Zhang Was Employed as a Qualified Accountant

¶ … Zhang was employed as a qualified accountant in a small accounting practice. Following an investigation, the disciplinary committee of the professional body to which Sam belonged found that he provided misleading sets of financial statements at the request of clients on several occasions, in return for substantial payments. This was done without the knowledge of his employer.

Trust is an important part of the accounting profession. Accountants have an ethical obligation to present financial statements that are accurate and true to the best of their ability. Many people depend on accounting statements to make financial decisions. Accounting statements are used to make business forecasts and for strategic planning. They are used by investors to decide if the company is a good risk or a bad risk. Many people depend on the statements of accountants and they must trust that the information that they receive is as accurate as possible.

There is little room for error and no room for mistrust in the accounting profession. People assume that the information contained in accounting statements is true to the best of the accountant's knowledge. Bad information on the accounting statement means bad financial decisions and a feeling of mistrust in the future. Accountants must adhere to a strict code of ethics in order preserve faith and trust in the statements that they present.

Accounting is an integral part of the world that we live in. Accounting has affected society as much as society has affected accounting. Accountants live in a world of dual loyalties. They have a duty to serve the public interests and provide and accurate picture of the firms that they represent, but they also have a duty to the capital interests of their clients. Their clients pay the accountant to perform services for their and it is not good business practice to make clients angry.

However, sometimes the accounting statement does not paint the client in the best possible light. When this happens, the accountant finds himself or herself in s tricky situation. They must please the public need for honesty and accuracy, yet they must remain loyal to their client's interests as well (Kaidonis, 2006). This was the reason for the development of ethics legislation such as APES 110, which clearly defines the ethical standards to which accountants must adhere. This was the key to the conundrum in which Sam was placed.

Which sections of APES110 have been violated?

APES 110 is in conformity with international accounting standards including the IFAC Code of Ethics for Professional Accountants

(Wijeshinghe, 2007). The key differences between APES 110 and the IFAC code are in terminology used. Currently, this standard is being revised so that the language is more consistent with international standards. A review board also plans to explicitly state in APES 110 that it is consistent with IFAC standards, but these changes are still in process.

Differences exist in the various codes with which accountants must comply. Some standards are more rules based, while others serve as guidelines to assist accountants in decision-making processes. For instance, the AICPA code is considered to be a rules-based code. Accountants are expected to follow these rules to the letter. By comparison, the IESBA code is a principles-based code that is similar to APES 110. These two codes can be compared to the U.S. GAAP. Accountants are expected to comply with the rules portion of the code and to use the framework of the code to make decisions on situations that arise in their individual practices (Allen, 2010).

APES 110 represents both mandatory requirements and guidance to the accounting profession (Lewis, 2010). This is a unique for an accounting standard. It represents the dual purpose of the law. However, this can make it difficult to determine whether a particular section is mandatory or simply a piece of guidance. Revisions have been suggested to separate the mandatory sections from the parts that are merely guidance (Lewis, 2010). It has also been suggested that APES 110 also need to be revised to reflect IFAC language. However, these changes have not yet been made. These suggestions do bring the position of APES 110 into question and makes it difficult to interpret. However, this is no excuse for Sam's actions. What he did was unethical by any measure. He created a conflict of interest between the company that he works for and his position as an employee.

APES 110 is clear about what is allowed and what is not allowed by accountants. Although it represents a set of guidelines more than hard, fast rules, they still clearly state what is expected from accountants. They leave little to interpretation, yet leave enough platitude to allow accountants to use their own judgment when the situation calls for it. The following will examine Sam's actions and the specific sections of APES 110 that were violated.

Part A of APES 110 sets forth the purpose of the document. Part A, section 100.1 states that as a member of the accounting profession, the person's primary responsibility is to the public interest. It is not, "to satisfy the needs of an individual, client, or employer," (APESB, 2006, p. 4). This principle was clearly violated by Sam's actions. His actions violated the public interest in providing accurate accounting statements. He acted in the interests of two individuals, himself and the client who paid him to falsify statements.

Part A established the following six principles as the keys to application of the code. These six principles are integrity, objectivity, professional competence and due care, confidentiality, and professional behavior (APESB 110, 2006, p. 5). The code is intended to help accounting profession members identify specific ethical threats as they arise. It provides them with a decision-making framework to help them make decisions regarding a particular action. If they are unable to make a decision about a particular action themselves, the standards provides them with a chain of command to aid them in the decision-making process.

