EBOOK Professional Ethics

1 Writer Norazura Binti Masdor Nurul Wahida Binti Abdullah Amirah Zawani Binti Wakhi Anuar Dr. Radziah Binti Mohd Dani Designer Norazura Binti Masdor Nurul Wahida Binti Abdullah Amirah Zawani Binti Wakhi Anuar Dr. Radziah Binti Mohd Dani Application Publishers and Developers Norazura Binti Masdor Nurul Wahida Binti Abdullah Amirah Zawani Binti Wakhi Anuar Dr Radziah Binti Mohd dani 1st Edition 2023 All rights reserved. No part of this work may be reproduced, stored in any form or by any means without the written permission of the publisher. Published by: Politeknik Muadzam Shah, Lebuhraya Tun Abdul Razak, 26700 Muadzam Shah, Pahang Darul Makmur

2 ACKNOWLEDGEMENT We would like to record our warm appreciation and thanks to the many parties who have provided encouragement and helpful comments towards the arrangement of this Professional Ethics eBook. It is our hope that this eBook would help students to gain better understanding of this course. NORAZURA BINTI MASDOR NURUL WAHIDA BINTI ABDULLAH AMIRAH ZAWANI BINTI WAKHI ANUAR DR. RADZIAH BINTI MOHD DANI Lecturer Department of Commerce Politeknik Muadzam Shah

3 PREFACE PROFESSIONAL ETHICS provide an understanding of the underlying ethical theories, philosophies and values in individual, organizational and professional. Students will be focus on the practical development of skills needed in dealing with ethical issues in accounting and corporate. The application of these ethical principles is best discussed within the framework of good practice of corporate governance, corporate social responsibilities, professional skepticism and code of ethics. Several important topics include fundamental principles of ethical behaviour, role of regulatory and professional accountancy bodies in promoting ethical and professional standards in the profession, corporate codes of ethics and professional scepticism, ethical conflicts and dilemmas and corporate governance and corporate social responsibility which aim to give a comprehensive view of the subject. In addition, the exercises are given at the end of each chapter to test students understanding in the particular chapter. We hope this eBook will be useful for all students of Polytechnics especially for Diploma Accountancy students to understand and grasp the professional ethics concepts well. Suggestions for improving the coverage and the content of this eBook are most welcome from the end-users. We honestly feel and hope that these suggestions will greatly help us further improve the quality of the eBook. NORAZURA BINTI MASDOR NURUL WAHIDA BINTI ABDULLAH AMIRAH ZAWANI BINTI WAKHI ANUAR DR. RADZIAH BINTI MOHD DANI Lecturer Department of Commerce Politeknik Muadzam Shah

4 Table of Contents TOPIC 1 FUNDAMENTAL PRINCIPLES OF ETHICAL BEHAVIOUR.................................6 1.1 Definition of Ethics ..................................................................................................................7 1.2 Importance of Ethics in Business ...........................................................................................8 1.3 Consequentialist Ethical Theories..........................................................................................9 1.4 Non Consequentialist Ethical Theories...............................................................................12 1.5 Organizational Values in Promoting Ethical Behavior.....................................................15 1.6 Unethical Behavior in Organizations ..................................................................................17 1.7 Ethical Challenges in Organizations ...................................................................................18 EXERCISES .........................................................................................................................................19 CASE STUDIES ..................................................................................................................................19 TOPIC 2 ROLE OF REGULATORY AND PROFESSIONAL ACCOUNTANCY BODIES IN PROMOTING ETHICAL AND PROFESSIONAL STANDARDS IN THE PROFESSION....................................................................................................................................21 2.1 Guidelines of Codes of Ethics and Profession ...................................................................22 2.2 Regulatory and Professional Accountancy Bodies in Promoting Ethical and Professional Standards ......................................................................................................................22 2.3 IFAC & MIA By-Laws: Principles of Code of Ethics.........................................................28 2.4 How Professional Bodies and Regulators Promote Ethical Awareness and Prevent the Unethical Behavior.............................................................................................................................29 2.5 Factors that Distinguish Accounting Profession from other Types of Profession........32 2.6 Roles of The Accountant in Promoting Ethical Behavior.................................................33 2.7 Disciplinary Process Following Suspected Ethical Breaches ...........................................34 EXERCISES .........................................................................................................................................37 CASE STUDY......................................................................................................................................37 TOPIC 3 CORPORATE CODES OF ETHICS AND PROFESSIONAL SKEPTICISM .......39 3.1 Definition Corporate Code of Ethics and Professional Skepticism.................................40 3.2 Applying Professional Skepticism in Auditing .................................................................42 3.3 Specific applications of professional skepticism ...............................................................44 EXERCISES .........................................................................................................................................46 CASE STUDIES ..................................................................................................................................46 TOPIC 4 ETHICAL CONFLICTS & DILEMMAS...................................................................48 4.1 Define ethical conflicts ..........................................................................................................49 4.2 Discuss Situations Ethical Conflicts and Whistle-Blower Can Arise..............................50 4.3 Threats to Ethical Behavior...................................................................................................51

5 4.4 Ethical Dilemmas in Workplace..........................................................................................53 4.5 Safeguards Against Ethical Threats and Dilemmas ..........................................................54 EXERCISES .........................................................................................................................................58 TOPIC 5 CORPORATE GOVERNANCE & CORPORATE SOCIAL RESPONSIBILITY 59 5.1 Definition Corporate Governance .......................................................................................60 5.2 Theories Concept of Corporate Governance......................................................................60 5.2.1 Theories of Corporate Governance..............................................................................62 5.3 Importance of Corporate Governance in Organizations ..................................................69 5.4 Developments of Corporate Governance ...........................................................................70 5.4.1 Historical Development of Corporate Governance in United Kingdom ...............70 5.4.1 Historical Development of Corporate Governance in United States (US).............76 5.4.2 Development of Corporate Governance in Malaysia ...............................................77 5.4.3 Regulatory Framework of Corporate Governance in Malaysia ..............................86 5.4.4 Features on poor Corporate Governance....................................................................91 5.5 Best practice in effective Corporate Governance...............................................................92 5.6 Reporting of Corporate Governance ...................................................................................96 5.7 Define Corporate Social Responsibility (CSR)...................................................................98 5.7.1 Importance of corporate social responsibility in organizations ............................101 5.7.2 Reporting on Corporate Social Responsibility.........................................................102 EXERCISES .......................................................................................................................................106 CASE STUDIES ................................................................................................................................106 REFERENCES..................................................................................................................................109

6 TOPIC 1 FUNDAMENTAL PRINCIPLES OF ETHICAL BEHAVIOUR Learning Outcomes At the end of the topic, students able to: • Define meaning of Ethics • Explain importance of ethics in business • Explain Consequentialist Ethical Theories • Explain Non-Consequentialist Ethical Theories • Discuss Organizational Values in Promoting Ethical Behaviour • Discuss various of Unethical Behaviour in Organizations • Discuss ethical Challenges in Organization

7 1.1 Definition of Ethics Introductory of ethics will guide in broad concept of differentiate ethics from morality and hence derive to the main factors that will contribute to shaping of one’s ethical values. Justification of certain actions will be drawn and needed as to why ethics is important in life, and even more in business and in career profession individually. Some people will have some basic questions in their mind either: How they should lead their life? Which type of persons should they strive to be? Is there any specific standards or principles to be followed in conducting their daily life? People’s self-reflection in addressing the personal issues arise lead us to study of right or wrong action or moral reasoning. Moral reasoning specifically will be a driven to understand more on morality, which is ethics. Human as a unique creation, as a leader in this universe are differ from nonhuman in which they are made and contain with spectacular of whole functioning mind where help them to use their gifted intelligence and highest degree of free will, to think wisely whether their actions are right or wrong, while fulfilling their own desires and self-interest. Ethics is a set of principles that contains behavioral codes to determine what is right and wrong. It also outlines the moral duty and obligations that any human being should practice. Furthermore, ethics can be elaborate as a value that an individual’s uses to interpret whether any actions or behavior taken is considered acceptable and appropriate in business or in career profession. Ethics comes from our feelings which subsequently translate into our moral behavior. As a human, we are fully responsible for our ethical and unethical behavior since there are consequences or impact for each of our own action or behavior. Business Ethics is the concept of applying ethical code and moral values to a business scenario. A company must demonstrate ethical behavior in all internal matters as well as in dealings with the external environment.

