Ethics

importance

• accountants hold positions of trust, people rely on them and their expertise

• public interest

• need to be able to given an independent view

• guidelines can be used as a defence in litigious situations

principles based guidance

• active consideration and demonstration of conclusions

• encourages compliance

• allows for variations in individual and changing situations

• can incorporate rules where needed

integrity

being straightforward and honest

objectivity

not allowing bias, conflict of interest or the undue influence of others to compromise judgement

professional competence and due care

maintaining professional knowledge and skills at the level to provide services based on current standards and legislation, acting diligently and as per regulations

confidentiality

respect the confidentiality of information acquired in professional and business relationships

professional behaviour

comply with relevant laws and regulations, and avoid any conduct that may discredit the profession

independence of mind

the state of mind that allows the expression of a conclusion without judgement being compromised, and acting with integrity, objectivity and professional scepticism

independence in appearance

avoiding facts and circumstances that a 3rd party would believe integrity, objectivity or professional scepticism has been compromised

safeguards created by the profession, legislation, regulations

• training and experience requirements

• CPD

• corporate governance regulations

• professional standards

• regulatory monitoring and disciplinary procedures

• external reviews

safeguards in the work environment

• other accountants reviewing work

• consulting independent 3rd parties, eg regulatory bodies

• rotating senior personnel

• discussing ethical issues with those in charge of client governance

• disclosing the nature of services and the extent of fees with clients

• involving other firms to help perform/reperform the audit

mitigating bias

• seek expert advice

• consult with others to ensure ideas are challenged

• training on recognising bias

types of bias

• anchoring

• automation

• availability

• confirmation

• groupthink

• overconfidence

• representation

• selective perception

public interest entities

a listed company that is significant to the public due to its size, nature or impact. subject to stricter regulations and auditing requirements

banned non-audit services for PIEs

• tax services relating to tax forms, payroll, customs, subsidies, calculations and advice

• management toles or decision making

• bookkeeping, accounting records, preparing FS

• payroll services

• internal control or risk management procedures

• valuation services

• legal services

• HR services

• internal audit function

• financing, capital structure, allocation and investment

• promoting, dealing in or underwriting shares

self-interest threats

• employment with the client

• partner on client board

• family and personal relationships

• gifts and hospitality

• loans and guarantees

• overdue fees

• contingent fees

• high percentage of fees

• lowballing

• financial interests

• close business relationships

direct or indirect material financial interests

cannot be owned by the audit firm, partner, member of the team or an immediate family member

financial interests safeguards

• disposing of it

• removal from the audit team

• informing the audit committee

• engagement quality reviews

• firms need to have procedures for dislcosure

close business relationships

• common commercial interest, eg joint ventures

• not allowed unless clearly immaterial and insignificant

• if not, the audit needs to be ended or the relationship terminated

• if it is between an individual, they need to be removed from the team

• purchases from clients in the ordinary course of business isn’t usually a threat

dual employment

• not allowed

• auditor may lose objectivity if they are trying to impress a future employer

• if the auditor moves to the client, they will know too much about the procedures and systems

dual employment safeguards

• modifying the audit strategy

• assigning it to someone with equal experience to prevent intimidation

• quality reviews

partner moving to client rules

• need to resign as auditors if they have acted for the client in the past 2 years

• cannot accept reappointment until 2 years after the partner was involved with the audit or until they leave

partner or employee on client board

not allowed

loan staff assignments

• not allowed

• cannot work for the client for a temporary period

family or close personal relationships

• need to consider responsibilities and closeness

• if an immediate family member is a director, officer, or can influence the subject matter, then they need to be removed from the team

• policies and procedures for disclosure

• quality reviews

• discuss with audit committee

gifts and hospitality

can only be accepted if trivial and inconsequential

loans and guarantees

• cannot be made to or accepted from clients

• unless the client is a bank and it is in the ordinary course of business

overdue fees

• need to pay overdue fees before the audit report can be issued

• discuss with governance

• may need to resign if they aren’t paid

contingent fees

• not allowed

• fees based on the outcomes

high percentage fees safeguards

• dicussing with audit committee

• taking steps to reduce dependency

• engagement quality reviews

• consulting a 3rd party

ICAEW high percentage fees

if total fees from a PIE represent more than 15% of the total fees for 2 years, then it needs to be disclosed to governance and a quality review done

FRC high percentage fees

• if total fees exceed 10% or 5% for a PIE, this needs to be disclosed to the ethics partner and governance and safeguards put in place

• if they exceed 15% or 10% for a PIE, the firm cannot act

non-audit services PIEs fees

cannot be more than 70% of the total audit fee

lowballing safeguards

• maintain records to prove that appropriate staff and time were spent on the engagement

