A junior accountant in a manufacturing company is told by the managing director to book next year's sales in this year's accounts so that the bonus targets are met. No rule in the company manual covers this exact instruction. Should the accountant comply? How the profession answers depends on its approach to ethics: a long list of rules, or a small set of principles applied with judgement.
Accountants also meet ethical conflicts as employees and as members of boards, in both private companies and public bodies.
This topic compares rules-based and principles-based codes, explains why the codes of the International Federation of Accountants (IFAC) and the Institute of Chartered Accountants of Nigeria (ICAN) are principles-based, and covers the ethical conflicts of accountants as employees and as people charged with governance, in private and public entities.
In 30 seconds
Rules-based: specific rules for specific situations; clear but cannot cover every case, needs constant updating and cannot fit cultural differences. Principles-based: general principles applied with judgement; flexible, but needs judgement and can be applied unevenly. IFAC and ICAN codes: principles-based, with some firm prohibitions. Employees: pressure to misstate, use of assets, bonus-linked targets. Governance: conflicts from several roles, and from approving matters that benefit the member. Public sector: public funds, declaration of assets and procurement integrity.
Key terms in plain English
| Term | What it means |
|---|---|
| Rules-based code | A code made of specific rules for specific situations |
| Principles-based code | A code of general principles applied with judgement |
| Prohibition | A firm rule where a threat cannot be reduced enough |
| Those charged with governance | People who oversee strategy and financial reporting |
| Related-party deal | A transaction with a person connected to the entity |
| Code of conduct | Rules of behaviour for members of a body or office |
Syllabus check
This topic is in syllabus area E, professional ethics and public interest (15% of marks). It covers:
- rules-based and principles-based approaches to professional ethics
- ethical conflicts of an accountant as an employee
- ethical conflicts of an accountant charged with governance in private or public entities
CAMA 2020 and governance ethics
The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.
| Section | What it says | Link to this topic |
|---|---|---|
| s. 404(2) | A public company must set up an audit committee | A governance body that oversees reporting and controls |
| s. 404(3) and (5) | Five members: three members and two non-executive directors, all financially literate, one a member of a professional accounting body | Competent and independent oversight |
| s. 404(7) | The committee reviews policies, controls and the audit and recommends the auditor | A forum for resolving governance conflicts |
The rules in more depth
Rules-based codes
A regulator could issue a code with specific rules for specific situations. Such a rules-based code has weaknesses:
- Accountants meet very many different situations where an ethical decision is needed. Circumstances are complex and varied, and it is impossible to make in advance a rule for every problem without knowing the exact facts.
- The kinds of ethical dilemma change as the business environment changes, so the rule book would have to be reviewed and updated regularly.
- Ethical views differ between countries and cultures. What is slightly unethical in one country may be normal in another, and a rule book cannot easily allow for national and cultural differences.
Principles-based codes
A principles-based code sets out general principles of ethical behaviour and requires the accountant to act in line with them, using judgement in each case to decide whether a course of action is proper. Both the IFAC and ICAN codes are principles-based.
| Rules-based | Principles-based | |
|---|---|---|
| Strengths | Clear, easy to check, easy to enforce, little room for excuse | Flexible, adapts to new situations, works across cultures, encourages thinking, not box-ticking |
| Weaknesses | Cannot cover every case, invites hunting for loopholes, needs constant revision, may not fit different cultures | Depends on judgement, may be applied unevenly, harder to prove a breach, needs training and an ethical culture |
In practice the Code mixes the two. Its core is principles and the conceptual framework of threats and safeguards. It also contains firm prohibitions in specific areas where the threat cannot be reduced to an acceptable level, such as contingent fees for audit clients, direct financial interests in audit clients and taking management responsibility. The principles guide judgement, and the prohibitions remove judgement where the risk is clear.
Ethical conflicts of an accountant as an employee
An accountant employed in a company, in the private or public sector, may meet conflicts such as:
- Pressure to misstate. A superior asks for sales to be brought forward, for expenses to be left out or for a note to be dropped. This threatens integrity and professional behaviour, and creates intimidation and self-interest threats where the accountant's job is at risk.
- Targets and bonuses. Pay linked to reported profit gives a personal reason to flatter the figures.
- Misuse of corporate assets. Using company property or funds for personal ends is a self-interest threat and may be illegal.
- Competence. Being asked to do a task the accountant cannot properly perform.
- Confidential information. Pressure to give company information to a friend, a competitor or a former employer.
The response follows the conflict-resolution steps: consider the facts, issues, principles, internal procedures and alternatives; raise the matter with a superior, then with higher management or those charged with governance; document; take advice from the Institute or lawyers; and if it is unresolved, refuse to be associated with the matter and, if necessary, resign. The accountant must not take part in a false or misleading statement.
Ethical conflicts when charged with governance
Those charged with governance oversee strategy and financial reporting and are accountable for the organisation as a whole. Private companies have a board and an audit committee. Public bodies have boards, councils and oversight committees. An accountant in such a role may have conflicts when:
- he holds a governance position in more than one organisation and learns confidential information in one that could help or harm another; or
- he approves investments or contracts that would benefit himself or an immediate family member.
The usual safeguards are to disclose the interest, to take no part in the decision, to rely on a policy on conflicts and on gifts, and, if the conflict is lasting, to give up one of the roles.
A public company's audit committee has an additional duty under section 404(7) of the Companies and Allied Matters Act 2020 (CAMA 2020): it keeps the effectiveness of the system of accounting and internal control under review.