8 1.2 Importance of Ethics in Business All businesses or organizations comprises of business people who participate in planning, directing or organizing work of business, to provide goods and deliver services in pursuing and to achieve high level of profits. Economic character is always considered as one of main feature of business organizations. People in the business from low level employee to high level of management interact with each other to maximize organization’s objective, vision, and mission, and therefore accounted to different roles according to organization’s hierarchy to realize organization’s vision and mission. While ensuring organization’s vision and mission are in the right path and in the smooth track in other hand, businesses must connect and build relationship with several stakeholders in which the business is operating including shareholders, customers, suppliers, government agencies, non-governmental organizations (NGO’s), bankers, employees, the community and even competitors. The bigger activity of business operation and the more business enter into the global and international market, the higher number of stakeholder and more greater challenging for business in balancing all their needs for maintaining business sustainability. This is where ethics is critical in the conduct of any business operation activity. Most established business organizations have formally developed either a compliance based or an integrity-based code of ethics, alongside with business ethics guidelines, to remind their employees of the importance of ethics at the workplace. In fact, code of ethics has generally become an important feature in organizations to remind employees to practice work in ethical way. Ethical codes remain as legal reference documents to employee in business to develop and improve ethical organizational culture, whereby today’s business people have many reasons behind to be concerned and strictly careful with the ethical standards of their organizations: • Attract customers to the company’s products, which means increased sales and profits • Make employees want to stay in business, reduce labor turnover and therefore increase productivity • Attract and keep more existing employees interested in working for a business, reducing hiring costs, and being able to get the most talented employees in the organization • Attract investors and keep the company’s share price high, thereby protecting the business from acquisitions

9 • Avoid future lawsuits where reputable organizations able to maintain their good image and dignity 1.3 Consequentialist Ethical Theories Ethical theories widely were bound by two conceptual theories of Consequentialist and Non-Consequentialist Theory. i. Consequentialist Also known as Teleological ethical theory. Consequentialism is a theory that suggests an action is good or bad depending on its outcome. An action that brings about more benefit than harm is good, while an action that causes more harm than benefit is not. In other words, Consequentialist theory hold the rightness of actions is determined solely by the amount of good consequences they produce. The consequences are defined by various theories such as: ▪ Utilitarianism ➢ According to utilitarianism, a person’s obligation or duty in any situation is to perform the action that will result in the greatest possible of good over evil. ➢ Goodness is an inherent trait of human of human well-being. Whatever makes human beings generally better off or that which benefits them, is good; whatever makes them worse off or that which harms them is evil. ➢ Utilitarianism attempts to evaluate all of the good and bad consequences of an action, whether the consequences arise after the act or during the act. ➢ Utilitarian advocates will develop some alternative actions to weight the good and bad consequences of each act, before deciding on the best action to take. ➢ The more consequences for the majority, the more ethical the decision or action will be.

10 ➢ An action is right if it leads to the most happiness for greatest number of people. ➢ An action is right if it tends to promote happiness or pleasure and wrong if it tends to produce unhappiness or pain—not just for the performer of the action but also for everyone else affected by it. ➢ There are two forms of Utilitarianism which are Classical Utilitarianism, developed by Jeremy Bentham and Rule Utilitarianism, developed by John Stuart Mill. ➢ Jeremy Bentham (1748-1832) developed Classical Utilitarianism considered that an action is judged to be right by virtue of the consequences of performing that action. Classical utilitarianism requires consequences to be measured in some way, so that the pleasure and pain of different individuals can be added together and the results of different courses of action compared. ➢ Classical Utilitarianism is also silent on compliance to codes and rules, where telling a lie or breaking a promise is right if it has a better consequences than any alternative course of action. It highlights the principles of utility by defining it as a measure of maximizing pleasure while minimizing pain. ➢ John Stuart Mill (1806–1873) reconsidered the principles of utilitarianism since it caused controversy and ‘over-freedom’. Mill’s principle relates to the importance of complying with rules while assessing the rightness of actions. Individuals have to make their own moral judgements to determine the rightness of actions and suggested that pleasure should not merely refer to sensual pleasure but also to mental pleasure, such as music, literature, and friendship. Mill sought to make intellectual pleasures preferable to sensual ones. ➢ Both Classical and Rule Utilitarianism focus on the consequences or results to determine the rightness of an action. However, Classical Utilitarianism emphasizes results only regardless of the compliances to rules, as long as the consequences of the action gives happiness to everyone. ➢ In summary, there are six points about utilitarianism: 1. When deciding which action will produce the greatest happiness, we must consider unhappiness or pain as well.

11 2. Some actions affect people to some degree. 3. Because utilitarianism evaluate actions according to their consequences, and actions produce different results in different circumstances, almost everything in principles might be morally right in some particular circumstances. 4. Utilitarians wish to maximize happiness not simply immediately, but also in the long run. 5. Utilitarians acknowledge that we often do not know with certainty what the future consequences of our actions will be. Accordingly, we must act so that the expected happiness is as great as possible. 6. Try to assess the good and bad consequences of our actions before taking an action or decision. The action must create more happiness or pleasure than unhappiness or pain. ➢ Strength of Utilitarianism: Utilitarianism is result oriented since people are trying to evaluate the consequence either good or bad before acting. Moreover, classical Utilitarianism is simple to apply and provides an easily understood decision procedure. Economist’s decision always root by Utilitarianism principle, with assumption that each of individuals seek to maximize their utility and welfare to explain and predict a wide range of economic phenomena, for example allocation of resources or prices. ▪ Egoism ➢ Egoism is the theory that promotes a self-centred way of acting towards others. This theory emphasize that a person must always perform or take action in his/her own interest. The key concept of this theory is that an action is considered to be ethically right only when it promotes a person’s self-interest. ➢ An action is right if it maximizes the good for the self. EgoismThe view that morality coincides with the self-interest of an individual or an organization. ➢ Ethical Egoism -an action is right if and only if it promotes the self-interest of the person.

12 ➢ What’s good for me in the sense that it gives me pleasure and happiness is also good in the sense that it’s the morally right thing to do. ➢ Adam Smith (1723-1790) when individuals single-mindedly pursue “the gratification of their own vain and insatiable desires” they unintentionally, as if “led by an invisible hand,” benefit society as a whole. ➢ 3 categories of Egoism: o Individual: would hold that all people should do whatever benefits them. o Personal: would hold that he/she should act in his or her self-interest, but would make no claims about what anyone else ought to do. o Universal: would argue that everyone should act in ways that are in their self-interest. 1.4 Non Consequentialist Ethical Theories Also known as Deontological ethical theory. Denies the premise that an action is good or bad depending on its outcome. It determines the moral rightness and wrongness based on the action’s intrinsic features or character and not the consequences of those actions. Duty-based ethics: concerned with what people do, do the right thing, do it because it’s the right thing to do, don’t do wrong things and avoid wrong things. In other words, this theory focused on the obligation or duties motivating a decision or action rather than the consequences of the action. Defined by various theories such as ▪ Kant’s ethics ➢ An action is right if focused on motives and the willingness of individuals to act for the good of others, even though that action might result in personal loss ➢ Immanuel Kant (1724–1804) Doing something for the right reason was much more important than any particular outcome.

