The Challenges of Ethics in Accountancy

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Global Ethics Day is celebrated annually on the third Wednesday of October. To mark Global Ethics Day, two ISCA Council members who have served on the Institute’s Ethics Committee share the challenges of upholding ethics in the accountancy profession.

Global Ethics Day, which was observed on October 19 this year, is an annual movement started by the Carnegie Council to empower ethics through the actions of individuals and organisations.

Accountancy is one profession that is respected for its adherence to truth and integrity. To this end, a Chartered Accountant in Singapore has to abide by the financial reporting standards and the Companies Act. Additionally, ISCA members must adhere to the Institute’s Code of Professional Conduct and Ethics. Ethics Pronouncement (EP) 100 states, “Every member shall conduct himself in a manner consistent with the good reputation of the accountancy profession and refrain from any act or default, which is likely to bring discredit to the profession or to himself.”

EP 100 and EP 200 (enhanced mandatory requirements on implementing controls and procedures for anti-money laundering and countering the financing of terrorism) serve to guide accountants in their decision making. However, upholding the rules and regulations are often challenging in actual practice due to a variety of reasons; these include cultural differences to a different understanding of what constitutes “common practice”. Sometimes, clients may have expectations that challenge the rules and regulations.

Here, two experienced accountancy professionals share their experiences and dispense wisdom on how to avoid getting into ethically questionable situations.

TAKEAWAYS

Chartered Accountants, who play a very important role in the ecosystem of every business, should uphold the highest standards of ethics and professionalism.
Be proactive: take steps to avoid getting into conflict situations.
Leaders should exemplify strong ethics, and help their organisations understand that ethics must come before profits.
Keep in tune with the latest developments through continuing professional education or volunteer for committees like ISCA’s Ethics Committee.

Balasubramaniam Janamanchi, FCA (Singapore), Managing Partner/Director, JBS Practice PAC

“The Chartered Accountant plays a very important role in the ecosystem of every business,” says Balasubramaniam Janamanchi, Founder and Managing Director of JBS Practice Public Accounting Corporation. “So if their ethics are in doubt, there will be great upheaval.”

JBS Practice offers audit and assurance services to a diverse range of clients from across geographies. Beyond Singapore, these clients are based out of North America, Europe and India. Mr Bala is a Chartered Accountant in India, the US and Singapore. His career has taken him to many cities worldwide, where he experienced the different ways of doing business.

Abiding by ethics, no matter where one is located, is non-negotiable, states Mr Bala firmly. “The chief thing is to follow the rules that are in place (in that country). Accountants have to uphold ethical standards as their credibility and honesty form the foundation of their position. In Singapore, a Chartered Accountant has to abide by the financial reporting standards and the Companies Act.”

WHEN PRINCIPLES FALL INTO QUESTION

Mr Bala is keenly aware that not all cultures are like Singapore’s. When he did an audit for a bank in another country years ago, “the same asset was pledged in multiple accounts. When I brought it up to the bank manager, he said, ‘Let’s go for lunch’. About 16 bank employees went with my manager and I to a five-star restaurant, which was very expensive in those days. After lunch, we discussed the issue of the collateralised asset, which the client wanted us not to report. That was a red flag, and it opened our eyes to the magnitude of the issue. At that level (a single branch of a bank), if we had agreed not to report the problem, it would have snowballed into a much bigger problem further down the line.”

There are ways to avoid getting into such conflict situations, says Mr Bala, such as doing the homework before onboarding the client. However, things may sometimes fall outside the norm. He cites an example where a Singapore company wanted to enter into a partnership with a Nepalese entity, but one of the shareholders was politically exposed in Nepal. “We refused to onboard the client until we could certify that the client and the source of funds were not conflicted, and that there was no instance of money laundering,” he explains. Their advice was for the partnership to not proceed. “But the Singapore client insisted that we onboard this partner, so we had to take proper steps and carry out the process to ascertain conflict of interest. That’s what the systems and processes are in place for.”

