Putting ethics first

Nicky Burridge
Gianfranco Bonadies

The Code of Ethics for Professional Accountants is considered the cornerstone of a professional accountant’s work, but how well do they know its requirements? Nicky Burridge finds out about the profession’s current perception of the Code, common ethical issues that accountants face at work, and how companies can uphold a good ethics culture

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Nicky Burridge
Gianfranco Bonadies


Whether auditing a company’s financial statements, valuing an entity for an acquisition, or investigating corporate fraud, the need to be trustworthy is at the heart of everything professional accountants do.

The standards of behaviour professional accountants must follow is set out in the Code of Ethics for Professional Accountants (the Code), which, through its fundamental principles of integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour, details their responsibility to act in the public interest.

Helen Tang CPA (practising), Managing Director of Moore Stephens CPA Limited, and Chair of the Hong Kong Institute of CPAs’ Ethics Committee, describes the Code as being the “foundation and cornerstone of a professional accountant’s work.” She says: “Without it, the quality and judgement of the work will be questioned, and unethical acts may be committed.”

Horace Ma CPA (practising), Chief Financial Officer at S. Culture Holdings (BVI) Limited, and a member of the Ethics Committee, agrees: “The Code is very important to the accounting profession. If it was not in place, we would be building the foundations of the profession on quicksand; if we don’t practice the Code, the profession will be gone sooner or later.”

Despite the importance of the Code, the Ethics Survey 2021 carried out by the Ethics Committee between December 2021 and January 2022 found that many Institute members were not as familiar with it as expected.

Maria Xuereb CPA, Partner Emeritus at Deloitte China, and Deputy Chair of the Ethics Committee, says: “From the survey results, it appears that the level of awareness is not as high as we were hoping. Only 67 percent of respondents reported they were aware of certain revisions made to the Code, while 33 percent reported they were not aware of any of the revisions made.”

The study also found that accountants aged under 44 and those in junior positions were less likely to be aware of revisions to the Code, and were also less likely to see the Code as providing them with guidance to meet their responsibility to act in the public interest. “Instead, they considered it more as a practical tool to assess their decision-making, while the older and more senior accountants indicated that they see it as guidance to enable them to meet their public responsibility,” Xuereb says.

Tang adds that the Code and recent provisions also seemed to be better understood and implemented by professional accountants in practice (PAIP), as their workplace strongly promotes and encourages a good ethics culture. “This is probably due to the requirements imposed on professional practice and the importance [of the Code] that is emphasized,” she says.

Ethical issues

The study found that the most common ethical issue professional accountants encountered in their work was conflict of interest. Ma explains: “For practising members, the central issue is whether they are perceived to be independent enough to perform their services for clients. This is the core ethical yardstick we are measured against.”

Other ethical issues experienced by respondents in the past 12 months included undue bias, the manipulation of information (including fraudulent accounting, or altering income or expenses), distorting information by being overly optimistic in making judgements on accounting estimates, discount rates etc., and relying on information that they knew to be overly optimistic in making judgements on accounting estimates.

Xuereb explains that conflict of interest or undue bias can lead accountants to manipulate information. “For example, if accountants are trying to achieve a certain result, they may do so by altering some figures, such as by reducing expenses, or some other manipulation of information.”

She adds that relying on information that might be overly optimistic when making judgements on accounting estimates can also be an issue for professional accountants. “People tend to expect certain estimates, and, indirectly, they listen only to the part of the explanation that supports their bias on that aspect,” she says. “Auditors may have an undue bias if they have certain expectations, and that may result in them not considering certain negative information or information that doesn’t seem to support their initial expectation.”

For PAIPs, Tang thinks the biggest challenge is the requirement to exercise professional competence and due care, and in particular, professional scepticism. “The breach of this has been seen in a lot of compliance cases presented by the regulators, a lot of which would result in disciplinary action in various forms,” she says.

Pressure from above

Unethical behaviour does not appear to be particularly widespread, with 87 percent of respondents indicating that they did not act unethically or know someone who did in the last 12 months, although 2 percent admitted they had acted unethically at work and 11 percent knew someone who had.

