Ethical Lapses Force More CEOs Out of Office

The share of CEOs forced out of office for ethical lapses has been on the rise, according to the 2016 CEO Success study by Strategy&, PwC’s strategy consulting business. The study, which analysed CEO successions at the world’s largest 2,500 public companies over the past 10 years, reports that forced turnovers due to ethical lapses rose from 3.9% of all successions in 2007–2011, to 5.3% in 2012–2016. The 36% increase was due in large part to increased public scrutiny and accountability of executives.

The increase was more dramatic at companies in the US and Canada, where forced turnovers for ethical lapses increased from 1.6% of all successions in 2007–2011 to 3.3% in 2012–2016, or a 102% jump. In Western Europe, the share of CEOs forced out for ethical lapses increased to 5.9% from 4.2%, and in the BRIC countries, to 8.8% from 3.6%.

It is noteworthy that there were 12 women globally appointed to the role of CEO in 2016 – 3.6% of the incoming class. This marks a return of the slow trend toward greater diversity that had been in place over the last several years, and a recovery from the previous year’s low point of 2.8%. The share of incoming female CEOs was highest in the US and Canada, rebounding to 5.7% after falling for the previous three years. Five industries – healthcare, industrials, information technology, consumer staples, and telecom services – did not have a single incoming female CEO in 2016.

Read the full story “More CEOs forced out of office for ethical lapses” at Chartered Accountants Worldwide online. This article was originally published by the Institute of Singapore Chartered Accountants (ISCA) in the June 2017 edition of ISCA Journal. 

Research and Guidance Resources by the Center for Audit Quality (CAQ)

Devoted to enhancing investor confidence and public trust in the global capital markets, the Center for Audit Quality (CAQ) is an autonomous, nonpartisan, and nonprofit public policy organization based in Washington, DC. Supported by a membership of U.S. accounting firms registered with the Public Company Accounting Oversight Board (PCAOB), the CAQ is led by a Governing Board made up of CEOs from leading public company auditing firms and the AICPA, as well as three members from outside the public company auditing profession. CAQ resources include guides, case studies, technical alerts, research reports, comment letters, amicus briefs, and videos. They are all publicly available and free of charge.

On August 7, 2016, top practitioners from the public company auditing profession gathered with leading academics at the CAQ’s Eighth Annual Symposium in New York, Research in Auditing – Insights from Academics and Practitioners. The event is a key part of the CAQ’s ongoing dialogue with the academic community on how research can help inform audit practice. As in past years, the 2016 Symposium included panel discussions on critical issues.

This Symposium panel focused on the advantages that can be gained when academics team up with members of the profession to inform their research. Behavioral and archival researchers working with the CAQ Research Advisory Board have benefited from conferring with auditors to better understand the challenges faced in practice, how those are addressed, and how changes in approach or audit methodology could impact the research question.

The Center for Audit Quality has also developed two video vignettes for use in the classroom (each approximately five minutes in length) that provide insights into the types of conversations that occur when auditors are assessing the internal controls used by management. In these scenarios, the focus is on a management review control over goodwill impairment estimates. The discussions captured in the videos can also be used in other teaching situations as they highlight communications and interviewing techniques, professional skepticism, and how to navigate conversations on difficult and sensitive issues. To learn more, refer to video Vignette 1: A Meeting between the Audit Manager and the Company Controller and video Vignette 2: A Meeting between the Audit Manager and the Engagement Partner.

Ethical issues encountered by Chartered Accountants

In 2008, the Institute of Chartered Accountants of Scotland (ICAS) published the report What do you do now? Ethical Issues Encountered by Chartered Accountants. This report by Dr. David Molyneaux contains 28 true life case studies of ethical dilemmas faced by accountants either in practice or business. The objective of the report is to bring ethical problems to life and to encourage debate and understanding of such issues, rather than providing definitive answers.

In recognition of this work, the ICAS Technical Policy Board published Shades of Grey which contains a further series of case studies. As a starting point, refer to Ethical dilemma 1: The creeping FD as well as Ethical dilemma 2: Double your money and Ethical dilemma 3: To be or not to be a NED. These topical case studies are designed to help embed ethical values and thinking into the day-to-day work of Chartered Accountants. Also, look at other views on the topic of ethics.

