International Ethics Standards Board for Accountants (IESBA) Firm Culture and Governance Working Group (FCGWG) Final Report, was published January 14, 2025.

The report examines the relationship between firm culture and governance and compliance with ethical and independence standards, focusing on the public interest implications of unethical behaviour within accounting firms.

Background

The report stems from concerns arising from recurring instances of unethical behaviour within accounting firms. These cases, resulting in significant sanctions, penalties, and reputational damage, have eroded public trust in the profession and raised questions about firms' culture and governance. The IESBA, recognizing the public interest implications, established the FCGWG to investigate these concerns.

Key Findings

1. Public Interest at the Forefront:

• The report underscores the paramount importance of acting in the public interest, a cornerstone of the accountancy profession's reputation and licence to operate.
• Stakeholders universally acknowledge the responsibility of firms and PAs to act in the public interest, especially considering their work's impact on investors, capital markets, and the wider economy.

"A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest." (IESBA Code, paragraph 100.1)

2. Ethical Culture: The Foundation of Ethical Behaviour:

• The report emphasises the significant influence of firm culture on the ethical behaviour of individual PAs and their compliance with the IESBA Code.
• It acknowledges the challenges firms face in balancing revenue growth with ethical responsibilities and highlights the need to embed ethical values into the firm's culture to foster long-term success and public trust.

3. Leadership's Crucial Role:

• The report identifies strong and ethical leadership as a critical driver of ethical culture within firms.
• It calls for leaders to demonstrate a commitment to ethical values, set clear expectations, and hold individuals accountable for their actions.

"Tone at the top" is critical in shaping ethical behaviour. Leaders must be role models and actively promote ethical conduct within the firm. (Report, Appendix One)

4. Robust Governance Framework:

• The report recommends developing a comprehensive, firm-wide governance framework to support and promote ethical behaviour. This framework should encompass:
• Accountability mechanisms applicable to all personnel
• Independent input mechanisms (e.g., Independent Non-Executives)
• Performance management policies that incentivise ethical behaviour
• Transparency and reporting mechanisms

5. Systemic Importance of Large Firms:

• The report recognises the "systemically important" role of large firms that have significant influence on industries and economies.
• These firms face heightened public scrutiny and calls for enhanced transparency and accountability mechanisms.

6. The Emergence of Private Equity Investments:

• The report highlights the growing trend of private equity investments in accounting firms and the potential implications for ethical culture and governance.
• While such investments can fuel growth and innovation, concerns exist regarding the influence of PE ownership on ethical decision-making and audit quality.

Recommendations

The FCGWG recommends two primary actions:

1. Standard-setting Project:

• Develop new provisions in the IESBA Code to address firm culture and governance, focusing on:
• Leadership commitment and responsibility for promoting ethical behaviour
• A robust firm-wide governance framework encompassing accountability, independent input, and performance management policies aligned with ethical values
• These provisions should be principles-based, scalable, and applicable across all service lines.

2. Non-Authoritative Materials (NAMs):

• Develop a series of NAMs to complement the new standard, covering topics like:
• The role of stakeholders, including regulators, PAOs, and those charged with governance, in promoting ethical behaviour within firms
• Illustrative examples of best practices for implementing the new firm culture and governance provisions

Conclusion

The FCGWG Final Report provides a valuable analysis of the critical link between firm culture, governance, and ethical behaviour within accounting firms. It underscores the profession's fundamental responsibility to act in the public interest and outlines concrete steps to strengthen ethical culture and rebuild public trust. The recommendations for a new standard and supporting NAMs lay the groundwork for a more robust framework to promote ethical conduct and accountability within the profession.

#Mediterranean #Accountants

United by the Accountant-Sea

By fostering strong ethical cultures and robust governance frameworks, accounting firms in the Mediterranean region, play a crucial role in shaping the region's economic landscape.

FCM - Fédération des Experts Comptables Mediterranéens / Federation of Mediterranean Accountants is committed to supporting its member organisations in implementing the IESBA's recommendations, recognising that a robust ethical foundation is essential for the profession's continued success and the region's prosperity.

Full report available here:

IESBA Firm Culture and Governance Working Group Final Report | Ethics Board