13 ➢ In business contexts, Kantianism implies an obligation for businesses to treat all persons with respect. In particular, respectful treatment is considered obligatory regardless of what one’s goals and mission are. A desire to achieve a particular outcome, such as to make a profit, cannot override the obligation to treat people fairly and with respect. ➢ Kant’s Categorical Imperatives derives to two categories: o First Categorical Imperatives - Act only according to that maxim by which you can, at the same time, will that it should become a universal law. In simple terms, it refers to how you would want all people to act toward others. It simply requires us to place ourselves in the shoes of the receiving party. If the action is going to cause pain rather than happiness to others, then the action is not ethical. o Second Categorical Imperatives - Act so that you treat humanity, whether in your own person or in that of another, always as an end and never as only a means. An action is morally right if and only if in performing the action, the person does not use others merely as a means for advancing his/her interest. ➢ Strength of Kant’s Ethics o First Categorical Imperative provides firm rules to follow in moral decision-making. No matter what the consequences may be or who does it, some actions are always wrong. For example, lying, cheating, greed. o Second Categorical Imperative emphasize the importance of the humanistic dimension, not using/treating other humans to an end, but as an end themselves. This principle is consistent with human right principles. o The theory highlights the importance of motivation and acting on the principles out of sense of duty towards fellow human beings rather than fulfilling oneself interest. o Kant’s duty principles are certainly consistent with the Islamic concept of Khalifah. Man is directly informed of their role to be a leader in the universe. Therefore, has specific duties, accountabilities, and responsibilities to accomplish as Khalifah.

14 o Kant’s ethics emphasises the respect for any human being. It states that as a matter of logic, people should be consistent in making judgements. There should be no double standards in actions that may lead to bias and disrespects to others. o Kant’s ethics provides a strong foundation for rights. Individual human rights must be acknowledged. ▪ Prima facie obligations ➢ Conditional duty. It may be overridden by a duty of greater importance. ➢ Basic obligation o Duties of fidelity-duty to fulfil (explicit & implicit) promises/agreements into which one has entered. o Duties of Reparation- duty to make up for wrongful acts previously done to others. o Duties of Gratitude- duty to repay others for past favours done for oneself. o Duties of justice- duty to prevent or correct such a mismatch. o Duties of beneficence-duty to improve the conditions of others in these respects. o Duties of self-improvement- duty to improve one’s own condition in this respect. o Duties of non-injury- duty not to injure other. ▪ Moral right ➢ A moral theory based on the concept that all people have human rights that form the justifying basis of obligations because they best express the purpose of morality, which is the securing of liberties or other benefits for a right holder. ➢ It does not depend on the existence of a legal system to determine the individual right.

15 ➢ Synonyms with Natural and human Rights ➢ Natural Right- Subset of moral rights. Prominently covered in historical literature. Rights that belong to all persons, being humans. Among basic human rights: o Right to be treated with justice. o Freedom of speech. o To choose one ways of life, religion. ➢ 2 main features of Human Right: o Universality: rights that are possessed by everyone, irrespective of demographic differences (race, gender, religion) o Unconditionally: rights that do not depend on any particular practice or institutions in society. There is nothing we can do to deprive ourselves or others of these rights 1.5 Organizational Values in Promoting Ethical Behavior What is Organizational Values? The beliefs, philosophies, and principles that drive an organization. These values will impact the whole employees as well as the relationship between organization and customers, partners, and shareholders. They help in promoting ethical behavior in an organization. There are six examples of values commonly practiced in an organization; i. Openness ▪ A culture high on openness encourages receiving and giving ideas and feelings from internal and external environment. ▪ Openness may also mean spatial openness, in terms of accessibility like installing Facebook, no separate cabin for executives. ▪ This openness combined with willingness to share results in greater clarity of objectives and free interactions among people.

16 ii. Trust ▪ No matter how many such formal structures there may be in organizations, if we do not trust each other simply to do what we say we will, we cannot conduct business in the modern world. ▪ Trust is confidence in the integrity, ability, character, and truth of a person thing (Berube, 1985). ▪ It is the most critical prerequisite for knowledge exchange and without trust, knowledge initiatives will fail, regardless of how thoroughly they are supported by technology and rhetoric (public speaking) (Davenport and Prusak, 1998). iii. Honesty ▪ In the context of human communication, people are generally said to be honest when they tell the truth to the best of their knowledge and do not hide what they know or think. ▪ Apart from being truthful, honesty is also generally thought to involve abstaining from unfair behavior. iv. Respect ▪ Respect is an important value that takes into consideration others’ strengths and weaknesses and who they are as persons. ▪ Respect includes also the courtesy towards others and also the willingness to keep confidentiality. v. Empowerment ▪ Empowerment should be seen as the process of an individual enabling himself to take action and control work and decision making in autonomous ways. ▪ The organization has the responsibility to create a work environment which helps foster the ability and desire of employees to act in empowered ways. ▪ The work organization has the responsibility to remove barriers that limit the ability of staff to act in empowered ways. vi. Accountability ▪ It is frequently described as an account-giving relationship between individuals,

17 ▪ e.g. "A is accountable to B when A is obliged to inform B about A’s (past or future) actions and decisions, to justify them, and to suffer punishment in the case of eventual misconduct". ▪ Accountability cannot exist without proper accounting practices; in other words, an absence of accounting means an absence of accountability. 1.6 Unethical Behavior in Organizations Ethical Behavior in Organizations Behavior that is appropriate. It is based on morals. Ethical behavior is when someone is being on his or her best behavior. All of their actions and words are following good moral principles. This refers to conduct that organizations expect their employees to hold while at work. Most organizations have formulated documents referred to as ‘codes of conduct’, that set out the accepted behaviors within the work place Non-Ethical Behavior in Organizations Any action that is aimed at taking advantage of another without their knowledge or consent. It can also be defined as manipulating someone without his or her permission. Unethical behavior is a way of acting that society disapproves of. It is the behavior that is ‘bad’; ‘wrong’ in a particular setting. Profuse languages, acting violent towards others are some examples of unethical behavior. Examples of non-ethical behavior in Workplace; • Pass off the work of others as their own. • Employees misrepresent facts as a way to convince others to buy a product or service that they are selling. • Lie about expenses in order to get a larger reimburse-ment check from their employer every month. • Lying and changing the number of hours worked, • Making a long distance phone call on the business phones, • Copying business software so they can use it at home.

18 1.7 Ethical Challenges in Organizations Competitive and global free market system make all types of business including sole proprietorship, partnership and corporations struggle to maximize profits. This driven objective to maximize profit sometimes may lead to consideration of risk of conducting a business and more opportunity cost involved in business setups. However, board of directors, managers and employees at all levels of a business organization are bound to face ethical challenges or conflicts in achieving objectives of the business either in short term or long term. Among others are balancing profit maximization with ethics in the conduct of business, exercising justice and rights to please stakeholders, as well as fulfilling organizational needs and individual aspirations. As the number of human interactions in business is infinite, it follows that organisations will be faced with ethical challenges that they have to address. Among the challenges are; • Bribes ▪ the act of giving money, goods, or other forms of compensation to a recipient in exchange for an alteration of their behaviour. • Conflict of interest ▪ ethical challenge that occurs when an individual or organization is involved in multiple interests that are at odds with one another. COI is especially problematic in situations involving someone in a position of trust • Honesty and integrity ▪ In business, sometimes need to deciding whether or not to tell the truth. Admitting an error, disclosing material facts, or sending a customer to a competitor are all decisions that business people make based on issues of honesty and integrity. • Whistle-blowing ▪ A whistle-blower is a person who exposes any kind of information or activity that is deemed illegal, unethical, or not correct within an organization that is either private or public.

