Ethical considerations

1. Integrity — be honest and straightforward. 2. Objectivity — do not let bias, conflict of interest or undue influence override judgement. 3. Professional competence and due care — keep knowledge current and work diligently. 4. Confidentiality — do not disclose or misuse confidential information without proper authority. 5. Professional behaviour — comply with laws and regulations and avoid discrediting the profession.

(a) Using confidential information for gain → confidentiality (and integrity). (b) Careless preparation → professional competence and due care. (c) Accepting a large gift → objectivity (self-interest threat). (d) Signing misleading statements → integrity.

Self-interest threat — a personal interest (such as a bonus linked to reported profit) tempts the accountant to bias the figures in their own favour. Intimidation threat — the accountant is pressured (e.g. a manager threatening dismissal) to act against the fundamental principles. (Other valid threats: self-review, advocacy, familiarity.)

Creative accounting is the use of accounting policies and judgements to present a misleading picture of a company's performance or position — exploiting flexibility in the rules, or bending them, to flatter the figures (for example, capitalising costs that should be expensed, or manipulating the timing of revenue).

It is unethical because it breaches integrity (it is dishonest and misleading) and objectivity (it is deliberately biased), and it prevents the accounts from giving a faithful representation. As a result it misleads users — investors, lenders and employees — who may make poor decisions and suffer losses, and it undermines confidence in financial reporting and in the accountancy profession.

Overstating inventory would make the accounts misleading, breaching integrity and objectivity and producing figures that are not a faithful representation (and breaching IAS 2, which requires the lower of cost and NRV). The instruction also creates an intimidation threat (pressure from a senior).

The junior accountant should not make the false entry. They should:

1. Explain to the finance director why the adjustment is wrong and the risks it creates;
2. Refuse to be associated with misleading information;
3. Escalate the matter internally — for example to the audit committee or those charged with governance;
4. Seek advice from their professional body (and, if necessary, legal advice), keeping a written record;
5. If the matter cannot be resolved, decline to prepare the accounts and, as a last resort, resign.

Throughout, the guiding consideration must be the public interest and the fundamental principles, not the pressure applied or any personal consequences.

1. Use separate teams — ensure the staff who prepared the statements are not the ones who audit them, with an independent review of the audit work. 2. Rotate personnel, or decline either the preparation or the audit engagement, so the same firm does not both prepare and review the same figures. (Seeking guidance from the professional body and strengthening quality controls are also valid.)

Confidentiality requires an accountant not to disclose confidential information acquired through their work without proper authority, and not to use it for personal advantage or that of third parties. This protects the trust between accountant and client and is essential to the working relationship.

However, confidentiality is not absolute. An accountant may or must disclose confidential information when:

• they have the client's authority to do so;
• there is a legal duty to disclose — for example, producing documents in legal proceedings, or reporting suspected money laundering / fraud to the authorities;
• there is a professional duty or right to disclose (where not prohibited by law) — for example to protect their own interests or comply with a professional body's review.

Where disclosure may be required (e.g. on discovering a fraud), the accountant should take legal and professional advice before acting, disclose only what is necessary, and ensure they are not associated with illegal acts. So confidentiality protects legitimate client information but cannot be used to conceal illegal activity.

A wide range of users — investors, lenders, employees, suppliers, governments — rely on the financial information accountants prepare and audit to make important decisions. If accountants behave ethically, that information is trustworthy and faithfully represented, so users are protected and can make sound decisions.

Ethical behaviour also maintains public confidence in the accountancy profession and in capital markets: investors are willing to provide finance when they trust the figures, which keeps the cost of capital lower. By contrast, unethical behaviour — such as creative accounting or concealing fraud — can cause financial losses, corporate scandals and a collapse of confidence, harming not just the parties directly involved but the wider economy. Acting ethically therefore serves the public interest, which the accountancy profession exists to protect.

Because the accountant's bonus rises with reported profit, they have a personal financial interest in showing a higher profit. This is a self-interest threat to objectivity and integrity: the accountant might be tempted to choose policies or make adjustments that overstate profit rather than represent it faithfully. It could be reduced by safeguards such as basing the bonus on factors other than reported profit, having the accounts subject to independent review/audit, and a strong ethical culture with clear consequences for manipulation.

Three threats are self-interest, intimidation and familiarity (also self-review and advocacy). For example, an intimidation threat arises when a manager pressures an accountant to change figures by threatening dismissal, making it harder for the accountant to act objectively.