Chapter 14 Codes of professional ethics Flashcards
1.1 Importance of ethics to accountants
Accountants hold positions of trust with many stakeholders relying on their work. Ethical codes aim to:
- Ensure qualified and trainee accountants observe proper standards of professional conduct
- Help the accountancy professional act in the public interest by providing appropriate regulation of members
Failure to observe the applicable ethical standards can result in disciplinary action.
1.2 Sources of ethical guidance
The following codes are applicable to ICAEW accountants:
- International federation of accountants (IFAC) code of ethics for professional accountants
- ICAEW code of ethics
- Financial reporting council (FRC) ethical standard, applies to UK auditors
1.3 Principles based or rules based guidance
There are two main approaches to ethical guidance, principles based, and rules based.
Principals based: encourages accountant to use judgement, requires compliance with the spirit of the guidance, is flexible so can be applied to new and changing situations and can still incorporate rules where necessary. Most professional bodies use principles based including the IFAC, ICAEW and the FRC.
Rules based: may be easier to follow because it is objective, needs frequent updating to ensure the guidance applies to new situations and may encourage accountants to interpret requirements narrowly in order to get around the spirit of the requirements.
2.1 IFAC code
The IFAC code is issued by the international ethics standards board for accountants (IESBA). IESBA is IFAC’s ethics board. The IFAC code applies to all professional accountants.
2.2 Fundamental ethical principals
The IFAC code has five fundamental ethical principles:
- Integrity: members should be straightforward and honest in all professional relationships
- Objectivity: members do not allow bias or conflict of interest in business judgements
- Professional competence and due care: there is a duty to maintain professional knowledge and skill at an appropriate level and to follow professional standards
- Confidentiality: information on clients must not be disclosed without appropriate authority, or used for personal advantage
- Professional behaviour: members must comply with relevant laws and avoid actions that would discredit the profession
2.3 Independence
required for audit engagements. Independence is a state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement. The IFAC code sets out the approach that accountants should take to independence issues: identify threats, evaluate significance of threats, identify, and apply safeguards.
Safeguards are steps that the accountant can take to eliminate the threat or reduce it to an acceptable level. If not, safeguards are available, you should:
- Eliminate the interest or activities causing the threat
- If this is not possible, decline or discontinue the engagement
2.4 threats to independence
The IFAC code has five general sources of threat to independence:
- Self-interest: the auditor is reluctant to take actions that are averse to the interests of the audit firm. For example, owning shares in a client.
- Self-review: the auditor is predisposed to accept/reluctant to question the work done by others in the audit firm. For example, auditing accounts that have been prepared by the audit firm
- Familiarity: the auditor is predisposed to accept/reluctant to question the work done by the audit client. for example, an audit team member is a close family member working in the client accounts department
- Advocacy: the auditor takes management’s side, adopting a position closely aligned with management. For example, promoting the client’s shares in a share issue.
- Intimidation: the auditor’s conduct is influenced by fear. For example, the client threatens the auditor who is suggesting that a modified opinion on the accounts will be given.
2.5 Safeguards
The IFAC code identifies two categories of general safeguards that may be used to eliminate or reduce the threats to independence.
Safeguards created by the profession, legislation, or regulation:
- Education and training
- Continuing professional development requirements
- Corporate governance regulations
- Professional standards
- Monitoring of professional work including disciplinary proceedings
- External reviews
Safeguards within the work environment:
- Review procedures
- Consultations with independent third parties
- Rotation of senior staff
- Discussions with those charged with governance
- Disclosing fees and services to those charged with governance
3.1 ICAEW code
The ICAEW code of ethics implements the IFAC code of ethics. It applies to all members and trainees in professional, business, and personal activities.
4.1 FRC ethical standard
UK auditors must comply with the FRC ethical standard for auditors on audit engagements. Although this is due to be replaced by a new regulator. The ethical standard identifies six threats to independence, the same five as the IFAC code plus an additional one:
- Management: the auditor becomes closely aligned with the views and interests of management. For example, the audit firm takes on an engagement to design and implement the accounting IT systems for an audit client.
