Codes of professional ethics Flashcards
What is the aim of ethical codes?
- Ensure that qualified and trainee accountants observe proper standards of professional conduct
- Help the accountancy profession act in the public interest by providing appropriate regulation of members
`Which codes of professional ethics are applicable to ICAEW accountants?
- International Federation of Accountants Code of Ethics for Professional Accountants
- ICAEW Code of Ethics
- Financial Reporting Council Ethical Standard
Who does the ICAEW Code of Ethics apply to?
ICAEW members and trainees
Who does the International Federation of Accountants Code of Ethics for Professional Accountants apply to?
All professional accountants
Who does the Financial Reporting Council Ethical Standard apply to?
UK auditors
Describe principles based ethical guidance
- Encourages the accountant to use judgement
- Requires compliance with the spirit of the guidance
- Flexible, so can be applied to new, unusual, or rapidly changing situations
- Can still incorporate rules where necessary
Describe rules based ethical guidance
- May be easier to follow
- Is objective
- Needs frequent updating to ensure the guidance applies to new situations
- May encourage accountants to interpret requirements narrowly in order to get round the spirit of the requirements
Which is more popular? Principles-based ethical guidance or rules-based ethical guidance?
Principles-based
Which body issues the IFAC Code?
International Ethics Standards Board for Accountants, which is IFAC’s ethics board
What are the fundamental ethical principles of the IFAC Code?
BOCCI
- Professional behaviour
- Objectivity
- Confidentiality
- Professional competence and due care
- Integrity
Describe integrity
Members should be straightforward and honest in all professional/business relationships
Describe objectivity
Members do not allow bias or conflict of interest in business judgements
Define professional competence and due care
There is a duty to maintain professional knowledge and skill at an appropriate level and to follow professional standards
Define confidentiality
Information on clients must not be disclosed without appropriate authority, or used for personal advantage
Define professional behaviour
Members must comply with relevant laws and avoid actions that would discredit the profession
Define independence
A state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement
What is the approach set out by the IFAC Code that accountants should take to independence issues?
- Identify threats
- Evaluate significance of threats
- Identify and apply safeguards
Define safeguards
Steps that the accountant can take to eliminate the threat or reduce it to an acceptable level
What should the accountant do if no safeguards are available?
- Eliminate the interest or activities causing the threat
2. If this is not possible, decline or discontinue the engagement
What are the threats to independence identified by the IFAC Code?
FAIRI
- Familiarity
- Advocacy
- Intimidation
- Self-review
- Self-interest
Define self-interest threat
The auditor is reluctant to take actions that are adverse to the interests of the audit firm
Define self-review threat
The auditor is predisposed to accept/reluctant to question the work done by members of the audit firm
Define familiarity threat
The auditor is predisposed to accept/reluctant to question the work done by the audit client
Define advocacy threat
The auditor takes management’s side, adopting a position closely aligned with management
Define intimidation threat
The auditor’s conduct is influenced by fear
What are the threats identified by the FRC Ethical Standard?
FAIRIM
- Familiarity
- Advocacy
- Intimidation
- Self-review
- Self-interest
- Management
What are the two categories of general safeguards outlined by the IFAC Code?
- Safeguards created by the profession, legislation, or regulation
- Safeguards within the work environment
Define management threat
The auditor becomes closely aligned with the views and interests of management
What threat arises when the audit firm holds a financial interest in a client?
Self-interest threat
What threat arises when there is a business relationship between the audit firm and client?
- Self-interest
- Advocacy
- Intimidation
What threat arises when an audit partner leaves to take up employment with a client?
- Self-interest
- Familiarity
- Intimidation
What threat arises when an employee of an audit firm negotiates employment with a client?
- Self-interest
- Familiarity
- Intimidation
What threat arises when a member of the audit team holds a financial interest in a client?
Self-interest
What threat arises when a partner in an audit firm holds a financial interest in a client?
Self-interest
What threat arises when someone is employed by both the audit firm and the client?
Self-interest
What threat arises when a staff member leaves the assurance firm to work for the client?
Self-interest
What threats arise when a staff member on the audit team has a close personal or family relationship with a member of client staff?
- Self-interest
- Intimidation
- Familiarity
What threat arises when a client offers gifts or hospitality to an auditor?
Self-interest
What threat arises when a client provides a loan to the auditor?
Self-interest
What threat arises when an auditor provides a loan to a client?
