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CHAPTER 2 | Code of Ethics and

Conduct

1. Professional Ethics

DEFINITION
Ethics is:
Moral principles which govern a persons or groups behaviour

Ethics is about doing the right thing. An action that is illegal is by

definition also unethical. An issue that is not illegal may still be
unethical, even if there is no legislation to cover the specific matter.

Ways the profession and society encourage ACCA members to be ethical

Behaving ethically is required by all persons registered with ACCA this includes
members, affiliates and students, whether working in the audit profession or anywhere
else (for example teaching).

Sources of guidance on ethics include:

The ACCA
The IFAC International Federation of Accountants
Audit firms
National legislation
ISAs International Standards on Auditing

Factors affecting Professional Conduct

ISAs
ACCA Examinations

Conduct of ACCA
firm personnel

Quality Controls

Peer Review

ACCA Continuing
Professional
Education (CPE)

Legislation

Code of Professional
Conduct

2. Principles VS Rules Based Approach

Ethical guidance can either be principles based (a conceptual framework approach
providing guidance) or rules based.

2.1. Advantages of the Rules Based Approach

Certainty
Clarity regarding what is and what is not permitted

However, it is virtually impossible for rule based systems to be able to deal with every
single situation that may arise, particularly across various national boundaries and
especially in a dynamic industry.

2.2. Advantages of the Principles Based Approach

A framework is more appropriate to changing circumstances in a dynamic
profession
Principles may be applied across national boundaries, whereas laws may not
be applied very easily
The responsibility is placed on the auditor to demonstrate that all matters are
considered within the principles of the Framework
A framework approach may include some specific prohibitions or deal with
specific matters

However, the main disadvantage is that some auditors may be applying wrong or
inadequate judgment, with different auditors reaching different conclusions.

2.3. Principles or Rules?

Both IFAC and the ACCA have decided on a principles based approach, whereas the
USA follows a rules based approach.

IESBA (International Ethics Standards Board for Accountants) develops and promotes
the IFAC Code of Ethics for Professional Accountants, which applies to all professional
accountants, whether in public practice or not.

The ACCA has adopted the IFAC Code of Ethics (with minor changes) and so all
ACCA members and students are obliged to follow this Code.
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3. The Five Fundamental Principles

The IFAC/ACCA code of ethics and conduct is built around 5 Fundamental Principles:

1. Integrity
2. Professional Behavior
3. Professional Competence & Due Care
4. Confidentiality
5. Objectivity (and Independence)

3.1. Integrity
All members must be straightforward and honest in professional and business
relationships.
Integrity also implies fair dealing and truthfulness.
Members should not be associated with reports, returns, communications or other
information where they believe that the information:

contains materially false or misleading statements

contains statements or information prepared recklessly or
omits or obscures information required to be included where such omission or
obscurity would be misleading

3.2. Professional Behaviour

Professional accountants should comply with laws and regulations, and refrain from
any activity that would discredit the profession.

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3.3. Professional Competence and Due Care

To maintain professional knowledge and skill at the level required to ensure that
clients or employers receive competent professional service, and to act diligently in
accordance with applicable technical and professional standards when providing
professional services.

Competent professional service requires the exercise of sound judgment in applying

professional knowledge and skill in our work. It requires continuing awareness and an
understanding of relevant technical, professional and business developments.

3.4. Confidentiality
Any audit client information obtained during the course of the audit should not be
disclosed by the auditor to anyone unless:

RIGHT

OBLIGATION

Client had given permission

If ordered by a court

To protect the auditors interest in court

To relevant regulatory authorities such

as: Financial Services Authority (FSA),
Charities commission, Money
Laundering Reporting Organization
(MLRO), Police

It is in the Public Interest

If the auditors are in any doubt, they should seek legal advice or consult the ACCA.
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In deciding whether to disclose in the Public Interest, the auditor should consider:

The materiality of the monetary values involved

Whether members of the public are likely to be involved
The seriousness of the matter
The likelihood of repetition of the problem
The reasons for the client's unwillingness to make the disclosures
Relevant legislation, accounting & auditing standards
Legal advice obtained

3.5. Objectivity
Objectivity/Independence: an obligation on all members not to compromise their
professional or business judgment because of bias, conflict of interest or the undue
influence of others (free from all economic, financial, and other relationships).

Objectivity/independence is a state of mind. Professional accountants in public practice

must also be independent in appearance. They have to avoid actions and
circumstances that could be seen to affect independence.

Audit firms and members of assurance teams have an obligation to identify and evaluate
circumstances and relationships that create threats to independence. They are expected
to take appropriate action to eliminate these threats or to reduce them to an acceptable
level by applying safeguards.

4. Threats to Objectivity and Independence

IFAC has identified the following threats:

1.
2.
3.
4.
5.

Familiarity becoming too sympathetic to the interests of the client

Self-review reviewing own work
Self-interest other benefits obtained through the relationship with the client
Intimidation actual or perceived threats
Advocacy actual or perceived promotion of the clients position or opinion

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The APB (UK only) also added:

6. Management threat when the auditor makes decisions for the management

For exam purposes you need to know the 6 threats, even though the 6th threat was
issued for the UK.

5. Safeguards (Controls)
Auditors are required to apply/implement safeguards in order to address/reduce the risks
identified.

For some risks we may be able to reduce them to acceptable levels by using
safeguards.

In some cases the risks may be so large, that even if we apply safeguards the
risks cannot be reduced enough, in which case more extreme action may be
required, such as resigning from an engagement.

EXAM TIP

Note that in exam questions, you will need to evaluate all alternatives to
get good marks, and you should not be absolute in your answer.
(use should instead of must)

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Some general Safeguards:

For the auditor:

Accountant must be independent of management

High caliber staff should be employed (competent and experienced)
Senior staff rotation
Maintain contact with ACCA and invest in training
Use separate engagement teams and partners Chinese walls
Second partner reviews on high risk engagements
Internal Quality Control Reviews

Within the work environment:

Document independence policy & procedures

Publish the ethical Code of Conduct
External Quality Control Reviews
Consult other firms & peer reviews

Within the profession:

Educational, training and work experience requirements

Regulatory enforcement & Disciplinary action
Continuous Professional Development/Education (CPD/CPE)
Corporate Governance requirements

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6. Examples of Risks, