Question

Pham Toan Vu is chief accountant for the Bank of Australia. Through vigorous marketing the bank has grown rapidly, but there is some evidence of a decline in the quality of the loans it is making. The bank seems to be getting business that is rejected by other banks. Because of strict credit control procedures, the bank has had very few bad-debt problems in the past. It has traditionally maintained a provision for doubtful debts of about 5% of loans receivable.

For the year ended 30 June 2018, however, Pham is convinced that this provision should be increased to about 10% of loans receivable. If Pham’s advice is accepted, the doubtful debt expense will be about $200 million higher than normal. The managing director of the bank dismisses Pham’s opinion.

Pham is deeply hurt by the managing director’s personal attacks, but insists that the matter be considered by the bank’s audit committee. The bank’s auditors, an international firm, express some concern about the difference of opinion, but eventually decide to support the managing director on the ground of ‘his experience in the banking industry’.

Pham, however, strongly believes that the bank’s financial statements will be misleading if the provision is not increased. She is also fearful that the managing director’s lending policies are irresponsible, with implications for the survival of the bank.

Required :

Apply the AAA model of ethical decision making to this scenario. The analysis should include references to the ‘Code of Ethics for Professional Accountants’ where appropriate.

Answer 1

Determine the Facts

Pham is an accountant in business being Chief Accountant at the Bank of Australia. The bank’s loan portfolio appears to have become too heavily weighted with high-risk loans. Pham has formed the view that the bank’s bad debts provision should be substantially increased to reflect the higher risk, but her recommendation has been emphatically rejected by the managing director. An appeal to the bank’s auditor has also been unsuccessful because the auditor has favoured the more extensive experience of the managing director.

Define the Ethical Issue

Key stakeholders include Pham, the managing director, the auditors, the bank’s shareholders and the bank’s depositors.The most immediate decision problem for Pham is how should she respond to the rejection of her recommendation.

Identify the Major Principles, Rules and Values in relation to the Code of ethics for Professional Accountant

Major professional ethical principles are:

1.Integrity -Pham should promote honesty with regard to the bank’s financial statements.

2.Objectivity -Pham should not be influenced by the fact she is employed by the bank.

3.Competence and Due Care-Pham should ensure that the calculation of the provision reflects appropriate accounting practices, calculations, etc..

4.Confidentiality-Pham should not disclose the private information of the bank without permission.