• comply with all standards, guidelines and quality management procedures

• need to be able to prove the audit was done per the standards

self review threats

• employment with the client

• preparing accounting records and financial statements

• valuation services

• internal audit services

• corporate finance

employment with client

if someone has been a director, officer or employee with influence over the subject matter in the last 2 years they cannot be on the audit team

preparing accounting records and FS

• cannot prepare records and have the same team audit them

• different staff members preparing statements and auditing

• policies to prevent managerial decisions being made

• clients need to originate the source data

• clients need to originate and approve the underlying assumptions

valuations

cannot be done if they have a material effect on the financial statements or are highly subjective

valuation safeguards

• second partner review

• confirming the client understands the valuation and assumptions used

• ensuring the client takes responsibility

• different staff for the valuation and audit

tax returns

no threat if management takes responsibility

tax calculations

• cannot be done for PIEs unless in an emergency

• can be done for non PIEs with safeguards

tax planning

• only when advice is clearly supported by tax authorities

• not when there are doubts and material consequences

assistance in resolving tax disputes

• can be done if the subject and effect is material

• need to use staff not on the audit team

• obtain advice from external tax professionals

tax safeguards

• people not on the audit team

• reviewed by senior tax employees

• external advice

• calculations being reviewed

FRC tax rules

• cannot promote structures where there is doubt over the accounting treatment and if it is true and fair

• cannot play a management role

• cannot prepare material tax calculations to a PIE

• cannot act as an advocate

internal audit

the same external auditors cannot do the internal audit

corporate finance services

• cannot promote, deal in or underwrite a client’s shares

• cannot commit a client to the terms of a transaction

• can provide structuring advice when there are safeguards and no managemnet decisions are made

• cannot be done for PIEs

IT services

not allowed if related to the accounting or finanical management system

litigation support

not allowed if material

advocacy threat

• the firm takes a client’s part in a dispute or acts as their advocate

• eg defending them in a legal case or negotiations with a bank on their behalf

familarity threat

risk losing independence and professional scepticism when overfamiliar with a client

• family and personal relationships

• employment with client

• long associations

• recruitment

long associations

• need to monitor relationships

• safeguards - rotating senior staff, regular reviews

long associations non PIEs

• if a partner has held that role for 10+ years, then they need to be rotated

• if not, other safeguards are needed and the reasons for not rotating them documented and communicated to governance

long associations PIEs

• cannot act as the engagement partner for more than 5 years

• cannot take part in the engagement until another 5 years have passed

• some flexibility for if there are unexpected changes in client management, or to maintain audit quality

long associations quality reviewers

• cannot be a reviewer for more than 7 years

• cannot return to the role for 5 years

recruitment

• not allowed

• eg advising on the appointment of an employee or a renumeration package

intimidation threat

• close business relationships

• litigation

• family and personal relationships

• assurance staff moving to the client

litigation

• may pressure the firm to produce an unqualified audit report

• risk of losing the client, bad publicity, negligence charges

• need to consider the materiality, nature and if the litigation relates to a prior engagement

litigation safeguards

• disclosing the nature and extent to the audit comittee

• removing affected individuals from the team

• involving another professional accountatnt to review the work

• resigining if serious

management threat

making judgements and decisions that are the responsibility of management

informed management

• can make independent judgements and decisions based on the information provided

• understand their roles and responsibilities and those of the auditor

• highly experienced

• are questioning of the auditors work

accepting new clients

• need to consider if there are any ethical issues

• need to consider any client factors that will threaten the firm’s integrity, eg illegal activities, dishonesty, questionable accounting policies

• need to decline the engagement if safeguards cannot reduce the risks

• eg obtaining a commitment to improve corporate governancec

resolving ethical issues factors

• facts

• parties

• fundamental principles

• internal procedures

• alternative courses of action

• best to resolve issues in-house

• but can seek guidance from external parties, eg via the ICAEW helpline

confidentiality

• a key factor in trust

• cannot discuss client matters with anyone outside the firm

• cannot discuss client matters with anyone outside the team if there is a conflict of interest

• accidental disclosure is more likley than deliberate

data protection

• GDPR and Data Protection Act

• anyone storing personal data needs to ensure it is protected

• can only store personal data if there is a lawful reason or consent was given

• people have a right to access their data and know how it is processed

• organisations need the data controller to notify the ICO and report any breaches to them

personal data breaches

a breach of security leading to the accidental or unlawful destruction, loss, alteration, unathorised disclosure or access to personal data

personal data breaches examples

• unauthorised access to files

• leaving documents in a public area

• emailing personal data to the wrong person

• accidentally deleting files

• loss of availability, eg server faults

• devices being lost or stolen

• cars containing files being broken into and then stolen and read

• passing on client details to a 3rd party

• downloading a client list before leaving the firm

• incorrectly updating contact details for the wrong person

accidental disclosure safeguards

• don’t dicuss client matters with people outside the firm

• don’t discuss client matters in public places

• don’t leave files in cars

• only remove working papers from the office if needed

• don’t work on electronic working papers on unprotected systems

• raise concerns with senior staff

• seek legal advice before making disclosures

when can information be disclosed

• consent given

• public duty

• legal or professional right or duty, eg reporting terrorist activities or to comply with prodessional body reviews

money laundering

• suspicions need to be reported to the MLRO who makes a report to the NCA

• not doing so is an offence, as is tipping off

• firms need an MLRO and an MLCP

examples of money laundering

• keeping customer overpayments

• offences that involve a saved cost

• criminal offences under the companies act

conflicts of interest

• when an auditor directly competes with a client or has a joint venture with a major competitor

• when an auditor performs services for 2 competing or disputing clients

• need to evaluate the threats and use safeguards

• can’t act for both without consent and if safeguards can’t reduce the risks

conflicts of interest safeguards

• disclosing to the clients

• obtaining consent from both to act

• confidentiality agreements

• information barriers - separate audit teams, physical separation of teams, procedures for if information dissemination

• ceasing to act