CPA PROGRAM

ETHICS AND
GOVERNANCE
MODULE 1

Version 16a
Published by Deakin University, Geelong, Victoria 3217 on behalf of CPA Australia Ltd, ABN 64 008 392 452.

First published January 2010, reprinted July 2010, revised January 2011, July 2011,
reprinted January 2012, July 2012, updated January 2013, reprinted July 2013,
updated January 2014, reprinted July 2014, revised January 2015, updated January 2016.

© 2001–2016 CPA Australia Ltd (ABN 64 008 392 452). All rights reserved. This material is: owned or
licensed by CPA Australia and is protected under Australian and international law. Except for personal and
educational use in the CPA Program, this material may not be reproduced or used in any other manner
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Authors
James Beck Managing Director, Effective Governance Pty Ltd
Courtney Clowes Director, KnowledgEquity
Craig Deegan Professor of Accounting, RMIT University
Patrick Gallagher Director, Governance Tax & Risk Pty Ltd
Alex Martin Manager Financial Policy, Australia and New Zealand Banking Group Ltd
Greg McLeod Senior Investigator, Australian Securities & Investments Commission
Roger Simnett Professor, School of Accounting, University of New South Wales
Jennifer Tunny Senior Research Advisor, Effective Governance Pty Ltd

2016 updates
Jeremy St John Faculty of Business and Economics, Monash University
Thomas Clarke Director, Centre for Corporate Governance, UTS Business School
Roger Simnett Professor, School of Accounting and Centre for Social Impact,
University of New South Wales

Acknowledgments
Steven Delaportas Professor of Accounting, RMIT University
Greg McLeod Senior Investigator, Australian Securities & Investments Commission
Michaela Rankin Associate Professor, Monash University
Tehmina Khan Lecturer, RMIT University

Advisory panel
James Beck Effective Governance Pty Ltd
Prof Thomas Clarke University of Technology Sydney
Dr Mary Dunkley Swinburne University
Alan Greenaway Australian Pharmaceutical Industries
Jennifer Lauber Patterson Frontier Carbon Limited
Mike Sewell Clean Technology Innovation Centre
Marcia O’Neill Consultant
Eva Tsahuridu CPA Australia

CPA Program team

Kerry-Anne Hoad Alisa Stephens Sarah Scoble
Kristy Grady Yvette Absalom Belinda Zohrab-McConnell
Desley Ward Nicola Drury
Kellie Hamilton Elise Literski

Educational designer
Deborah Evans DeakinPrime

Acknowledgment
All legislative material is reproduced by permission of the Office of Parliamentary Counsel, but is not the official or authorised version. It is
subject to Commonwealth of Australia copyright. The Copyright Act 1968 permits certain reproduction and publication of Commonwealth
legislation. In particular, s. 182A of the Act enables a complete copy to be made by or on behalf of a particular person. For reproduction
or publication beyond that permission by the Act, permission should be sought.
These materials have been designed and prepared for the purpose of individual study and should not be used as a substitute for
professional advice. The materials are not, and are not intended to be, professional advice. The materials may be updated and
amended from time to time. Care has been taken in compiling these materials but may not reflect the most recent developments and
have been compiled to give a general overview only. CPA Australia Ltd and Deakin University and the author(s) of the material expressly
exclude themselves from any contractual, tortious or any other form of liability on whatever basis to any person, whether a participant
in this subject or not, for any loss or damage sustained or for any consequence which may be thought to arise either directly or indirectly
from reliance on statements made in these materials.
Any opinions expressed in these study materials are those of the author(s) and not necessarily those of their affiliated organisations,
CPA Australia Ltd or its members.
 ETHICS AND GOVERNANCE

Module 1
ACCOUNTING AND SOCIETY

* CPA Australia gratefully acknowledges the many authors who have contributed to this module.
 16 | ACCOUNTING AND SOCIETY

Contents
Preview 17
Introduction
Objectives
Teaching materials

Part A: Accountants as members of a profession 19

Public interest or self-interest? 19
Responsible decision-making
Enlightened self-interest 22
MODULE 1

Ideals of accounting—entrepreneurialism and professionalism 22

What is a profession? 23
What is a professional? 25
Professions—the traditional view and the ‘market control’ view 26
Trust and professions 27
Attributes of the accounting profession 27
A systematic body of theory and knowledge
An extensive education process
An ideal of service to the community
A high degree of autonomy and independence
A code of ethics for members
A distinctive ethos or culture
Application of professional judgment
The existence of a governing body
The profession’s regulatory process 34
Accounting Professional and Ethical Standards Board
The quality assurance process
Professional discipline

Part B: Interaction with society 39

Accounting roles, activities and relationships 39
Relationships and roles
Accounting work environments
Public practice accounting
Professional accountants in business
Accounting in small and medium enterprises (SMEs)
Public sector
Not for profits (NFPs)
Social impact of accounting 48
Social impact example—depreciation and behaviour
Credibility of the profession 50
Credibility under challenge
Key issues causing reduced credibility
Restoring credibility to accounting
Capability considerations 54
Business leadership capabilities
Technical skills, knowledge and experience
Soft skills, knowledge and experience
TSKE and SSKE—career perspectives
Career guidance system

Review 57

Readings 59
Reading 1.1 59
Reading 1.2 63

Suggested answers 65

References 71
 Study guide | 17

Module 1:
Accounting and society
STUDY GUIDE

MODULE 1
Preview
Introduction
This module takes an in-depth look at what it means to be a professional accountant.

The terms ‘profession ‘or ‘being a professional’ are well known and regularly used today.
This module examines what it is that sets certain occupations apart from others and why some
are regarded as professions and others are not. It also looks at what expectations being a
member of a profession places on individuals.

The nature of a profession and the attributions of a profession are discussed, along with the
self‑regulatory nature of professions, which is a key to their continued status in society.

The module then looks further into the role that the accounting profession plays in society.
Accounting is of such importance to society that it is considered a social force because it effects
changes on organisations, people and their lives and, consequently, entire societies.

The accounting profession has faced significant challenges in recent history. These have,
to some degree, damaged the credibility of the accounting profession. These challenges will
be considered in this module, along with the steps that have been taken by governments,
regulators and the profession to address them.

The module also considers the work environment, roles and activities that a professional
accountant can work in, and the relationships that are created through these roles. The roles
accountants can hold are diverse, and opportunities exist in many sectors and areas of expertise.
 18 | ACCOUNTING AND SOCIETY

Objectives
After completing this module, you should be able to:
• describe the nature and attributes of a profession;
• explain the co-regulatory processes of the accounting profession;
• differentiate the roles, relationships and activities of accountants;
• evaluate the challenges faced by the accounting profession in the global context; and
• explain the importance of soft and technical skills required of accountants.

Teaching materials
MODULE 1

• Readings
Reading 1.1
‘Profile: Roel van Veggel—The sweet sounds of success’
IFAC

Reading 1.2
‘How “soft skills” can boost your career’
J. Jarvis

• The Compiled APES 110 Code of Ethics for Professional Accountants (APESB 2013),
accessed August 2015, http://www.apesb.org.au/uploads/standards/apesb_standards/
compiledt2.pdf.

Module 1 readings are placed after the main text of the module. All readings are important and
must be read in full.
 Study guide | 19

Part A: Accountants as members of

a profession
Accountants perform roles and help make decisions that have a significant impact on clients,
organisations and society. As such, they are expected to act in a professional and ethical manner.
In this module we explore what is meant by the term ‘profession’ and what it means to be
a professional.

We will also consider the role of the accounting profession in society.

MODULE 1
Public interest or self-interest?
Economies and societies require the free flow of accurate information to function efficiently.
The efficiency of market economies is particularly dependent upon disclosure of accurate
financial information. The accounting profession is integral to the process of ensuring people
have access to accurate information. In analysing and presenting information, the professional
accountant needs to be able to clearly distinguish between what information is in the public
interest to be disclosed, and any sense of self-interest. Ultimately, the accounting profession
will only retain its integrity and authority by serving the wider public interest. The ideals of
professionalism and the essential principles of entrepreneurship are compatible when it is
understood that the essential basis of business is trust.

Accounting information is relied on heavily by people who make significant decisions about
the allocation of resources. Accountants, therefore, serve the public interest by creating
and distributing information that conveys a clear and accurate picture of an entity’s financial
performance, financial position and other relevant issues.

Professional accountants also serve the public interest by providing objective, accurate and
appropriate financial and accounting-related advice that is free from bias and based on expertise.

Further descriptions of how accounting, as a profession, serves society are provided later in
this module.

This focus on acting with integrity, objectivity and without bias is linked to the idea of altruism.
The term ‘altruism’ describes action that brings no benefit to an individual and may even be
at their own expense. This view then aligns with the concept that professional accountants
act in the public interest.

However, altruism may not be the driving motivation. Like West (2003), Larson (1977) is
concerned that monopolistic professionals are not motivated by a service ideal or the public
interest. Larson considers there is evidence to suggest that professions and professionals are
about maintaining monopolies and extracting unwarranted wealth and influence from that
position. This could be more accurately described as self-interest or enlightened self-interest,
rather than altruism.
 20 | ACCOUNTING AND SOCIETY

Responsible decision-making
When accountants make a decision it is within a systemic framework of principles. These include
governance, accountability and ethics. This means as a member of a profession an accountant
cannot simply make decisions according to personal preferences. The skill and knowledge of
the accountant must be exercised firstly within the governance framework of the profession,
which stipulates certain codes of behaviour. Also, decision-making must be within the relevant
corporate governance framework of the entity concerned, not only in terms of the instruments
and articles of association, but in terms of the policies and strategies that have been formally
approved by the board of directors.
MODULE 1

Also, in conducting accounting work and reaching decisions this must be completed within a
framework of accountability, in terms of the requirements of regulatory authorities, and with the
appropriate disclosure to shareholders and other stakeholders.

Finally, the work of the accountant and any decisions taken must be exercised within a framework
of ethical conduct that informs all aspects of the accountant’s work, which is based on a
commitment to integrity and honesty in the pursuit of professional purposes and client interests.

When all these principles are recognised there is the possibility of effective action and decision-
making as illustrated in Figure 1.1. Within a framework of good governance, corporate
accountability and robust ethics, the accountant’s work will be more authoritative.

Figure 1.1: A model of responsible decision-making

Governance

Corporate
Ethics
accountability

Source: CPA Australia 2015.

Corporations strive to balance their decisions firmly on these principles of governance,

accountability and ethics, which involve considerable rigour and professionalism in management
conduct. The ideal position for balanced decisions is to be at the centre of this figure where
corporate governance, corporate accountability and ethics interconnect.

Westpac Bank in Australia has, in recent years, consistently performed exceptionally well in
international corporate governance and corporate responsibility indices.
 Study guide | 21

Westpac has shown how it is possible to be commercially successful and committed to the
highest standards. The opening statement on corporate governance in the Westpac group
website is:
Corporate governance is about promoting fairness, transparency and accountability by setting
out the rights and responsibilities of the Board, management and shareholders.
Growing evidence links good governance and enhanced shareholder returns. More than just
showing a further commitment to doing the right thing, good governance is a strong indicator of
overall management capability and quality.

Source: Westpac Group 2014, ‘Corporate governance’, accessed August 2015, http://www.westpac.com.

MODULE 1
au/about-westpac/westpac-group/corporate-governance/corporate-governance-overview.

In Westpac’s Corporate Governance Statement of the company there is a clear definition of the
ethical commitments of the bank:
• we act with honesty and integrity;
• we comply with laws and with our policies;
• we do the right thing by our customers;
• we respect confidentiality and do not misuse information;
• we value and maintain our professionalism;
• we work as a team; and
• we manage conflicts of interest responsibly.

Source: Westpac Group 2014, ‘Corporate Governance Statement’, accessed August 2015,
http://www.westpac.com.au/docs/pdf/aw/Corporate_Governance_Statement.pdf.

The focus of each of the principles is to provide a set of guiding principles to help us make the
right decisions ensuring we uphold the reputation of the Group.

In explaining how the bank’s ‘Principles for Doing Business’, which underpin its commitment to
sustainability and the community, Westpac’s annual report states:
• we believe our success depends on the trust and confidence placed in us by our customers,
people, shareholders, suppliers, advisers and the community;
• we believe in maintaining the highest level of governance and ethical practice while protecting
the interests of our stakeholders;
• we believe in putting our customers at the centre of everything we do;
• we believe our people are a crucial element of a successful service business;
• we are committed to managing our direct and indirect impacts on the environment;
• we believe being actively involved in our community is fundamental to the sustainability of our
business; and
• we believe our suppliers should be viewed as partners in our sustainability journey.

Source: Westpac 2014 Interactive Annual Review & Sustainability Report, accessed September 2015.
http://www.westpac.com.au/about-westpac/investor-centre/financial-information/annual-reports/.

In fact, all four of the large Australian banks CBA, ANZ, NAB and Westpac have adopted very
robust standards for corporate governance, accountability and business ethics. They have built
these principles into their fundamental business models, and this could be part of the reason why
Australian banks have enjoyed substantial commercial success over recent decades and fared
relatively well during the global financial crisis (GFC).
 22 | ACCOUNTING AND SOCIETY

However, the fact that each of the Australian banks have experienced some issues of governance,
accountability and ethics from time to time (particularly in the area of financial advice), and
financial institutions in other advanced countries have experienced much greater problems,
is a reminder that all corporations need to remain vigilant in these endeavours.

It is often the case that examples of good corporate governance, accountability and ethical
conduct are drawn from leading corporations of the advanced industrial countries. However,
these principles are, if anything, even more essential if enterprises are to succeed in emerging
economies. In a report titled Corporate Governance Success Stories, the International Finance
Corporation (2010) demonstrates how critical these principles are to successful businesses in the
MODULE 1

Middle East and North Africa, in a series of case studies.

Enlightened self-interest
Inevitably, in a market economy the economic self-interest of a profession will be an important
driver of behaviour. However, this should never be allowed to outweigh the primary commitment
to the public interest. The term ‘enlightened self-interest’ suggests that both purposes may be
served together; that is it is possible to be committed to the public interest and yet possess a
degree of self-interest. The phrase sometimes employed is ‘doing well by doing good’.

But if enlightened self-interest leads to actions that are not the right and ethical thing, but that
will further a person’s own interests—this is not acceptable professional behaviour. There is a
careful balance to be maintained between serving the public interest and pursuing self-interest,
and it is the public interest that is paramount. Can the public interest and self-interest really be
integrated in a form of ‘enlightened self-interest?

