- 20 Marks
FR – L2 – Q9 – Professional and Ethical Issues in Financial Reporting
Question
TWO CASES
Case 1
Kofi Mensah has been on a two-year study sabbatical in Canada and this is his first job on returning to work. Kofi Mensah qualified as an ICAG chartered accountant just before his sabbatical. He worked in a medium-sized practice with wide experience of clients in the mining, manufacturing, and agricultural sectors.
Volta Assurance Limited is a subsidiary of a listed group involved in financial services. The financial controller of Volta Assurance Limited has been on long-term sick leave. Kofi Mensah has been offered an appointment as temporary financial controller three months before the 31 December 20X9 year-end.
Kofi Mensah would be responsible for preparing the financial statements for the year ended 31 December 20X9. Key areas of the financial statements include lessor accounting, financial instruments, and insurance contracts.
During his interview for the post, the group finance director told Kofi Mensah that the group is looking for a strong financial position and performance from the subsidiary and that if Kofi Mensah helps deliver it, he is sure to obtain a permanent post in the group.
Case 2
Kwame Osei is an ICAG Chartered Accountant and works as a financial accountant working for Kumasi Builders plc.
Kumasi Builders plc is about to finalise its financial statements for the year ended 31 December 20X9 and will release its results in two days’ time.
One of Kwame Osei’s tasks during the frantic year-end work was to perform an impairment review on certain assets owned by the company. There were indications of impairment, but Kwame Osei’s calculation of recoverable amount showed that no assets were impaired.
Kwame Osei has just read an article on spreadsheet error. This led him to review the spreadsheets that he built to perform the recoverable amount calculations, and he has found an error in the logic. This error, if corrected, would have led to the company recognising a material impairment loss.
The loss, if recognised, would lead to the profit figure falling below the level at which Kwame Osei’s bonus is triggered. He is also concerned that his mistake will compromise his future promotion prospects.
Required
Identify and explain the ethical issues arising in the above cases.
Answer
ICAG Chartered accountants must always abide by the spirit of the five fundamental ethical principles set out in the IFAC code of ethics.
Case 1
Professional competence and due care
It is questionable whether Kofi Mensah has the necessary skills and experience to prepare the financial statements of Volta Assurance Limited.
The fact that Kofi Mensah is an ICAG Chartered Accountant means that he has achieved a high level of competence. However, Kofi Mensah has been out of the profession for two years and his knowledge may be out of date. His experience before the sabbatical was in different industrial sectors, and there is little to suggest that he has the professional competence necessary to prepare financial statements in the financial services sector.
Professional behaviour
Kofi Mensah has an obligation to maintain his professional knowledge and skills at the level required to ensure that his current employer receives competent professional services based on current developments in financial reporting and legislation. If he is not able to do this, he should reject the appointment as it would not seem feasible that he could bring himself up to date in the areas mentioned in the short time allowed before the year-end.
Integrity and objectivity
Kofi Mensah faces intimidation and self-interest threats which might impinge on his professional integrity and objectivity.
The suggestion that the group needs a particular result seems designed to bias Kofi Mensah in his work, and this, coupled with the offer of a permanent position, could pressure him to act inappropriately.
The finance director is at fault for making these statements. It might be presumed that the finance director of a listed financial services group would be a member of a professional accounting body. All such bodies of note have similar ethical guidelines to those of ICAG, and the finance director must know that his statements are contrary to the spirit of those guidelines.
Case 2
Integrity and objectivity
Members should be straightforward and honest in all professional and business relationships. Integrity implies not just honesty but also fair dealing and truthfulness.
Members should not allow bias, conflicts of interest, or undue influence of others to override their professional or business judgements.
Kwame Osei faces a self-interest threat that might compromise his professional integrity and objectivity. He must set his personal considerations aside and admit his error to meet his duty to his employer, the profession, and society at large.
Professional behaviour
Kwame Osei has made an honest mistake, but now that he is aware of the circumstances, he must act accordingly and correct the impact of his error.
Kwame Osei is in a difficult position, but his duty is clear. He must reperform the calculations and see that the financial statements are adjusted if necessary.
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