TAKEAWAYS
In recent years, the accountancy profession has faced high-profile incidents linked to unethical behaviour in accounting firms. Recurring unethical behaviour in firms raises the broader issue of their culture and governance, and how these might impact ethical behaviour of professional accountants and their compliance with ethical standards.
With this in mind, the International Ethics Standards Board for Accountants (IESBA) determined that it should take a leadership role in addressing the topic of firm culture and governance (FCG), and established a working group (WG) in March 2024. The goal of the WG was to understand the impact of FCG on ethical behaviour within accounting firms, and the relevance of the IESBA Code in addressing these issues. As part of its information gathering, the WG commissioned an academic study and undertook extensive outreach throughout 2024 to engage with a broad range of global stakeholders to gather feedback on the issues surrounding FCG.
These outreach efforts culminated in the WG’s Final Report (Report), which was published in January 2025. The Report reveals that ethical culture will only become embedded in an accounting firm, if the firm has leaders who prioritise ethical values and behaviour, and exemplify that culture through their conduct. There must also be a strong FCG framework to ensure that ethical standards and policies are implemented and complied with across the firm.
In considering how an FCG framework will drive ethical culture and behaviour, the WG identified some common characteristics of what an ethical firm could look like.
1. Ethical leadership and oversight
First and foremost, the leadership needs to be committed to putting ethics, trust and public interest as a top priority, and to continually monitor and improve the firm’s ethical culture and performance. Leadership plays a pivotal role in shaping and fostering an ethical culture within a firm. Firm leadership should communicate the importance of ethical behaviour and lead by example, exemplifying these values through their actions and decisions. How leaders respond to ethical issues will be mirrored by their staff and thus, their behaviour should consistently reflect the firm’s values and serve as a role model for staff.
2. The provision of independent input
The effectiveness of an FCG framework in promoting ethical values and culture could be enhanced through independent input obtained from advisors or independent non-executives with the necessary skills, knowledge and experience. These advisors may provide advice on the firm’s oversight of key strategies and policy matters, how it addresses ethical issues or its ethical culture.
3. Accountability across the firm
Next, an ethical firm is one where partners and staff are committed to ethical behaviour and acting in the public interest. Accountability should be a shared responsibility among partners and staff at all levels within a firm, not just in its leadership. It involves holding everyone in the firm responsible for upholding ethical standards and the firm’s values. When partners and staff understand that they are accountable for their behaviour, they are more likely to adhere to ethical principles and contribute to a culture of integrity.
4. Incentives and rewards that align with ethical behaviour
Performance evaluations of partners and staff include measures on ethical performance to demonstrate the firm’s commitment to ethics and integrity. By aligning incentives and rewards with ethical behaviour, firms can create an environment where staff are driven to act ethically. Such alignment can serve as a strong motivator for ethical behaviour and is crucial for fostering an ethical culture.
Conversely, performance evaluations that prioritise short-term financial results over ethical considerations and integrity can lead to unethical behaviour. There is therefore a need to establish disincentive mechanisms for unethical behaviour, with clear penalties or negative consequences. How a firm’s leadership addresses breaches of ethical standards or other unethical behaviour will reflect its commitment to ethical values to both partners and staff as well as its external stakeholders.
5. A “speak-up” culture
Partners and staff feel comfortable with reporting unethical behaviour and challenging each other’s views and ideas. A "speak-up" culture that encourages open discussion and challenge is essential for identifying and addressing unethical practices. It involves creating an environment where partners and staff feel comfortable raising concerns and challenging unethical behaviour without fear of retaliation or negative consequences. A “speak-up” culture fosters transparency and accountability, empowering partners and staff to contribute to a firm’s ethical environment.
6. Transparency about the firm’s ethical performance
Lastly, a firm’s commitment to leadership accountability and its ethical values is demonstrated through its transparency regarding ethical performance. Such transparency should cover the measures in place to uphold the firm’s ethical values, including its approach to addressing breaches of ethical standards. Actions such as engaging in open discussions with regulators on ethical or public-interest related issues can enhance transparency. When firm leadership is transparent with its partners and staff about how it has handled ethical failures within the firm, it demonstrates the firm’s commitment to ethical values and compliance with ethical standards.
We appreciate IESBA’s efforts in embarking on this important project. However, we foresee challenges in developing an FCG framework that is principles-based, applicable across all service lines of the firm and scalable to accommodate smaller firms as well as large firms with global networks.
A “speak-up” culture might be hard to inculcate in smaller firms with few or sole practitioners who are dominant, making it hard for staff to voice their concerns. While obtaining independent input could be an avenue to address this, making this a rule requires careful consideration as there may be a limited pool of suitable advisors, and whether these advisors have sufficient influence over the leadership of smaller firms.
IESBA will initiate a standard-setting project based on the WG’s recommendations, to establish a global baseline for how firms should develop an FCG framework, covering its leadership, governance and other mechanisms that embed ethical values and incentivises ethical behaviour. IESBA will also look to develop non-authoritative materials (NAMs) to help firms in implementing the necessary FCG framework.
To inform the development of the new standard and NAMs, IESBA had held a series of in-person and virtual global roundtables between March and April 2025. Terence Lam, ISCA’s Director of Advocacy & Professional Standards, participated in the session that concluded on April 28 in Kuala Lumpur, Malaysia.
Ng Shi Zhen, CA (Singapore), is Associate Director of Professional Standards, ISCA.
© 2024 Institute of Singapore Chartered Accountants
