APES 110 Ethics Violations in Professional Accounting

Introduction: Trust and Ethics in Accounting

An accountant employed at a small accounting practice was found, following a disciplinary investigation, to have 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 for business forecasting and strategic planning, and investors rely on them to assess whether a company represents an acceptable risk. Because so many stakeholders depend on the accuracy of these statements, accountants must ensure that the information they provide is as reliable as possible.

There is little room for error and no room for mistrust in the accounting profession. Bad information in an accounting statement leads to poor financial decisions and erodes confidence in the profession. Accountants must therefore adhere to a strict code of ethics in order to preserve the faith and trust that the public places in the statements they present.

Accounting is an integral part of modern society, and accountants live in a world of dual loyalties. They have a duty to serve the public interest and to provide an accurate picture of the firms they represent, but they also have a duty to the financial interests of their clients. Their clients pay for accounting services, and it is rarely good business practice to present clients in an unflattering light. When an accounting statement does not reflect well on a client, the accountant finds himself or herself in a difficult position: they must satisfy the public need for honesty and accuracy while remaining attentive to their client's interests (Kaidonis, 2006). This tension was precisely the context in which the ethical standards codified in APES 110 were developed.

Violations of APES 110: Specific Sections Breached

APES 110 is consistent with international accounting standards, including the IFAC Code of Ethics for Professional Accountants (Wijesinghe, 2007). The key differences between APES 110 and the IFAC code lie primarily in the terminology used. A review board has planned to explicitly state in APES 110 that it is consistent with IFAC standards and to align its language accordingly, but these changes remain in process.

Differences also exist among the various codes with which accountants must comply. Some standards are rules-based, while others serve as guidelines to assist accountants in decision-making. For instance, the AICPA code is considered a rules-based code; accountants are expected to follow its provisions to the letter. By comparison, the IESBA code is a principles-based code similar to APES 110. Accountants working under principles-based codes are expected both to comply with the rules and to use the code's framework when navigating situations unique to their own practice (Allen, 2010).

APES 110 represents both mandatory requirements and guidance to the accounting profession (Lewis, 2010). This dual function is unusual for an accounting standard, and it can make it difficult to determine whether any given section is mandatory or merely advisory. Revisions have been suggested to separate the mandatory provisions from those that are guidance only (Lewis, 2010). Nevertheless, the existence of these ambiguities does not excuse the conduct in question. What this accountant did was unethical by any measure: he created a conflict of interest between his employer and his own position as an employee.

APES 110 is clear about what accountants are and are not permitted to do. Although it functions more as a framework of guidelines than as a rigid rulebook, it still articulates what is expected of accountants and leaves sufficient latitude for professional judgment when circumstances require it. The following analysis examines the accountant's actions against the specific sections of APES 110 that were violated.

Part A of APES 110 sets out the purpose of the document. Part A, section 100.1 states that a member's primary responsibility is to the public interest — not to "satisfy the needs of an individual, client, or employer" (APESB, 2006, p. 4). This principle was clearly violated. The accountant acted in the interests of two parties — himself and the clients who paid him to falsify statements — at the expense of the broader public interest.

Part A also establishes six foundational principles: integrity, objectivity, professional competence and due care, confidentiality, and professional behavior (APESB, 2006, p. 5). The code is intended to help members identify ethical threats as they arise and provides a decision-making framework to guide them. Where a member is unable to resolve a situation independently, the standard provides a chain of command to aid the decision-making process. This accountant blatantly ignored that chain of command. When a client offered to pay him to falsify accounting statements, he should have immediately referred the matter to his manager or to a higher authority, in accordance with established protocols.

Part A, section 100.8 provides for inadvertent violations: "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 provision does not apply here. Rather than correcting the violation upon its occurrence, the accountant repeated the conduct on multiple occasions. This pattern cannot be dismissed as a simple mistake; it demonstrates deliberate, repeated intent.

Part A, section 100.10 addresses threats to ethical accounting procedures. Subsection (a) covers self-interest threats, which arise when financial or other interests benefit the member or members of their close family (APESB, 2006, p. 6). The accountant's conduct was clearly motivated by self-interest. Subsection (e) provides the only potential grounds for partial mitigation: if the accountant was coerced by a client — for instance, by a threat to withdraw business — some portion of the blame might rest with the client. However, even in such a scenario, the accountant should have reported the matter to a supervisor. Moreover, given that the misconduct involved multiple clients, it is highly unlikely that all of them applied coercive pressure.

The most blatant violation of Part A is that of section 110, which concerns integrity. Section 110.2 states that a member should not be associated with reports, returns, communications, or other information where they believe 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 its application to the accountant's conduct. Not only did he present misleading statements; he did so repeatedly and knowingly.