This concept of enlightened self-interest is described by Lee (1995) as protecting the public
interest in a self-interested way, and is also explained in the following quote, which shows how
enlightened self-interest and the public interest may be integrated:
The accounting profession would account for its existence in relation to the efficiency benefits for
society as a whole, arising from the existence of an institutionally organised body of accounting
knowledge … In return for their monopoly position concerning the right to practise particular
accountancy and auditing functions, accountants would see themselves as serving the public
interest (Robson & Cooper 1990, p. 379).

We explore this concept again in Module 5 in relation to a different question—why organisations

make the commitment to produce sustainability information and reports.

Ideals of accounting—entrepreneurialism
and professionalism
Some argue that professions never really had a public interest or service ideal (Johnson 1972;
Abbott 2014). Others believe it may have existed in the past, but has been abandoned for a
more lucrative role as ‘partner in business’ (Saravanamuthu 2004). Carnegie and Napier (2010)
identify the ideals of accounting professionalism as comprising ‘the four Es’ of education, ethics,
expertise and entrepreneurship. According to these authors, placing too strong an emphasis
on entrepreneurship, especially where it involves a de-emphasis on any of the other ideals,
may result in a ‘de-professionalisation’ of accounting. This de-professionalisation may occur
because the pursuit of commercial opportunities moves an accountant away from integrity,
objectivity and professional behaviour in order to achieve commercial success.
 Study guide | 23

Entrepreneurship can lead professional accountants to place more importance on increasing

their personal wealth and influence than on notions of public service.

Accountants are often in a position of power that can create an ‘ethics versus profits’ dilemma.
Examples of accountants pursuing self-interested outcomes at the expense of their ethical or
professional standards have been linked to the corporate collapses of the early 2000s, and more
recently when we consider the failures of organisations, such as Lehman Brothers in the GFC
of 2008–2009. In these cases of systemic failure it was clearly demonstrated in all of the official
reports by the US Congress, UK parliament and others that not only had financial executives
failed, but all of the associated professionals and regulators had some responsibility in allowing

MODULE 1
the failures inherent to develop into a crisis (US FCIC 2011; UK HCTR 2009).

These points identify the potential conflicts that members of a profession may face, where
they must, at times, choose between their own self-interest, and the public interest and their
responsibility as members of a profession.

We will further consider why trust in professions is so important and look at the key attributes
of the accounting profession. An in-depth analysis of these attributes will emphasise the
co‑regulating nature of the profession and how, as a result, professions are able to continue
maintaining their status and valued role in society today.

What is a profession?
A profession is defined in the Oxford Dictionary as an occupational area or vocation that
‘involves prolonged training and a formal qualification’.

A profession is based on a high level of competence and skills in a given area, which are
learnt through specialised training and maintained by continuing professional development.
Members of professions are expected to behave ethically and in the best interests of society.
There is a difference between the concept of a ‘profession’ as defined by the established
professional associations, which carry many obligations and attributes (see list), and the wider
reference to somebody being ‘professional’, which simply means they complete their work with
dedication and skill (attributes to be highly valued in any occupation).

Professions focus on intellectual or administrative skills, rather than mechanical or physical

actions. Further characteristics defining the professions relate to the critical nature of their work
and the esoteric knowledge required to perform it to a high standard; for example––surgery,
corporate litigation or audit.

However, there is an almost universal process of ‘professionalisation’ occurring across occupations

as diverse as financial advisers, project managers, physiotherapists, and among service occupations
and manual trades––such as builders and electricians. They have established professional bodies
and codes of conduct. The efforts of these occupations to raise their standards, and to invest in
training, education and quality standards must be respected. This raises the bar for the established
professions, including accounting, which must demonstrate its high-level commitment to integrity
and service.
 24 | ACCOUNTING AND SOCIETY

The key attributes listed below, combined together as a group, provide valuable guidance in
recognising the existence of a profession (elements of these attributes were originally derived
from Greenwood, and have since been developed further. The existence of these attributes
tends to confirm the existence of a profession:
• systematic body of theory and knowledge;
• extensive education process for its members;
• ideal of service to the community;
• high degree of autonomy and independence;
• code of ethics for its members;
• distinctive ethos or culture;
MODULE 1

• application of professional judgment; and

• existence of a governing body.

Source: Adapted from Greenwood, E. 1957, ‘Attributes of a professional in social work’, in S. Loeb
(ed.) 1988, Professional Ethics in Accountancy, Wiley, Santa Barbara, California.

It must be noted, however, that there is no clear distinction between an occupation and a
profession. It is suggested that there is a continuum of the degree to which these attributes are
displayed so that professionals are only distinguished from non-professionals by a higher level
of standards

Another feature of a profession is that it often leads to greater status and wealth for its members.
This is often a result of the members’ specialised skills and the level of monopoly control.
Monopoly control describes the situation where members of the profession control who is
allowed to work in the industry by establishing licensing rules and regulations. This creates
protection against competition. An example of this exclusivity is the requirement under the
Corporations Act 2001 (Cwlth) where a company auditor must be a member of a professional
accounting body (such as CPA Australia).

Early authors argued that professions exist primarily to serve society, and this view persists today.
In this view, often called the ‘service ideal’, it is accepted that professions should both serve
society and act in the public interest.

The services provided by professions are so important that high levels of expertise are required.
This expertise calls for extensive educational programs focused on the development of
intellectual skills, knowledge and experience, with an emphasis on lifelong updates.

Self-regulation
Most of the time professions are given permission to provide services to the public through
some regulatory process. For example, in many countries only doctors of medicine are allowed
by law to prescribe certain drugs.

Once accorded the relevant permissions, it is common for the professions to have a substantial
degree of independence or autonomy. This means they have a greater level of authority to set
their own rules and regulations, and have less detailed government regulation.

The independence, or autonomy, to self-regulate commonly extends to membership and

membership rules of a profession. Professional bodies for different professions set the education
requirements, professional ethical standards and disciplinary processes (which can be in
addition to legal processes) for the members of their profession.
 Study guide | 25

Autonomy allows members of a profession to be judged by their informed peers, rather than
by regulators whose knowledge is inevitably more limited and may have a bias resulting from
less experience.

Autonomy also enables internal penalties, or sanctions, for matters that a legal process might
ignore or not be able to identify (e.g. ethical breaches of a professional code of conduct that are
not legal breaches).

It is also common for professions to apply internal sanctions in addition to legal sanctions, if a
member has been found in breach of the law and has brought the profession into disrepute.

MODULE 1
From self-regulation to a co-regulatory process
Members provide services to society in their field of expertise and society benefits from the
service provided. Society trusts the profession to act in its best interest and values the service
provided. There is a potential negative outcome from this autonomy if the profession fails to
properly demonstrate self-control and self-regulation and does not hold its members to account
when they act inappropriately. If members of a profession act in an unethical way, they are
seen not to be acting in the best interest of society. If this is allowed to continue through lack
of self‑regulation, trust in the profession will be eroded and the value and the status of the
profession will be destroyed.

Due to a large number of corporate failures and the poor conduct of some accountants,
this erosion of trust has occurred in the accounting profession. As a result, some of the authority
to self-regulate has been removed from the accounting profession. Regulations from external
sources are also in place, so the profession has moved from a situation of self-regulation to
co‑regulation, with regulation shared between the profession and external sources. Examples of
co-regulation include the involvement of the Australian Financial Reporting Council, which is a
government body, and the regulations within the Corporations Act, which have given auditing
and accounting standards the force of law. This issue is discussed in more detail later.

What is a professional?
The term ‘professional’ refers to the members of a profession and much of the previous
discussion about professions is directly relevant to this question. A professional is a person
who has a significant level of training and a high level of competence and skills in an area.
They behave in an ethical and appropriate manner and apply their skill and judgment in areas of
importance. The process of becoming a professional is sometimes described as the development
from a technician (i.e. someone who has technical knowledge about how to perform specific
tasks in a given area), to someone who uses their knowledge and experience in that area to make
judgments of importance to the public interest. The description of a profession that has been
used so far in this module is often called the ‘traditional’ or ‘functional’ view of professionalism.
As discussed, professions are recognised as offering important advantages to society by
undertaking complex tasks and functions on its behalf. In return, the professions are accorded
a privileged position in society.

Later in this module we will examine in more detail each of the attributes of a profession as they
apply to the accounting profession.
 26 | ACCOUNTING AND SOCIETY

Professions—the traditional view and the

‘market control’ view
There are two contrasting views of the accounting profession:
• The traditional view sees the accounting profession as demonstrating a range of attributes
that are focused on serving society. The professional accountant acts for the public interest,
rather than self-interest, and can demonstrate skill and judgment in their area of expertise.
Important attributes include a systematic body of knowledge, an extensive education
process, a code of ethics, an ethos or culture, and a governing body. This could be described
MODULE 1

as the ideal view of the accounting profession.

• The market control view is more critical and suggests that professional accountants are
self‑interested and less concerned with the broader public interest, than with their own
careers. The accounting profession, according to this view, has acted to create a ‘monopoly’
in order to ensure only certain people (members of the profession) can work in this area.
This helps generate greater financial returns as well as building status and prestige in
the community.

Not everybody believes professions are necessarily so valuable—and for some, the concept of
the ‘service ideal’ has often been replaced by visible greed. One common perception is that
professionals are self-serving monopolists whose professional bodies exist principally to maintain
membership exclusivity. Denial of entry of non-members into an industry or occupation maintains
the monopoly.

An extreme example of this would be the case of Andersen (previously Arthur Andersen, one of
the world’s largest professional accounting firms) in relation to the failure of HIH Insurance. We find
ourselves immediately questioning the motivations of Andersen’s partners. Andersen was the
auditor of HIH, which was, until its failure, Australia’s largest insurance company. Its failure was
rapid and spectacular and took place at about the same time Enron failed in the US in 2001/2002.
(This was the accounting firm that also audited Enron and WorldCom that both experienced major
bankruptcies, which were not flagged in their audit reports. As a result of a court case against
Andersen’s role in the Enron failure, Andersen itself was put out of business, despite the shell
company winning the case on appeal). These three cases of HIH, Enron and WorldCom were the
most graphic illustrations of corporate failure in this period, and Arthur Anderson featured in each
of them (McLean and Elkind 2004; Jeter 2003; Westfield 2003).

There were a number of unacceptable financial and management practices at HIH, including a
series of illegal transactions resulting in numerous people being convicted and jailed.

In 2006, Allan noted in the Deakin Law Review that:

The independence of Andersen was also highly questionable. Three former partners of the
firm sat on the HIH board. One, who was the recipient of continuing benefits from Andersen,
was made chairman and was appointed to the audit committee only 17 months after his retirement.
Another, who had been the engagement partner, was made chief financial officer only the day
after his resignation from the firm. The third was appointed to the board only five months after his
retirement having ‘played a significant role in the audit of HIH for 25 years’ (Allan 2006, p. 144).

Examples such as this have a highly negative impact on the reputation of the accounting
profession.

Therefore, it is not surprising, as West points out, that ‘images of altruism, ethical service and
self-regulation were supplanted by a portrayal of professions as self-interested collectives’
(West 2003, p. 21).
 Study guide | 27

Trust and professions

Society recognises, or perhaps more correctly demands, that professions be especially equipped
to work with complex matters of economic and social significance. Society expects great individual
capability and the application of professional ethics from professionals as they make complex
judgments that might affect individuals and entire economies and societies.

Ultimately, the way the public regards a particular profession will control the rights granted to the
profession and the professionals working within it. Public trust regarding any profession is vital.

MODULE 1
If a profession loses credibility in the eyes of the public, the consequences can be severe for
the public, the profession and the profession’s members.

In the wake of the early 2000s collapses of Enron, WorldCom and HIH Insurance, and the
demise of the global accounting firm Arthur Andersen, the accounting profession worldwide
experienced the effects of a credibility crisis. The international bank failures during the GFC also
caused doubt about the credibility of accounting standards and the reliability of the professional
work of accountants. Institutional failure, business collapses and widespread doubt about the
integrity of financial information hurt all levels of society.

So how can a profession sustain its relevance, credibility and the public’s trust?

Attributes of the accounting profession

In this section we demonstrate how accounting meets the traditional attributes of a profession
that were identified earlier:
• systematic body of theory and knowledge;
• extensive education process for its members;
• ideal of service to the community;
• high degree of autonomy and independence;
• code of ethics for its members;
• distinctive ethos or culture;
• application of professional judgment; and
• existence of a governing body.

Source: Adapted from Greenwood, E. 1957, ‘Attributes of a professional in social work’, in S. Loeb
(ed.) 1988, Professional Ethics in Accountancy, Wiley, Santa Barbara, California.

As you read through this section you should consider what it will mean for you to be a professional
and member of the accounting profession.

A systematic body of theory and knowledge

It is sometimes contended that the main difference between an occupational group that is a
profession and another occupational group not recognised as a profession lies in the element
of superior skill. This contention does not always withstand scrutiny, as many occupations require
high levels of manual skill but make no claim to professional status. Much more important than
the possession of skills, however, is the fact that the entire range of skills and expertise should
relate to, and be supported by, a well-founded body of knowledge.

Thus, theory construction by means of systematic research becomes an essential basis for the
development of a profession and for professional practice.
 28 | ACCOUNTING AND SOCIETY

The educational process for accountants is one of lifelong learning that commences with the first
study of accounting. The International Federation of Accountants (IFAC) has issued International
Education Standards that outline the core competencies all aspiring accountants must satisfy in
order to be recognised as a member of the profession, and of a professional body.

All IFAC member bodies must abide by the requirements in these standards when designing the
content and assessment of their education programs. The aim of the standards is to ensure an
equivalent level of competence and knowledge for all members of the accounting profession.
The standards cover technical knowledge, soft skills and professional competence, and they
provide a framework for professional bodies to assure the quality of their education programs.
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An extensive education process

Membership of a professional body ensures, in principle, that entrants to that profession will
have acquired an understanding of the theory and practice of the profession. They will have
already acquired knowledge and skills that are not generally obtained or understood by
the general public.

Importantly, their knowledge and skills will be further enhanced by the accumulation of
knowledge and experience through mentoring, professional development and continuing
education programs. Throughout their careers, all professionals must maintain their knowledge
and skills.

As part of the commitment to lifelong learning for the accounting profession so as to ensure
all members possess current knowledge and skills, IFAC has issued a standard prescribing the
requirements for ongoing professional development. All CPA Australia members must undertake
ongoing professional development throughout their careers.

An ideal of service to the community

Wilensky (1964, p. 140) referred to the importance of the ‘service ideal’, which he considered to
be ‘the pivot around which the moral claim to professional status revolves’.