PwC - Gut & gigabytes: The art and science of big decisions

The February 2015 PwC booklet called Gut & gigabytes: The art and science of big decisions observes that: “Right now, intuition still prevails, with the majority of corporate decision-makers finding that listening to their gut is preferable to “paralysis by analysis.” More and more, however, executives will be pressed to defend their choices against contrary outcomes that were plainly visible in the data tea leaves. The key isn’t to favor one approach over the other — art versus science — but rather to cultivate and hone the role that instinct plays in our increasingly data-driven world (or, conversely, hone the role that data plays in our intuition-prone decision-making).

The booklet is supported by the 40-page report called Gut & gigabytes: Capitalising on the art & science in decision making. That report was prepared by the Economist Intelligence Unit, sponsored by PwC. It is intended to explore the agenda for big decisions and the process that business leaders will go through in making these decisions.

Big decisions are the most significant decisions about the strategic direction of the business (i.e., not concerned with day-to-day operations). Big data are the recent wave of electronic information produced in greater volume by a growing number of sources (i.e., not just data collected by a particular organisation in the course of normal business). Data analysis is the use of analytical techniques to generate new insights from data.

Executives know the right questions to ask. Now they need to know how to get the right answers from the data (and have the desire to do so). Those who do not should consider learning how. Those who resist doing so will gradually be replaced, as the next generation of data-savvy executives and future senior managers come through. By the time this happens, most executives should be using big data to make strategic decisions – rather than the other way around.

PwC - 10 Minutes on making big decisions

In PwC’s report called 10 Minutes on making big decisions (released in May 2015), it suggests that: “When it comes to making your most important business decisions, there are a plethora of factors to consider. Company leaders often rely on gut instinct to guide them — what we think of as the ‘art’ of strategic decision making. But, what about the ‘science’ side of the equation: data and analytics?"  

Consider that 85% of CEOs maintain that data and analytics creates value for their organizations. But, where and how are they realizing that value? One area ripe for the picking is strategic decision making. According to this report, superior decision making — done with confidence, clarity, and agility — is only possible through a combination of art and science.

"And most businesses have only begun to achieve this delicate balance: While 94% of respondents in PwC's Global Data & Analytics Survey 2014: Big Decisions said that senior management believe they are prepared to make their next big decision, just 38% relied on data

and analytics to do so.”

Professional Judgment: Perspectives on the Professions

An informative article on “Professional Judgment” was published in the periodical Perspectives on the Professions in 1992. According to the article: “Professionals offer (and, we hope, deliver) honest and competent judgment. Perspectives has devoted many issues to the first of these, honesty, what we tend to call “professional ethics:” We have had little to say about the second, technical competence, what makes honest judgment professional. We have, it seems, simply taken it for granted. Yet, an engineer without engineering judgment, a lawyer without a lawyer's judgment, or any other professional without the particular form of judgment distinguishing his or her profession from all others, would be an incompetent “layman” who could not honestly practice the profession in question.”

 

“What is professional judgment? It is, of course, good judgment-good enough at least to make us want it instead of lay judgment. But what makes judgment good (in the way professional judgment is supposed to be)? One witty answer is: Good judgment comes from experience; experience, from bad judgment.” “The pieces that follow suggest that we may not yet have a better answer. That, of course, is not all bad-if it leads us to think more about professional judgment. While we cannot walk well if we think about walking as we walk, we cannot learn to walk better if we do not think about walking at all. If good judgment comes from bad judgment, only through reflection can the transformation be accomplished.”

 

This article provides perspectives that address the following four professions: (1) Judgment in Police Work; (2) Professional Judgment in Engineering; (3) Balancing Risks and Benefits in Clinical Decision Making; and (4) How Do Judges Think?

 

To learn more, read the article on “Professional Judgement” by Michael Davis, Editor, Perspectives on the Professions, (Vol. 11, No.2, 1992). Perspectives is a periodical of the Center for the Study of Ethics in the Professions (CSEP), Illinois Institute of Technology, Chicago. CSEP was established in 1976 for the purpose of promoting education and scholarship relating to ethical and policy issues of the professions.

 

Auditor Judgment Under Uncertainty: Doctoral Dissertation 2013

A recent research paper investigates how experienced auditors recognize and respond to the degree of management’s evidentiary support and the level of estimate uncertainty when assessing management estimates. Drawing on information processing research, the paper predicts that auditors can be more comfortable with management estimates, and expect a lower adjustment, when there is alignment between the degree of estimate uncertainty and management’s evidentiary support (that is, high uncertainty and more support or low uncertainty and less support). The following diagram provides a graphical representation of the theoretical predictions.

