Ethical Decision Making Ethical Decision Making ModelModel

Applying Ethical Decision Making Applying Ethical Decision Making modelsmodels

American Accounting Association model American Accounting Association model (AAA)(AAA)

7 step model 7 step model

Purpose- to develop a systematic Purpose- to develop a systematic approach to making decisions that can be approach to making decisions that can be used in any situation having ethical used in any situation having ethical implicationsimplications

7 Steps7 Steps

1.1. What are the facts of the case?What are the facts of the case?

2.2. What are the ethical issues?What are the ethical issues?1.1. Identify the primary stakeholdersIdentify the primary stakeholders

2.2. Define the ethical issuesDefine the ethical issues

3.3. What are the norms, principles & values What are the norms, principles & values related to the case?related to the case?

Generally norms, principles and values are Generally norms, principles and values are standards, rules and beliefs that guide standards, rules and beliefs that guide acceptable and morally ‘good’ conduct. acceptable and morally ‘good’ conduct. Examples of principles include the profit motive, Examples of principles include the profit motive, harm, integrity and respect for individualsharm, integrity and respect for individuals

7 Steps7 Steps

4.4. What are the alternative courses of What are the alternative courses of action?action?

5.5. What is the best course of action that is What is the best course of action that is step 3?step 3?

Is there any norm, principle or value so Is there any norm, principle or value so persuasive that a resolution is obvious. For persuasive that a resolution is obvious. For example, protecting the environment is example, protecting the environment is important to avoid permanent damage and important to avoid permanent damage and respect the rights of the communities who respect the rights of the communities who rely on the environment for survivalrely on the environment for survival

7 Steps7 Steps

6.6. What are the consequence of each What are the consequence of each possible course of action?possible course of action?

Each course of action should be evaluated in Each course of action should be evaluated in respect to its norms, principles and values and respect to its norms, principles and values and from both short and long tem perspectives & from both short and long tem perspectives & positive and negative consequencespositive and negative consequences

7.7. What is the decision?What is the decision?

Joint code of Professional ConductJoint code of Professional Conduct

Guidance note 1 and Sections 100.16 to 100.21 contain steps for Guidance note 1 and Sections 100.16 to 100.21 contain steps for Ethical conflict resolution similar to those outlined in the AAA Ethical conflict resolution similar to those outlined in the AAA model however the focus is more on the fundamental principles of model however the focus is more on the fundamental principles of professional conduct, threats & safeguards as outlined in the Joint professional conduct, threats & safeguards as outlined in the Joint code of Professional Conductcode of Professional ConductIt outline 5 steps that should be consideredIt outline 5 steps that should be considered

1.1. Relevant factsRelevant facts2.2. Ethical issuesEthical issues3.3. Fundamental principles related to the matter in question, including Fundamental principles related to the matter in question, including

the identification of threats to those principlesthe identification of threats to those principles4.4. Establish internal procedures which might represent safeguards Establish internal procedures which might represent safeguards

against the identified threats; andagainst the identified threats; and5.5. Alternative course of actionAlternative course of action

Code of Ethics for Professional AccountantsCode of Ethics for Professional Accountants

Ethical conflict resolutionEthical conflict resolution

100.16     In evaluating compliance with the fundamental principles, a 100.16     In evaluating compliance with the fundamental principles, a Member may be required to resolve a conflict in the application of Member may be required to resolve a conflict in the application of fundamental principles.fundamental principles.

100.17     When initiating either a formal or informal conflict resolution 100.17     When initiating either a formal or informal conflict resolution process, a Member should consider the following, either individually process, a Member should consider the following, either individually or together with others, as part of the resolution process:or together with others, as part of the resolution process:

(a)     Relevant facts;(a)     Relevant facts;(b)     Ethical issues involved;(b)     Ethical issues involved;(c)     Fundamental principles related to the matter in question, including (c)     Fundamental principles related to the matter in question, including

the identification of threats to those principles;the identification of threats to those principles;(d)     Established internal procedures which might represent safeguards (d)     Established internal procedures which might represent safeguards

against the identified threats; andagainst the identified threats; and((e)     Alternative courses of actione)     Alternative courses of action..