How this service ideal is achieved by accountants is described by Willmott:

Accounting is perceived to present information in a reliable and comparable form by quantifying
and reporting the basic facts of economic life, thereby monitoring past performance and
facilitating rational, efficient decision making in respect of the generation and allocation of
resources. In performing this role, accounting is widely understood to serve the public interest
(Willmott 1990, p. 315).

According to Buckley (1978), society grants the professions monopoly power over professional
affairs and the power to use this monopoly power as they see fit, as long as the power is used
in the public interest. Any profession that deliberately and consistently breaches this trust does
so at its own risk. This trust is an important part of the philosophical notion of a ‘social contract’.
As Wilensky (1964, p. 140) observes, ‘any profession that abandons the service ideal will very
quickly lose the moral claim to professional status’.
 Study guide | 29

Continued erosion of public trust by unethical behaviour may lead ultimately to extreme
governmental intervention in the profession’s affairs, with consequent reduction of autonomy,
authority and reputation. Therefore, each member of a profession has a responsibility, and an
obligation, to behave in a manner that maintains the reputation of the profession.

The Compiled APES 110 Code of Ethics for Professional Accountants (APESB 2013) specifies
the fundamental principles of acceptable professional conduct for professional accountants.
These are reviewed in detail in Module 2.

To better understand the service ideal, we examine it from three perspectives:

MODULE 1
• the well-being of society;
• the pursuit of excellence; and
• community service.

The well-being of society

Accountants contribute to the well-being of society by preparing and attesting information that
ensures the efficient and orderly functioning of business, and not-for-profit and government
enterprises. Additionally, accountants provide information that facilitates better decision-making
for individuals, business and government. Thus, financial information is vital for advancing the
interests of parties at all levels, which ultimately results in the betterment of society.

The pursuit of excellence

Here the focus is the performance of the professional. The individual accountant accepts
responsibility for maintaining and updating their knowledge and skills, and applying such skills
and competence with due professional care in the best interests of society.

Community service
Many accountants offer their time and skills free of charge to the community. This is sometimes
described as pro bono, a Latin term meaning ‘for the good’, which indicates the provision of
unpaid work for the public good. Various kinds of pro bono work may include:
• membership of finance committees for church groups, charities and schools;
• providing financial counselling and other advice to people referred by community welfare
groups; and
• holding honorary positions on hospital and university boards.

True professionals bring the same care and skill to such volunteer work as they bring to assignments
they are paid for. Note that as a member of the accounting profession, an accountant is held to the
same level of responsibility for all their work, whether it is paid or unpaid.

➤➤Question 1.1
Discuss whether acts of public service are considered as purely political actions designed to
maintain the profession’s status in the eyes of the community.
 30 | ACCOUNTING AND SOCIETY

A high degree of autonomy and independence

As discussed earlier in this module, as part of the trust relationship between the community
and the professions, it is common for professions to be allowed a substantial degree of
autonomy and independence from government interaction and control. This is referred to as
the self-regulatory aspect of professions that, for the accounting profession, has now become
a co-regulatory situation. The degree to which this autonomy continues is dependent on the
consistent demonstration of professional and ethical standards by members of the profession
and by the profession generally.

Many professions, including accounting, have endured numerous significant examples of

MODULE 1

unprofessional conduct by their members. Earlier we looked at examples of corporate failures

that involved some degree of poor conduct by accounting professionals. As a result of these
failures, accounting is less free to self-regulate than it used to be, and now co-regulates in
combination with external authorities. An example of this change is outlined in the following
text, and describes how the boards that previously created Australian Accounting Standards now
report to a government body, not to the professional accounting bodies in Australia.

Example 1.1: C
 o-regulatory approach to setting accounting
standards in Australia
In Australia, accounting standards are developed by the Australian Accounting Standards Board (AASB)
and auditing standards are developed by the Auditing and Assurance Standards Board (AUASB). Until
recently, these boards were created and controlled by the professional accounting bodies in Australia.
There are three major professional accounting bodies in Australia: CPA Australia; the Chartered
Accountants Australia and New Zealand (previously the Institute of Chartered Accountants (ICAA));
and the Institute of Public Accountants (IPA).

This has now changed, and the AASB and AUASB report to the Australian Financial Reporting Council
(FRC), which is a government body. While the professional bodies have a number of their members on
the AASB and AUASB boards, they no longer have the complete regulatory control they had previously.
This has been a natural evolution of accounting standard setting, where a stronger regulatory framework
has been required. The professional accounting bodies are still very involved, but their involvement
is tempered by overarching regulation and FRC control.

Individual member autonomy is closely related to the concepts of professional judgment,

adherence to a code of professional conduct and professional independence.

The member must be allowed to use their professional judgment free from the direction or
influence of others, and detached from the risk of financial gain (or loss) as a result of the advice
provided. The member must also be free from fear of reprisals. In other words, the professional
person’s judgment should be autonomous in the literal sense of the term (i.e. governed by
their own professional rules and laws and not influenced by inappropriate outside interests).
Autonomy in this sense implies a self-principled, ethical and responsible approach by
the member.

For a professional accountant in public practice, the specific attribute of independence becomes
more important in relation to the concepts of objectivity and integrity. At times the accountant
may be torn between meeting the requirements of the client to report in a given way and
maintaining their own ethical compass and professional obligations.

The ethics of the professional accountant can be tested in these circumstances, and maintaining
independence and autonomy from the client will help the professional accountant ensure the
most appropriate position is adopted.
 Study guide | 31

Co-regulation and professional discipline

As part of maintaining autonomy and independence, the profession is expected to regulate
itself in combination with external authorities. Co-regulation promotes a consistently high
level of professional practice in the public interest and is important to maintaining the
profession’s esteem.

A complex set of regulatory structures and practices have been developed around the public
accounting profession. These regulatory structures and practices attempt to define the technical
and ethical responsibilities that accountants owe to their employers, clients, third parties and
the public.

MODULE 1
The regulatory structures of CPA Australia include:
• a system of accreditation for accounting degree programs to ensure that the relevant body
of knowledge is acquired by future members;
• a membership qualification process by way of examination and required practical experience;
• a requirement for high levels of continuing professional education;
• a code of ethics that must be complied with; and
• a disciplinary process to address member misconduct.

A brief overview of the code of ethics is provided in the following commentary. Later in this
module, we discuss the role of the Accounting Professional and Ethical Standards Board and the
disciplinary procedures designed to enforce compliance with accounting and auditing standards.

A code of ethics for members

Codes of professional ethics establish expected standards of behaviour and the need for
members to act in the public interest.

The Compiled APES 110 Code of Ethics for Professional Accountants (APESB 2013), various
other APES statements and the Constitution of CPA Australia provide a guidance and discipline
framework for members of CPA Australia. Relevant legislation, such as corporate law and
accounting standards regulation, also provides a framework that members of CPA Australia
must follow.

Professional ethics in its simplest form is behaviour that is consistent with the APESB Code
of Ethics, and behaviour that contravenes the Code is considered unprofessional. The Code
attempts to deter unethical behaviour or, alternatively, promote desirable behaviour by
stipulating acceptable and unacceptable conduct.

As part of working in a global market, we find that in different cultures and nations, different
behaviours are seen as acceptable or unacceptable. This raises challenges for professional
accountants, in fact all professionals, because there is a need to be true to the ethical guidelines
of a profession without causing others to feel that their behaviour is unethical. An example of this
is the payment of bribes, which in some countries is seen as unethical and corrupt, but in others
is a part of business dealings that is sometimes tolerated (albeit a part of business dealings that
invariably leads to the undermining of the economies in which it takes place, and to inefficiency
and nepotism replacing business dealings based on quality, efficiency and capability).
 32 | ACCOUNTING AND SOCIETY

A distinctive ethos or culture

The ethos or culture of a profession consists of its values, norms and symbols.

The norms of a professional group comprise both formal and informal characteristics.
New members become familiar with the professional culture in a variety of ways. Creating a
culture and a sense of belonging are very important in maintaining a professional organisation
that is kept vital by new and interested membership—a key part of the ongoing value of the
profession itself.

Symbols of a profession may include its insignia, emblems, certification and titles (e.g. ASA,
MODULE 1

CPA or FCPA). Culture and ethos stem from formal history, significant milestones, jargon,
stereotypes and folklore.

To succeed in their chosen profession, a new member needs to learn about the culture and ethos
of the profession, and to become part of the culture and ethos. A key to evolutionary growth
is that new members must contribute to the ethos and the culture of the profession to ensure
change happens in ways that are desirable for the community and the profession.

For CPA Australia members our ethos has the word ‘integrity’ as its foundation. This word is at
the heart of CPA Australia’s image, and is seen on our corporate logo.

Application of professional judgment

Becker (1982) argues that professional judgment is the single most important attribute that
differentiates professionals from non-professionals. The acquisition of knowledge through
a formal educational process, important though that is, obviously is not sufficient to identify
a person as a professional. According to Becker, the key is the ability to diagnose and solve
complex, unstructured values-based problems of the kind that arise in professional practice.

Since many non-professional occupations insist on practical experience, and since problem-
solving is by no means absent from those occupations, it is important to try to understand what
distinguishes professional judgment from decisions involving technical judgments only.

A major difference, as Schön (1983, p. 17), expresses it, is that professional people must have an
‘awareness of the uncertainty, complexity, instability, uniqueness, and value conflict’ that surround
many of the problems they tackle in practice. This reference to ‘value conflict’ identifies that
complex social values can regularly apply to decisions.

Professionals must choose the outcome that professionally best meets the social ideal of
professions—rather than merely the best outcome for the client at that moment. It is certain
that professionals will make many technical judgments based on technical skills. However, it is
the expectation that professionals can also judge values and make judgments regarding values
(based on professional ethical wisdom) that distinguishes the work of a professional within
a profession.

To emphasise the previous point, Schön also stated that professionals are required to develop
competency in professional judgment, artistry and intuition. These competencies are not only
required in applying knowledge and skills to problem-solving, but also (and Schön would argue,
more importantly) to finding and defining the right problem to be solved. The emphasis on
problem-setting rather than on problem-solving, in turn, requires professionals to communicate
skilfully with their clients and/or employers in order to identify and solve the right problems.
The complexity of understanding the nature of problems may not seem obvious at first, but this
understanding is an essential component in gaining the wisdom required to make values-based
professional judgments. The exercise of professional judgment in the accounting profession is
important for all accountants, irrespective of their work environment or geographic location.
 Study guide | 33

One area of concern for professionals is the distinction between a judgment made in error—
a mistake—and a negligently formed judgment.

Many interesting questions regarding the professional judgment of accountants have occurred
in the area of auditing. This is because judgment, and negligence in respect of judgment,
have been tested in the courts, proving the ongoing social impact of the judgments of auditors.

Auditing is based on judgment in almost every fundamental dimension of the process.

Some of the key judgments that auditors must make include:
• identifying ‘those charged with governance’ in a reporting entity;

MODULE 1
• deciding whether reasonable assurance or limited assurance is possible;
• ensuring that the budget for the audit is sufficient;
• deciding on an audit plan—including details such as whether in any area, ‘sufficient
appropriate audit evidence’ has been identified and whether such additional procedures
as are required have been undertaken; and
• deciding whether the evaluation of the results is appropriate and ensuring that the
conclusions are soundly based on the evidence examined and that appropriate action has
been taken. It is also important to consider whether the appropriate level of management
has been informed and an appropriate opinion expressed to the relevant authority or,
where applicable, a modified audit report is required.

Accounting, essentially, is a profession constantly involving the exercise of judgment. Indeed,

West (2003, p. 195) suggests that without judgment, accounting becomes nothing more than
a book of rules for compliance. Instead of providing a useful and genuine service, accounting
may become an occupational group that depends upon the imposition of ‘regulatory fiat’,
which is where external regulations are created that force people to use accounting services
(e.g. requirements for external audits).

➤➤Question 1.2
Discuss four situations where accountants may apply professional judgment in the course of
their work.

The existence of a governing body

A profession must have a governing body that has been drawn from the membership on a fully
democratic basis. The governing body has the responsibility for ensuring that the attributes
listed earlier are achieved and maintained and that the professional body and the profession
are successful.

The governing body of a profession, therefore, has an important enabling role and should:
• speak for the profession as a whole, particularly on those matters of public policy that may
adversely affect the profession’s independence and autonomy;
• ensure that those who enter the profession have the requisite standard of education and
that those practitioners already within the profession continue to keep themselves up to
date with developments in accounting theory and practice;
• encourage the setting and monitoring of high standards of professional conduct;
• apply disciplinary sanctions if standards of professional conduct are not observed.
The power to discipline, therefore, requires the governing body to have the power to
control its members’ activities. Any breach of professional conduct is judged and acted on
by professional peers without public interference, although members who may have acted
illegally may face public prosecution in the courts; and
• ensure high standards of performance and conformance by the professional body itself—
including establishing policies and strategies and appropriate codes of conduct within
the organisation.
 34 | ACCOUNTING AND SOCIETY

The governing body must be credible and effective in the eyes of both the members and the
public. Even though the attributes of a profession may be clearly evident, the community’s
view about whether or not a profession deserves to be regarded as a profession is shaped to a
significant extent by how the profession (and its members) actually behave.

The profession’s regulatory process

Accounting Professional and Ethical Standards Board
MODULE 1

The Accounting Professional and Ethical Standards Board (APESB) is an independent body
that sets the professional standards for accountants. The APESB was the result of an initiative
of CPA Australia and Chartered Accountants Australia and New Zealand (CAANZ), which at the
time was called the Institute of Chartered Accountants in Australia (ICAA). The roles of the APESB
are discussed in detail below.

Background
Earlier we highlighted that a high degree of autonomy is an important characteristic of a
profession, and noted how this attribute has been challenged by the regulators with the removal
from the profession of the powers to set accounting and auditing standards. As we have seen,
these powers are now in the hands of the Australian Accounting Standards Board (AASB) and the
Australian Auditing and Assurance Standards Board (AUASB) respectively. These two boards in
turn report to the Australian Financial Reporting Council (FRC).

In regard to auditing standards, the CLERP 9 legislation (Corporate Law Economic Reform
Program (Audit Reform and Corporate Disclosure) Act 2004 (Cwlth)) reconstituted the AUASB as
a body corporate under the Australian Securities and Investments Commission Act 2001 (Cwlth).
Consequently, the AUASB reports to the FRC and not to the professional accounting bodies.

Auditing standards have the force of law under the Corporations Act, which means registered
auditors have a legal duty to comply with auditing standards issued by the AUASB. The AUASB’s
power to approve legally enforceable standards means that all references to ethical requirements
in auditing standards will attract legal status. However, the AUASB has acknowledged that,
while this will result in professional standards having the force of law, it will not reduce or limit
the profession’s own disciplinary activities.

