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- 1. Chapter 4: Code of Ethics for the Accountancy Profession Business Ethics & Corporate Governance Dr TAN Shen Kian
- 2. Accountancy Profession Malaysia's accounting profession plays a vital role in the country's economy and business sector. Professional accountants serve various functions, including auditing, financial reporting, taxation, and advisory services. Ethics form the foundation of the accounting profession, ensuring the integrity and credibility of financial information. In Malaysia, ethical conduct is particularly crucial due to the following factors
- 3. Role of Professional Accountants Provide Financial Information and Ensuring Accuracy and Transparency Ensures Alignment of Financial Reporting Practices with MASB Assisting In Decision- making Processes Assist Directors in Fulfilling Obligations Related to Financial Management Governance and Integrity Implement and Monitor MCCG Practices
- 4. Concept of Blind Loyalty Blind loyalty can be a challenging ethical issue faced by professional accountants in Malaysia. It refers to a situation where an accountant unconditionally supports and remains loyal to their employer or client, without considering the ethical implications or potential conflicts of interest that may arise. Blind loyalty can create ethical dilemmas for professional accountants. They may find themselves torn between their loyalty to their employer or client and their professional duty to act in the public interest, uphold ethical standards, and maintain their independence and integrity.
- 5. Concept of Blind Loyalty: Acts The Companies Act 2016: Malaysian Institute of Accountants (MIA) By-laws Whistle-blower Protection Act 2010
- 6. Fraud & White-collar Crime Fraud refers to deliberate deception or manipulation of financial information with the intent to gain an unfair advantage, cause harm, or mislead stakeholders. White-collar crime refers to non-violent offenses committed by individuals or organizations in business or professional settings, typically involving financial or economic motives.
- 7. Fraud & White-collar Crime: Impact Financial Losses Reputational Damage Market Integrity
- 8. Fraud & White-collar Crime: Role in Combat Fraud Identify Red Flags:
- 9. Accountancy Profession: Acts & Policies The Companies Act 2016 Securities Commission Act 1993 Malaysian Anti- Corruption Commission Act 2009:
- 10. Dealing with Conflict of Interest Auditor Independence Insider Trading Employment & Business Relationship
- 11. Dealing with Conflict of Interest: Measurement Disclosure & Transparency Professional Codes & Guidelines Governance & Regulatory Frameworks
- 12. Dealing with Conflict of Interest: Acts • Section 176: empowers the SC to establish rules and guidelines for market intermediaries. Capital Markets and Services Act 2007 (CMSA): • Section 2.1: Duty of Directors (Page 8): highlights the duty of directors to act in the best interests of the company and avoid conflicts of interest. Malaysian Code on Corporate Governance (MCCG), 3rd Ed: • Section 17: Offense of Giving or Accepting Gratification. • Section 23: Offenses Relating to Public Bodies. Malaysian Anti-Corruption Commission Act 2009 (MACCA): • Do not have specific sections and pages, address conflicts of interest within the overall framework of professional ethics, conduct, and practice. Malaysian Institute of Accountants (MIA) By-laws:
- 13. Public Expectations of Professional Accountants Integrity and Ethical Conduct Professional Competence and Due Care Independence and Objectivity Confidentiality and Data Protection Compliance with Laws and Regulations Ethical Decision- Making and Professional Judgment
- 14. Sources of Ethical Guidance for Professional Accountants
- 15. IFAC Code of Ethics for Professional Accountants
- 16. Effective Implementation of the Code of Conduct Leadership and Tone at the Top Clear Policies and Procedures Training and Education Monitoring and Enforcement Reporting Mechanisms
- 17. Effective Implementation of the Code of Conduct: Benefits of Effective Implementation Cultivate a culture of integrity and ethical behaviour Enhance employee morale, trust, and loyalty Minimise the risk of fraud, misconduct, and unethical behaviour Safeguards organisation's reputation and maintain stakeholder trust.
