Critical success factors for tomorrow’s business leaders: Perspectives from the UK

The latest report from Chartered Accountants Worldwide has called for business to instill a culture of ‘moral courage’ from the boardroom downwards. In Critical Success Factors for Tomorrow’s Business Leaders: Perspectives from the UK, the international body states that social media and the 24-hr scrutiny of the digital age mean that there is a direct link between ethics and value creation that business needs to acknowledge.

The report follows the latest Chartered Accountants Worldwide Critical Success Factors Summit in London. The summits gather senior CEOs, CFOs and executives, together with the heads of global Chartered Accountancy bodies, to discuss key issues facing future finance professionals. The report covers issues ranging from geopolitical tensions to the need for tax simplification and also draws on research surveying chartered accountants leading UK businesses.

According to Pat Costello, Chairman of Chartered Accountants Worldwide: “The digital age means that everyone is under scrutiny, all of the time, and issues can escalate through social media like wildfire. The right decisions need to be taken in real time – it’s no longer enough to rely on the traditional hierarchies. This means we need to foster a culture where people are trained to know what the right thing to do is when a challenge presents itself. A culture of ethics certainly starts in the boardroom, but it can’t stop there.”

REAL INTEGRITY: Practical Solutions for Organizations Seeking to Promote and Encourage Integrity

Research carried out by the Institute of Chartered Accountants of England and Wales (ICAEW) notes that: “Integrity is a much-desired but little-understood feature of organizations and of the individuals they employ. It features widely in codes of conduct and lists of ethical principles. A lack of integrity is frequently cited as a cause of crises and scandals in business and public life. On the other hand few people have a clear idea of what integrity means or how it should be understood separately from ethical behaviour more generally.”

According to this research, the responsibility for promoting integrity in organizations ultimately falls to their leaders. Therefore, the aim of the research was to provide practical solutions for organizational leaders to help them achieve this. In addition, there is a clear need to involve human resources in activities, since they have access to many of the organizational levers that can make a difference. The research was conducted in three stages: a desk-based review of academic literature, a large-scale online survey of Chartered Accountants and a series of 94 semi-structured one-on-one interviews with people working in a variety of organizations.

Four major themes arise in the philosophical literature on integrity which can be synthesized into an account of integrity. People of integrity partly define themselves by, and act consistently on the basis of, principles and commitments, at least some of which are ethical in nature and which include honesty, openness and fairness. They will also stand up for their principles and thereby attempt to influence the culture of their organization or society.

Professional integrity involves commitment to the founding values of a profession and may involve attempting to influence the culture of that profession. As well as having employees with greater or lesser degrees of integrity, organizations can exhibit integrity by achieving consistency between their expressed values and what is genuinely valued within the organization by valuing ethical behaviour and by taking a wider view of the social context in which they operate.

To learn more, read the 2012 ICAEW Briefing and related publication REAL INTEGRITY: Practical Solutions for Organisations Seeking to Promote and Encourage Integrity by Jim Baxter, James Dempsey, Chris Megone and Jongseok Lee at the University of Leeds. Also, refer to other guidance on “integrity” matters.

A Definition of the Public Interest: IFAC Policy Position Paper #5

In November 2010, the International Federation of Accountants (IFAC) published a consultation paper setting out its perspective of the public interest. According to IFAC, “A hallmark of the accountancy profession is its obligation to act in the public interest. But, it is not always apparent what this means and how accountants can determine whether they are meeting this expectation. IFAC, by developing this position paper, is seeking to advance its understanding of this important issue.”

IFAC defines the “public interest” as the net benefits derived for, and procedural rigor employed on behalf of, all society in relation to any action, decision or policy. This practical definition of the public interest enables one to assess the extent to which actions, decisions or policies are made in the public interest.

IFAC considers that the “public” is inclusive of all individuals and groups because the responsibilities of the accountancy profession affect (directly or indirectly) every aspect of society: investors, consumers, suppliers, citizens and taxpayers, as well as those seeking sustainable living standards and environmental quality, for themselves and future generations. The extent to which any particular group is impacted can vary according to the action, decision or policy taken.

The paper was developed in the context of IFAC’s mission, to enable IFAC to assess the extent to which its actions and decisions are made in the public interest. IFAC is of the view that the benefits for society noted in the public interest definition may include the soundness of financial and non-financial reporting, the comparability of financial and non-financial information across borders, fiscal prudence in public expenditures, and the contributions that accountants make to corporate governance, efficient resource management and organizational performance.

For an overview of IFAC’s work, see A Definition of the Public Interest: At a Glance. Also, review the related materials: A Definition of the Public Interest: Policy Position Paper #5 and Appendices referred to in the paper which was published in June 2012. In addition, consider the guidance issued by the Institute of Chartered Accountants in England and Wales (ICAEW) in the paper Acting in the public interest: a framework for analysis.

Chartered Accountants Worldwide: business leaders, decision-makers and trusted advisers

Chartered Accountants (CAs) were the founders of the accountancy profession and have led its global development. Today, they hold influential positions around the world as business leaders, decision-makers and trusted advisers. In over 180 countries, CAs have attained and maintained the top professional standard that this status demands.

CAs have been a mark of excellence across all aspects of business and financial life for over 150 years. They advise organizations, lead major companies, shape economic policy and deliver effective financial management and reporting. Talented, ethical and committed professionals have never been more highly valued. By combining unrivalled knowledge, skill and commitment, CAs enable businesses, organizations, individuals and communities to achieve their financial and strategic goals with rigour, integrity and vision.