In addition to the integrity violation, the accountant also breached the principle of objectivity. Part A, section 120.1 states that objectivity is a requirement for all members and that members must not place themselves in situations in which bias or a conflict of interest could arise (APESB, 2006, p. 9). By accepting payment from clients in addition to his regular salary from his employer, the accountant created a financial incentive to misrepresent clients favorably on accounting ledgers. This constitutes both bias and a clear conflict of interest.

The third major violation in Part A involves professional behavior. Section 150.1 disallows any action or omission that might bring discredit to the profession (APESB, 2006, p. 13). Accepting payments from clients in exchange for producing false financial statements plainly falls within this prohibition. The section further provides that discreditable conduct 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 be difficult to argue that the accountant's conduct did not negatively affect the profession's reputation.

Part B of APES 110 addresses special considerations for members in public practice. It was not stated whether this accountant was in public or private practice; if he was in public practice, additional violations arise under Part B, many of which expand upon the principles already stated in Part A. Public accountants are generally held to more rigorous standards than those in private practice. Part C similarly reiterates and expands upon the concept of conflict of interest. Taken together, the violations documented here are so extensive that the accountant would face considerable difficulty arguing any ethical justification for his actions.

Does Professional Status Affect Ethical Responsibility?

Rogers (2005) examined the global rise of more rigorous accounting standards and principles. According to Rogers, the tightening of regulations followed international accounting scandals and reflected a growing need for legislation that increases accountability and transparency. This trend produced a shift away from purely rules-based approaches, such as U.S. GAAP, toward principles-based accounting legislation. Principles-based standards grant individual accountants greater latitude in decision-making but hold them to correspondingly higher ethical expectations. Because this accountant was a credentialed professional, he was not merely morally obligated but legally obligated to act in accordance with the highest ethical standards of his profession.

The APESB has provided forums for discussing the ethical responsibilities of professional accounting bodies and the standards to which they must adhere (Spargo, 2010). Recent revisions to accounting codes include the introduction of requirements applicable to public interest entities and provisions for rotating key audit partners, thereby preventing the development of mutual interests and promoting greater transparency in auditing practice (Spargo, 2010). A mandatory twelve-month cooling-off period for key audit partners has also been introduced. These measures signal clearly that independent audits exist to keep all parties accountable, and they increase the probability that unscrupulous conduct will eventually be discovered.

According to CPA Australia (2010), no meaningful distinction exists between providing technical accounting services and providing interpretation of accounting laws and ethical considerations. However, a separation does exist between managing a client's project and providing accounting services for that same project: an accountant cannot perform both roles simultaneously without creating a conflict of interest. Avoiding conflict of interest has become a central ethical concern in the field. This accountant not only acted in direct violation of ethical obligations; he created a conflict of interest by accepting payment from both his employer and the client, effectively placing himself in the role of a private consultant or independent contractor — an arrangement that fundamentally compromised his professional independence.

Conclusion and Recommendations

The incident involving this accountant is unfortunate, not only for him personally, but for the company that employed him. An incident such as this can damage the company's reputation and place its future in jeopardy. His actions also harm the accounting profession as a whole: when misconduct of this kind becomes public knowledge, it erodes the trust that the public places in accounting professionals generally.

The company must take decisive action to demonstrate to the public that it treats ethical violations seriously. From a public relations standpoint, this may require terminating the accountant's employment and, where warranted, pursuing criminal charges in order to restore confidence in the firm. The company should also communicate transparently to the public the steps it has taken to prevent recurrence. These actions may be necessary not only to repair reputational damage but to ensure the firm's continued viability. Organizations across the profession must adopt a firm and unambiguous stance against ethical violations — and must be prepared to enforce it.

References

Accounting Professional and Ethical Standards Board (APESB). (2006). APES 110 Code of Ethics for Professional Accountants. June 2006.

Allen, C. (2010). Comparing the ethics codes: AICPA and IFAC. Journal of Accountancy, October 2010.

Bolt-Lee, C., & Moody, J. (2010). Highlights of finance and accounting ethics research. Journal of Accountancy, October 2010.

CPA Australia. (2010). Frequently asked questions about financial reporting.

Dellaportas, S. (2006). Making a difference with a discrete course on accounting ethics. Journal of Business Ethics, 65, 391–404.

Kaidonis, M. (2008). The accounting profession: Serving the public interest or capital interest? Australian Accounting Business and Finance Journal, 2(4), 1–5.

Lewis, P. (2010). Consultation paper: Proposed revision of APES 110 Code of Ethics for Professional Accountants. Group 100, February 8, 2010.

Rogers, J. (2005). Going too far is worse than not going far enough: Principle-based accounting standards, international harmonization, and the European paradox. Houston Journal of International Law.

Spargo, K. (2010). Audit quality in Australia: A strategic review. APESB, May 10, 2010.

Wijesinghe, C. (2007). Six monthly review of APES 110 Code of Ethics for Professional Accountants issued in June 2006. Accounting Professional & Ethical Standards Board Limited.