4: Code of Ethics

Ethics

set of concepts and principles that guide us in determining what behavior helps or harms an individual and/or the society

Code of Ethics

represents a set of moral principles, rules of conduct or values

Objective of Code of Ethics

assist members in understanding the difference between right and wrong and in applying that understanding to their decisions

Why is there a need for a Code of Ethics

1. A distinguishing mark of the accountancy profession is its acceptance of the responsibility (“public interest responsibility”) to act in the public interest which is the collective well-being of the community of people and institutions the CPA serves

2. All recognized professions have developed codes of professional ethics

3. The profession’s attempt to achieve a number of common interests and by its observance of certain fundamental principles for that purpose

Adoption of strict set of standards

is intended to increase the confidence of the public to quality of professional services being offered by the members of the accountancy profession

Credibility, Professionalism, Quality of Services, Confidence

4 basic needs to be met in order for the accountancy profession to have value to the society

Credibility

A need for credibility of information and information systems

Professionalism

A need for individuals who can be clearly identified by clients, employers and other interested parties as professional persons in the accountancy field

Quality of Services

A need for assurance that all services obtained from a professional accountant are carried out to the highest standards of performance

Confidence

A need for users of professional services of accountants to feel confident that there exists a framework of professional ethics which governs the provision of those services

Profession

defined as a vocation founded upon specialized educational training, the purpose of which is to supply objective counsel and service to others, for a direct and definite compensation, wholly apart from expectation of other business gain

Characteristics of a Professional Activity

• Mastery of a particular intellectual skill, acquired by training and education

• Adherence by its members to a common code of values and conduct established by its administrating body, including maintaining an outlook which is essentially objective

• Acceptance of a duty to society as a whole (usually in return for restrictions in use of a title or in the granting of a qualification)

Code of Ethics

• a requirement for an activity to be considered as a profession

• inherent to a profession

The accountancy profession’s public consists of

• clients

• credit grantors

• governments

• employers

• employees

• investors

• business and financial community

• others who rely on the objectivity and integrity of CPAs to maintain the orderly functioning of commerce

Professional Regulatory Board of Accountancy (BOA)

has the power and function to prescribe and/or adopt a Code of Ethics for the practiceof accountancy

Philippine Institute of Certified Public Accountants (PICPA)

assist the BOA in the responsibility of setting ethical requirements

PICPA’s Board of Directors

The code of ethics are evaluated and approved by __________________

BOA, PRC

After the approval of the code of ethics by PICPA’s Board of Directors, it is then submitted to ________ for adoption and to __________ for approval of application

International Ethics Standards Board for Accountants (IESBA)

The ethical requirements being adopted in the Philippines are based on Code of Ethics for Professional Accountants developed and issued by the _______________________ and which are subsequently adopted by International Federation of Accountants (IFAC)

Code of Ethics

establishes principles that set the standard of behavior expected of a professional accountant

Public interest responsibility

The code of ethics is written with a purpose of emphasizing the accountancy profession’s recognition of its _______________

Overarching Requirements of the Code

• Fundamental Principles of Ethics

• Conceptual Framework

• International Independence Standards

Fundamental principles of ethics

These principles establish the standard of behavior expected of a professional accountant (COBID)

1. Integrity

2. Objectivity

3. Professional competence and Due care

4. Confidentiality

5. Professional Behavior

Conceptual Framework

The professional accountants shall apply the framework in order to identify, evaluate and address threats to compliance with the fundamental principles

International Independence Standards

Established for audits, reviews and other assurance engagements regarding threats to independence specific to these engagements

4 Parts, Glossary

The Code is composed of _________ and a __________

High-Level Structure of the Code of Ethics

• Part 1: Complying with the Code, Fundamental principles and Conceptual Framework

• Part 2: Professional Accountants in Business (PAIBs)

• Part 3: Professional Accountants in Public Practice (PAPPs)

• Part 4A: Independence for Audit and Review Engagements

• Part 4B: Independence for Other Assurance Engagements

• Glossary

Professional Accountant (PA)

refers to an individual who holds a valid Certificate of Registration and current Professional Identidication Card issued by the BOA and PRC, whether he/she be in public practice, industry or commerce, public sector, or education

Professional Account in Business (PAIB)

is a professional accountant working in areas such as commerce, industry, service, public sector, education, the not-for-profit sector, or in regulatory or professional bodies, who might be an employee, contractor, partner, director (executive or non-executive), owner-manager or volunteer

Senior Professional Accountant in Business (Senior PAIB)

is a director, officer or senior employee who is able to exert significant influence over, and make decisions regarding, the acquisition, deployment and control of the employing organization’s human, financial technological, physical and intangible resources

Professional Accountant in Public Practice (PAPP)

a professional accountant, irrespective of functional classification (for example, audit, tax or consulting) in a firm that provides professional services. The term is alsoused to refer to a firm of professional accountants in public practice

