Question 1
Which one of the following is NOT a fundamental ethical principle of accounting?
Strand 2 · Financial Accounting
Accounting Year 3 Learner Material, Section 1: Implications and Threats of Ethical Principles
This is the first section of the third-year business accounting programme. In this section, we will focus on the conceptual framework of accounting. We will delve into the implications and threats of ethical principles of accountants in both personal life and business. The main goal is to equip you with the understanding of how to avoid fraudulent activities, which will lay the groundwork for trust and transparency in financial statements.
Consequently, this can help to ensure improved employee morale and sustainable financial growth. Emphasis will be placed on the practical application of ethics, enabling you to effectively use them not only to produce reliable and transparent financial statements, but also to apply them in daily life.
By the end of this section, you will be expected to understand and explain ethical principles, discuss how these principles are applied in daily life and within the accounting profession and demonstrate the ability to avoid threats to these ethical principles.
Before continuing, reflect on some areas you studied in Year 1 and Year 2 that relate to implications and threats of ethical principles. These include areas such as accounting standards and the accounting concepts and conventions.
KEY IDEAS
• Commitment is sticking to a goal and putting in the effort over time.
• Compliance is following the rules that apply to you.
• Ethical Principle is a basic moral rule that guides behaviour.
• Integrity is doing the right thing even when no one is watching.
• Sustainability is using resources so they last for future generations.
Ethics can be defined as what is right and wrong and the values that guide how we act and make decisions. It is a set of rules to help us behave properly.
In accounting, ethics means the core rules and values that guide how accountants work. So an accountant should not only try to satisfy one client or employer, but they should also act in the public interest. The basic ethical principles show the standard of behaviour expected from a professional accountant.
The Fundamental Ethical Principles
The fundamental ethical principles include
1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behaviour Explanation of Fundamental Ethical Principles ₁. Integrity – Be honest and straightforward in all work and business deals.
2. Objectivity – Make judgments fairly, without being influenced by bias, conflicts of interest or other people pushing you.
3. Professional Competence and Due Care – Keep up with the knowledge and skills you need, so you give clients or employers good, up-to-date service. Work carefully and follow the right rules and standards.
4. Confidentiality – Respect and keep the information you learn because of your work.
Confidentiality is an ethical ideal that demands that a person keep private information private and not share it with others without proper authority or consent.
5. Professional Behaviour – Follow laws and rules and avoid actions that could bring the accounting profession into disrepute.
Activity 1.1 Ethical Principles
1. In groups, read the case below SHS Accounting Club A Senior High School Accounting Club runs a small fundraising project to support school activities. You are the clerk responsible for recording the club’s financial transactions in the ledger and preparing the Statement of Profit or Loss report.
One day, the club president asks you to “make the books look better” by:
• Recording a donation of GH¢200 as “revenue from events” even though it came from one sponsor who supported the club’s general activities.
• Inflating total donations by double-counting a receipt from a sponsor.
• Excluding a small loss from a purchasing error in the expenses section to show a cleaner profit.
2. Answer the questions below.
a. Identify the ethical issues in this scenario.
b. Which ethical principles of accounting are being violated?
c. List at least three prudent actions.
d. What could be the potential consequences if the club changes the books as requested?
e. If the president insists, what are your options, and which would you choose?
(e.g., refuse, report to a higher authority in the school, seek guidance from a teacher/mentor.)
f. How can the club prevent similar issues in the future? Provide at least two preventive measures.
3. Present your answers to the whole class for discussion and correction.
Ethical threats are things, factors or situations that can tempt you to do the wrong thing and make it hard to keep your good moral standards. Threats may arise as a result of any of the following:
1. Self-Interest threat: This occurs when an accountant has a personal financial stake/ interest that could affect their judgment. For example, if their bonus depends on how profitable the company looks, they might try to boost profits by changing numbers.
2. Lack of Scrutiny: This occurs when an accountant checks his or her work or the firm’s work instead of having someone independent check it. Mistakes or false figures can be missed.
3. Conflict of Interest: This arises when a close relationship or loyalty to someone (like a client or boss) makes it hard to be objective. For example, being too lenient with a long-time client who does questionable accounting.
4. Intimidation or Threat: This happens when an accountant or auditor feels pressured or threatened. They might give in to pressure and break ethical rules.
5. Advocacy Threat: The threat arises when the accountant is asked to push for a specific position or outcome. It can compromise their objectivity and fairness.
Activity 1.2 Threats to Ethical Behaviour
1. In pairs, read the case below and answer the questions that follow.
The Kyei Baffour Family-Owned Car Repair Shop
A small family-owned car repair shop by the Kyei-Baffour has been profitable for several years. You are a senior student helping with the shop’s accounting as part of a school project. The owner, Mr Kyei-Baffour (who is also the father of the shop manager), asks you to help prepare the monthly financial statements. You notice a few concerns:
• Some small expenditures (tools and supplies) are recorded as “miscellaneous” instead of specific expense accounts.
• The owner asks you to record GH¢2,000 of accounts receivable as if it will be collected in the next month, even though several customers are late and you have doubts about collectability.
• The owner requests that revenue for a significant repair project, completed in the following month, be recognised in the current month, explaining that the timing does not affect the total amount received, only the reporting period.
• The owner frequently reminds you that the business needs to show higher profits because a bank loan will soon be due, and the owner wants to “keep the bank happy.”
• You notice the owner sometimes asks you to approve petty cash withdrawals without receipts, saying, “Don’t worry, I’ll cover it.”