The leading institutes of Chartered Accountants from around the world have come together to support, develop and promote the vital role that Chartered Accountants play throughout the complex global economy. They include the Institute of Chartered Accountants in England and Wales (ICAEW), the Institute of Chartered Accountants of Scotland (ICAS), the Institute of Chartered Accountants Australia (ICAA), Chartered Accountants Ireland (CAI), the New Zealand Institute of Chartered Accountants (NZICA) and the South African Institute of Chartered Accountants (SAICA).

To learn more about this initiative, browse the new website “Chartered Accountants Worldwide.” In addition, review the 87-page publication Chartered Accountants Worldwide: No ordinary business minds. For further information, contact: info@charteredaccountantsworldwide.com.

ICAEW - Acting in the public interest: a framework for analysis

According to the Institute of Chartered Accountants in England and Wales (ICAEW), the phrase “in the public interest” is used by many to justify a wide range of actions and proposals. It is often unclear what it means and there can be a natural suspicion that it may be used as a smokescreen to garner support for something that is actually in the advocate’s own interests. From a broad perspective, the ICAEW suggests that a definition would serve no useful purpose because circumstances vary widely and a definition would inevitably result in unintended consequences.

Instead, the ICAEW proposes, in the summary report Acting in the public interest: a framework for analysis that there be a framework of matters to consider when justifying an action as being in the public interest. That framework is presented in graphic form below.

The report starts by considering the issues surrounding the use and application of the concept, and how the concept has developed, including its use by professions. It then goes on to consider the key issues that would arise in each element of the framework. The elements, together with some of the key aspects and questions are also discussed. For more information, read the Full Report (81 pages) and visit the ICAEW website section on The Public Interest.

Should Accounting Standards be Principles or Rules?

In a recently-published article, Sir David Tweedie notes that: “Forty-odd years ago, as a CA apprentice, I didn't have to study accounting standards because there weren’t any! There was one major standard – the true and fair view – augmented by accepted practice.” According to Tweedie, two disputed takeover bids soon changed that. The President of the Institute of Chartered Accountants in England and Wales (ICAEW), Sir Ronald Leach, senior partner of Peat Marwick & Co., and Professor Edward Stamp of Edinburgh University became embroiled in a public argument in the pages of The Times over the state of British financial reporting.

 

“Professor Stamp argued that for any major company, there would be a million ways which you could show a true and fair view, and that this was totally unacceptable. Sir Ronald reacted with alacrity, and together with the other Institutes (including a rather reluctant ICAS), agreed to form the Accounting Standards Steering Committee in 1969. Pressured by the Government, the Committee looked for a quick win and came upon a research paper of the ICAEW dealing with Associated Companies. This was rapidly turned into the Statement of Standard Accounting Practice 1. While to accountants such a topic would be a bizarre choice for the first standard, rather than what became SSAP2 – Accounting Policies – the profession needed to show it.”

 

“The argument continues over whether standards in financial reporting can best be governed by clear and detailed rules, or by principles and judgement could act quickly in a time of crisis. Since then, we have seen the SSAPs gradually replaced with Financial Reporting Standards and latterly by International Financial Reporting Standards (IFRS). These standards have become more and more complex.”

 

“Accounting is not rocket science. Writing a standard to deal with 80 per cent of the problems takes only a few pages, yet if our profession requires every avenue to be explored, then it can run into hundreds. ICAS is just completing a judgement framework to assist professionals who are unsure what exactly judgement involves. If you have been trained in what I term ‘search-engine’ accounting – looking up the answer in a massive book of rules –judgement can be scary.”

 

“The profession is at a crossroads, and the more we head down the rules route the harder it will be to pull back to simpler, more clearly expressed principle-based standards.” Read the article “Should Accounting Standards be Principles or Rules?” by Sir David Tweedie, President of the Institute of Chartered Accountants of Scotland (ICAS), as well as previous postings regarding the Principles versus Rules debate.

Professional scepticism and other key audit issues

There is an ongoing debate about whether professional accountants are sufficiently sceptical in applying professional judgment. For example, the concerns of regulators and others have been highlighted in the media and form part of the discussions on the future of the accounting profession. In this regard, the Institute of Chartered Accountants in England and Wales (ICAEW) (Audit and Assurance Faculty) is exploring the possibility of conveying key messages on the issues and has discussed this possibility with the UK Professional Oversight Board (POB).

The result is a new set of videos Professional scepticism and other key audit issues now available on the ICAEW website. The purpose of the videos is to highlight some of the concerns of the POB (and other regulators around the world) and to be constructive about how audit firms respond to the issues. In total, there are ten videos with one compilation video (about 40 minutes long). It is hoped that, in addition to individual auditors watching them, some firms will play the videos as part of training activities and team meetings.

The longest video (about 17 minutes) highlights the fundamental importance of professional scepticism. The video provides key messages on the issues that will be of interest to firms at the current time. Martyn Jones (ICAEW Vice-President) speaks about how auditors should be dealing with the challenges and the need to understand that scepticism is a behavioural issue for the entire audit team. John Kellas (POB Chairman) talks about what the Audit Inspection Unit (AIU) has been looking at in the current climate and describes the ways a lack of scepticism can be apparent. Myles Thompson (Chairman of the faculty’s Technical and Practical Auditing Committee) outlines the personality traits that auditors need to have and gives tips on how to produce documentation that demonstrates scepticism.

The messages are relevant to auditors from firms of all sizes and the personal qualities that are spoken about are needed for all types and sizes of audit. The key points also apply internationally, not just in the UK. Other subjects covered in the videos are group audits, quality control, audit committee reporting, audit documentation, ethical matters and concluding remarks.