15: Integrity, objectivity and independence Flashcards
Why does objectivity and independence matter
- Expectation of members of company is to provide objective assurance
- The public interest
What are threats to this?
MASSIF
Management threat
Advocacy threat
Self review
Self interest
Intimidation
Familiarity
What are self-interest threats?/Safeguards
- Financial interests
- Close business relationship
- Gifts and hospitality
- Loans and guarentees
- Overdue fees
- High percentage of fees
- Lowballing
- Percentage or contingent fees
Explain financial interests/safeguards
prohibited for anyone/assurance firm to have a direct financial interest in a client.
/Dispose of interest e.g. sell shares. Remove indiviudal from team. Make client aware
Explain close business relationships /safeguards
e.g. joint ventures, combining products, leases between parties.
/End assurance provision or terminate business relationship, unless immaterial and insignificant.
Explain gifts and hospitality / Safeguards
- Should not be accepted unless insignificant as looks like a bribe.
/ Firm should have policy on gift acceptance e.g. nothing special given out, only what they would give to own employees.
Explain loans and guarentees / safeg
- material loans require safeguards to reduce threat to independence.
/ Independent review re material loan from a lending institution.
Explain overdue fees /SG
- assurance provider runs risk of essentially making a loan to client.
/ Payment should be required before assurance report can be issued.
Explain high percentage of fees / SG
When total fees generated by an assurance client represebt a large proportion of a firm’s total fees. FRC states if annual fee income from all services to a client regularly exceed 10% for a listed company (PLC) and 15% for unlisted (LTD) of gross income this could constitute self interest threat. Also total non-audit fees must be no more than 70% average audit fee from last 3 years.
/ Monitor fee income - warning at 5% plc (10% ltd).
Disclose with audit committee/ICAEW.
Reduce dependency on client by increasing revenue elsewhere.
Explain Lowballing / SG
When a firm quotes a significantly lower fee for an assurance service than would have been charged by the predecessor firm, may cut corners or reduce scope to keep costs down.
/ Comply with all guidlines and keep evidence to show appopriate time/staff worked on engagement.
Explain percentage or contingent fees /SG
Fees based on outcome or result of the work performed. /Firm should not enter into any fee arrangement where its dependent on result.
What are self review threats
- Service with an assurance client
- Internal audit services
- Preparing account records and financial statements
- Valuation services
- Tax services
Explain service with an assurance client / SG
Audit firm members who have been a director or employee of client and in a position to exert significant influence over F/S.
/ These members should not be assigned to this client (until 2 years after leaving client)
Explain internal audit services
Providing internal audit services to an audit client is absolutely prohibited.
Explain preparation of accounting records and financial statements as a sef review threat. /SG
If firm prepares accounting records and F/S then audits them = significant risk of SR threat.
/Use staff members other than assurance team to carry out work.
Responsibility for F/S with client
Explain valuation services as a self review threat. /SG
If an audit firm performs a valuation that will be included in financial statements audited by the firm. Therefore should not carry out valuations which has material effect on a listed company’s F/S.
/ Ensure client acknowledges responsibility for valuation.
Use separate personnel for valuation and audit.
Explain tax services as a self review threat
Tax return prep, calculations, planning, assistance in dispute resolution
/Management must take responsibility
Calcs: Unlisted companies use separate staff, listed this is prohobited if material.
Planning advice if subjective/material is prohibited.
Assistance: unlisted use separate teams/external consultation. Listed = prohibited if material.
What is the general services law for unlisted/listed companies
Listed: Cannot provide tax services for a listed company
Unlisted - use separate team for audit/tax
What is an advocacy threat? S/G
Where assurance firm takes clients side in a dispute acting as their advocate e,g, defending them in a legal case.
/Use different departments in firm to carry out work.
Make disclosures to audit committee.
What are familiarity threats? /SG
Long association with assurance client - over familiar and sympathetic could effect professional scepticism. S/G = Rotate senior staff off assurance team and quality control reviews. Listed companies: Audit engagement partner max 5 years, other key partners max 7 years. Unlisted: 10 years, use 3rd party test to measure objectivity.
Family/personal relationships - between assurance firm and client staff threatens independence. Depends on role of other party at assurance client and closeness of relationship. S/G = Indiviudal removed from assurance team, QC policy = members should disclose if family member employed/promoted by client.
What is an intimidation threat? S/G
When the client threatens to sue or does sue the assurance firm for work done previously. risk of losing client and bad publicity if found to have been negligent. Therefore may be more lenient towards client in future if they don’t sue.
S/G - Disclose to audit comittee nature/extent of litigation. Remove specific indiviudals from engagement team. Additional pro accountant review work as second opinion.
What is a management threat?
Audit firm undertakes work involving making judgements and decisions which arer the responsibility of management. Cross over with self-review threat.
S/G ensure management understands it is their decision/responsibility if ADVICE is given by audit firm.
What factors should frims look out for when accepting new clients that could be a threat to a firm’s integrity/professional behaviour?
Illegal activities
Apparent dishonesty of client
Questionable accounting practices of client
What should professional accountants consider when resolving ethical conflicts?
Consider PIPCO
- also relevant facts, parties, ethical issues, alternative course of action.
What are conflicts of interest for the accountant?
Could be under pressure to act contrary to law/regulation, to lie, facilitate unethical or illegal earnings management strategies.
How should accountant deal with these conflicts of interests?
- Resolve internally using formal dispute resolution process or audit comittee
- Obtain advice from ICAEW
- Seek legal advice
- Resign
