Building an Ethical Culture: Strengthening Trust in the Global Profession

Academic research identifies ethical culture as a key factor influencing professional behavior, establishing a strong link between an organization's ethical culture and the professional conduct of its employees. Research also shows that a strong ethical culture and governance support audit quality. Further, there are growing trends in accounting firms that can negatively impact public interest obligations. One study highlights that accounting firms have become increasingly driven by commercial interests over time, prioritizing revenue generation and client retention. Rising commercial pressures and private equity investments in firms also raise concerns about conflicts of interest and the potential erosion of public interest priorities. Against this backdrop, how does one ensure that ethics and the public interest are not compromised?

IESBA's Response: A Framework that Fosters an Ethical Culture

As a global standard setter for ethics for the accounting profession, the International Ethics Standards Board for Accountants (IESBA) has a clear public interest mandate to respond to these developments.

Informed by the insights from its Firm Culture and Governance (FCG) Working Group's final report, the IESBA approved the FCG project in December 2024 with the objective to establish a Firm Culture and Governance Framework (FCG Framework) consisting of eight elements, (1) ethical leadership; (2) oversight and governance; (3) provision of independent input; (4) accountability; (5) incentives and rewards; (6) a culture of open discussion and challenge; (7) continuous education and training; and (8) transparency, that can promote, support and reinforce a high standard of ethical behavior within accounting firms. This would help firms develop reputations and operate as highly ethical firms, mitigate the risks of unethical behavior, and strengthen public trust and confidence in services provided.

The IESBA is keenly aware of the wide range of accounting firms that operate across the world, and the different jurisdictional contexts to consider. India, as an example, has approximately 96,000 Chartered Accounting firms, with 75,000 of them being small and medium-sized firms. However, the six largest firms account for about 67% of Nifty 500 audits, underscoring their market dominance and the relevance of scalable ethics guidance.

The challenges of implementing the eight FCG elements, or some of them at least, are different for smaller firms as compared to larger firms, and accordingly, scalability and proportionality need to be considered.

Building an Ethical Culture: Eight Elements of a Firm Culture and Governance Framework

The significance of ethical leadership and the impact a leader has on the conduct of people within their organization cannot be underestimated. They must establish the "tone at the top" by modeling ethical behavior and demonstrating their commitment to ethics in practice by consistently aligning actions with values.

This is particularly relevant in organizations such as accounting firms and others alike which do not operate under a typical corporate structure, but rather a partnership model, where the leadership is usually significantly concentrated in one person or a very narrow group of people.

To ensure that the tone at the top has appropriately cascaded throughout the firm, it is just as important for leaders to understand the "mood in the middle" and "buzz at the bottom," fostering an environment of trust and psychological safety, where people feel encouraged to speak up and question decisions.

"In the face of difficult ethical decisions, just like in day-to-day management and action, an ethical leader must not allow any kind of undue external or internal pressure, including from clients or their own interests, to compromise ethical decision-making."

In the face of difficult ethical decisions, just like in day-to-day management and action, an ethical leader must not allow any kind of undue external or internal pressure, including from clients or their own interests, to compromise ethical decision-making. For those looking from the outside-in, not to mention those looking from within, there should be no question that ethics is a driving force in strategic decisions and deeply embedded within the firm's strategy. This includes focusing on promotion criteria and recruitment strategy to ensure that people with strong ethical values are hired, employed, and promoted, and that commercial achievements are not the only, or the most important, hiring and promotion drivers.

Ethical leadership is a "must-have" in all firms, irrespective of their dimension. However, the impact of senior leadership's decisions at a small and medium practice (SMP) may be felt more directly and swiftly by individuals in the firm than those working in a larger firm. It can be argued that if senior leadership sets the appropriate ethical tone and strategy for the SMP, it is easier for it to permeate through the firm. But some ethical decisions, like declining a client for ethical reasons, can be more challenging in SMPs given the higher commercial pressures.

Oversight and governance mechanisms are critical elements in building an ethical culture. In whatever form they are incorporated into a firm's structure, such mechanisms are crucial to ensure the fundamental checks and balances that support ethical decision-making. They are the "hardware" of an ethical organization.

A senior-level ethics leader or committee, or internal oversight mechanisms, may help build and strengthen oversight and governance mechanisms. The appointment of a senior-level ethics leader, with appropriate levels of information and authority, sends a powerful message and establishes an effective platform for ethics as a strategic imperative.

However, it is also important to consider operational realities and alternative approaches depending on the firm.

Independent input mechanisms also reinforce the firm's internal oversight, governance, and culture by incorporating objectivity, challenge, and a public interest perspective into executive decision-making. This can be done through a supervisory board, an ethics committee, independent directors, external advisors, or other mechanisms. There is no one-size-fits-all approach for obtaining independent input, and each firm should tailor its approach based on its circumstances.