How can an accountant tell if a situation fails ethically? “You need a lot of knowledge to figure out if your client is trying to blindside you,” he states plainly. “If he is, don’t sign off on the accounts.” The most common tactics that clients employ, he adds, are playing with numbers, fudging projections and trying to gloss over income that is potentially not recoverable. “In such cases, you need to qualify these items, but usually, they will have a thousand and one reasons why you shouldn’t!”

Issuing a qualified opinion may face resistance from clients, because it may look as if they are “hiding” something. But as Mr Bala explains, “I tell the directors that I am protecting their business by qualifying, because by putting it there, they’re adhering to the Companies Act.”

SAFEGUARDING AGAINST TROUBLE

Mr Bala’s approach is strict and straightforward when it comes to ethical considerations. “Being upfront with the client is one way to avoid any grey areas,” he says. “Don’t be wishy-washy, or give the impression you can be persuaded. Yes, there are genuine cases where documentation is really missing, but there are ways to ascertain that.”

He recognises, however, that even if an accountant senses that what he sees is not all there in the picture, there is no way to report a client “unless we can point a finger and say for certain they are not telling the truth”. Often, judgement is also based on one’s past history with the client – does he routinely try to get around declaring conflict of interest, or is he by and large honest? But if there is any sign at all that rules have been broken, Mr Bala’s advice is to take appropriate action. “If you suspect the client has not been honest, you should file an STR (suspicious transaction report), even if you have resigned,” he says. “You have to manage the process, though your client may try to bulldoze his way through.”

Losing a client is sometimes a necessary move as “we have to weigh the pros and cons of keeping a client”. Explaining that he has “no qualms losing clients”, he shares that he has had to resign from some privately held MNC clients that were looking for ways to get around complying with the rules and regulations.

He notes that as much as Singapore works hard to keep itself ethical and above reproach, the same cannot be said for all jurisdictions. For example, in some places, “a ‘commission’ (cash gift) is considered part of the ‘cost of doing business’ but in Singapore, it is viewed as a kickback”. He names the case of Keppel Offshore & Marine Ltd’s deep-sea mining project in Brazil, in which the company pled guilty to charges that bribes were paid to Brazilian officials. “At that point in time when they had first signed the deal, they may have thought it was ‘normal’ to do so,” he notes. “While it’s important to uphold high ethical standards, it can be quite a challenge to impose your standards in a different jurisdiction.”

WORDS OF ADVICE

“Chartered Accountants in Singapore, whether in practice or in business, are highly respected as the custodians of financial information, and a lot of stakeholders depend on them,” says Mr Bala. So what should an accountant do to stay above board? “Stick to the common principles; you cannot flout basic rules and regulations.”

If the situation is too complex, “don’t keep it to yourself; get a second opinion from an independent accountant”, he advises.

It is imperative for all accountants to keep up their knowledge of ethics and governance through continuing professional education (CPE). “There is no shortcut,” he states. “All accountants should subscribe to ISCA’s CPE. You have to keep up with the discussions and impending changes affecting ethics.”

Another way to stay in tune with the developments in ethics is to volunteer for committees. “Get involved so that you can understand the latest developments. Share and learn – that’s the only way to be upskilled and upgraded.” Mr Bala himself served on ISCA’s Ethics Committee for six years. “The committee bridges the gap between IESBA (International Ethics Standards Board for Accountants) and the local requirements,” he explains. “It has working groups that gather feedback from stakeholders, including ACRA (Accounting and Corporate Regulatory Authority) and Singapore Exchange. This committee gives us a great platform to debate topics such as the recent EP 100 revision on non-assurance services and fees, which was quite a difficult subject to resolve. We also deliberated at length on what would be the definition of PIE (Public Interest Entities) in the Singapore context based on IESBA’s ED issued in January 2021.”

Ultimately, ethics is the honesty and integrity of an accountant, says Mr Bala. “Once you compromise on a basic thing in your life, you put yourself at risk. For example, littering. You might get away with it two, three times. Then you get caught; you pay a fine. Some people may say, ‘I’m okay with the fine’, and continue to litter.” But is this the right or ethical thing to do?

