INTRODUCTION –INTERNATIONAL FEDERATION OF ACCOUNTANTS (IFAC)
The IFAC Board has established the International Ethics Standards Board for Accountants (IESBA) to develop and issue, under its own authority, high quality ethical standards and other pronouncements for professional accountants for use around the world.
The Code of Ethics for Professional Accountants (IESBA Code) establishes ethical requirements for professional accountants. A member body of IFAC or firm shall not apply less stringent standards than those stated in this Code.
A professional accountant in acting in the public interest shall observe and comply with this Code. The code contains 3 parts:-
Part A – establishes the fundamental principles of professional ethics for professional accountants.
Parts B & C – provide a conceptual framework that professional accountants shall apply to:
- Identify Threats
- Evaluate Threats
- Apply Safeguards
Part B – applies to professional accountants in public practice
Part C – applies to professional accountants in business
ICPAR code of ethics is based on the principles of the IFAC code of ethics as are other professional accountancy bodies around the globe.
FUNDAMENTAL PRINCIPLES
A professional accountant shall comply with the following fundamental principles:-
- Integrity – To be straightforward and honest in all professional and business relationships.
- Objectivity – To not allow bias, conflict of interest or undue influence of others to override professional or business judgments.
- Professional Competence and Due Care – to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques and act diligently and in accordance with applicable technical and professional standards.
- Confidentiality – To respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the professional accountant or third parties.
- Professional Behaviour – To comply with relevant laws and regulations and avoid any action that discredits the profession.
Synopsis of Fundamental Principles
Integrity
Integrity implies fair dealing and truthfulness.
A professional accountant shall not knowingly be associated with reports, returns, communications or other information where the professional accountant believes that the information:-
- Contains a materially false or misleading statement
- Contains statements or information furnished recklessly
- Omits or obscures information required to be included where such omission or obscurity would be misleading
When a professional accountant becomes aware that the accountant has been associated with such information, the accountant shall take steps to be disassociated from that information.
Objectivity
A professional accountant may be exposed to situations that may impair objectivity.
A professional accountant shall not perform a professional service if a circumstance or relationship biases or unduly influences the accountant’s professional judgment with respect of that service.
Professional Competence & Due Care
Competent professional service requires the exercise of sound judgment in applying professional knowledge and skill in the performance of such service. There are 2 phases of professional competence:-
- Attainment of professional competence
- Maintenance of professional competence
The maintenance of professional competence requires a continuing awareness and an understanding of relevant technical, professional and business developments.
The professional accountant should act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis. The professional accountant shall take steps to ensure that those working under the professional accountant’s authority in a professional capacity have appropriate training and supervision.
Where appropriate the professional accountant shall make clients, employers, or other users of the accountant’s professional services aware of the limitations inherent in the services.
Confidentiality
The professional accountant shall maintain confidentiality, including in a social environment. A professional accountant shall take reasonable steps to ensure that staff under the professional accountant’s control and persons from whom advice and assistance is obtained respect the professional accountant’s duty of confidentiality.
The need to comply with the principle of confidentiality continues even after the end of relationships between a professional accountant and a client or employer.
Circumstances where disclosure of confidential information is appropriate:- • Disclosure permitted by law and is authorized by the client or employer • Evidence in legal proceedings
- Public authorities of infringements of the law
- Quality review of a member body or professional body
- Respond to an inquiry or investigation by a member body or regulatory body
- To protect the professional interests of a professional accountant in legal proceedings
- To comply with technical standards and ethical requirements
Factors to consider in deciding whether to disclose confidential information:-
- Whether the interests of all parties, including third parties whose interests may be affected, could be harmed if the client or employer consents to the disclosure of information by the professional accountant.
- When a situation involves unsubstantiated facts, incomplete information or unsubstantiated conclusions, professional judgment shall be used in determining the type of disclosure to be made.
- The type of communication that is expected and to whom it is addressed
- Whether the parties to whom the communication is addressed are appropriate recipients.
Professional Behaviour
In marketing and promoting themselves and their work, professional accountants shall not bring the profession to disrepute. Professional accountants shall be honest and truthful and not:-
- Make exaggerated claims for the services they are able to offer, the qualifications they possess, or experience they have gained
- Make disparaging references or unsubstantiated comparisons to the work of others
PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE
A professional accountant in public practice shall not knowingly engage in any business, occupation, or activity that impairs or might impair integrity, objectivity or the good reputation of the profession.
Threats & Safeguards
When a relationship or circumstance creates a threat, such a threat could compromise, or could be perceived to compromise, a professional accountant’s compliance with the fundamental principles. A circumstance or relationship may create more than one threat, and a threat may affect compliance with more than one fundamental principle. Threats fall into the following categories:-
- Self – Interest Threat – The threat that a financial or other interest will inappropriately influence the professional accountant’s judgment or behaviour.
o E.g.: the improper use of corporate assets or where an accountancy firm has an undue dependence on one particular client’s fees or enters into a joint venture.
