Topic: Regulatory Framework and Ethics

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  • 10 Marks

CR – Aug 2022 – L3 – Q3c – Regulatory framework and ethics

This question discusses ethical breaches committed by staff members and the finance director related to cash management and accountability in Gogo Ltd.

Mr. Ben Terkper, the Finance Director of Gogo Ltd, is known to be very strict in managing his staff and his dealings with other employees. A new product introduced by the company is yielding high sales. This has led to increases in cash shortages. In order to reduce the cash shortages, Management employed Hannah, a cousin of the Managing Director, Mr. Okantey.

It is the policy of the company to recover cash shortages made by cashiers by the end of the next working day. Over the years, Mr. Terkper has applied this policy without fear or favor. However, since her employment as a cashier, Hannah has made several cash shortages that have come to the attention of Mr. Terkper and Mr. Okantey. However, Hannah has never been asked to refund any of the cash shortages made so far. The financial statements for the year ended 31 December 2021 are being prepared, and Mr. Okantey has instructed Mr. Terkper to write off the losses made by Hannah.

Required:

i) Assess the possible ethical breaches committed by Hannah, Mr. Terkper, and Mr. Okantey. (4 marks)

ii) Recommend FOUR (4) possible actions that should be taken in dealing with the ethical breaches raised above. (6 marks)

i) Ethical Breaches

The possible ethical breaches committed by Hannah, Mr. Terkper, and Mr. Okantey are as follows:

  1. Integrity (Hannah and Mr. Terkper):
    • The principle of integrity requires accountants to be straightforward and honest in all professional and business relationships. By overlooking Hannah’s repeated cash shortages and not requiring her to refund the amounts, both Hannah and Mr. Terkper have breached this principle.
    • Hannah has failed to fulfill her responsibility as a cashier by not accounting for the shortages, while Mr. Terkper has not upheld his duty to enforce company policy consistently.
  2. Objectivity (Mr. Terkper and Mr. Okantey):
    • The principle of objectivity requires accountants to avoid bias, conflict of interest, or undue influence. By not holding Hannah accountable for her cash shortages due to her relationship with the Managing Director, both Mr. Terkper and Mr. Okantey have compromised their objectivity.
    • Mr. Okantey’s instruction to write off Hannah’s cash shortages shows undue influence and favoritism.
  3. Professional Competence and Due Care (Mr. Terkper):
    • As the Finance Director, Mr. Terkper is responsible for applying the company’s policies consistently. His failure to demand accountability from Hannah undermines his professional competence. Additionally, agreeing to write off the cash shortages is a sign of negligence in fulfilling his role.
  4. Professional Behavior (Hannah, Mr. Terkper, and Mr. Okantey):
    • By allowing Hannah’s cash shortages to go unchecked, the actions of all parties bring disrepute to the company. Writing off the cash shortages sets a bad precedent for other employees and tarnishes the reputation of the company.

(4 marks)

ii) Recommended Actions

To address the ethical breaches, the following actions should be taken:

  1. Strict Enforcement of Cash Management Policies:
    • The company’s policy on cash shortages should be strictly enforced for all employees, including Hannah. Any future shortages must be recovered promptly, in accordance with the established policy.
  2. Engage the Managing Director:
    • Mr. Terkper should engage Mr. Okantey to explain the consequences of favoritism and the ethical implications of allowing cash shortages to go unaddressed. He should advocate for a fair and consistent application of company policies.
  3. Disciplinary Measures for Hannah:
    • Hannah should be required to refund the total amount of cash shortages she has incurred. Disciplinary action may also be necessary to ensure that she understands the seriousness of her role as a cashier.
  4. Reinforce Ethical Standards and Training:
    • The company should reinforce its ethical standards by organizing training sessions on ethical behavior and accountability for all employees, including management. This will help promote a culture of integrity and fairness within the organization.
  5. Implement Strong Internal Controls:
    • Stronger internal controls should be put in place to prevent future cash shortages. The company could introduce measures such as cash handling training, tighter cash reconciliations, or an independent review of cashier activities.
  6. Seek Guidance from Professional Bodies:
    • If the Managing Director continues to insist on writing off the shortages, Mr. Terkper should seek guidance from a professional body, such as the ICAG, to resolve the ethical dilemma and ensure that his professional responsibilities are not compromised.