Self-interest
What threat arises when a client owes the auditor overdue fees?
Self-interest
What threat arises when fees are contingent?
Self-interest
What threat arises when regular fee income from a non-listed client exceeds 10% of the audit firm’s fee income?
Self-interest
What threat arises when regular fee income from a listed client exceeds 5% of the audit firm’s fee income?
Self-interest
What threat arises when an audit firm charges a much lower fee than the predecessor auditor?
Self-interest
What threats arise when client staff joins the audit firm?
- Self-review
- Self-interest
- Familiarity
What threat arises when audit staff complete a loan assignment to a client?
Self-review
What threat arises when an audit firm completes accounting services for a client?
Self-review
What threats arise when an audit firm completes valuation services for a client?
- Self-review
2. Management
What threats arise when an audit firm prepares tax calculations for accounting entries in an audit client?
- Self-review
- Management
- Advocacy
What threat arises when internal audit services are offered to an audit client?
- Self-review
2. Management
What threats arise when an audit firm provides IT services to a client?
- Self-review
2. Management
What threat arises when an audit firm provides recruitment services to an audit client?
Familiarity
What threat arises when an audit client provides recruitment services to an audit firm?
Familiarity
What threat arises when there is a long association scenario at a non-listed client with the engagement partner?
Familiarity
What threat arises when there is a long association scenario at a listed client with the engagement partner?
Familiarity
What threat arises when there is a long association scenario at a listed client with the quality control review partner?
Familiarity
What threat arises when there is a long association scenario at a non-listed client that has become listed with the engagement partner?
Familiarity
What threat arises when there is a long association scenario at a listed client with senior staff?
Familiarity
What threat arises when an audit firm provides corporate finance services to an audit client?
Advocacy
What threat arises when an audit firm provides legal services to an audit client?
Advocacy
What threat arises when an audit firm represents an audit client in a tax tribunal or court to resolve a tax dispute?
Advocacy
What threat arises when the client threatens litigation against the audit firm?
Intimidation
What threat arises when an audit firm provides a non-audit service to the client where the auditor may take on a management role?
Management
How can an audit firm safeguard against a partner holding a financial interest in a client?
Any partner in the firm must not hold a financial interest in a client
How can an audit firm safeguard against the firm itself holding a financial interest in a client?
The audit firm must not hold a financial interest in a client
How can an audit firm safeguard against a member of the audit team holding a financial interest in a client?
Any member of the audit team must not hold a financial interest in a client
How can an audit firm safeguard against business relationships with a client?
The audit firm must not participate in a business relationship with a client
How can an audit firm safeguard against an employee who is employed by both the audit firm and a client?
Dual employment is prohibited by Companies Act 2006
How can an audit firm safeguard against an audit partner leaving to take up employment with a client? (2)
- The firm should resign as auditor
2. The firm cannot take on the audit again for two years
How can an audit firm safeguard against an employee of the audit firm negotiating employment with a client?
- The employee should inform the audit firm
2. The firm should remove the employee from the engagement and perform a review of their recent work on the client
How can an audit firm safeguard against staff with close personal or family relationships with a member of client staff?
Staff with close personal or family relationships with a member of client staff should not work on the engagement
How can an audit firm safeguard against gifts and hospitality?
Do not accept gifts or hospitality from a client unless the value is trivial
How can an audit firm safeguard against overdue fees?
Consider resignation if fees remain unpaid
How can an audit firm safeguard against contingent fees?
Contingent fees are prohibited
How can an audit firm safeguard against fee dependence at a non-listed client?
When regular fee income exceeds 10% of the firm’s fee income:
- Disclose to ethics partner
- Disclose to those charged with governance at the client
- Implement independent quality control review of the audit
When regular fee income exceeds 15% of the firm’s fee income, the audit firm cannot act as auditor
How can an audit firm safeguard against fee dependence at a listed client?
When regular gee income exceeds 5% of the firm’s fee income:
- Disclose to ethics partner
- Disclose to those charged with governance at the client
- Implement independent quality control review of the audit
- Seek to reduce fees
When regular fee income exceeds 10% of the firm’s fee income, the audit firm cannot act as auditor
How can an audit firm safeguard against lowballing?
The engagement partner should document that adequate resources have been allocated in order to comply with auditing and ethical standards
How can an audit firm safeguard against client staff joining the audit firm?
The staff member cannot have any involvement in the audit of that client for two years
How can an audit firm safeguard against audit staff completing a loan assignment to an audit client?
