Sei sulla pagina 1di 50

Ethics for Professional Accountants

Auditing and Financial Control

- Course 3-



E A sense of agreement in a society as to what
is right and wrong.
E Ethics represent a set of moral principles,
rules of conduct or values.
Ethics apply when an individual has to make a
decision from various alternatives regarding moral

Illustration 3.1

Objectives of Accountantancy

To work to the highest standards of

To attain the highest levels of performance
Generally, to meet the publics interest

IESBA - the Ethics Board

The International Ethics Standards Board for
Accountants is an independent standardsetting body that serves the public interest by
setting robust, internationally appropriate
independence requirements, for professional
accountants worldwide.
These are compiled in the Code of Ethics for
Professional Accountants

The Code is divided into three

A, B, and C
Part A establishes the fundamental principles of
professional ethics for professional accountants and
provides a conceptual framework for applying those
Parts B and C illustrate how the conceptual framework
is to be applied in specific situations.
Part B applies to professional accountants in public
Part C applies to professional accountants in business.

Code of Ethics for Professional Accountants fundamental
principles for ALL Accountants:

1) Integrity
2) Objectivity
3) Professional Competence and Due Care
4) Confidentiality
5) Professional Behavior

1) Integrity A professional accountant should
be straightforward and honest in performing
professional services.
2) Objectivity: A professional accountant
should not allow bias, conflict of interest or
undue influence of others to override
professional or business judgments.


3) Professional Competence and Due Care: A

professional accountant has a continuing duty to
maintain professional knowledge and skills at the
level required to ensure that a client or employer
receives competent professional service based on
current developments in practice, legislation and

4) Confidentiality: A professional accountant

should respect the confidentiality of

information acquired as a result of
professional and business relationships and
should not disclose any such information to
third parties without proper and specific
5) Professional Behavior: A professional
accountant should comply with relevant
laws and regulations and should avoid any
action that discredits the profession.

Conceptual Framework Approach

A conceptual framework requires a
professional accountant to identify, evaluate
and address threats to compliance with the
fundamental principles, rather than merely
comply with a set of specific rules which may
be arbitrary.
If threats to ethics are not clearly insignificant,
a professional accountant should apply
safeguards to eliminate the threats or reduce
them to an acceptable level.

Threats and Safeguards

(no longer related just to Independence, but to ethics)

fundamental principles may
potentially be threatened by a
broad range of circumstances.
Many threats fall into the
following categories:
Self-interest threats
Self-review threats
Advocacy threats
Familiarity threats
Intimidation threats

Figure 3.5

Self-Interest Threat
A Self-interest threat occurs as a result of the
financial or other interests of a professional
accountant or of an immediate or close family

Self Interest Threats Circumstances (In Part B)

A financial interest in a client or jointly holding a
financial interest with a client.
Undue dependence on total fees from a client.
Having a close business relationship with a client.
Concern about the possibility of losing a client.
Potential employment with a client.
Contingent fees relating to an assurance engagement.
A loan to or from an assurance client or any of its
directors or officers.

Self-Review Threat
Self-Review Threat occurs occur when a
previous judgment needs to be reevaluated by the professional accountant
responsible for that judgment.

Self-Review Threats Circumstances (In Part B)

The discovery of a significant error during a re-evaluation of the
work of the public auditor.
Reporting on the operation of financial systems after being
involved in their design or implementation.
Having prepared the original data used to generate records that
are the subject matter of the engagement.
A member of the assurance team being, or having recently been, a
director or officer of that client.
A member of the assurance team being, or having recently been,
employed by the client in a position to exert direct and significant
influence over the subject matter of the engagement.
Performing a service for a client that directly affects the subject
matter of the assurance engagement.

Advocacy Threat
An Advocacy Threat occurs when a

professional accountant promotes a

position or opinion to the point that
subsequent objectivity may be
Examples of circumstances that create advocacy
threats :
Selling, underwriting or otherwise dealing in financial
securities or shares of an assurance client;
Acting as an advocate on behalf of an assurance client
in litigation or disputes with third parties.