(6 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.
  • 6 Marks

CR – Nov 2017 – L3 – Q5d – Regulatory Framework and Ethics

Discuss the implications of compliance or non-compliance with the ethical code of conduct for professional accountants.

A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore, a professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employer. In acting in the public interest, a professional accountant should observe and comply with the ethical requirements of the IFAC’s Code of Ethics. All accounting professionals are responsible for acting in the public interest, and for promoting professional ethics.

Required:
Comment on the implications of compliance or non-compliance of the ethical code of conduct by professional accountants.

Implications of Compliance with the Ethical Code of Conduct:

  1. Maintaining Public Trust:
    Compliance with the IFAC Code of Ethics ensures that professional accountants maintain the trust of the public. By adhering to the principles of integrity, objectivity, and professional behavior, accountants can foster confidence in their services, which is essential for the credibility of financial reporting.
  2. Ensuring High Standards of Professionalism:
    Accountants who comply with ethical standards uphold the highest levels of professionalism, which benefits both the profession and society. It helps to mitigate risks of unethical behavior, such as fraud or misrepresentation, and ensures that the financial information presented is accurate and reliable.
  3. Promoting Transparency and Accountability:
    Ethical compliance promotes transparency and accountability in financial reporting, which is critical for the decision-making processes of various stakeholders, including investors, regulators, and the general public.

Implications of Non-Compliance with the Ethical Code of Conduct:

  1. Loss of Public Confidence:
    Non-compliance with the ethical code can lead to a loss of public confidence in the accountant and the accounting profession as a whole. A breach of ethics can damage the reputation of the accountant and may result in the public questioning the reliability of financial statements.
  2. Legal and Disciplinary Consequences:
    Professional accountants who do not adhere to ethical guidelines may face legal consequences or disciplinary action from regulatory bodies. This can include penalties, suspension, or removal from the professional body, impacting their ability to practice.
  3. Undermining the Integrity of Financial Reporting:
    Non-compliance may result in biased, inaccurate, or misleading financial information. This undermines the integrity of financial reporting, which can lead to poor decision-making by users of financial statements and, in severe cases, financial scandals.

Conclusion:
Compliance with the ethical code of conduct is crucial for maintaining public trust, ensuring the integrity of financial reporting, and upholding the professionalism of the accounting profession. Non-compliance, on the other hand, can have serious consequences, including legal action, loss of credibility, and damage to the profession as a whole.

(6 marks)

  • 3 Marks

CR – Nov 2017 – L3 – Q5c – Regulatory Framework and Ethics

Discuss the impact of a partner’s family relationship on the objectivity and independence of the audit firm.

Mr. Odorkor Asare is a partner of Fobes Chartered Accountants, an auditing firm. Mr. Asare was informed by the other partners to take a “compulsory leave” because he was in breach of the firm’s independence rules as his wife was the Finance Director of Millenium Insurance (an audit client). He was to resume after completion of the audit. Mr. Asare was disturbed by this notice even though he was not the reporting partner.

Required:
Discuss the stance taken by the other partners of the firm and its effect on the objectivity of Fobes Chartered Accountants.

  1. Threat to Objectivity and Independence:
    The relationship between Mr. Asare and his wife, who is the Finance Director of an audit client, poses a self-interest threat to the objectivity and independence of the audit. Even though Mr. Asare is not the reporting partner, the relationship may lead to undue influence on the audit work, potentially compromising the audit’s integrity.
  2. Ethical Decision by the Firm:
    The firm’s decision to place Mr. Asare on compulsory leave aligns with the ethical standards required to maintain independence and objectivity in auditing. This approach helps to prevent any perception of bias or conflict of interest that could arise due to the close personal relationship.
  3. Impact on Firm’s Objectivity:
    By removing Mr. Asare from any involvement with the client during the audit, Fobes Chartered Accountants ensures that the audit is conducted impartially. This action strengthens the firm’s commitment to ethical practices and helps preserve its reputation for objectivity and independence.
  4. Public Perception and Compliance with Ethics:
    Ensuring auditor independence is not only about actual threats but also about perceived threats. The stance taken by the partners demonstrates a proactive approach to avoid any doubt or suspicion from external stakeholders, in line with the IFAC Code of Ethics for professional accountants.