19 EXERCISES 1. Define ethics and business ethics. 2. List five (5) importance of ethics for an organisation. 3. Differentiate between consequentialism theory and non-consequentialism theory. 4. Briefly explain the following organizational values a. Openness b. Accountability c. Respect d. Empowerment e. Honesty 5. Discuss the ethical challenges faced by organization. 6. Select Private-Listed Companies in Malaysia. Examine its code of ethics. CASE STUDIES Case Study 1 Salman works at a housing development company as a project manager. As a project manager, Salman is responsible on the financial and non-financial issues of the project. Currently, he is responsible to ensure that the biggest investment of SP Aspura Berhad to develop a residential area called ‘Project Villa Langkapuri’ in Puncak Alam, Selangor, follows the prescribed plan and will be completed within the budget. The project will take three years to be completed with a total cost of RM10million. His salary and bonus depend on his capabilities to handle this project. Salman recently received a report from the appointed Site Consultant requiring the company to undertake an additional soil treatment for 30 villas due to unexpected soft soil condition. However, the budget of RM2 million for the soil treatment was not included in the original plan. The Head of Engineer of SP Aspura Berhad also issued a notice that if the soil treatment is not performed, the villa would slowly sink after three years and eventually facing the risk of collapsing in due course. Salman decided not to proceed with the soil treatment since the warranty given by SP Aspura Berhad to all villa purchasers is only valid for a period of two years. Until such time, the company would no longer be responsible for any defect on the villa purchased. You are required evaluate Salman’s decision based on the Utilitarianism Theory.

20 Case Study 2 Sorna and Wan are office mates for the last 15 years in Orogon Berhad, a telecommunication company. One day, the Chief Executive Officer of Orogon Berhad informed them that a new position, General Manager of Procurement Department, had been created and that he intended to interview Sorna and Wan to fill that position. Sorna was initially not interested in the new position, but when he heard that the salary offered would be four times his current salary, he changed his mind. On the day of the interview, Sorna brought to the interviewers attention losses the company made seven years ago, when Wan was heading up a project. Even though Sorna knew the losses were due to the economic crisis at that time, he hoped to sabotage Wan’s chances of being selected for the new position. You are required evaluate Sorna’s action based on the Egoism Theory. Case Study 3 Semarak Berhad is a small and medium food processing enterprise based on Penang Island. The Chief Executive Officer (CEO), Mr Amiruddin, has been approached by a giant foreign corporation for a merger, with the objective of gaining competitive advantage. The terms offered by the corporation for the merger are lucrative to the CEO, who would receive a generous severance (separation package). The shareholders of Semarak Berhad would also benefit because the offer for their shares is substantially above the current market price. Mr Amiruddin realizes that the merger plans would call for a closure of the food processing plant. The plant currently provides job for most of the local residents. He is now unsure of how to balance his employees’ welfare- who would be thrown out of work-and the community where the plant is located, against the interests of the shareholders. He is also in dilemma as to how much he should take his own interest into account. Assume that you are Mr Amiruddin. Should you support the merger plan? Justify your position from utilitarian principles.

21 TOPIC 2 ROLE OF REGULATORY AND PROFESSIONAL ACCOUNTANCY BODIES IN PROMOTING ETHICAL AND PROFESSIONAL STANDARDS IN THE PROFESSION Learning Outcomes At the end of the topic, students able to: • Describe the Guidelines of Codes of Ethics and Profession • Recognize Regulatory and Professional Accountancy Bodies in Promoting Ethical and Professional Standards • Discuss IFAC & MIA By-Laws: Principles of Code of Ethics • Elaborate How the Professional Bodies and Regulators Promote Ethical Awareness and Prevent the Unethical Behavior • Discuss factors that Distinguish Accounting Profession from other Types of Profession • Explain Roles of The Accountant in Promoting Ethical Behaviour • Explain Disciplinary Process Following Suspected Ethical Breaches

22 2.1 Guidelines of Codes of Ethics and Profession Professional accountants worldwide along with other key players in governance structure play a crucial role in enhancing ethical and reducing corruption. Public deem fully expect on all professionals in which they will show highest level of credibility in presuming their career. The word of profession in a career is not just only performing work or job, instead it is beyond than that where it is a career for individual to contribute significant knowledge or skills to the society with fully utilize their competency and specialize in field area. Attending course and training will boost profession expertise hence make them keep with their requirement of continuing professional development (CPD) and in result, eventually will help them to work professionally and ethically for the sake of the public. The profession needs to be certified, represented by institutes and having the degree certification and commissioning from government regulation. Profession is Code of Ethics outlines the ethical principles that govern decisions and behavior at a company or organization. They give general outlines of how employees should behave, as well as specific guidance for handling issues like harassment, safety, and conflicts of interest. For professional bodies, code of ethics refers to a code of conduct that outlines the ethical principles that govern decisions and behavior of member of an association/in an organization. They give general outlines of how members should behave, as well as specific guidance for handling issues like integrity, harassment, safety, and conflicts of interest. 2.2 Regulatory and Professional Accountancy Bodies in Promoting Ethical and Professional Standards Worldwide, most important part for a business to succeed especially to employees is to enhance the ethical principles as a main culture in business mostly in Malaysia. Major scandals in the world such as Enron Corporation, Arthur Andersen and World.com as well as 1MDB have clearly shown that professional accountants owe their primary loyalty to the public interest. Business need to be more accountable to their shareholder and other group of stakeholders to protect and maximize their interest. Eventually, both business and professional accountants will be depending on their ability to uphold with regulations and ethical expectations of the stakeholders.

23 Over the years, in Malaysia, the accountancy profession bodies are regulated by several national regulatory and professional bodies such as the Audit Oversight Board (AOB), the Companies Commission of Malaysia (Suruhanjaya Syarikat Malaysia or SSM), the Malaysian Institute of Accountants (MIA), and the Malaysian Institute of Certified Public Accountants (MICPA). Professional Accountants in Malaysia was introduced with continuously code of ethics for generally associated with the following code of professional conduct which embarked by: i. The International Ethics Standards Board for Accountants (IESBA) established by the International Federation of Accountant (IFAC) ii. The Malaysian Institute of Accountant (MIA) By-Laws iii. The Malaysian Anti-Corruption Commissions (MACC) Code of Ethics IFAC IFAC is committed to a global standard-setting system that is credible, inclusive, legitimate, and produces international standards that are relevant, innovative, and responsive to meet the challenges of the future. Transparent, highquality international standards used by professional accountants is an essential pillar of the global financial architecture. IFAC is champion international standards for audit and assurance, ethics and independence, education, and public sector accounting. These standards advance vital outcomes for: • Greater international consistency and ease of doing business • Enhanced cross-border capital, financial flows, investments • Greater financial stability; and • Lower risks of regulatory arbitrage in corporate reporting. In addition, IFAC is an organization focus on developing high-quality standards requires a robust standard-setting process, global consultation, and extensive oversight mechanisms. IFAC covers the multi-stakeholder, shared publicprivate governance model under which the standards are developed to ensures that the public interest remains the focus of standard setting, takes place without political or commercial interference, and includes checks and balances to ensure that no one stakeholder has undue influence.

24 IFAC are continuing to ensure the profession is appropriately engaged in a shared public/private standard-setting model that widely adopted and implemented highquality standards developed in the public interest. Main functions of IFAC are: • To support the development, adoption, and implementation of high-quality international standards, • To prepare a future-ready accounting profession. • To serve as spokesperson for the international profession on relevant public issue • To develops benchmark guidance and promotes the sharing of resources • To serve professional accountants in business IFAC Board in focus on professional ethics has established the International Ethics Standards Board for Accountants® (IESBA®) sets high-quality, international ethics (including independence) standards as a cornerstone to ethical behaviour in business and organizations and to public trust in financial and non-financial information that is fundamental to the proper functioning and sustainability of organizations, financial markets and economies worldwide. The IESBA is an independent global standard-setting board which sets out fundamental principles of ethics, conduct and practice for all professional accountants through International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code). Public Interest Oversight Board (PIOB) oversight the ethical standards of IESBA with the advice from IESBA Consultative Advisory Group (CAG). IESBA Code outline 4 parts • Part 1 Complying with the Code, Fundamental Principles and Conceptual Framework, which includes the fundamental principles and the conceptual framework and is applicable to all professional accountants. • Part 2 Professional Accountants in Business, which sets out additional material that applies to professional accountants in business when performing professional activities.

