Professional Ethics And The Regulatory Metronome

Introduction 

In the UK and Republic of Ireland, history points to a regulatory landscape (with its accompanying abundance of regulatory bodies, legislation, statutory codes, guidance and performance indicators) which is subject to fluidity. It oscillates to the beat of prevailing social and political mores; to perceptions of (and appetites for) risk; and with the economic pressures that face society at the time. Inevitably, it lags behind advancements in science and technology, and novel ways of doing business. 

In contrast to this oscillation, personal ethical values (such as integrity, honesty, courage, and fairness) are less fluid. By joining a profession, individuals inform and test their own personal values with a core of intrinsic norms that regulate their profession and with which all the members of that profession must comply. 

The fundamental principles set out in the Code of Ethics for Professional Accountants published by the International Ethics Standards Board for Accountants (and on which the Codes of all CCAB member bodies are based) is supplemented by the conceptual framework. This framework requires professional accountants to identify, mitigate or eliminate any potential threats to their compliance with these principles. 

It may be observed that in a time of deregulatory pressures and amidst a relentless push for increased productivity and growth, the flexible but constant nature of the fundamental principles and conceptual framework remain an essential aid for professional accountants seeking to do the right thing in challenging circumstances; to exercise professional judgement, and to demonstrate ethical resilience. 

The ebb and flow of regulatory imperatives 

An understanding of the historical background to the development of our profession’s regulation is provided by an awareness of the linkage between the way in which society and business have evolved and the manner in which regulation and codification has been layered to respond to each stage of evolution.

• In the early 1960s, business was largely governed by perceptions of trust; regulation was light touch, detailed codes of ethics did not exist; codification of practice was loose. Other than very broad outlines set out in Companies legislation, there were few standards on how to prepare or a set of accounts or, indeed on professional behaviour. 
• The early 1970s saw increasing regulation in the spheres of pricing, health and safety, employment, consumer rights and the environment. The accountancy profession was not immune to these societal shifts and economic and cultural changes. Concern over widely differing profit statements based on the same data, led to the introduction of the first Statement of Standard Accounting Practice (SSAP 1). Other standards quickly followed. 
• The 1980s was a period of economic liberalism: low taxes, sale of state-owned industries; removal of barriers to free trade; reducing the size of the public sector; and, significantly, deregulation. Yet in this period, the accountancy profession witnessed a surge in the development of strictly technical standards, such as those relating to accounting for stocks, depreciation, R&D, contingencies, segments, post balance sheet events, goodwill etc. However, these standards were not universally well received by clients, and accounting standards attempting to deal with inflation were subject to considerable criticism. 
• During the 90s and the noughties, a series of well publicised business failures were followed by reviews and recommendations which sought to redress particular concerns on a piece meal basis. 

The accounting errors of the 1990s derived from the new and increasingly complex balance sheet arrangements, often designed to massage gearing ratios and to produce smoothed cyclical earnings. An increasing body of accounting and auditing standards, and of national and international standard setting bodies, accompanied them. 

The idea that regulation should be based on a conceptual framework (The Corporate Report) was put on the back burner and it was not until 2010 that the International Accounting Standards Board produced the first stand-alone Conceptual Framework for Financial Reporting (incorporating the earlier work of other bodies, and focusing on objectives and qualitative characteristics). A comprehensive revision of this framework was undertaken in 2018 (enhancing concepts like prudence and with additional chapters on measurement, presentation and disclosure) which became effective for policy making from 2020 onwards., 

Unfortunately, the development of Corporate Governance regulation was not always informed by best practice. Indeed, it was often derived from worst practice. Consequentially, the focus shifted from personal professional ethical behaviour to a comply or explain approach in which organisations were required to comply with an increasingly onerous body of detailed rules, or explain their reasons for any departure from the published norms. This approach was echoed in the regulation of accounting and audit. 

The present 

The current economic, business and social climate is characterised by a push-back against globalisation, and rapid innovation including digitisation and the emergence of disruptive technologies such as AI.  The regulatory landscape is mirroring these changes. The risk, however, is that we continue to create further regulation in response. 

Discourse in relation to important matters like Sustainability/Environmental Social Governance (ESG) including Equality, Diversity and Inclusion, is increasingly polarised and politicised. Companies that operate internationally, may well find themselves conflicted between the different regulatory approaches, and sanctions regimes, that operate in the UK, Europe and America. Professional accountants are still required to master and comply with an increasing array of standards and technical guidance. 

This volume and pace of regulation, require professional accountants and professional firms to invest significantly in technical expertise to ensure up to date compliance capability. In addition to the financial, human and activity-displacement costs, this creates an over-emphasis on rules-based compliance, to the detriment of the application of personal ethical judgement. 

It is important to reflect on whether, as a profession, we have attained the appropriate balance between an increasing volume of proscriptive rules and the ability of the professional accountant to be confident in exercising professional judgement, in accordance with the fundamental principles. 

We should address the premise that smarter reporting does not necessarily emanate from more reporting. Equally, we need to be alert to societal pressures to deregulate for the sake of it, or to create a vacuum that may be advantageous to bad actors. 

Perhaps the answer lies in placing a greater emphasis on ethical training (including reasoning, self-reflection, value-based decision making and the exercise of professional judgement), in the initial and continuing education of professional accountants. 

In an age of increasing reliance on AI tools and the output of technology, the rigorous training undertaken by professional accountants; their ability to exercise professional judgement and their commitment to ethical decision making governed by the fundamental principles and the conceptual framework, remain unique indicators of quality and professionalism.