Conclusion:
The decision to have Mr. Asare take leave is a precautionary measure to uphold the firm’s independence and objectivity. Even though he was not the reporting partner, the relationship with a key officer of the audit client warranted such action to prevent any potential compromise to the audit’s integrity.

(3 marks)

  • 6 Marks

CR – Nov 2017 – L3 – Q5b – Regulatory Framework and Ethics

Discuss the need for an international conceptual framework for financial reporting and its practical impact on accounting issues.

The financial reporting process is concerned with providing information that is useful in the business and economic decision-making process. Therefore, a conceptual framework will form the theoretical basis for determining which events should be accounted for, how they should be measured, and how they should be communicated to the user. Although theoretical in nature, a conceptual framework for financial reporting has practical aims.

Required:
Discuss whether an agreed international framework for financial reporting is needed in order to resolve practical accounting issues.

The Need for an International Conceptual Framework:

  1. Consistency and Comparability:
    An agreed conceptual framework provides a common set of principles that standard setters and accountants can use when preparing financial reports. This ensures consistency in how financial statements are prepared and makes it easier to compare the financial performance and position of companies across borders.
  2. Reduction of Ambiguity and Inconsistencies:
    Without a conceptual framework, accounting standards may be developed haphazardly, leading to inconsistencies. A framework acts as a guide for standard setters, helping them resolve accounting issues consistently and ensuring that standards are not contradictory.
  3. Guidance in Absence of Specific Standards:
    A conceptual framework provides a basis for determining the appropriate accounting treatment in situations where no specific accounting standard exists. This helps accountants make informed decisions that are consistent with underlying principles, improving the reliability of financial reporting.
  4. Resisting Political Influence:
    A well-established framework helps standard setters resist political pressures and lobbying efforts that may push for the development of standards that benefit specific groups. It supports the development of standards that reflect the underlying economics of transactions rather than political interests.

Limitations of a Conceptual Framework:

  1. Variety of User Needs:
    Financial statements are intended for a wide range of users, including investors, creditors, regulators, and employees. It is unlikely that a single conceptual framework can meet the diverse needs of all these users, leading to some compromises in how information is presented.
  2. Complexity and Interpretation:
    Although a framework can help standardize reporting, the complexity of financial transactions means that judgment is often required. Different accountants may interpret the principles differently, leading to variations in how similar transactions are reported.
  3. Focus on Financial Capital Providers:
    The current conceptual frameworks, such as that of the IASB, tend to focus on the needs of capital providers, such as shareholders and creditors. Other stakeholders, such as employees and the public, may not get the information they need from financial statements under the current frameworks.

Conclusion:
An international conceptual framework is essential for creating a consistent, comparable, and reliable financial reporting environment. It helps resolve practical accounting issues by providing a foundation for the development of standards and guiding the preparation of financial statements. However, it cannot address all the challenges and complexities in financial reporting and may not fully meet the needs of all users.

(6 marks)

  • 5 Marks

CR – Nov 2016 – L3 – Q5d – Regulatory framework and ethics

Explain two constraints on relevance and faithful representation of financial statements.

Two key constraints on relevance and faithful representation in financial statements are:

  1. Timeliness:
    • Information must be provided in a timely manner to be useful. However, if there is a delay in reporting, the relevance of the information diminishes. To achieve timeliness, financial statements may need to be prepared before all details of a transaction or event are fully known, which can impair faithful representation. Hence, there is often a trade-off between timeliness and accuracy.
  2. Cost vs. Benefit:
    • There is a balance between the cost of providing financial information and the benefit derived from it. In some cases, the cost of collecting and reporting detailed information may outweigh the benefits to users. This constraint limits how much detail can be provided, potentially affecting both the relevance and faithfulness of the representation of financial data.