25 • Part 3 Professional Accountants in Public Practice. which sets out additional material that applies to professional accountants in public practice when providing professional services. • Part 4 International Independence Standards which sets out additional material that applies to professional accountants in public practice when providing assurance services either for Audit and Review Engagements and for Assurance Engagements Other than Audit and Review Engagements. The MIA By-Laws A professional accountant may engage in either financial accounting, auditing, management accounting, company secretary or consulting and hold both title as accountant thus deemed to be professional. As an accountant, they are required to have special technical expertise, uphold extensive knowledge and skills that associated and related with accounting. In addition, they also need to comply to the general professional duties, values, code of ethics that prescribed by the legislator and regulators as well as to the membership body that they belong to. In the case of professional accountants violate code of ethics and put professional accountant’s self-interest higher than interest of other stakeholders as regulated in Code of Ethics by MIA By-Laws, it could negatively impact public’s confidence and credibility the whole profession. Malaysian Institute of Accountants (MIA) is a statutory body established under the Accountants Act 1967, with a mandate to regulate and develop the accountancy profession in Malaysia in support of nation building. MIA accords the Chartered Accountant Malaysia or “C.A.(M)” designation. Working closely alongside businesses, MIA connects its membership to a wide range of information and resources, events, professional development and networking opportunities. Main functions of MIA are: • To regulate and develop the accountancy profession in Malaysia • To determine the qualification of persons for admission as a member • To provide for the training and education to members or other bodies • To render financial or other assistance to members or their dependents as it thinks fit with a view to protect or promoting the welfare of members

26 The MIA By-Law is a set of standards of professional ethics and professional conduct for members and member firms in view of the professional responsibilities and duties owed to their clients, employers, the authorities and the public. A professional accountant who identifies a breach of any other provision of the Code shall evaluate the significance of the breach and its impact on the accountant’s ability to comply with the fundamental principles. The accountant shall also: • Take whatever actions might be available, as soon as possible, to address the consequences of the breach statutorily; and • Determine whether to report the breach to the relevant parties. MIA By-Law outline 4 parts • Part 1 Complying with the Code, Fundamental Principles and Conceptual Framework • Part 2 Professional Accountants in Business • Part 3 Professional Accountants in Public Practice • Part 4 International Independence Standards The MACC Code of Ethics • In line with its existence as a single entity against corruption in Malaysia, MACC jurisdictions under the Malaysian Anti-Corruption Commission Act 2009 is dedicated to investigate and prevent any form of corruption and abuse of power. • Act 2009, also provides power to the MACC to investigate any offense under other acts listed as "Prescribed Offence" as follows: - (a) An offense punishable under section 161, 162, 163, 164, and others of the Penal Code; (b) An offense punishable under section 137 of the Customs Act 1954; (c) Offences under Part III of the Election Offences Act 1954;

27 (d) An attempt to commit any of the offenses referred to in paragraphs (a) to (c); or (e) An abetment or conspiracy to commit a crime (as that term was defined in the Penal Code) any offense referred to in paragraphs (a) to (c), whether or not the offense is committed in consequence thereof. • Main functions of this body are: • Receive complaints of corruptions and abuse of position • Conducting investigation • Providing consultancy and advisory the services to improve the system can close the opportunity and space for corruption. • Educate and enlist the support of community in the fight against bribe and corruption. • The Code of Ethics and Conduct of the MACC combines moral values with the uniformed deeds and actions to guide MACC officers to perform their duties and responsibilities with the objective to: • Strengthen the level of integrity of MACC officers in the execution of their duties and responsibilities; and • Clarify permissible and non-permissible actions by MACC officers in accordance with the enforced policies, guidelines, and the law. • Integrity is a core element in the Code of Ethics and Conduct of the MACC. • The core values of integrity upholding the MACC in shaping the "MACC Values" are: Trustworthy, Firm, Fair, Independent, Transparent and Professional. In addition, positive values such as Discipline, Cooperation, Loyalty and Commitment also form the "MACC Values" to be consistently upheld by all MACC officers in executing their duties and responsibilities.

28 2.3 IFAC & MIA By-Laws: Principles of Code of Ethics The Code of Ethics and Conduct is binding on all members of MIA, and any partner (or director) in an MIA practice. Addition, it is also binding on the staff of such a practice, regardless of whether or not they are members of MIA or any other professional body. A professional accountant shall comply with each of the fundamental principles. The fundamental principles of ethics establish the standard of behaviour expected of a professional accountant. The conceptual framework establishes the approach which an accountant is required to apply in complying with those fundamental principles. The Fundamental Principles Within the Code, the Fundamental Principles are set out in Part A. As a member body of the IFAC, MIA is required to apply ethical standards that are at least as stringent as those stated in the IESBA Code. Whenever the IESBA Code is revised, the MIA Rulebook is reviewed, and updated as necessary, to ensure that it remains aligned with the IESBA Code. The Fundamental Principles set out the obligations placed on all members, whether or not they are in practice. The five principles are set out below: i. Integrity • Members shall be straightforward and honest in all professional and business relationships. Integrity implies not merely honesty, but fair dealing and truthfulness. ii. Objectivity • Members shall exercise professional or business judgement without being compromised by bias, conflicts of interest or undue influence of or undue influence on, individuals, organizations, technology or other factors. iii. Professional competence and due care • Members shall attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organization receive competent professional service, based on current technical and professional standards and legislations.

29 • Members shall act diligently in accordance with applicable technical and professional standards when providing professional services. iv. Confidentiality • Members shall respect the confidentiality of information acquired as a result of professional and business relationships, • Members shall not disclose any such information to third parties without proper and specific authority or unless there is a legal or professional right or duty to disclose. • Similarly, confidential information acquired as a result of professional and business relationships shall not be used to the personal advantage of members or third parties. v. Professional behaviour • Members shall comply with relevant laws and regulations and shall avoid any action that may discredit the profession. • Members shall behave with courtesy and consideration towards all with whom they come into contact in a professional capacity 2.4 How Professional Bodies and Regulators Promote Ethical Awareness and Prevent the Unethical Behavior Ethical behaviour can be promoted, or even enforced, in several ways. • If specific unethical practices are widespread and detrimental to the public at large, a national government or supra-national authority may take action to curtail such practices by making them illegal. • The most obvious examples are discrimination in the workplace and selling high interest consumer loans to vulnerable people. Many governments have outlawed various forms of discrimination by passing national legislation and have introduced disclosure requirements at pre-application stage when personal borrowers are considering taking out loans that may not be in their best interests. • It is not possible to legislate on every matter of concern, however, so professional bodies have a vital role to play in controlling unethical behaviour. Professions are characterised by offering specialist services that are underpinned by certain minimum educational standards.

