Ethics Module - Overview of Professional Conduct

Ethics Module Overview

  • Module Title: Module 1: Ethics

    • Reference: Chapter 2 in the handbook.

Study Materials

  • Lecture slides

  • Textbook: Auditing Fundamentals in a South African Context – Chapter 2

  • Question Banks:

    • Auditing Fundamentals in a South African Context: Graded Questions

    • Module 1: Ethics Question Bank and Suggested Solutions

Learning Objectives

Upon completion of this module, students should be able to:

  1. Explain what ethics are and the necessity of codes of ethics in professions.

  2. Identify points in the audit process where ethical requirements must be considered.

  3. Contrast a “principle-based” approach to ethics with a “rules-based” approach.

  4. Recognize applicable ethical codes and rules for Registered Auditors in South Africa, including prohibited actions.

  5. Outline the disciplinary processes of the IRBA (Independent Regulatory Board for Auditors) and SAICA (South African Institute of Chartered Accountants).

  6. Describe and apply the conceptual framework of ethics adopted in the IFAC (International Federation of Accountants)/SAICA/IRBA Codes of Professional Conduct.

  7. Understand the guidance in the codes of professional conduct and apply this to practical situations.

  8. Define improper conduct per IRBA's Rules Regarding Improper Conduct and apply these rules to practical examples.

  9. Understand the foundational theories of ethics and their practical applications in examinations.

2.1 The Nature of Ethics

  • Ethics Definition:

    • “Set of principles of right conduct and a theory or a system of moral values.” (Typically studied in second-year Business Ethics)

  • Origin:

    • The Greek word ‘ethos’ translates to “custom,” “habit,” or “character.”

  • Subjectivity in Ethics:

    • Individuals may have varying viewpoints on what is ethical or unethical.

    • Distinction between “ethical” (personal beliefs) and “legal” (dictated by law and regulations).

  • Morality vs. Ethics:

    • Morality: Pertains to personal character.

    • Ethics: Pertains to a broader social system or communal standards.

2.2 Codes of Ethics

2.2.1 Background to Codes of Ethics of Professions

  • Characteristic of Professions:

    • A defining aspect of a profession is the existence of a Code of Ethics.

  • Purpose of a Code of Ethics:

    • Acts as a framework for member conduct and guides daily ethical decision-making.

    • Serves as a discussion tool for ethical dilemmas and grey areas.

    • It is not a replacement for established standards, policies, or rules.

  • Types of Codes:

    • Code of Ethics: Contains fundamental principles.

    • Code of Conduct: Provides detailed guidance on specific behaviors.

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2.2.2 Rules-Based vs. Principle-Based Codes of Ethics

  • Rules-Based Approach:

    • Contains detailed rules focusing on compliance with specific regulations.

  • Principle-Based Approach:

    • Offers a conceptual foundation for ethical decision-making.

    • The IFAC Code of Ethics (basis for SAICA/IRBA Codes) emphasizes principles with local adaptations.

2.2.3 Ethical Misconduct by Auditors

  • Examples of Ethical Misconduct:

    • Refer to Section 2.2.3 in the Auditing Fundamentals for both international and local examples of ethical misconduct by auditors, including:

    • International Cases:

      • Enron

      • KPMG (multiple instances linked with Gupta, SARS rogue unit, and VBS bank)

      • SMSF Auditors

    • South African Cases:

      • Nkonki Inc

      • Masterbond

2.3 Ethical Codes and Rules for External SAICA Auditors in South Africa

  • Regulatory Framework:

    • Ethics governed by:

    • Constitutional standards

    • By-laws

    • SAICA Code of Professional Conduct

    • Rules regarding improper conduct

    • Code of Professional Conduct for Registered Auditors

  • Differences Between SAICA and IRBA Codes:

    • Refer to Figure 2.1 in Auditing Fundamentals for a detailed description of differences in nature between the SAICA and IRBA Codes of Conduct.

2.4 Prohibited Actions for the External Auditor

2.4.1 IRBA Rules Regarding Improper Conduct

  • Prohibited Actions for Registered Auditors:

    • Refer to Figure 2.2 in Auditing Fundamentals for detailed descriptions.

    • Covers offenses by registered persons, applicable to trainee accountants too per paragraph 34 of the by-laws.

    • More details in Figure 2.3 within Auditing Fundamentals.

2.5 Disciplinary Processes

2.5.1 SAICA Disciplinary Process

  • Applicability:

    • Applies to any registered or previously registered individual with SAICA, including trainee accountants.