Once professional standards acquired the force of law for auditors, the profession sought a
more rigorous and transparent process for setting ethical requirements. On 4 November 2005,
CPA Australia and the ICAA announced the establishment of the Accounting Professional and
Ethical Standards Board (APESB), an independent ethical standards board to review and set the
code of ethics and professional standards. The formation of the APESB effectively transferred
the setting of professional and ethical standards from the professional accounting bodies to an
independent body.

CPA Australia, CAANZ (previously the ICAA) and the Institute of Public Accountants (IPA)
(formerly known as the National Institute of Accountants) are all members of the APESB.
Members of these three professional associations are required to abide by APESB standards.

The profession acknowledges that, in order to increase public confidence, it needs to open the
professional standard-setting process to greater public scrutiny. While the standards previously
released by CPA Australia and the ICAA were of a high standard and enforced through
appropriate due processes, the profession has an ongoing interest in improving the public’s
perception of its professional standards. Any appearance of self-interest should be removed
and the standards should be written by an independent board.
 Study guide | 35

The APESB comprises a technical board and a secretariat to enable it to fulfil this role. The technical
board consists of eight members, including two members from CPA Australia. It comprises
representatives from the public sector, corporate sector, audit profession, academia and the
general public.

The APESB fulfils its role by:

• reviewing the professional and ethical standards on a yearly cycle, and monitoring the needs
of the accounting profession and the public for areas requiring new or updated professional
and ethical standards;
• reviewing the implementation of new and amended professional and ethical standards within

MODULE 1
six months of issue;
• referring matters to the secretariat for research, direction and amendment;
• seeking comment on exposure drafts for proposed standards from the public, the professional
bodies and their members; and
• monitoring the effectiveness of professional and ethical standards.

The quality assurance process

Every profession is concerned about the quality of its services, and the accounting profession
is no exception. The integrity of accounting information is enhanced through the profession’s
quality assurance process. To help assure quality outputs, the profession and the regulators have
developed a multi-level regulatory framework that encompasses many of the activities of private
and public sector organisations. These activities may be described as follows.

Standard setting
The institutional arrangements for standard setting involve the FRC with oversight responsibility
for the AASB, which deals with standard setting in the private and public sector, and the AUASB,
which deals with the setting of auditing standards.

Conformity with standards

Issued by the APESB, APES 205 Conformity with Accounting Standards and APES 210 Conformity
with Auditing and Assurance Standards are mandatory statements of responsibilities for
members involved in the preparation, presentation or audit of financial reports.

Practice reviews
To hold a Certificate of Public Practice, members must demonstrate compliance with quality
control standards by annually providing a signed assurance that the established quality control
requirements are being met and by undergoing a practice review. Reviewers appointed by
CPA Australia visit public accounting firms and meet with Certified Practising Accountants (CPAs)
who are partners or principals of these firms. The reviews occur on a five-year cyclical basis. If the
findings of the review are unsatisfactory, the practitioner is required to take remedial action within
an agreed timeframe. Serious deficiencies will result in the instigation of disciplinary procedures.

Accounting firm regulation

Each public practice entity adopts policies and procedures to ensure that practising accountants
adhere to professional standards. Corporate failures and accounting scandals over the past
decade have often prompted accounting firms to be more vigilant about their procedures of
quality control and independence. In order to facilitate this, the APESB issued APES 320.
 36 | ACCOUNTING AND SOCIETY

APES 320 Quality Control for Firms establishes the basic principles of and provides guidance
for a system of quality control that provides reasonable assurance that a firm and its personnel
comply with professional and regulatory requirements. Under this statement, the elements of a
system of quality control include policies and procedures addressing:
• Leadership responsibilities for quality within the firm—policies and procedures to
promote an internal culture that recognises quality is essential in performing engagements.
• Ethical requirements—policies and procedures to provide reasonable assurance that
the firm and its personnel comply with relevant ethical requirements as contained in the
profession’s code of ethics.
• Acceptance and continuance of client relationships and specific engagements—policies
MODULE 1

and procedures to ensure that it will only undertake or continue with engagements where it
has considered the integrity of the client, is competent to perform the engagement and can
comply with the ethical requirements.
• Human resources—policies and procedures to ensure there are sufficient personnel
with the capabilities, competence and commitment to the ethical principles needed to
perform engagements in accordance with professional standards and regulatory and legal
requirements.
• Engagement performance—policies and procedures to provide reasonable assurance that
engagements are performed in accordance with professional standards and regulatory and
legal requirements.
• Monitoring—policies and procedures necessary for ongoing evaluation of the firm’s
system of quality control, including a periodic inspection of completed engagements and
documentation.

If you have worked for a public practice firm, reflect on the way that it approached quality control.
For example, what was covered in your induction program? What procedures and manuals were
used consistently?

➤➤Question 1.3
A merger is being finalised between your public practice and a firm that provides
bookkeeping services. As the partner in charge of quality control, you have not quite
finalised your due diligence on the policies and procedures designed to provide reasonable
assurance that the firm and its personnel comply with relevant ethical requirements.
You are confident that the bookkeeping firm’s policies and procedures are robust, but
you have not yet completed a review of them. You nevertheless assume that there are
no issues, as the firm being acquired only provides bookkeeping services.
A few months after the merger is completed, you receive a phone call from one of
your clients. Your client is concerned because an employee of your firm who performs
bookkeeping services for them has an interest in a business that is one of their major
competitors.
Your client is particularly disturbed because they are in the middle of extremely
confidential business negotiations. The client wants guarantees that your employee will
not have access to any confidential information. You agree to investigate your client’s
concerns (Sexton 2009).
Identify and describe the quality assurance and ethical issues arising from this scenario.
 Study guide | 37

Professional discipline
Professional and ethical standards aim to ensure that members of the accounting profession
work to the highest level of professionalism, providing a quality of service that achieves credibility
among the general public and gains their confidence. Members often face personal, financial and
other pressures that threaten their integrity and test their judgment. Unfortunately, in response to
such pressures, some members prioritise self-gain and overlook their duty to protect the interests
of third parties and the trust bestowed upon members by the public. It should be noted that no
profession is totally free of unscrupulous members.

Joining CPA Australia means committing to upholding the reputation of the CPA designation by

MODULE 1
adhering to the obligations spelt out in CPA Australia’s Constitution and By-Laws, the Code of
Professional Conduct and applicable regulations. To ensure all members uphold these standards,
CPA Australia has a formal process that enables complaints about members to be heard and
evaluated and, where appropriate, disciplinary actions to be taken.

Investigations and disciplinary processes are guided by the principles of procedural fairness
(the right for a member to put forward their case), confidentiality, independence and the right
to appeal.

CPA Australia has undertaken to act in the public interest and has an obligation to ensure that
complaints about members are investigated thoroughly, in an impartial and timely manner,
at all times striving to preserve the rights of members while acknowledging the public interest
concerns of complainants.

Investigation and disciplinary procedures form an essential adjunct to the Code of Professional
Conduct. CPA Australia has placed due importance on the area of co-regulation and professional
discipline by establishing an elaborate set of rules and procedures to handle disciplinary matters.

Regulation of member conduct

The specific procedures for regulation are identified in:
• Clauses 39–43 in the Constitution of CPA Australia Ltd (effective 28 April 2014); and
• Part 5 of the By-Laws of CPA Australia Ltd (effective 17 October 2014).

You should now read these parts of the Constitution and By-laws. You can access these documents
via the following links:
cpaaustralia.com.au/~/media/corporate/allfiles/document/about/cpa-australia-constitution-2014.pdf
cpaaustralia.com.au/~/media/corporate/allfiles/document/about/by-laws-effective-17-october-2014.
pdf?la=en

The process for dealing with member conduct is started when a complaint is made. A complaint
may be raised by any person including members of the public, members of CPA Australia or
the General Manager Professional Conduct of CPA Australia.

Types of complaint identified in the Constitution of CPA Australia (clause 39) include:
• obtaining admission as a Member by improper means;
• breaching the Constitution, By-Laws or Code of Professional Conduct;
• dishonourable practice or conduct that is derogatory to CPA members;
• failing to observe a proper standard of professional care, skill or competence;
• becoming insolvent; and
• being found to have acted dishonestly in any civil proceedings.
 38 | ACCOUNTING AND SOCIETY

The complainant should first attempt to resolve the matter directly with the CPA Australia
member. Where this initial resolution attempt is unsuccessful, the complainant must lodge a
written complaint providing all necessary details, supported by documentary evidence.

All complaints are reviewed by CPA Australia’s General Manager Professional Conduct (the MPC).
The MPC will determine whether the complaint is relevant and if it is, a file will be opened to
address the issue. The complaint will be allocated to a professional conduct officer (PCO).

The PCO will contact the member against whom the complaint has been made and provide
details of the nature of the issue. The member will be asked to provide an explanation.
MODULE 1

Once the PCO has completed the investigation, a report will be given to the MPC to enable a
recommendation to the chief executive officer (CEO) of CPA Australia as to whether there is
a case to answer.

The CEO must determine whether there is a case to answer based on the MPC’s recommendation
and any relevant external advice. If the member is assessed as having a case to answer, the CEO
must refer the complaint to either the Disciplinary Tribunal or to a One Person Tribunal (OPT),
depending on the circumstances.

The member and complainant will be notified by the MPC that there is a case to answer and the
MPC will refer the case to an investigating case manager (ICM). The ICM will prepare written
particulars of the case and present the complaint at the hearing that will be conducted.

After the hearing of the case, a determination (decision) will be made and the member and
complainant will be advised of the outcome.

Penalties and appeals

The findings and decisions of the Disciplinary Committee are published on CPA Australia’s
website. The Constitution of CPA Australia (clause 39(b)) specifies that penalties that can be
imposed include:
• forfeiture of membership;
• suspension of membership for five years or less;
• a fine;
• a severe reprimand;
• cancellation or suspension of any certificate, privilege, right or benefit available to
the member;
• restricting the member from using the CPA designation and/or ordering the member to
remove any CPA Australia signage and the designation from advertising materials and
office premises;
• lowering the member’s status and/or removing any specialist designation;
• directing the member to undertake additional hours of professional development; and
• a direction to undertake such quality assurance as may be prescribed.

It should be noted that the formal complaints process does not investigate issues relating to
fees. Fees charged by members are a commercial matter between members and their clients.
However, the complaints process will consider cases where members are in breach of their
professional obligations, such as those included in the Code of Professional Conduct and APS 12
Statement of Financial Advisory Service Standards. Where the client’s concern relates to the
size of the fee, the client may consider contacting an organisation that mediates commercial
disputes. There is usually a cost involved in using mediation services.
 Study guide | 39

Part B: Interaction with society

Accounting roles, activities and relationships
Relationships and roles
Accountants are found in an ever-increasing number of roles and relationships in society.

The key professional relationships that accountants have are with:

MODULE 1
• employers;
• clients;
• employees (if business owners or managers); and
• their peers.

Peers may include work colleagues, other accountants in professional networks and other
accountants who work for the same client in a different aspect of accounting. Maintaining
good-quality professional relationships is an essential part of being a successful professional
accountant.

Many factors influence how an individual will behave in their workplace. These factors include
culture, standards and ethical evaluations. Other variables that impact on an accountant include:
• personal moral development;
• family influences and personal relationships, including those at work;
• the organisational level (business structure and relationships with superiors and
subordinates, etc.);
• laws and regulations; and
• professional aspects (including professional expectations and professional ethics).

These all have an impact on the way problems and issues are dealt with by an individual in the
workplace. A threat to, or excessive pressure on, any of these areas has the potential to result in
unprofessional conduct.

Accounting work environments

Examples of accounting work environments are shown in Table 1.1.
 40 | ACCOUNTING AND SOCIETY

Table 1.1: Types of accounting work environments

Work environment Examples

Public practice Public practitioner

Big Four accounting firm
Second-tier accounting firm
Small partnerships and sole practitioners

Private or business sector Professional accountant in business

Large companies—privately held or publicly listed
Small and medium enterprises (SMEs)
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Start-ups

Public sector Government departments

Public entities (e.g. hospitals)

Financial advice High wealth individuals

Business organisations
Trusts and foundations

Not-for-profit sector Charities

Sporting and cultural associations

Source: CPA Australia 2015.

CPAs must be equipped with a range of skills to function as business leaders. Further, our
professional capabilities are mobile, enabling us to work in different geographic locations and
in various work environments.

Public practice accounting

Public practice refers to professional accountants who offer accounting services to businesses
and the public.

The public practice environment can be grouped into three types of firms and practices.

Big Four accounting firms

The ‘Big Four’, as they are known, are the four largest international professional public practice
firms that offer services in accountancy and professional services.

These firms are PwC (PricewaterhouseCoopers), Deloitte, Ernst & Young and KPMG. These firms
each have more than 150 000 employees globally and annual revenues in excess of AUD 20
billion each.

It is worth noting that these firms manage the vast majority of audits for all publicly listed
companies and many private companies.

Second-tier accounting firms

Second-tier public practice firms operate on a smaller scale than the Big Four. They generally
have a number of offices in capital cities and large regional centres, together with some level of
international engagement, generally through alliances.
 Study guide | 41

Small practices and sole practitioners

This level of public practice includes the smaller accounting practices with one professional
accountant as practitioner or a team of professional accountants and support staff.

Smaller accounting firms tend to be used by small and medium enterprises (SMEs), which often
have no statutory audit requirements. Accordingly, these practices usually undertake compliance
work that is less related to audit (e.g. tax returns, standard accounting).

Roles in public practice

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While Big Four firms, and to some extent second-tier firms, offer services that include consulting
and legal divisions, the range of accounting activities for an accountant in public practice are
similar, irrespective of the size of the practice.

The types of roles within public practice work environments include those shown in Table 1.2.

Table 1.2: Public practice roles

Area Activity

Assurance and audit Financial statement attestation, in which the firm examines and attests
to a company’s financial statements, or other assurance services such as
assessing procedures and controls relating to privacy and confidentiality,
performance measurements, systems reliability, information security and
outsourced process controls.

Financial management Covers areas from performance management to corporate governance,

stakeholder relations to risk, as well as the traditional financial controls.

Taxation services Covers company and individual taxation, fringe benefits tax (FBT), goods
and services tax (GST), capital gains tax (CGT) and international tax issues.

Forensic accounting Specialised area that involves engagement for legal issues including fraud,
disputes or litigation.

