Code of Ethics for

Professional
Accountants
 WHAT ARE ETHICS ?

 A sense of agreement in a society as to what is right and

wrong.

 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 principles.
Objectives of Professional
Accountants

work to the highest standards of professionalism

attain the highest levels of performance, and
meet the public’s interest
 The Code of Ethics (A, B, and C)

 Part A establishes the fundamental principles of ethics for

professional accountants and provides a conceptual
framework for applying those principles.

 Parts B and C illustrate how the conceptual framework is

to be applied in specific situations.

• Part B applies to professional accountants in public

practice.
• Part C applies to professional accountants in business.
 IFAC Code of Ethics - fundamental principles for
all Accountants:

 Integrity (Sec 110)

 Objectivity (Sec 120)

 Professional Competence and Due Care (Sec 130)

 Confidentiality (Sec 140)

 Professional Behavior (Sec 150)

Continuation…
Integrity The principle of integrity imposes an obligation on
all professional accountants to be straightforward and
honest in performing professional services. It also implies
fair dealing and truthfulness.

Objectivity: The principle of objectivity imposes on all

professional accountant not to compromise their
professional or business judgment because of bias,
conflict of interest or undue influence of others.

Continuation…
Professional Competence and Due Care: A professional
accountant has a continuing duty to maintain professional
knowledge and skill at the level required to ensure that a
client or employer receives competent professional service
based on current developments in practice, legislation and
techniques.

Continuation…
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 authority.

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

Compliance with the 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

Continuation…
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 member;
 Self Interest Threats Circumstances

 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 engagement.
 A loan to or from a client or any of its directors or officers.
 Self-Review Threat

Self-Review Threat occurs occur when a previous judgment

needs to be re-evaluated by the professional accountant
responsible for that judgment.
Self-Review Threats Circumstances

 The discovery of a significant error during a re-evaluation of the work of

the 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 team being, or having recently been, a director or
officer of that client.
 A member of the 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 engagement.
 Advocacy Threat

An Advocacy Threat occurs when a professional accountant

promotes a position or opinion to the point that
subsequent objectivity may be compromised.

Examples of circumstances that create advocacy threats :

Selling, underwriting or otherwise dealing in financial
securities or shares of a client;
Acting as an advocate on behalf of a client in litigation or
disputes with third parties.
 Familiarity Threat

Familiarity Threat occurs when, by virtue of a close

relationship with a client, its directors, officers or employees,
an auditor becomes too sympathetic to the client’s interests.
Familiarity Threats Circumstances

 Immediate family member or close family member who is a

director, officer, or influential employee of the client;
 A member of the team having a close family member who, as an
employee of the 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 client or
an employee in a position of significant influence;
 Long association of a senior member of the team with the client
 Acceptance of gifts or hospitality, unless the value is clearly
insignificant, from the client, its directors, officers or employees.
 Intimidation Threat

Intimidation Threat occur when a professional accountant

may be deterred from acting objectively by threats, either
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
Safeguards that may eliminate or reduce such threats to an
acceptable level fall into three broad categories:

◦ Safeguards created by the profession, legislation or

regulation;
◦ Safeguards within the client; and
◦ Safeguards within the firm’s own systems and procedures.
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.
 Safeguards within the Client

 When the client’s management appoints the firm, persons other

than management ratify or approve the appointment;
 The client has competent employees to make managerial decisions;
 Policies and procedures that emphasize the client’s commitment to
fair financial reporting;
 A corporate governance structure, such as an audit committee,
that provides appropriate oversight and communications regarding
a firm’s services.
 Safeguards in the work environment

leadership that stresses the importance of independence and

the expectation that members of the teams will act in the
public interest.

Policies and procedures to implement and monitor quality

control of the engagements;
 Safeguards in the work environment

Documented independence policies regarding the identification

of threats to independence, the evaluation of the significance
of these threats and the identification and application of
safeguards to eliminate or reduce the threats, other than those
that are clearly insignificant, to an acceptable level;
Resolution of Ethical Conflicts

 If the matter remains unresolved, the professional accountant

should consult with other appropriate persons within the firm
 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
committee.
 If a significant conflict cannot be resolved, obtain professional
advice from the relevant professional body or legal advisors.
 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.
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 auditor
should:

◦ Request permission from the client to contact

former auditor directly;
◦ Contact existing auditor before beginning audit.
 Information from Existing Auditor

 Once the client permission is obtained, the existing auditor

should provide information honestly and unambiguously.
 If the proposed auditor is unable to communicate with the
existing auditor, the proposed auditor 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 auditor is no longer required to provide
information in writing or regarding reasons not to take an
audit.
Conflicts of Interest

A professional accountant in practice should take reasonable

steps to identify circumstances that could pose a conflict of
interest. Such circumstances may give rise to threats to
compliance with the fundamental principles
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 auditor, describing the limitations surrounding any
opinion and providing the existing auditor 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 professional accountant in public practice should not pay or

receive a referral fee or commission, unless he/she has
established safeguards to eliminate the threats or reduce
them to an acceptable level.