  • Professional Conduct Committee (PCC):

    • Initial evaluation of cases, determining merits and whether to proceed.

    • Powers to caution, reprimand, fine, or refer to the Disciplinary Committee.

2.5.2 IRBA Disciplinary Process

  • Applicability:

    • Specific to Registered Auditors (RAs) only.

  • Complaint Process:

    • Any member of the public or organization can lodge a complaint against an RA, submitting an affidavit.

    • IRBA Board may refer justified complaints to Investigations Committee.

    • If grounds for charges exist, cases are launched against the members through a Disciplinary Committee.

2.6 Content of the SAICA and IRBA Codes of Professional Conduct

2.6.1 Background to the Codes

  • Importance of Ethical Conduct:

    • Global corporate collapses raised serious questions around audit ethics.

    • Stakeholders expect reliability in audit reports; integrity is crucial.

  • IFAC Code of Ethics:

    • Restructured in 2018, focusing on auditor independence and robustness, adopted and modified by SAICA and IRBA.

2.6.2 Differences Between the SAICA and IRBA Codes

  • SAICA Code Parts:

    • Previously divided into three parts (A, B, C) now listed as 1, 2, 3, and 4.

  • IRBA Code Parts:

    • Parts 1, 3, and 4.

    • Modifications to the IFAC Code noted in both codes.

2.6.3 Structure of the Codes

  • Purpose of the Code:

    • Fundamental principles reflect public interest.

  • Conceptual Framework:

    • Aims for identification, evaluation, and addressing threats to fundamental principles.

  • Professional Accountant Definition:

    • Definitions and obligations encapsulated in the code.

2.6.3.1 Requirements and Application Material

  • Requirements:

    • Obligations denoted with an „R” highlight mandatory compliance.

  • Application Material:

    • Context and explanations for optional compliance denoted with an „A".

2.6.3.2 Part 1: Complying with the Code

  • Fundamental Principles (Section 110):

    1. Integrity:

    • Honesty and truthfulness in professional conduct.

    • Avoidance of being associated with false or misleading statements.

    1. Objectivity:

    • Must not compromise professional judgment through bias or conflicts of interest.

    1. Professional Competence and Due Care:

    • Must maintain knowledge, skills, and act diligently embracing technical standards.

    1. Confidentiality:

    • Duty to maintain confidentiality of client/employer information.

    1. Professional Behaviour:

    • Compliance with laws and regulations protecting the profession’s integrity.

2.6.4 Applying the Conceptual Framework

2.6.4.1 Steps to Comply with the Code

  1. Identify and discuss the ethical issue.

  2. Address threats to fundamental principles.

  3. Evaluate if the threat level is acceptable.

  4. Implement safeguards to mitigate threats.

  5. If reassess reveals unmanageable threat: eliminate the activity or refuse engagement.

2.6.4.2 Identifying Threats to Compliance

  • Types of Threats:

    • Self-Interest: Financial considerations influencing judgment.

    • Intimidation Pressure: Threats affecting objectivity.

    • Self-Review: Evaluating prior work leads to bias.

    • Advocacy Threats: Promoting a client’s position may compromise independence.

    • Familiarity Threats: Close relationships create potential bias.

2.6.4.3 Evaluating Threats

  • Assess factors affecting threat levels through qualitative and quantitative evaluations, including policies, procedures, and any new information.

2.6.4.4 Addressing Threats

  • If threats are not at acceptable levels:

    • Eliminate the source of the threat.

    • Apply appropriate safeguards.

    • Decline or end the professional activity if needed.

Professional Skepticism

  • Definition:

    • Refers to a mindset of questioning and critically assessing gathered evidence.

  • Elements:

    • Avoids taking evidence at face value.

    • Pursues all lines of inquiry relevant to the audit.

    • Must confirm significant management assertions.

2.6.4.5 Practical Application

  • Homework and Examples:

    • Individual case studies emphasized practical application of ethical principles.

Class Examples of Ethical Misconduct

  • Class Example 1: and requirements surrounding identified threats to fundamental principles.

    • Engagement examples highlight conflicts of interest, confidentiality breaches, and integrity issues encountered in auditing.

  • Class Example 2: Address specific situations with threat evaluation and safeguard application per the SAICA Code of Professional Conduct.

Conclusion

  • A comprehensive understanding of ethics is crucial in auditing to maintain integrity, objectivity, and public trust.

  • Ethical misconduct can result in severe ramifications for auditors and the profession at large; thus adherence to ethical codes is imperative for successful practice.