For budding accountants, the accountancy veteran’s advice is to set the bar high from the start. “The best thing is to be ethical from day one. Don’t compromise.”

Tan Kuang Hui, FCA (Singapore), CEO and Managing Partner, Crowe Singapore

“Once, an engagement client pushed a stack of currency to me in the hope of receiving a more ‘lenient’ audit of its financial statements. I politely refused. It was a good test for me – my first reaction was ‘No’.”

That was not the only time Tan Kuang Hui, CEO and Managing Partner of Crowe Singapore, experienced such an ethical conflict, but he has reacted the same way each time. “Accountants are the guardians of the business and financial sectors,” he stresses. “Ethics is a fundamental precept we must uphold as a profession.” Mr Tan ought to know, given his more-than-27 years of experience in audit and business advisory services. “There is a general expectation to uphold good ethical behaviour in a country like Singapore, which is known to be very clean and free from corruption,” he states. “And that’s referring to the general population; what more as a Chartered Accountant?”

For Singapore’s talent economy, it is essential to maintain and protect the trust it inspires. “We are showing the world that our ecosystem is clean and ethical,” explains Mr Tan, who served on ISCA’s Ethics Committee from 2017 to earlier this year.

STEERING CLEAR OF TROUBLE

But ethics is not a straightforward science as what is acceptable in one culture may not be acceptable in another. “The biggest challenge we face is upholding our ethical standards while operating business in certain countries,” Mr Tan shares, adding that he has dealt with clients from various Asian countries which have different ways of doing business. “When you go there, you’ll get a culture shock at the way business is conducted. For instance, while they may not outrightly demand ‘gifts’, there is an expectation that they will receive something for doing business with you. So where do you draw the line?”

Mr Tan has some pro tips for avoiding trouble. “First, don’t get involved in these tricky situations,” he says. He then elaborates on how to keep from being cornered into making a moral or ethical compromise. “For example, if I know that I am going to be pressured to give something, I will seek the views of my fellow partners and/or some external advisors.” What if there is no way to avoid getting cornered? “Ultimately, you have to ask yourself, ‘Is this the right and ethical thing to do?’ You can have all the guidelines but eventually, it still falls back on how you choose to respond to the dilemma. Ask yourself, ‘Should I take a step back and rethink the situation?’”

He shares that he has had to stand up for what he believes in. “Yes, I have been in some ethical conflicts before, where people pressured me to issue certain documents,” he says. “But I refused because of the ethical issues involved. As a professional, I cannot do it as it goes against the fundamental principle of integrity as a Chartered Accountant.” That said, Mr Tan recognises that every individual has his own moral standard of right and wrong. He highlights that the Singapore Standards on Auditing (SSA) specifically require auditors, in exercising professional judgement, to take into account not only the accounting and auditing standards but also the ethical standards. While ethics guidelines exist for accountancy professionals – EP 100 Code of Professional Conduct and Ethics and EP 200 Anti-Money Laundering and Countering the Financing of Terrorism, issued by ISCA – these do not provide detailed guidance for grey areas which accountants may encounter from time to time. He also recognises that it may be easier for him to take a stand “because I am a leader and my fellow partners are very supportive of me, but it’s more difficult for middle management to make a hard call”. Hence, he advocates for leaders to exemplify strong ethics, and to help their organisation understand that ethics comes before financial performance. “The tone must come from the top that this is the way we represent ourselves. Losing one client doesn’t mean anything, but losing your reputation – that is the end of your professional career,” he states plainly. “You can do a hundred good deeds, but one wrong thing will cost you everything.”