- Prohibited unless the loan is for a short period of time, they do not take on a management role, client management acknowledge their responsibility for work done
- On returning to the audit firm the employee is not involved in the audit of this client
How can an audit firm safeguard against accounting services offered to a non-listed audit client?
- Seperate teams
- Mechanical/technical work only
- Quality control review of audit
How can an audit firm safeguard against accounting services offered to a listed client?
Not allowed
How can an audit firm safeguard against valuation services offered to an audit client?
- Not allowed if material and subjective
- Allowed if immaterial as long as there are separate teams, a second partner review, and management acknowledge responsibility for valuation
How can an audit firm safeguard against preparing tax calculations for accounting entries in a non-listed audit client?
- Separate teams
- Review of tax work by independent tax partner
- Quality control review of audit
How can an audit firm safeguard against preparing tax calculations for accounting entries in a listed audit client?
Do not prepare tax calculations for the purpose of making material accounting entries
How can an audit firm safeguard against internal audit services offered to a non-listed audit client?
- Not allowed if the audit firm expects to place significant reliance on internal audit work as part of the statutory audit
- Otherwise, allowed as long as there are separate teams and a second partner review of the audit to ensure internal audit work has been properly assessed
How can an audit firm safeguard against internal audit services offered to a listed audit client?
Do not provide internal control or risk management services relating to the accounting records or financial statements
How can an audit firm safeguard against IT services offered to a non-listed audit client?
- Separate teams
2. Second partner review of the audit to ensure the IT work has been properly assessed
How can an audit firm safeguard against IT services offered to a listed client?
Do not provide IT services that form a significant part of the controls over financial reporting or generate information that is significant to the financial statements
How can an audit firm safeguard against recruitment services provided to a listed client?
Not allowed to provide recruitment services for key management positions
How can an audit firm safeguard against recruitment services provided by a listed client?
Not allowed to provide recruitment services for key management positions
How can an audit firm safeguard against a long association scenario at a non-listed client with an engagement partner?
- Review independence after 10 years
- Either rotate
- Or continue but must document reasons, disclose to client, and consider other safeguards
How can an audit firm safeguard against a long association scenario at a listed client with an engagement partner?
- Rotate off after five years
- This can be extended to seven years with Audit Committee approval
- No return for five years
How can an audit firm safeguard against a long association scenario at a listed client with a quality control review partner?
- Rotate off after seven years
2. No return for five years
How can an audit firm safeguard against a long association scenario at a non-listed client that has become listed with an engagement partner?
- Take previous service into account
- If already served more than four years can only continue for two more
- No return for five years
How can an audit firm safeguard against a long association scenario at a listed client with a senior staff?
Review independence after seven years
How can an audit firm safeguard against corporate finance services offered to a non-listed audit client?
- The firm is not allowed to promote, deal in, or underwrite a client’s shares
- Other work may be carried out if the audit firm considers safeguards such as separate teams and the disclosure of nature of services provided to the Audit Committee of the client as effective
How can an audit firm safeguard against corporate finance services offered to a listed audit client?
- The firm is not allowed to promote, deal in, or underwrite a client’s shares
- Not allowed unless there is no material effect on the financial statements
How can an audit firm safeguard against legal services offered to a non-listed audit client?
- An audit firm must not act as a solicitor representing the client in a legal case
- May offer litigation support with safeguards such as separate teams and a second partner review
How can an audit firm safeguard against legal services offered to a listed audit client?
- An audit firm may not act as a solicitor representing the client in a legal case
- Not allowed to offer litigation support
How can an audit firm safeguard against representing an audit client in a tax tribunal or court to resolve a tax dispute?
- This is prohibited if the issue is material to the financial statements
- If the issue is immaterial, it may be carried out with safeguards such as separate teams and advice obtained from an external tax professional
How can an audit firm safeguard against actual or threatened litigation?
- Disclose to those charged with governance at the client
2. Consider resignation
How can an audit firm safeguard against any additional non-audit service provided to an audit client where the auditor may take on a management role
- Do not take on management roles
- Use the engagement letter to clarify the responsibility of management for decision making and to limit the involvement of the audit firm ot work of a more mechanical or technical nature
- Establish informed management
What steps should an accountant take if asked by an employer to act outside of the Code of Ethics?
- Try to resolve the matter internally
- Obtain advice from the ICAEW
- Seek legal advice
- Consider resignation as a last resort
