Understanding the conceptual framework

If you either fail to recognise threats to our fundamental principles, or ignore your responsibility to address them, you’ll be liable to disciplinary action.

Help is at hand in the form of the conceptual framework set out in our Rulebook. Based on the IESBA model, this principles-based approach to addressing ethical dilemmas will equip you to recognise threats and satisfy yourself that you’ve acted ethically when addressing them.

The conceptual framework comprises five steps in the form of questions, which you should consider when confronted with an ethical dilemma:

  • What are the relevant facts?
  • What are the ethical issues involved?
  • Which fundamental principles are threatened?
  • Do internal procedures exist that mitigate the threats?
  • What are the alternative courses of action?

Finally, you should consider whether you can look yourself in the mirror after making the decision and applying any necessary safeguards.

An ethical dilemma: what would you do?

Let’s explore each of the five steps using the following example:

You’re the management accountant of a pharmaceuticals company. Your finance director asks you to contact the marketing director about the implications of increasing significantly the price of a generic drug you produce for thinning the blood in heart patients. The request follows a pricing agreement drawn up between the three main companies supplying these drugs to the national health service of a country. All three companies have agreed to increase their prices.

  • 1. What are the relevant facts?

    Sometimes the real issue is obvious, but if you’re not sure ask yourself questions such as:

    • Is this my problem, or does it belong to someone else?
    • Is it the real problem or part of a larger one?
    • Is this a real problem or am I only avoiding a difficult task?
    • Do I need more information?

    Is this your problem?

    You might think not, because you haven’t made the decision to fix the drug price, nor brokered the agreement with the company's main competitors. On the other hand, it could be your problem, since doing this could be seen as helping to implement a potentially illegal arrangement. If not strictly illegal, the arrangement could be considered to be unethical, as it’s detrimental to the taxpayers who finance the national health service.

    Is being asked to change the price the real problem?

    No, it’s part of a larger problem: namely coming into possession of knowledge of a wider conspiracy of a serious nature - in other words, that a cartel is being operated and that price-fixing is taking place, which you’re being asked to condone. The problem you face is that, if you go along with it, you’re aiding and abetting an illegal/unethical process; if you don’t go along with it, there may be career implications or other problems for you in the future.

    Is this the problem or am I only avoiding a difficult task? 

    In this case the problem certainly exists, but rather than just implementing the price change and ignoring the wider issue, or refusing to do so, you should sit down to discuss the larger problem with the finance director. You should try to establish the reason for the price-fixing arrangement and question its legality as well as its ethics.

    If the situation gets difficult, you may need to explore your options. Where you feel pressured to act against your professional judgement or to use information that you have about illegal or unethical behaviour, you might need to discuss this with your solicitor or your professional body. You may need to consider alerting appropriate authorities about this arrangement - in other words, to consider the act of ‘whistleblowing’ and all its wider implications for you, your organisation, its stakeholders and others.

    Logic errors

    As you’re thinking about the issue, watch out for some common errors in logic. Remember that logic errors are different from factual errors; a factual error is simply being wrong about the facts, but in a logic error, the statement leading to the conclusion doesn’t provide the necessary degree of support. You can sometimes spot a logic error by looking out for these words:

    • Either/or – ‘It’s either this or that; there are only two choices’. This isn’t always the case. There are often many other solutions to a problem beyond the two extremes mentioned. In this example, you may: abide by the wishes of the finance director; resign; or take a less extreme course of action, such as discussing the issue with appropriate people initially.
    • All or nothing - Like either/or, things are rarely so black and white.
    • No exceptions - Rules that are followed blindly, without taking specific situations into account, can lead you to make wrong decisions. Again, things are usually more grey than black and white.
    • If... then … – ‘If we do x then y will happen’. This may not always be the case. Beware of emotive language.
    • Everyone’s doing it - Stop and ask yourself two things if you hear these words: is everyone really doing it; and is it the right thing to do? This is another example of emotive language.
    • We’ve always done it that way - You don’t want to change things simply for the sake of changing them. However, if this line is used to defend a practice that you think is wrong, consider suggesting alternatives.
  • 2. What are the ethical issues involved?

