Examining the International Accounting Codes of Conduct

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The International Federation of Accountants (IFAC) has recently issued a revised "Code of Ethics for Professional Accountants" (IFAC Code). As a requirement for membership in IFAC, a national accounting organization must either adopt the IFAC Code or adopt a code of conduct that is not "less stringent" than the IFAC Code. In this paper, we examine the extent to which 158 national accounting organizations have adopted the revised IFAC Code as their own. Our results indicate that 80 of our sample organizations have adopted the IFAC Code (sometimes with minor modifications), while the remaining 78 opted not to utilize the model IFAC Code. We then test the hypothesis that national accounting organizations in lower income economies would be less likely to adopt the IFAC Code than those in high income economies. Our results do not support the hypothesis. We argue that one potential reason for such a finding is that adopting the IFAC Code may be a cost effective means of adopting a code of ethics for organizations in lower income economies.

Introduction

Even though it is generally conceded that we are moving toward a global economy, the accounting profession has traditionally been slow in progressing past national boundaries. For example, most countries have their own financial reporting standard setting body (e.g., the Financial Accounting Standards Board in the United States) and unique accounting professional organization (e.g., the American Institute of Certified Public Accountants). However, within the past few years, there is some movement toward internationalization in the accounting profession. As an example, the International Accounting Standards Board is attempting to harmonize financial reporting standards throughout the world. Similarly, and more relevant to this study, the International Federation of Accountants (IFAC) has recently issued a revised "Code of Ethics for Professional Accountants" (IFAC Code). According to Farrell and Cobbin (2000, p. 182), the IFAC Code is "intended as a model code directed at national associations of accountants." In other words, the IFAC Code can potentially serve as the basis for various national accountancy codes of conduct.

Given the rate at which we are approaching a global economy, one might predict that there would be significant similarities across international accounting codes of conduct. However, there may be cultural, institutional, philosophical, and nationalistic influences on the purposes, approaches, and content contained in codes of ethics in the accounting discipline across the world. Our goals in this study are to assess the extent to which various national accounting organizations' codes of conduct align with the recently revised IFAC Code and to test whether national accounting organizations' choice as to whether to adopt the IFAC Code is influenced by socioeconomic factors.

Prior Research

Our literature review has uncovered only two prior studies that analyze a number of international accounting codes of conduct. In the earlier of the two studies, Farrell and Cobbin (2000) conducted a content analysis of 57 national accounting associations' codes of ethics. They found that 96% of the codes of conduct that they analyzed were decretal (i.e., rule-based) in nature. Even though the vast majority of the 57 codes were rule-based codes, many of them also included an allodial (i.e., inspirational) component that listed important values and/or principles that professional accountants should adhere to. Farrell and Cobbin (2000, p. 188) conclude that:

The Ethics Committee of IFAC has chosen to provide a model code of ethics in the quest for harmonisation of measurable behavioural standards for professional accountants throughout the world. The findings presented in this paper indicate that the position taken by IFAC in selecting a decretal code (with inspirational content) is congruent with the codes analysed in this research.

More recently, Jakubowski et al. (2002, p. 111) examined "the extent to which similarities and differences exist in the codes of professional conduct of certified (chartered) accountants across the following countries: the United States, Taiwan, South Korea, Malaysia, Ontario (Canada), Australia, India, and Hong Kong." They found both similarities and differences in ethical rules across the eight countries analyzed. Specifically, Jakubowski et al. (2002, p. 111) determined that some ethical rules were "culture free" and did not vary across the eight countries, while "cross-country variations" were present in regards to the elaborateness and/or specificity of certain ethical rules. They attributed the cross-country variations to various factors, including economic, cultural, and legal differences across the countries.

On a more conceptual level, Cohen et al. (1992, p. 687) provide "a framework for the examination of cultural and socioeconomic factors that could impede the acceptance and implementation of a profession's international code of conduct." Specifically, they apply their analysis to the decision as to whether or not to adopt the version of the IFAC Code that was in place at the time of their analysis. While we concede that the decision as to whether to adopt the IFAC Code may be influenced by both cultural and socioeconomic factors, in the current paper we focus on socioeconomic influences and leave the cultural influences for future research efforts.

Cohen et al.'s (1992) analysis suggests that a country's level of socioeconomic development is related to the decision about whether to adopt the model IFAC Code or not. They argue that national accounting organizations in less developed economies will be resistant to adopting the IFAC Code since the code was largely authored by, and is primarily useful for accountants in developed economies. Cohen et al. (1992, p. 690) develop their argument as follows:

Wallace (1990) identifies the lack of appropriateness of international standards for developing countries as the primary problem confronting harmonization of accounting standards. A code of ethics which addresses the ethical conflict arising in the context of the high technical proficiency required of accountants in a developed economy might also be inappropriate, or at the very least irrelevant, for accountants in developing countries.