- Self – Review Threat – The threat that a professional accountant will not appropriately evaluate the results of a previous judgment made or service performed by the professional accountant, or by another individual within the professional accountant’s firm or employing organization, on which the accountant will rely when forming a judgment as part of providing a current service.
o E.g.: providing a service for a client that relies on previous results that the individual, firm or another professional carried out – if this situation arises such results should be double checked before proceeding.
- Advocacy Threat – The threat that a professional accountant will promote a client’s or employer’s position to the point that the professional accountant’s objectivity is compromised.
o E.g.: When a professional accountant promotes an organisations position with misleading and factually incorrect statements, or where you inappropriately promote shares of a client that you are auditing.
- Familiarity Threat – The threat that due to a long or close relationship with a client or employer, a professional accountant will be too sympathetic to their interests or too accepting of their work.
o E.g. becoming too sympathetic to the client’s needs and losing objectivity.
- Intimidation Threat – The threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the professional accountant.
o E.g… Where an individual or firm is placed under pressure to act in a certain way or feels threatened by a client, employer or third party if they do not produce the results they expect.
- Safeguards
Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level. They fall into two broad categories:-
- Safeguards created by the profession, legislation or regulation
- Safeguards in the work environment
E.g. 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 or regulatory monitoring and disciplinary procedures
- External review by a legally empowered third party of the reports, returns, communications or information produced by a professional accountant.
E.g. Safeguards in the work environment
- Leadership of the firm that stresses the importance of compliance with the fundamental principles
- Policies and procedures to implement and monitor quality control of engagements
- Using different partners and engagement teams with separate reporting lines for the provision of non-assurance services to an assurance client.
- Designating a member of senior management to be responsible for overseeing the adequate functioning of the firm’s quality control system.
- Having a professional accountant who was not involved with the non- assurance service review the non-assurance work performed or otherwise advise as necessary.
- Having a professional accountant who was not a member of the assurance team review the assurance work performed or otherwise advise as necessary.
- Consulting an independent third party, such as a committee of independent directors, a professional regulatory body or another professional accountant.
- Discussing ethical issues with those charged with governance of the client.
- Disclosing to those charged with governance of the client the nature of services provided and extent of fees charged Rotating senior assurance team personnel.
Professional Appointment
A professional accountant in public practice before accepting a specific client engagement shall determine whether acceptance would create any threats to compliance with the fundamental principles.
E.g. Professional Competence & Due Care – the engagement team does not possess the competencies necessary to properly carry out the engagement.
The professional accountant shall evaluate the significance of threats and apply safeguards, to eliminate them or reduce them to an acceptable level.
Possible safeguards:-
- Acquiring an appropriate understanding of the nature of the client’s business, the complexity of its operations, the specific requirements of the engagement and the purpose, nature and scope of the work to be performed
- Acquiring knowledge of relevant industries or subject matters
- Possessing or obtaining experience with relevant regulatory or reporting requirements
- Assigning sufficient staff with the necessary competencies
- Using experts where necessary – consider: reputation, expertise, professional and ethical standards
- Agreeing a realistic timeframe for the performance of the engagement
- Complying with quality control policies and procedures designed to provide reasonable assurance that specific engagements are accepted only when they can be performed competently.
The professional accountant should decline the engagement is threats cannot be eliminated or reduced to an acceptable level through the application of safeguards.
Conflicts of Interest
A professional accountant before accepting or continuing a client relationship or specific engagement, the professional accountant in public practice shall evaluate the significance of any threats created by business interests or relationships with the client or third party.
Possible Safeguards:
- The use of separate engagement teams
- Procedures to prevent access to information – e.g. secure data filing
- Clear guidelines to members of the engagement team on issues of security and confidentiality
- Confidentiality agreements by employees and partners of the firm
- Regular review of the application of safeguards by a senior individual not involved with relevant client engagements
In circumstances where a threat cannot be eliminated or reduced to an acceptable level through the application of safeguards, the professional accountant in public practice should not accept the engagement or resign.
Fees and Other Types of Remuneration
A professional accountant in public practice may quote whatever fee is deemed appropriate. There may be threats to compliance with the fundamental principles arising from the level of fees quoted.
Possible Safeguards:
- Making client aware of the terms of the engagement, basis on which fees are charged and which services are covered by the quoted fee. (e.g. Engagement letter)
- Assigning appropriate time and qualified staff to the task
- Quality control policies and procedures
- Review by an independent third party of the work performed by the professional accountant in public practice.
Marketing Professional Services
A professional accountant in public practice, who solicits new work through advertising or other forms of marketing, may be creating a threat to compliance with the fundamental principles.
Recommendation:
If the professional accountant in public practice is in doubt about whether a proposed form of advertising or marketing is appropriate, the professional accountant in public practice should consider consulting with the relevant professional body.
Gifts and Hospitality
An offer of a gift or hospitality from a client to a professional accountant may create threats to compliance with the fundamental principles.