SMPs can experience challenges with finding qualified and experienced external individuals to provide independent input. Nevertheless, they can seek input through other avenues, such as their Professional Accounting Organization (PAO), regulators, or consultants.

Importantly, it is crucial to ensure the true objectivity of those providing such input and the absence of any factor that might unduly influence their judgment. This input, however, will only make a difference if and when the firm, and its leadership above all, is ready to accept it and transform it into real value that helps set a consistently ethical line of action throughout the firm.

This is where accountability comes in, as an obligation to act responsibly for maintaining ethical standards, upholding the firm's values, and, accordingly, being answerable for one's actions. It involves not only being prepared to justify decisions and behaviors to those affected by the work but also being open to scrutiny and evaluation against principles of good practice, legitimate expectations, and professional norms.

At its core, accountability stems from a fiduciary relationship: a privilege entrusted to an individual or institution to act on behalf of others. In audit, this means upholding public trust through certification of financial information, and in consulting, honoring client delegations with integrity.

Clear and consistent expectations for ethical behavior must, therefore, be communicated across all levels to establish a baseline expected ethical behavior against which everyone in the firm is able to justify an action, irrespective of geography or service line. For example, a firm-wide code of conduct could establish clear expectations across service lines and regions.

Continuous education and training are integral components for establishing expected behavior. It should not be treated as standalone training content, but rather to instill and build ethical awareness. This means being able to identify ethical dilemmas that are in the "gray zone" and having an "ethical muscle" with the necessary skillset and fortitude for ethical decision-making. This can either be done through in-house training programs or by making use of external support. For example, SMPs might rely on their PAO or form an informal sharing network with other SMPs. ⁱⁱ

"Firms can also use incentives and rewards to emphasize ethical expectations and make ethical conduct organic. Setting financial targets or incentives for such behavior can be deeply transformative for a firm's culture."

Firms can also use incentives and rewards to emphasize ethical expectations and make ethical conduct organic. Setting financial targets or incentives for such behavior can be deeply transformative for a firm's culture. For example, it has been used in the financial sector after the financial crisis, where it became clear that remuneration structures and policies were one of the factors contributing to the problems that ended up generating the crisis. Non-financial recognition, in many ways, can also be an effective tool to reward those who demonstrate exemplary ethical behavior. Additionally, firms can implement disincentive mechanisms, such as considering unethical behavior in determining promotions or bonuses.

Awareness of ethical expectations is crucial for partners and staff, but individuals also need to feel comfortable to be able to raise questions and point out when they face ethical dilemmas in practice.

This is why a culture of open discussion and challenge should be encouraged by firms. This is an effective and engaging way to allow early detection and timely addressing of the problems at the right level. Effective prevention or early remediation avoids small issues from becoming big problems. This includes open discussion of ethical issues and dilemmas at all levels and creating an environment where people feel comfortable challenging decisions, putting alternatives forward, and sharing their concerns. This starts at the top - leaders have a central role in creating an environment where such conversations are not only permitted but expected, while preserving confidentiality and avoiding any kind of explicit or implicit retaliation, ridicule or dismissal. In addition, trusted whistleblower or external speak-up channels are necessary when internal mechanisms are not sufficient.

Finally, transparency is key for accounting firms. Transparency is not merely a virtue but an anchor of credibility and a quiet test of governance integrity. It signals a firm's willingness to be looked through, questioned, and understood by the broad ecosystem that depends on its judgments, not only by regulators. In a profession built on trust and discretion, transparency does not erode authority; it legitimizes it. When firms openly disclose how decisions are made, how risks are managed, and how standards are upheld, they reinforce the very foundation on which their license to operate rests. In this light, transparency becomes less about disclosure alone, and more about a posture of openness - an institutional habit of answering before being asked. Further, a firm's own internal transparency about ethical breaches can help people understand what is unethical and the related consequences, and help to clearly and effectively communicate leadership's ethical commitments within the firm.

Looking Ahead: IESBA's Next Steps

It is evident that these eight FCG elements should not be looked at in isolation; there are clear interconnectivities between them and an added value resulting from a robust framework that goes beyond the mere sum of these elements. It is also clear that building an ethical culture requires more than a one-time initiative or checklist. An ethical culture takes time to cultivate, highlighting the importance of regular review and continuous improvement.

To support firms on their ongoing journey to build and strengthen their ethical culture, IESBA will very soon launch a series of one-page "Viewpoints" outlining its thoughts and perspectives on each of the FCG elements. This will also serve as an invitation and a proposal to continue developing effective instruments that can foster ethical culture. At IESBA, we look forward to engaging with ICAI and all professionals in India to jointly build an accounting profession that is highly ethical, stronger, and more resilient to the many challenges it faces today.