Ethical Framework (Cambridge (CIE) A Level Accounting): Revision Note
Exam code: 9706
Ethical framework
What is the ethical framework in accounting?
The ethical framework sets out the fundamental principles of how people working in accounting roles must behave
The principles of professional ethics apply to all roles and functions related to accounting
Payroll
Reporting
Auditing
Bookkeeping
Accountants
What are the five principles of the ethical framework?
There are five principles of professional ethics
Principle | Explanation | Example |
|---|---|---|
Integrity |
| An accountant cannot agree to withhold information from the financial statements so that the business looks better. |
Objectivity |
| An accountant cannot produce financial statements for a relative. |
Professional competence and due care |
| An accountant should know the most recent terminology and accounting practices. |
Confidentiality |
| An accountant cannot share information about wages with the employees of a business. |
Professional behaviour |
| An accountant must be truthful about their qualifications when advertising their services. |
Why is it important to apply the ethical framework?
The framework enables stakeholders to have trust and confidence in the work performed by accountants
The framework makes sure that the reputation of the profession is maintained
The framework allows stakeholders to make informed and valid decisions
There can be severe consequences if professional ethics are not followed
Unethical practices can damage an accountant's reputation
Businesses will refuse to hire accountants if they are unethical
There can be legal repercussions for unethical practices, such as fines or, in serious cases, imprisonment
What is the impact of ethical accounting on stakeholders?
Stakeholder | Impact of ethical accounting |
|---|---|
Shareholders |
|
Lenders and banks |
|
Employees |
|
Suppliers |
|
Government and tax authorities |
|
Public |
|
What are the social implications of decision-making with accounting information?
Accounting decisions have social consequences which extend beyond financial results
Manipulating profits can lead to false confidence
This can cause investors to lose savings if the business collapses
Overstating assets or understating liabilities can lead to risk across financial markets
Accountants have a public interest duty
They have to act in the public's best interest, not just their client's
Unethical decisions can damage public trust in the business
Such as tax avoidance schemes and inflated bonuses
Worked Example
R Limited is a successful retail business. During the preparation of the financial statements for the year ended 31 December 2023, the directors discovered an issue concerning their chief accountant, Tariq.
Tariq had deliberately excluded several large purchase invoices from the draft financial statements to artificially increase the draft profit. He later admitted this was done to ensure that the business met its performance targets so that he and the directors would receive their annual cash bonuses.
Discuss Tariq’s actions with reference to the fundamental principles of the ethical framework for accounting.
Answer:
By deliberately altering the profit figure to benefit himself, Tariq has infringed the principle of integrity. This principle requires accountants to be straightforward and honest in all professional and business relationships, which he has failed to do.
His actions also breach the principle of professional behaviour because deliberately manipulating financial statements brings discredit to the profession and the business.
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