ACCOUNTING EHTICS
INHOUD
1. introduction .................................................................................................................................................... 5
1.1. what is accounting ethics ...................................................................................................................... 5
1.2. Why does accounting ethics matter? .................................................................................................... 5
1.3. Who are the stakeholders? ................................................................................................................... 5
1.4. Who are the players? ............................................................................................................................ 5
1.5. External audit of the financial statements ............................................................................................ 6
1.6. IESBA code of ethics for professional accountants................................................................................ 7
1.7. audit quality ........................................................................................................................................... 7
1.8. audit firm culture ................................................................................................................................. 10
1.9. economics of auditing ......................................................................................................................... 10
1.9.1. demand ........................................................................................................................................... 11
1.9.2. supply .............................................................................................................................................. 11
1.10. data driven audit environment ............................................................................................................ 12
1.11. Functioning of the audit market .......................................................................................................... 12
1.12. regulation ............................................................................................................................................ 12
1.13. Public oversight ................................................................................................................................... 13
2. ethical decsion making .................................................................................................................................. 15
2.1. What is ethics? ........................................................................................................................................... 15
2.1.1. What is ethics not? .............................................................................................................................. 15
2.1.2. What is ethics ...................................................................................................................................... 15
2.2. Ethical reasoning: implications for accounting .......................................................................................... 15
2.2.1 Modern moral philosophies ................................................................................................................. 15
2.3. Cognitive processes and ethical decision making in accounting ................................................................ 17
2.3.1. Heinz and the drug .............................................................................................................................. 17
2.3.2. Kohlberg stages of moral development .............................................................................................. 18
2.3.3. Rest 4 component model of ethical decision making ......................................................................... 18
2.3.4. integrated ethical decision making process ....................................................................................... 19
2.3.5. Cases ................................................................................................................................................... 19
2.4. Giving voice to values ................................................................................................................................. 19
3 Organizational ethics and corporate governance ......................................................................................... 22
3.1. Framwork for understanding ethical decision making ...................................................................... 22
3.2. Ethical dissonance model .................................................................................................................... 22
3.3. Seven signs of ethical collapse............................................................................................................. 23
1
, 3.4. Establishing an ethical culture ............................................................................................................. 23
3.4.1. Ethics in the workplace ................................................................................................................... 24
3.4.2. Character and leadership in the workplace .................................................................................... 24
3.5. Surveys................................................................................................................................................. 24
3.5.1. KPMG’s integrity survey 2013 ......................................................................................................... 25
3.5.2. 2018 global business ethics survey ................................................................................................. 25
3.5.3. KPMG’s integrity survey 2019 ......................................................................................................... 25
3.5.4. 2021 global business ethics review ................................................................................................ 26
3.6. Fraud .................................................................................................................................................... 27
3.6.1. Behavioural indicators of fraud ....................................................................................................... 27
3.6.2. Financial statement fraud ............................................................................................................... 27
3.6.3. Why does financial statement fraud occur? ................................................................................... 28
3.7. (Sustainable) corporate governance ................................................................................................... 28
3.7.1. Best practices of governances ......................................................................................................... 28
3.7.2. Corporate governance: groups involved ......................................................................................... 29
3.7.3. Audit committee ............................................................................................................................. 29
3.7.4. Internal auditors .............................................................................................................................. 29
3.7.5. Internal controls .............................................................................................................................. 30
3.7.6. External auditors ............................................................................................................................. 31
4. Ethics and professional judgement in accounting ........................................................................................ 32
4.1. Professional judgement ....................................................................................................................... 32
4.1.1. Professional judgement in auditing................................................................................................. 32
4.1.2. What drives professional judgement? ............................................................................................ 32
4.1.3. Judgment bias ................................................................................................................................. 33
4.1.4. Judgement biases depend on environmental factors ..................................................................... 33
4.1.5. The profession’s response: judgment framework in auditing......................................................... 33
4.1.6. Judgement traps .............................................................................................................................. 35
4.1.7. Avoiding judgement traps ............................................................................................................... 37
4.1.8. What makes a good coach in auditing?........................................................................................... 38
4.2. Auditor scepticism ............................................................................................................................... 39
4.2.1. Challenges to professional scepticism............................................................................................. 40