    In our example, the issue is one of possible price-fixing. The impact would be to artificially inflate the price of a drug which is required by a large number of people, and funded by public money.

    You’re well aware of the fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Is one or more of them being compromised, and how? The price-fixing example is one of integrity, and your objectivity may also be threatened, due to intimidation from the finance director and your desire to hold onto your job.

  • 3. Which fundamental principles are threatened?

    Threats to the fundamental principles can come from several directions:

    • Self-interest threats - These come about if you or a close family member stands to gain (or not lose) something from a particular course of action. These threats can take many forms, and certainly the example considered above isn't without self-interest.
    • Self-review threats - These often exist when you're in the position of having to review your own work. This could put your objectivity at risk, as there's a tendency to support your own judgement.
    • Advocacy threats -These can occur if you're promoting a position that compromises your objectivity, or promoting a position or opinion to the point that subsequent objectivity may be compromised.
    • Familiarity threats - These can occur if you have (or develop) a close personal relationship with someone, and so you become too sympathetic to their interests. 
    • Intimidation threats - These can occur if you're physically or verbally threatened, or if there's a perceived threat - perhaps to your career or prospects. In the price-fixing example, it's likely that you would feel intimidated by the finance director, who presumably has an influence over your career prospects.
    • Determining the significance of a threat depends on the individual situation. Only you or a disinterested third party who knows all the facts can determine whether the threat is significant. In our example, the fundamental principles most threatened are those of integrity and objectivity.

    You should always consider what others would make of the situation and your proposed actions. The 'disinterested third party' is the theoretical voice of reason you would consult to help you gain perspective on the issue.

  • 4. Do internal procedures exist that mitigate the threats?

    If a threat is significant, you’ll want to put safeguards in place or rely on any that already exist. For example, safeguards can range from government regulations and professional standards, to people or policies in your workplace. If you take the time to consider, you may find that some safeguards are already in place to help you.

    First, there are the safeguards created by laws and regulations in your country and by your own accounting profession. These are designed to ensure that: 

    • all accountants work in line with the fundamental principles; 
    • compliance with the fundamental principles is regulated, and; 
    • sanctions are imposed on those professional accountants who don’t comply.

    Another safeguard is the education and training you underwent before entering the profession and the continuing professional development you’ve completed since qualifying as an accountant. This training teaches you current practices and helps keep you up-to-date with accounting standards and regulations. 

    These safeguards can be reinforced by controls established in the work environment, such as:

    • the introduction of organisational ethics policies and procedures; 
    • the development of training for all employees to ensure their compliance; 
    • strong internal controls; 
    • appropriate disciplinary procedures; and 
    • a culture that encourages employees to communicate to senior levels about ethical issues without fear of retribution. 

    Unfortunately, the circumstances of our example would suggest that these safeguards aren’t going to be adequate in the face of the threats presented.

    Finally, there are safeguards you can create for yourself, such as: 

    • complying with continuing professional development requirements; 
    • keeping records of contentious issues and how they were addressed; 
    • using an independent mentor; and 
    • using the services of legal advisors and your professional body.

    When you make a decision on a course of action you propose to take, you should be able to point to the principles being threatened, the nature of the threat, and the safeguards in place to reduce the threat to an acceptable level and allow the proposed course of action to go ahead.

  • 5. What are the alternative courses of action?

    If you can’t identify an existing safeguard or implement a new one, you should refuse to carry out the activity in question. Of course, there are some threats which are, in themselves, so serious that no adequate safeguards can mitigate against them. In such situations, you may have to disengage from an assignment or refuse to participate in a particular course of action.

    Final step

    As a final step in the resolution of an ethical problem, you should consider whether you could look at yourself in a mirror with self-respect and take responsibility for the action taken.

    In doing so, you might also ask yourself questions such as:

    • What would I tell my child or parent to do?
    • How would I feel if my family, friends or neighbours knew I had done this?
    • How will I feel about myself afterwards?
    • Will I sleep soundly tonight?
    • How would it look on the front page of the newspapers?
    • What could go wrong with the solution chosen?
    • Will my action stand the test of time?
    • Could the action give a negative perception?
    • Am I confident I can justify this decision?