- 18. Effective Implementation of the Code of Conduct: Examples of Best Practices Regular communication and reinforcement of ethical standards through newsletters, workshops, or town hall meetings Incorporating ethical considerations into performance evaluations and recognizing ethical behaviour Establishing ethical committee or appointing ethical officers to oversee compliance and provide guidance Conduct periodic assessments and reviews of the code’s effectiveness to identify areas for improvement
- 19. Case Study Scenario XYZ Sdn Bhd is a well-established manufacturing company that has been experiencing declining profits and cash flow problems. As their external accountant, you have been working closely with the company's management team to address these issues. However, you have recently discovered some alarming information: You notice that the company's CEO, who is also a major shareholder, is pressuring you to manipulate the financial statements to present a more favorable picture of the company's financial health. The CEO insists that this is necessary to secure additional funding from investors. However, you are concerned about the ethical implications of misrepresenting the company's financial position. During your analysis, you uncover evidence suggesting fraudulent activities within the company. Specifically, you suspect that the CEO and other senior executives may be involved in embezzlement, inflating revenues, and understating expenses. These activities are aimed at artificially boosting the company's financial performance and deceiving stakeholders. You realize that your firm also provides consultancy services to the same manufacturing industry and has several other clients who may be potential competitors or business partners of XYZ Sdn Bhd. This creates a conflict of interest as your firm may have access to sensitive information that could compromise the confidentiality and integrity of the client's data. As a professional accountant, you are aware of the public's expectations regarding your ethical conduct, integrity, and responsibility to uphold the profession's standards. The public places trust in your expertise and expects you to act in the best interest of your clients, shareholders, and society at large.
- 20. Case Study Scenario: Questions 1. How would you apply the concept of blind loyalty while considering your professional obligations and ethical responsibilities? 2. What steps would you take to address the suspected fraudulent activities within XYZ Sdn Bhd? How would you balance your duty to report these activities and maintain client confidentiality? 3. How would you manage the conflict of interest arising from your firm's involvement with other clients in the same industry? What actions would you take to ensure the integrity and independence of your work with XYZ Sdn Bhd? 4. Considering the public expectations of professional accountants, how would you ensure transparency, integrity, and accountability in your handling of this ethical dilemma? How would you communicate and engage stakeholders to maintain their trust and confidence?
- 21. End
Editor's Notes
- Providing Financial Information and Ensuring Accuracy and Transparency: Professional accountants are responsible for preparing and presenting financial statements that accurately reflect the financial position and performance of an organization. They adhere to accounting standards and principles such as the Malaysian Financial Reporting Standards (MFRS) issued by the Malaysian Accounting Standards Board (MASB). Malaysian Accounting Standards Board (MASB): MASB is responsible for developing and issuing accounting standards in Malaysia. It ensures the alignment of financial reporting practices with international standards, promoting consistency and comparability of financial information. Assisting in Decision-Making Processes: Professional accountants provide valuable insights and analysis to support strategic decision-making within organizations. They help management evaluate financial risks, assess the viability of investment projects, and develop effective financial strategies. Companies Act 2016: The Companies Act outlines the duties and responsibilities of directors, including the need for sound financial decision-making. Professional accountants assist directors in fulfilling their obligations related to financial management and reporting. Contributing to the Overall Governance and Integrity of Organizations: Professional accountants play a significant role in maintaining good governance practices and upholding ethical standards within organizations. They support the establishment of robust internal control systems, risk management frameworks, and compliance mechanisms. Malaysian Code on Corporate Governance (MCCG): The MCCG provides guidelines for corporate governance practices in Malaysia. Professional accountants contribute to the implementation and monitoring of these practices to ensure transparency, accountability, and ethical conduct.
- Some common ethical dilemmas related to blind loyalty in the Malaysian accounting profession include: Misrepresentation of Financial Information: Accountants may face pressure from their employer or client to manipulate or misrepresent financial information. Blind loyalty might compel them to comply with such requests, even if it compromises the accuracy, transparency, and reliability of the financial statements. This poses a significant ethical concern and violates professional standards. Conflicts of Interest: Blind loyalty can cloud accountants' judgment when faced with conflicts of interest. For example, if an accountant is responsible for auditing a company while simultaneously being a significant shareholder in that company, their loyalty to their personal financial interests may conflict with their duty to provide an unbiased and objective assessment of the company's financial position.
- The Companies Act 2016: The Companies Act in Malaysia provides guidance to professional accountants on their responsibilities and obligations. It emphasizes the need to act in the best interests of the company and its shareholders, prioritizing ethical conduct over blind loyalty to individual stakeholders or executives. This act sets a legal framework for accountants to make decisions that align with the public interest and corporate governance principles. Malaysian Institute of Accountants (MIA) By-laws: The MIA's By-laws play a significant role in guiding the ethical behavior of professional accountants in Malaysia. These by-laws highlight the importance of maintaining independence, objectivity, and integrity in accounting practice. Professional accountants are expected to exercise professional judgment and not be unduly influenced by the interests of their employer or client. Whistleblower Protection Act 2010: The Whistleblower Protection Act provides protection to individuals who report misconduct, including fraudulent activities, in the workplace. This act encourages professional accountants to fulfill their ethical duty by reporting any unethical practices they come across, even if it means challenging blind loyalty. It offers legal protection against retaliation for individuals who act in good faith to expose wrongdoing.