Insolvency Specialised area that involves engagements in personal insolvencies

(bankruptcies) and corporate insolvencies (administrations, liquidations,
receiverships).

Internal audit services Systematic, disciplined approach to evaluating and enhancing risk
management, control and governance processes.

Business advising Assisting business managers to more successfully achieve value. The tasks
involved are varied, often reflecting that businesses have internally
recognised weaknesses or identified that objective external evaluations
and contributions can be valuable. It can also extend to advice on business
re engineering, restructuring, takeovers and mergers.

Source: CPA Australia 2015.

 42 | ACCOUNTING AND SOCIETY

Professional accountants in business

Professional accountants are employed by private sector business in varying roles. The scale
of a business’s operations will determine the professional accountants’ roles.

Accountants employed in the large business environment

Many professional accountants work in large corporations, often in specialised roles in
accounting and related areas.
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Roles in private business

Roles within private business work environments include those shown in Table 1.3.

Table 1.3: Private practice roles

Role Responsibilities

Board member Elected to the Board of Directors to oversee the activities of the
company or organisation.

Finance director or chief financial Formulation, management and review of the financial and strategic
officer direction of the company or corporate group.

Financial accountant Preparation of general purpose financial reports, the annual report
and special purpose financial reports as required. May supervise a
team of accountants.

Treasury accountant Management of treasury functions of the organisation in order

to ensure sufficient cash flow and the effective use of financial
instruments.

Risk manager Quality and risk management responsibility for the business.

Strategic management accountant Preparation of budgets and forecasts, performance measures for
analysing and improving organisational performance.

Internal auditor Review of internal controls, information and business processes.

Human resources accountant Remuneration and payroll-related functions.

Company secretary Reporting and regulatory compliance and ensuring, with the chair,
the efficient functioning of the board of directors.

Source: CPA Australia 2015.

During their career a professional accountant may remain in a particular role or may move
through various functional roles and then on to management levels within the finance area.
Often, professional accountants move into general management roles as a result of the wide
capabilities and skills they acquire during their career.

Professional accountants are also often found on the boards of companies as directors or
company secretaries.

Even with changes in the roles performed and challenges faced, which generally become more
complex as more senior roles are accepted, a CPA must continue to maintain the service ideal
and continue to comply with professional ethical requirements.
 Study guide | 43

Accounting in small and medium enterprises (SMEs)

Small and medium size enterprises (SMEs) vary significantly in their size, number of employees,
direct ownership control and geographic dispersion of resources.

So what is an SME?

IFAC defines SMEs as follows:

Entities considered to be of a small and medium size by reference to quantitative (for example
assets, turnover/employees) and/or qualitative characteristics (for example, concentration of
ownership and management on a small number of individuals). What constitutes an SME differs

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depending on the country (IFAC 2010, p. 10).

The accounting functions within an SME are broadly the same as in a large business environment.
However, an SME-employed accountant may have to complete more detailed work because
there will be fewer (if any) support staff. Also, the number of areas they need to cover may be
wider but have less complexity compared to a large business environment.

At the same time, because they will know the business and typically be very close to the
ownership (in fact, may even be an owner) and senior management, the professional accountant
in an SME will also often be involved in a range of business decision activities.

An example of the differences in the roles performed by a professional accountant in a large

business compared to an SME is as follows:
• a large business may engage a management accountant whose sole responsibility is
budgeting, forecasting and reporting actual results compared to budget for one of its areas
of operation; and
• an SME may engage a finance manager who is responsible for their end-to-end accounting
and finance function—with responsibility for every function from petty cash to monthly
reporting to the directors.

It is important to note that in very small SMEs, often no accountants will be employed and
therefore there will be total reliance on an external public accounting practice to perform all
accounting functions.

➤➤Question 1.4
Outline four possible accounting-related roles with an SME and, for each role, identify the tasks
that could be undertaken in that role.

IFAC research
The Professional Accountants in Business Committee (PAIB Committee) of IFAC ‘provides
leadership and guidance on relevant issues pertaining to professional accountants in business
and the business environments in which they work’ (IFAC 2013).

The PAIB Committee in 2005 developed an information paper titled The Roles and Domain of the
Professional Accountant in Business. This paper provides a description of the contemporary roles
that are filled by professional accountants in business (PAIB).
 44 | ACCOUNTING AND SOCIETY

The PAIB Committee described PAIB roles as:

implementing and maintaining operational and fiduciary controls, providing analytical support for
strategic planning and decision making, ensuring that effective risk management processes are in
place, and assisting management in setting the tone for ethical practices (IFAC 2005, p. 1).

The PAIB Committee paper provides the following description of activities.

Table 1.4: PAIB description of activities of a professional accountant

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Activity Examples

Value Generation or creation of value through effective use of resources, through

understanding the drivers of value and innovation.

Information Creating, providing, analysing and interpreting information for management

to formulate strategy, plan, control and make decisions.

Measurement Developing appropriate measurement tools and accurately measuring

performance.

Communication Communicating financial reports and interacting with stakeholders so they

can understand the business and make informed choices.

Costing Accurate costings of products and services.

Control Financial control, budgeting and forecasting, and the reduction of waste
through process analysis.

Risk Managing risk and providing business assurance.

Source: Adapted from The Roles and Domain of the Professional Accountant in Business, Professional
Accountants in Business Committee, p. 4, published by the International Federation of Accountants
(IFAC) in 2005 and is used with permission of IFAC, accessed October 2015, https://www.ifac.org/
publications-resources/roles-and-domain-professional-accountant-business.

We can link these IFAC activities to the roles identified earlier and the different sizes of
private sector businesses. For example, the measurement activity in a large business may be a
management accountant measuring the performance of international freight supplier contracts.
In a small business, the measurement activity may be the financial controller determining a
breakeven sales figure.

In 2008, the PAIB Committee released another information paper titled The Crucial Roles of
Professional Accountants in Business in Mid-sized Enterprises (IFAC 2008). Understanding the
role of accounting in these enterprises is vital for the success of the enterprises and of economies
reliant on such enterprises.

For the paper, IFAC interviewed various accountants in mid-sized enterprises (MEs). The MEs
were chosen because they all had employed accountants, so the multi-dimensional role of
the professional accountant as an employee could be explored. The report summarises the
interviews as follows:
 Study guide | 45

Generating Value
The PAIBs featured in this report have identified numerous responsibilities that directly affect the
current and future success of the mid-sized enterprises in which they work …
Their most prevalent duties hinge on helping their companies to generate value by:
• establishing a common ‘performance language’ throughout the company so that everyone’s
activities are aligned with the vision and goals leadership has set;
• upholding business integrity;
• creating, implementing and improving management information systems to bolster strategy,
planning, decision-making, execution and control activities;

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• managing costs through rigorous planning, budgeting, forecasting and process improvement
efforts;
• managing risk and handling business assurance;
• measuring and managing performance; and
• communicating financial and other performance information to internal and external
stakeholders, including regulatory authorities, lenders, bankers and investors in a manner
that fosters trust

Source: This text is an extract from The Crucial Roles of Professional Accountants in Business in Mid‑sized
Enterprises, p. 6, Professional Accountants in Business Committee, published by the International
Federation of Accountants (IFAC), New York in 2008 and is used with permission of IFAC.

The report continues with specific observations about the importance of continuing self-
development by the employed accountants—especially regarding communication.

Study Reading 1.1 ‘Profile: Roel van Veggel—The sweet sounds of success’, which is an excerpt from
‘The Crucial Roles of Professional Accountants in Business in Midsized Enterprises’ (IFAC 2008).

As you review this reading, identify three areas where you have added value in your own workplace.

➤➤Question 1.5
Refer to Reading 1.1.
How did Roel van Veggel add value to Andre Rieu’s business?

The role of accountants as financial advisers

Accountants are often called upon to offer financial advice to clients, who may be high net
worth individuals, businesses or other entities such as trusts or foundations. As accountants are
knowledgeable and skilled about financial matters, and are able to interpret complex financial
information, it is natural that clients might call upon them for investment or other financial advice
beyond their normal accounting duties. However, offering financial advice has significant risks
and responsibilities that must be recognised. This, again, takes a critical step away from assessing
compliance within a body of rules and frameworks to actually taking complex decisions regarding
the best means of financial performance.
 46 | ACCOUNTING AND SOCIETY

The risks involved in offering financial advice are many. It is vital to remember Adam Smith’s words:
this is ‘other people’s money’. That is, any risks involved in the proposed investment strategy are
borne by the client, not the adviser. Moreover, if, as a financial adviser, the accountant becomes
too close to certain investment funds, this poses the risk of the adviser acting out of self-interest
rather than the client’s interest. The financial advice industry has been associated with these
dilemmas on frequent occasions, which has led to a number of government inquiries into the
financial advice industry both in Australia and overseas, most recently as part of a comprehensive
examination of the current cost, quality, safety and availability of financial services, products and
capital for users, in the Australian Government’s Financial System Inquiry Final Report (2014).
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The dilemmas of self-interest conflicting with public service are most serious in the field of
financial advice. The occupation of financial adviser has expanded considerably in recent
decades as more people have accumulated wealth that they wish to invest wisely. Since
accountants have extensive financial skills and knowledge, some accountants have been drawn
into providing financial advice, often at the request of their clients.

Regrettably, internationally there has been a series of scandals in which there has been widespread
selling of inappropriate investment products, unacceptably high fees, and sometimes corrupt
practices. This has not only occurred with individual financial advisers, but in the past with financial
advisers working for the insurance industry in the UK, and the major banks in Australia.

Clearly the role of financial adviser carries significant responsibilities and risks beyond those
normally encountered in the accounting profession. It is essential for any accountant engaging
in financial advice to be fully aware of the responsibilities and risks involved, and to maintain a
sense of objectivity regarding the best interests of the client receiving the advice.

Regulation of financial advisers is achieved by Regulatory Guide 146, issued by ASIC, which details
minimum levels of training, competence and experience to those giving financial advice.

Accountants as external advisers to SMEs

Research commissioned by CPA Australia in 2005 found that accountants as advisers provided a
wide range of services to the SME sector. We are referring here to professional accountants from
public practice providing services to businesses in the private sector.

The survey reported that 97 per cent of SMEs purchase accounting services (i.e. taxation advice
and financial statement preparation) from an external accountant (CPA Australia 2005, p. ii).

Importantly, 67 per cent of SMEs identified business advice as a key service available from
external advisers. CPA Australia’s survey found that 76 per cent of SMEs at some stage relied
on external accountants as business advisers. However, the survey found that reliance on
accountants for business advice was very limited in extent and overall effect. Only 6.5 per cent
of SMEs were found to place any substantial degree of reliance on their external accountant
for general business advice (including managerial accounting advice). This is disappointing and
the survey therefore indicates that external accountants have an important role in conformance
(i.e. compliance) but have not been much valued in improving performance (i.e. profitability).

Five years later, and at an international level, IFAC (2010) found the same general trend. IFAC also
clarified that it is important for external accountants (small to medium practices) to recognise the
real opportunities—for the businesses they advise and for their own practice growth—that exist
in the greater provision of profit-oriented business advice rather than accepting the current
overwhelming dominance of compliance advice.
 Study guide | 47

➤➤Question 1.6
Why have SMEs not relied in the past on their external accountants for business advisory services?
Comment on whether this might be changing or needs to change.

Reflecting on your own organisation or one with which you are familiar, consider whether it relies on
external accountants for advice. If not, what may have prevented this from happening?

Public sector
The public sector includes a wide range of government and regulatory bodies. It includes the

MODULE 1
national government and lower levels including state, territory and local government. Where
governments provide for-profit services, they often set up particular entities called government
business enterprises (GBEs) or state-owned enterprises (SOEs). Governments are characterised
by the breadth of their powers in comparison with the private sector, such as the ability to
establish and enforce legal requirements.

Governments and their agencies require economic, finance, accounting and audit staff for their
operations and qualified professionals can build successful careers. Often people are drawn
to the government sector because of the potential for greater work–life balance, training and
development and career progression and because they wish to ‘make a difference’.

Over recent years there have been significant cultural changes with a shift towards a more
corporate model of best practice and ‘value for money’ approaches. As in the private sector,
the public sector highly values commercial know-how, analytical thinking and leadership and
stakeholder management abilities.

Accounting roles within the public sector are quite similar to those in the private and business
sector, with the requirement for financial reporting, internal audit, risk management and strategic
management accounting of key importance.

Not for profits (NFPs)

NFPs are generally defined as legal or social entities formed for the purpose of producing goods
or services, and whose status does not permit them to be a source of income, profit or financial
gain for the individuals or organisations that establish, control or finance them.

NFPs can vary in size from very large charitable institutions to local sports clubs. The principal
sources of income for their operations are usually receipts from members and supporters,
grants, donations and fundraising. Some NFPs also supplement revenue with trading activities.
Although profitability is not their core purpose, NFPs require sound financial management to
ensure that they are sustainable, can demonstrate positive social impact and can continue
to meet their objectives.

The NFP sector, sometimes called the community or third sector, is diverse and growing.
In Australia, the NFP sector encompasses 600 000 organisations contributing an estimated
AUD 43 billion, making it larger than the communications industry, agriculture or tourism
(Office for the Not-for-Profit Sector 2013).

As the complexity of tendering and accountability requirements grow in this sector, so does the
need for professionally qualified staff to enhance efficiency and effectiveness.
 48 | ACCOUNTING AND SOCIETY

Keeping the organisation in good financial shape, meeting the reporting requirements of a
myriad of stakeholders, understanding the grants process, constructing and monitoring budgets,
tendering for outsourced government services, diversifying revenue streams through new models
of investment and social enterprise and meeting best practice volunteer management are all part
of the daily mix for a finance professional working in an NFP.

Social impact of accounting

It might be argued that all professions, because of their accumulation of relevant capabilities,
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have a duty to use those capabilities to improve and enhance society. We can call this a positive
(or active rather than passive) social impact. Does accounting have a positive social impact?
Can that impact be negative in some circumstances? Is it possible that accounting may even
change society?

One aspect of accounting is the important role of reporting to investors, owners, management
and other users. This reporting may be designed principally to inform users about events that
occurred in the past, by way of annual, half-yearly and quarterly reports, and also some types of
historical reports within organisations.

Some people might think that this reactive information is passive. However, as a result of this
historical accounting information (created under applicable accounting standards), investors,
governments, managers and other stakeholders make decisions with significant social
consequences. Reporting, which is reactive in respect of events, is the active foundation for
a variety of outcomes—and these outcomes actively change social circumstances and entire
societies. An example of this may be the preparation of the half-yearly results for a publicly
listed company. If the results are poor, there is an obligation for the company to announce this
to the public. Investors may then choose not to go ahead with a plan to purchase shares in the
company. If financial results for a large number of companies are poor, society may interpret
this as a sign that the economy is failing.

