Ethics & Independence – CPC Essentials

Objectives

• After studying this lecture, you must be able to:
  • Discuss / explain ethical issues facing South-African accountants in public practice.
  • Identify & evaluate threats to the fundamental principles per the Code of Professional Conduct (CPC).
  • Apply a systematic approach to resolve ethical dilemmas.

Fundamental Principles

• Integrity, Objectivity, Professional Competence & Due Care, Confidentiality, Professional Behaviour.
• Threat categories: Self-interest, Self-review, Advocacy, Familiarity, Intimidation.
• Safeguard hierarchy: (1) Eliminate circumstance, (2) Apply safeguards, (3) Decline / withdraw.

Independence & Professional Scepticism

• Independence = freedom from conditions that compromise professional judgement; must be both mind & appearance.
• Professional scepticism = questioning mind, alert to error/fraud indications, critical appraisal of evidence.
• Applies to engagement team & network; stricter for Public-Interest Entities (PIEs).

Section-by-Section Highlights (CPC)

Fees – $410$

• Relative, contingent, overdue, fee-dependency.
• Threats: Self-interest, Intimidation (esp. >$15\%$ for PIEs).
• Transparency & TCWG communication essential.

Compensation & Evaluation Policies – $411$

• Linking partner pay to selling non-audit work  Self-interest threat.

Gifts & Hospitality / Litigation – $420$

• Accepting gifts, hospitality or being in litigation with client ⇒ Self-interest, Familiarity, Intimidation.
• Nominal & customary only; otherwise refuse.

Financial Interests – $510$

• Direct / indirect, trustee, in-common, unintentionally received, other circumstances.
• Apply materiality & control tests.
• If held by firm/network/audit-team  dispose or remove individual.

Loans & Guarantees – $511$

• From audit client: generally prohibited; limited exceptions for banking clients under normal terms.

Business Relationships – $520$

• Joint venture, supplier / customer deals  Self-interest, Intimidation.
• Must be insignificant or terminated.

Family & Personal Relationships – $521$

• Immediate or close family in key positions at client  Self-interest, Familiarity, Intimidation.
• Remove individual or use independent review.

Recent Service with Client – $522$

• Staff who served in senior client roles during / before period covered by audit create Self-review threat.

Serving as Director/Officer – $523$

• Audit team member acting as director, officer, or company secretary of client prohibited (Self-review, Self-interest).

Employment with Client – $524$

• Moving from firm to client (esp. key audit partner)  Familiarity & Intimidation.
• Cooling-off periods; safeguards stricter for PIEs.

Temporary Personnel Assignments – $525$

• Secondments allowed if no management responsibilities; watch Self-review / Advocacy / Familiarity threats.

Long Association & Partner Rotation – $540$

• Threats heighten with time-on.
• PIE key audit partner: max $7$-year “time-on”, min $2$-year cooling-off.
• Adjust role, rotate, or engage external quality review as safeguards.

Non-Assurance Services – $600$ Series

General Rules (all NAS)

• May not assume management responsibility.
• Evaluate threats considering client type (PIE vs non-PIE), service nature, reliance on audit.

Accounting & Bookkeeping – $601$

• Routine/mechanical work for non-PIE sometimes acceptable.
• For PIEs: generally prohibited (Self-review).

Administrative Services – $602$

• Usually no threat (e.g., courier, translation).

Valuation Services – $603$

• Self-review & Advocacy.
• Prohibited for PIEs if material to FS; limited for non-PIEs with safeguards.

Tax Services – $604$

• Return prep (low), calculations, planning, valuation, dispute assistance.
• Threat evaluation: materiality & advocacy; restrictions tighter for PIEs.

Internal Audit – $605$ (labelled 601 in slides)

• Allowed if firm is not part of audit team, work is not core to audit reliance, management retains responsibility.
• ISA $610$ guidance.

IT Systems Services – $606$

• Designing/implementing systems forming part of FS generation = Self-review; usually prohibited for PIEs.

Litigation Support – $607$

• Estimating damages, acting as expert witness  Self-review; assess materiality & role.

Legal Services – $608$

• Advisory may be acceptable; acting as general counsel or advocate in court = prohibited (Advocacy).

Recruitment Services – $609$

• Searching, screening allowable; negotiating remuneration or selecting senior management for client prohibited.

Corporate Finance – $610$

• Structuring deals, underwriting, promoting securities  Self-review & Advocacy; generally prohibited.

Systematic Approach to Ethical Dilemmas

1. Identify facts & parties involved.
2. Identify relevant principles & threats.
3. Evaluate significance; if > acceptable level  apply safeguards.
4. Decide & document; consult if needed.

Quick Recall: Default Safeguards

• Remove / rotate affected individual.
• Independent review or quality control reviewer.
• Reduce service scope; separate teams.
• Disclose to TCWG & obtain consent.
• Decline service or engagement when threats can’t be reduced.