In the current paper, we extend prior research in three ways. First, our research is unique since, in the first stage of the analysis, we do not conduct a cross-country analysis, but rather compare each of our international accounting codes of conduct with the model IFAC Code. That is, our goal is to assess the extent to which the IFAC's efforts to harmonize ethics standards have been successful. Second, this paper represents an update of prior research findings since we examine various national accounting organizations' decision about whether to adopt the IFAC Code in a time period subsequent to the recent major revision of the IFAC Code. Third, we conduct an empirical assessment of the hypothesis suggested by Cohen et al.'s (1992) analysis that the decision to adopt the IFAC Code is related to a country's level of socio-economic development.

The IFAC Code of Ethics

The International Federation of Accountants currently has 134 members and 24 associate [1] member organizations. Members of the IFAC are national accounting organizations rather than individual professional accountants or accounting firms. For example, there are currently three IFAC member organizations in the United States. They are the American Institute of Certified Public Accountants (AICPA), the Institute of Management Accountants (IMA), and the National Association of State Boards of Accountancy.

According to the IFAC Code, the mission of the International Federation of Accountants is "the worldwide development and enhancement of an accountancy profession with harmonized

standards, able to provide services of consistently high quality in the public interest" (IFAC, 2005, p. 2). International harmonization of accounting standards, including ethical standards, is therefore a major goal of the IFAC. Pursuant to that goal, the IFAC issued a revised "Code of Ethics for Professional Accountants" in June 2005. As previously mentioned, Farrell and Cobbin (2000) describe the IFAC Code as a model code of ethics directed at national accounting associations.

Adoption of the IFAC Code is not a prerequisite for membership in the IFAC. However, according to the IFAC Code, "A member body of IFAC or firm may not apply less stringent standards than those stated in this Code" (IFAC, 2005, p. 2). IFAC member organizations may therefore adopt their own code of conduct for their members. However, any code adopted by IFAC member organizations must not be "less stringent" than the IFAC Code.

Based on the preceding discussion about the possibility that IFAC member organizations may choose to adopt a code that is not "less stringent" than the IFAC Code and Cohen et al.'s (1992) analysis of socioeconomic influences on the adoption decision, we have formulated two research questions. Our primary research question is: "To what extent are IFAC member accounting organizations adopting the IFAC Code of Ethics as their own?" In other words, are IFAC members adopting the model IFAC Code or are they utilizing a unique code of ethics that is not "less stringent" than the IFAC Code? Our secondary question is "What is the effect of socioeconomic level on the decision as to whether to adopt the IFAC model code?"

Data Collection and Empirical Results

Data

We were able to collect the necessary data directly from the IFAC website (IFAC, 2007) about whether IFAC member and associate organizations have adopted the IFAC Code. Each IFAC member organization must complete a survey as a requirement of membership and the results of those surveys are available online to the public. The survey consists of two parts. In Part 1, IFAC members and associates must provide information regarding their country's standard-setting and regulatory framework, while in Part 2 they describe their organization's attempts to address IFAC's membership requirements. A portion of the Part 2 survey questions specifically address whether the member organization has adopted the model IFAC Code of Ethics. We were able to collect data on whether all 158 member and associate members adopted the IFAC Code or not.

It is important to note at the outset that our data represents self-reported data by each of the 158 IFAC member organizations. We would also point out that we classified each national accounting organization as either an adopter or non-adopter of the IFAC Code based on the survey responses that are currently available on the IFAC website. Most of the survey responses represent recent data since they were posted on the IFAC website within the last year, but a few of the responses have been on the website since June, 2006. Therefore, it is possible that one or more of the organizations that had not adopted the IFAC Code at the time that they completed the IFAC membership survey have subsequently adopted the IFAC Code as their own. [2] 

We also collected data on the socioeconomic status of each IFAC member's country from the World Bank (2007). The World Bank classifies economies into income groups based on gross national income per capita. The various income groups are labeled low income, lower middle income, upper middle income, and high income. According to the World Bank (2007, p. 1), "Low income and middle income economies are sometimes referred to as developing economies." However, in our analysis we have chosen not to combine the low income and two middle income groups into one "developing economies" group. Rather, we have chosen to examine each of the four World Bank income groups separately. [3] We were able to collect socioeconomic data for 153 of the 158 IFAC members and associates. Therefore, our empirical tests of the relationship between socioeconomic status and IFAC Code adoption decision are based on the 153 organizations for which we have complete data.

Empirical Results - IFAC Members Which Adopted the IFAC Code

Of the 158 IFAC member and associate member organizations, 42 have adopted the IFAC Code as their organizational code of ethics without any modifications. Table 1 lists these 42 national accounting organizations. A cursory examination of Table 1 reveals that the vast majority of accounting organizations that have adopted the IFAC Code without modification are from economies that are generally considered to be in the lower per capita income groups. Even though we will conduct a formal statistical analysis later in this paper, at first glance it appears that the hypothesis cannot be supported that lower income countries would be less likely to adopt the model code of ethics.

