Common ethical dilemmas in small and medium practices

Feb 01, 2020

Shane McAleer writes:

“That would be an ecumenical matter!”

The Ethics Research Report, published by Chartered Accountants Ireland in January 2019, reported that “94% of respondents have ‘observed or encountered’ some level of unethical behaviour during their professional career”.

Due to the nature of their business, members working in practice can be more exposed to certain ethical dilemmas. In my experience, the following are two typical dilemmas that can arise and, unless appropriately managed, may potentially lead to unethical behaviour.

Business & professional client relationship vs close personal friendship

Over time, practitioners can develop a good professional relationship with their client. On some occasions this can develop into a closer personal friendship which, in some circumstances, can expose the practitioner to a threat to their professional ethics. The level of threat can vary. For example:

  • Acting for two clients, both friends of the practitioner, on opposite sides of the same transaction can present a greater threat to independence (breach of objectivity) than perhaps having two bookkeeping clients who happen to be competitors
  • Casually discussing a client’s affairs over a drink with a mutual friend can present a breach of confidentiality.

There are safeguards in the Code of Ethics, or the Ethical Standard for Auditors, to help manage these. The ultimate safeguard is resignation, but only insofar as the threat arises between the client and the practitioner. Where the misconduct arises through an action of the client, then this can lead to specific professional responsibilities, e.g. whistleblowing or reporting suspicious transactions under Anti-Money Laundering legislation. Such scenarios can present an ethical dilemma where the practitioner is torn between the value of friendship and their professional obligations. For some, the dilemma can deepen where the client pleads for discretion. This segues to another typical dilemma, below.

Expectations to deliver vs Undue pressure/influence from the client or management

Situations can arise where practitioners are put under undue pressure/influence from the client to “turn a blind eye” on certain matters. This pressure may also come from management within the practice.

In my experience as an insolvency practitioner, I have come across scenarios in companies where a potential ethical threat existed for the practitioner previously advising or auditing the company.

In one scenario, a sole practitioner provided audit and tax advice to a large family company for many years. There was a good relationship with the client, given that the client had followed from a firm where the practitioner had previously worked. Over time, the owner/director amassed a significant director’s loan. The practitioner was aware of the loan but for several years it was not disclosed correctly in the accounts. The relevant taxes associated with the loan were not submitted.

In another scenario, a practitioner prepared management accounts, showing a solvent position, for the purposes of providing these accounts to a secured lender. The practitioner was aware that the accounts were materially different from the actual position, i.e. an insolvent one. The client was insistent that failure to present a solvent position would result in financial support being withdrawn, with the potential loss of the business and jobs.

The facts of the cases in scenario one and scenario two suggested that the practitioner had, perhaps inappropriately, succumbed to pressure from the client to agree with the client’s rationalisation that it was in the best interests of the company to account for matters in this way, and even that the company’s survival may depend upon it. Perhaps,
the decision to accommodate the client was influenced out of a sense of loyalty. Perhaps it was out of fear of losing a client. Or, perhaps it was out of a lack of awareness of the relevant requirements!

In addition to the safeguards outlined in the ‘Code of Ethics’, there are a number of supports available to all Members and their staff from the Institute, including the Ethics Resource Centre which contains a number of articles and publications to assist members to reach a decision. The Practice Consulting team will always be willing to advise members in practice in dealing with ethical issues and, in addition, CA Support is open to all members to assist them in times of difficulty.

Shane McAleer is a director in Somers Murphy & Earl Corporate Services Limited. He is a member of Council, the Institute’s Ethics and Governance Committee, and the Members in Practice Committee. He is also a member of the CCAB-I Insolvency Committee.