This prediction is tested using an experiment where experienced auditors evaluate an uncertain warranty estimate. The level of uncertainty is manipulated by varying the range of potential costs as either two-times or eight-times materiality. The degree of management’s evidentiary support is manipulated by management either obtaining industry information, inquiring of technicians, or doing these two plus reviewing records, and performing field inspections.

The results support the prediction. In the higher uncertainty condition, auditors were more comfortable and expected a lower adjustment when management obtained more evidential support, but in the lower uncertainty condition auditors were more comfortable and expected a lower adjustment when management obtained less evidential support. In fact, the alignment between estimate uncertainty and management’s evidentiary support can make auditors more comfortable with management estimates supported by relatively less evidence.

These findings demonstrate how audit risk factors, such as the level of uncertainty and degree of management’s support can interact and cause auditors to more readily accept less supported financial statement estimates. More broadly, these findings reveal how providing more information can actually make recipients more uncomfortable with a proposition.

For more information, refer to the 93-page Dissertation, “Auditor Judgment Under Uncertainty” by Stephen P. Rowe, submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Accountancy in the Graduate College of the University of Illinois at Urbana-Champaign, 2013. The Doctoral Committee included: Professor Mark Peecher, Chair; Assistant Professor Bradley Pomeroy; Professor Ken Trotman, University of New South Wales; and Professor Michel Regenwetter.

The Art of Ethical Leadership (2013)

In October 2012, Praesta Ireland and Chartered Accountants Ireland (CAI) surveyed leading business executives on their ethical approaches, as well as their organization’s ethical codes and attitudes. The survey results provide encouraging news that many organizations are responding to the emerging and increasing risks that arise from unethical behaviour and the consequent adverse impact on an organization’s reputation.

The survey demonstrates that those charged with governance within organizations are expected to play a key role in establishing expectations relating to ethical behaviour. The example needs to be set by senior management by the way in which they behave and by ongoing monitoring of the effectiveness of their ethics policies and programs. An appropriate code of ethics remains the primary tool for guiding staff on corporate standards of behaviour and on how to respond to ethical dilemmas which they may encounter in their day-to-day work.

Having confidence that businesses, directors and professionals adhere to the highest ethical standards is critical to ensuring public trust in financial reporting and business practices and even to ensuring the future sustainability of businesses themselves. Those organizations that have developed ethics programs which include training about their values and how these are implemented, as well as ‘speak up’ policies, demonstrate they are actively trying to decrease their integrity risk. Business ethics are under the spotlight as never before. Therefore, it is anticipated that this 44-page report, The Art of Ethical Leadership, released in 2013, will stimulate further informed debate about the role of ethics and ethical decision-making in business.

Praesta Ireland is a member of Praesta International, the global leader in senior executive coaching, working in more than 20 countries. Since its foundation in 2001, Praesta Ireland has established a track record of professional, discreet and confidential service to major companies and organizations in support of the leadership development of their Chairs, CEOs, Senior Executives and Non-Executive Directors. Chartered Accountants Ireland is the largest and longest established accountancy body in Ireland. It has over 21,000 members and 6,000 students, and it is the leading voice of the accountancy profession in Ireland. Chartered Accountants Ireland was established as the Institute of Chartered Accountants in Ireland by Royal Charter in 1888. Its activities and those of its members are governed by its Bylaws and by Rules relating to professional and ethical conduct.

Additional information on ethics, including case studies, is available at the Chartered Accountants Regulatory Board (CARB). The case studies provide practical guidance for resolving ethical dilemmas on topics such as conflicts of interest, confidentiality and questionable accounting and business practices.

Ethics of Relationships between Accounting Academics and External Sponsors

They challenge and shape the accounting world, and support the standard-setters and regulators. For leading academic accountants, research informs not only accounting and the financial world in general, but also their work with aspiring accountants. The very best in academe are those scholars who challenge their students as well as established thought while shaping novel and inventive ways of looking at the accounting world. The need for rigorous research to support the decisions that have to be made by standard-setters and regulators is only going to increase (see the article “Inquiring minds” by Robert Colapinto in the April 2013 edition of CAmagazine online).

