate financial reporting.

b) The Directors of Okonko Ltd are considering acquiring shares in blue-chip companies domiciled in Asia, Europe and North America in the near future in order to diversify their operations and minimise systematic risk. Unfortunately, the entity is currently cash strapped and unable to exploit such opportunities. They would prefer to raise finance from shares on the Ghana Stock Exchange because it is currently highly geared and they do not wish to expose the company to further financial and liquidity risk. They are therefore keen to have a good amount as the balance on the retained earnings in order to remain attractive to prospective investors.

One proposal is that they sell non-controlling interest in one of its domestic subsidiaries (Afa-Alhaji Ltd) which has been recording persistent losses for the past five (5) years. The sale will improve the cash position but Okonko Ltd will continue to maintain control over Afa-Alhaji Ltd. In addition, the Directors are of the strong opinion that the shares can be sold profitably to boost its retained earnings. The Directors intend to transfer the relevant proportion of their share of the losses from the domestic subsidiary to the retained earnings, knowing that this is contrary to accounting standards.

Required:

Explain FIVE (5) ethical issues which may arise from the proposal of the directors of Okonko Ltd. (10 marks)

The proposal presented by the directors of Okonko Ltd raises several ethical concerns related to transparency, financial reporting, stakeholder interests, and proper corporate governance. Here are eight ethical issues that may arise from their proposal:

Misleading Financial Reporting: The directors’ intention to transfer the relevant proportion of their share of the domestic subsidiary’s losses to retained earnings, knowing that this is contrary to accounting standards, raises concerns about the accuracy and transparency of the company’s financial information. This action could mislead investors and other stakeholders about the company’s true financial position. IFRS 9 outlines the criteria for recognizing and derecognizing financial assets and liabilities. Transferring losses from a subsidiary to retained earnings without proper justification and adherence to IFRS 9 criteria misrepresents the financial position.

Addressing the Issue: Financial statements must be prepared in accordance with accounting standards and provide accurate and reliable information. Transferring losses to retained earnings to improve financial appearance is unethical and can mislead investors and stakeholders.

Manipulation of Retained Earnings: The directors plan to transfer losses from the subsidiary to retained earnings to make the company more attractive to investors. This manipulative practice violates the principle of faithful representation which is a fundamental qualitative characteristics of the financial statement according to the conceptual framework. In addition, IAS 1 requires financial statements to provide a true and fair view. Misrepresenting financial information by transferring losses to retained earnings contradicts this principle.

Addressing the Issue: Retained earnings should accurately reflect the company’s cumulative profits and losses. Manipulating retained earnings misrepresents the company’s true financial performance. The company should adhere to transparency and honesty in financial reporting.

Conflict of Interest The directors’ decision to sell minority interest in Afa-Alhaji Ltd to improve the cash position and boost retained earnings may be influenced by their personal interests rather than the best interests of the company and its shareholders. Selling underperforming assets to manipulate financials and attract investors raises ethical concerns. This raises concerns about potential conflicts of interest and whether the directors are fulfilling their fiduciary duties. IAS 24 “Related Parties Disclosure” sets guidelines for disclosing related party transactions. If the directors’ actions favor personal benefits over transparent decision-making, this could lead to a breach of these guidelines.

Addressing the Issue: Selling shares to boost earnings without addressing the underlying operational issues is a short-term solution that can harm investors in the long run. Ethical behavior requires addressing the root causes of losses rather than artificially boosting earnings.

Selective Disclosure to Attract Investors The directors plan to sell the shares of a domestic subsidiary that has been consistently losing money. Disclosing only selective information that may attract investors while concealing negative aspects of the subsidiary’s performance is unethical. Selling shares of the loss-making subsidiary to boost earnings selectively highlights positive aspects and omits crucial negative information. IAS 1 “Presentation of Financial Statements” requires the presentation of financial statements that fairly represent the financial performance and position of the company. Selective reporting that masks negative information violates this requirement.

Addressing the Issue: The company should provide complete and accurate information to potential investors, including both positive and negative aspects of the subsidiary’s performance. Selective disclosure undermines investor trust.

Maintaining Control Over Loss-Making Subsidiary The directors’ proposal to sell a minority interest in the loss-making subsidiary while maintaining control contradicts ethical corporate governance practices. Selling underperforming assets should involve relinquishing control.

Addressing the Issue: Maintaining control over an underperforming subsidiary to profit from its assets while shifting losses elsewhere goes against transparency and accountability. A more ethical approach would be to address the losses or divest fully.

Lack of due diligence The proposal to sell minority interest in Afa-Alhaji Ltd without conducting proper due diligence on the potential risks and benefits of such a transaction raises concerns about the directors’ decision-making process and whether they are acting in a responsible and prudent manner. Selling a minority interest in the subsidiary without full disclosure of its consistent losses and financial challenges disregards the interests of minority shareholders who may not have complete information.

Addressing the Issue: The directors should prioritize the interests of all shareholders, providing them with transparent and accurate information about the subsidiary’s performance and financial situation before making any decisions.