Sam blatantly ignored the chain of command that should have been followed in this case. When a client offered to pay him for falsifying accounting statements, he should have immediately taken the matter to his manager, or perhaps higher, according to established protocols within the company.

Part A, section 100.8 provides an out for those who might not be aware that they have violated a section of APES 110. The provision states, "A Member may inadvertently violate a provision of this Code. Such an inadvertent violation…once the violation is discovered, the violation is corrected promptly and any necessary safeguards are applied," (APESB, 2006, p. 5). This was not what Sam did; instead, he did it several more times. This cannot be overlooked as a simple mistake. It can be construed as criminal motive in the case of Sam. Sam did not correct it, but did it again and again.

Part A, section 100.10 addresses threats to ethical accounting procedures. Subsection (a) addresses self-interest threats. These threats occur when financial or other interests occur either for the member of the organization or other members of their close family (APESB, 2006, p. 6). In this case, Sam acted unethically clearly in his own self-interest. Subsection (e) provides for the only possible grounds to alleviate some of the blame from Sam. If Sam was threatened or coerced by the client, perhaps by threatening to drop the account if Sam did not comply, or by some other threat, then they might share some of the blame. Yet, even if this were the case, Sam should have gone to his supervisor. However, it might be noted that Sam did this with several clients and it is highly unlikely that all of them made threats.

The most blatant violation of APES 110, Part A, is that of section 110 (Integrity). In section 110.2 this section states that,

"A Member should not be associated with reports, returns, communications or other information where they believe that the information: (a) Contains a materially false or misleading statement; (b) Contains statements or information furnished recklessly; or (c)

Omits or obscures information required to be included where such omission or obscurity would be misleading" (APESB, 2006, p. 8).

This section could not be clearer in regards to Sam's actions. Not only did he present misleading statements; he continued to do so repeatedly.

Sam's most blatant violation occurred in the section on integrity, but he also violated the principle of objectivity. Part A, section 120, subpart 120.1 states that objectivity is a requirement for members of an organization and that they by no means supposed to create a situation in which bias of conflict of interest could occur (APRSB, 2006, p. 9). Sam received money from both his employer, in the way of salary and from the client. If can be assumed by Sam's actions that the amount offered by the client was sufficient to sway Sam's representation of them on the accounting ledger. This created bias in the accounting reports and is a clear conflict of interest.

The third major section of Part A that was violated was that of Professional Behavior. Of the sections that were previously mentioned, this section is the more obscure. It allows much room for interpretation. However, it is clear that if one violates the previous two sections, then they have also violated professional behavior. Section 150.1 disallows any action or omission that might bring discredit to the profession (APESB, 2006, p. 13). Taking bribe from a client to produce false financial statements falls under this category. The section further goes on to state that this includes,

"actions or omissions which a reasonable and informed third party, having knowledge of all relevant information, would conclude negatively affects the good reputation of the profession. (APESB, 2006, p. 13).

It would make a difficult case to argue that Sam's actions did not negatively impact the good reputation of the profession.

Part B addresses special considerations for Members in Public Practice. The case did not state whether Sam was in public or private practice. If he is in public practice, then there are many more violations in this section. Many of them are redundant with those already stated. Regulations for public practice take the basic regulations in Part A and expand on them. Pubic accountants are held to more rigid standards than those in private practice. Part C reiterates and expands on the concept of conflict of interest. The violations to this point are so blatant that Sam will have a difficult time arguing that what he did had any ethical reasoning behind it at all. The violations of APES 110 are clear and my suggestion to Sam is to hire a very good attorney and plan on never working in the accounting profession again.

Do you think the fact that Sam was practicing as a professional makes a difference to an evaluation of his/her behaviour?

Rogers (2005) explored the rise in tougher accounting standards and principles on a global basis. According to Rogers, the tightening of regulations comes on the heels of international accounting scandals and the need for legislation that increases accountability and transparency in the accounting profession. This has caused a movement away from rules-based accounting, such as the U.S. GAAP to principles based accounting legislation. This type of accounting allows the individual accountant greater platitude in decision making, bur holds them to higher ethical standards than rules-based legislation. Sam was working as a professional accountant, therefore he was not only morally obligated, but legally obligated to act in a manner that reflected the highest ethical practices, according to his profession.

