Ethics Resources for Accounting Professionals

Matthew, a certified public accountant, was newly appointed as the senior accounting manager of a retail company. He was responsible for supervising the whole financial accounting team and reported to Andrew, the Financial Controller.

One of Matthew's duties was to check and approve payment vouchers prepared by his subordinates. Occasionally, some vouchers were found to have insufficient supporting documents and some supporting documents appeared to be bogus.

Matthew received a call from Ivy, the Sales Director. Ivy said that she had recently had a business dinner with clients. She asked Matthew to book the expense under the "miscellaneous expenses" account and reimburse her as soon as possible.

Matthew found that the cost of the dinner was remarkably high. He also learnt from other sources that the dinner's attendees were all Ivy's relatives and friends. None of the company's clients was present.

Matthew also noted that the accounting system of the company was very outdated which required a lot of manual adjustments.

Besides, Matthew discovered that the company regularly made large payments to a supplier, but the actual shipments delivered by the supplier were much fewer than what the accounting records showed. Matthew found that the supplier was a company owned by Ivy's husband but Ivy had never disclosed this relationship to the company.

Matthew reported to Andrew about the suspected misconduct of Ivy. Andrew responded, "In real business life, we have to tolerate these minor variations." Andrew also said that it was too costly to update the accounting system.

Andrew further asked Matthew to cooperate in polishing the financial statements. He was promised a good appraisal report and a special "reward" if the company could announce good financial results.

If you were Matthew, what would you do?

Expense Reimbursement

Financial accountants should always ensure that only expenses with sufficient and proper supporting documents are reimbursed and booked. For procurement of goods and services, three-way matching of the purchase order, delivery note and sales invoice should be performed as far as practicable to ensure accuracy. In the case study, the dinner held was attended by Ivy's relatives and friends. Hence, Ivy might be held liable under Section 9(3) of the POBO for using falsified document to deceive the company into granting reimbursement of the dinner expense.

Conflict of Interest

As Ivy's husband owned the company which was a supplier, Ivy's private interest competed or conflicted with her company's interest. Hence, there was a clear case of conflict of interest for Ivy, the Sales Director. Ivy was also in breach of her fiduciary duties as a senior employee of the company, such as the duty to act in good faith and in the interests of the company, the duty to exercise powers for proper purposes, the duty to avoid conflicts of interest, etc.

Although a conflict of interest does not necessarily amount to a criminal offence, mishandling conflict of interest can be conducive to criminal acts such as fraud, corruption or submission of false documents to deceive the principal. If Ivy intentionally omitted to declare her relationship with the supplier concerned when submitting documents to declare her financial interests to the company, she would have committed an offence under Section 9(3) of the POBO by using false documents with the intent to deceive the company. Also, Ivy and her husband might have breached the common law offence of conspiracy to defraud.

Fabrication of Financial Statements

The act of fabricating financial statements would contravene the COE, or even constitute a deception or false accounting offence. Andrew's offering of "reward" to Matthew may be seen as an internal corruption. If Matthew agreed to collude with Andrew to conceal from the management the real financial position of the company, they may commit a bribery or conspiracy to defraud offence.

Under section 380 of the Companies Ordinance (Cap. 622), the annual financial statements must give a true and fair view of the financial position/performance of the company as at the end of/for the financial year. In addition, under the COE, a professional accountant in business shall:

Prepare or present the information in accordance with a relevant reporting framework, where applicable;
Prepare or present the information in a manner that is intended neither to mislead nor to influence contractual or regulatory outcomes inappropriately;
Exercise professional judgment to:
- represent the facts accurately and completely in all material respects;
- describe clearly the true nature of business transactions or activities; and
- classify and record information in a timely and proper manner; and
Not omit anything with the intention of rendering the information misleading or of influencing contractual or regulatory outcomes inappropriately.

Report of Misconduct

As the financial controller, Andrew should be responsible for ensuring good governance and offering sound advice on financial and risk management to the company. Instead, he chose to brush Matthew off without giving any useful advice and to tolerate Ivy's misconduct. Andrew failed to perform his duties as a member of senior management to exercise care, skill and diligence to address the company's system deficiencies and staff misconduct.

Matthew played a central management role in monitoring the company's operations, in particular overseeing the company's financial activities and accounts to safeguard the company's assets and prevent fraud. When encountering non-compliance or suspected non-compliance with laws and regulations (NOCLAR) in the course of carrying out professional activities, Matthew should refer to section 260 of Chapter A of the COE which sets out detailed guidance for professional accountants in business on how to respond to NOCLAR committed by the management or any employee of the company.

In gist, Matthew should discuss with his immediate superior or a higher authority of the company, take appropriate steps to rectify or mitigate the consequences of the non-compliance, and decide whether it should be disclosed to the external auditor. Since the board had the ultimate responsibility for risk management and internal control of the company, Matthew should raise the matter to the board, possibly through the Audit Committee, if he did not receive an appropriate response from Andrew.

In addition, Matthew should also determine whether further action was needed, such as disclosing the matter to an appropriate authority and/or resigning from the company. In exceptional circumstances where an imminent breach of a law or regulation would cause substantial harm to investors, creditors, employees or the general public, Matthew should consider immediately disclosing the matter to an appropriate authority to cause the matter to be investigated and action to be taken. Unless the disclosure is precluded by law or regulation, this would not be considered as a breach of the duty of confidentiality.

Accounting System

Very often, companies are cost conscious and reluctant to invest in accounting and IT systems. An outdated accounting system may contribute to an ineffective internal monitoring system. As part of the internal control, a company should have adequate accounting functionality for reporting purposes, including the compilation of consolidated accounts for management purposes. Manual adjustments should only be made in special circumstances and with proper justifications.

Besides, it is a good practice to keep the number of ambiguous accounts in an accounting system to the minimum in order to reduce the risk of manipulation. Such accounts include "miscellaneous expenses", "other expenses", "sundry expenses", "other administrative expenses", etc. Transactions should be duly verified before booking in such accounts.