Ethics for Professional Accountants

Auditing and Financial Control

- Course 3-- Course 3-

03.09.2015

WHAT ARE ETHICS?

E A sense of agreement in a society as to what

is right and wrong.

E Ethics represent a set of moral principles,

rules of conduct or values. rules of conduct or values.

– Ethics apply when an individual has to make a

decision from various alternatives regarding moral

principles.

Illustration 3.1

Objectives of Accountantancy

Profession

☺To work to the highest standards of

professionalismprofessionalism

☺To attain the highest levels of performance

☺Generally, to meet the public’s interest

IESBA - the Ethics Board

• The International Ethics Standards Board for

Accountants is an independent standard-

setting body that serves the public interest by

setting robust, internationally appropriatesetting robust, internationally appropriate

ethics standards, including auditor

independence requirements, for professional

accountants worldwide.

• These are compiled in the Code of Ethics for

Professional Accountants

The Code is divided into three

parts:

A, B, and C

• Part A establishes the fundamental principles of professional ethics for professional accountants and provides a conceptual framework for applying those principles.

• Parts B and C illustrate how the conceptual framework is to be applied in specific situations.

• Part B applies to professional accountants in public practice.

• Part C applies to professional accountants in business.

The IFAC

Code of Ethics for Professional Accountants fundamental

principles for ALL Accountants:

1) Integrity

2) Objectivity

3) Professional Competence and Due Care

4) Confidentiality

5) Professional Behavior

Principles

1) Integrity A professional accountant should

be straightforward and honest in performing

professional services.

2) Objectivity: A professional accountant

should not allow bias, conflict of interest or

undue influence of others to override

professional or business judgments.

Principles

3) Professional Competence and Due Care: A

professional accountant has a continuing duty to

maintain professional knowledge and skills at the

level required to ensure that a client or employer

receives competent professional service based on receives competent professional service based on

current developments in practice, legislation and

techniques.

Principles

4) Confidentiality: A professional accountant should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific third parties without proper and specific authority.

5) Professional Behavior: A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession.

Conceptual Framework Approach

• A conceptual framework requires a

professional accountant to identify, evaluate

and address threats to compliance with the

fundamental principles, rather than merelyfundamental principles, rather than merely

comply with a set of specific rules which may

be arbitrary.

• If threats to ethics are not clearly insignificant,

a professional accountant should apply

safeguards to eliminate the threats or reduce

them to an acceptable level.

Threats and Safeguards (no longer related just to Independence, but to ethics)

Compliance with thefundamental principles maypotentially be threatened by abroad range of circumstances.Many threats fall into thefollowing categories:following categories:

• Self-interest threats

• Self-review threats

• Advocacy threats

• Familiarity threats

• Intimidation threats

Figure 3.5

Self-Interest Threat

A Self-interest threat occurs as a result of the

financial or other interests of a professional

accountant or of an immediate or close family

member;member;

Self Interest Threats Circumstances (In Part B)

• A financial interest in a client or jointly holding a financial interest with a client.

• Undue dependence on total fees from a client.

• Having a close business relationship with a client.

• Concern about the possibility of losing a client.• Concern about the possibility of losing a client.

• Potential employment with a client.

• Contingent fees relating to an assurance engagement.

• A loan to or from an assurance client or any of its directors or officers.

Self-Review Threat

Self-Review Threat occurs occur when a

previous judgment needs to be re-

evaluated by the professional accountant

responsible for that judgment.responsible for that judgment.

Self-Review Threats Circumstances (In Part B)

• The discovery of a significant error during a re-evaluation of the work of the public auditor.

• Reporting on the operation of financial systems after being involved in their design or implementation.

• Having prepared the original data used to generate records that are the subject matter of the engagement.

• A member of the assurance team being, or having recently been, a • A member of the assurance team being, or having recently been, a director or officer of that client.

• A member of the assurance team being, or having recently been, employed by the client in a position to exert direct and significant influence over the subject matter of the engagement.

• Performing a service for a client that directly affects the subject matter of the assurance engagement.

Advocacy Threat

An Advocacy Threat occurs when a professional accountant promotes a position or opinion to the point that subsequent objectivity may be compromised.Examples of circumstances that create advocacy Examples of circumstances that create advocacy threats :

Selling, underwriting or otherwise dealing in financial securities or shares of an assurance client;

Acting as an advocate on behalf of an assurance client in litigation or disputes with third parties.