Two key constraints on relevance and faithful representation in financial statements are:

  1. Timeliness:
    • Information must be provided in a timely manner to be useful. However, if there is a delay in reporting, the relevance of the information diminishes. To achieve timeliness, financial statements may need to be prepared before all details of a transaction or event are fully known, which can impair faithful representation. Hence, there is often a trade-off between timeliness and accuracy.
  2. Cost vs. Benefit:
    • There is a balance between the cost of providing financial information and the benefit derived from it. In some cases, the cost of collecting and reporting detailed information may outweigh the benefits to users. This constraint limits how much detail can be provided, potentially affecting both the relevance and faithfulness of the representation of financial data.
  • 5 Marks

CR – Nov 2016 – L3 – Q5c – Regulatory Framework and Ethics

Discuss the advantages of Ghana’s adoption of IFRS as national accounting standards for Ghanaian companies.

In 2007, Ghana adopted the International Financial Reporting Standards (IFRS). This move has been applauded by many who suggest that Ghana’s adoption of IFRS will offer many advantages to Ghanaian companies.

Required:
Discuss the advantages that Ghana’s adoption of IFRS as National Accounting Standards offers to Ghanaian companies.

The adoption of International Financial Reporting Standards (IFRS) in Ghana offers several advantages to Ghanaian companies:

  1. Comparability with Global Competitors:
    • Ghanaian companies can present their financial statements on the same basis as foreign competitors. This enables easier comparison and evaluation by investors, analysts, and other stakeholders across different jurisdictions.
  2. Facilitation of Cross-Border Listings:
    • IFRS adoption facilitates cross-border listing of Ghanaian companies, making it easier for them to raise capital in international markets. Foreign investors are more likely to invest in companies whose financial statements they can easily understand and trust.
  3. Common Accounting Language:
    • For companies with foreign subsidiaries, IFRS provides a common, company-wide accounting language. This harmonization simplifies the consolidation of financial statements across different jurisdictions.
  4. Enhanced Appraisal for Mergers and Acquisitions:
    • IFRS adoption makes it easier to appraise foreign companies that are potential targets for takeovers or mergers by Ghanaian companies. The consistency in accounting standards provides a clearer understanding of the financial health of foreign entities.
  5. Mobility of Accounting Staff:
    • Accountants trained in IFRS can easily transition between companies or subsidiaries operating in different countries. The global recognition of IFRS enhances the mobility of accounting professionals.
  6. Cost-Effective Audits for Multinational Firms:
    • Auditing engagements for multinational firms become more efficient and cost-effective under IFRS, as auditors are familiar with a single set of global standards.
  7. Improved Earnings Quality:
    • Firm-level adoption of IFRS often leads to higher earnings quality because of the transparency and rigorous disclosure requirements embedded in IFRS. This builds trust with stakeholders and can enhance the reputation of Ghanaian companies.
  • 5 Marks

CR – Nov 2016 – L3 – Q5b – Regulatory framework and ethics

Discuss the ethical and professional conflicts faced by the chief accountant of Nyamekye Plc when pressured to alter financial statements to secure a loan.

The board of directors of Nyamekye Plc, a company listed on the Ghana Stock Exchange, needs a significant capital injection to finance a capital-intensive project to consolidate the company’s market share, failure of which will result in a loss of 25% of its market share. The management of the company has approached National Commercial Bank (NCB) for a loan facility to undertake the project.

However, the bank’s current lending policies require borrowers to demonstrate good projected cash flow, as well as a level of profitability which would indicate that repayments would be made. Unfortunately, the current projected statement of cash flow does not satisfy NCB’s criteria for lending. The directors have told the bank that the company is in an excellent financial position and that the financial results and statement of cash flow projections will meet the criteria, and that the chief accountant will forward a report to this effect shortly. The chief accountant has just recently joined Nyamekye Plc and has openly indicated that she cannot afford to lose her job because of her financial commitments and family concerns.

Required:
Discuss the professional and potential ethical conflicts which may arise in the above scenario and the ethical principles which would guide how a professional accountant should act in this situation.