The survey suggested the main cause of unethical behaviour was pressure from management, but insufficient ethical awareness at an organization, and a lack of ethics compliance policies and monitoring were also cited as reasons.

The drivers for unethical behaviour can be both internal and external. Xuereb points out that during economic downturns, management could be under pressure and that pressure is then transferred to the staff.  “For example, if in a downturn the company’s turnover or performance is poor or below market expectations, management may put pressure on staff to inflate turnover or increase profits or reduce losses. Both internal and external factors will have an impact, but ultimately I feel the internal ones are critical to avoid and prevent ethical issues,” she says.

Ma points out that both challenging and strong economic conditions can lead to unethical behaviour. “During poor economic times, there may be a tendency to ‘cosmeticize’ the financials. During good economic times, it is easier to make things look better than they are. Whatever the economy is doing, people can be greedy,” he says.

Ma adds that conflicts of interest can arise during deals or mergers and acquisitions. “There are many parties of grave interests to deal with. Accountants may succumb to the biased influence of these parties under immense pressure. Ultimately, it is all about who gets the biggest benefits out of it,” he says.

“Both internal and external factors will have an impact, but ultimately I feel the internal ones are critical to avoid and prevent ethical issues.”

Anna Lam, Executive Director of the Hong Kong Business Ethics Development Centre (HKBEDC) at the Independent Commission Against Corruption (ICAC), and a member of the Ethics Committee, says the tone has to come from the top. “While the economic environment, social norms and cultural differences are some external factors that have an impact on organizational behaviour, management and corporate leaders play the biggest role in shaping the organizational values and ethics culture,” she says. “At the corporate level, an ineffective system of control, poor risk management and lack of determination of top management to uphold an ethical culture may be conducive to corruption and other unethical practices.”

Lam adds that at the heart of most unethical practices, there is a bad decision driven by human behaviour at the personal level, likely due to ill intent, greed, heedlessness or ignorance of the law. “That is why organizations need to establish clear ethical guidelines and organize integrity training to enhance staff awareness of legal and regulatory requirements, as well as the grave consequences of non-compliance,” she says.

Upholding standards

Unfortunately, the most common response among members who encountered unethical behaviour was to do nothing, sometimes due to pressure from management. Professional accountants were also more likely to resign in the face of unethical behaviour than to report it to an appropriate external party, according to the survey.

“Being submissive will encourage repeated unethical practices, which might lead to illegal activity and jeopardize one’s professional career,” Lam points out. Instead, she urges members to uphold a high standard of integrity by understanding and complying with the legal and professional requirements when discharging their duties.

“When facing ethical dilemmas at work, one should always apply critical thinking and adhere to the fundamental principles of professional accountants. If the ethical dilemma could not be resolved, one should escalate the issue to a higher level of authority, such as the audit committee or to those charged with corporate governance inside the organization,” she says.

Lam adds that members should also be prepared to recognize ethical crises or wrongdoing as issues that require their intervention. “For issues that might have legal implications, they should seek external guidance such as legal advice or report to relevant law enforcement agencies to avoid breaking the law.”

Tang agrees, adding that professional accountants should never succumb to pressure to act unethically. “Instead, they should use the right channel to voice their concerns and also to report to their superiors, or the authorities where applicable.”

Ma suggests professional accountants who encounter unethical behaviour should follow the “consult, consult, report” formula set out in the Code, consulting people in the company who are in charge of governance, before ultimately reporting the behaviour. But he concedes: “In Chinese culture it can be a bit awkward to report on your superiors or colleagues. Although the practice of whistleblowing has been in place for some years in Hong Kong, we don’t have a law that protects the whistleblower.”

“We have to let people know what is being punished, and what is going on in the real world, so they know where they need to pay more attention.”

Building a strong ethics culture

To promote ethical behaviour internally, Tang also suggests organizations need to set the tone at the top, encourage staff to speak up when necessary and have a good whistleblowing policy that enables informants to remain anonymous. She adds that they should also ensure their internal policies are up to date, changing them when necessary.