Examples such as these show that implementing accounting systems and their constructs
have a forceful social impact and social and economic consequences, so accountants need
to understand and apply vast ‘professional capabilities’ to achieve appropriate reporting in
each circumstance. These professional capabilities include relevant technical knowledge,
soft (sometimes called ‘social’ or ‘interpersonal’) skills and extensive experience to avoid
adverse consequences due to poor or inaccurate reporting.

Beyond reporting about the past, accounting is commonly used within organisations to provide
information to support managers in decision-making. Such information is future-oriented and is
designed to facilitate, support and even to cause change. For example, a strategic management
accountant designing information to support a new manufacturing plant is change-focused,
as is an accounting ‘regulator’ working on new laws or new accounting standards designed to
create changes.

If the reporting is right, then the social impact, arguably, will be good, as markets and decision-
makers are informed appropriately. If the reporting is wrong, then the social impact will
almost certainly be negative.

Arguably, even perceptions about accounting can create significant social impact—so
communications regarding accounting need to be professional and balanced.

Accounting is increasingly recognised internationally and nationally as creating changes to

society, impacting individuals, business entities and regulatory agencies (including governments).
The professional accountant must always be aware of their ethical obligations and the reliance
society places on the information they provide.
 Study guide | 49

Social impact example—depreciation and behaviour

A powerful example of how accounting has a social impact is shown by looking at how assets
are depreciated.

People who are not familiar with accounting may see depreciation as a technically accurate
adjustment to reflect the decline in values of non-current assets. However, in reality there is a
broad scope for choice in depreciation methods.

The depreciation method and estimated residual life or productive capacity will have an impact
on several measures, including reported profits and asset balances, and therefore remuneration

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and bonus plans that are linked to profits or return on investment.

Impacts of higher levels of depreciation

• In the short term, it will mean lower profits and lower asset levels.
• In the longer term, there will be a rise in profits with lower assets levels. This may lead to a
lower measurement base for a manager against which future performance is measured—
this will show a greater percentage improvement and is likely to lead to higher long-term
bonuses. Lower asset levels will also lead to a higher return on assets.
• Lenders may be nervous due to lower profit levels and asset values that may be used
as security.
• Owners with a short-term approach may be frustrated by lower profits and consider selling
their investment. This may lead to a decline in the share price.

Impacts of lower levels of depreciation

• It will lead to higher profits and higher asset levels, which may be the source of short-term
rewards for managers.
• Lenders and owners may have greater confidence levels in the organisation because of
higher profits and asset values.
• It may reduce investments in assets in the future, as assets are assumed to have a longer
lifespan than is actually the case. This may hinder the organisation’s competitiveness.
• When assets reach the end of their useful life and are scrapped or sold, there may be large
write-offs if the written-down value of the asset is higher than its disposal value.

From these points, we can conclude that the choice of depreciation method and residual life
of the asset is not a ‘value-free’ or technical choice, but one that may have a significant impact
on different people. Because the different outcomes may have positive or negative effects,
they have a social and behavioural impact on accountants, managers and users of financial
reports, including lenders, owners and the broader community. This may create a situation
where an accountant is pressured to report an artificial result.

Accounting is often perceived as neutral—a set of black and white tasks performed in a
mechanical manner—but this understates its influence. Rather, the activities of accountants
and the use of accounting information, including the decisions that are made based on
the outputs of accountants, have a decisive impact on the social functioning of individuals,
groups and entities. The impact is far wider than at first might be apparent.

It is important for accountants to understand the potentially broad social impact of accounting
at the micro and the macro level. At the macro level, this extends to all types of business,
public organisations and social institutions, and society generally. At the micro level, we must
understand the potential impact that accounting can achieve on the motivation and behaviour
of managers and employees within an organisation.

The motivational effects of performance measurement are discussed in more detail in the
‘Strategic Management Accounting’ subject of the CPA Program.
 50 | ACCOUNTING AND SOCIETY

Credibility of the profession

For accounting to continue to be regarded as a profession, it is important that it is perceived to
provide a public service and contribute to effective governance of organisations, large and small,
public and private.

Our technical actions and behaviours as accountants are under scrutiny. The way we act and the
work we perform have a significant impact on organisations and society. As such, when we fail to
perform our work to an adequate standard and organisations experience trouble and distress,
the credibility of the profession is called into question.
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Credibility under challenge

Some authors argue that the credibility of the profession has declined because of several factors
including accuracy of financial reporting, corporate failures, auditor independence and a lack
of audit quality. For example, Brewster (2003) documents the loss of trust in the accounting
profession during 2001 and 2002 in How the Accounting Profession Forfeited a Public Trust.

Accountants and auditors who have not performed their roles effectively are seen as responsible
for the failures and inaccuracies that have led to the decline in credibility. The view is that the
accounting profession did not fulfil its service ideal role as it did not prevent these situations by
giving appropriate advice to managers and/or making appropriate disclosures.

Following the many corporate collapses of the late 1980s and the market collapse of October
1987, many efforts were made to make accounting standards more consistent—and these
efforts continue today.

Despite these efforts, there have been a number of high-profile corporate failures in the
past 15 years, including Enron, WorldCom and Lehman Brothers (US), Babcock & Brown
and HIH Insurance (Australia), Parmalat (Italy), and Equitable Life Assurance Society (UK).
These failures have again placed the accounting profession under extensive scrutiny.

Key issues causing reduced credibility

Other core problems affecting the credibility of the profession are outlined below. These were
highlighted during the corporate failures of the early 2000s as well as during the GFC.

Creative accounting
‘Creative accounting’ means using the choices available to present information in ways that
do not clearly represent reality, and which provide a distorted and often favourable view of the
organisation.

Many accounting issues from the 1980s remain unresolved, including practices such as
capitalisation of interest expenditure, financial instrument valuation and risk management,
formation expenditure being treated as an asset, mining exploration expenses regularly
being capitalised and related party transactions. The words of Chambers, writing in 1973,
are still current:
If due to the optional accounting rules available to them, the company managers and directors are
able to conceal the drift (in financial position), shareholders and creditors will continue to support,
and support with new money, companies that are weaker than their accounts represent them to be
(Chambers 1973, p. 166).
 Study guide | 51

Chambers could just as easily have been writing about 2001 and 2002 or about the valuation of
sub-prime debt and complex financial instruments from 2007 to 2009.

Poor audit quality

Poor audit quality refers to the perceived inability of auditors to identify a company in distress
prior to collapse.

The GFC also saw auditors become subject to increased scrutiny (e.g. see Durkin & Eyers 2009;
Eyers 2009). GFC corporate failures have demonstrated valuation failures especially in relation to

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financial instruments and these valuation failures have raised questions about the role and value
of auditing (Sikka 2009; Sikka, Filling & Liew 2009; Woods et al. 2009).

In view of the massive financial bail-outs of many prominent corporations around the globe,
Sikka observed that:
Many financial enterprises have sought state support within a short period of time of receiving
unqualified audit opinions. This raises questions about the value of company audits, auditor
independence and quality of audit work, economic incentives for good audits and the knowledge
base of auditors (Sikka 2009, p. 868).

Lack of auditor independence

Another issue is lack of auditor independence, where conflicted auditors do not act in the
public interest.

Sikka, Filling and Liew (2009), for example, expressed a perennial view of the basic auditing
model, that is, it is ‘flawed since it makes auditors financially dependent on companies’.
Consequently, according to Sikka’s view, auditors will not give objective independent professional
judgments because their incomes depend on the survival of the audit ‘target’. Case Study 2.2
in Module 2, ‘Arthur Andersen’, explores this issue in detail.

Financial accounting distortions

Accounting has played a role in triggering financial distress, especially with mark-to-market
techniques that reduce asset values, and may lead to breach of banking covenants or
even default.

It has been proposed that the GFC was at least in part caused by ineffective accounting
standards for complex financial instruments. The role of risk, along with the failure of the various
decision-makers to understand risk and the true nature of ‘complex financial instruments’,
has also been a key factor. The fact that accounting standards did not help has been a matter
of professional concern for accountants.

It is worth noting that IFAC commissioned a study in 2002 to look at the loss of credibility in
financial reporting and approaches to resolving the problem.

Critical matters that were identified in the study include:

• the payment of incentives that encourage the manipulation or misstatement of information;
• lack of actual or perceived auditor independence;
• lack of audit effectiveness both through lack of skill or deliberate action; and,
• too much flexibility and loopholes in reporting practices (IFAC 2003).
 52 | ACCOUNTING AND SOCIETY

Case Study 1.1 demonstrates several of these issues as they relate to the collapse of ABC Learning.

Case Study 1.1: The collapse of ABC Learning

A strong example of misreporting, auditor failure and uncontrolled management changes to accounting
figures is the 2008 case of ABC Learning.
The accounts of ABC Learning Centres were altered to add millions of dollars of possible
revenue, as it struggled to stay afloat in the months before its $1.6 billion collapse more than
a year ago.
ABC Learning’s former acting chief financial officer, John Gadsby, told the Federal Court in
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Sydney yesterday that in mid-2008, as the group battled mounting debts, the company’s
internal accountants were instructed to prepare a cashflow statement for the rest of the year.
The document was to be given to the company’s syndicate of banks as part of negotiations
to extend financing and keep ABC Learning afloat.
The original cashflow statement, referred to in court as ‘the first cut’, showed the group did
not expect to receive any ‘compensation fees’ paid to ABC Learning Centres from childcare
centre operators and developers from June to December 2008.
However, after it was reviewed by former chief executive and founder Eddy Groves, a ‘second
cut’ of the statement showed there could be $44.79 million in fees received over that six-
month period.
The court was told there were other substantial changes made to the ‘first cut’, including an
increase in the value of childcare payment receipts from parents in that time (Murdoch 2010).

In May 2013 the former CFO was charged with providing false or misleading documents to the
company’s auditors.

Auditor failure
Pitcher Partners were the auditors for ABC Learning during the 2007 period. However, due to the
company’s overseas expansion, Pitcher Partners indicated it would no longer conduct the audits
so Ernst & Young took over the audit work for the 2008 financial year. Ernst & Young then made the
radical decision to reject the previous accounts based on, amongst other issues, a disagreement with
particular accounting treatment of revenue items.

In August 2012, Simon Green, the company’s former Pitcher Partners auditor was suspended from audit
work for five years It was Green’s failure to adequately and properly perform his duties as an auditor
when conducting the audit of the 2007 financial report that led to this suspension. Specifically, Green
did not obtain enough evidence to confirm the correct treatment of fees, which led to an overstatement
of fees, nor to establish whether the company was a going concern (Kruger 2012).

As we look at corporate failures over the last 30 years, it appears that too often the
independence and professional ethics of accountants failed. Instead, professionals left behind
their standards in the hope of becoming part of an economic revolution related to booming
share market growth. The decade beginning with the failures of 2001 to 2002 has seen the
profession come under scrutiny to an extent never previously seen.

The credibility of accounting as a profession of value has been very much ‘on the line’.
Arguably, there has been a diminution of public trust in the profession’s service ideal and a
reduction in its former degree of autonomy and independence. We now consider the response
of the professions and government to restore credibility to financial accounting, auditing and
the accounting profession itself.
 Study guide | 53

Restoring credibility to accounting

Pressure from governments, the investor community, professional accounting bodies and others
have resulted in a number of measures aimed at reducing the likelihood and severity of the
corporate failures that have occurred in recent times. Examples are given below.

Establishment of the Financial Reporting Council. As detailed earlier, the Australian

Accounting Standards Board (AASB) and the Australian Auditing Standards Board (AUASB)
are no longer controlled only by the professional accounting bodies. They are controlled by
the Australian Financial Reporting Council (FRC), a government body set up to oversee the
effectiveness of financial reporting.

MODULE 1
Accounting standards are backed by law. Accounting standards are externally created and
enforced by regulations, meaning non-compliance by a professional accountant can mean both
disciplinary action from their professional body and legal penalties.

Auditors must apply the code of ethics. The Compiled APES 110 Code of Ethics for
Professional Accountants also has legislative application to auditors.

FRC responsible for auditor independence. The FRC now has direct responsibility for
monitoring the effectiveness of auditor independence. This reduction in autonomy is likely to
lead to greater comfort in the community and less opportunity for abuse by auditors. As a result,
this change should help to restore and maintain professional auditor credibility in the future.

Enhanced regulation. New laws, regulations and guidance have also been developed globally,
including the Sarbanes–Oxley Act 2002 in the US, COSO 2004 (discussed in more detail in
Module 3), and the extensive process leading to the CLERP 9 Act in Australia.

Adoption of international standards. Since 2004, many countries have adopted, or are in
the process of adopting, common international standards on accounting, auditing and
professional ethics.

➤➤Question 1.7
Outline reasons why the four key issues identified by IFAC (2003) would reduce the profession’s
credibility. What strategies may be useful at reducing or eliminating these problems in future?

The reduction of the profession’s autonomy (in terms of setting its own rules and guidelines)
is one change that is leading to restored credibility, as externally enforced legislation and
rules provides greater protection and comfort to users of accounting information and society
in general.

Individual accounting bodies, such as CPA Australia, have also been active with various
initiatives in support of improved financial reporting, enhanced auditing standards and more
effective governance. The Corporate Governance Council of the Australian Securities Exchange,
the OECD and the UK Financial Reporting Council have also undertaken much work.

To restore credibility the underlying problems must be identified and practical measures put in
place to reduce or eliminate them. The measures described above aim to reduce the likelihood
of past issues being repeated.

If these aims are met, they will help alleviate society’s concerns and provide reassurance that
these issues will not happen again. Success will require the utmost application of all the relevant
professional capabilities that a professional accountant must possess.
 54 | ACCOUNTING AND SOCIETY

Capability considerations
So far, we have been discussing the broader accounting profession, what it means to be a
professional and the issues the profession has been facing. Professional accountants are
expected to understand their professional responsibilities and apply themselves diligently
to achieve and maintain these standards. As such, they have a role to play in improving the
credibility of the profession, ensuring the public interest is served, and making sure clients,
employers and the broader community benefit from their skills, knowledge and decision-making.

The CPA Program is a large component of developing technical knowledge to attain professional
MODULE 1

status. However, it is also important to develop a broader range of skills. The pathway to
becoming a CPA includes professional mentoring and achieving rigorous technical knowledge
requirements, combined with broader business knowledge and soft skills including communication
and leadership. Managing oneself is fundamental to successfully achieving professional status,
and so personal effectiveness becomes another foundation for a successful career.

