Ethics. Do ask, do tell

Transcription

1 Do ask, do tell A new code of ethics for accountants comes into effect this month to help professionals navigate ethical minefields, writes Christine Gonsalves Illustrations by Allan Sanders 32 January 2011

2 spate of negative news has dogged Hong Kong s accounting profession in recent years. Facing allegations of falsifying audit documents, Ernst & Young paid millions to settle a negligence claim filed against it in September 2009 by liquidators of Akai Holdings Ltd., a failed electronics company audited by the Big Four firm. That same month, high-flying accountant Gabriel Dias-Azedo, a former Grant Thornton managing partner, fled Hong Kong amid allegations that he swindled millions from clients only to be nabbed by police in Spain in November. And then there is the KPMG senior manager, Leung Sze-chit, who got into trouble in April last year for allegedly accepting January

3 a HK$300,000 bribe as a reward for preparing the accountant s report in fabric maker Hontex s initial public offering prospectus and offering bribes to a subordinate. With so much riding on the integrity of accountants and auditors, especially those who work with listed companies, upholding professional ethics standards is imperative. But as has been amply demonstrated, accountants and auditors are only human. Their sole support when conflicted or tempted is their own moral compass and a lifetime of ethical practice. Chris Joy, the Institute s executive director for standards and regulation, says there is a stronger push globally to make ethics part of the core professional development of accountants. Increasingly, people are starting to think about the ethical dilemmas or issues that might be faced not just by auditors but by accountants in business as well, he says. In line with this, the Institute adopted the International Federation of Accountants code of ethics, which underwent a revamp and takes effect at the beginning of this month. The Institute is also working with accountants in businesses and small- and medium-sized practitioners to help them adhere to the new code. Ethics defined The Association of Certified Fraud Examiners, the world s largest anti-fraud organization with nearly 55,000 members, said in a 2010 report that the median fraud loss for organizations in Asia in 2008 was roughly US$300,000, almost double the global median loss of US$160,000. Corruption was the main reason, appearing in more than half of the Asia-Pacific fraud cases 34 January 2011

4 Even though the potential new work might be 100 times more lucrative than your existing work, you have to be mindful of this and stay away from the conflicting area. in the study, while asset misappropriation was the most common type of occupational fraud, occurring in 80 percent of all cases. Financial statement fraud was the most expensive category, causing a median loss of US$4.3 million. Aside from outright fraud, accountants in Hong Kong usually face two types of ethical dilemmas, says Clement Chan, managing partner of BDO. One is upholding the accounting and auditing standards while maintaining a trusting relationship with clients, so that when a standard requires the accountant to take a position that is not to the client s liking, he or she can stand firm and explain the reasons. The second type involves being alert to potential conflicts that might arise during the course of daily work, which could be as simple as taking on a new client that creates a conflict of interest, Chan explains. Even though the potential new work might be 100 times more lucrative than your existing work, you have to be mindful of this and stay away from the conflicting area. Whenever I am introduced to a new opportunity, the first thing I ask myself is the potential scope of work. If we know exactly what is required, it is not difficult to analyze the situation for conflicts considering our present portfolio, clients and work, he says. Issues that are unethical may not be illegal. Melissa Claassen, chief financial officer of Adidas for Hong Kong and Taiwan, says some of the biggest challenges for any CFO can be discussing accounting treatment with the front end of the business, such as the sales team. For example, what exactly constitutes a sale? she asks. Revenue recognition is probably one of the biggest topics to discuss with the front end. It s about bringing accounting sensibilities into these discussions in terms of what should be recognized and what should not. Another issue is kickbacks. Instructing people how to proceed, including how to even identify a kickback, is critical, Claassen says. Adidas has a staff handbook and internal policies that outline what is acceptable in terms of companyfunded meals and entertainment, or when an overtime meal allowance or taxi allowance should be granted. They give clear guidance and set rules as to acceptable behaviour within the company. The finance team is very much a part of making sure that those controls are met, she says. One accountant who didn t get the rules right was Desmond Yuen, a former Grant Thornton Hong Kong managing partner who was found guilty of stealing company assets by forging travel and work expenses amounting to HK$492,000 from 2002 to At Asian Capital Group, whose principal subsidiary is a corporate finance house licensed and regulated by the Securities and Futures Commission, chief executive Patrick Yeung, who is an Institute member, says clients may not be aware that their plans could bend the rules; some of this stems from ignorance about the regulations and some comes from conflicts of interest. There is a top and bottom to this equation, he says. The top, in terms of regulatory and ethical issues, is whether we are assisting the client to breach the law or codes of conduct, or would there be any criminal or regulatory issues on the part of the client, or even for us. The bottom is having to work out a solution that is legally and regulatorily compliant and then convincing the client that this is the way action should be taken. Yeung says ethical issues that he finds most challenging arise in insolvency cases, especially those that involve listed companies and many parties like employees, creditors and shareholders. These cases tend to raise ethical issues involving management: the migration of assets, shifting of profits and liabilities, and sometimes the creation of fraudulent assets. We have seen cases where evidence suggests that accountants are behind the scenes helping corporations January