Part 1: Complying with the Code, Fundamental principles and Conceptual Framework

Applies to all professional accountants

Part 2: Professional Accountants in Business (PAIBs)

• Applies to professional accountants in business (PAIB) when performing professional activities

• Also applies to professional accountants in public practice (PAPP) when performing professional activities pursuant to their relationship with the firm, whether as a contractor, employee or owner

Part 3: Professional Accountants in Public Practice (PAPPs)

Applies to professional accountants in public practice (PAPP) when providing professional services

Part 4

Applies to professional accountants in public practice (PAPP) who are performing assurance services

Part 4A: Independence for Audit and Review Engagements

Aplies to professional accountants in public practice (PAPP) when performing audit or review engagements

Part 4B: Independence for Other Assurance Engagements

Aplies to professional accountants in public practice (PAPP) when performing assurance engagements that are not audit or review engagements

Glossary

Applies to all professional accountants (PA); Contains defined terms and descrived terms which have a specific meaning in certain parts of the Code

Laws and regulations

In cases where the code of ethics and laws and regulations, ____________ shall prevail

Ethical requirements with stricter provisions

In cases where there is a conflict in ethical requirements between two countries, apply the ____________________

Breaches of the Code

1. Evaluate the significance of the breach and its impact on the PA’s ability to comply with the fundamental principles

2. Take whatever actions might be available, as soon as possible, to address the consequences of the breach satisfactorily

3. Determine whether to report the breach to the relevant parties

Integrity

to be straightforward and honest in all professional and business relationships

Objectivity

to exercise professional or business judgment without being compromised by bias, conflict of interest, or undue influence of, or undue reliance on, individuals, organizations, technology or other factors

Professional Competence and Due Care

to attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organization receives competent professional service, based on current technocal and professional standards and relevant legislation, 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

Professional Behavior

to comply with relevant laws and regulations, behave in a manner consistent with the profession’s responsibility to act in the public interest in all professional activities and business relationships, and avoid any conduct that the professional accountant knows or should know might discredit the profession

Integrity

involves fair dealing, truthfulness andhaving the strength of character to act appropriately

• Standing one’s ground when confronted by dilemmas and difficult situations

• Challenging others as and when circumstances warrant, in a manner appropriate in the circumstances

Objectivity

PA shall not undertake a professional activity if a circumstance or relationship unduly influences the accountant’s professional judgment regarding that activity

Professional Competence and Due Care

• Shall take reasonable steps to ensure that those working in a professional capacity under the accountant’s authority have appropriate training and supervision

• Shall make clients, the employing organization, or other users of the accountant’s professional services or activities, aware of the limitations inherent in the services or activities

Confidentiality

serves the public interest as it facilitates the free flow of information in the knowledge that the information will not be disclosed to a third party

Circumstances when it is required to disclose confidential information

• Disclosure is required by law

• Disclosure is permitted by law and is authorized by the client or the employing organization

• There is a professional duty or right to disclose, when not prohibited by law

Professional Behavior

Shall not knowingly engage in any endeavor that impairs or might impair the integrity, objectivity or good reputation of the profession

Professional Behavior

Shall be honest and truthful and shall not make:

• Exaggerated claims for the services offered by, or the qualifications or experience of, the accountant, or

• Disparaging references or unsubstantiated comparisons to the work of others

Conceptual Framework

sets the approach to be taken to identify, evaluate and address threats to compliance with those fundamental principles and, for audits and other assurance engagements, threats to independence

3 Step Approach

1. Identify — threats (I-FASS) to compliance with fundamental principles

2. Evaluate — the threats identified

3. Address — the threats by eleminating or reducing them to an acceptable level

Have an inquiring mind, Exercise professional judgment, Use the reasonable and informed third party test

When applying the conceptual framework, the PA shall ____________, __________, and _______________

Self-Interest Threat

the threat that a financial or other interest will inappropriately influence a PA’s judhment or behavior

Self-Review Threat

the threat that a professional accountant will not appropriately evaluate the results of aprevious judgment made

Advocacy Threat

the threat that a professional accountant will promote a client’s or employing organization’s position to the point that the accountant’s objectivity is compromised

Familiarity Threat

the threat that due to a long or close relationship with a client, or employing organization, a professional accountant will be too sympathetic to their interests or too accepting of their work

Intimidation Threat

the threat that a professional accountant will be deferred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the accountant

Acceptable Level

The PA shall evaluate whether the identified threat is at an ____________

Acceptable Level

is a level at which a PS using the reasonable and informed third party test would likely conclude that the accountant complies with the fundamental principles

Address Threats

• Eliminating the circumstances, including interests or relationships, that are creating the threats

• Applying safeguards, where available and capable of being applied, to reduce the threats to an acceptable level

• Declining or ending the specific professional activity

Safeguards

are actions, individually or in combination, that the professional accountant takes that effectively reduce threats to compliance with the fundamental principles to an acceptable level

Bias

affects the exercise of professional judgment when identifying, evaluating and addressing threats to compliance

Anchoring bias

A tendency to use an initial pirce of information as an anchor against which subsequent information is inadequately assessed.

