CPA Ethics and Governance cheat sheet

Ethics is the study of the moral principles governing behaviour; a professional code converts general moral norms into enforceable obligations on members.

Teleological (consequentialist) theories judge an act by its outcomes - utilitarianism seeks the greatest net good for the greatest number and can justify sacrificing a minority.

Deontological theories judge an act by duty or rule irrespective of outcome; Kant's categorical imperative requires acting only on maxims that could be willed as universal law.

Virtue ethics locates morality in the character of the agent (honesty, integrity, courage) rather than in the act itself or its consequences.

APES 110 / IESBA five fundamental principles: integrity, objectivity, professional competence and due care, confidentiality, professional behaviour.

The social contract of a profession: monopoly rights, restricted title and self-regulation are granted in exchange for serving the public interest ahead of member self-interest.

Five categories of threat to compliance: self-interest, self-review, advocacy, familiarity and intimidation; management participation and fee dependence are common sources.

Agency logic underpins the profession's role: information asymmetry between managers and capital providers creates demand for independent assurance and ethical restraint.

Ethical relativism holds that right and wrong vary with culture or individual, denying a single universal standard - a position professional codes reject in favour of minimum global norms.

Conceptual framework sequence: identify the threat, evaluate its significance (reasonable and informed third-party test), then eliminate the circumstance, apply safeguards, or decline/terminate the engagement.

Independence prohibitions: no direct financial interest or material indirect interest in an audit client for engagement team members; loans and guarantees to clients are generally prohibited.

Inducements (gifts, hospitality): acceptable when trivial and inconsequential; otherwise assess intent and whether a reasonable third party would perceive integrity as compromised.

Confidentiality survives termination of the engagement; disclosure is permitted only with consent, where required by law, or where there is a professional right or duty to disclose.

Conflicts of interest are managed by separate teams and information barriers ('ethical walls'), confidentiality, and disclosure to and consent from affected parties.

Rest's four-component model: moral sensitivity → moral judgement → moral motivation → moral character; failure at any component produces unethical behaviour.

The AAA model: establish facts, define the ethical issue, identify principles and values, specify alternatives, compare against principles, assess consequences, decide.

Jones's moral intensity dimensions: magnitude of consequences, social consensus, probability of effect, temporal immediacy, proximity, concentration of effect.

Fee dependence: a large proportion of total fees from one client creates a self-interest threat requiring disclosure, external quality review or engagement decline.

Agency theory: separation of ownership and control plus self-interested managers generates agency costs, addressed by monitoring (boards, audits) and incentive alignment.

Agency costs = monitoring costs borne by principals + bonding costs borne by agents + residual loss where interests still diverge.

Stakeholder theory: the entity is accountable to all affected parties (employees, customers, suppliers, communities), not only to shareholders.

Stewardship theory: managers are intrinsically motivated stewards, favouring insider-dominated boards and combined CEO/chair roles.

Resource dependence theory: board capital = human capital (expertise, experience) + relational capital (networks, legitimacy); composition should match the resources the entity needs.

Legitimacy theory: organisations seek to appear to operate within societal norms, using voluntary disclosure to maintain a social licence to operate.

Managerial hegemony and class hegemony theories: boards are symbolic, dominated by management or by an elite linked through interlocking directorates.

Positive accounting theory: managers select accounting and disclosure policies to reduce political costs, tax and contracting costs, not necessarily to report faithfully.

Transaction cost economics (Williamson): governance structures - market, hybrid, hierarchy - are chosen to minimise transaction costs including opportunism and asset specificity.

Australia uses a unitary board; the ASX Corporate Governance Council Principles and Recommendations (4th edition) contain 8 principles applied through 'if not, why not' disclosure.

Principle 2: board of appropriate size, skills and diversity, majority independent directors, and an independent chair who is not the CEO.

Principle 4 recommends an audit committee of at least three members, all non-executive, majority independent, chaired by an independent director who is not the board chair.

Audit committee remit: financial reporting integrity, external auditor appointment and independence, internal audit, risk management and internal control, whistleblower arrangements.

Remuneration committee: independent members, no executives participating in decisions on their own pay, remuneration linked to performance and disclosed.

Common board committees: audit, risk, remuneration, nomination, and sustainability or health-safety-environment committees.

Corporations Act 2001 directors' duties (ss 180–184): care and diligence, good faith, proper purpose, avoid material personal interest, no insolvent trading, no misuse of position or information.

Principle 7: a sound risk management framework with internal control, and disclosure of whether the internal audit function is independent of management.

Section 295A declaration: CEO and CFO must state in writing that financial records comply with accounting standards and give a true and fair view.

Triple bottom line reporting evaluates performance on three dimensions: economic (profit), social (people) and environmental (planet).

Integrated reporting (IIRC) framework uses six capitals: financial, manufactured, intellectual, human, social and relationship, and natural - showing value creation over time.

GRI Standards provide the most widely used sustainability reporting framework, comprising universal standards and topic-specific economic, environmental and social standards.

Sustainability materiality: topics that reflect significant economic, environmental and social impacts, or that substantively influence stakeholder assessments and decisions.

Stakeholder salience (Mitchell, Agle & Wood): power, legitimacy and urgency determine classification as latent, expectant or definitive stakeholders and hence priority.

Carroll's CSR pyramid ranks responsibilities as economic, legal, ethical, philanthropic - lower layers must be satisfied before higher ones.

Assurance over sustainability reports uses ISAE 3000 or AA1000AS; scope and level (limited vs reasonable) must be disclosed to avoid an assurance expectation gap.

TCFD recommendations structure climate disclosure around governance, strategy, risk management, and metrics and targets; the UN SDGs provide 17 global goals.

Greenwashing - overstated or misleading environmental claims - is treated as misleading or deceptive conduct under the Australian Consumer Law, enforced by the ACCC.