5.5 Ethical Codes: Rules-Based vs Principles-Based & How Professional Behaviour Protects the Public

Ethical Codes: Rules-Based vs Principles-Based & How Professional Behaviour Protects the Public

Three learning outcomes in Area 4 of ICAB Syllabus 2023 sit together: stating the role of ethical codes and identifying the key features of the system adopted by IESBA and ICAB, recognising the difference between a rules-based and a principles-based code, and recognising how the principles of professional behaviour protect the public and fellow professionals.

1. Why the profession has a code at all

Accountancy is a profession rather than a trade because it accepts a duty to the public interest that can override the interests of the individual member and of the paying client. That claim only survives if it is enforced.

An ethical code serves five functions:

1. Protecting the public interest. Users rely on assurance they cannot themselves verify; the code is the mechanism that makes reliance rational.
2. Setting a common standard. Members, clients, regulators and employers know what conduct to expect.
3. Providing a decision framework. It gives a structured method for resolving dilemmas that would otherwise turn on individual temperament.
4. Providing a disciplinary basis. Conduct can be measured against a published standard, so ICAB can sanction breaches.
5. Protecting members. A member who refuses an improper instruction can point to a binding external obligation rather than personal preference — a genuinely useful shield in commercial pressure.

ICAB is a member body of the International Federation of Accountants (IFAC) and has adopted the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA) as the ICAB Code of Ethics. Members are also subject to the Bangladesh Chartered Accountants Order 1973 and the ICAB bye-laws, which govern professional misconduct and discipline.

2. Rules-based versus principles-based codes

Why the profession chose principles

The decisive weakness of a rules-based code is that it can be gamed. If the rule prohibits a partner holding shares in an audit client, a member can arrange for a relative to hold them and claim compliance while the underlying threat to objectivity is unchanged. A principles-based code asks whether objectivity is threatened, and answers yes.

Principles also cope with change. New services, new instruments and new technologies appear faster than any rulebook can be rewritten. A framework built on integrity, objectivity, competence, confidentiality and professional behaviour applies to a situation nobody drafted for.

The IESBA Code is not purely principles-based

An important nuance: the Code contains a small number of outright prohibitions where the threat is so severe that no safeguard could reduce it to an acceptable level. Examples include assuming a management responsibility for an audit client, and certain financial interests in an audit client. The Code is therefore principles-based with targeted rules, which is the accurate way to describe it in an answer.

3. Key features of the system adopted by IESBA and ICAB

1. Five fundamental principles — integrity, objectivity, professional competence and due care, confidentiality, professional behaviour.
2. A conceptual framework requiring the accountant to identify threats, evaluate their significance and address them by eliminating the circumstance, applying safeguards, or declining or ending the engagement.
3. The reasonable and informed third party test — the benchmark for whether a threat is at an acceptable level is whether such a party, weighing the facts available at the time, would likely conclude that the accountant complied with the fundamental principles.
4. International Independence Standards — additional requirements for audit, review and other assurance engagements, including the six threats, the independence-of-mind and independence-in-appearance distinction, fee dependency provisions and long-association and rotation rules.
5. Separate parts for different roles — Part 2 addresses professional accountants in business and Part 3 addresses professional accountants in public practice, with the NOCLAR provisions appearing in Section 260 for the former and Section 360 for the latter.
6. Documentation. Judgements made under the framework, and the safeguards applied, are documented so they can be reviewed.

4. How professional behaviour protects the public and fellow professionals

Professional behaviour requires compliance with relevant laws and regulations and the avoidance of any conduct that the accountant knows or should know might discredit the profession. Candidates are asked specifically how this protects two different groups.

Protection of the public

• It sustains trust in audited and assured information, without which capital markets and lending decisions become materially more expensive.
• It ensures accountants comply with law — tax, anti-money-laundering, company law — rather than assisting clients to evade it.
• It restrains misleading self-promotion: members must not make exaggerated claims about services or qualifications, or disparaging references to others' work.
• It gives the public a route to redress, because conduct falling below the standard is a disciplinary matter for ICAB.

Protection of fellow professionals

• Reputation is collective. One member's misconduct becomes "accountants cannot be trusted" in public perception, damaging every member's ability to practise.
• It maintains a level competitive field, so members who follow the rules are not undercut by those who do not.
• Rules on professional clearance — communicating with the outgoing auditor before accepting an appointment — protect the predecessor from being replaced silently to bury a disagreement.
• It preserves the profession's self-regulatory standing, which is retained only while self-regulation demonstrably works.

5. Applying the framework to a dilemma

Use the same sequence every time:

1. Establish the facts. Do not act on assumption.
2. Identify which fundamental principles are threatened.
3. Classify the threat as self-interest, self-review, management, advocacy, familiarity or intimidation.
4. Evaluate significance against the reasonable and informed third party test.
5. Address it: eliminate the circumstance, apply safeguards, or decline or end the engagement.
6. Document the assessment and the action taken.

If safeguards cannot reduce the threat to an acceptable level, the answer is always to decline or withdraw — never to proceed and hope.