4.2.2. Safeguards to professional scepticism ............................................................................................ 40
4.2.3. Audit deficiencies ............................................................................................................................ 41
4.3. Public interest in auditing .................................................................................................................... 41
5. Fraud in financial statements and the role of the auditor ............................................................................ 45
5.1. fraud in financial statemetns ............................................................................................................... 45
5.2. fraudulent financial reporting ............................................................................................................. 46
2
, 5.3. Error, fraud and illigal acts ................................................................................................................... 46
5.4. the fraud triangle ................................................................................................................................. 47
5.5. dark triad personality trait s ................................................................................................................ 48
5.6. Fraud risk assessement ........................................................................................................................ 49
5.7. Internal control assessment ................................................................................................................ 49
PwC’s 2022 global economic crime and fraud survey ................................................................................... 50
5.8. management representation............................................................................................................... 51
5.9. Audit committee responsibilities for fraud risk assessment ............................................................... 51
5.10. Auditor’s communication .................................................................................................................... 51
5.11. audit reports ........................................................................................................................................ 52
5.11.1. Internal control over financial reporting .................................................................................... 52
Concluding thoughts ......................................................................................................................................... 52
6. Earning management .................................................................................................................................... 54
6.1. Motivation to manage earnings .......................................................................................................... 54
6.2. Is earning managemetn legal? ............................................................................................................. 54
6.2.1. Green mountain coffee roaster....................................................................................................... 55
6.3. Using social media to report earnings guidance and financial results ................................................ 55
6.4. Non gaap measures of earnings ( form of earning management) ...................................................... 55
6.5. income smoothing ( form of earning manamgent) ............................................................................. 56
6.6. charactersitics of earnings management ............................................................................................ 56
6.7. some definitions of earnings management ......................................................................................... 57
6.8. ethics of earnings management .......................................................................................................... 58
6.8.1. continuum of eearnings managemetn ............................................................................................ 58
6.8.2. acceptability of earnings management from a materiality perspective ......................................... 58
6.9. good to know ....................................................................................................................................... 59
6.10. financial shenanigans .......................................................................................................................... 59
6.11. red flags of earning management........................................................................................................ 60
6.12. Restatements ....................................................................................................................................... 60
6.13. conclusion ............................................................................................................................................ 60
7. quality control & public oversight ................................................................................................................. 63
7.1. quality control ..................................................................................................................................... 63
7.2. Elements of a system of quality control .............................................................................................. 63
7.2.1. tone at the top ................................................................................................................................ 63
7.2.2. relevant ethical requirements ......................................................................................................... 64
7.2.3. acceptance and continuance of client relationships and specific engagements ............................ 64
7.2.4. human resources ............................................................................................................................. 65
7.2.5. engagement performance ............................................................................................................... 65
3
, 7.2.6. monitoring ....................................................................................................................................... 66
7.3. documentation of the system of quality control ................................................................................. 66
7.3.1. transparancy report ........................................................................................................................ 66
7.4. public oversight ................................................................................................................................... 67
7.4.1. PCAOB ............................................................................................................................................. 68
7.4.2. CEAOB ( european level) ................................................................................................................. 69
7.4.3. IFIAR ( on international level) .......................................................................................................... 69
8. ethical leadership .......................................................................................................................................... 73
8.1. ethical refelction .................................................................................................................................. 73
8.2. what is ethical leadership .................................................................................................................... 73
8.3. ethical leadership in accounting firms ................................................................................................. 74
8.4. research on leadership and audit firms ............................................................................................... 74
8.5. ethical leadershio and the internal audit function .............................................................................. 77
8.6. different types of leaders .................................................................................................................... 77
8.7. social learning theory ( role model) ..................................................................................................... 77
8.8. ethical leadership competence ........................................................................................................... 77
8.9. the ethical leadership scales ................................................................................................................ 78
8.10. ethical leadership failure ..................................................................................................................... 79
8.11. whistleblowing in accounting .............................................................................................................. 79
8.12. moral intensity ..................................................................................................................................... 80
8.13. concluding thought .............................................................................................................................. 80
