Ethics: Client Confidentiality, Conflict of Interest, and Whistleblowing
A senior finance manager at an Islamic bank is preparing the year-end accounts. She discovers that a large murabaha customer, also a board member's private company, has been granted a 9-month payment extension without the credit committee's approval and without disclosure to the audit committee. The extension was signed by the CEO. The finance manager's bonus is tied to the bank's reported profit, which would be flattered by not recognising an impairment on this exposure. Her line manager tells her the extension is 'a commercial matter, not an accounting one' and asks her not to raise it. She is also aware that the customer's file contains confidential medical information about the guarantor. The external auditor has asked a general question about related-party transactions.
1. Identify the ethical threats and how the finance manager should respond, applying the AAOIFI Code of Ethics for Islamic Financial Institutions.
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Threats:
- Self-interest: bonus linked to reported profit creates an incentive to suppress the impairment.
- Intimidation: the line manager's instruction not to raise it.
- Conflict of interest / related party: the customer is connected to a board member, and the extension bypassed the credit committee.
- Confidentiality vs disclosure: the guarantor's medical information must not be disclosed, but the related-party transaction and the extension must be.
Response:
- Do not suppress the impairment. Assess whether the extension constitutes evidence of impairment or a modification requiring accounting treatment; document the analysis.
- Escalate to the audit committee and, if unresolved, to the SSB/board. The manager's instruction cannot override the duty to present faithful financial statements.
- The related-party nature must be disclosed to the external auditor and in the financial statements per the applicable standard; the medical data is irrelevant to that disclosure and stays confidential.
- Record the escalation in writing. If the matter remains unresolved, use the whistleblowing channel.
The Code requires integrity, objectivity, professional competence, confidentiality, and professional behaviour; the bonus conflict must be disclosed and managed (e.g., recusal from the bonus determination on this item).
2. The external auditor asks a general question about related-party transactions. How should the finance manager answer without breaching confidentiality, and what must be disclosed?
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Confidentiality under the Code does not prevent disclosure to the external auditor in the course of the audit; it prevents disclosure to third parties without authority. The finance manager should:
- Answer the auditor's question accurately and completely, including the existence of the board member's connection, the 9-month extension, the absence of credit committee approval, and the CEO's signature.
- Not volunteer the guarantor's medical information, which is not relevant to the audit of related-party transactions and is protected.
Disclosure requirements:
- Related-party relationship and the nature of the transaction (the extension and any modification of terms).
- The amount, terms, and any impairment recognised.
- The governance breach (approval bypassed) as a control matter, reported to the audit committee.
- The accounting judgement on whether the extension is a modification or an impairment indicator.
Withholding the related-party facts from the auditor would itself be a breach of the Code and could mislead the financial statements.