30 • Unfortunately, although it is possible to teach ethics, this does not ensure that those who learn about it will necessarily become ethical as a result. For this reason, most professional bodies set ethical standards to which all their members are expected to adhere. Failure to do so may result in censure or even removal from membership. • The accountancy profession has to consider ethical issues not only nationally but also in a global context. It is in this regard that IFAC has a role to play. IFAC is a global representative body for accountants, with 164 members and associates from 125 countries. It develops international standards on ethics, auditing and assurance, education and public sector accounting standards. • Under the auspices of IFAC, the International Ethics Standards Board for Accountants (IESBA) develops ethical standards and guidelines. In turn, the work of IESBA is overseen by the Public Interest Oversight Board. In common with other major accountancy bodies, MIA By-Law defines fundamental principles as follows: 1. Integrity – A professional accountant should be straightforward and honest in all professional and business relationships.’ Integrity implies not merely honesty, but fair dealing and truthfulness. A professional accountant should not prepare, attest, certify or otherwise be associated with reports, returns, communications or other information where the professional accountant believes that the information (a) Contains a materially false or misleading statement; (b) Contains statements or information provided recklessly; or (c) Omits or obscures required information where such omission or obscurity would be misleading. 2. Objectivity – A professional accountant should not allow bias, conflicts of interest or undue influence of others to override professional or business judgements.’ A professional accountant shall not undertake a professional activity if a circumstance or relationship unduly influences the accountant’s professional judgment regarding that activity. 3. Professional competence and due care – A professional accountant has a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques.

31 Members should act diligently and in accordance with applicable technical and professional standards when providing professional services.’ Maintaining professional competence requires a continuing awareness and an understanding of relevant technical, professional, business and technology-related developments. Continuing professional development enables a professional accountant to develop and maintain the capabilities to perform competently within the professional environment. In complying with the principle of professional competence and due care, a professional accountant shall take reasonable steps to ensure that those working in a professional capacity under the accountant’s authority have appropriate training and supervision. 4. Confidentiality – A professional accountant should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority, or unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of himself or third parties. Professional accountant shall: (a) Be alert to the possibility of inadvertent disclosure, including in a social environment, and particularly to a close business associate or an immediate or a close family member; (b) Maintain confidentiality of information within the firm or employing organization; (c) Maintain confidentiality of information disclosed by a prospective client or employing organization; (d) Not disclose confidential information acquired as a result of professional and business relationships outside the firm; (e) Not use confidential information acquired as a result of professional and business relationships for the personal advantage of the accountant or for the advantage of a third party; and (f) Not use or disclose any confidential information, either acquired or received as a result of a professional or business relationship, after that relationship has ended.

32 5. Professional behaviour – A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession. He or she should behave with courtesy and consideration towards all with whom they come into contact in a professional capacity. A professional accountant shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession, and as a result would be incompatible with the fundamental principles. When undertaking marketing or promotional activities, a professional accountant shall not bring the profession into disrepute. A professional accountant shall be honest and truthful and shall not make an exaggerated claims for the services offered by, or the qualifications or experience of, the accountant. The MIA By-Law then goes on to elaborate on specific responsibilities in relation to many aspects of practice, including money laundering, whistleblowing responsibilities, advertising and publicity, the descriptions of members and firms, changes in professional appointments, legal ownership and access to books and other documents, professional liabilities and clients’ monies. 2.5 Factors that Distinguish Accounting Profession from other Types of Profession • Unlike other professions, professional accountants are increasingly challenged to demonstrate their relevance in the capital market and their ability to evolve and face new challenges. • Public expectations are increase in time; hence the value of professional accountants will be measured by the extent to which they are perceived to be accountable not only to their own organizations but more importantly to the public. • Accountants are bound both by the rules of their organization and by the professional standards of the accounting industry. Accountants have ethical

33 responsibilities to many different parties, both internal and external to the company. • Professional accountants in business are a key pillar in organizations helping to create and sustain value and growth. Their ability to continue to fulfil these roles in the face of constant environmental changes is vital to their continued relevance. • Professional accountants in business are also the front runners when it comes to upholding the quality of financial reporting and providing the broader public with reliable financial information. • Professional accountants in business, must maintain high standards and have a key role to play in helping organizations to act ethically. Public accountants need to be trusted to provide public value. • Accountants will lose their legitimacy as protectors of public interest if there is no public trust. In the most basic way, confidence in the financial data produced by professionals in businesses forms the core of public trust and public value. 2.6 Roles of The Accountant in Promoting Ethical Behavior • Situations may occur where professional accountants in businesses are expected to help the organization achieve certain financial outcomes. In some of these cases, the required action may risk compromising compliance with accounting and financial reporting rules. Professional accountants in businesses encounter tension in these situations. • As an example, accountants in organizations may face pressures to account for inventories at higher values or select alternative accounting methods which are more financially favourable to the company. • However, these actions may be contrary to what are allowable in the accounting standards or to what the professional accountant may feel comfortable with. • Accountants often face conflicts between upholding values to their profession and the demands of the real world. • Professional accountants are expected to exercise professional judgment in performing their roles so that when times get challenging, they do not undertake

34 actions that will result in the profession losing the public’s trust as protectors of public interest. • Ethical codes for professional accountants globally cover for professional accountants, regardless of the roles that they perform, to uphold values of integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. • However, competing pressures can put professional accountants in challenging and often difficult situations. These conflicts revolve around ethics, commercial pressures and the burden of regulation. 2.7 Disciplinary Process Following Suspected Ethical Breaches • Disciplinary proceeding against a member can be initiated by way of a complaint from any persons made to the Registrar of MIA pursuant to Rule 3 of the Malaysian Institute of Accountants (Disciplinary) (No.2) Rules 2002 (‘the Rules’) or an Inquiry based on a decision of a court of law pursuant to Rule 18(2) of the Rules or by the complaints from the Financial Statement Review Committee and the Practice Review Committee of MIA. • All complaints made to the Registrar shall fulfil the requirements of Rule 4 of the Rules failing which the complaint will not be processed. Once the complaint is registered, the Registrar will issue a Notice of Complaint (‘NOC’) setting out the particulars of the complaint, inviting the Respondent to give written explanation on the complaint alleged against him and stating whether the Respondent wants to be heard by the Investigation Committee (‘IC’). At this stage, no finding of fact nor investigation is involved but only administrative issuance of NOC based on the complaint/allegation(s) received. • When the time specified in the NOC has elapsed, the Registrar shall refer the matter to the IC for investigation wherein the Respondent will be invited to give 1.Registrar Office 2.Investigation Committee 3.Disciplinary Committee 4.Disciplin ary Appeal Board 5.Judicial Review

35 written explanation. At this stage, the IC is empowered to request for documents for purposes of investigation from the Respondent and any other member. Refusal of any member of the Institute to comply is an offence and can be convicted. Pursuant to Rule 9 of the Rules, upon investigation, the IC either refers the case to the Disciplinary Committee (‘DC’) with a report stating the IC’s findings or dismisses the complaint. • Once the complaint is referred, the DC will proceed to conduct the hearing against the Respondent giving him notice of the same attaching the IC’s Report stating that the Respondent will be given an opportunity to be heard and can be represented by an advocate and solicitor or a member of MIA. It is important to note that evidence before the DC shall be given orally or if necessary, by way of sworn affidavits. The DC is also empowered to proceed with the hearing if the Respondent fails to attend without lawful notice as provided in Rule 13 of the Rules. The IC will also be given the same opportunity when presenting their case during the hearing. Rule 17 of the Rules gives the DC mandate to regulate its own procedures subject to the Act and Rules. • Upon hearing both parties, the DC will determine if the Respondent is guilty of an unprofessional conduct. If found guilty, the DC is empowered to impose combination of punishment(s) as set out in Rule 18(3) of the Rules based on the presented facts, aggravating and / or mitigating points. In cases involving serious misconduct, the DC can remove or suspend the Respondent. In discharging its function, the DC is also mindful that any directions or decisions made must be in line with natural justice. • As for cases initiated by the DC based on a court’s decision involving a member of the Institute pursuant to Rule 18(2) of the Rules for unprofessional conduct, offences relating to fraud or dishonesty or bankruptcy, it is to be noted that no finding of facts nor investigation are involved in the process. Only a due inquiry will be held and if the DC is satisfied with the facts, the DC will proceed to impose appropriate punishment set out in Rule 18(3) of the Rules. • If the Respondent is aggrieved by the decision of the DC, the member may within 21 days upon receipt of the decision of the DC appeal to the Disciplinary Appeal Board (‘DAB’) by giving a notice of appeal stating grounds of appeal together with the payment of costs imposed by the DC. Failing to pay the costs shall invalidate the appeal made to the DAB. It is to be noted that the appeal will be heard by way of written representation only. By virtue of Section 21(3) of the Act,

36 after deliberation of the appeal, the DAB is empowered to confirm, reverse or vary the decision of the DC. The decision made by the DAB is final. • The decision of the DAB can only be challenged by way of a judicial review proceeding filed in the High Court by virtue of Order 53, Rule of Court 2012. In a judicial review proceeding, the courts generally will not interfere into the merits of the matter but rather preside to determine whether the whole process of the disciplinary proceedings were lawfully held according to the Act and Rules. Judicial review application must be filed within three months from the communication of the DAB’s decision that is sought to be challenged (Para.1 Court of Judicature Act 1964 & O.53 r.3(6) of the Rule of Court 2012).

