The CCAB has published a series of ethical dilemmas case studies in order to assist members of the CCAB bodies to understand how the Codes of Ethics of their professional bodies (‘the Code’) can be applied. For ease of use, the case studies are grouped as follows:
All professional accountants must comply with the five fundamental ethics principles enshrined in the Code: integrity; objectivity; professional competence and due care; confidentiality; and professional behaviour.
The case studies illustrate the application of the conceptual framework approach within the Code to resolving ethical dilemmas. This approach requires professional accountants to identify threats to compliance with the fundamental ethics principles; evaluate the threats identified; and address the threats by eliminating them, or reducing them to an acceptable level by applying safeguards. The scenarios are not intended to cover every possible circumstance, but instead they illustrate how the Code can be applied and outline key principles and processes that could be considered when facing ethical dilemmas.
This article is one of a series published by the CCAB member bodies discussing the case studies, and it focuses particularly on the case studies for professional accountants working as non-executive directors.
The role of the non-executive director
All members of CCAB bodies have a responsibility to behave professionally and ethically at all times, and it is important when working within an organisation that all professional accountants consider how their behaviour will help to promote an ethical culture within it.
Individuals who are both a professional accountant and a non-executive director have a particularly important role to play in creating, promoting and maintaining an ethical culture.‘Tone at the top’ is the fundamental building block. Boards are responsible for establishing a set of clear values, defining the culture of their organisation. These values serve as the basis for how everyone in the organisation is expected to behave. Legal duties and responsibilities apply to all directors, whether executive or non-executive, paid or unpaid (eg, serving in a voluntary capacity on the board of a charity or school). All members of the board must behave in a manner that reflects the company’s values, and this should be a key driver when making critical decisions.
The Code emphasises that professional accountants are expected to encourage and promote an ethics-based culture in their organisation and highlights that those in more senior positions have a greater ability to be influential, therefore greater expectations are placed on them. The Code notes that this includes the promotion of effective policies and procedures to encourage and protect those who report actual or suspected illegal or unethical behaviour, including whistle-blowers.
All directors are accountable for their behaviour, and how they fulfil their duties and responsibilities. All professional accountants who are directors are expected to behave professionally and demonstrate strong ethics.
Non-executive director case studies
The CCAB’s six case studies illustrate various scenarios, outlined briefly below, that a non-executive director could face. After describing the dilemma, each case study follows the same format, providing discussion around:
(a) Which of the five fundamental ethics principles feature more prominently for safeguarding?
(b) What would be your key considerations in your approach to resolving the dilemma presented?
(c) What possible course of action would you take to resolve the dilemma?
Case Study 1 – To be or not to be a non-executive director
You are a recently retired accountant who has been offered a non-executive director role for a well-known financial services provider. You have no prior experience of the financial services sector.
Case Study 2 – Formal governance procedures not being followed
You are a non-executive director of a public sector body and the director of finance has suggested that the normal tender process be waived in relation to a substantial capital improvement.
Case Study 3 – Confidentiality and conflict of interest in non-executive roles
You are the non-executive director of two unrelated companies, Company A and Company B. Company A has recently bought a business that has an operation that competes with Company B, so that both companies are now bidding for the same contracts. You are now likely to find out information about Company A that could be useful to your role in Company B and vice versa.
Case Study 4 – Non-executive director being used as a sounding board by an employee
During a visit to the company premises, the purchasing manager seeks your views on a matter that has been causing her concern. She is of the opinion that the purchasing director is ignoring the company’s agreed purchasing strategy and is accepting bribes to purchase a product from a particular supplier.
Case Study 5 – Pressure on a non-executive director to make a decision without adequate information
The company’s financial director is advocating that the company make an acquisition and implies that, if the company does not act quickly, the opportunity will disappear. You are not convinced that the figures presented indicate that the acquisition is the right thing to do, and that further discussion is warranted.
Case Study 6 - Withholding information from the non-executive directors
You are becoming increasingly concerned about the quality and completeness of the information pack being provided to non-executive directors for monthly board meetings. Also, for recent board meetings, the pack has only been circulated the day before, leaving insufficient time for review. The intimidating CEO is expected to be awarded a significant bonus if the company continues to increase profitability, but sales information has not been included in the packs over recent months, despite repeated requests.
Resolving ethical dilemmas
If you are a professional accountant who is facing, or who thinks they might be facing, an ethical dilemma it is best to deal with issues at the earliest possible stage before they escalate. Similarly, if someone in your organisation ‘speaks up’ and brings their concerns to you, it is important that you listen and act upon what has been heard by investigating the issue. The Code explains that integrity involves having the strength of character to act appropriately when faced with challenging circumstances. If a problem is left to fester, the potential harm that could be caused increases. Ultimately, ‘turning a blind eye’ could lead to reputational ruin for an individual as well as their organisation.
Consider carefully how to raise an issue for maximum effect, thinking carefully in advance rather than speaking in the heat of the moment is advised. Do not tackle an issue alone. It is useful to be aware of who your trusted advisors are – a colleague or friend, someone you can approach to discuss the situation confidentially or as a hypothetical scenario. You should consider the resources available from within your organisation – by, for example, referring to the organisation’s ‘speak up’ policies and procedures – or from your professional body. You might also need to consider whether you should obtain independent legal advice.
The ‘reasonable and informed third-party test’ required by the Code is helpful when considering what would be the most appropriate action to take. It is the consideration about whether the same conclusions would be reached by another party. The ‘reasonable and informed third party’ doesn’t have to be an accountant, but does have to be objective, knowledgeable, experienced and informed – ie, not an uninformed member of the public – who can impartially consider the appropriateness of the accountant’s conclusions.
Documentation of the substance of the issue, the details of any discussions, the decisions made and the rationale for these decisions is encouraged. Keeping an evidence trail of conversations, emails and documents; a diary of meetings; and noting down a summary immediately afterwards can be helpful.
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