Familiarity Threat

Familiarity Threat occurs when, by virtue

of a close relationship with an assurance

client, its directors, officers or employees,

an auditor becomes too sympathetic to the

client’s interests.client’s interests.

Familiarity Threats Circumstances (In Part B)

�Immediate family member or close family member who is a director, officer, or influential employee of the assurance client;

�A member of the assurance team having a close family member who, as an employee of the assurance client, is in a position to exert direct and significant influence over the subject matter of the engagement;

�A former partner of the firm being a director, officer of �A former partner of the firm being a director, officer of the assurance client or an employee in a position of significant influence;

�Long association of a senior member of the assurance team with the assurance client

�Acceptance of gifts or hospitality, unless the value is clearly insignificant, from the assurance client, its directors, officers or employees.

Intimidation Threat

Intimidation Threat occur when a professional

accountant may be deterred from acting

objectively by threats, actual or perceived

Examples of circumstances:Examples of circumstances:

Being threatened with dismissal or replacement in

relation to a client engagement.

Being threatened with litigation.

Being pressured to reduce inappropriately the extent

of work performed in order to reduce fees.

Safeguards

Safeguards that may eliminate or reduce such

threats to an acceptable level fall into two

broad categories:

(1) Safeguards created by the profession, (1) Safeguards created by the profession, legislation or regulation;

(2) Safeguards in the work environment.

Safeguards created by the profession, legislation or regulation

include:

Educational, training and experience requirements for entry into the profession.

Continuing professional development requirements.

Corporate governance regulations.

Professional standards.Professional standards.

Professional or regulatory monitoring and disciplinary procedures

External review by a third party of the reports, returns, communications or information produced by a professional accountant.

Firm-wide safeguards in the work environment may

include:

�Leadership that stresses the importance of

compliance with the fundamental principles

and the duty to act in the public interest.

�Quality control policies�Quality control policies

�Documented independence policies

�Policies against reliance on revenue received

from a single client.

Resolution of Ethical Conflicts

1. If the matter remains unresolved, the professional accountant should consult with other appropriate persons within the firm

2. Where a matter involves a conflict with, or within, an organization, consult with those charged with governance of the organization, such as the board of directors or the audit committee.

3. If a significant conflict cannot be 3. If a significant conflict cannot be resolved, obtain professional advice from the relevant professional body or legal advisors.

4. If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a professional accountant should, where possible, refuse to remain associated with the matter creating the conflict.

.

PART B Contents

Professional Appointment

• Client Acceptance - consider whether

acceptance would create any threats to

compliance with the fundamental principles

• Engagement Acceptance - agree to provide • Engagement Acceptance - agree to provide

only those services that the accountant is

competent to perform.

Changes in a Professional Appointment

Before accepting an appointment involving

services that were carried out by another the

proposed accountant should:

�Request permission from the �Request permission from the client to contact former auditor directly

�Contact existing auditor before beginning audit.

Information from Existing Auditor

Once client permission is obtained, the existing accountant should provide information honestly and unambiguously.

If the proposed accountant is unable to communicate with the existing accountant, the proposed accountant should try to obtain information about any possible threats by other means such as through accountant should try to obtain information about any possible threats by other means such as through inquiries of third parties or background investigations on senior management.

The existing account is no longer required to provide information in writing or regarding reasons not to take an audit.

Conflicts of Interest

An accountant

should take

reasonable steps to

identifyidentify

circumstances that

could pose a conflict

of interest.

Second Opinions

Providing a second opinion on the application of accounting, auditing, reporting or other standards or principles by or on behalf of a company that is not an existing client may cause threats to compliance with the cause threats to compliance with the fundamental principles

Safeguards such as seeking client permission to contact the existing accountant, describing the limitations surrounding any opinion and providing the existing accountant with a copy of the opinion may be required.

Fees and Other Types of Remuneration

An auditor may quote whatever fee deemed

to be appropriate. However, a self-interest

threat to professional competence and due

care is created if the fee quoted is so low that care is created if the fee quoted is so low that

it may be difficult to perform the engagement.

Commissions, Referral Fees, and Contingent Fees

$ A accountant in public practice should not pay or receive a referral fee or commission, unless she has established safeguards to eliminate the threats or reduce them to an acceptable level.acceptable level.

