2. Threats & Safeguards to fundamental ethical principles Flashcards
What approach must accountant take to threats
a conceptual framework based approach.
Eliminate or reduce to acceptable level
The threats are
Intimidation Familiarity Advocacy Self-Interest Self-Review
Intimidation
These may occur when an accountant may be deferred from acting OBJECTIVELY because of real or perceived threats
Self-Interest
These may occur where a financial or other interest will inappropriately influence the accountant’s judgement or behaviour
Familiarity
These may occur when, because of a close or personal relationship, an accountant becomes too sympathetic to the interests of others
Self-Review
These may occur when an accountant has to re-evaluate a judgement or data that he/she has previously made or produced
Advocacy
These may occur when an accountant promotes a position or opinion (normally of a client) to the point that his/her objectivity may be compromised in the future
Examples of Self-Interest threats
Shares (husband planning to invest)
Resign or don’t buy shares
Loans (Client offers loan for new prems)
Decline or resign
Joint ventures (Client suggests JV) Decline or resign
Significant client (Too reliant on one big client) Decline extra work for this client
Potential employment (offered job by client) Tell manager, be taken off engagement team or full-review work
Contingent fee (eg net profit below £x) Request set fee
Finding significant error (self or colleague0
Safeguard by have strong review procedures and good leadership culture stressing importance of compliance with fundy principles
Examples of Self review threats
Where an accountant discovers a significant error in his/her work - may decide not to highlight
Where an accountant is asked to report on the operation of financial systems afetr being involved in the design
Where an accountant performs a service for a client that directly affects the subject matter of the assurance engagement eg. when an accountant in practice prepares the dep’n calc for a client and is then involved in the audit of the same client
where accountant provides consultancy service eg. management consultancy & tax advice
- Make recommendations
- NOT make management decisions
- NOT take responsibility for management decisions
Example of familiarity threat
Being accountant for family members firm
Significant gifts
Long association between senior member of assurance team and the client
Example of intimidation threat
Threat to dismiss
Threat not to award contract to the accountant
Threat if litigation
Pressure to reduce quality of work to reduce fees
Pressure to agree with client judgement because he/she has more experience of the matter in question
Example of Advocacy threat
Means you are seen to support the client’s point of view publicly, - even in a court of law
Going beyond advisory role to client and actively speak on their behalf or in their support.
May mean accountants objectivity in the future may be compromised.
- Endorsing product… negative effect on independence
- Promoting shares in a listed entity when entity is an audit client
- acting as an advocate of assurance client in litigation or dispute with a third party
Safeguards and procedures an accountant might use are in ADDITION to any requirement provided for by law or by professional rules (eg rules that govern the accountancy profession)
Employers system of corporate oversight
Employers ethics and conduct programmes
Recruitment procedures emphasising importance of high-calibre, competent staff
A system of strong internal controls
Appropriate disciplinary processes
Leadership within the business stressing importance of ethical behaviour
Policies & procedures to implement & monitor quality of training
Policies & procedures encouraging employees to communicate any ethical issues to senior management without fear of retribution.
Opportunity to ask advice from another approprate professional member of staff
Safeguards created by the accountancy profession, legislation or regulation
Entry requirements to the profession - Education & experience
CPD requirements
Corporate governance regulations
Professional accounting standards
Professional or regulatory monitoring and disciplinary procedures
External review of reports etc produced by a professional accountant by a legally-empowered third party - eg an auditor
