Unit 1d - Professional ethics Flashcards
Who does the ACCA Code of Ethics apply to?
The code applies to all members of ACCA and also to all ACCA students. It also applies not only to those in public practice (‘auditors’) but also those in industry and commerce (‘in business’)
What does the ethical framework recognise exists?
The ethical framework recognises that there are:
Ethical principles to be followed
These are subject to threats
Accountants should apply safeguards to avoid or to respond to threats by reducing them to acceptable levels.
What are ACCA’s five fundamental principles?
The ACCA’s fundamental principles are as follows:
Integrity requires professional accountants to be honest and straightforward in all professional and business relationships. If they see something is amiss, they should say so and shouldn’t try to conceal it; they shouldn’t turn a blind eye, they shouldn’t try to be ambiguous, they should state things plainly.
Objectivity in making professional or business judgements must not be compromised. They must avoid bias, conflict of interest and undue influence.
Professional competence and due care must be exercised. They must keep themselves up-to-date with legislation and recent developments. They shouldn’t take on work which they are not qualified for or for which they have no skills. They must be diligent, and careful.
Confidentiality must be respected. Auditors, in particular, have access to highly confidential and price sensitive info, it must be held confidentially. Members shouldn’t disclose confidential info unless they have a legal or professional duty to do so. An example of a legal duty to disclose information can arise if a member thinks that a client or the person they are working for is involved in money laundering
Professional behaviour requires accountants to comply with the law and avoid any actions which discredit the profession. So for example when they are trying to advertise their services they shouldn’t say that other members are bad or poor. They should confine themselves to promotion what they are good at; they shouldn’t criticise other professionals.
A few examples of self interest threats, go into depth
Financial: For example if an auditor owns shares in the client, the auditor could be accused of wanting the client’s profits to look good, so that the share/dividends ^enrich auditor
Close business relationships: If a partner retired from an audit then immediately went to work for a client, they could be accused of doing the audit poorly so they could be lined up to get a job there. >2 years. Partner on client board is unacceptable.
Close family and personal relationships between the auditor and owners/directors of the company they are auditing lay the auditor open to suggestions that the audit has been neither objective nor independent, and that auditor didn’t show proper level of integrity
Loans and guarantees from the client to the auditor should be looked at carefully. If the audit client is a bank and it makes a loan on normal business terms to a member of the audit staff, e.g. a mortgage, it wold be acceptable, but if they gave a large loan not on normal lending terms then it may compromise the auditor’s independence. No special relationship.
Overdue fees put the auditor at some risk as there is a possibility that the client will never pay those fees. This could lead to accusations that the auditor has not modified the audit opinion to reduce the likelihood that a worried creditor triggers the company liquidation. If there are overdue fees the auditor should not make the situation worse and should not incur any more chargeable time until those fees have been settled. If fees remain outstanding, then the auditor should resign.
Contingent fees – Not permitted for audit engagements – an example of a contingent fee is one that is calculated based on reported revenue/profit
High percentage fees – If the auditor earns a high % of total income from one audit client, then the auditor will rely too much on that client and can’t afford to lose them. This can give the client too much leverage over the auditor. The total fees from a public interest entity (listed on stock exchange) shouldn’t exceed 15% of the firm’s total fees for two consecutive years. If they do, safeguards must be applied. No figure is mentioned for non-pie clients but auditors need to be mindful of the threat.
Low-balling refers to the practice of quoting a very low audit fee to win a client, in the hope of gaining more lucrative non-audit work. This means the audit doesn’t pay for itself so how could a proper audit be done? Audit is competitive, the fee is important to clients. An auditor can just find it difficult to claim a proper audit has been carried out if a loss was made there.
Recruiting staff on behalf of a client should not be undertaken. The danger here is that members of staff are recruited by the auditor, particularly financial staff, then subsequently the auditor might be reluctant to criticise the performance of those staff members as the advice they gave on recruitment looks bad. However, providing recruiting services to a non-PIE client is not prohibited as long as the hiring decision is left to the client. Similar considerations should be taken into account when asked to perform any management function for the client.
What are self-review threats?
Self-review threats arise when an auditor does work for a client and that work may then be subject to self-checking during the subsequent audit. For example, if the auditor prepares the F/S and then has to audit them, or the auditor performs internal audit services and then has to check that the system of internal control is operating properly. Auditors could obviously be reluctant to criticise the work which their own firms have undertaken earlier, and this could interfere with independence and objectivity.
Generally auditors must be very careful when undertaking such work. Certainly, it is common for auditors to do additional work for their clients, but what is important is that the work is done by an entirely different team from the audit firm
Self-review threats can also arise if a member of the audit team:
Recently served as a director/officer of the client
Is seconded (‘lent’) to the client for a temporary assignment
Advocacy threats
Advocacy is where the assurance/audit firm promotes a point of view or opinion to the extent the subsequent objectivity is compromised. An example would be where the audit firm promotes the shares in a listed company or supports the company in some sort of dispute (e.g. with tax authorities) It can interfere with professional scepticism
As always, the audit firm should weigh up the risks to its objectivity, integrity and independence and they should withdraw from performing further works if the risks too high
Familiarity threats
Familiarity threats arise because of the close relationship between members of the audit team and the client. The close relationship can arise by friendship, family or through business connections. There is no general definition of what’s meant by close relationships, but if you were an auditor and your brother was the FD of a client firm then there probably is a close relationship. If however the FD was a remote cousin of yours then there might not be a close relationship. Friendship can threaten independence and integrity too.
Long association of senior personnel creates a familiarity and self-interest threat. The code requires that a key auditor partner cannot serve a PIE client for more than seven years. This is to prevent too close of a relationship and friendship growing between the two parties. The problem is that when a close relationship does grow, objectivity and scepticism may be lost.
Intimidation
They can deter the assurance team from acting properly.
Examples could be threatened litigation, blackmail, or even physical intimidation. Blackmail can also be more subtly applied, e.g. giving a gift to an auditor then the possibility of that being made public can create an intimidation threat to objectivity.
The supply of other services
The issue of whether the auditor should provide audit clients with other services, such as taxation and management consultancy is a controversial one, as there are both pros and cons.
For example, auditors will know a great deal about the operations of their clients and this can make the performance of other work much more efficient. If entirely new firms have to be brought in to supply these services, much of the info they find about the client will already be known by the auditor and there is duplication of effort.
The provision of many non-assurance services will create a self-review threat (eg bookkeeping, internal auditing, tax calcs and valuations material to the F/S)
Another danger, of course, is that auditors come to rely too heavily on the fees earned from the other work and are therefore reluctant to risk losing a client if they express a modified auti opinion (ie self interest threat) large audit firms can at least use separate departments, though this may be difficult with small firms.
In the us, listed companies are not allowed to obtain other services from their auditor. This is to ensure that the auditor is independent and performs only the aaudit. In most jurisdictions there are no hard and fast rules, but the overall guidance on ethics ralting to objectivity and independence should be adhered to.
Safeguards
The code’s conceptual framework approach requires that when a threat to the fundamental principles is not at an acceptable level, safeguards must be applied to eliminate or reduce the threat to an acceptable level. The ‘test’ of what is acceptable is whether a “reasonable and well informed party would be likely to conclude that compliance with the fundamental principles is not compromised”.
They fall into two broad categories:
Those created by the profession, legislation or regulation (eg professional standards and membership requirements, including CPD)
Those in the work environment for example:
Firm wide/engagement specific safeguards