The significance of the threat will depend on the nature, value, and intent of the offer. If the gift or hospitality is considered trivial and inconsequential, the professional accountant may conclude that the offer was made in the normal course of business without the specific intent to influence decision making or to obtain information.
If threats cannot be eliminated or reduced to an acceptable level through the application of safeguards, a professional accountant in public practice should not accept such an offer.
Custody of Client Assets
A professional accountant in public should not assume custody of client monies or other assets unless permitted to do so by law, and, if so, in compliance with any additional legal duties imposed on a professional accountant in public practice holding such assets. The holding of client assets creates threats to compliance with the fundamental principles.
The professional accountant in public practice entrusted with money (other assets) should:- • Keep such assets separately from personal or firm assets
- Use such assets only for the purpose for which they are intended
- At all times be ready to account for those assets
- Comply with relevant laws and regulations
The professional accountant should make appropriate enquiries about the source of such assets, e.g. the assets could be derived from illegal activities, such as money laundering. In this situation the professional accountant should seek legal advice.
Objectivity – All Services
A professional accountant in public practice should determine when providing any professional service whether there are threats to compliance with the fundamental principle of objectivity results from having interests in, or relationships with, a client or its directors, officers or employees.
The threat to objectivity will depend on the nature of the work that the professional accountant in public practice is performing.
Possible Safeguards:
- Withdrawing from the engagement team
- Supervisory measures
- Ceasing the financial or business relationship
- Discussing the issue with higher levels of management within the firm
- Discussing the issue with those charged with governance of the client
If safeguards cannot eliminate or reduce the threat to an acceptable level, the professional accountant should decline or terminate the engagement.
Independence – Audit & Review Engagements
Independence is required in audit engagements where a professional accountant in public practice expresses a conclusion on financial statements. Audit engagements are in the public interest, and therefore members of audit teams, firms and network firms shall be independent of audit clients.
Networks & Network Firms
If a firm is deemed to be a network firm, the firm shall be independent of the audit clients of the other firms within the network.
Public Interest Entities:
- all listed entities
- Any entity defined by regulation as a public interest entity
Related Entities
When the audit team knows or has reason to believe that a relationship or circumstance involving another related entity of the client is relevant to the evaluation of the firm’s independence from the client, the audit team must include that related entity when identifying and evaluating threats to independence and applying appropriate safeguards.
Those Charged with Governance
Regular communication is expected between the firm and those charged with governance of the audit client regarding relationships and other matters that might in the firm’s opinion, have a bearing on independence.
Documentation
The professional accountant should document conclusions regarding compliance with independence requirements:-
- Document nature of threat, and appropriate safeguard
Independence from the audit client is required both during the engagement period and the period covered by the financial statements.
Engagement Period
Engagement starts – when audit team begins to perform the audit
Engagement ends – when audit report is issued
Mergers & Acquisitions
As a result of a merger or acquisition, an entity becomes a related entity of an audit client, the firm shall identify and evaluate previous and current interests and relationships with the related entity, taking into account available safeguards, could affect its independence and therefore its ability to continue the audit engagement after the effective date of the merger or acquisition.
Other Considerations
In situations where an inadvertent violation occurs, it generally will be deemed not to compromise independence provided the firm has appropriate quality control policies and procedures in place.
Independence Applications
Financial Interests
Holding a financial interest in an audit client may create a self-interest threat. The significance depends upon;
- The role of the person holding the financial interest
- Whether the financial interest is direct or indirect
- Materiality of the financial interest
Loans and Guarantees
If an audit client approaches a member of the audit team, member of the audit teams immediate family, or the firm offering a loan or guarantee that is not under normal lending procedures, terms and conditions, a self- interest threat would be created that would be so significant that no safeguards could reduce the threat to an acceptable level.
The member of the audit team, member of the audit teams immediate family or firm should not accept such a loan or guarantee.
Business Relationships
Close business relationships between a firm and the audit client as a result of a commercial relationship or common financial interest, may create self-interest or intimidation threats.
E.g… Financial interest in a joint venture
Unless the financial interest is immaterial and the business relationship is insignificant, the business relationship should not be entered into, be reduced to an insignificant level or terminated.
Family & Personal Relationships
Family and personal relationships between a member of the audit team and the audit client may create self-interest, familiarity or intimidation threats. The existence and significance of threats will depend on:-
- Individuals responsibilities on the audit team
- Role of the family member or other individual within the client and the closeness of the relationship
Possible Safeguards:
- Remove the individual form the audit team
- Re-structuring the responsibilities of the audit team
Employment with an Audit Client
Familiarity or intimidation threats may be created if a director or officer of the audit client, or an employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion, has been a member of the audit team or partner of the firm.
Possible Safeguards
- Modifying audit plan
- Having professional accountant review the work of the former member of the audit team
Temporary Staff Assignments
The lending of staff by a firm to an audit client may create a self-review threat. The firm’s personnel should only give assistance for a short period of time should not be involved in non- assurance services or assume management responsibilities.
The audit client should be responsible for directing and supervising the activities of the loaned staff.
