Free CPA Ethics and Governance Exam Flashcards

When a client's or employer's wishes conflict with the public interest, the professional accountant's overriding duty is to the public interest, not to whoever is paying them - the feature that distinguishes a profession from an ordinary service business.

Society grants accountants privileges such as a protected title and self-governing standards in exchange for prioritising public trust and reliable financial information over narrow commercial gain.

Global federation of professional accountancy bodies (CPA Australia is a member) that sets obligations its member bodies must meet. Since 2023 the ethics (IESBA) and audit (IAASB) standard-setting boards sit in the independent International Foundation for Ethics and Audit, not inside IFAC. IFAC does not discipline individual accountants.

The gap between what the public believes an audit guarantees - such as detecting all fraud or certifying a company's future viability - and what an audit actually provides: reasonable assurance that the financial statements are free of material misstatement.

AASB (accounting standards) and AUASB (auditing standards) are government-backed standard-setters. APESB sets the profession's ethical and professional standards, including APES 110. CPA Australia does not write these standards itself - it enforces APES 110 on its own members, illustrating the co-regulation split between government standard-setters and the professional body.

Without external oversight, a profession that writes and enforces its own rules can drift toward protecting members' interests rather than the public interest - one reason government regulators keep a role even alongside professional bodies.

A proven breach of professional standards can bring reprimand, fine, suspension, or expulsion from CPA Australia membership - a separate consequence from any court or regulator action arising from the same conduct.

Judges an action by its outcomes: the option producing the greatest overall benefit, or least harm, is preferred - the rule followed to get there matters less than the result.

Judges an action by whether it follows a moral rule or duty, not by its results - some acts (such as deceiving a client) are treated as wrong even if they would produce a better outcome.

It gives accountants a repeatable sequence (gather facts and stakeholders, identify the ethical issue, weigh options, decide, justify) so judgment calls under pressure are consistent and defensible rather than ad hoc.

Integrity, Objectivity, Professional Competence and Due Care, Confidentiality, and Professional Behaviour - the baseline standard of conduct expected of every CPA Australia member.

Integrity is being honest and straightforward; Objectivity is not letting bias, conflicts of interest, or undue influence override professional judgment. A member can be truthful yet still be biased, so both principles are needed.

Requires both maintaining up-to-date knowledge and skill AND acting diligently on each engagement - having competence without diligence (or the reverse) does not satisfy the principle.

The duty not to disclose client or employer information without proper authority yields when disclosure is legally or professionally required or permitted, such as responding to a regulator or reporting suspected money laundering.

Self-interest, Self-review, Advocacy, Familiarity, and Intimidation - the conceptual framework requires identifying which of these could compromise a member's compliance with the fundamental principles.

Arises when a member must re-evaluate a judgment or service they, or their firm, previously performed, making an objective reassessment difficult - for example, auditing statements you helped prepare.

Three ways to address a threat that isn't at an acceptable level: (a) eliminate the circumstances, including interests or relationships, creating it; (b) apply safeguards to reduce it to an acceptable level; or (c) decline or end the specific professional activity.

In a corporation, shareholders (owners) typically do not run daily operations; professional managers (agents) do. This split is a central structural reason corporate governance and oversight mechanisms exist, alongside broader accountability needs that apply even outside the corporate form.

Views managers as agents who may pursue self-interest over the owners' interests. Governance mechanisms - incentives, monitoring, an active board - exist to reduce this 'agency cost' and align management behaviour with shareholders.

Assumes managers act as trustworthy stewards of the owners' interests by nature, so governance should focus on empowering and trusting management rather than tightly monitoring them - the opposite emphasis to agency theory.

Separate legal personality, limited liability for shareholders, and perpetual succession. These features help companies raise capital, but also motivate governance rules that protect people who cannot directly control the entity.

The 4th edition (February 2019, effective for financial years from 1 January 2020) remains in force. A draft 5th edition went to public consultation in 2026; under that proposal, first reporting against a new edition would not be due until financial years ending 30 June 2028.

ASX-listed entities disclose against each Recommendation and, where they choose not to follow one, must explain why - a flexible alternative to forcing every listed company into identical governance practices.

Eight Principles, spanning management/board foundations, board effectiveness, an ethical and lawful culture, integrity of corporate reporting, timely disclosure, security holder rights, risk, and remuneration.

The ASX Principles recommend a majority of independent directors on a listed entity's board, plus a chair who is independent and, in particular, is not also the CEO - reducing management's influence over board decisions.