Private and public entities compared
| Issue | Private entity | Public entity |
|---|---|---|
| Whose interests | Shareholders, lenders, employees | The public and taxpayers |
| Typical conflicts | Profit targets, related-party deals, dividend and bonus pressure | Misuse of public funds, contract awards to connected persons, political pressure |
| Controls and oversight | Board, audit committee, external audit, regulators | Legislature, the auditor-general, anti-corruption bodies, code of conduct rules |
| Special rules | Company law, corporate governance code, listing rules | Financial regulations and the rules on declaring assets by public officers |
| Public interest | Important for public interest entities | Central: the money belongs to the public |
In the public sector the pressure may be political, and the duty to the public is stronger. A public sector accountant who is told to approve a payment without a voucher, or to award a contract to a politician's company, faces a clear ethical conflict. The right response is to refuse, to record the instruction and to report it through the proper channels.
Worked examples
Example 1: rules or principles? A code says "an auditor must not hold more than 100 shares in a client". Another says "an auditor must not hold a financial interest that threatens objectivity".
- The first is a rule: precise, but it allows 100 shares in every client and does not mention a bond or a loan.
- The second is a principle: it covers any interest, but depends on judgement.
Example 2: the employee under pressure. The managing director tells the accountant to book ₦90 million of January sales in December.
- The instruction would mislead users of the statements: integrity and professional behaviour are at risk.
- The accountant refuses, records the instruction and raises it with the audit committee or the board.
- If it continues, he takes advice and, if necessary, resigns.
Example 3: a board conflict. A non-executive director who is an accountant sits on the boards of two suppliers of the same company.
- He may learn confidential pricing from one and use it against the other.
- He discloses the roles, takes no part in the decision and, if the conflict persists, gives up one role.
Example 4: public sector. A director of finance in a state ministry is asked by the permanent secretary to pay a contractor in advance for work not yet begun.
- The payment would misuse public funds and breach financial regulations.
- He refuses in writing and reports through the proper channels, such as the audit committee.
How to score full marks
- Give two or three weaknesses of rules and the main strength of principles.
- Say both IFAC and ICAN codes are principles-based, with firm prohibitions.
- For conflicts follow the order: facts, principles, consult, document, advice, withdraw.
- Separate private and public entity points.
Common mistakes in the exam
- Calling the ICAN code rules-based.
- Saying principles-based means no firm rules.
- Ignoring the public sector dimension.
- Complying with a superior's instruction to avoid conflict.
Quick revision
- Rules: clear but incomplete. Principles: flexible but depend on judgement.
- IFAC and ICAN codes: principles-based with prohibitions.
- Employee conflicts: pressure, targets, assets, competence, confidentiality.
- Governance conflicts: several roles, benefit to self.
Practice questions
Questions 1 to 10 are multiple choice. Questions 11 to 13 are written. Try each before opening the answer.
Question 1. A rules-based code:
- Sets general principles only
- Sets specific rules for situations
- Has no rules
- Is used only in banks
Show the answer
B. It gives specific rules.
Question 2. The IFAC and ICAN codes are:
- Rules-based
- Principles-based
- Not written
- Tax codes
Show the answer
B. They are principles-based.
Question 3. A weakness of rules-based codes is that they:
- Are flexible
- Cannot cover every situation
- Need no updating
- Fit every culture
Show the answer
B. New situations arise.
Question 4. A weakness of principles-based codes is that they:
- Depend on judgement
- Are too detailed
- Ignore culture
- Are rigid
Show the answer
A. Judgement can be uneven.
Question 5. An accountant told to misstate profit should first:
- Comply
- Refuse and raise the matter with higher management or governance
- Resign silently
- Tell the press
Show the answer
B. Follow the conflict resolution steps.
Question 6. Contingent fees for audit clients are prohibited because:
- The threat cannot be reduced enough
- They are cheap
- They are old
- The code is vague
Show the answer
A. A firm prohibition.
Question 7. A governance conflict arises when an accountant:
- Approves an investment that raises the value of his own holdings
- Reads a report
- Attends a meeting
- Pays tax
Show the answer
A. His own interest conflicts with the entity's.
Question 8. In the public sector the ethical duty is mainly to the:
- Directors
- Public and taxpayers
- The auditor
- Banks
Show the answer
B. Public funds belong to the public.
Question 9. Pay linked to reported profit creates a:
- Self-interest threat
- Advocacy threat
- Competence threat
- No threat
Show the answer
A. A personal reason to flatter figures.
Question 10. A safeguard in a conflict of interest on a board is:
- Disclosing the interest and taking no part in the decision
- Voting with the majority
- Hiding the interest
- Resigning from ICAN
Show the answer
A. Disclose and abstain.
Question 11 (10 marks). Distinguish between rules-based and principles-based approaches to professional ethics, and explain why the IFAC and ICAN codes are principles-based. (7 marks)
Question 12 (10 marks). An accountant employed in a company is told by the managing director to overstate inventory to meet a bank covenant. Explain the ethical conflict and the steps the accountant should take. (7 marks)
Question 13 (10 marks). Explain two ethical conflicts of an accountant charged with governance. (4 marks)
Model answers
Show the model answer to Question 11
Rules-based: specific rules for specific situations; weaknesses are that no rule book can cover every case, it must be updated, and it cannot fit cultural differences. (3) Principles-based: general principles applied by judgement; flexible and fit for varied, changing situations. (2) The IFAC and ICAN codes set five principles and a framework of threats and safeguards, with some firm prohibitions. (2)
Show the model answer to Question 12
Conflict: pressure to mislead users threatens integrity and professional behaviour; intimidation and self-interest. (2) Steps: consider facts, ethical issues, principles, internal procedures and alternatives; refuse to take part; raise with higher management or the audit committee; document; take advice from the Institute or lawyers; if unresolved withdraw or resign. (5)
Show the model answer to Question 13
Holding roles in more than one organisation and using confidential information from one in the other; approving investments that increase the value of the accountant's own or a family member's portfolio. (2 each)
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