37 EXERCISES 1. Discuss the function of the following regulatory and professional accountancy bodies in promoting ethical and professional standards a. Malaysian Institute of Accountant (MIA) b. International Federation of accountant (IFAC) c. Malaysian Anti-Corruption Commissions (MACC) 2. Briefly explain the following fundamental principles set out by the MIA ByLaws: a. Integrity b. Objectivity c. Professional competence and due care d. Confidentiality e. Professional behaviour 3. Discuss factors that distinguish accounting profession from other types of profession. 4. Explain roles of the accountant in promoting ethical behavior. CASE STUDY Harlina is an MBA graduate from a Malaysian Institution of higher learning. She had majored in marketing and is interested in retailing. One day, while browsing Jobstreet.com, to her excitement, she received a job offer from a large and prestigious department chain store in Kuala Lumpur. Harlina accepted the job offer with open hands. She is all sets to face the challenges at the new workplace. At the entry point, she is appointed as entry executive, whereby she will be rotated on the job and task to all the departments to gain exposure and appreciate the nature of the business. Helena’s first assignment is to assist Madam Marina, a qualified buyer in the food and Beverages department. Buyers play a critical in the management of the department store. They select the goods to be offered, negotiate purchase terms and conditions, set retail prices, arrange displays, organize promotions, and are generally responsible for the operations of the departments within the store. Harlina was extremely happy on the first month of her employment. Madam Marina respected her as an employee. On several occasions she has received praised for good discipline. Her views and opinions have been well considered and workload is just right.

38 However, an event occurred that threatened to destroy all her contentment. According to Madam Marina, the department store has received a shipment of imported halal biscuit from Australia with an authentic chocolate cream filling. They are well-packed in attractive foil covered boxes, but somehow some of them had become infested with mould and insects. Not all the boxes were infested, since only a few customers have returned the item after purchase. But the point is some people did return their purchase packs. Obviously, said Madam Marina, “We cannot continue to sell them at our department store to uphold our good image. We also do not have the time to inspect every package and keep the ones that are not infested.” Madam Marina went on to discuss the cost implications. She uttered, “What about the losses that we have to incur? We have already committed a capital cost of almost RM50,000. The biscuit manufacturer will not refund us since it is doubtful whether the infestation had occurred during shipment, or even during storage at our own warehouse.” After a serious discussion, Madam Marina asked Harlina to get rid of the biscuit. Harlina thought that Madam Marina asked her to throw them away at the rubbish bins provided by the KL municipality (DBKL) near the store, but Madam marina further clarified to Harlina, “Absolutely not! Call Mr Maniam. He operates a mini market at the outskirts of the Klang Valley where the majority of the residents are in the low income groups. We have to get our money back!” Harlina protested openly, but Madam Marina further assured, “Look, there is nothing wrong with our actions. The residents of these areas have never had high quality foodstuff of this nature. These imported biscuits will be sold very cheaply, and for most people who buy them, it will be an opportunity to try something really good. Only a few people will get the infested boxes. They will not be very happy, but at such remote areas, they will have expected this especially when they see a low price on an expensive product. They make the choice. We don’t!” Harlina is in dilemma…should she follow the instructions of her boss?

39 TOPIC 3 CORPORATE CODES OF ETHICS AND PROFESSIONAL SKEPTICISM Learning Outcomes At the end of topic, students able to: • CORPORATE CODE OF ETHICS o Describe corporate codes of ethics o Explain the benefits of a corporate code of ethics to the organization and its employees • PROFESSIONAL SKEPTICISM o Describe professional scepticism o Provide explanation on the increasing importance of professional scepticism o Specific application of professional scepticism

40 3.1 Definition Corporate Code of Ethics and Professional Skepticism Definition of Corporate Code of Ethics Corporate code of ethics is designed to provide guidance about the conduct expected by members in order that the services offered will be of acceptable quality and the reputation of the company will not be violated. To be effective, codes of conduct need to blend fundamental principles with a limited number of specific rules. Corporate codes of conduct are completely voluntary. Among example of corporate code of ethics are; • Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in profession, • Place the interests of clients above own personal interests. • Use reasonable care and exercise independent professional judgment when conducting analysis, making recommendations, taking actions, and engaging in other professional activities. • Practice and encourage others to practice professionally and ethically that will reflect credit on themselves and the profession. • Promote the integrity and viability of the global markets for the ultimate benefit of society. • Maintain and improve professional competence and strive to maintain and improve the competence of other Importance of Code of Ethics to the Organization • to define a company’s ethical stances on topics like material sourcing, conflict resolution and legal compliance, to ensure that every member of the company understands the ethics code. • To prevent lawsuits and legal challenges • Creating a positive public image

41 Importance of Code of Ethics to the Employee • To protect employees’ rights ▪ Pay disputes ▪ Discrimination ▪ Sexual harassment ▪ Disparate treatment ▪ Resolving conflicts ▪ Pursuing promotions • To assist employee in making the right decision through the predetermined guidelines Definition of Professional Skepticism Professional skepticism consists of a skeptical mindset and a skeptical attitude process (Nolder & Kadous, 2018). A skeptical mindset is a cognitive process that understands the issue, gathers the facts, and performs an analysis. A skeptical attitude is a judgment process based on cognitive and affective evaluation. The outcome of a skeptical attitude is an intention to behave, and it will be followed by behavioral action “An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence.” IAASB’s Handbook of International Quality Control, Auditing, Review, Other Assurance, and Related Services Pronouncements Importance of Professional Skepticism • With the increased use of judgement in financial reporting in recent years, the ability to exercise professional scepticism is an increasingly important competency for accountants. • Professional skepticism needs to be exercised by all professional accountants, not just auditors. Preparers, in particular, need to exercise skepticism themselves

42 before handing information over to external auditors. Outdated practices of 'gaming' the auditors, to see how far they can be pushed, is no longer acceptable. • Audit committees and internal auditors need to challenge themselves, the controls they put in place, and the quality of the information they produce, before handing it over to external auditors. It is not for the auditors to prove management wrong; it is for management to support its assertions. • Whether doing audit, tax, consulting, or industry work, due professional care is needed for maintaining accounting independence, that state of mind where an individual can perform his services without being impacted by influences that compromise his professional judgement. • A healthy dose of skepticism and sound professional judgement are keystones in every successful accountant’s career. Skepticism is to doubt the truth. It’s a safeguard that helps an accountant ensures due professional care when deciding which auditing procedures, accounting principles, tax positions, or consulting advice would be best in any given situation. • IFAC believe that those who prepare financial information within an organization and those who review it, including internal auditors, are in a position to improve the quality of the information they process and review by applying professional skepticism. • The CEO, CFO, and members of the audit committee have the responsibility to fully understand the composition of all the line items in the financial statements to satisfy themselves that they trust the integrity of the organization’s financial statements. This could result the auditor to recognize a lower risk of material misstatement in the financial statement 3.2 Applying Professional Skepticism in Auditing ISA 200: Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing describe professional skepticism includes being alert to, for example: • Audit evidence that contradicts other audit evidence obtained. • Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence. • Conditions that may indicate possible fraud.