Having considered these issues, a Member should determine the Having considered these issues, a Member should determine the appropriate course of action that is consistent with the fundamental appropriate course of action that is consistent with the fundamental principles identified. The Member should also weigh the principles identified. The Member should also weigh the consequences of each possible course of action. If the matter remains consequences of each possible course of action. If the matter remains unresolved, the Member should consult with other appropriate unresolved, the Member should consult with other appropriate persons within the Firm or employing organisation for help in persons within the Firm or employing organisation for help in obtaining resolutionobtaining resolution

Ethical conflict resolutionEthical conflict resolution cont cont

..100.18     Where a matter involves a conflict with, or within, an 100.18     Where a matter involves a conflict with, or within, an

organisation, a Member should also consider consulting with those organisation, a Member should also consider consulting with those charged with governance of the organisation, such as the board of charged with governance of the organisation, such as the board of directors or the audit committee.directors or the audit committee.

100.19     It may be in the best interests of the Member to document the 100.19     It may be in the best interests of the Member to document the substance of the issue and details of any discussions held or substance of the issue and details of any discussions held or decisions taken, concerning that issue.decisions taken, concerning that issue.

100.20     If a significant conflict cannot be resolved, a Member may wish 100.20     If a significant conflict cannot be resolved, a Member may wish to obtain professional advice from the relevant professional body or to obtain professional advice from the relevant professional body or legal advisors, and thereby obtain guidance on ethical issues without legal advisors, and thereby obtain guidance on ethical issues without breaching confidentiality. For example, a Member may have breaching confidentiality. For example, a Member may have encountered a fraud, the reporting of which could breach the encountered a fraud, the reporting of which could breach the Member's responsibility to respect confidentiality. The Member should Member's responsibility to respect confidentiality. The Member should consider obtaining legal advice to determine whether there is a consider obtaining legal advice to determine whether there is a requirement to report.requirement to report.

100.21     If, after exhausting all relevant possibilities, the ethical conflict 100.21     If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a Member should, where possible, refuse to remains unresolved, a Member should, where possible, refuse to remain associated with the matter creating the conflict. The Member remain associated with the matter creating the conflict. The Member may determine that, in the circumstances, it is appropriate to withdraw may determine that, in the circumstances, it is appropriate to withdraw from the Engagement Team or specific assignment, or to resign from the Engagement Team or specific assignment, or to resign altogether from the Engagement, the Firm or the employing altogether from the Engagement, the Firm or the employing organisation.organisation.

Case studyCase study

Use the AAA model to analyse the caseUse the AAA model to analyse the caseAnd determine what Davis should doAnd determine what Davis should do

The business environmentThe business environment

Role of Financial ReportsRole of Financial Reports

GPFR provide information about a GPFR provide information about a reporting entity to a wide range of parties reporting entity to a wide range of parties who are unable to demand information who are unable to demand information specifically tailored to their individual specifically tailored to their individual requirementsrequirements

Costs & Benefits of RegulationCosts & Benefits of Regulation

Costs:Costs:– Developing, promulgating and enforcing Developing, promulgating and enforcing

reporting standards;reporting standards;– Collecting and processing information in order Collecting and processing information in order

to prepare financial reports that comply with to prepare financial reports that comply with disclosure requirements;disclosure requirements;

– Auditing and disseminating financial reports;Auditing and disseminating financial reports;– Information search, analysis and use by Information search, analysis and use by

decision makers;decision makers;

Users & their information needsUsers & their information needsUsersUsers Information NeedsInformation Needs

InvestorsInvestors Risk & return on investmentRisk & return on investment

Information to assist in decision making – buy, hold or Information to assist in decision making – buy, hold or sell sharessell shares

