Managing ethical conflicts – what would you do?

This article is taken from the ‘Managing ethical conflicts’ module in Harvard ManageMentor, the comprehensive CPD program for members. The module is a performance support tool developed to help CIMA members, as professionals in business, to manage ethical conflicts. It is based on the CIMA Code of Ethics which was derived from the International Federation of Accountants’ Code of Ethics.

Put yourself in the shoes of CIMA member CM. CM recently took up the role of accountant at a small food production and processing company in the UK. As she settled into her role she noticed some practices that did not seem right to her.

Some employees were not on the payroll and were being paid cash in hand, raising the possibility that National Insurance contributions and tax were not being paid. The company was run by two owner/directors, who were fairly set in their ways. CM did not agree with paying people off the payroll, and was concerned that she could be implicated if this ever came to light publicly.

However, it was clear that the business had always been run in this way. Other people within the business were aware that it was going on and she had only been at the company a short time so was reluctant to ‘rock the boat’. Think about what you would do and compare your solution to CIMA member suggestions; CIMA's advice; and what CM did.

Conflict resolution process

When initiating a formal or informal conflict resolution process in response to a challenge to the fundamental principles of the CIMA Code of Ethics, a professional accountant should consider the following:

• relevant facts
• ethical issues involved
• fundamental principles related to the matter in question
• established internal procedures
• alternative courses of action.

Having considered these issues, a professional accountant should determine the appropriate course of action that is consistent with the fundamental principles identified. The professional accountant should also weigh the consequences of each possible course of action. If the matter remains unresolved, the professional accountant should consider the internal safeguards available to them.

If the issue has organisational consequences this may include escalating the issue to those charged with governance of the organisation, such as the board of directors or the audit committee.

The professional accountant should document the substance of the issue and details of any discussions held or decisions taken. If a significant conflict cannot be resolved, a professional accountant may wish to resort to external safeguards and so avoid breaching confidentiality. For example, a professional accountant may have encountered a fraud, the reporting of which could breach the professional accountant’s responsibility to respect confidentiality. The professional accountant should consider obtaining legal advice to determine whether there is a requirement to report.

If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a professional accountant should, where possible, refuse to remain associated with the matter creating the conflict. The professional accountant may determine that, in the circumstances, it is appropriate to withdraw from the specific assignment, or to resign altogether from the employing organisation.

Potential conflicts

A professional accountant in business, as a professional, has an obligation to comply with the fundamental principles of the code. However, there may be times when their roles as an employee and as a professional are in conflict. Ordinarily, a professional accountant in business should support the legitimate and ethical objectives established by the employer and the rules and procedures drawn up in support of those objectives. However, where a professional falls under pressure to act in ways that could directly or indirectly threaten compliance with the fundamental principles then they must consider a response to the circumstances.

Such pressure may be explicit or implicit and it may come from a supervisor, manager, director or another individual within the employing organisation. For example, a professional accountant in business may face pressure to:

• act contrary to law or regulation
• act contrary to technical or professional standards
• facilitate unethical or illegal earnings management strategies.

A professional accountant in business may also face pressure to lie to, or otherwise intentionally mislead (including misleading by remaining silent) others - in particular the auditors of the employing organisation or the regulators.

He or she may issue, or otherwise be associated with, a financial or non-financial report that materially misrepresents the facts, including statements in connection with, for example:

• the financial statements
• tax compliance
• legal compliance
• reports required by securities regulators.

The significance of threats arising from such pressures, such as intimidation threats, should be evaluated. If they are other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate them or reduce them to an acceptable level.

Examples

Preparation and reporting of information 
Acting with sufficient expertise 
Financial interests 
Receiving inducements 
Offering inducements.

Steps

The six-step cycle is based on the conceptual framework contained within the CIMA Code of Ethics. It is designed to help you approach ethical challenges in a structured way. The steps can be used to analyse and manage an ethical conflict.

You can find the six-step process - formulated as an ethical decision-making tool - in the foundation case study, located in the case study area. The six steps are:

1. define the problem
2. assess the significance of the situation
3. design an approach
4. act to initiate a response
5. reflect throughout the process
6. evaluate the effectiveness of the response.

Skills

Knowledge of any code of ethics needs to be supported by competence in a range of cognitive and behavioural skills.

An individual will need to be analytical in understanding an ethical dilemma, reflective in considering their options and assertive in implementing their chosen solution.

The ethical decision-making tool used in the foundation case study highlights a structured approach to managing an ethical conflict and incorporates some of the key questions an individual will need to ask themselves at each stage of the process.

 
January 2007