Audit failures are rarely caused by technical shortcomings alone. More often, they stem from weaknesses in culture. In global financial centres such as New York, London, and Hong Kong SAR of China, commercial pressures can erode professional scepticism and ethical judgment.
Against this backdrop, the International Ethics Standards Board for Accountants (IESBA) is developing a global culture and governance framework, against which firms of different sizes and contexts can assess their ethical culture and governance.
‘Highly competitive environments can create excessive pressure and distort priorities’
IESBA’s emerging Firm Culture and Governance Framework reflects a growing recognition that ethical failures may reflect deeper organisational and behavioural problems in audit firms.
‘Unethical behaviour is often involved in audit and accounting failures. It might be a bad apple – or it might reflect a bad barrel, a poor organisational culture,’ says Chris Cowton, emeritus professor at the University of Huddersfield and a former professor of finance ethics.
Tougher dilemmas
IESBA’s initiative aligns with research by ACCA, which found that 64% of professional accountants believe ethical dilemmas have become harder to resolve over the past three years, while over 40% cited ethical leadership and culture as top ethical challenges.
More than half of respondents said they had witnessed unethical behaviour during their careers, while nearly one in four reported being pressured to act unethically.
The challenge is particularly acute in global financial hubs. ‘Highly competitive environments can create excessive pressure and distort priorities,’ says Cowton.
‘How our culture drives the work we do to provide that public trust is critical’
Alex Koh, partner and head of audit at KPMG in Singapore, says the profession plays a ‘unique role’ in a financial centre like Singapore, ‘where it’s important for investors and other stakeholders to be able to rely on financial statements put up by companies,’ he says.
‘For KPMG, we play an important role to provide that assurance that financial statements are true and fair. How our culture drives the work we do to deliver quality and provide that public trust is critical.’
Maintain confidence
When confidence in governance and assurance declines, the cost of capital can rise, investor sentiment can weaken and long-term competitiveness can suffer.
‘Financial centres that lose confidence in audit quality become less attractive to investors, talent and other stakeholders,’ says Eelco Fiole, professor of finance ethics at Switzerland’s University of Neuchâtel. ‘They become less competitive and lose business to better-governed jurisdictions.’
‘Commercial pressures such as fee competition, client retention, and revenue concentration can affect ethical behaviour and create threats to independence if they are not properly managed,’ says Sarah Lane, head of ethics assurance at ACCA.
While those commercial demands are familiar across global markets, the ethical risks they create vary by region with local conditions shaping how ethical behaviour is promoted and enforced.
In Europe, accountants report pressure from management to compromise independence, while in Africa, bribery and the normalisation of unethical practices are recurring concerns. And in Asia, cultural factors such as a reluctance to challenge authority can make ethical issues harder to address.
Global baseline
IESBA’s initiative aims to establish a global baseline against which firms of different sizes and contexts can assess their ethical culture and governance, while supporting consistency across international networks and allowing local flexibility.
The proposed framework is built around eight interconnected elements: leadership, governance, incentives, internal controls, ethical decision-making, transparency, speaking up and continuous improvement.
‘The ability to escalate, question and consult are expected behaviours’
‘Firms need an ethical culture that supports independence, professional scepticism, and sound decision-making when commercial pressures arise, while recognising that implementation will vary by firm context,’ Lane says.
Integrate ethics
IESBA’s proposed framework recognises that ethical culture cannot be treated as a standalone compliance exercise. Instead, it must be integrated into how firms are governed, managed and rewarded.
‘It’s a matter of being consistent through communication, through the way these values are being encouraged, recognised and called out when they are perhaps lacking in certain situations,’ Koh says.
Koh says firms must create environments where challenge and escalation are encouraged, and stresses that commercial considerations cannot override ethics.
‘The ability to escalate, question and consult are expected behaviours. Any difficult issue is never down to an individual alone. We work together, we consult and we do the right thing,’ he says.
‘We want auditors to be a respected force for good’
Vikash Sinha, associate professor of management accounting at Aalto University in Finland, says that, in order to implement such an initiative in diverse markets, a principles-based approach rather than a rules-based one should be applied to provide a flexible framework that can be adapted across different jurisdictions.
This, he says, can help establish ‘a minimum ethical baseline and act as a knowledge hub that promotes greater consistency in practices among audit firms and regulators.’
As IESBA advances its global culture and governance framework, the main challenge for firms will be turning ethical principles into daily practice.
Cowton points to the need for firms to underpin audit work with sound governance principles that go beyond what is merely acceptable. ‘We want auditors to be a respected force for good’ he adds.
More information
Read ACCA’s report, The new era of ethical challenges for professional accountants