- In the field of accountancy, fraud and white-collar crime pose significant challenges to the integrity of financial information and the overall stability of businesses. Professional accountants in Malaysia play a crucial role in detecting, preventing, and addressing these illicit activities. Fraud refers to deliberate deception or manipulation of financial information with the intent to gain an unfair advantage, cause harm, or mislead stakeholders. White-collar crime refers to non-violent offenses committed by individuals or organizations in business or professional settings, typically involving financial or economic motives. Examples include embezzlement, bribery, money laundering, and insider trading.
- Impact of Fraud on Organizations, Investors, and the Economy: Financial Losses: Fraud can result in significant financial losses for companies, shareholders, and stakeholders. It can deplete assets, erode profits, and negatively impact investment returns. Reputational Damage: Organizations involved in fraudulent activities suffer reputational damage, leading to loss of public trust, decreased customer confidence, and a damaged brand image. Market Integrity: Fraud undermines the integrity of the market and erodes investor confidence. It hampers the fair and transparent functioning of the economy and can deter foreign investments.
- Professional accountants in Malaysia play a crucial role in combating fraud and white-collar crime. They utilize their expertise in financial analysis, internal controls, and risk management to: Identify Red Flags: Professional accountants are trained to recognize warning signs and indicators of potential fraudulent activities, such as inconsistencies in financial statements, unexplained transactions, or unusual patterns in financial data. Implement Effective Internal Controls: Accountants contribute to the design and implementation of robust internal control systems within organizations. These controls aim to prevent and detect fraudulent activities by establishing checks and balances, segregation of duties, and monitoring mechanisms. Conduct Forensic Investigations: Professional accountants may be involved in conducting forensic investigations to gather evidence, analyze financial records, and uncover fraudulent activities. They collaborate with law enforcement agencies, regulatory bodies, and legal professionals to ensure appropriate action is taken.
- Relevant Acts and Policies in Malaysia: The Companies Act 2016: The Companies Act in Malaysia establishes regulations for the formation, operation, and reporting requirements of companies. It emphasizes the need for accurate and reliable financial reporting to protect the interests of shareholders and stakeholders. Securities Commission Act 1993: The Securities Commission Act oversees the capital market in Malaysia. It emphasizes the importance of fair and transparent financial reporting by companies listed on the stock exchange. Malaysian Anti-Corruption Commission Act 2009: This act aims to combat corruption and bribery in Malaysia. Professional accountants play a crucial role in preventing, detecting, and reporting financial misconduct, including fraudulent activities and white-collar crimes.
- Conflict of interest is a situation where a professional accountant's personal or financial interests interfere with their professional responsibilities or obligations. Addressing conflicts of interest is crucial to maintain the integrity, objectivity, and independence of professional accountants in Malaysia. Let's delve deeper into this topic and explore how conflicts of interest can be managed effectively. In Malaysia, conflicts of interest can arise in various scenarios, such as: Auditor Independence: Professional accountants who serve as auditors need to maintain independence from their audit clients. This ensures unbiased and objective reporting of financial statements and safeguards the public interest. Insider Trading: Accountants who possess privileged information about a company may face conflicts of interest if they use that information for personal gain through buying or selling shares in the company. This is prohibited and constitutes insider trading, which is illegal in Malaysia. Employment and Business Relationships: Accountants may encounter conflicts of interest when their personal relationships, financial interests, or affiliations with other entities create potential biases or impair their ability to exercise professional judgment objectively.
- To address conflicts of interest effectively, professional accountants in Malaysia should adopt the following measures: Disclosure and Transparency: Accountants should disclose any potential conflicts of interest to their employers, clients, or relevant stakeholders. Transparent communication allows parties involved to evaluate the situation and make informed decisions. Independence and Objectivity: Professional accountants must maintain their independence, objectivity, and professional skepticism when fulfilling their duties. They should prioritize the interests of their clients, employers, or the public over their personal or financial interests. Professional Codes and Guidelines: Adhering to the ethical codes and guidelines provided by professional bodies like the Malaysian Institute of Accountants (MIA) is essential. These codes, such as the By-laws: Professional Ethics, Conduct and Practice of the MIA, outline the expected behavior and standards of professional accountants. Governance and Regulatory Frameworks: Organizations and regulatory bodies in Malaysia should establish governance structures, policies, and procedures to identify, manage, and mitigate conflicts of interest. This ensures that conflicts are addressed appropriately and promptly.