Assess ability of entity to pay dividendsAssess ability of entity to pay dividends

EmployeesEmployees Stability & profitability of employersStability & profitability of employers

Assess ability of entity to pay remuneration, Assess ability of entity to pay remuneration, retirement benefits and employment opportunitiesretirement benefits and employment opportunities

LendersLenders Assess ability of the entity to pay interest and loan Assess ability of the entity to pay interest and loan repaymentsrepayments

Suppliers & trade Suppliers & trade CreditorsCreditors

Assess ability of the entity to pay amounts owing to Assess ability of the entity to pay amounts owing to themthem

CustomersCustomers Assess continuance of the entityAssess continuance of the entity

Governments & Governments & AgenciesAgencies

Assess their allocation of scare resources i.e. funding. Assess their allocation of scare resources i.e. funding. Regulate the activities of the entities, determine Regulate the activities of the entities, determine taxation policies.taxation policies.

PublicPublic Assess recent trends and developments in the Assess recent trends and developments in the prosperity of the entity and a range of its activitiesprosperity of the entity and a range of its activities

Regulatory influences on corporate Regulatory influences on corporate financial reportingfinancial reporting

Why regulate?Why regulate?– Justice & fairnessJustice & fairness

In the absence of regulation and min standards of financial In the absence of regulation and min standards of financial reporting, firms may fail to disclose adequate information or reporting, firms may fail to disclose adequate information or could possibly engage in creative accounting practicescould possibly engage in creative accounting practices

Protect investors against exploitation by insiders, maintaining Protect investors against exploitation by insiders, maintaining fairness and eliminating fraudfairness and eliminating fraud

– UtilitarianismUtilitarianismContribute to the goal of achieving an efficient allocation of Contribute to the goal of achieving an efficient allocation of scarce resourcesscarce resources

‘‘Common good’ or ‘economic benefits to all of equity on Common good’ or ‘economic benefits to all of equity on capital markets’capital markets’

Costs & Benefits of RegulationCosts & Benefits of Regulation

Benefits:Benefits:– Improved credibility of financial reporting;Improved credibility of financial reporting;– Increased confidence in capital marketsIncreased confidence in capital markets– Reduction in costs of using information in Reduction in costs of using information in

GPFR because if increased uniformity of GPFR because if increased uniformity of accounting policy choices among reporting accounting policy choices among reporting entities;entities;

– Better investment decisions because of Better investment decisions because of improved information available to decision improved information available to decision makersmakers

Beyond GPFR - TBLBeyond GPFR - TBL

TBL- Triple bottom line - refers to the three elements of TBL- Triple bottom line - refers to the three elements of social, environmental and financial accountabilitysocial, environmental and financial accountability– Social accountability- involvement in shaping local, national and Social accountability- involvement in shaping local, national and

international public policy, equality, treatment of minorities, international public policy, equality, treatment of minorities, employee issues and public concernemployee issues and public concern

– Environmental accountability- impacts made through processes, Environmental accountability- impacts made through processes, products or services i.e.. Air, water, land, natural processes, products or services i.e.. Air, water, land, natural processes, human healthhuman health

– Financial accountability – financial performanceFinancial accountability – financial performance

Aim of TBL – to extend decision- making and disclosure Aim of TBL – to extend decision- making and disclosure beyond the domains of financial reporting so that beyond the domains of financial reporting so that decisions also include the impacts on natural and human decisions also include the impacts on natural and human capital as well as financial capitalcapital as well as financial capitalOnly a few of the top 500 companies use TBL and Only a few of the top 500 companies use TBL and generally the reports tend to have a bias toward generally the reports tend to have a bias toward disclosing only positive informationdisclosing only positive information

International Financial Reporting International Financial Reporting StandardsStandards