 A variety of relationships can develop between accounting academics and external sponsors that raise issues of ethical propriety. External donors may seek to influence academic decisions by applying pressure on recipients to gain favored treatment. These types of situations are on the rise because of increased commercialization of universities. A recently-completed study examined relationships between accounting academics and external sponsors that challenge academic independence because of conflicts of interest when donors seek to impose conditions on financial support.

 

The authors solicit the opinions of academic accountants about how likely they are to go along with the conditions. They link these activities to the following ethical issues: fair-mindedness, objectivity and integrity. They conclude that the more experienced accounting academics (i.e., full professors, current chairs, holders of endowed chairs and designated faculty fellows) are less likely to engage in ethically questionable relationships with external sponsors than academics who are less experienced.

 

The results are driven primarily by two cases: allowing a Big Four CPA firm to interview students before other firms as a condition of continued recruiting and allowing a firm to decide on the recipient of a named faculty fellowship. Read more in the forthcoming research article “Ethics of Relationships between Accounting Academics and External Sponsors,” by Steven M. Mintz, Li Dang and Arline Savage in Issues in Accounting Education (2013) published by the American Accounting Association.

Professional Ethics for CPAs in Business

“The AICPA Code of Conduct applies to all CPAs and the aftermath of accounting scandals has created new expectations and federal compliance issues. Those working in business face unique problems and are sometimes faced with ethical decisions that affect their only source of income.”

“The goal of this course is to promote ethical behavior and ethical reasoning and to give CPAs working in business the tools they need to resolve ethical dilemmas in compliance with the AICPA and government regulations. Case studies are the primary learning tool to allow participants to practice their ethical decision-making skills and their knowledge of AICPA rules.”

The AICPA course Professional Ethics for CPAs in Business is available for online access and as a CD-ROM. Choose the best format that best meets your self-study/on-site group study needs. In addition, review other available professional ethics research and guidance.

UK Supreme Court Blocks Tax Advisers' Legal Privilege

In the recent court case of Prudential plc v Special Commissioner of Income Tax, the United Kingdom’s Supreme Court decided that legal professional privilege (LPP) should not be extended to clients of non-legally qualified tax advisers, but that the matter should be looked at by Parliament.

LPP is a common law right that has developed over the past 400 years. In other cases, the English legal system requires full disclosure from a party of all the documents which they have which are relevant to the matters at issue, but the privilege is designed to ensure that any person can feel confident in seeking advice about their legal rights and obligations, and be reassured that any information they provide cannot be passed to a third party without their express consent.

LPP currently only applies to clients of lawyers, and also extends to any tax advice they provide – despite the fact that the majority of tax advice is now provided by chartered accountants. Confidential tax advice passing between the latter and their clients will now still have to be disclosed as part of any litigation. Extending the privilege, the Supreme Court held, would cause uncertainty over its scope and inconsistency in its application. That would be likely to lead to what is currently a clear and well understood principle becoming an unclear principle, involving uncertainty.

Read more about this court judgment in the article “UK Supreme Court Blocks Tax Advisers' Legal Privilege” by Jason Gorringe in Global Tax News online (London, January 2013). Tax-News.com is a daily worldwide tax news service with a 45,000 story archive that can be searched for free!

Centre for Accounting Ethics: 2013 Symposium on “Tone at the Top”

The Centre for Accounting Ethics at the University of Waterloo was established in 1991 through a grant from the Auditing and Accounting Development Fund. In supporting projects designed to enhance the teaching of ethics to accounting students and the research of ethical issues in accounting, the Centre aims to help prepare future accountants and financial managers to exercise professional judgment within an ethical framework and to promote high ethical standards.

The Centre has announced its first biennial Symposium to be held on April 18–20, 2013 in Toronto, Canada. The theme is Accounting Ethics and Tone at the Top. Papers are invited from academe and practice addressing this theme. Possible questions include the role of boards of directors in shaping ethics policy, the audit committee’s oversight role in setting the ethical environment of an organization, the intersection of risk management, control systems and ethical practices and its impact on tone at the top. The papers from this Symposium will be considered for a Special Issue of the Journal of Business Ethics. Submission deadline is January 15, 2013. For more information, see the Call for papers and register online.

Additional resources are available at the Centre, including Members of the Centre, Ethics Teaching Cases, Published Articles,  Ethics Links and an Ethics Bibliography which can be searched by 59 subjects, such as “Ethical/Professional Values,” “Integrity” and “Professional Judgment.”