Possible Safeguards
- Double checking work performed by the loaned staff
- Not giving the loaned staff audit responsibility
- Not including the loaned staff as a member of the audit team
Recent Service with an Audit Client
Self-interest, self-review or familiarity threats may be created if a member of the audit team has recently served as a director, officer, or employee of the audit client.
E.g… A member of the audit team has to evaluate elements of the financial statements for which the member of the audit team had prepared the accounting records while with the client.
Possible Safeguard
- Double checking/reviewing the work performed by the individual as a member of the audit team.
Serving as a Director or Officer of an Audit Client
If a partner or employee of the firm serves as a director or officer of an audit client, the selfreview and self-interest threats created would be so significant that no safeguards could reduce the threats to an acceptable level, therefore, no partner or employee should serve as a director or officer of an audit client.
Long Association of Senior Personnel with an Audit Client
Familiarity and self-interest threats are created by using the same senior personnel on an audit engagement over a long period of time.
Possible Safeguards
- Rotating senior personnel
- Professional accountant who is not a member of the audit team review the work of the senior personnel
- Regular independent internal and external quality reviews of the engagement
Fees
When the total fees from an audit client represent a large proportion of the total fees of the firm expressing the audit opinion, the dependence on that client and concern about losing the client creates a self-interest or intimidation threat.
Possible Safeguards
- Reducing the dependency on the client
- External quality control reviews
- Consulting a third party, such as a professional regulatory body or a professional accountant.
Overdue Fees
A self-interest threat may be created if fees due from an audit client remain unpaid for a long time, especially if a large part is not paid before the issue of the audit report for the following year. If fees remain unpaid after the report has been issued, the existence and significance of any threat should be evaluated and safeguards applied.
Possible Safeguards
- Have an additional professional accountant who did not take part in the audit engagement provide advice or review the work performed.
Contingent Fees
Contingent fees are fees calculated on a predetermined basis relating to the outcome of a transaction or the result of the services performed by the firm.
It is strongly advised that firms do not enter contingent fee arrangements.
Compensation and Evaluation Policies
A self-interest threat is created when a member of the audit team is evaluated on or compensated for selling non-assurance services to an audit client.
Possible Safeguards
- Removal of the member from the audit team
- Have a professional accountant review the work of the member of the audit team
Actual or Threatened Litigation
When litigation takes place between a firm or a member of the audit team and the audit client, self-interest and intimidation threats are created. The significance of the threats will depend on factors such as:-
- Materiality of litigation
- Whether litigation relates to a prior audit engagement
Possible Safeguards
- If litigation involves a member of the audit team, remove that individual from the team
- Having a professional accountant review the work performed
Provision of Non-assurance Services to Audit Clients
Self-review, self-interest and advocacy threats create threats to the independence of the firm by providing non-assurance services.
Management Responsibilities
Management of an entity performs many activities in managing the entity in the best interests of stakeholders. Management responsibilities involves leading, directing an entity, making significant decisions regarding the acquisition, deployment and control of human, financial, physical and intangible resources. E.g.
- Strategic decisions
- Being responsible for the actions of the entity’s employees
- Authorizing transactions
- Taking responsibility for the preparation and fair presentation of the financial statements in accordance with applicable financial reporting framework
- Taking responsibility for designing, implementing and maintaining internal control
Preparing Accounting Records and Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework. E.g.
- Originating or changing journal entries, determining account classifications of transactions
- Preparing originating data
The client may request technical assistance from the firm on matters such as resolving accounting reconciliation problems, or analysing or accumulating information for regulatory reporting. Such services do not, generally, create threats to independence provided the firm does not assume a management responsibility for the client.
Valuation Services
A valuation comprises the making of assumptions with regard to future developments, the application of appropriate methodologies and techniques and the combination of both to compute a certain value, range of values, for an asset, a liability or for a business as a whole.
A firm performing valuation services for an audit client may create a self-review threat.
Possible Safeguards
- Have a professional who is not involved in providing the valuation review the audit or valuation of work performed
- Ensure personnel providing such services do not participate in the audit engagement Taxation Services
When a firm performs certain tax services a self-review and advocacy threat is created.
E.g. of taxation Services
- Tax return preparation
- Tax calculations for the purpose of preparing the accounting entries
- Tax planning
- Tax advisory
- Tax disputes
Possible Safeguards
- Using professional who are not members of the audit team to perform the service
- Senior partner/senior staff member to review tax calculations
- Obtain advice from an external tax professional
- Advice from tax authorities
Internal Audit Services
The provision of internal audit services to an audit client creates a self-review threat to independence if the firm uses the internal audit work in the course of a subsequent external audit. If a firm’s personnel assume a management responsibility when providing internal audit services to an audit client, the threat created would be so significant that no safeguards could reduce the threat to an acceptable level therefore a firm’s personnel should not assume a management responsibility when providing internal audit services to an audit client.
IT Systems Services
Providing systems services may create a self-review threat depending on the nature of the services and the IT systems.