Familiarity Threat
Familiarity Threat occurs when, by virtue
of a close relationship with an assurance
client, its directors, officers or employees,
an auditor becomes too sympathetic to the
clients interests.

Familiarity Threats Circumstances (In Part B)

Immediate family member or close family member
who is a director, officer, or influential employee of the
assurance client;
A member of the assurance team having a close family
member who, as an employee of the assurance client,
is in a position to exert direct and significant influence
over the subject matter of the engagement;
A former partner of the firm being a director, officer of
the assurance client or an employee in a position of
significant influence;
Long association of a senior member of the assurance
team with the assurance client
Acceptance of gifts or hospitality, unless the value is
clearly insignificant, from the assurance client, its
directors, officers or employees.

Intimidation Threat
Intimidation Threat occur

when a professional
accountant may be deterred from acting
objectively by threats, actual or perceived
Examples of circumstances:
Being threatened with dismissal or replacement in
relation to a client engagement.
Being threatened with litigation.
Being pressured to reduce inappropriately the extent
of work performed in order to reduce fees.

Safeguards that may eliminate or reduce such
threats to an acceptable level fall into two
broad categories:
(1) Safeguards created by the profession,
legislation or regulation;
(2) Safeguards in the work environment.

Safeguards created by the profession, legislation or regulation


Educational, training and experience requirements

for entry into the profession.
Continuing professional development requirements.
Corporate governance regulations.
Professional standards.
Professional or regulatory monitoring and
disciplinary procedures
External review by a third party of the reports,
returns, communications or information produced by
a professional accountant.

Firm-wide safeguards in the work environment may


Leadership that stresses the importance of

compliance with the fundamental principles
and the duty to act in the public interest.
Quality control policies
Documented independence policies
Policies against reliance on revenue received
from a single client.

Resolution of Ethical Conflicts

1. If the matter remains unresolved, the
professional accountant should
consult with other appropriate
persons within the firm
2. Where a matter involves a conflict
with, or within, an organization,
consult with those charged with
governance of the organization, such
as the board of directors or the audit
3. If a significant conflict cannot be
resolved, obtain professional advice
from the relevant professional body
or legal advisors.
4. If, after exhausting all relevant
possibilities, the ethical conflict
remains unresolved, a professional
accountant should, where possible,
refuse to remain associated with the
matter creating the conflict.

PART B Contents

Professional Appointment
Client Acceptance - consider whether
acceptance would create any threats to
compliance with the fundamental principles
Engagement Acceptance - agree to provide
only those services that the accountant is
competent to perform.

Changes in a Professional Appointment

Before accepting an appointment involving

services that were carried out by another the
proposed accountant should:
Request permission from the
client to contact former auditor
Contact existing auditor before
beginning audit.

Information from Existing Auditor

Once client permission is obtained, the existing
accountant should provide information honestly and
If the proposed accountant is unable to communicate
with the existing accountant, the proposed
accountant should try to obtain information about
any possible threats by other means such as through
inquiries of third parties or background investigations
on senior management.
The existing account is no longer required to provide
information in writing or regarding reasons not to
take an audit.

Conflicts of Interest
An accountant
should take
reasonable steps to
circumstances that
could pose a conflict
of interest.

Second Opinions
Providing a second opinion on the application
of accounting, auditing, reporting or other
standards or principles by or on behalf of a
company that is not an existing client may
cause threats to compliance with the
fundamental principles
Safeguards such as seeking client permission
to contact the existing accountant, describing
the limitations surrounding any opinion and
providing the existing accountant with a copy
of the opinion may be required.

Fees and Other Types of Remuneration

An auditor may quote whatever fee deemed
to be appropriate. However, a self-interest
threat to professional competence and due
care is created if the fee quoted is so low that
it may be difficult to perform the engagement.

Commissions, Referral Fees, and Contingent Fees

$ A accountant in public
practice should not pay or
receive a referral fee or
commission, unless she has
established safeguards to
eliminate the threats or
reduce them to an
acceptable level.
$ Contingent fees are widely
used for certain types of
engagements. They may,
however, give rise to selfinterest threats to
compliance with the
fundamental principles.

