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23 August 2021 | Minutes to read: 4

The new ethical challenges in testing times

By Ian Lavis on behalf of Praxity

This articles was first published by Praxity on 24 May 2021.

As the pandemic wanes, accountants and stakeholders will be under increasing pressure to cut corners, warns the IESBA.

Ethical challenges are set to intensify in the coming months and years, placing increasing pressure on accountants and their clients as they seek to navigate the changing business landscape.

 An article published on 10 May 2021 by the International Ethics Standards Board for Accountants (IESBA) identifies five ethical challenges set to intensify as the pandemic moves into a new phase:

  1. An uneven economic recovery
  2. Demands for greater support and efficiency
  3. Rapid digitalisation
  4. Burn out and mental health issues
  5. Focusing on the past and not the future

The IESBA article, entitled 5 Ethical Challenges that Will Intensify as the Pandemic Wanes, was compiled by the ethics board’s Covid-19 Working Group and national ethical standard setters from Australia, Canada, China, South Africa, the UK and the US.

It states the ethics challenges the accountancy profession and stakeholders face are “far from over” and “might well intensify”.

Huge strain on accountants

Perhaps the biggest ethical challenge facing accounting professionals will be the “huge strain” that comes from dealing with clients at vastly different stages of resetting and adjusting their businesses in the wake of Covid-19. This could create added risk of unethical behaviour, according to the IESBA Working Group and standard setters.

Estimations made during the height of the pandemic may be based on assumptions which no longer apply and client pressures “might weigh on judgments and decisions regarding the use of non-traditional audit procedures without proper regard for the fundamental principles of objectivity, and professional competence and due care”.

Independence, crime and health issues

Accountants are also likely to face new pressures to support and advise their clients, formally and informally, which might create independence issues.

There is a danger of increased exposure to cybercrime as a result of rapid digitalisation while accountants must also be alert to the growing risk of mental health issues clouding judgement. Checking on colleagues’ wellbeing will be crucial in this respect.

The IESBA Working Group and national ethical standard setters stress the importance of understanding the issues that lie ahead, such as automation, and the threats to ethics posed by the use of new technology.

The challenges facing accountants and stakeholders today underline the importance of improving ethical decision-making at every turn, not only to do the right thing but to add value and drive business success.

Being on the ball

This journey of continued improvement was examined in an article published by Praxity in 2019 entitled How to improve ethical decision making, which is just as relevant, if not more so, today.

In the Praxity analysis, Jeffrey Luckins, Director of Audit and Assurance at Praxity participant firm William Buck in Australia, and a member of the Governance Institute of Australia, says ethical decision-making is influenced by:

  • Risk – how to mitigate the negative outcomes from potentially unethical decisions being made by a business
  • Market forces – consumers are specifically choosing to buy from ethical business (especially younger generations)

“In most cases, the risk issues are the first issues business leaders respond to in order to avoid brand damage,” he explains.

Organisations and their employees must continually strive to make better judgements, not only to minimise risk and brand damage but also to add value through ethical, sustainable practices.

Many business leaders believe the answer lies in putting a framework in place to help guide people on what action to take, but there is also an argument for better governance throughout an organisation to improve ethical decision-making.

Doing the right thing

The accounting profession has led the way when it comes to making ethics central to decision-making, principally with the Code of Ethics which every accounting professional must follow.

Steffen Ahrens, Partner at German Praxity participant firm FALK GmbH & Co KG, says ethical decision-making boils down to values and the notion of being responsible.  He adds: “Individuals have to look at who they are working for and ask themselves, can I feel proud?”

In recent years, steps have been taken by accounting bodies and firms to improve training, while guidance is continually being updated to encourage good practice.

One approach which has gained credence in recent years is the creation of ethical frameworks for employees to follow. The idea is that putting a framework in place helps managers and employees understand the moral dimensions and implications of situations they might meet and helps them ask the right questions and work towards identifying solutions that are in line with the organisation’s values.

Having a method for ethical decision-making is “absolutely essential”, according to the Markkula Center for Applied Ethics, in Santa Clara University, California. The ethics body says: “Making good ethical decisions requires a trained sensitivity to ethical issues and a practiced method for exploring the ethical aspects of a decision and weighing the considerations that should impact our choice of a course of action.”

The Markkula Center has created its own framework for decision-making based on five sources of ethical standards – utilitarianism, rights, fairness or justice, common good and virtue. This is examined further in the original Praxity insight.

Management and governance

However, putting in place a framework of this type is not enough by itself. Ethical-decision making is also about effective management and good governance.

Jeffrey Luckins argues: “The dilemma on ethical decision making is not so much the framework and having policies and procedures in place, it’s about having the management awareness to know there is a problem and how to deal with it. If the problem occurs at too low a level of management and there is not appropriate governance in place for identifying and dealing with issues, then the problem may not be resolved in accordance with the governing vision and principles of the business.”

With pressure on accountants and stakeholders set to increase, it would seem the best way to uphold ethics and do the right thing is not only to create a clear framework, but to ensure the board and senior management set and communicate the right tone, backed by strong governance.

As Jeffrey Luckins points out, better ethical decision-making “can reduce risks and protect the goodwill of the business” while also being consistent with profit motives.

The need for a strong ethical stance is more important than ever if accountants and their clients are  to thrive in this fast-changing business landscape.

The new ethical challenges in testing times

Ian Lavis on behalf of Praxity

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