It is important that the firm’s personnel do not assume a management responsibility otherwise there may to a threat to independence.
Litigation Support Services
Self-review or advocacy threats may be created in litigation support services such as:- • Acting as an expert witness
- Calculating estimated damages
- Document management and retrieval.
Legal Services
Legal services that support an audit client in executing a transaction (for example, contract support, legal advice, legal due diligence and restructuring) may create self-review threats.
The existence of any threat will depend on factors such as:- • The nature of the service
- Whether the services is provided by a member of the audit team
- The materiality of any matter in relation to the client’s financial statements
Acting as an advocacy role for the audit client in resolving a dispute of litigation when the amounts involved are not material to the financial statement on which the firm will express an opinion, the firm should evaluate the significance of any advocacy threats and apply safeguards.
Possible Safeguards
- Using professional who are not members of the audit team to perform the service
- Having a professional who was not involved in providing the legal services provide advice to the audit team on the service and review any financial statement treatment.
Acting in an advocacy role resolving a dispute or litigation when the amounts involved are material, the firm shall not perform this type of service for an audit client.
Recruiting Services
Providing recruiting services to an audit client may create self-interest, familiarity or intimidation threats. In all cases, the firm should not assume management responsibilities, including acting as a negotiator on the client’s behalf, and the hiring decision should be left to the client.
Corporate Finance Services
Providing corporate finance services such as:-
- Assisting an audit client in developing corporate strategies
- Assisting finance raising transactions may create advocacy and self-review threats.
Possible Safeguards
- Using professionals who are not members of the audit team to provide the services
- Have a professional who was not involved in providing the corporate finance service advise the audit team on the service and review the accounting treatment and any financial statement treatment.
Independence – Other Assurance Engagements
This section addresses independence requirements for assurance engagements that are not audit or review engagements.
Compliance with the fundamental principle of objectivity requires being independent of assurance clients.
Assurance Engagements
The professional accountant in public practice in an assurance engagement expresses a conclusion designed to enhance the degree of confidence of the intended users about the outcome of the evaluation or measurement of a subject matter.
“Subject Matter Information” is used to mean the outcome of the evaluation or measurement of a subject matter.
Assurance engagements may be direct reporting or assertion based. It involves three separate parties:-
- Professional Accountant in Public Practice
- Responsible Party
- Intended users
Direct Reporting
Within direct reporting assurance engagements the professional accountant in public practice directly performs the evaluation or measurement of the subject matter, or obtains a representation from the responsible party that has performed the evaluation or measurement that is not available to the intended users. The subject matter information is provided to the intended users in the assurance report. The firm should be independent of the assurance client (the party responsible for the subject matter). An evaluation should be made of any threats the firm has reason to believe are created by network firm interests and relationships.
Assertion-based Assurance Engagements
Assertion based assurance engagement is the evaluation or measurement of the subject matter performed by the responsible party and is made available to intended users.
The members of the assurance team and the firm should be independent of the assurance client (the party responsible for the subject matter information). Such independence requirements prohibit certain relationships between members of the assurance team and
- Directors or officers
- Individuals at the client in a position to exert significant influence over the subject matter information
Reports that Include a Restriction on Use and Distribution
The firm should communicate with the intended users regarding the independence requirements that are to be applied with respect to the provision of the assurance engagement, (for example – Engagement Letter).
Multiple Responsible Parties
In some assurance engagements, whether assertion-based or direct reporting, there may be several responsible parties. The firm should consider factors with regard to independence such as:-
- Materiality of the subject matter for which the responsible party is responsible
- Degree of Public Interest associated with the engagement
Documentation
The professional accountant should document conclusions regarding compliance with independence requirements. The professional should document:- § Nature of threat
- Safeguard applied
- Rationale for conclusions
Engagement Period
The engagement period starts when the assurance team begins to perform assurance services. The engagement period ends when the assurance report is issued.
Other Considerations
There may be situations where an unintended violation occurs it generally will not compromise independence provided the firm has appropriate quality control policies and procedures.
Independence Applications
There may be circumstances that may create threats to independence. Such threats can be eliminated or reduced to an acceptable level by implementing appropriate safeguards.
Financial Interest
Assurance client may create a self-interest threat. The significance depends on:- • The role of the person holding the financial interest
- Whether financial interest is direct or indirect
- Materiality of the financial interest
Possible Safeguards
- Removing the individual from the assurance team
- Have a professional accountant review the work of the member of the assurance team
- Excluding the member of the assurance team from any important decisions concerning the assurance engagement
Loans & Guarantees
A self-interest threat is created if a loan or guarantee is not made under the normal lending procedures, terms and conditions. No safeguards could be applied in this situation, therefore neither the member of the assurance team, a member of that individual’s immediate family, or a firm should accept such a loan or guarantee.
Business Relationships
Close business relationships may create self-interest or intimidation threats. E.g. having a financial interest in a joint venture with either the client or a controlling owner, director or officer or other individual who performs senior managerial activities for that client.
