13: Ethics, Regulation, Independence

Question 1

Why is accountancy highly regulated?

Answer 1

Accounts hold positions of trust with those relying on their work!

Question 2

What do ethical codes aim to do?

Answer 2

• ensure that qualified and trainee accountants observe proper standards or professional conduct
• help the accountancy profession act in the public interest by providing appropriate regulation

Failure to observe the standards may result in disciplinary action

Also gives protection to accountants as they can be proved to have acted in a way that is reasonable in the eyes of their peers

Question 3

What codes of ethics are out there?

Answer 3

1. IESBA Code - a body of the IFAC
   (also called the IFAC code of ethics)
2. ICAEW Code of Ethics
3. FRC Ethical standard: applies to UK

Question 4

What are the two main approaches to ethical guidance?

Answer 4

Principles based (nearly always used)
- encourages accountant to use judgement
- requires compliance with spirit of guidance
- flexible, so can be applies to new situations
- can still incorporate rules where necessary

Rules based
- may be easier to follow because it is objective
- needs frequent updating to ensure the guidance applies to new situations
- may encourage accounts to interpret requirements narrowly, to get round the spirit of the requirements

Question 5

Who does the IESBA code apply to?

Answer 5

All professional accountants!

Question 6

What are the five fundamental ethical principles of the IESBA Code?

Answer 6

Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behaviour

Question 7

What is independence?

Answer 7

A state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement

OR

Freedom from situations and relationships that may lead a reasonable and informed third party to conclude that objectivity is impaired

Highest degree of independence required for audit

Assurance providers need to be, and should be seen to be independent

NOT a principle in IESBA code. Falls under integrity and objectivity

Question 8

What is the approach to independence issues, according to the IESBA code?

Answer 8

1. Identify threats
2. Evaluate significance of threats
3. Identify and apply safeguards

Safeguards are steps to eliminate or reduce threat to an acceptable level

If not safeguards:
- thing causing the threat should be eliminated
- or, decline or discontinue engagement

Question 9

According to the IESBA code, why are the five general sources of threat to independence?

Answer 9

Self-interest
- auditor is reluctant to take actions that are adverse to the interests of the firm
- owning shares in a client

Self-review
- accepting/not questioning work done by others in the audit firm
- auditing statements prepared by the audit firm themselves

Familiarity
- accepting/not questioning work done due to familiarity
- audit team has close family member in the accounts department

Advocacy
- auditor takes management’s side, adopting a position close to management
- promoting client’s shares in a share issue

Intimidation
- audit influenced by fear
- clients threatens the auditor

Question 10

What are the two categories of safeguards to independence?

Answer 10

Created by profession, legislations or regs
- education and training
- CPD
- corporate governance regs
- professional standards
- monitoring of professional work
- external review

Within the work environment:
- review procedures
- consultation with independent third parties
- rotation of senior staff
- discussions with those charged with governance
- disclosing fees and services

Question 11

How is ICAEW code different from IESBA?

Answer 11

It incorporates IESBA, but has additional rules

Applies to all ICAEW members and trainees in all professional and business activities

ALSO applies to personal activities such as volunteering

Question 12

The sixth threat to independence in the FRC Ethical Standard?

Answer 12

Management
- auditor becomes closely aligned with views and interests of management
- firm designs and implements accounting IT standards for an audit client

UK auditors must comply with this standard

Question 13

How should professional accountants deal with ethical conflicts?

Answer 13

They should firstly look to the IESBA code for a framework

They should consider the following:
- relevant facts
- relevant parties
- ethical issues involved
- fundamental issues related to the matter
- established internal procedures
- alternative courses of action

Accountant can refer matter internally or externally