- Capital Markets and Services Act 2007 (CMSA): The Capital Markets and Services Act (CMSA) 2007 is the primary legislation governing the securities industry in Malaysia. While the CMSA does not explicitly mention conflicts of interest, it establishes the regulatory framework for the Securities Commission Malaysia (SC) to develop rules and guidelines to prevent and manage conflicts of interest in the capital market. Relevant sections that address conflicts of interest include: Section 176: This section empowers the SC (Securities Commission Malaysia) to establish rules and guidelines for market intermediaries, including provisions to prevent conflicts of interest. Malaysian Code on Corporate Governance (MCCG), 3rd Ed: The Malaysian Code on Corporate Governance (MCCG) provides guidance on best practices in corporate governance in Malaysia. It is periodically updated, and the specific sections and pages may vary across different editions. For reference, the details provided below are from the Third Edition of the MCCG (2012): Section 2.1: Duty of Directors (Page 8): This section highlights the duty of directors to act in the best interests of the company and avoid conflicts of interest. It emphasizes the importance of disclosure, abstention, and establishment of procedures to manage conflicts of interest effectively. Malaysian Anti-Corruption Commission Act 2009 (MACCA): The Malaysian Anti-Corruption Commission Act (MACCA) 2009 aims to combat corruption and bribery in Malaysia. While it does not specifically address conflicts of interest, it establishes the legal framework to address corrupt practices that can arise from conflicts of interest. Relevant sections include: Section 17: Offense of Giving or Accepting Gratification (Applies to public servants and individuals in the private sector involved in bribery and corrupt practices) Section 23: Offenses Relating to Public Bodies (Applies to public officers and individuals acting on behalf of public bodies) Malaysian Institute of Accountants (MIA) By-laws: The Malaysian Institute of Accountants (MIA) has its own set of By-laws, known as the By-laws: Professional Ethics, Conduct and Practice. These by-laws provide ethical guidance to professional accountants in Malaysia. While they do not have specific sections and pages, they address conflicts of interest within the overall framework of professional ethics, conduct, and practice. The by-laws emphasize the importance of independence, integrity, objectivity, and disclosure in managing conflicts of interest effectively.
- Integrity and Ethical Conduct: The public expects professional accountants to uphold the highest standards of integrity and ethical conduct. Accountants are entrusted with sensitive financial information and must demonstrate honesty, transparency, and fairness in their work. They are expected to act in the best interests of their clients, employers, and the public. Professional Competence and Due Care: Professional accountants are expected to possess the necessary knowledge, skills, and expertise to perform their duties competently. The public relies on them for accurate financial reporting, auditing, and financial advisory services. Accountants must continually update their professional knowledge and ensure that their work meets the required standards of quality and due care. Independence and Objectivity: Independence and objectivity are fundamental expectations of professional accountants. The public expects accountants to maintain independence from any undue influence or conflicts of interest. Accountants should provide unbiased and objective advice, free from personal or external pressures that may compromise their professional judgment. Confidentiality and Data Protection: The public places great importance on the confidentiality and protection of their financial information. Professional accountants have a duty to maintain strict confidentiality regarding client data and financial records. They should adhere to relevant laws and regulations governing data protection and privacy to safeguard the sensitive information entrusted to them. Compliance with Laws and Regulations: Professional accountants are expected to comply with applicable laws and regulations governing their profession. This includes adherence to financial reporting standards, auditing requirements, tax laws, and professional codes of conduct. Compliance ensures that accountants operate within the legal framework, maintaining the public's trust in the profession. Ethical Decision-Making and Professional Judgment: The public expects professional accountants to exercise ethical decision-making and professional judgment in their roles. They should prioritize the public interest, act in an unbiased manner, and consider the potential impact of their decisions on stakeholders. Accountants should also be transparent about any conflicts of interest and take appropriate actions to address them.