Unless the financial interest is immaterial, the business relationship should not be entered into, should be reduced to an acceptable level or terminated.
Possible Safeguards
- Eliminating or reducing the magnitude of the transaction Removing the individual from the assurance team
Family & Personal Relationships
Self-interest, familiarity or intimidation threats may be created as a result of family and personal relationships between a member of the assurance team and a director or officer or certain employees.
Possible Safeguards
- Removing the individual or professional from the assurance team
- Structuring the responsibilities of the assurance team so that the professional does not deal with matters that are within the responsibility of the immediate family member
- Structuring the partner’s or employee’s responsibilities to reduce any potential influence over the assurance engagement
- Have a professional accountant review all relevant assurance work performed
Employment with Assurance Clients
Familiarity or intimidation threats may be created if a director or officer of the assurance client, or an employee who is in a position to exert significant influence over the subject matter information of the assurance engagement, has been a member of the assurance team or partner of the firm.
Possible Safeguards
- Making arrangements such that the individual is not entitled to any benefits or payments from the firm, unless made in accordance with fixed pre-determined arrangements
- Making arrangements such that any amount owed to the individual is not material to the firm
- Modifying the plan for the assurance engagement
- Assigning individuals to the assurance team who have sufficient experience in relation to the individual who has joined the client
- Have a professional accountant review the work of the former member of the assurance team
- Removing the individual from the engagement team
Self-review threats are created when a member of the assurance team participates in the assurance engagement while knowing that the member of the assurance team will, or may, join the client sometime in the future.
Possible Safeguards
- Removing the individual from the assurance team
- A review of significant judgments made by the individual while on the team
Recent Service with an Assurance Client
Self-interest, self-review or familiarity threats may be created if a member of the assurance team has recently served as a director, officer or employee of the assurance client.
Possible Safeguard
- Review the work performed by the individual as part of the assurance team
Serving as a Director or Officer of an Assurance Client
If a partner or employee of the firm serves as director or officer of an assurance client, the self-review and self-interest threats would be so significant that no safeguards could reduce the threats to an acceptable level. Accordingly, no partner or employee should serve as a director or officer of an assurance client.
Long Association of Senior Personnel with Assurance Clients
Familiarity and self-interest threats are created by using the same senior personnel on an assurance engagement over a long period of time.
Possible Safeguards
- Rotation of senior personnel
- Professional accountant who is not a member of the assurance team review the work of the senior personnel
- Regular independent internal and external quality review
Provision of Non-assurance Services to Assurance Clients
Self-review, self-interest and advocacy threats are created when firms provide their assurance clients with a range of non-assurance services that are consistent with their skills and expertise.
If threats cannot be reduced to an acceptable level by the application of safeguards the nonassurance service should not be provided.
Management Responsibilities
Management duties involve managing the entity in the best interests of stakeholders of the entity. Management responsibilities involve leading, directing, decision making, deployment and control of human, financial, physical and intangible resources.
A firm should not assume a management responsibility as part of the assurance service, the threats created would be so significant that no safeguards could reduce the threats to an acceptable level.
Other Considerations
Self-review threats are created if the firm develops and prepares prospective financial information and subsequently provides assurance on this information. The firm should evaluate the significance of this self-review threat created by the provision of such services and apply safeguards when necessary to eliminate the threat or reduce it to an acceptable level.
Fees
Self-interest or intimidation threats are created when the total fees from an assurance client represent a large proportion of the total fees of the firm.
Possible Safeguards
- Reducing dependency on the client
- External quality control reviews
- Consulting a third party, such as a professional regulatory body or a professional accountant, on key assurance judgments
- Professional accountant who is not a member of the assurance team review the work or otherwise advise as necessary
Overdue Fees
A self-review threat may be created if fees due from an assurance client remain unpaid for a long time.
Possible Safeguard
- Professional accountant who did not take part in the assurance engagement provide advice or review the work performed
It is important to note that overdue fees could be considered as a loan especially if the amount is significant.
Contingent Fees
Contingent fees are fees calculated on a predetermined basis relating to the outcome of a transaction or the result of the services performed by the firm.
A self-interest threat is created if a contingent fee is charged directly or indirectly through an intermediary, by a firm in respect of a non-assurance service provided to an assurance client. No safeguards could reduce the threat to an acceptable level the firm should not accept such arrangements.
For other contingent fee arrangements charged by a firm for a non -assurance service to an assurance client, factors to consider:- • Possible fee amounts
- Whether an appropriate authority determines the outcome of the matter upon which the contingent fee will be determined
- The nature of the service
- The effect of the event or transaction on the subject matter information
Possible Safeguards
- Have a professional accountant review the relevant assurance work or otherwise advise as necessary
- Using professionals who are not members of the assurance team to perform the non-assurance service
Gifts & Hospitality
Self-interest and familiarity threats are created when accepting gifts or hospitality from an assurance client. If a firm or a member of the assurance team accepts gifts or hospitality unless the value is trivial and inconsequential, the threats created would be so significant that no safeguards could reduce the threats to an acceptable level. The firm should not accept such gifts or hospitality.