Recently, the APESB provided a forum for the discussion of the ethical responsibilities of professional accounting bodies and issues that were related to the standards that need to be followed by professional accounting bodies. They set the believe in setting the bar high for accounting professionals (Spargo, 2010). The most current revisions to the accounting codes include the introduction of public interest entities, on whom more stringent code requirements will be introduced. It is also introducing the need to rotate Key Audit Partners in order to prevent the development of mutual interests among partners and to provide greater transparency of auditing practices (Spargo, 2010).

The new changes also require a 12-month cooling off period for key audit partners. These standards make it clear that independent audits are designed for the purpose of keeping everyone honest. These new regulations are designed to make certain that accountants, like Sam, know that someone will eventually come back and look at what he has done. These rules make it less likely that accountants will be able to conceal unscrupulous activities. It increases the chances that they will get caught. These standards also reflect the level of integrity to which accountants are being held.

According to CPA Australia (2010), there is no differences between providing technical accounting services for a client and providing interpretation of accounting laws and ethical considerations. However, a separation does exist between managing one of the client's projects and providing accounting services for them on the same project. An accountant cannot provide both project management services and accounting services without creating a conflict of interest. Avoiding conflict of interest has become a key ethical consideration in the accounting field. Same not only blatantly acted in a manner that was a direct ethical violation; he created a conflict of interest by accepting payment from both his employer and the client. This placed him in the position of acting as either a private consultant and/or an independent contractor for the client. This creates muddy ground in terms of whom Sam was working for at the time.

Why do you think the ethical issues you have identified occurred, and how might they have been avoided?

Famous Enron accountant, Arthur Andersen, fell hard when his "creative" accounting methods were discovered in the United States. This began a long look into the standards to which accountants are held. Arthur Andersen intentionally misrepresented the financial standing of his company in order to present a more favorable public image for investors. His actions misled the public and caused many to invest money in a company that they might not have otherwise invested, had it not been for the misrepresentation in accounting (Dellaportas, 2006).

It is difficult to understand why Sam would make such as decision, without more information about Sam and his personality. However, one can surmise that personal profit was behind the actions of both Sam and Arthur Andersen. Dellaportas (2006) suggested that humans go through certain stages of moral reasoning. The first stage is pre-conventional. At this stage, a fear of punishment is the motivating factor in ethical behavior.

In the second stage of pre-conventional the individual obeys the rules out of self-gratification. It makes them feel good to follow the rules and to be a good citizen. It is apparent that both Arthur Andersen and Sam were out for themselves and did not feel that they would get caught. They apparently did not feel find any self-gratification from simply doing a good and ethical job. Their motivations were completely self-centered. It would be a reasonable assumption that they did not have high ethical reasoning skills.

The second stage of ethical reasoning is the conventional stage. The first half of this stage is defined by role expectations and approval from others. Role expectations in this case would be the expectation that accountants are honest and that the statements contained on the accounting statement are true and accurate. The second half of the conventional stage is marked by adherence to moral and ethical codes (Dellaportas, 2006). The highest level of ethical reasoning is the Post-conventional stage, In this stage of ethical reasoning, a person's inner conscious in their guide. They feel that rules are just and determined by consensus. In the final stage of ethical reasoning, rules are determined by self-chosen ethical principles. Dellaportas considers some people to progress through these stages, but in some, they appear to be stuck in one particular stage. Sam shows no progression from the early stages of ethical reasoning. His actions are purely self-motivated and for his own benefit.

We do not know what thoughts went through Sam's head before he decided to act in the manner in which he did and we do know that whether he considered the potential consequences of his actions or not. In the end, he many have only thought about the money that he would make, the things that he could have, or whatever else might have gone through his head. He might have acted on an impulse. He might have spent long hours debating the acts and the potential risks that he was taking. He might have lost sleep over the risk of getting caught, but in the end, for whatever reason, he decided to go through with it. We have no way to knowing the real motivations and circumstances behind Sam's actions, but we do know that in the end, he did not demonstrate a high level of ethical reasoning.

Prior to the conviction of Enron executives in the United States, non-compliance with accounting codes had little consequence. The convictions of these executives caused a global shift in how people thought about accounting codes, their importance in maintaining public trust and why consequences need to be applied when these codes are broken. Now, managerial decision-making is more in alignment with the principles of acceptable, ethical principles.

Accountants now have a greater respect for the law than they did in the past (Bolt-Lee & Moody, 2010). Laws and ethical codes are only as good as the ability to enforce them. Sam broke many portions of APES 110, and he did so numerous times. However, until the company had the ability to enforce the code, there was little that could be done to prevent Sam, or any other employee from doing it again.