Business leadership capabilities

Professional accountants are well-placed to attain leadership roles within society. These leadership
roles may be as a partner in a professional practice, chief financial officer of a large enterprise or
on the board of a company or not-for-profit organisation.

Leaders are required to develop the strategy, drive the change and align the organisation’s
structure, resources and culture with strategy. Leadership requires vision, energy and drive
from the professional accountant, the desire to be strategic and to be a key contributor to the
improvement and strategic growth of the organisation. As business leaders, and as professionals,
accountants must exercise a high degree of competence and due care, and have a professional
obligation to service ideals.

We discussed earlier that professional competence requires not only strong technical accounting
skills, knowledge and experience, but also the desire to actively enhance our professional
expertise and insights through the acquisition of diverse new skills, knowledge and experience.

Professional capabilities arise over a relatively long time frame, through the steady accumulation
of all the relevant skills, knowledge and experience. As the professional accountant enhances
their skills, knowledge and experience, they enhance what they can offer society, and in particular
their readiness to be leaders in society.

As mentioned earlier in this module, the skills, knowledge and experience of a professional
accountant can be broken into the two key categories of technical skills and soft skills.

Both are vitally important and it is a mistake to concentrate on one at the expense of the other.
Professional capabilities are not simply skills, knowledge nor experience on their own. Rather,
professional capabilities arise over a relatively long timeframe through the steady accumulation
of all the relevant skills, knowledge and experience. There is no clear definition of when we
become professional, but arguably an individual can be regarded as professional when that
individual has sufficient capabilities to make complex and difficult professional judgments and
effectively advise others in respect of those judgments.
 Study guide | 55

Technical skills, knowledge and experience

From your study and employment, you will have a good understanding of the technical skills,
knowledge and experience (TSKE) that relate to general accounting activities, including
(but not limited to):
• financial reporting;
• taxation;
• finance and financial analysis;
• management accounting;
• relevant IT and technical communications knowledge; and
• an understanding of regulations, laws and company structures.

MODULE 1
The degree of TSKE required varies according to the tasks being undertaken by the accountant.
For example, an accountant functioning as a company secretary (called ‘public officer’ in some
jurisdictions) for a publicly listed entity must have a strong awareness of financial reporting
requirements and the local stock exchange listing rules.

Some accountants will have TSKE regarding internal audit, external audit and forensic
accounting. Technical requirements will depend on the field of work and the level of detailed
skills and knowledge required.

Soft skills, knowledge and experience

CPAs must also possess extensive soft skills, knowledge and experience (SSKE).

SSKE is primarily (some might say is all) about people and related issues. More specifically,
professional accountants need well-developed social skills and capabilities, including the
ability to:
• listen;
• understand complex and difficult issues and their role in the decisions and information
needs of others;
• communicate effectively (both verbally and in writing);
• discuss and debate without hostility—a vital aspect of interpersonal skills;
• persuade and convince based on logical and reasonable argument—another vital aspect
of interpersonal skills and an important part of leadership;
• manage time;
• meet deadlines; and
• build and improve our capabilities.

TSKE and SSKE—career perspectives

CPAs are subject to formal continuous professional development (CPD) learning requirements.
CPA Australia recognises both TSKE and SSKE activities as satisfying CPD requirements,
acknowledging that lifelong learning for both activities is vital for professional accountants.

Professional career progression, advancement and promotion within employment, along with
higher status in the profession (as a person becomes a CPA and then an FCPA), are all functions
of demonstrated improvement in TSKE and SSKE capabilities.

Staff from the University of North Carolina (Blanthorne, Bhamornsiri & Guinn 2005) reported that
TSKE are relatively more important in the early years of professional accountants’ actual careers
but, as time passes, and TSKE and SSKE improve and as some CPAs move to partnership (and/or
senior management) level, SSKE becomes relatively more important in career progression.
 56 | ACCOUNTING AND SOCIETY

In fact, Blanthorne, Bhamornsiri and Guinn (2005) found that CPA firms, when selecting
candidates for early career promotions, regarded technical skills of candidates as the most
important evaluation criterion (ranked first on a list of six ranked appointment criteria).
However, when seeking promotion later in their careers (promotion to partnership level),
the research found that technical skills moved to fifth place in the six items.

Further, the ‘interpersonal’ soft skill moved from its previous third place (for early career
appointments) to first place, with leadership in second place and communication in third place
for partner appointments.
MODULE 1

This demonstrates that accountants need to have a strong foundation of technical skill, but that
building relationships, interacting with staff and clients, and leadership skills are required to
further their careers.

Reading 1.2, ‘How “soft skills” can boost your career’, is from 2005 and is still relevant. It is valuable
in further discussing attributes of soft skills and how these can be important in successful career
development. You should study this now.

Career guidance system

CPA Australia has developed a career guidance system which assists members to evaluate
their professional development needs based upon their interests, the requirements of their role,
and their long-term career goals. Members can assess their current level of competence in the
desired areas and, with the aid of the assessment tool, determine the appropriate professional
development tools to enable them to achieve their goals.

The Career Guidance System identifies four skill areas:

• technical skills;
• business skills;
• personal effectiveness skills; and
• leadership skills.

The Career Guidance System provides an interactive tool on the CPA Australia website at:
cpaaustralia.com.au/cps/rde/xchg/cpa-site/hs.xsl/career-guidance.html.

As you use the tool you should consider:

• What are your greatest strengths?
• What areas of weakness do you wish to improve?
• What types of roles you would like to perform in the next five years?
 Study guide | 57

Review
In this module, we have explored what it means to be a professional accountant. We also
considered the signals that exist when professions are under challenge. More importantly,
we learned that both as individuals and as part of the overall profession of accounting, we have
a responsibility to respond to these challenges. It is our responsibility to ensure that society
genuinely benefits from our profession.

Throughout this module, it has been apparent that professional accounting capability extends far
beyond the important tasks of preparing accounts and financial reporting. We observed various

MODULE 1
illustrations of accounting as a social force. Accountants must be aware of professional ethical
responses required in a variety of detailed circumstances. These include how we should:
• deal with staff and staff problems;
• build and maintain our soft and technical professional capabilities and ethical responses in a
variety of challenging workplaces;
• be able to analyse and interpret complex financial information, even in contexts of change,
uncertainty and ambiguity; and
• advise managers and build value.

As always, we must conduct ourselves appropriately so that our professional role and reputation
are never diminished.

We learned what it is to be a professional by looking at the attributes of a profession. Inevitably,

professions will be subject to regulation and external control to greater and lesser degrees,
and professions must be willing to be their own harshest critics and impose standards on
themselves that are higher than those imposed from the outside. In line with this, we also
explored the co-regulatory nature of the accounting profession, and the responsibilities not just
to regulators and society, but to the profession as a whole. We have discussed the processes
CPA Australia has in place by to ensure its members meet the required standards of professional
conduct and the measures it has to monitor and manage members’ conduct.

The real task is to remain constantly professional in all circumstances. To do this, professional
accountants must be enquiring, innovative, measured and courageous in making correctly
balanced professional judgments. More than anything else, it is the consistent ability to make
good professional judgments in the right way that should be our fundamental goal.

By understanding all that accountants do and consistently acting professionally, we will ensure
that our many various roles bring value to society.
MODULE 1
 Reading 1.1 | 59

Readings
READINGS

MODULE 1
Reading 1.1
Profile: Roel van Veggel—the sweet sounds of success
International Federation of Accountants

An innovative professional accountant in business’ focus on profitability enables his world

renowned CEO to concentrate on vision and leadership.

When Roel van Veggel was asked to consider working for globally renowned Dutch violinist and
conductor André Rieu, his immediate reaction was, ‘Does he want me to carry his violin?’

Actually, Van Veggel’s finely tuned finance and accounting skills attracted Rieu’s interest.
Their ensuing collaboration during the past seven years has helped Rieu focus more energy on
performing for audiences, leading the highly talented musicians in his orchestra and conceiving
new ways to make classical music more accessible to his fast‑growing worldwide audience.

‘André has a unique vision with regard to where he wants to take his orchestra and music,’
says Van Veggel, André Rieu Group CFO. ‘It’s my role to inform him about the risks involved in
executing his vision and to identify ways to manage these risks.’

Because he successfully fulfils his primary (CFO) responsibilities, Van Veggel’s role has expanded
beyond the traditional boundaries of the chief financial officer in a mid-sized enterprise (ME).
In addition to serving as a trusted advisor to his CEO and the business, he has taken on business-
executive duties by managing the fastest-growing and largest source of revenue, concert touring.
These combined activities explain why Van Veggel possesses perhaps the most musical title
among any professional accountant in business (PAIB): ‘CFO and Concert Tour Director.’
 60 | ACCOUNTING AND SOCIETY

Traditional background, untraditional experience

Despite his untraditional title and responsibilities, Van Veggel’s early career is textbook
PAIB. After graduating from Tilburg University in The Netherlands and earning his public
accounting certification, he joined PricewaterhouseCoopers. He credits the varied challenges
he encountered auditing very large organizations—a government-owned telecommunications
company during its transition to a publicly listed company, and the largest pension fund in
The Netherlands—with providing ideal preparation for his later work in mid-sized companies.

Van Veggel then joined a private importer of Swiss watches as its finance director. The move was
well-timed: the company’s growth during Van Veggel’s tenure resulted in its becoming part of
MODULE 1

the Swatch Group, one of the largest watchmakers in the world. During his eight years with the
Swatch Group, Van Veggel again accumulated a variety of PAIB experience, including financial
reporting, post-acquisition integration and staffing management activities, that helped tune
him up for his current role.

When Rieu recruited Van Veggel, the André Rieu Group was already a thriving company
contending with the same challenges that most fast-growing MEs encounter. Rieu’s talent,
success and rocketing global popularity helped sell more than 23 million CDs since his
breakthrough album, ‘From Holland with Love,’ was first released in 1994. His concerts currently
rank as the 16th top-grossing act in the world, and he stages about 120 concerts annually.
The quick growth required new staffers and new investments to support a heavier touring
schedule; however, accounting and some other support processes were struggling to keep
pace. Van Veggel was hired to instill more sophisticated financial management capabilities and
controls in the organization.

‘I joined the company, in large part, because it was completely unique,’ he recalls. ‘You don’t
see anything like it in the accounting textbooks. And I soon realized that you can create your
own job. You’re expected and encouraged to look for potential needs throughout the company;
if you see a challenge you can address, you pick it up.’

One of the challenges that provided the greatest allure to Van Veggel was an issue that
commonly confronts finance executives in fast-growing entities: injecting greater finance and
accounting discipline into managing growth, but doing so without stifling the founder’s vision,
creativity and success.

Building a factual foundation

Establishing greater control and accountability begins with fact-based decision making, and facts
require numbers.

‘So many mid-sized companies become successful because the founder has a great idea that
really takes off,’ explains Van Veggel. ‘When the company just starts out, the founder hires a
handful of people to help with the details. All of a sudden, they have a mid-sized company,
yet the same people are doing the accounting. And now they have a range of challenges that
they did not anticipate when they joined the company.’

His first move after he came aboard was to revamp the organization’s financial information
systems. The bulk of the existing accounting department’s time and energy was devoted to
accounts payable—processing the invoices and cutting checks. A more sophisticated finance
and accounting system would equip the business with greater visibility into its costs and revenue.
The company’s revenue comes from three sources: touring, CDs and video specials that it sells
to television stations and releases on DVD.
 Reading 1.1 | 61

While the company understood that touring represented its largest source of revenue, Van Veggel
wanted to gain a far more detailed understanding of what drove revenue and costs. ‘We were not
really focusing on what a concert costs, and that is our core business,’ he explains. ‘I changed the
entire system so it could follow what was truly happening and inform us where our costs were,
how we could save money and what it would cost us to expand into new markets.’

Second, Van Veggel beefed up the accounting department by hiring specialists. ‘Just as a
Dutch soccer coach always takes his best players along to a new club, I took my best accounting
players with me to my new company,’ he notes. Those professionals included a payroll specialist
(to help manage the complexities of compensating international musicians), an accounts payable

MODULE 1
specialist (whose expertise extends to credit and collections) and a controller (who can manage
the accounting department in The Netherlands while Van Veggel executes his new business
responsibilities around the world).

Third, he sought to open lines of communications on two fronts. Inside the company, he worked
to relay the importance of financial management and controls throughout the company. ‘At any
fast‑growing company, the sales team can sell a ton of wonderful products, but if the finance
team is not collecting the money from those sales, you have a major problem,’ Van Veggel notes.
‘That’s why I think communications within companies represents one of the most important aspects
of a CFO’s job.’ He also strengthened relationships with important external sources, including
auditors and tax authorities in the countries and localities where the company operates. ‘This is
not easy to do when you’re an orchestra that performs in numerous countries,’ he explains.
‘There are so many different regulations and rules that affect us. That’s why it’s important to let
the tax authorities know they have a good contact person within the organization.’

Fourth, and perhaps most important, Van Veggel sought to help Rieu focus less on administrative
issues while providing greater support with regard to strategic decision-making activities.
That objective required Van Veggel to establish credibility with Rieu and his new management
colleagues. ‘At a certain level, the organization and its leaders thought, ‘What do we need him
for? We pay our bills on time,’’ explains Van Veggel. ‘So, as soon as you’ve put in the systems,
processes and people that let you get much more detailed information, you have to show them
the value of your management information.’

To demonstrate the value of his work, Van Veggel immediately showed Rieu which countries
and venues provided higher touring profits and which costs were creating the greatest drag on
profits. He also produced highly accurate forecasts. Equipped with the information, the company
took action. It lowered transportation costs by flying less frequently and upgrading its tour
busses. It increased the number of concerts it performed each year to increase the returns on
its overhead.

And, in an even bigger move, André Rieu Group began promoting its own events in the U.S.
in 2003 since Van Veggel’s analysis indicated that the company could lower costs and increase
concert attendance by doing so.

In addition to his musical talent, Rieu ‘is a superstar in terms of assembling his orchestra and
leading them on a daily basis,’ Van Veggel points out. ‘Our team of 130 people really operates
as a family. Everyone one of us truly enjoys what we do, and that’s because of André’s vision and
leadership.’ By having to spend less time in the back of the office, Rieu can dedicate more energy
to leading his team and performing.
 62 | ACCOUNTING AND SOCIETY

Beyond finance and accounting

As a result of these decisions, all of which were fueled by the information Van Veggel’s
improvements delivered, the company’s profits have grown significantly in the past several years.
So, too, has Van Veggel’s role within the company.