Actual or Threatened Litigation
Self-interest and intimidation threats are created when litigation or threatened litigation takes place between the firm or a member of the assurance team.
Possible Safeguards
- If litigation involves a member of the assurance team, removing that individual from the assurance team
- Have a professional review the work performed
If such safeguards do not reduce the threats to an acceptable level, the only suitable action is to withdraw from, or decline the assurance engagement.
PROFESSIONAL ACCOUNTANTS IN BUSINESS
A professional accountant in business may be a salaried employee, a partner, director, owner manager, a volunteer or another working for one or more employing organization. Professional accountants in business may be solely or jointly responsible for the preparation and reporting of financial and other information, which both their employing organizations and third parties may rely on. Investors, creditors, employers, and other sectors of the business community, as well as governments and the public at large, all may rely on the work of professional accountants in business.
Potential Conflicts
Intimidation threats arise when a professional accountant in business may face pressure for example in the following circumstances:- • Act contrary to law and regulation
- Lie or intentionally mislead – Auditors or Regulators
- Issue or be associated with financial or non-financial reports that materially misrepresents the facts
Possible Safeguards
- Obtaining advice, from within the employing organization, an independent advisor, or a relevant professional body
- Seeking legal advice
- Using a formal dispute resolution process within the employing organization
Preparation & Reporting of Information
A professional accountant in business may be involved with such information as:-
- Forecasts and budgets
- Financial Statements
- Management discussions and analysis
- Management letter of Representation – provided to auditors
Threats to compliance with the fundamental principles, e.g. self-interest or intimidation threats to objectivity or professional competence and due care, are created where a professional accountant in business is pressured to become associated with misleading information or to become associated with misleading information through the actions of others.
Possible Safeguards
- Consultation with superiors within the employing organization
- Consultation with audit committee or those charged with governance Consultation with relevant professional body
Where it is not possible to reduce the threat to an acceptable level, the professional accountant should refuse to be or remain associated with information he/she determines misleading, and it may be advisable to consider legal advice or resign.
Acting with Sufficient Expertise
The professional accountant in business may encounter threats in performing his/her duties within the fundamental principle of professional competence and due care, e.g. include:- • Insufficient time for properly performing or completing the relevant duties
- Incomplete, restricted or otherwise inadequate information for performing the duties properly
- Insufficient experience, training and/or education
- Inadequate resources for the proper performance of the duties
Possible Safeguards
- Obtaining additional advice or training
- Ensuring there is adequate time available for performing relevant duties
- Obtaining assistance from someone with necessary expertise
- Consulting where appropriate with – Superiors, Independent experts, professional body
Financial Interests
Circumstances that may create self-interest threats for the professional accountant in business or an immediate close family member:-
- Holds a direct or indirect financial interest in the employing organisation and the value of that financial interest could be directly affected by decisions made by the professional accountant in business
- Profit related bonuses
- Holds directly or indirectly share options
Possible Safeguards
- Consultation with superiors within the employing organisation
- Consultation with those charged with governance
- Consultation with relevant professional body
- Up to date education on ethical issues and on the legal restrictions and other regulations around potential insider trading
Inducements (receiving offers)
Offers of inducements may create threats to compliance with the fundamental principles.
Self-interest threats to objectivity or confidentiality are created when an inducement is made in an attempt to unduly influence actions or decisions encourage illegal or dishonest behaviour or obtain confidential information. Intimidation threats to objectivity or confidentiality are created if such an inducement is accepted and it is followed by threats to make that offer public and damage the reputation of either the professional accountant in business or an immediate or close family member.
DISCIPLINARY PROCEDURES
Introduction
Regulatory professional bodies take complaints seriously and will deal with them fully. You may find that you need advice about particular circumstances, or you may not be sure if you have sufficient grounds on which to complain. You should telephone, write to the Secretary. You will be given advice.
All complaints should be made in writing. The complaint should detail the pertinent issues as comprehensively as possible and where possible important copy documentation should be provided.
Types of Complaint
Complaints can be made where for example or member of a regulatory professional body has been guilty of a breach of professional conduct i.e. a breach of the Fundamental Principles.
Investigation & Discipline
An Investigation Committee will use evidence (such as statements, letters, documentation and accounts) to form a view. Investigations are detailed and are designed to get to the core of the matter. Investigations will frequently involve meetings with several parties and indepth reviews of documentation. The volume and complexity of the evidence have a direct bearing on the length of time required to properly investigate a complaint.
The Investigation Committee discusses all the evidence and communicates its opinion, both to the complainer and member has been guilty of misconduct or of bringing himself or herself, the Institute, or the accountancy profession into disrepute. It the complaint is not made out, the complaint will be dismissed the complainer and the member will be informed in writing.