4
INHOUD
1. introduction .................................................................................................................................................... 5
1.1. what is accounting ethics ...................................................................................................................... 5
1.2. Why does accounting ethics matter? .................................................................................................... 5
1.3. Who are the stakeholders? ................................................................................................................... 5
1.4. Who are the players? ............................................................................................................................ 5
1.5. External audit of the financial statements ............................................................................................ 6
1.6. IESBA code of ethics for professional accountants................................................................................ 7
1.7. audit quality ........................................................................................................................................... 7
1.8. audit firm culture ................................................................................................................................. 10
1.9. economics of auditing ......................................................................................................................... 10
1.9.1. demand ........................................................................................................................................... 11
1.9.2. supply .............................................................................................................................................. 11
1.10. data driven audit environment ............................................................................................................ 12
1.11. Functioning of the audit market .......................................................................................................... 12
1.12. regulation ............................................................................................................................................ 12
1.13. Public oversight ................................................................................................................................... 13
2. ethical decsion making .................................................................................................................................. 15
2.1. What is ethics? ........................................................................................................................................... 15
2.1.1. What is ethics not? .............................................................................................................................. 15
2.1.2. What is ethics ...................................................................................................................................... 15
2.2. Ethical reasoning: implications for accounting .......................................................................................... 15
2.2.1 Modern moral philosophies ................................................................................................................. 15
2.3. Cognitive processes and ethical decision making in accounting ................................................................ 17
2.3.1. Heinz and the drug .............................................................................................................................. 17
2.3.2. Kohlberg stages of moral development .............................................................................................. 18
2.3.3. Rest 4 component model of ethical decision making ......................................................................... 18
2.3.4. integrated ethical decision making process ....................................................................................... 19
2.3.5. Cases ................................................................................................................................................... 19
2.4. Giving voice to values ................................................................................................................................. 19
3 Organizational ethics and corporate governance ......................................................................................... 22
3.1. Framwork for understanding ethical decision making ...................................................................... 22
3.2. Ethical dissonance model .................................................................................................................... 22
3.3. Seven signs of ethical collapse............................................................................................................. 23
1
, 3.4. Establishing an ethical culture ............................................................................................................. 23
3.4.1. Ethics in the workplace ................................................................................................................... 24
3.4.2. Character and leadership in the workplace .................................................................................... 24
3.5. Surveys................................................................................................................................................. 24
3.5.1. KPMG’s integrity survey 2013 ......................................................................................................... 25
3.5.2. 2018 global business ethics survey ................................................................................................. 25
3.5.3. KPMG’s integrity survey 2019 ......................................................................................................... 25
3.5.4. 2021 global business ethics review ................................................................................................ 26
3.6. Fraud .................................................................................................................................................... 27
3.6.1. Behavioural indicators of fraud ....................................................................................................... 27
3.6.2. Financial statement fraud ............................................................................................................... 27
3.6.3. Why does financial statement fraud occur? ................................................................................... 28
3.7. (Sustainable) corporate governance ................................................................................................... 28
3.7.1. Best practices of governances ......................................................................................................... 28
3.7.2. Corporate governance: groups involved ......................................................................................... 29
3.7.3. Audit committee ............................................................................................................................. 29
3.7.4. Internal auditors .............................................................................................................................. 29
3.7.5. Internal controls .............................................................................................................................. 30
3.7.6. External auditors ............................................................................................................................. 31
4. Ethics and professional judgement in accounting ........................................................................................ 32
4.1. Professional judgement ....................................................................................................................... 32
4.1.1. Professional judgement in auditing................................................................................................. 32
4.1.2. What drives professional judgement? ............................................................................................ 32
4.1.3. Judgment bias ................................................................................................................................. 33
4.1.4. Judgement biases depend on environmental factors ..................................................................... 33
4.1.5. The profession’s response: judgment framework in auditing......................................................... 33
4.1.6. Judgement traps .............................................................................................................................. 35
4.1.7. Avoiding judgement traps ............................................................................................................... 37
4.1.8. What makes a good coach in auditing?........................................................................................... 38
4.2. Auditor scepticism ............................................................................................................................... 39
4.2.1. Challenges to professional scepticism............................................................................................. 40