Questions
a. Identify the different threats to ethical behaviour that are present in this scenario.
b. Which fundamental ethical principles of accounting are at risk in this case?
Explain briefly.
c. For each inappropriate action you identified in (i), explain why it is a problem from an ethical and accounting perspective.
d. What steps should the student (you) take to handle these situations safely and ethically? Consider both short-term and long-term actions.
e. If you were advising the shop’s owner, what would you tell them to do differently to protect the business and its stakeholders? Include at least three concrete recommendations.
₁. Ensuring legal compliance - Making sure the business follows all laws and rules in Ghana.
2. Preserving financial reporting integrity and building trust - Keeping honest, accurate financial records and showing them honestly to earn people’s trust.
3. Preventing fraud and unethical practices - Stopping cheating, theft and any bad or unfair actions in the business.
4. Enhancing corporate reputation and image - Improving how the company is seen by customers, workers and the community.
5. Supporting long-term sustainability - Helping the business stay strong and survive for many years.
Why Ethical Principles are Important to the Preparation of Financial Statements
1. Ensuring legal compliance Doing the right thing in accounting helps accountants follow rules from the law and the profession. Ethical practices protect accountants from trouble and rule-breaking.
2. Preserving financial reporting integrity and building trust Accountants must present true and reliable financial information. Being honest, fair and open makes the reports believable. Investors and others rely on these numbers to make smart choices. When we stay ethical, trust in the data and in the profession grows.
3. Preventing fraud and unethical practices Ethical accounting helps stop fraud and other bad acts. People are less likely to steal or bend the numbers. Being honest protects the company, owners and stakeholders from financial harm.
4. Enhancing corporate reputation and image Doing the right thing in accounting improves how people see the company. When a business is known for ethics, clients, investors and the public view it as trustworthy and responsible. That strengthens its name and builds long-term relationships.
5. Supporting long-term sustainability Ethical accounting helps a business last longer. By following good practices, resources are managed effectively, finances remain stable, and operations remain solid over time.
Avoiding unethical behaviour creates a healthy environment for growth and ongoing success.
Activity 1.3 Implications/Importance of Ethical Principles in the Prepara- tion of Financial Statements
1. In your groups, pick the questions presented by the resource person.
2. Listen attentively to the resource person’s presentation.
3. Discuss the questions each group picked.
4. Groups make presentations to the whole class in turns.
1. What are the core ethical principles in accounting?
2. Define the integrity principle in accounting.
3. What does the professional competence and due care principle require?
4. How does confidentiality apply to accounting?
5. Why is faithful representation important in FS preparation from an ethics viewpoint?
Which one of the following is NOT a fundamental ethical principle of accounting?
Mr Mensah is the accountant of a trading company in Kumasi. His end-of-year bonus will be paid only if the company reports a high profit. He is now tempted to reduce the allowance for doubtful debts so that the reported profit will look bigger. Which threat to ethical behaviour does this best describe?
Adjoa is an accountant at a firm in Takoradi. A friend asks her to show him the financial records of one of her firm's clients because he wants to buy shares in that client's business. Which fundamental ethical principle should guide Adjoa to refuse the request?
The owner of Kyei-Baffour Car Repair Shop asks the student keeping the books to record revenue for a big repair job completed next month in the current month's statement. He explains that the total amount received will not change, only the period in which it is shown. Why is this request unacceptable?
Yaa is the only accountant in a small firm in Ho. She prepares the financial statements herself and also checks all the figures herself, because no independent person reviews the work. In addition, her bonus depends on the profit she reports. Which two threats to ethical behaviour are present in this situation?
Kofi Mensah is the accounts clerk of Adom Fresh Foods, a small grocery in Techiman. During the year ended 31 December 2025, the owner, Madam Akua, wants the financial statements to show a higher profit so that a bank loan application will succeed. Kofi noticed the following items in the records.
| No. | Item | Amount (GH¢) | How it was recorded | Correct treatment |
|---|---|---|---|---|
| 1 | Bank loan received | 3,000 | Recorded as sales revenue | Record as loan payable |
| 2 | Deposit from customer for goods to be delivered next year | 1,200 | Recorded as sales revenue this year | Record as deferred income |
| 3 | Unpaid electricity bill for December | 500 | Omitted from expenses | Record as expense and payable |
| 4 | Owner's personal shopping paid by the business | 700 | Recorded as business purchases | Record as drawings |
Assume the accrual basis is used and all amounts are material.
Identify the ethical principle that is most directly violated in each of the four items.
Calculate the net amount by which profit for the year would be overstated if all four items are left uncorrected. Show your workings.
Explain two threats to ethical behaviour that could cause Kofi to make these entries.
Suggest three measures the business can put in place to prevent unethical practices in preparing financial statements.
Nsawam Agro-Processing Company Ltd is a growing company in the Eastern Region. The Managing Director, Mr. Boateng, wants to obtain a bank loan to expand the factory. The bank requires the company to show a minimum profit of GH¢500,000 for the year ended 31 December 2025. The actual profit before adjustments is GH¢420,000. Mr. Boateng instructs the accountant, Akosua, to delay recording GH¢60,000 of unpaid expenses and to record GH¢40,000 of revenue from a contract that is only 40% complete. Akosua is worried about the ethical implications of these instructions.
State five fundamental ethical principles that Akosua should follow in her work as an accountant.
Explain two threats to ethical behaviour that could arise from Mr. Boateng's instructions.
Analyse three implications of preparing the financial statements unethically as instructed.
Suggest three actions Akosua should take to uphold ethical principles in this situation.