ICAEW SE · Chapter 7
Ethics and public trust MCQs with Answers
18 multiple-choice questions on Ethics and public trust for ICAEW SE Sustainability and Ethics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
According to the ICAEW Code of Ethics, what is a distinguishing mark of the accountancy profession?
- A) Its focus on maximising fee income
- B) Its exclusive right to prepare all tax returns
- C) Its duty to act only in the interests of the employing organisation
- D) Its acceptance of the responsibility to act in the public interest
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Answer: D) Its acceptance of the responsibility to act in the public interest
The Code states that a distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. A professional accountant's responsibility is therefore not exclusively to satisfy the needs of an individual client or employer. This responsibility underpins public trust in the profession.
Question 2
In the context of governance, what does 'accountability' mean?
- A) Keeping accurate accounting records
- B) Having the right to make decisions without explanation
- C) Publishing all information about a company, including trade secrets
- D) Being answerable to others for decisions and actions, and accepting responsibility for their outcomes
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Answer: D) Being answerable to others for decisions and actions, and accepting responsibility for their outcomes
Accountability means that those with power, such as directors, must explain and justify their decisions to those they serve, such as shareholders and other stakeholders, and accept responsibility for the results. Keeping records supports accountability but is not the same thing. Accountability is the opposite of making decisions without explanation.
Question 3
Which of the following best describes 'transparency' in corporate governance?
- A) Using glass walls in office buildings
- B) Reporting only positive results to shareholders
- C) Making all decisions in private board meetings
- D) Openness and clarity in disclosing information, so that stakeholders can understand the organisation's decisions and performance
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Answer: D) Openness and clarity in disclosing information, so that stakeholders can understand the organisation's decisions and performance
Transparency is about open, clear and timely disclosure of relevant information, both positive and negative. It allows stakeholders to hold the organisation to account and supports trust. Selective disclosure of good news only undermines transparency.
Question 4
The UK Cadbury Report (1992) gave a widely used definition of corporate governance. What is it?
- A) The process by which a company calculates its tax liability
- B) The system by which companies are directed and controlled
- C) The set of accounting standards a company must follow
- D) The method by which share prices are determined
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Answer: B) The system by which companies are directed and controlled
The Cadbury Report defined corporate governance as 'the system by which companies are directed and controlled'. Boards of directors are responsible for the governance of their companies, and shareholders appoint the directors and auditors to satisfy themselves that an appropriate governance structure is in place.
Question 5
Why are independent non-executive directors considered important to good governance?
- A) They manage the day-to-day operations of the business
- B) They can provide objective challenge to executive management and help protect the interests of shareholders and other stakeholders
- C) They prepare the company's statutory financial statements
- D) They guarantee that the company will make a profit
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Answer: B) They can provide objective challenge to executive management and help protect the interests of shareholders and other stakeholders
Independent non-executive directors are not involved in day-to-day management, which allows them to scrutinise and challenge executives objectively. They often sit on audit, remuneration and nomination committees. This supports ethical behaviour and reduces the risk of management acting in its own interests.
Question 6
Shareholders own a company but appoint directors to run it. The directors award themselves large bonuses linked to short-term profits, at the expense of long-term value. Which concept does this illustrate?
- A) The tragedy of the commons
- B) The agency problem
- C) Professional scepticism
- D) The circular economy
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Answer: B) The agency problem
The agency problem arises when agents (directors) act in their own interests rather than in the interests of the principals (shareholders) who appointed them. Governance mechanisms such as independent boards, well-designed remuneration and transparent reporting aim to reduce this conflict.
Question 7
Which of the following best describes professional scepticism?
