AA - Chapter 4: Professional Codes of Ethics and Conduct

Professional Codes of Ethics and Conduct

Scope and Authority

• As a member of IFAC, ACCA's Code of Ethics and Conduct is based on IESBA's International Code of Ethics for Professional Accountants.

• All members of ACCA must observe proper standards and refrain from misconduct

Non-compliance actions

• evaluate impact

• take actions to address consequence of the breach

• determine to report the breach to ACCA

Fundamental Principles

1. integrity.

2. objectivity.

3. professional competence and due care.

4. confidentiality.

5. professional behavior.

Fundamental Principles - Integrity (R111)

• strength of character to act appropriately

• a state of mind

• information accountant is associated with

Fundamental Principles - Objectivity (R112)

must not be compromised by

• bias;

• conflict of interest; or

• undue influence

Fundamental Principles - Professional Competence and Due Care (R113)

• ensure their competence based on current standards and relevant legislation

• act diligently and in accordance with applicable technical and professional standards

Fundamental Principles - Confidentiality (R114)

• respect the confidentiality of information acquired as a result of professional and business relationships

• Confidential information should not be:

  • disclosed to third parties without proper and specific authority or unless there is a legal, professional right or duty to disclose;

  • used for any personal advantage or the advantage of a third party.

Fundamental Principles - Professional Behaviour (R115)

• comply with relevant laws and regulations; and

• behave in a manner consistent with the profession’s responsibility to act in the public interest; and

• avoid any conduct that might discredit the profession.

• be honest and truthful and not make:

  • exaggerated claims

  • unsubstantiated comparisons

Conceptual Framework

• identify, evaluate and address threats to compliance with the fundamental principles

• implement safeguards to eliminate or reduce them to an acceptable level

• Acceptable level

  • reasonable

  • informed third party accountant complies principles

Threats (R120.6)

• Self-interest threat;

• Self-review threat;

• Advocacy threat;

• Familiarity threat; and

• Intimidation threat.

• But not “management threat”

Self-Interest Threat

financial or other interests of, i.e.:

• undue dependence on total fees from a client

• loans or guarantees made to or from a client

• concern over losing a client or employment security

Self-Review Threat

• does not appropriately evaluate the results of a previous judgment made by either themselves or another individual

• i.e.:

  • reporting on the operation of systems after being involved in their design or implementation

  • a member of an audit team having previously been employed by the client

Advocacy Threat

• promotes a client's or employer's position or opinion to the point that subsequent objectivity may be compromised

• If the position has changed later, there may be pressure to ignore that change

• i.e.:

  • promoting shares in an audit client

  • commenting publicly on future events

Familiarity Threat

• long or close relationship, becomes too sympathetic to the interests of a client or employer

• or too willing to accept their work and explanations

• significant risk that professional skepticism will not be sufficiently applied

Intimidation Threat

• deterred from acting objectively by actual or perceived pressures, including attempts to exercise undue influence over the accountant

• i.e.:

  • reduce necessary work to reduce costs or fees

  • being threatened with litigation

  • threat of dismissal (as an employee) or replacement (as an auditor)

Addressing Threats

• Eliminate threats, i.e. sell shares before audit

• Apply Safeguards

• Decline

Safeguards

• actions, individually or in combination

• effectively eliminate threats

• compliance with the fundamental principles

• reduce them to an acceptable level

Independence => [Objectivity and Integrity]

• mind: independent judgement

• appearance: significant facts and circumstances

Threats and safeguard - Fee

• Fee: self-interest, intimidation

• Safeguard:

  • Assess reasonable fees

  • Contingent fee is mostly prohibited

  • Reduce other services

  • Having other independent reviewers

  • PIE: each 2 years + >15%; <= 5 years: “pre-issuance review”

  • Not PIE: each 5 years + >30%: other independent reviewers

Threats and safeguard - Inducements, Including Gifts and Hospitality

• Threats: self-interest, familiarity or intimidation

• safeguards:

  • Informing senior management of the firm or TCWG of the client

  • Amending or terminating

Threats and safeguard - Actual or Threatened Litigation

• threats: self-interest and intimidation

• safeguards:

  • independent review litigation subjects

  • remove involved individuals

Threats and safeguard - Financial Interests

• threats: self-interest including immediate family

• no safeguards:

  • dispose interest

  • disengage

  • partner/audit member resigns

Threats and safeguard - Loans and Guarantees

• threats: self-interest

• safeguards:

  • prohibited if not banks

  • remove partner or audit member if they have material loans from client banks

Provision of Non-assurance Services to Assurance Clients

• If a threat cannot be reduced to an acceptable level by applying safeguards, the NAS cannot be provided.