Where the complaint is made out, the Investigation Committee will decide if the conduct of the member was disgraceful to such an extent that disciplinary action is required against the member. The Committee may decide that disciplinary action is unnecessary if, in all the circumstances, the case is not serious, or if there is some other compelling reason. In the remainder of cases it will take action by prosecuting a formal complaint.
Prior to Investigation Committee’s complaint being upheld, the Disciplinary Committee must be satisfied that the member is guilty of the conduct complained of. If it finds the complaint proven, it will impose a sanction against the member which, according to the seriousness of the breach of professional conduct, will range from reprimand to exclusion from membership and may include a fine.
Liability of Member Firms to Disciplinary Action
A member firm will be liable to disciplinary action in circumstances as follows:-
- Member firm has been guilty of misconduct whilst discharging its professional duties or otherwise
- Member firm has performed its professional duties or conducted its practice inefficiently or incompetently to such an extent that as to bring discredit to itself, the Institute or the accountancy profession
- Member firm has failed or neglected to respond adequately or at all to correspondence or other communication from an officer, the Secretary or an employee of the Institute or any person acting on behalf of any committee of the Institute or failed to co-operate fully with an enquiry or investigation being conducted by or on behalf of the Institute
- Member firm has failed to satisfy a judgment debt in any jurisdiction
- Member firm has before a Court pleaded guilty or has been found guilty of any offence involving violence or indecency, drug trafficking, money laundering, tax evasion, breach of companies legislation or complicity of any such offences or has in any criminal proceedings been found to have acted fraudulently or dishonesty, it should be presumed, unless to the contrary that such conviction or finding constitutes proof of misconduct.
Duties of the Secretary in Disciplinary Proceedings
The secretary should ensure that:-
- A copy of the Complaint is sent to the Member, Audit Affiliate, Student or Member Firm concerned with a request for a response within a two week period.
- Receipt of the Complaint is acknowledged to the Complainant where applicable. He has been advised that a copy of the Complaint has been sent to the Member, Audit Affiliate, Student or Member Firm and that a copy of a response from the Member, Audit Affiliate, Student or Member Firm will be forwarded to him when received.
- When a response is received, a copy of it is sent to the Complainant. The Complainant may be requested, or he may wish, to respond to the response of the Member, Audit Affiliate, Student or Member Firm.
PRECEDENT BOOK
The Institute should establish and maintain a Precedent Book. The Institute should appoint a person who is an employee of the Institute to establish and maintain the Precedent Book.
The Precedent Book should record all Investigation Committee, Disciplinary Tribunal and Appeal Tribunal decisions and sanctions imposed.
The Precedent Book may be used by members of all Investigation Committees, Disciplinary Tribunals and Appeal Tribunals as a reference when dealing with Complaints, Formal Complaints or Appeals.
GENERAL
In situations where there are disciplinary proceedings (e.g. Disciplinary Tribunal) the Respondent should submit to the Secretary all relevant certificates, licenses and authorisations affected by the Order.
CONFIDENTIALITY
The Secretary, Special Investigator, Independent Reviewer, Investigation Committee, Disciplinary Committee, Disciplinary Tribunal have the absolute authority not to provide certain information and/or documentation (including written responses from a Respondent) to a Complainant if he or it deems it appropriate.
RESIGNATION DURING THE DISCIPLINARY PROCESS
In the event of a Member, Firm, Affiliated Partner or Student resigning during the course of any disciplinary process or prior to the commencement of any disciplinary process but where a Complaint has been made then the Institute may publish a statement that such a resignation has taken place together with a statement as to the existence of the complaint and/or a statement of fact that the disciplinary process was on-going prior to the resignation. In any such statement the Member, Firm, Affiliate Partner or Student should be named. In the event of such a resignation details will also be recorded in the registrar of findings naming the Member, Firm, Affiliated Partner or Student.
ETHICAL OBLIGATIONS OF COMPANY DIRECTORS
Directors duties
Company directors’ responsibilities are wide and diverse. Their duties arise primarily from:- • Statute Legislation
- Company Law
Directors duties include:-
- Exercising their powers in good faith and in the interests of the company as a whole
- Not allowed to make an undisclosed profit from their position as directors
- Carrying out their functions with due care, skill and diligence
- Maintaining proper books of account
- Preparing annual accounts
- Maintaining certain registrars and other documents
- Filing certain documents with the Office of the Registrar General (ORG)
- Disclosure of certain personal information
- Convening at general meetings of the company
- Transactions with the company
Auditor’s duties
Auditors duties include:-
- Duty to provide an Audit Report – report to the members of the company on the financial statements examined by them. The auditors’ report must be read at the general meeting and should be made available to every member of the company.
- Duty to report failure to maintain proper books of account – where auditors form the opinion that the company being audited is disobeying, or has disobeyed its obligations to maintain proper books of account, they are obliged to serve notice on the company informing it of that opinion. The auditors may report this to the Office of the Registrar General (ORG)
- Duty to exercise Professional Integrity – Auditor is under a duty to carry out the audit with professional integrity. In preparing their report, they must exercise skill, car and caution of a reasonably competent, careful and cautious auditor.