- A) An attitude that includes a questioning mind, being alert to conditions that may indicate misstatement, and critical assessment of evidence
- B) Assuming that management is dishonest in every engagement
- C) Accepting all information provided by a client as reliable
- D) Refusing to rely on any evidence unless it is obtained from a third party
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Answer: A) An attitude that includes a questioning mind, being alert to conditions that may indicate misstatement, and critical assessment of evidence
Professional scepticism means maintaining a questioning mind and critically assessing evidence, without assuming either dishonesty or unquestioned honesty. It helps accountants to identify errors, bias and fraud. Automatically assuming dishonesty or rejecting all client evidence would be unbalanced and impractical.
Question 8
Which of the following best describes professional judgement?
- A) Following rules mechanically without considering the facts
- B) Doing whatever the client's management prefers
- C) Making decisions based purely on personal intuition without regard to standards
- D) The application of relevant training, knowledge and experience to make informed decisions about the appropriate course of action in the circumstances
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Answer: D) The application of relevant training, knowledge and experience to make informed decisions about the appropriate course of action in the circumstances
Professional judgement involves applying knowledge, skills and experience, together with an understanding of the facts and relevant standards, to reach well-reasoned decisions. It is especially important under a principles-based code, where not every situation is covered by a specific rule.
Question 9
An accountant reviewing a provision estimate starts from last year's figure and makes only small adjustments, even though circumstances have changed significantly. Which type of bias is this most likely to be?
- A) Automation bias
- B) Groupthink
- C) Anchoring bias
- D) Availability bias
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Answer: C) Anchoring bias
Anchoring bias is the tendency to rely too heavily on an initial piece of information, such as last year's figure, when evaluating subsequent information. The accountant should reassess the estimate based on current evidence. Automation bias relates to over-reliance on systems, and groupthink to group decision-making.
Question 10
A finance manager believes that a new product has been a success. When reviewing sales data, she focuses on the regions with strong sales and pays little attention to regions where sales have been poor. Which bias is she showing?
- A) Anchoring bias
- B) Overconfidence bias
- C) Confirmation bias
- D) Automation bias
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Answer: C) Confirmation bias
Confirmation bias is the tendency to favour information that supports an existing belief and to underweight information that contradicts it. Recognising this bias helps accountants seek out and consider evidence fairly, which is essential for informed judgements and reliable communication with stakeholders.
Question 11
An assistant accepts the output of a spreadsheet-based forecasting tool without question, even though some results look unusual, because 'the system is always right'. Which bias does this demonstrate?
- A) Automation bias
- B) Confirmation bias
- C) Selective perception
- D) Representation bias
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Answer: A) Automation bias
Automation bias is the tendency to favour output generated from automated systems, even when human reasoning or contradictory information suggests it may be unreliable. Accountants should understand the limits of the tools they use and challenge unexpected results.
Question 12
A board consistently reaches quick unanimous decisions and members are reluctant to challenge the chief executive. Which of the following would be most effective in reducing the risk of groupthink?
- A) Requiring all decisions to be made more quickly
- B) Restricting board papers so that only the chief executive sees full information
- C) Appointing only directors who share the chief executive's views
- D) Inviting independent members to challenge proposals and asking for alternative options to be considered before decisions are made
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Answer: D) Inviting independent members to challenge proposals and asking for alternative options to be considered before decisions are made
Groupthink occurs when the desire for harmony leads a group to reach decisions without critically evaluating alternatives. It can be reduced by encouraging diverse views, independent challenge, considering alternatives and ensuring all members have full information. The other options would make groupthink worse.
Question 13
Which of the following is a likely consequence for the accountancy profession as a whole when a professional accountant is found to have acted unethically?
- A) Higher fees for all accountants
- B) Removal of the need for audit
- C) Automatic tax relief for clients
- D) Loss of public trust and confidence in the profession
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Answer: D) Loss of public trust and confidence in the profession
Unethical conduct by individuals damages the reputation of the whole profession and undermines public trust, which can lead to tighter external regulation. For the individual, consequences can include disciplinary action, fines and loss of membership. Organisations may suffer financial losses and reputational damage.
Question 14
Which of the following is part of ICAEW's regulatory role in maintaining public trust?