5 It is possible that auditors can... smell something fishy and, therefore, refuse to continue to act as the auditors of the relevant companies and resign from their position in order not to expose themselves. or major shareholders or directors to do that, Yeung says. Because they know what the auditors will look for, they help to conceal the evidence from them or provide false evidence. Insolvency practitioner Derek Lai, a financial advisory partner at Deloitte, says it is difficult to gather evidence to prove that CPAs are acting behind the scenes to help corporations conceal facts. Having said that, it is possible that auditors can, in certain circumstances, smell something fishy and, therefore, refuse to continue to act as the auditors of the relevant companies and resign from their position in order not to expose themselves, Lai says. Outside parties always have some concerns when there is a change of auditors and would like to know the reasons behind the change. Enforcing ethics Over the past decade, new reforms and regulations, such as the U.S. Sarbanes-Oxley Act of 2002 and Australia s Corporate Law Economic Reform Programme Act 2004, have been introduced to combat the dangers of unethical behaviour. They also mean that accountants are coping with regulators who are becoming increasingly vigilant. To strengthen ethics education, Joy says the Institute runs regular training workshops. We also hold an annual event with the Independent Commission Against Corruption on general business ethics and behaviour, he says. It s hard to teach ethics but these programmes raise members awareness that ethics must be central to what they do. Lai says more frequent workshops on ethics and more updates to the ethical guidelines would be welcome. Making ethics a component of the yearly CPD requirements would be a very good move, especially for members working in a business or leading a small practice, he says. Indeed, practitioners say they find pockets of unethical behaviour in their daily work. For example, maintaining multiple sets of financial books for management, the tax authorities and the auditors continues to be practised in the mainland. If we come across multiple sets of books, we report that to our clients and explain what the impact on the transaction might be, says Bernard Poon, managing director of Ernst & Young Transactions Ltd. Some of our clients are overseas investors coming into the region for the first time. Part of our role is trying to explain the differences they are going to experience. While often a major issue for a foreign party, two sets of books need not be a deal breaker and sometimes, once we ve explained the reasoning behind why these books are kept in this way and after thorough due diligence and integration considerations, we can help them determine which investment strategy will be the best for their decision making, he says. Joy notes that professional standards in the mainland at the official level are similar to Hong Kong s. The custom of keeping multiple books merely highlights what can happen in practice. A large number of our members are practising in the mainland. What we have to do is look at where we support them, what specific needs they have given the market they are working in, and how to reconcile the conflict of unethical behaviour when working in a different business environment, he says. Ultimately, accountants say that ethics must be developed throughout a career. Ethical values can t be taught in a two- or three-hour training course but have to be inculcated based on a lifetime of professional training. There can never be enough emphasis on ethics. And the best way to ensure that proper ethical standards are assured is by establishing them as a core value in the profession, says BDO s Chan. 36 January 2011