Lack of Accountability for Losses The lack of transparency surrounding the proposal to sell minority interest in Afa-Alhaji Ltd and transfer the relevant proportion of their share of the domestic subsidiary to the retained earnings raises concerns about whether the directors are being open and honest with shareholders and other stakeholders about their actions and intentions. Transferring losses from the subsidiary to retained earnings allows Okonko Ltd to avoid accountability for the poor performance of the subsidiary. IFRS 10 Consolidated Financial Statements outlines the principles of consolidated financial statements. Transferring losses to avoid proper consolidation or to manipulate financial reporting disregards the intent of this standard.

Addressing the Issue: Companies should be transparent about their performance, addressing losses instead of transferring them to other areas. This accountability fosters ethical behavior and proper corporate governance.

(Any 5 points @ 2 marks each = 10 marks)

  • 10 Marks

CR – Mar 2024 – Q3c – Regulatory framework and ethics

Analyze ethical issues in a takeover scenario, including views on considering ethics and potential conflicts of interest.

The directors of Akilapa Ltd are involved in takeover talks with Bongo Partners. In the discussions, Mr Mensah, the Managing Director of Akilapa Ltd stated that there was no point in considering issues of ethics because the purpose of the takeover is to increase the market share of the company and ultimately increase the profit of the firm. In seconding his point, Miss Benkro indicated that in adopting a pragmatic approach to the takeover, there was no ethical issue in considering a third-party in relation to Bongo Partners because, in her opinion, the takeover will not benefit the third party but the company and the society.

During the meeting, Dr Worlanyo who was the previous Accountant of Bongo Partners before moving to Akilapa Ltd was involved in drafting the financial statements and provided a positive approval of the takeover bid. Upon receipt of the recommendation, a member of the board of directors found that there are indications that several of Bongo Partners’s Non-current assets might be impaired.

Required: i) Comment on the views of Mr Mensah and Miss Benkro regarding the fact that there is no point in considering ethical issues in the takeover bid. (4 marks)

ii) Assess the ethical issues in this scenario and explain how they should be addressed. (6 marks)

i) Comments on the views of Mr Mensah and Miss Benkro:

There are several reasons why ethical issues should be considered in a takeover bid, contrary to the views expressed by Mr Mensah and Miss Benkro:

  1. Integration of ethical cultures: A takeover involves integrating two companies’ ethics and compliance programs. This process is critical and begins well before the union of the companies. Ignoring ethical considerations can lead to conflicts in company cultures and values post-merger.
  2. Long-term success: Ethical considerations are crucial for the long-term success of the merged entity. Ignoring ethical issues or placing them on hold can endanger the success of the takeover bid and the future of the combined company.
  3. Stakeholder interests: Takeovers affect various stakeholders, including employees, customers, and the broader community. Considering ethical issues ensures that the interests of all stakeholders are taken into account, not just profit maximization.
  4. Legal and regulatory compliance: Ethical considerations often overlap with legal and regulatory requirements. Ignoring ethics could lead to non-compliance issues and potential legal risks.
  5. Reputation and brand value: Ethical behavior contributes to a company’s reputation and brand value. A takeover that ignores ethical issues could damage the reputation of both companies involved.

ii) Ethical issues in the scenario and how they should be addressed:

  1. Conflict of interest: Issue: Dr Worlanyo, the previous Accountant of Bongo Partners, is now involved in drafting financial statements and approving the takeover bid for Akilapa Ltd. How to address: Dr Worlanyo should recuse himself from any decision-making processes related to the takeover. An independent third party should be engaged to review the financial statements and takeover bid to ensure objectivity.
  2. Potential misrepresentation of financial information: Issue: There are indications that several of Bongo Partners’s non-current assets might be impaired, which was not reflected in Dr Worlanyo’s positive approval. How to address: A thorough and independent impairment review should be conducted. If impairments are confirmed, the financial statements should be restated, and the takeover bid should be reassessed based on the updated information.
  3. Duty of care and due diligence: Issue: The directors of Akilapa Ltd seem to be overlooking the importance of thorough due diligence, particularly regarding ethical and financial aspects of Bongo Partners. How to address: Conduct a comprehensive due diligence process, including ethical and financial audits. This should involve external experts to ensure objectivity and thoroughness.
  4. Transparency and disclosure: Issue: The potential impairment of Bongo Partners’s assets raises questions about the transparency of information provided during the takeover talks. How to address: Both companies should commit to full transparency, disclosing all material information that could affect the takeover decision. This includes any potential impairments or other financial issues.
  5. Professional conduct and integrity: Issue: Dr Worlanyo’s involvement in the process, given his previous position at Bongo Partners, raises questions about professional conduct and integrity. How to address: Implement clear guidelines for professional conduct in takeover situations. This should include policies on conflicts of interest and the involvement of former employees in sensitive business decisions.
  6. Stakeholder consideration: Issue: The focus solely on market share and profit increase ignores the broader implications of the takeover on other stakeholders. How to address: Conduct a stakeholder impact analysis to consider the effects of the takeover on employees, customers, suppliers, and the community. Use this analysis to inform decision-making and plan for post-merger integration.

By addressing these ethical issues, Akilapa Ltd can ensure a more transparent, fair, and sustainable takeover process, reducing risks and increasing the likelihood of long-term success for the merged entity.

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