Principles versus rules in professional ethics

AUTHOR │Mandie Wentzel, Project Manager: Ethics and Practice at SAICA

SAICA’s Code of Professional Conduct aims to enable SAICA members and associates to meet their responsibility to act in the public interest (paragraph 100.1 A1). A code of conduct is a declaration of a profession’s values and in the code, the profession declares its obligations to society and defines the standards of behaviour that the public can expect from members of the profession. Having a code of conduct is a key requirement for accounting to be classified as a profession and not simply a vocation, as it provides the standards of professional conduct used for the self-regulation of the profession. The SAICA code is based on the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA code), which is a principles-based code rather than a rules-based one.

There are several reasons for selecting a principles-based code instead of a rules-based code − the most obvious being the diverse nature of the scenarios that professional accountants could find themselves in, as it would be impossible to create a rule of conduct for each unique situation.

Furthermore, rules-based approaches often have negative consequences, such as:

  • Increased legislation and regulation often lead to increased administration costs.
  • An excessive emphasis on rigid ‘box-ticking’’ may deflect attention from transparent accounting practices and the need to present an accurate and true reflection of the financial state of a company. Recent financial scandals have proven that a seemingly compliant company can still be hiding information.
  • Excessive or outdated regulations could encourage a disregard for the law.
  • An excessive focus on compliance to avoid penalties could divert management’s focus away from strategic expansion and limit the ability to identify growth opportunities.
  • When professional judgement is not encouraged, there can be a culture of depending on rules. This results in an inability to internalise the ethical values that the rules are meant to promote. When values are not internalised, compliance with rules must be carefully monitored, as it may depend on ‘who is watching’.
  • Professionals often look for loopholes to satisfy the demands of excessive rules while doing the very things that the rules were designed to prevent.
  • Excessive rules tend to challenge people to find ways to circumvent them. People then tend to try and push the envelope while trying to stick to the rules. The focus shifts away from doing the right thing and begins to centre on whether the law can be interpreted ‘to my benefit’.
  • The possible consequences of non-compliance are considered, as well as the possibility of claiming innocence through a difference in interpretation.
  • The law tends to be seen as the highest ethical standard (instead of the minimum) and legality versus ethicality is not considered. Professionals often try to appear ethical by meeting regulatory requirements. Compliance with minimum requirements (the rules) often leads to a false sense of being ethical, although the spirit underlying the rules is not taken into account.
  • Excessive regulation through rules tends to discourage professionals from applying professional judgement and they become reliant on tick-box and rules solutions. As no rules apply to all situations this is problematic, and where rules are not clear enough or no answers exist, there is a tendency to resolve to inaction. The problem is then either circumvented or passed on to others.
  • Excessive regulation can create a culture of blind compliance in which authority is neither challenged nor questioned.

Rules-based regulation therefore tends to create a culture of compliance instead of ‘doing the right thing’. There are, however, some advantages to using a rules-based code instead of a principles-based code. As principles-based codes (such as the SAICA and IESBA codes) allow a certain level of discretion, this could result in different interpretations of a situation, which could run the risk of people manipulating information. The biggest advantage of rules-based regulations is therefore that they are easier to apply since the requirements are prescriptive and leave little room for misinterpretation. Also, rules-based approaches are easier to enforce consistently and can provide comparability and standardisation as they require professional judgement, principles-based codes are often difficult to apply and may be ambiguous. The principles constituting a principles-based code could also be difficult to interpret, resulting in professionals not being able to make the right decisions due to a lack of guidance.

However, the advantages of having a robust and flexible principles-based code far outweigh the disadvantages:

  • Ethical dilemmas are unique, and a set of broad principles rather than rigid rules allows more flexibility and room for professional judgement.
  • Uniform principles create an ethical culture in which values drive behaviour.
  • Principles-based codes focus on providing guidance rather than prescribing, and thereby encourage responsibility. People tend to take ownership of their decisions when they have the freedom to adapt their behaviour to specific situations. This also prevents the cultivation of a check-box mentality and encourages professional judgement instead of seeking legalistic loopholes in the application of rules.
  • Internalised values allow one to consider what the right thing to do would be according to the legal requirements.
  • Principles provide clear objectives for behaviour rather than prescriptive rules and, in turn, act as deterrents for unethical conduct.
  • Principles-based codes describe the minimum requirements for conduct and behavioural expectations rather than specific activities.

To conclude: principles provide high-level guidance on what the right thing to do would be and call for professional judgement in the application of these principles in specific circumstances. By adopting a principles-based code, professional bodies such as SAICA shift the responsibility from having to identify prohibited services or activities to having professional accountants use professional judgement to manage threats to the fundamental principles of ethics through designing and implementing safeguards.