Consultancy to evaluate how professional and business ethics are applied in practice by accounting firms
This Appendix details:
- the statement of work for the consultancy to evaluate how professional and business ethics are applied in practice by accounting firms; and
- the consultant’s findings and recommendations.
The consultant’s report will shortly be published on the FRC’s website (www.frc.gov.au) as a discussion paper for the purpose of seeking public comments on the findings and recommendations.
Statement of work
1. The purpose of the consultancy is to evaluate how professional and business ethics are applied in practice by accounting firms. It is envisaged that the consultancy will consider the Big Four accounting firms and three firms agreed by the Consultant and the Audit Independence Committee of the Financial Reporting Council (FRC) in the group immediately below the Big Four firms.
2. Without limiting the scope of the work to be done, it is expected that the Consultant will consider:
- the extent to which the accounting firms ensure their partners and staff are aware of, and comply with, the ethical requirements of the professional accounting bodies;
- whether the accounting firms have their own ethical requirements which supplement those of the professional bodies and, where they do, the extent to which partners and staff comply with them;
- whether accounting firms take disciplinary or other action against partners or staff who fail to comply with the ethical requirements of either their professional body or the firm;
- whether firms reward partners and staff for maintaining high ethical standards, even in circumstances where there is a resultant financial loss to the firm; and
- any observations, findings or recommendations made by the Consultant who reviewed the teaching of professional and business ethics by, or on behalf of, the professional accounting bodies about the manner in which professional and business ethics are applied in practice by accounting firms.
3. The Consultant will prepare a report for the FRC detailing its findings and including recommendations for further actions that could be considered by the FRC.
4. The performance of the work specified in paragraphs 2 and 3 will be undertaken in three stages:
- research concerning the environment, processes and procedures impacting on ethical performance in accounting firms;
- testing the extent to which the accounting firms being considered can identify, understand and respond to the issues associated with their ethical performance; and
- preparation of a report by the Consultant on its findings and recommendations.
Consultant’s findings and recommendations
The findings and recommendations made by the consultant in its report to the FRC are outlined below.
The consultant arrived at the following general findings:
- Ethical practices are highly valued, especially in the context of the firms’ demonstrated understanding that unethical practices damage their reputations and brands.
- Organisational values are articulated by all the firms. As a result of this values-based building of culture and the other evidence collected we are able to conclude that the firms are focused on actioning preferred behaviours and these include ethical behaviours.
- Size does not matter as there were no clear significant differences between the Big Four and the significant other firms reviewed, but there are differences between individual firms.
- The profession has leading ethical practices.
- Significant resources are being invested by the firms to ensure compliance with independence and quality requirements, however ethics in practice is more than independence.
- Some firms’ risk management functions are not working as closely with HR as they could to leverage fully the HR data contained in employee-surveying mechanisms to understand the firm’s ethical cultural health.
- The tension between a principles-based versus rules-based approach to encouraging ethical behaviour continues.
- The FRC’s ethical supervisory responsibilities are seen by the firms as limited to independence and our broader scope created concern from some review participants, who saw this as the FRC overreaching its responsibilities in relation to ethics. All of the firms cooperated and most welcomed the opportunity presented by the review.
Key issue specific findings included:
- Most firms have mechanisms such as employee surveys which are monitoring cultural health through specific questions.
- Firms are declining work with decisions where ethics is a factor.
- Approaches to whistleblower mechanisms are different. Small numbers of cases have been recorded. Those firms asserted that the numbers are low because ethical practice is very strong within the firm. This uses the number of cases as a lag indicator of strong ethical practice; a valid function for the indicator once widespread confidence in the mechanism can be demonstrated.
- • Leading firms have embedded into their performance management processes explicit expectations in relation to ethical behaviour, such as acting with integrity and in some cases this is being tied to remuneration. There are clear sanctions in all firms for those who behave unethically and there is evidence that these sanctions are applied.
- The monitoring of ethical training is primarily focused on ‘outputs’, for example the number of people who complete the training rather than ‘outcomes’ as in the effectiveness of the training.
- There is significant difference between firms in terms of how they use symptomatic or ‘lead’ indicators, such as the results of employee surveys and diversity performance, as indicators of cultural health, with some firms well developed in this area.
Recommendations from the review are:
1: 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.
2: 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 a comparable proxy for cultural health and ethics in practice across the profession.
- The FRC could consider the greater use of lead and symptomatic indicators of cultural health and ethics in practice in delivering its supervisory responsibilities.
- The firms could review their approach to evaluating ethics training with a view to extending from measuring outputs (that is, the number of employees who have completed them) to include outcomes also.
3: A more transparent profession
- Potential clients of the firms should consider requesting lead and symptomatic indicators from those that they are considering appointing.
- Beyond users of the firms’ services, other stakeholders of the profession could also begin to request this additional information relating to ethical performance and ask specifically that it be put in the public domain so that those stakeholders can come to their own conclusions in relation to ethical performance.
- Company directors, when considering audit reports, could request of the auditor an explanation of how ethical practice has been assured in the conduct of the engagement.
4: FRC going beyond independence
- In considering what role the FRC has in the business ethics space beyond independence compliance, it 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.
5: Can the FRC show greater leadership?
- 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.