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IAI Actuarial Core Principles · Business Finance · Ethical responsibilities of owners and managers

A manager's bonus depends on reported profit for the year. Close to year-end he asks the accounts team to defer recognising a known large expense to next year so that the bonus target is met. Which ethical principle is most directly breached?

The principle breached is integrity and objectivity in financial reporting. Moving a known expense into a later year to secure a personal bonus misstates profit, puts private interest ahead of shareholders and users of accounts, and undermines a true and fair presentation.

  1. AObjectivity and integrity in financial reporting, because he is placing personal gain above a true and fair viewCorrect
  2. BCompetence, because he lacks the technical skill to value the expense
  3. CConfidentiality, because he discussed the expense with the accounts team
  4. DSocial responsibility, because the deferral will reduce employment
  5. Stewardship, because he has retained too much cash in the business

Explanation

Deferring a known expense to hit a bonus target distorts the accounts for personal benefit. This breaches integrity and objectivity and undermines a true and fair view. Confidentiality and competence are not the issue, since the expense is known and discussed internally.

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