The role of a leader in encouraging a strong sense of ethics in his staff cannot be underestimated. It was precisely from watching how his former superiors handled what seemed like an innocuous situation that sealed Mr Tan’s conviction to always do the right thing. “Over 20 years ago, I was working in a Big Five (it was Big Five at that time) firm that helped to take a client successfully through to IPO,” he recalls. “The client was very happy, and decided to buy the whole team that worked on the IPO the then-latest Motorola flip phone each, as a token of appreciation. That phone was over $1,000! But my ex-boss said to the client, ‘We cannot accept them. You can buy us a meal, but we cannot accept the phones.’” That experience has followed Mr Tan throughout his career, as he learned to keep relationships professional and not allow even something seemingly small to compromise the reputation of the Chartered Accountant and his firm. It is not a value that is taught, but caught, he states. “I don’t know how to inculcate ethics; I learned from my ex-bosses and through experiences. Most important of all, I have to lead by example. As a leader, you must believe in upholding high ethical standards yourself, or it will never happen in your organisation.”

WHAT ETHICS LOOKS LIKE NOW AND IN FUTURE

Over the course of his career, Mr Tan has worked with businesses across a wide spectrum of industries. While the details of ethical considerations may differ, the broad principles apply. “By and large, they’re the same,” he says. “Once it comes to ethical conflicts, avoid them as much as you can. If you allow yourself to get into a situation once, you will find yourself on a slippery slope. So, whether it’s a potentially big situation or a small one, it’s better to take early steps to avoid any conflicts.” In this regard, Mr Tan reminds that it is always helpful to revisit the five cardinal ethical principles enshrined in the Code of Professional Conduct and Ethics for Public Accountants and Accounting Entities issued by ACRA (also known as the ACRA Code), viz, integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. He shares that, among these ethical tenets, he is most concerned with two of them – (i) “integrity”, which is generally understood to mean being straightforward and honest in all professional and business relationships, and (ii) “professional behaviour”, which is to comply with relevant laws and regulations and avoid any conduct that the professional accountant knows or ought to know might discredit the profession. He adds that one “should not forget the five potential threats to compliance with the five ethical principles (that is, self-interest, self-review, advocacy, familiarity, and intimidation threats)”.

Ethics also evolves as society does, taking into account fresh concerns that come about with new financial opportunities. Hence, it is imperative for an accountant to stay up to date with developments, such as environmental, social and governance (ESG) guidelines. Highlighting the recent issues surrounding green loans and whether they meet their environmental objectives, Mr Tan asks, “Can a financial instrument really be classified as green? What are the criteria? What if your client gives you incentives to look the other way when it comes to green standards? Therefore, training must be provided in our sector, because ESG is still pretty new and the guidelines are only just emerging.” He forecasts that the International Ethics Standards Board for Accountants will likely come together – “in the next one or two years” – and set the ethical standards for ESG. “Climate change is a key issue for the world and for businesses. In the future, we may be required to provide audit or assurance services on ESG-related matters,” he says.

The profession makes available as many rules and guidelines as it can to help the accountant carry out his job with as much integrity as he can, but it boils down to the individual’s value system and character in situations where even existing guidelines cannot address. “Generally, I would tell my staff, if the client presents such a situation as their way of doing business, find out if it is a ‘common practice’. If it is not, then it’s very likely to be wrong,” Mr Tan explains. “Ask, even it is a ‘common practice’, if there is any evidence to show that it is ‘common practice’, such as ratification of certain payments by the board of directors and/or executive committee of the company with domestic legal advice. Notwithstanding this, is it legal and ethical in the Singapore context?”

For his firm, determining if new staff possess the necessary ethical standards begins at the hiring stage, though “we can’t be 100% certain how this person will handle a conflict of interest” until he is actually faced with one. But every precaution is taken, from the interview process to the employee handbook which spells out the standards of ethics that staff must adhere to. For young accountants, Mr Tan’s advice is that, first and foremost, they must fully understand the requirements of ethical standards and guidelines as set out in the ACRA Code. Then, in tricky situations, “ask yourself, ‘Is this the right thing to do?’ Often, you will have the gut feeling that something is not right. And, if you are still unsure or in doubt, approach and consult your superiors”.