$ Contingent fees are widely used for certain types of non-assurance engagements. They may, however, give rise to self-interest threats to compliance with the fundamental principles.

Advertising and Marketing

When a professional accountant in public

practice solicits new work through advertising

or other forms of marketing, there may be

potential threats to compliance with the potential threats to compliance with the

fundamental principles.

What Advertising Cannot Do

An accountant should not bring the profession

into disrepute when marketing professional

services. She should be honest and truthful

and should not:and should not:

• Make exaggerated claims for services offered,

qualifications possessed or experience gained;

or

• Make disparaging references to

unsubstantiated comparisons to the work of

another.

Example of Bad Advertising

“At our firm we believe the financial success of any business requires regular monitoring and attention to the smallest detail. Without the objective oversight of a practiced eye, huge opportunities can slip by unnoticed, and minor problems can quickly evolve into significant issues. That’s why the experts at our firm maintain a issues. That’s why the experts at our firm maintain a close relationship with our clients all year round, rather

than merely reviewing financial records annually.”

Gifts and Hospitality

�Self-interest threats to objectivity may be

created if a gift from a client is accepted;

intimidation threats to objectivity may result

from the possibility of such offers being made from the possibility of such offers being made

public.

�Gifts or hospitality which are acceptable are

those which a reasonable and informed third

party, having knowledge of all relevant

information, would consider clearly

insignificant.

Custody of Client Assets

� To safeguard against a self interest threat to objectivity , a professional accountant in public practice entrusted with money (or other assets) belonging to others should:

�Keep such assets separately from personal or firm assets; andassets; and

�Use such assets only for the purpose for which they are intended

�At all times, be ready to account for those assets, and any income, dividends or gains generated

�Comply with all relevant laws and regulations relevant to the holding of and accounting for such assets

Objectivity – All Services

�When providing any professional service the auditor should consider whether there are threats to compliance with the fundamental principle of objectivity resulting from having interests in, or relationships with, a client or directors, officers or relationships with, a client or directors, officers or employees.

�In an assurance service the auditor is required to be independent of the assurance client. Independence of mind and in appearance is necessary to express a conclusion, and be seen to express a conclusion, without bias, conflict of interest or undue influence of others.

Independence—Assurance Engagements

In the case of an assurance engagement it is in

the public interest and, therefore, required by

the Code of Ethics, that members of assurance

teams, firms and, when applicable, network teams, firms and, when applicable, network

firms be independent of assurance clients

Independence• Independence involves independence in appearance

and independence in mind.

• Independence in Appearance : The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firm’s, or a member of the assurance team’s, integrity, objectivity or professional skepticism had been firm’s, or a member of the assurance team’s, integrity, objectivity or professional skepticism had been compromised.

• Independence of Mind The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism.

Independence in the Sarbanes-Oxley Act of 2002

TITLE II – AUDITOR INDEPENDENCE

Sec. 201. Services outside the scope of practice of auditors.

Sec. 202. Pre-approval requirements.

Sec. 203. Audit partner rotation.

Sec. 204. Auditor reports to audit committees.

Sec. 205. Conforming amendments.

Sec. 206. Conflicts of interest.

Sec. 207. Study of mandatory rotation of registered public accounting firms.

Sec. 208. Commission authority.

Sec. 209. Considerations by appropriate State regulatory authorities.

Independence in the Sarbanes-Oxley Act of 2002

Prohibited non-audit service contemporaneously with the audit include:

(1) bookkeeping or other services related to the accounting records or financial statements of the audit client;

(2) financial information systems design and implementation;

(3) appraisal or valuation services, fairness opinions, or contribution-in-kind reports;

(4) actuarial services;(4) actuarial services;

(5) internal audit outsourcing services;

(6) management functions or human resources;

(7) broker or dealer, investment adviser, or investment banking services;

(8) legal services and expert services unrelated to the audit; and

(9) any other service that the Board determines, by regulation, is impermissible.

Part B of the Code illustrates how the conceptual framework contained in Part A is to be applied by professional accountants in to be applied by professional accountants in

public practice.

Examples Part B

Part C of the Code illustrates how the

conceptual framework contained in Part A is to be

applied by professional accountants in business.

Examples in Part C

Thank You for Your Attention

Any Questions?