The chief accountant of Nyamekye Plc faces significant ethical and professional conflicts due to the pressure from the board of directors to manipulate financial statements to meet the lending criteria of the National Commercial Bank (NCB). These conflicts include:

  1. Integrity:
    • The chief accountant has an ethical obligation to ensure that the financial statements and cash flow projections are accurate and truthful. Altering the cash flow projections to meet the bank’s criteria would violate the principle of integrity by presenting false or misleading information to the bank.
  2. Objectivity:
    • The chief accountant must maintain objectivity and resist the pressure from the directors to manipulate the financial statements. Allowing personal concerns, such as job security or financial commitments, to influence her judgment would compromise her professional objectivity.
  3. Professional Competence and Due Care:
    • The accountant is expected to demonstrate professional competence by applying her knowledge of accounting standards and practices accurately. Providing inaccurate or overly optimistic cash flow projections would breach her duty of due care and may lead to financial losses for the bank if the loan is granted on false pretenses.
  4. Confidentiality:
    • The accountant must balance her ethical responsibility to the company with her duty to provide transparent and truthful financial information to external stakeholders, such as the bank. In this case, there is a conflict between the company’s interests and the need to present accurate financial information.
  5. Potential Conflicts of Interest:
    • The accountant may be tempted to comply with the directors’ demands due to her personal financial commitments and fear of losing her job. However, acting in this way would create a conflict of interest between her ethical obligations and her personal circumstances. The ethical principle of independence requires her to prioritize the truthfulness and accuracy of the financial reports over her personal situation.

Ethical Guidance:

The professional accountant should be guided by the following ethical principles:

  • Integrity and Objectivity: The accountant must ensure that all financial reports are accurate and truthful, and must avoid being influenced by pressure from the company’s directors.
  • Professional Competence and Due Care: She must provide an accurate assessment of the company’s financial position and refuse to engage in creative accounting or manipulation of cash flow projections.
  • Professional Behavior: The accountant should act in a manner that upholds the reputation of the profession and should report any unethical behavior to the company’s internal audit committee or governance body if necessary.

Conclusion:

The chief accountant must adhere to ethical principles and resist the pressure to misrepresent financial information. She should inform the board of directors of her professional obligations and ensure that the financial reports and cash flow projections accurately reflect the company’s position, even if it means jeopardizing the loan application.

  • 5 Marks

CR – Nov 2016 – L3 – Q5a – Regulatory framework and ethics

Discuss the ethical and professional issues faced by the financial accountant when considering the treatment of a finance lease in financial reporting.

Mordern Technology Ghana Limited plans to upgrade its production process, and the directors believe that technology-led production is the only feasible way to remain competitive in recent times. However, the company operates from a leased property, and the leasing arrangement was established to maximize taxation benefits. Surprisingly, the financial statements have not shown a lease asset or liability to date.

A new financial accountant joined Modern Technology Ghana Limited just after the financial year-end of 31 July 2016 and is currently reviewing the financial statements to prepare for the upcoming audit and to begin making a loan application to finance the new technology.

The financial accountant believes that the lease relating to both the land and buildings should be treated as a finance lease, but the finance director completely disagrees. The finance director does not wish to recognize the lease in the statement of financial position and, as a result, wishes to continue treating it as an operating lease. The finance director believes that the lease does not meet the criteria for a finance lease and was made clear by the finance director that showing the lease as a finance lease could adversely affect the loan application.

Required:
Discuss the ethical and professional issues which face the financial accountant in the above transaction.

The financial accountant at Modern Technology Ghana Limited is faced with an ethical dilemma regarding the treatment of the lease in the financial statements. The ethical and professional issues involved include:

  1. Integrity:
    • The financial accountant is ethically bound to act with honesty and integrity. If the lease meets the criteria for a finance lease under IAS 17, it must be presented as such in the financial statements, regardless of the finance director’s instructions to treat it as an operating lease. Misrepresenting the lease as an operating lease would violate the principle of integrity and mislead stakeholders.
  2. Objectivity:
    • The financial accountant must remain objective and avoid being influenced by the finance director’s preference to omit the finance lease from the statement of financial position. The finance director’s desire to manipulate the financial statements to enhance the company’s chances of securing a loan constitutes unethical pressure, which could result in misleading financial information.
  3. Professional Competence and Due Care:
    • The financial accountant must demonstrate professional competence by applying the correct accounting standards (IAS 17) to classify the lease. If the lease transfers substantially all the risks and rewards to the lessee, it must be classified as a finance lease. Failing to apply due care in this situation would undermine the financial accountant’s responsibilities as a professional.
  4. Transparency and Fair Presentation:
    • The financial statements should provide a true and fair view of the company’s financial position. The accountant has an ethical obligation to ensure that the financial statements are transparent and that the lease is recognized appropriately. Treating the lease incorrectly as an operating lease would obscure liabilities and mislead potential lenders, violating the principle of fair presentation.
  5. Conflict of Interest:
    • The financial accountant may face a conflict of interest, as failing to follow the finance director’s instructions could affect their job security. However, the accountant must prioritize professional ethics and the accuracy of the financial statements over personal concerns.

