May 2022
We outline a case from the CCAB’s ethical dilemmas for professional accountants in the public sector.
Outline of the case
The year-end accounts for a local authority have been prepared, and they will soon be adopted by the council, ready for audit.
The local authority applies generally accepted accounting practices including the accruals basis. You are the head of social services finance, and you have become aware that work has been performed by an external consultant which has resulted in a proposal to close an older adult’s residential care home.
The council members want to suppress this information from becoming public knowledge because there is a forthcoming by-election in the electoral division where the care home is located. The consultant has agreed not to submit the invoice for their fees, which are significant, until after the by-election.
Normal accounting treatment would require the consultant’s fees to be accrued as an expense in the accounts. Additionally, the estimated costs of the potential closure may need to be included as a provision in the accounts. The council members will not make their decision known until after the by-election, which will be after the audit has been completed and the audit opinion signed.
Questions
As a professional accountant in the public sector:
(a) Which fundamental principles feature more prominently for safeguarding?
(b) What would be your key considerations in your approach to resolving the dilemma presented?
(c) What course of action would you take to resolve the dilemma?
(a) Key fundamental principles Integrity: How can you ensure that the accounts are an accurate and honest representation of the council’s activities? You cannot allow yourself to be involved in the publication of information that is misleading.
Objectivity: How can you maintain your professional objectivity in the face of undue pressure from the highest governance level of the local authority, i.e., the council. You may have a concern that if you don’t comply with the councillors’ wishes you will be subject to political pressure affecting your position and also your personal life outside of work.
Professional behaviour: You are required to perform your work in accordance with applicable law and regulations, including relevant accounting standards. How should you act so as not to discredit yourself or your profession? Furthermore, the opening paragraph of the International Code of Ethics states, “a distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. A professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employing organisation.”
Threats to compliance
There is an intimidation threat to your compliance with the fundamental principles, since you are being deterred from acting objectively because of pressure to exercise undue influence over you. There is also a selfreview threat in that you might not appropriately account for the consultant’s fees or that you might not appropriately apply professional judgement to determine whether certain closure costs should be provided for.
(b) Considerations Identify relevant facts: Consider the Local Government Authority Code of Conduct, Standards in Public Life, generally accepted accounting standards applied by the authority, and applicable law and regulations. Also, establish the extent of the potential misstatement of the accounts. What is the likelihood that the council members have already decided to act on the consultant’s advice and is there confirmation of this, in which case the provision for the costs of closing the care home is also required? Could past accounts have been misleading as well?
Identify affected parties: Affected parties include you, management, the council, council members, the external auditor, the consultant, the occupants of the care home, and the electorate.
Who should be involved in the resolution: As the intention to conceal the consultation exercise is that of the council members, you should inform the council’s chief financial officer/ director of finance/head of finance (or section 151 officer in UK). This may lead them and you to involve the chief executive and the leader of the council in the resolution process. Due to the potentially serious nature of the issue, you should also consider involving the internal audit function and possibly also the external auditor.
(c) Possible course of action: The consultant’s fees are significant, and so they should be included in the local authority’s yearend accounts. You should establish, through discussions with senior management (CFO/ CEO), whether the accounts should also reflect the proposal to close the care home with a provision or other note.
You should try to explain to your colleagues the accounting principles that require the liability in respect of the consultant’s charges and the potential provision in respect of the closure of the care home to be accounted for.
You should make clear your professional and ethical responsibilities and be prepared to discuss the issues with the CEO, CFO, audit committee chair or leader of the council, if necessary. You should also highlight the reputational damage to all concerned if this issue is dealt with inappropriately. The CFO or a member of management may decide to bring the matter to the attention of those responsible for internal compliance (e.g. the internal auditors).
It may also be appropriate to notify the external auditors if the matter is unresolved. If it appears necessary to make a protected disclosure (whistleblow) to third parties, you should consider carefully to whom you should report, bearing in mind the fundamental principles of confidentiality and professional behaviour.
You may wish to seek legal counsel for advice on this approach. You should determine what access you have to organisations that can offer guidance and support to employees who find they have a whistleblowing responsibility.
You may also wish to discuss the matter, in a manner that does not require disclosure of confidential information, with a trusted advisor, for example a colleague or your professional body.
You should document, in detail, the steps that you take in resolving your dilemma, in case your ethical judgement is challenged in the future.
• The CCAB case studies illustrate how the codes of ethics of the CCAB bodies can be applied by professional accountants and the five sets can be found at https://tinyurl.com/4sy88cbm