Recommendation 4.1: at least three members, all non-executive, a majority independent, chaired by an independent director who is not the board chair - aimed at keeping financial-reporting oversight free of management influence.

The FRC's 2024 edition applies on a 'comply or explain' basis to companies in the UK Listing Rules' commercial companies and closed-ended investment funds categories (premium listing ended 29 July 2024). It applies from financial years starting 1 January 2025; Provision 29 (internal-controls declaration) from 1 January 2026.

Rules-based regimes, such as the US Sarbanes-Oxley Act, mandate specific, detailed requirements with limited flexibility. Principles-based regimes, such as the ASX Principles and the UK Code, set broad principles plus recommended practices (ASX Recommendations, UK Code Provisions) that entities may depart from if they explain why.

National codes such as the ASX Principles and the UK Code share themes - board independence, disclosure, remuneration - but reflect local listing rules, legal systems, and ownership patterns, so one code cannot simply be copied onto another market.

Not-for-profits, government agencies, and private companies also need governance - clear roles, accountability, risk oversight - even though ASX listing rules and the ASX Principles do not apply to them directly.

The board sets strategy and oversees management; management runs day-to-day operations. Governance failures often trace back to a board doing management's job (or management operating with no real board oversight).

Diverse boards - in gender, skills, and experience - are recommended because varied perspectives reduce groupthink and improve decision quality, not simply to satisfy a compliance checkbox.

If 25%+ of votes oppose a listed company's non-binding remuneration report vote at two consecutive AGMs, a spill resolution is put to shareholders (s250V); if a majority backs it, a spill meeting to re-elect the board must be held within 90 days (s250W).

Linking non-executive directors' fees to company performance, like executive incentive pay, could compromise their independent oversight of that same performance - so governance codes recommend distinct remuneration structures.

Lets shareholders judge whether pay structures reward genuine long-term performance rather than short-term risk-taking, rather than simply disclosing a total dollar figure.

ASX-listed entities must promptly disclose information a reasonable person would expect to materially affect the entity's security price, as soon as the entity becomes aware of it - not only at scheduled reporting dates.

The ASX Principles recommend a board committee (or the full board) oversee the entity's risk management framework and review its effectiveness at least annually.

Governance principles recommend giving security holders a genuine opportunity to ask questions and vote at meetings - for example, webcasting or proxy facilities - rather than a meeting that only technically satisfies the law.

Management may be incentivised to understate risks tied to their own performance targets; independent board oversight provides a check that is less exposed to that same conflict of interest.

Australia's Corporations Act whistleblower regime protects people who report suspected corporate misconduct - such as current or former officers, employees, and contractors - from victimisation, and keeps their identity confidential.

A whistleblower who is protected on paper but whose identity leaks can still face informal retaliation - confidentiality is what makes an anti-detriment protection meaningful in practice, not just a policy statement.

Entities covered by the Privacy Act must notify affected individuals and the regulator when a data breach is likely to cause serious harm - a governance and disclosure duty, distinct from the technical cybersecurity controls themselves.

Under the Security of Critical Infrastructure Act 2018 (Cth), operators of designated critical infrastructure assets face statutory risk-management and incident-reporting duties, reflecting that some governance and security failures have consequences beyond the company itself.

Judges organisational performance across three dimensions - economic (profit), social (people), and environmental (planet) - rather than financial results alone.

Organisations report social and environmental information to appear consistent with society's values and norms, maintaining their 'social licence to operate' - the motive is perceived legitimacy, not simply supplying information investors demand.

Stakeholder theory holds that management is accountable to everyone affected by the business - employees, community, environment - not only to the shareholders who supply capital. The two views can point to different priorities.

Financial reporting only captures impacts that can be reliably reduced to a dollar figure, so it leaves out most of the social and environmental consequences of a company's activities that broader stakeholders are affected by.

The International Sustainability Standards Board issues global baseline standards - IFRS S1 (general sustainability disclosures) and IFRS S2 (climate disclosures). Australia's local climate standard, AASB S2, is based on IFRS S2 and is mandatory (phased in by entity size); the equivalent general standard, AASB S1, remains voluntary.

The largest entities (Group 1) began reporting under Australia's local climate standard for financial years starting on or after 1 January 2025. Group 2 entities followed from 1 July 2026, and Group 3 follows from 1 July 2027.

GRI Standards are voluntary and stakeholder-inclusive, covering broad economic, environmental, and social impacts. ISSB/IFRS standards are investor-focused, targeting information material to enterprise value, and are increasingly mandated by regulators.