Advertising and Marketing

When a professional accountant in public
practice solicits new work through advertising
or other forms of marketing, there may be
potential threats to compliance with the
fundamental principles.

What Advertising Cannot Do

An accountant should not bring the profession
into disrepute when marketing professional
services. She should be honest and truthful
and should not:
Make exaggerated claims for services offered,
qualifications possessed or experience gained;
Make disparaging references to
unsubstantiated comparisons to the work of

Example of Bad Advertising

At our firm we believe the financial success of any
business requires regular monitoring and attention to the
smallest detail. Without the objective oversight of a
practiced eye, huge opportunities can slip by unnoticed,
and minor problems can quickly evolve into significant
issues. Thats why the experts at our firm maintain a
close relationship with our clients all year round, rather
than merely reviewing financial records annually.

Gifts and Hospitality

Self-interest threats to objectivity may be
created if a gift from a client is accepted;
intimidation threats to objectivity may result
from the possibility of such offers being made
Gifts or hospitality which are acceptable are
those which a reasonable and informed third
party, having knowledge of all relevant
information, would consider clearly

Custody of Client Assets

To safeguard against a self interest threat to
objectivity , a professional accountant in public
practice entrusted with money (or other assets)
belonging to others should:
Keep such assets separately from personal or firm
assets; and
Use such assets only for the purpose for which they
are intended
At all times, be ready to account for those assets, and
any income, dividends or gains generated
Comply with all relevant laws and regulations relevant
to the holding of and accounting for such assets

Objectivity All Services

When providing any professional service the auditor
should consider whether there are threats to
compliance with the fundamental principle of
objectivity resulting from having interests in, or
relationships with, a client or directors, officers or
In an assurance service the auditor is required to be
independent of the assurance client. Independence
of mind and in appearance is necessary to express a
conclusion, and be seen to express a conclusion,
without bias, conflict of interest or undue influence
of others.

IndependenceAssurance Engagements
In the case of an assurance engagement it is in
the public interest and, therefore, required by
the Code of Ethics, that members of assurance
teams, firms and, when applicable, network
firms be independent of assurance clients

Independence involves independence in appearance
and independence in mind.
Independence in Appearance : The avoidance of facts
and circumstances that are so significant that a
reasonable and informed third party, having
knowledge of all relevant information, including
safeguards applied, would reasonably conclude a
firms, or a member of the assurance teams, integrity,
objectivity or professional skepticism had been
Independence of Mind The state of mind that permits
the expression of a conclusion without being affected
by influences that compromise professional
judgment, allowing an individual to act with integrity,
and exercise objectivity and professional skepticism.

Independence in the Sarbanes-Oxley Act of 2002

Sec. 201. Services outside the scope of practice of auditors.
Sec. 202. Pre-approval requirements.
Sec. 203. Audit partner rotation.
Sec. 204. Auditor reports to audit committees.
Sec. 205. Conforming amendments.
Sec. 206. Conflicts of interest.
Sec. 207. Study of mandatory rotation of registered public accounting
Sec. 208. Commission authority.
Sec. 209. Considerations by appropriate State regulatory authorities.

Independence in the Sarbanes-Oxley Act of 2002

Prohibited non-audit service contemporaneously with the audit include:
(1) bookkeeping or other services related to the accounting records or
financial statements of the audit client;
(2) financial information systems design and implementation;
(3) appraisal or valuation services, fairness opinions, or contribution-inkind reports;
(4) actuarial services;
(5) internal audit outsourcing services;
(6) management functions or human resources;
(7) broker or dealer, investment adviser, or investment banking services;
(8) legal services and expert services unrelated to the audit; and
(9) any other service that the Board determines, by regulation, is

Part B of the Code illustrates how the

conceptual framework contained in Part A is
to be applied by professional accountants in
public practice.

Examples Part B

Part C of the Code

illustrates how the
conceptual framework
contained in Part A is to be
applied by professional
accountants in business.

Examples in Part C

Thank You for Your Attention

Any Questions?