Table 2 provides a listing of another 38 national accounting organizations that have adopted the IFAC Code, albeit with modifications. For example, the Philippine Institute of Certified Public Accountants stated in their survey responses that they adopted the IFAC Code in its entirety with the exception of very small modifications in the requirements concerning advertising by professional accountants. For purposes of our analysis, we classify the 38 national accounting organizations listed in Table 2 as adopters of the IFAC Code of Ethics. Therefore, Tables 1 and 2 reveal that 80 out of the 158 (50.6%) IFAC members and associates have adopted (sometimes with minor modifications) the IFAC Code as their own code of ethical conduct.

Empirical Results -IFAC Members Not Adopting the IFAC Code

We have classified the 78 IFAC members and associates that did not adopt the IFAC Code into three categories, based on their responses to the IFAC survey. In Table 3, we provide a listing of the 34 IFAC members that responded that they have developed their own ethical requirements along with a process to eliminate differences between their ethical requirements and those of the IFAC Code. In other words, these 34 national accounting organizations have chosen not to adopt the IFAC Code as their own code of ethics at the present time, but they are on record as stating that they either plan to harmonize (i.e., converge) their ethical standards with those of the IFAC Code to the extent possible or replace their own code with the IFAC Code at some later date.

The Japanese Institute of Certified Public Accountants is an example of an accounting organization that is striving toward convergence of their code of conduct with the IFAC Code. They stated in their survey response that, "We have established an Ethics Committee charged with developing our Code of Ethics. When amending the existing Code or developing new requirements, the Committee reviews the IFAC Code and incorporates the IFAC Code requirements where necessary" (IFAC, 2007). As another example, the AICPA stated in their survey response that, "We have a convergence plan in place and are in the process of implementation" (IFAC, 2007).

It is interesting to note that accounting organizations from many of the largest economies (including the American Institute of Certified Public Accountants) are in this category. Again, at first glance, this result appears inconsistent with the hypothesis that accounting organizations in lower income economies would be less likely to adopt the IFAC Code as their own.

Table 4 lists the17 national accounting organizations that responded to the IFAC membership survey that they have developed their own ethical requirements and that they use another approach to incorporate the IFAC Code. As an example, the national accounting organization in Portugal stated in their survey response that "The IFAC Code of Ethics was considered and incorporated to some extent in our own Code of ethics. Our code is generally a principle based code containing the major issues of the IFAC Code that is more rules based than ours" (IFAC, 2007). Similarly, the Saudi Organization for Certified Public Accountants stated that "SOCPA prepared its code of ethics based on those ethics adopted in many countries including the code of ethics issued by IFAC" (IFAC, 2007). Therefore, in both of these examples, the accounting organization chose to adopt its own code of ethics and incorporated many of the provisions of the IFAC Code into their unique code of ethics.

A third example is also illustrative of the accounting organizations listed in Table 4. The accounting organization in Uruguay stated in their survey response that "The existing code differs from the existing IFAC Code of Ethics. At present, our organization is discussing how to minimize differences with IFAC Code of Ethics" (IFAC, 2007). Again, this accounting organization chose not to adopt the IFAC Code as their own, but they are intent on reducing the differences between their own code and the IFAC Code.

Finally, in Table 5 we list another 27 accounting organizations that have neither adopted the IFAC Code nor plan to converge their ethical requirements with those of the IFAC Code. In other words, the 27 organizations listed in Table 5 have not adopted the IFAC Code and have no plans to do so in the future. There are varied reasons for such a decision. For example, many of the organizations in this category state in their survey responses that ethical standards for professional accountants are mandated by law in their country and therefore there is no reason to adopt an ethical code beyond that prescribed by law. The accounting organizations in Finland, Germany, Belgium, Austria, and France that are listed in Table 5 each expressed this regulatory reason for not adopting the IFAC Code.

Another interesting reason for not adopting the IFAC Code was provided by the Institute of Management Accountants in the United States. The IMA stated in their survey response that "IMA established its Code of Ethics many years prior to the IFAC Code of Ethics. While the IMA Code is believed to be in compliance with the IFAC Code, this has not been established as a specific goal" (IFAC, 2007). In other words, the IMA is satisfied with their current code of conduct and has no desire to adopt the IFAC Code. One potential reason for such a response is that the IFAC Code is oriented toward professional accountants in public practice, while the vast majority of IMA members are involved in corporate or governmental accounting. It seems likely that professional organizations representing public accountants performing attestation work such as auditing financial statements would be concerned with ethical issues relevant to that work (such as independence), while managerial accountants would have different ethical concerns.