- A) Setting the rates of UK income tax
- B) Investigating complaints about members and firms and taking disciplinary action where appropriate
- C) Prosecuting criminal offences in the courts
- D) Appointing the directors of listed companies
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Answer: B) Investigating complaints about members and firms and taking disciplinary action where appropriate
ICAEW acts as a regulator of its members and firms, including monitoring firms, investigating complaints and taking disciplinary action. These measures help ensure that members comply with professional standards. Setting tax rates, prosecuting criminal offences and appointing directors are not ICAEW's role.
Question 15
A student member of ICAEW is unsure how to respond to an ethical dilemma at work and wants confidential advice. Which ICAEW resource would be most appropriate?
- A) The company's external auditors
- B) A social media discussion group
- C) The local newspaper
- D) ICAEW's ethics advisory service (helpline)
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Answer: D) ICAEW's ethics advisory service (helpline)
ICAEW provides a confidential ethics advisory service to help members and students apply the Code of Ethics to their circumstances. Discussing a client or employer issue on social media or with the press could breach confidentiality, and the external auditors are not the appropriate source of personal ethical advice.
Question 16
What is a key advantage of a principles-based code of ethics, such as the ICAEW Code, compared with a rules-based code?
- A) It gives a precise answer for every possible situation
- B) It removes the need for professional judgement
- C) It allows accountants to do anything not specifically prohibited
- D) It can be applied to new or unusual situations that specific rules do not anticipate
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Answer: D) It can be applied to new or unusual situations that specific rules do not anticipate
A principles-based code sets out fundamental principles and a conceptual framework that can be applied to any situation, including ones not foreseen when the code was written. It requires professional judgement. A rules-based code can encourage a 'tick-box' approach and the view that anything not expressly prohibited is acceptable.
Question 17
Which statement best describes the relationship between the IESBA Code of Ethics, the ICAEW Code of Ethics and the FRC Ethical Standard?
- A) The ICAEW Code is based on the IESBA Code with some additional UK requirements, while the FRC Ethical Standard applies to UK audits and certain other public interest assurance engagements and can impose stricter requirements
- B) The IESBA Code applies only in the UK and replaces both the ICAEW Code and the FRC Ethical Standard
- C) The FRC Ethical Standard applies to all accountants in business, whereas the ICAEW Code applies only to auditors
- D) The three codes are unrelated and frequently contradict each other
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Answer: A) The ICAEW Code is based on the IESBA Code with some additional UK requirements, while the FRC Ethical Standard applies to UK audits and certain other public interest assurance engagements and can impose stricter requirements
The IESBA Code is the international code issued by the International Ethics Standards Board for Accountants, and the ICAEW Code is derived from it with some additional requirements and guidance. The FRC Ethical Standard is issued by the UK audit regulator and applies to statutory audits and certain other public interest assurance engagements in the UK, where it can impose stricter requirements, particularly on independence. ICAEW members carrying out such engagements must comply with the FRC Ethical Standard, and where both apply they should follow the more restrictive requirement. The IESBA Code is not UK-only, and the codes are designed to be consistent rather than contradictory.
Question 18
An accountant faces a situation that is not specifically addressed anywhere in the ICAEW Code of Ethics. What should the accountant do?
- A) Conclude that, because there is no specific rule, any course of action is acceptable
- B) Wait until a specific rule is issued before acting
- C) Follow whatever approach their employer prefers
- D) Apply the conceptual framework to identify, evaluate and address any threats to compliance with the fundamental principles
Show answer & explanation
Answer: D) Apply the conceptual framework to identify, evaluate and address any threats to compliance with the fundamental principles
The ICAEW Code is principles-based. Where no specific requirement exists, the accountant must still comply with the fundamental principles by applying the conceptual framework: identifying threats, evaluating them, and addressing them by eliminating them or reducing them to an acceptable level. The absence of a rule does not make any action acceptable.