• An explicit prohibition of a NAS to an audit client applies regardless of the materiality of the outcome or results of the NAS on the financial statements.

NAS - Assuming Management Responsibilities

• Prohibition: self-review/interest, familiarity, advocacy. Advising could be self-review

• safeguards: designated client individual

NAS - Accounting and Bookkeeping Services

• Threats: self-review

• PIE: prohibited

• not-PIE:

  • routine, mechanical nature services (simple)

  • safeguard: excluding audit member, independently review services/audit

NAS - Valuation Services

• Threats: self-review, advocacy

• PIE: if threat is visible => ceased service

• not-PIE: ++subjectivity and material => ceased service

• Safeguard: exclude audit member / Independently reviews

NAS - Tax Services

• threats: self-review [1], advocacy [2]

• tax return preparation: clean

• tax calculations entries to FS: PIE prohibited, [1]

• tax advisory and plan services: PIE prohibited, [1] + [2]

• resolution tax disputes: assist prohibit of advocate before court or amount is material

NAS - Internal Audit

• threats: self-review [1]

• PIE: prohibit any financial reporting related services

• not-PIE: excluding audit member

NAS - IT Systems Services

• threats: self-review [1]

• PIE: prohibit any financial reporting related services

NAS - Recruiting Services

• threats: self-interest, familiarity and intimidation

• prohibited from acting as a negotiator on client behalf

NAS - Corporate Finance Services

• threats: Self-review or Advocacy Threat

• prohibited:

  • promoting, dealing in or underwriting client shares.

  • services effectiveness depends on a particular accounting treatment which is in doubt and material

• safeguards: excluding audit member / independent reviews

Long Association of Senior Personnel

• threats: familiarity, self-interest

• PIE: timing as table

Audit senior personnel	time-on	cooling-off
engagement partner	7 years	5 years
engagement quality reviewer	7 years	3 years
key audit partners	7 years	2 years

• Safeguards: rotating, independent reviews, subjecting whole assignment to in/ex quality control reviews

Employment with an Audit Client

	Threats	Safeguards
Former Partner/Audit Team Member Restrictions	familiarity or intimidation	modifying the audit plan; quality review
Audit Team Member Entering Employment with a Client	self-interest	PIE: key audit partner joining must cease to be partner after 12 months issued audited FS
Temporary Personnel Assignments	self-review, advocacy or familiarity	excluding from audit members

Close Business Relationships

• self-interest and intimidation

• no safeguards: decline the audit

Recent Service

• recently served as a director, officer or employee of the audit client

• self-interest, self-review or familiarity

• excluding from audit team

Serving as a Director

• self-review and self-interest

• Company Secretary is prohibited as well unless:

  • specifically permitted

  • management makes all decisions

  • limited to routine and administrative

Breach of Independence Provisions

• eliminate interest and address consequences

• consider legal

• communicate engagement partner

• evaluate firm’s objectivity

• significance factors:

  • nature and duration of breach and previous breaches

  • team knowledge of the interest and their role

  • extent threats created

• communication with TCWG: if they do not concur then end engagement

Second Opinions

• entity not an existing client may threaten principles

• self-interest

• undue pressure to objectivity of appointed auditor

• both auditor communication with client permission

Disclosure of Confidential Information

• Information to third parties with permission

• without permission:

  • legal duty

  • professional duty or right

Use of Confidential Information

• must not use information for his or a third party’s advantage

• distinguish between experience and confidential information

Conflicts of Interest

• threats objectivity and other principles

• conflict between clients or accountant vs. client

Conflicts of Interest - Professional Accountant v Client

• place clients' interests before their own

• self-interest

• safeguard for referral, disclosing to client in writing

  • commission will be received

  • amount and terms ASAP

  • agreement from client

Conflicts of Interest - Client v Client

• avoid client’s interests adversely affecting another’s

• even with safeguards materially prejudice the interests of any client, disengage