4.2.2. Safeguards to professional scepticism ............................................................................................ 40
4.2.3. Audit deficiencies ............................................................................................................................ 41
4.3. Public interest in auditing .................................................................................................................... 41
5. Fraud in financial statements and the role of the auditor ............................................................................ 45
5.1. fraud in financial statemetns ............................................................................................................... 45
5.2. fraudulent financial reporting ............................................................................................................. 46
2
, 5.3. Error, fraud and illigal acts ................................................................................................................... 46
5.4. the fraud triangle ................................................................................................................................. 47
5.5. dark triad personality trait s ................................................................................................................ 48
5.6. Fraud risk assessement ........................................................................................................................ 49
5.7. Internal control assessment ................................................................................................................ 49
PwC’s 2022 global economic crime and fraud survey ................................................................................... 50
5.8. management representation............................................................................................................... 51
5.9. Audit committee responsibilities for fraud risk assessment ............................................................... 51
5.10. Auditor’s communication .................................................................................................................... 51
5.11. audit reports ........................................................................................................................................ 52
5.11.1. Internal control over financial reporting .................................................................................... 52
Concluding thoughts ......................................................................................................................................... 52
6. Earning management .................................................................................................................................... 54
6.1. Motivation to manage earnings .......................................................................................................... 54
6.2. Is earning managemetn legal? ............................................................................................................. 54
6.2.1. Green mountain coffee roaster....................................................................................................... 55
6.3. Using social media to report earnings guidance and financial results ................................................ 55
6.4. Non gaap measures of earnings ( form of earning management) ...................................................... 55
6.5. income smoothing ( form of earning manamgent) ............................................................................. 56
6.6. charactersitics of earnings management ............................................................................................ 56
6.7. some definitions of earnings management ......................................................................................... 57
6.8. ethics of earnings management .......................................................................................................... 58
6.8.1. continuum of eearnings managemetn ............................................................................................ 58
6.8.2. acceptability of earnings management from a materiality perspective ......................................... 58
6.9. good to know ....................................................................................................................................... 59
6.10. financial shenanigans .......................................................................................................................... 59
6.11. red flags of earning management........................................................................................................ 60
6.12. Restatements ....................................................................................................................................... 60
6.13. conclusion ............................................................................................................................................ 60
7. quality control & public oversight ................................................................................................................. 63
7.1. quality control ..................................................................................................................................... 63
7.2. Elements of a system of quality control .............................................................................................. 63
7.2.1. tone at the top ................................................................................................................................ 63
7.2.2. relevant ethical requirements ......................................................................................................... 64
7.2.3. acceptance and continuance of client relationships and specific engagements ............................ 64
7.2.4. human resources ............................................................................................................................. 65
7.2.5. engagement performance ............................................................................................................... 65
3
, 7.2.6. monitoring ....................................................................................................................................... 66
7.3. documentation of the system of quality control ................................................................................. 66
7.3.1. transparancy report ........................................................................................................................ 66
7.4. public oversight ................................................................................................................................... 67
7.4.1. PCAOB ............................................................................................................................................. 68
7.4.2. CEAOB ( european level) ................................................................................................................. 69
7.4.3. IFIAR ( on international level) .......................................................................................................... 69
8. ethical leadership .......................................................................................................................................... 73
8.1. ethical refelction .................................................................................................................................. 73
8.2. what is ethical leadership .................................................................................................................... 73
8.3. ethical leadership in accounting firms ................................................................................................. 74
8.4. research on leadership and audit firms ............................................................................................... 74
8.5. ethical leadershio and the internal audit function .............................................................................. 77
8.6. different types of leaders .................................................................................................................... 77
8.7. social learning theory ( role model) ..................................................................................................... 77
8.8. ethical leadership competence ........................................................................................................... 77
8.9. the ethical leadership scales ................................................................................................................ 78
8.10. ethical leadership failure ..................................................................................................................... 79
8.11. whistleblowing in accounting .............................................................................................................. 79
8.12. moral intensity ..................................................................................................................................... 80
8.13. concluding thought .............................................................................................................................. 80
4