43 • Circumstances that suggest the need for audit procedures in addition to those required by the ISAs. (ISA 200 A.18). 5 stages in audit process to apply professional skepticism; • Assessing Engagement Acceptance ▪ whether the management of the intended audit client acts with integrity and ▪ whether there are any matters that may impact on the auditor being able to act with professional skepticism • Performing Risk Assessment Procedures ▪ be skeptical when performing risk assessment procedures at the planning stage of the audit. ▪ For example, when discussing the results of analytical procedures with management, the auditor should not accept management’s explanations at face value, and should obtain corroboratory evidence for the explanations offered. • Obtaining Audit Evidence ▪ ready to challenge management, especially on complex and subjective matters and matters that have required a degree of judgement to be exercised by management. ▪ The reliability and sufficiency of evidence should be considered, especially where there are risks of fraud. • Evaluating Audit Evidence ▪ should critically assess audit evidence and ▪ be alert for contradictory evidence that may undermine the sufficiency and appropriateness of evidence obtained. • Forming the Auditor’s Opinion ▪ considering the overall sufficiency of evidence to support the audit opinion, and ▪ evaluate whether the financial statements overall are a fair presentation of underlying transactions and events

44 3.3 Specific applications of professional skepticism ISA 240-The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements • specifically refers to professional skepticism stating that ‘when obtaining reasonable assurance, the auditor is responsible for maintaining professional skepticism throughout the audit, considering the potential for management override of controls and recognizing the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud’ • state a specific requirement for the auditor: ‘The auditor shall maintain professional skepticism throughout the audit, recognizing the possibility that a material misstatement due to fraud could exist, notwithstanding the auditor’s past experience of the honesty and integrity of the entity’s management and those charged with governance’ • Emphasize the importance of assessing the reliability of the information to be used as audit evidence and the controls over its preparation and maintenance. • states that ‘management is often in the best position to perpetrate fraud. Accordingly, when evaluating management’s responses to inquiries with an attitude of professional skepticism, the auditor may judge it necessary to corroborate responses to inquiries with other information’ • reminds the auditor that when management provides the auditor with audit evidence – be that in the form of answers to enquiries, written representations or other forms of documentary evidence – the auditor should carefully consider the integrity of that evidence and whether additional corroboratory evidence should be obtained from a more reliable source. IAASB-Staff Q & A document entitled Professional Skepticism in an Audit of Financial Statements • Accounting estimates – this can include fair value accounting estimates, the use of significant assumptions by management in developing accounting estimates, and reviewing the judgements and decisions used by management for management bias in developing accounting estimates.

45 • Going concern – the auditor should review management’s assessment of going concern and whether management’s plans are feasible, this being particularly important where there is a significant doubt over the entity’s ability to continue as a going concern. • Related party relationships and disclosures – it can be difficult to obtain information on related parties, as knowledge may be confined to management meaning that the auditor may have to rely on management to identify all related parties The auditor should also be skeptical when assessing the business rationale behind related party transactions. • Consideration of laws and regulations – the auditor should be alert throughout the audit for indications that there may have been a suspected non-compliance with laws and regulations.

46 EXERCISES 1. Define code of ethics 2. Discuss the importance of code of ethics to the employer and employee 3. Define professional skepticism 4. List and briefly explain five (5) stages in audit process to apply professional skepticism 5. Explain specific applications of professional skepticism relating to fraud in an audit of financial statements. CASE STUDIES CASE STUDY 1 Find relevant news articles that are related to the following issues. In group, discuss how these issues impact employees performance and satisfaction. • Safety and health at the workplace • Sexual harassment in the workplace • Workplace discrimination, e.g. discrimination based on gender, discrimination in terms of promotion. CASE STUDY 2 Noraini is a professional accountant who was hired by RO Bhd as the payroll manager. She works closely with Fendy, the Chief Executive Officer (CEO) of RCO Bhd. Before Noraini started her job at RCO Bhd, Fendy emphasizes to her on the maintain strict confidentiality regarding employees’ salaries and pay scales. On Noraini’s first day in RCO Bhd, she was introduced to Latifah, the founder of RCO’s Bhd, who told Noraini to see her if she has any problem at work. In their conversaion, Latifah told Noraini that Fendy is good and highly motivated staff, After four months of employment, Noraini notices that Zubaidi, a technician, who is also the CEO’s brother, makes huge commission compared to the other technicians. She assumes that Zubaidi must be hold a highly qualification education and must be working hard. Consistently, Noraini would prepare the job sheet for all RCO Bhd’s technicians. The technicians are instructed to take whatever job given and are not allowed to choose their job tasks. They cannot choose the work that they prefer or work that gives higher commission. One day, however, Noraini receives

47 memorandum from the CEO, asking her to give the easier and ‘high commission work’ to his brother, Zubaidi. Noraini is uncertain what she should do. Questions: 1. Discuss Noraini’s dilemma in the above case. 2. Explain the conflict of interest in the above case. If you were in Noraini’s place what actions would you take to avoid future conflict of interest and how would you deal with favouritism at the workplace? 3. Briefly discuss related fundamental principles that are related to the above case.

48 TOPIC 4 ETHICAL CONFLICTS & DILEMMAS Learning Outcomes Ath the end of topic, students able to: • Define ethical conflicts • Discuss situations where ethical conflicts and whistle-blower can arise • Explain Threats to ethical behaviour • Discuss Ethical dilemmas in workplace • Elaborate Safeguards against ethical threats and dilemmas

49 4.1 Define ethical conflicts As the number of human interactions in business is infinite, it follows that professional accountants will be faced with conflicts of interest and ethical dilemmas that they have to address. Conflicts of interest arise from various sources. The accountant may be asked to: • take a decision on a matter in which the individual has a personal involvement, such as where the accountant has a family or personal relationship with the client • advise a company that is in direct competition with an existing client • support two clients who are in competition with one another. Ethical dilemmas or conflict arise when the accountant has to consider two or more seemingly incompatible ethical obligations. For example: 1. he may be asked by a manager to remain silent about certain matters that would have an adverse impact on the financial accounts of an organisation, thereby testing the accountant’s loyalty to his manager on the one hand, and his responsibilities as a professional accountant on the other 2. he may consider that the policies of his employer are unethical and may find it difficult to reconcile personal values with those of the organisation 3. he may be advising a long-standing client who is also a personal friend, only to discover that one of the client’s family is behaving dishonestly, thereby playing the bond of friendship against the professional duty to give objective, truthful advice. When faced with ethical conflicts, the decision taker should consider: • the facts of the situation • the ethical principles involved • related fundamental principles • relevant internal procedures • the alternative courses of action • consequences of each alternative course of action.

50 4.2 Discuss Situations Ethical Conflicts and Whistle-Blower Can Arise Conflict of Interest There are three types of conflict of interest; 1. Actual conflict of interest Occurs when there is a real conflict between the interests of the accountants and other interests that influences a person’s actions or decision making 2. Potential conflict of interest Occurs when a person has interests or obligations that could conflict with the interests of the client 3. Perceived conflict of interest Occurs it appears or other people could form the view that a person could be influenced by a conflict of interest Whistleblower A whistle-blower is someone who exposes alleged dishonest or illegal activity within an organization. The alleged misconduct can be: • a violation of a law, rule or regulation; • a direct threat to public interest; • fraud; • health and safety violations; or • corruption. Whistle-blowers can make their allegations either internally or externally. Ethical Dilemmas A situation in which a difficult choice has to be made between two courses of action, either of which entails transgressing a moral principle