- By-laws: Professional Ethics, Conduct and Practice of the Malaysian Institute of Accountants (MIA): The Malaysian Institute of Accountants (MIA) has established the By-laws: Professional Ethics, Conduct and Practice. These by-laws outline the ethical responsibilities and professional obligations of accountants in Malaysia. They provide guidance on issues such as independence, integrity, objectivity, confidentiality, and professional competence. Professional accountants are expected to adhere to these by-laws in their day-to-day practices. Download via: https://mia.org.my/wp-content/uploads/2022/08/By-Laws-Amended-as-at-1-July-2022.pdf
- IFAC Code of Ethics for Professional Accountants: The International Federation of Accountants (IFAC) has developed a globally recognized Code of Ethics for Professional Accountants. While not specific to Malaysia, this code sets out fundamental principles of ethics that apply universally. The code covers areas such as integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. Professional accountants in Malaysia often refer to this code to guide their ethical decision-making. The IFAC Code of Ethics for Professional Accountants provides overarching ethical principles and specific requirements that professional accountants must adhere to. It covers topics such as independence, integrity, professional competence, confidentiality, professional behavior, and professional skepticism. Download via: https://www.ethicsboard.org/publications/2022-handbook-international-code-ethics-professional-accountants
- Code of conduct serves as a guide for ethical behavior, but its effectiveness relies on proper implementation and enforcement. Key elements for effective implementation of the code of conduct: Leadership and Tone at the Top: The commitment of top management in upholding ethical values sets the tone for the entire organization. Leaders should demonstrate ethical behavior, provide clear expectations, and promote a culture of integrity. Clear Policies and Procedures: Well-defined policies and procedures outline expected behaviors, ethical standards, and the consequences of non-compliance. They provide employees with a clear framework to make ethical decisions. Training and Education: Regular training programs and educational initiatives help employees understand the code of conduct, recognize ethical dilemmas, and develop the necessary skills to navigate them effectively. Training should be tailored to specific roles and include real-life scenarios. Monitoring and Enforcement: Establish mechanisms to monitor compliance with the code of conduct, such as internal audits, ethics committees, and regular assessments. Consistent enforcement of the code is crucial to maintaining accountability and addressing violations promptly. Reporting Mechanisms: Create confidential and accessible reporting mechanisms, such as hotlines or anonymous reporting systems, to encourage employees to report potential ethical breaches. Whistleblower protection policies should be in place to safeguard those who report in good faith
- How would you apply the concept of blind loyalty while considering your professional obligations and ethical responsibilities? As a professional accountant, it is crucial to prioritize ethical responsibilities over loyalty. The CEO insists is definitely disregarding the business ethic and focus on personal gain. On client side, they can secure funding from investor, on CEO side, he/she can secure business income. In this situation, although manipulate the financial statements will secure additional funding from investors. However, this is a cheating case. Manipulate report will lead investor for wrong decision making and cause trust issue to our firm. As the external accountant in-charge, I will be committed to white-collar crime. What steps would you take to address the suspected fraudulent activities within XYZ Sdn Bhd? How would you balance your duty to report these activities and maintain client confidentiality? I would gather substantial evidence to support my suspicions. This may involve conducting additional audits, reviewing financial records, and seeking advice from forensic accounting experts. While maintaining client confidentiality is important, it should not supersede my duty to report potential fraud. I would consult with my firm's ethics committee, seniors or legal department to determine the appropriate course of action, which may involve reporting the findings to the relevant authorities, such as the Malaysian Anti-Corruption Commission or the Securities Commission. If the CEO insists on unethical practices, I would escalate the matter within my firm not endorse any document consider reporting the issue to the appropriate regulatory authorities. How would you manage the conflict of interest arising from your firm's involvement with other clients in the same industry? What actions would you take to ensure the integrity and independence of your work with XYZ Sdn Bhd? I may propose my firm to transfer the responsibility for XYZ Sdn Bhd's engagement to another team member in other branches. implementing strict protocols to ensure the confidentiality and integrity of the client's data, for example of use code to replace customer real identity when having in-office conversation. limit PIC to attend meeting that will expose to their clients’ competitors, avoid any any actions or decisions from team that is handling competitors’ account. Considering the public expectations of professional accountants, how would you ensure transparency, integrity, and accountability in your handling of this ethical dilemma? How would you communicate and engage stakeholders to maintain their trust and confidence? I would show our internal policies and standards with my clients. I would inform my clients of our internal practices. I would share some real case study about handling conflict of interest with my clients I would tell my clients of my firms’ punishment history on those who commit to conflict of interest.