Regardless of the reasons given, each of the 78 national accounting organizations listed in Tables 3-5 chose not to adopt the IFAC Code as their own code of conduct at the time they answered the IFAC survey. As stated earlier, adoption of the IFAC Code is not mandatory for IFAC membership. What is required for IFAC membership is that any code of ethics adopted by an IFAC member organization must not be "less stringent" than the IFAC Code. As noted in the quote in the previous paragraph, the IMA "believes" that their code complies with the IFAC Code. Whether the IMA Code, or the codes for the other 77 non-adopting organizations for that matter, is at least as stringent as the IFAC Code is based on the subjective judgment of each of these national accounting organizations. We will revisit this issue when we provide some suggestions for future research.

Empirical Results - Is Adoption Decision Influenced by Socioeconomic Factors?

We categorized each of our national accounting organizations as either an adopter or a non-adopter of the model IFAC Code based on their responses to the IFAC membership survey. We also classified each organization based on its country's level of economic development. As stated earlier, we classified each organization into one of four income categories, based on economic data obtained from the World Bank website. The four income categories are low income, lower middle income, upper middle income, and high income. We were only able to collect economic data on 153 of our 158 accounting organizations. Therefore, the empirical tests described in this section were based on the 153 organizations for which we had complete data on both adoption decision and socioeconomic status.

Table 6 provides the results of a χ2 test that examines whether the decision to adopt the IFAC Code is influenced by socioeconomic factors. We are specifically testing the hypothesis that accounting organizations in lower income economies would be less likely to adopt the IFAC Code than those in high income economies. The results indicate that there is not a significant relationship between the IFAC Code adoption decision and socioeconomic status. Even if one were to view a p-value of 0.0997 as significant, the observed relationship is in the opposite direction than that hypothesized. Table 6 indicates that only 24 of the 58 (41.4%) accounting organizations in high income economies have adopted the IFAC Code as their own code of conduct. The table also shows an approximately equal percentage of adopters and non-adopters in both of the middle income groups. Both of these results are inconsistent with the hypothesis that accounting organizations in lower income economies would be less likely to adopt the IFAC Code.

Implications of Research Findings and Suggestions for Future Research

Our results indicate that the IFAC has been moderately successful in their attempt to harmonize ethics standards for professional accountants across the world. Our findings demonstrate that slightly over 50% of IFAC members and associates have adopted the IFAC Code (sometimes with minor modifications) as their own code of conduct. In addition, we found that numerous non-adopting accounting organizations are striving to minimize the differences between their code of ethics and the IFAC Code and still others are planning on adopting the IFAC Code at some later date. It therefore appears to us that the IFAC's harmonization efforts are working and we expect an even greater percentage of IFAC members will be adopters of the IFAC Code in the future than are now.

We are unable to provide empirical support for the hypothesis that accounting organizations in lower income economies would be less likely to adopt the IFAC Code. We believe that a potential reason for our lack of support for the hypothesized relationship is that accounting organizations in lower income economies may not have the resources needed to develop an effective code of conduct on their own. These organizations would therefore find it cost beneficial to simply adopt the model IFAC Code.

We should also note that there is potentially a difference between an accounting organization adopting a code of ethics and that organization being able to enforce such a code upon its membership. In other words, it may be relatively easy (i.e., low cost) for an organization in a lower income economy to adopt the IFAC Code, while the conditions within that country, including cultural and socio-economic factors, might make it very difficult for the organization to enforce the ethical code. It may very well be that an underfunded organization in a lower income country would find it very challenging to assess the extent to which members are compliant with an adopted code of ethics, let alone bring any meaningful enforcement action against members for alleged noncompliance. Therefore, Cohen et al.'s (1992) suggestion that economic endowment affects international accounting codes of ethics might well hold true if one examines adherence and enforcement rather than mere adoption.

There are several avenues for future research activity in this area. As stated earlier, in this paper we have focused on the socioeconomic influences portion of Cohen et al.'s (1992) analysis. Future research could test whether various cultural factors, including those described by Cohen et al. (1992), influence the IFAC Code adoption decision. As examples, do the extent to which a country (1) enjoys an established rule of law including property rights, (2) is a consumer verses regulatory oriented society, or (3) exhibits individualistic verses communal tendencies among its populous affect the likelihood that their professional accounting organizations would adopt a universal (international) code of ethics? Also as stated earlier, each non-adopter of the IFAC Code is required to have a code of conduct that is not "less stringent" than the model code. We believe an interesting empirical question is whether in fact the codes adopted by non-adopters of the IFAC Code are at least as restrictive as the IFAC Code.

As globalization continues to occur in culture, technology, and business, the accounting profession must continue to keep pace and reassess its role in the world economy and society as a whole. We hope that this study represents one effort, among many that must follow, to assess how the international accounting community may or may not be reacting to change.

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