Lam points out that the HKBEDC has developed a Corporate Ethics Health Checklist as a tool for organizations to review and enhance their ethics culture. She adds that business leaders should serve as role models, promoting ethical behaviour, facilitating open communication and adopting a zero-tolerance approach to unethical behaviour.

Organizations should also have a code of conduct setting out the expected standards of behaviour and reflecting the company’s core values and culture. “In addition, they should organize regular integrity training and ethics promotion activities, and establish a sound internal control system, which is monitored and reviewed regularly,” Lam says.

Xuereb thinks the solution to improving ethical standards also involves more guidance and training. The survey found that only 41 percent of respondents had attended an ethics-related training session in the past year, while 18 percent had not attended one in the past five years. “Training needs to move from being theoretical to being practical through using case studies and soliciting accountants’ own response to get them to think about what would be ethical, before telling them the correct ethical solution,” she suggests.

She thinks it is also important that organizations have procedures in place to enable someone who encounters a fraudulent issue to escalate it in order to ensure the situation is remedied at an early stage. But Xuereb adds that staff must feel confident that there will be no retaliation if they act as a whistleblower, otherwise they may be deterred from reporting issues.

Ma agrees that education is key to improving ethical behaviour. “You will not see an immediate effect, but you will see it over the long term,” he says.

Promoting understanding

The Institute’s Ethics Committee works hard to promote understanding of the Code and its revisions among members.

Ma explains that the survey, which was first launched in 2019, acts as a gauge for the committee to see the level of understanding and application of the Code among members, and to help it plan future education initiatives.

Xuereb adds: “The intention was for us to understand how the profession perceives the Code with regards to the relevant regulatory requirements. We were also interested to identify areas that have a higher risk of ethical non-compliance, as it helps us to focus any training we provide and any articles we issue.”

The committee set up the Ethics Educational Materials Advisory Panel in 2021 to provide information on proposed changes to the Code, and issue guidance notes and education material on the application of the Code for members. It will also continue to publish articles and case studies on past disciplinary cases. Last year, it created a video introduction to the Code for members.

“We have to let people know what is being punished, and what is going on in the real world, so they know where they need to pay more attention,” Ma says.

Tang says ethics modules have been incorporated into auditors’ workshops, such as the Workshop for New Auditors and the Workshop for Audit Managers/Seniors In-Charge, and the Institute’s Financial Controllership Programme, which are held regularly.

In addition, the committee will host webinars on revised pronouncements, such as the one on Revised Non-Assurance Services and Fee-related provisions that it held recently. “We have also approved for the Institute to put in place a post-implementation review of major standards. The objectives are to determine whether the standards are being consistently understood and applied. It is an opportunity to identify how practical challenges and concerns are being addressed,” Tang says.

Alongside the work of the Ethics Committee, Lam also advises members to look at the Ethics Resources for Accounting Professionals developed by the HKBEDC in consultation with the Institute. “The online resource, which can also be seen at the Institute’s New and Major Standards Resource Centre, features articles highlighting some common ethical risks faced by external auditors, internal auditors, financial accountants and management accountants, as well as the legal obligations and professional principles they should pay heed to in tackling ethical challenges,” she says.

Lam adds that the Institute has also joined hands with the HKBEDC to provide continuing professional development (CPD) to members on topics relating to corruption prevention, professional ethics and ethical decision-making.

Given the importance of ethics to professional accountants, Tang would like to see ethics training become a mandatory part of CPD. “When you are a professional, you must act professionally complying with the rules and regulations that a professional is required to follow. As CPD is an ongoing exercise, to make ethics training mandatory would raise the level of awareness and act as a reminder,” she says.

Lam agrees: “Ethics-related training is essential to preserve a high standard of professional integrity. Mandatory ethics training in CPD programmes could help members update their technical and regulatory knowledge, and refresh themselves on the ethical standards to ensure their professional competence and standard in discharging their accounting duties.”

According to the Ethics Committee’s survey, 87 percent of respondents did not act unethically or know someone who did in the last 12 months, although 2 percent had acted unethically at work and 11 percent knew someone who had.

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