After Van Veggel dedicated his first two years with the company to bringing its finance and
accounting capabilities in line with its growth, Rieu asked him to lead the U.S. operations.
While he maintains his CFO title and responsibilities, New York-based Van Veggel also became
responsible for devising and executing André Rieu Group’s U.S. touring. The work includes
negotiating agreements with concert venues and television stations—Rieu’s concerts have been
MODULE 1

televised on Public Broadcasting Service (PBS) stations throughout the U.S.

‘Touring is our main business,’ he notes. ‘It exerts such a strong influence on our finances
that I need to be closely involved with it.’ This involvement recently expanded: he is now also
responsible for managing all contract negotiations with promoters around the world.

While Rieu may not have wanted Van Veggel to carry his Stradivarius, he has enjoyed the rewards
of asking his PAIB do almost everything else.

Key lessons

• PAIBs are expected to establish greater finance and accounting rigor to more effectively manage
growth without stifling the founder’s vision, creativity and success.
• Help the organization conduct administrative matters more efficiently so it can focus more resources
on executing its vision.
• Communications within companies represent one of the most important aspects of a CFO’s job.
• Financial information systems should report what is truly happening and alert PAIBs to expansion and
cost cutting opportunities.
• Once PAIBs have put in place new information systems, processes and people, the value of those
investments should be clearly demonstrated to the entire management team.
• PAIBs within mid-sized enterprises are expected and encouraged to look for potential needs
throughout the company; if you see a challenge you can address, seize it.

Source: International Federation of Accountants 2008, ‘Profile: Roel van Veggel—The sweet sounds
of success’, The Crucial Roles of Professional Accountants in Business in Mid-Sized Enterprises
(extract), IFAC Information Paper, Professional Accountants in Business Committee, September,
New York, pp. 48–51. Used with permission of IFAC.
 Reading 1.2 | 63

Reading 1.2
How ‘soft skills’ can boost your career
Jessica Jarvis

Accountants may be focused on their qualifications, but don’t neglect soft skills. These are
becoming increasingly sought after by employers, and could give you that extra lift up

MODULE 1
the career ladder.

Most of us manage to arrange holidays and a social life around work, but the planning seems to
go out the window when it comes to reviewing our career paths.

Perhaps you have aspirations of progressing to the next level, but no real idea of how to do it or
where to start. Perhaps you’re simply lacking the motivation to do anything about it. Whatever
the situation, if career progression is something you really want to achieve, and you know where
you’d like to go, the next step is knowing what employers want from you.

A CIPD Guide to Career Management points out that few careers adhere closely to the idea
of upward progression through a hierarchical sequence of roles. Some involve sideways moves
within an organisation, or frequent moves in or out of employment in a number of different
companies. Or even phases of self-employment, temporary work and permanent employment.

So, it is important to think about transferable skills.

Qualifications are vital to building a successful career in most professions, but it is also
important to remember the significance of basic skills and talents that do not necessarily
require formal training.

Employers are increasingly interested in essential skills such as communication and interpersonal
skills, time management and even assertiveness.

People can develop their careers by accumulating and transferring job skills from one context to
another, by broadening the range of expertise they apply in each successive job, or by constantly
seeking out novel and challenging situations.

Therefore, anyone who is worried about giving the impression of being a ‘job hopper’ can
actually use the experience to highlight the skills they have developed from a variety of sources.

These skills may seem so basic they are often overlooked, but employers are looking for more
than a qualification, and highlighting your soft skills may make the difference between two
equally qualified candidates.

Time-management
Demonstrating good time management skills means controlling and using your time as efficiently
as possible. There are a number of benefits to be gained from effective time management.

Greater control of your time, improved productivity, an increase in free time, and higher visibility
among peers and superiors can all be achieved by introducing simple techniques and habits such
as effective diary keeping and organised delegation.
 64 | ACCOUNTING AND SOCIETY

Listening skills
Good communication is a two-way process, and listening is an essential aspect of this. Listening
is an activity that is often taken for granted as it is assumed we all do this as part of a natural
communication process. However, listening is more than just hearing what others are saying.

Real listening means giving your full attention, and really understanding what is being said.
The ability to listen well to others often means that they will reciprocate and listen to you—
and respond when you are speaking.
MODULE 1

Assertiveness
Assertive skills can bring a number of benefits to the individual and, therefore, the organisation.
Handling confrontation will become easier and produce satisfactory results, stress will be reduced
and self-confidence increased, behaviour will be more tactful (which will improve image and
credibility), and individuals will be able to disagree more convincingly in a way that maintains
the effectiveness of the relationship.

Assertiveness can sometimes be confused with aggression, so it is important to strike a balance

and consider your approach carefully. How people feel about us is a direct result of the way we
behave towards them, so the more positive that behaviour, the more valued we are as a boss,
colleague, member of staff, or friend.

Negotiation and influencing

Being able to negotiate and influence decisions is an excellent skill to possess. The ability to
influence people, and do so positively, is something that most of us could do better. Influencing
can be achieved through manipulative means.

However, influencing positively will help you achieve more of what you want and build relationships
based on openness, trust understanding and mutual respect. It also boosts personal credibility.
This is a skill that involves both good listening and assertiveness; thereby improving your abilities
in a variety of communication skills areas.

These ‘softer’ skills are all highly transferable to any organisation or role, and at all levels. So it is
important to demonstrate them through your work achievements, abilities and personal qualities.

Thinking about them will help you to decide what you are good at and what you need to develop
further. Looking at your soft skills will also help you to identify some realistic career options,
and work out what steps you need to take to start moving your career in that direction.

Source: Jarvis, J. 2005, ‘How “soft skills” can boost your career’, AccountancyAge, 28 April,
used with permission, accessed October 2015, http://www.accountancyage.com/aa/feature/
1789970/how-soft-skills-boost-career.
 Suggested answers | 65

Suggested answers
SUGGESTED ANSWERS

MODULE 1
Question 1.1
Many authors’ views are described in Module 1; the variety of views shows that there is a wide
range of interpretations about the actions of professional accountants in terms of serving
the public interest. At one end are those whose motives are selfish, and whose overarching
desire is to establish a monopoly group that maintains a position of prestige and power
within the community. At the other end are those who believe that many professionals have
a genuine desire to contribute to society, without the need for significant monetary reward or
political power.

In such a large profession, it is likely that there are many individuals who fit into the different
categories that have been described. While we often hear about the disgraceful and/or harmful
actions and outcomes from corporate collapses and failures, there are many untold examples of
selfless efforts and sacrifices that provide a significant contribution to the community.

Question 1.2
The following examples illustrate many situations where accountants might apply professional
judgment, although this list is not exhaustive. Your answer may have included four of the following:
• making decisions about workflows and staff recruitment needs;
• making staff selection decisions and choosing accounting team member roles;
• advising clients on business decisions;
• advising managers on accounting information relevance for business decisions;
• identifying environmental cost parameters and advising management of them, and devising
reporting mechanisms;
• planning for all types of professional assignments;
• interpreting accounting standards and other professional pronouncements;
• identifying business and audit risks;
• making assumptions in forecasts and estimates;
• placing quantitative assessments on future liabilities for clients and others;
• providing overall opinions on the adequacy of internal control, the reliability of accounting
records and the sufficiency of audit evidence;
 66 | ACCOUNTING AND SOCIETY

• drawing conclusions on the going concern assumption in relation to a business;

• evaluating materiality levels for the presentation of financial reports;
• relying on management representations;
• exercising judgment on the adequacy of non-financial information to be disclosed;
• setting and revising budgeting parameters;
• estimating levels of activities;
• developing and assessing costing methods; and
• assisting in the strategic directions of clients.
MODULE 1

Question 1.3
This situation highlights the importance of implementing an appropriate system of quality
control. Policies and procedures developed by individual firms need not be complex or time-
consuming to be effective. However, APES 320 Quality Control for Firms requires firms to
address each of the following elements of a system of quality control:
• leadership responsibilities for quality within the firm;
• ethical requirements;
• acceptance and continuance of client relationships and specific engagements;
• human resources;
• engagement performance; and
• monitoring.

Although we have not yet studied ethics (see Module 2), it is useful to assess your current
understanding of ethics. You may like to review this question and solution after completing
Module 2 to identify how your study of that module changes your approach to the question.
Ethical requirements are featured in the Compiled APES 110 Code of Ethics for Professional
Accountants and, as we shall see in more detail in Module 2, they address the fundamental
principles of professional conduct:
• integrity;
• objectivity;
• professional competence and due care;
• confidentiality; and
• professional behaviour.

Policies and procedures must be in place to identify and evaluate circumstances and relationships
that create threats to compliance with the fundamental principles. Appropriate action must be
taken to eliminate or reduce these threats to such a level that compliance with the fundamental
principles is not compromised.

Therefore, professional accountants must identify any actual and/or perceived conflicts of
interest, not only between their clients but also between their clients and their employees and
to manage these conflicts in accordance with any ethical requirements. The firm’s personnel
already have an obligation to observe at all times the confidentiality of information acquired as
a result of professional and business relationships and not to disclose such information without
proper and specific authority from the client or employer or unless there is a legal duty to
disclose. Nonetheless, in this case, it would have been prudent to ensure that the employees
providing bookkeeping services were also free of any conflicts of interest.
 Suggested answers | 67

Policies and procedures addressing the ethical requirements need to be communicated to all
personnel and reinforced by the firm’s leaders and through education and training, monitoring
and a process for dealing with non-compliance. It is important that policies and procedures
that address ethical requirements are continually reviewed and take into account changes
in circumstances, including staff changes, client acquisitions and structural changes such
as mergers.

The trust and confidence of clients are crucial to any ongoing professional relationship,
and avoiding real, potential or perceived conflicts of interest builds this trust. It is, therefore,
necessary for professional accountants to ensure that there are appropriate policies and

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procedures to address their clients’ concerns and to respond to clients’ concerns to restore
any loss of trust.

Question 1.4
There are many roles that a CPA may fill in relation to an SME. The question refers to a
professional accountant in business (PAIB) who is ‘the accounting professional working in an
SME’. This reasonably can be interpreted to mean a full-time employed accountant who is
working as an accountant assisting managers and not working as another form of manager.

You might have mentioned any four of the following roles for a professional accountant working
as an employee of an SME:
• provide detailed management information reporting, budgeting and forecasting etc.;
• provide relevant ‘consultation’ advice to managers regarding value for customers and
shareholders;
• take responsibility for developing long-term and short-term budgets and ensure they are
effective in achieving motivation and value;
• provide formal accounting documentation including general purpose financial reports and
relevant board reports;
• undertake all formal reporting and compliance activity including in relation to company
regulation and tax regulation; and
• take charge of needs relating to tax planning and advisory work.

Question 1.5
From careful reading of Reading 1.1, it is apparent that:
• Roel van Veggel acts as CFO and has a clear understanding of the business and its key revenue
and cost activities, and the strong accounting team that he built is providing assistance.
• He takes control of risks, freeing Andre Rieu (the person) to concentrate on his music and
related skills to build the overall business.
• Roel has become a manager beyond his CFO role and helps Rieu ‘focus less on administrative
issues while providing greater support about strategic decision-making activities’.
• Roel has also taken steps to ensure that communication within the company is at a very
high standard.
 68 | ACCOUNTING AND SOCIETY

Question 1.6
Some SMEs seek business advice extensively from external accountants; however it is apparent
that many SMEs are not yet taking this approach. The challenge for the profession is to engage
with SMEs so that the role of external accountants as business advisers (doing far more than
traditional bookkeepers, accountants and tax return agents) is better understood by all SMEs.

IFAC (2010) identifies that researchers have found ‘fortress mentality’ SME operators who simply
do not know how accountants may function as their valued business advisers. Other researchers
have identified that business advising is growing in range and quality. Obviously, SMEs operated
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by those with a fortress mentality need to be better informed about the range and quality
of external business advice from accountants. IFAC also identifies that as a matter of logic,
SMEs need external business advice and that change needs to occur. IFAC demonstrates that
change is occurring (in the article, they highlighted the business advising role of in-house
accountants) and that more change is needed. It is apparent that external accountants must learn
how to better communicate with clients and to ensure that SMEs with no in-house accountants
do not suffer by not having access to good business advice. External accountants must learn to
depict their role as being team players with those who manage SMEs and ensure that their role in
value creation is understood.

The following summary explains how IFAC (2010) discusses the issue.
• Researchers named by IFAC identified that some owner-managers want to ‘go it alone’ rather
than expose their problems to outsiders, depicting this as a ‘fortress enterprise’ mentality.
Owners displaying this attitude wanted to hide their weaknesses and typically they would
justify their approach by saying that outside advice was ‘irrelevant or poor.’ As they were not
using outside advice anyway—how would they know?
• Other researchers have pointed out that the ‘range and quality of advice available’ in relation
to business advising from external advisers is growing. This has been a derivative of the work
of external advisers helping SMEs to meet regulatory requirements and can be seen in the
increased number of advisers and the increasing advisory skills in relation to ‘regulatory and
day-to-day and strategic challenges’.
• ‘A priori’—or ‘based in logic’, it is apparent that SMEs do require external advice because
many smaller entities (much smaller than ‘Andre Rieu’ for example) will have no internal
accounting staff. Much advice has been in relation to meeting regulatory requirements but
demand is also evident in relation to business ‘monitoring and quality control’. Importantly,
IFAC states that ‘this is not merely confined to financial compliance’. While it is clear that
a compliance bias has continued, external advice and support have been sought from
accountants (as ‘general business advisers’) in relation to ‘employment, health and safety
and environmental regulations’.
 Suggested answers | 69

Question 1.7
The four issues raised are:
• creative accounting;
• poor audit quality;
• lack of auditor independence; and
• financial accounting distortions.

One overarching reason that the profession may lose credibility from these problems is they can
all be linked to acting in a self-interested way that ignores serving the public interest.

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Another reason is linked to the interpretation that accountants are not as technically skilled and
capable as they claim. This is especially the case when issues of poor audit quality are raised.

Lack of auditor independence can lead many people to doubt the usefulness or worth of audits.
Instead of being perceived as a public service, audits may be seen as a waste of time and only
performed to generate extra fees for accountants.

Strategies for dealing with these issues may include more restrictive accounting standards and
rules to minimise creative accounting, and greater penalties for inaccurate financial reporting,
including fines and jail terms.

One proposed solution for addressing auditor independence is to have auditors appointed to a
particular company by an independent body, rather than by the company itself. This should help
avoid the inherent conflict of interest that exists with the current way auditors are appointed.
MODULE 1
 References | 71

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