Australian companies and other reporting Australian companies and other reporting entities under the Corporations Act 2001 will be entities under the Corporations Act 2001 will be required to prepare their financial statements in required to prepare their financial statements in accordance with accounting standards issued by accordance with accounting standards issued by the International Accounting Standards Board the International Accounting Standards Board (IASB)(IASB)Accounting standards prepared by the AASB are Accounting standards prepared by the AASB are a source of regulation governing financial a source of regulation governing financial reportingreportingAlso important are the UIG consensus views Also important are the UIG consensus views Both are concerned with accounting Both are concerned with accounting measurement & disclosuremeasurement & disclosure

Benefits of IFRSBenefits of IFRS

Assist the Australian economy by facilitating cross Assist the Australian economy by facilitating cross border comparisons by investors, removing barriers to border comparisons by investors, removing barriers to international capital flowinternational capital flow

– Increasing the comparitability of financial reports prepared in Increasing the comparitability of financial reports prepared in different countries and providing participants in international different countries and providing participants in international capital markets with better quality information on which to base capital markets with better quality information on which to base investment and credit decisionsinvestment and credit decisions

– Removing barriers to international capital flows by reducing Removing barriers to international capital flows by reducing differences in financial reporting requirements for participants in differences in financial reporting requirements for participants in the international capital markets and by increasing the the international capital markets and by increasing the understanding by foreign investors of Australian financial reportsunderstanding by foreign investors of Australian financial reports

– Reduced financial reporting costs for multinational companies Reduced financial reporting costs for multinational companies and foreign companies operating in Australia and reporting and foreign companies operating in Australia and reporting elsewhereelsewhere

– Improving quality of financial reporting in Australia to best Improving quality of financial reporting in Australia to best international practiceinternational practice

Financial Reporting CouncilsFinancial Reporting Councils

Statutory body established under the ASIC ActStatutory body established under the ASIC ActResponsible for providing broad oversight of the process for setting Responsible for providing broad oversight of the process for setting accounting standards in Aust and giving the Treasurer reports and accounting standards in Aust and giving the Treasurer reports and advice on the processadvice on the processIn relation to the AASB the FRC is responsible for:In relation to the AASB the FRC is responsible for:– Appointing members of the AASBAppointing members of the AASB– Approving and monitoring the AASB’sApproving and monitoring the AASB’s

PrioritiesPrioritiesBusiness planBusiness planBudget & staffing arrangementsBudget & staffing arrangements

– Determining its broad strategic directionDetermining its broad strategic direction– Monitoring development of international accounting standardsMonitoring development of international accounting standards– Oversee Australians auditing standard setting processOversee Australians auditing standard setting process– Monitor the effectiveness of auditor independence requirements in Monitor the effectiveness of auditor independence requirements in

AustraliaAustralia

AASBAASB

International accounting standards are issued by the AASB International accounting standards are issued by the AASB (Australian Accounting Standards Board)(Australian Accounting Standards Board)AASB accounting standards are given authority by the Corporations AASB accounting standards are given authority by the Corporations Act 2001Act 2001The functions of the AASB are:The functions of the AASB are:– Develop a conceptual frameworkDevelop a conceptual framework– Make and Formulate accounting standardsMake and Formulate accounting standards– Participate in and contribute to the development of accounting Participate in and contribute to the development of accounting

standards for worldwide use; andstandards for worldwide use; andApplication of accounting standards is mandatory:Application of accounting standards is mandatory:– Under the enforcement of the provisions of Corporations Act 2001 with Under the enforcement of the provisions of Corporations Act 2001 with

respect to disclosing entitles (those entities in which there is likely to be respect to disclosing entitles (those entities in which there is likely to be significant investor interest), registered schemes and companies, other significant investor interest), registered schemes and companies, other than small proprietary companies in certain circumstancesthan small proprietary companies in certain circumstances

– Under commonwealth's state & territory legislation relating to public Under commonwealth's state & territory legislation relating to public sector reporting entitiessector reporting entities