Contingent fees are widely used for certain types of non-

assurance engagements. They may, however, give rise to
self-interest 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

A professional accountant should not bring the profession

into disrepute when marketing professional services.
He/she should be honest and truthful and should not:
 Make exaggerated claims for services offered, qualifications
possessed or experience gained; or
 Make disparaging references to unsubstantiated
comparisons to the work of another.
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
public.

Gifts or hospitality which are acceptable are those which a

reasonable and informed third party, having knowledge of all
relevant information, would consider clearly insignificant.
Custody of Client Assets

 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.
Application of Framework to Specific Situations

The Code of Ethics, discusses a principles-based framework

for identifying, evaluating and responding to threats. The
framework establishes principles to identify threats to ethics
principles, evaluate the significance of those threats, and, if
the threats are other than clearly insignificant, identify and
apply safeguards to eliminate the threats or reduce them to
an acceptable level.
Cross-Border Activities

An accountant may perform services in a country other than his

home country. If differences exist between ethical requirements
of the two countries, the strictest provisions should be applied.
The IFAC Code prohibits the following non-audit services
for audit clients:

 Bookkeeping Services
 Valuation services
 Management decision making functions
 Broker-dealer or investment advisor services
 Litigation support
Financial involvement with a client

 direct financial interest in a client;

 indirect material financial interest
 loans to or from the client or any
director or major stockholder in the
client company;
 financial interest in a joint venture
with a client or employee(s) of a
client.
 financial interest in non-client with
investor or investee relationship with
the client.
Professional Competence and Responsibilities Regarding the
Use of Non-Accountants

If a professional accountant does not have the

competence to perform a specific part of the
professional service, technical advice may be sought
from experts such as other professional accountants,
lawyers, actuaries, engineers, geologists, and
evaluators. However, since the auditors have ultimate
responsibility for the service, it is his responsibility to
see that the requirements of ethical behavior are
followed.
Activities Incompatible with the Practice of Public
Accountancy

 A professional accountant in public practice should not

concurrently engage in any business, occupation or activity
that impairs or might impair integrity, objectivity or
independence, or the good reputation of the profession.
 The simultaneous engagement in another activity unrelated
to assurance or accounting services, which reduces the
accountant’s ability to conduct his accounting practice
according to ethical principles, is inconsistent with public
practice.
 PROFESSIONAL
ACCOUNTANTS-IN SERVICE
 Conflict of Loyalties

 Employed professional accountants owe a duty of loyalty to

their employer as well as to their profession and there may
be times when the two are in conflict.
 An employee cannot legitimately be required to break the
law, breach the ethics, rules, and standards of the
accounting profession, lie to their employer’s auditors, or
be associated with a statement that materially
misrepresents the facts.
 If employed accountants cannot resolve any material issue
involving a conflict between their employers and their
professional requirements they may have no other recourse
but to resign.
Support for Professional Colleagues and
Professional Competence

 Support for Professional Colleagues A professional

accountant, particularly one having authority over others,
should allow them to develop their own judgment in
accounting matters.
 Professional Competence An accountant employed in
industry, commerce, the public sector or education may be
asked to undertake significant tasks for which she has not
had sufficient specific training or experience. Where
appropriate expert advice and assistance should be sought.
Presentation of Information

A professional accountant is expected to present financial

information fully, honestly and professionally and so that it
will be understood in its context.
Disciplinary action and common sanctions

 Disciplinary action ordinarily arises from such issues as:

 failure to observe the required standard of professional care, skills
or competence;
 non-compliance with rules of ethics and discreditable; or
dishonorable conduct.
 Sanctions commonly imposed by disciplinary bodies
include:
 reprimand, fine, payment of costs, withdrawal of practicing rights,
suspension, and expulsion from membership.