Automation bias

A tendency to favor output generated from automated systems, even when human reasoning or contradictory information raises questions as to whether such output is reliable or fit for purpose

Availability bias

A tendency to place more weight on events or experiences that immediately come to mind or are readily available than on those that are not

Confirmation bias

A tendency to place more weight on information that corroborates an existing belief than information that contradicts or casts doubt on that belief

Groupthink

A tendency for a group of individuals to discourage individual creativity and responsibility and as a result reach a decision without critical reasoning or consideration of alternatives

Overconfidence bias

A tendency to overestimate one’s own ability to make accurate assessments of risk orother judgments or decisions

Representation bias

A tendency to base an understanding on a pattern of experiences, events or veliefs that is assumed to be representative

Selective perception

A tendency for a person’s expectations to influence how the person views a particular matter or person

Considerations for Assurance Engagements

1. Firm Culture

2. Independence

3. Professional Skepticism

Integrity, Objectivity

Independence is grounded on two fundamental ethical principles which are _________ and ___________

Part 2

discusses how PAIB should apply the conceptual framework when they identify threats to compliance with fundamental ethical principles

Conflict of Interest

• Main Threat/s Created: Self-interest

• Main Fundamental Principle/s Affected: Objectivity

Preparation and presentation of information

• Main Threat/s Created: Self-interest; Intimidation

• Main Fundamental Principle/s Affected: All

Acting without suffieiceny expertise

• Main Threat/s Created: Self-interest

• Main Fundamental Principle/s Affected: professional competence and due care

Financial Interests, Compensation and Incentives

• Main Threat/s Created: Self-interest

• Main Fundamental Principle/s Affected: Objectivity; Confidentiality

Inducements, Including Gifts and Hospitality

• Main Threat/s Created: Self-interest; Familiarity; Intimidation

• Main Fundamental Principle/s Affected: Integrity; Objectivity; Professional Behavior

Responding to Non-compliance with Laws and Regulations (NOCLAR)

• Main Threat/s Created: Self-interest; Intimudation

• Main Fundamental Principle/s Affected: Integrity; Professional Behavior

Pressure to Breach the Fundamental Principles

• Main Threat/s Created: Intimidation

• Main Fundamental Principle/s Affected: All

Appropriate individuals

The PAIB shall determine the _______________ within the employing organization’s governance structure with whom to communicate

Both management and governance responsibilities

If a PAIB communicates with individuals who have ___________________, the PAIB shall be satisfied that communication with those individuals adequately informs all of those in governance role

• Is greatly influenced by the work environment within the employing organization and its operating environment

• Examples include:

  • Leadership

  • Policies and procedures

  • Systems of corporate oversight

  • Strong internal controls

  • Recruitment procedures

  • Timely communication of policies and procedures

  • Ethics and code of conduct policies

Address Threats

Refer to discussions of conflict of interest and pressure to breach fundamental principles for the examples of actions that might address threats

Conflict of interest

creates threats to compliance with the principle of objecitivity and might create threats to compliance with the other fundamental principles

Conflict Identification

• The nature of the relevant interests and relationships between the parties involved

• The activity and its implication for relevant parties

Safeguards to Threats Created by Conflicts of Interest

• Restructuring or segregating certain responsibilities and duties

• Obtaining appropriate oversight, for example, acting under the supervision of an executive or non-executive director

Disclosure and Consent

• Disclose the nature of the conflict of interest and how any threats created were addressed

• When safeguards are applied to address the threat, obtain consent to undertake the professional activity

Preparation and presentation of information

includes recording, maintaining and approving information

Preparation and presentation of information

• is relevant to stakeholders in understanding and evaluating aspects of the organization and making wise business decisions

• may create a self-interest, intimidation or other threats

Preparation and presentation of information

• Prepare or present the information in accordance with a relevant reporting framework (GAAP/PFRS), where applicable

• Observe fair presentation of the information

• Exercise professional judgment

• Not omit anything to mislead or influence outcome inappropriately

• Avoid undue influence of, or undue reliance on, individuals, organizations or technology, and

• Be aware of the risk of bias

Not exercise discretion

PAIB shall ______________ with the intention of misleading others or influencing contractual or regulatory outcomes inappropriately

PAIB who intends to rely on the work of others

A ________________, shall exercise professional judgment to determine what steps to take, if any, in order to fulfill the responsibilities

Addressing information that is or might be misleading

• Discussing the concern with the PAIB’s superior and/or the appropriate level/s of management, and requesting such individuals to take appropriate action to resolve the matter

• Consulting the policies and procedures of the employer (e.g., ethics or whistle-blowing policy).

Self-interest threat

PAIBs shall act with sufficient expertise to avoid creating a _____________ to compliance with the ethical principle of professional competence and due care