Conclusion:

The financial accountant must adhere to the ethical principles of integrity, objectivity, and transparency by ensuring that the lease is correctly classified as a finance lease if it meets the required criteria. This decision should be communicated to the finance director, and the potential consequences of unethical financial reporting should be discussed.

  • 10 Marks

CR – Mar 2023 – L3 – Q3c – Regulatory framework and ethics

Analyze ethical principles breached in payroll and recommend actions for addressing ethical dilemmas.

BYF Health Facility offers varied medical services; it is known for its high-quality laboratory services. In 2021, the company added to its laboratory services, testing for Covid-19 following the increased demand by airlines that travelers must have negative Covid-19 status either through PCR or Antigen tests. Consequently, the company recruited additional workers in the year to work in the new Covid-19 Lab on a part-time basis. All part-time employees (Locum staff) are paid based on hours worked, either on an 8-hour or 12-hour cycle.

As a precondition, part-time workers are to log in and also log out on every working day, for hours worked to be computed by the log-in device.

Bismark Appau (Bismark), a brother of the Director of Health Services of BYF Health Facility, is one of the employees who was employed on a part-time basis at the Covid-19 Lab on an 8-hour cycle. Bismark has permanent employment with KBT hospital and hardly gets time to work at the Covid-19 Lab of BYF Health Facility. However, in preparing payroll of Locum staff, the Director of Health Services continuously insists that in the case of Bismark, the full hours for the total working days in the month on the 8-hour cycle should be used, regardless of the hours he worked. Colleague workers are aware of this special treatment to Bismark, and are unhappy about this preferential treatment.

Required: i) Based on the scenario above, justify the possible ethical principles that might have been breached and its effect on productivity. (6 marks)

ii) Recommend the possible actions to be taken in dealing with this ethical dilemma. (4 marks)

 

i) The following fundamental principles of the IFAC code of ethics might have been breached:

  1. Integrity: An accountant is encouraged to be honest and straightforward in carrying out their duties. The Locum staff members are paid based on hours worked. Thus, under no circumstance is a Locum staff member expected to be paid for hours they did not work in the month. By complying with the directive of the Director of Health Services to pay Bismark the full allocated hours for the month, when he actually did not work, suggests dishonesty in the work of the accountant.
  2. Objectivity: The IFAC code of ethics expects accountants to be unbiased in their work and not succumb to any undue influence. The use of full hours allotted to Bismark in computing his salary when other Locum staff members are paid strictly on the hours they work suggests bias on the part of the accountant. The objectivity of the accountant might be impaired by the influence of the Director of Health Services.
  3. Professional behavior: The conduct of accountants at their workplace, in carrying out their duty, or wherever they find themselves, is expected to maintain the good reputation of the accountancy profession, and not to soil it. The “inconsistent” treatment given to the Locum staff, which has become known to other Locum staff, does not speak well of the accountant and could put the accountancy profession in a bad light.

(6 marks)

ii) Possible actions that the Finance Director should take include:

  1. The Finance Director should engage the Human Resource Director and the Laboratory Manager, if any, or whoever Bismark reports to on the issue of Bismark’s continuous absence from work. The Human Resource Director should ensure that Bismark reports to work during the allotted hours or loses the position to a willing and ready lab professional.
  2. Engage the Director of Health Services on why an exception cannot be made for Bismark regarding the determination of his earned salary in a month.
  3. Engage Bismark to reiterate that he will only be paid for hours worked and not the allotted hours.
  4. If the Director of Health Services insists on giving Bismark special treatment, the Finance Director should raise the matter with the Board of Directors.
  5. If necessary, the Finance Director can seek advice from the professional body on the matter.

(4 marks)

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