Australian Government, Financial Reporting Council

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3. Teaching of ethics by the professional accounting bodies

The ASIC Act requires the FRC to promote, and monitor the adequacy of, the teaching of professional and business ethics by, or on behalf of, the professional accounting bodies to the extent to which the teaching of those subjects relates to auditor independence.

In 2006-07, the FRC continued its work on the teaching of ethics by arranging for a consultant to undertake an evaluation of the way in which business and professional ethics are applied in practice by accounting firms. Further information about the findings and recommendations flowing from this consultancy appear later in this section of the report and in Appendix E.

During this period, the FRC also continued to monitor the adequacy of the teaching of ethics through its periodic meetings with the professional accounting bodies and reviewing publicly available material issued by those bodies. As a result of this work, the FRC did not become aware of any matters that would cause it to be concerned about the adequacy of the teaching of ethics.

Research by the FRC

In April 2006, the Treasury, in consultation with the FRC, engaged Ms Jane Walton of Henderson Walton Consulting Pty Ltd to examine the teaching of professional and business ethics. A summary of the findings and recommendations made by Henderson Walton was published in the FRC’s Report on Auditor Independence 2005-06.

Henderson Walton’s examination of the teaching of professional and business ethics found that the depth of understanding of ethical issues by officers of the three professional accounting bodies and members of accounting firms, their commitment to deal with these issues and steps being taken to do so, are well beyond anything observed in other disciplines, businesses or professions, including law.

In its 2005-06 report, the FRC indicated that it intended to examine the findings and recommendations of the consultant as part of its 2006-07 work programme. However, the FRC subsequently concluded that, before doing this, a more detailed evaluation should be undertaken of how professional and business ethics are applied in practice by accounting firms.

To undertake this project for the FRC, the Treasury engaged Mr Richard Boele of The Banarra Trust. The key requirements of the statement of work for this consultancy are set out in Appendix E of this report.

In its report, Banarra found that ethical practices are highly valued within the profession. Banarra also found that while it could not arrive at any clear conclusions in terms of ethics practice between the Big Four and the significant other firms, there were clear differences in practice between individual firms. A summary of Banarra’s recommendations is set out below.

  • Leading ethical practices — proprietary or common goods: the professional bodies, the Accounting Professional and Ethical Standards Board (APESB) and/or the firms themselves could consider establishing a mechanism that facilitates the sharing, reviewing and critiquing of leading ethical practices.
  • Extending from lag indicators and outputs to include lead indicators and outcomes: the firms and professional bodies could consider identifying a core set of lead and symptomatic indicators, based upon the leading practice already in place in some firms, that can work as an indication of cultural health and ethics in practice across the profession.
  • A more transparent profession: potential clients of the firms should consider requesting lead and symptomatic indicators from those that they are considering appointing.
  • FRC going beyond independence: the FRC, in considering what role it has in the business ethics space beyond independence compliance, should also consider the commonly stated ‘review and assessment fatigue’ amongst firms. Whatever role the FRC seeks to play, it should ensure that the role assumed does not become a barrier to more firms choosing to go beyond compliance and aiming for leading ethical practices.
  • Can the FRC show greater leadership: the FRC could show leadership by both facilitating and participating in the debate on the dynamic and evolving tensions between a principles-based and rules-based approach to encouraging ethical behaviour within the profession.

A more detailed outline of the findings and recommendations made by Banarra is contained in Appendix E.

As part of its 2007-08 work programme, the FRC intends considering the need to make recommendations to the Minister and the professional accounting bodies about the promotion and teaching of professional and business ethics by, or on behalf of, the bodies and related matters. To facilitate this process, the FRC will shortly publish the Banarra report as a discussion paper on the FRC’s website for the purpose of seeking feedback on the recommendations from stakeholders and other interested parties.

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