AASBAASB

International accounting standards are issued by the AASB International accounting standards are issued by the AASB (Australian Accounting Standards Board)(Australian Accounting Standards Board)AASB accounting standards are given authority by the Corporations AASB accounting standards are given authority by the Corporations Act 2001Act 2001The functions of the AASB are:The functions of the AASB are:– Develop a conceptual frameworkDevelop a conceptual framework– Make and Formulate accounting standardsMake and Formulate accounting standards– Participate in and contribute to the development of accounting Participate in and contribute to the development of accounting

standards for worldwide use; andstandards for worldwide use; andApplication of accounting standards is mandatory:Application of accounting standards is mandatory:– Under the enforcement of the provisions of Corporations Act 2001 with Under the enforcement of the provisions of Corporations Act 2001 with

respect to disclosing entitles (those entities in which there is likely to be respect to disclosing entitles (those entities in which there is likely to be significant investor interest), registered schemes and companies, other significant investor interest), registered schemes and companies, other than small proprietary companies in certain circumstancesthan small proprietary companies in certain circumstances

– Under commonwealth state & territory legislation relating to public Under commonwealth state & territory legislation relating to public sector reporting entitiessector reporting entities

Auditing and Assurance Standards Auditing and Assurance Standards BoardBoard

Mission – to develop in the public interest, Mission – to develop in the public interest, high quality standards and related high quality standards and related guidelines for auditors and providers of guidelines for auditors and providers of other assurance services, as a means to other assurance services, as a means to enhance the reliability of information enhance the reliability of information provided to users of audit and other provided to users of audit and other assurance servicesassurance servicesAuditing standards have the force of law Auditing standards have the force of law for the purpose of the Corporations Actfor the purpose of the Corporations Act

Authority of accounting standardsAuthority of accounting standards

Misc professional Statements APS, Conformity Misc professional Statements APS, Conformity with accounting standards and UIG Consensus with accounting standards and UIG Consensus Views requires members of CPA and ICAA to Views requires members of CPA and ICAA to comply with accounting standards.comply with accounting standards.Compliance is mandatory for all members of the Compliance is mandatory for all members of the professional bodiesprofessional bodiesNon compliance will represent a breach of the Non compliance will represent a breach of the ethics of those bodies and could result in ethics of those bodies and could result in disciplinary proceedings being brought against disciplinary proceedings being brought against those members resulting in a fine, expulsion those members resulting in a fine, expulsion from the professional bodyfrom the professional body

Conceptual Framework for financial reportingConceptual Framework for financial reporting

A set of interrelated concepts that represent a formal way of thinking A set of interrelated concepts that represent a formal way of thinking about a process or system under studyabout a process or system under studyDescribed asDescribed as

……………….. .. A set of interrelated concepts that define the nature, purpose A set of interrelated concepts that define the nature, purpose and broad content of general purpose financial reporting………and broad content of general purpose financial reporting………Provides a formal frame of reference for:Provides a formal frame of reference for:– the types of transactions and events that should be accounted forthe types of transactions and events that should be accounted for– How they should be measuredHow they should be measured– How they should be summarised and presented in the financial reportsHow they should be summarised and presented in the financial reports

The conceptual framework of Australia will be replaced by local The conceptual framework of Australia will be replaced by local equivalents of the IASB's conceptual framework.) with the possible equivalents of the IASB's conceptual framework.) with the possible exception of SAC 1 exception of SAC 1 Definition of a Reporting EntityDefinition of a Reporting Entity & SAC 2 & SAC 2 Objective of General Purpose Financial ReportsObjective of General Purpose Financial ReportsSAC 3 SAC 3 Qualitative Characteristics of Financial Information andQualitative Characteristics of Financial Information and

SAC4 Definition & recognition criteria of Elements of the financial SAC4 Definition & recognition criteria of Elements of the financial statements will be replaced with the IASB equivalent which is statements will be replaced with the IASB equivalent which is substantially similar but briefersubstantially similar but briefer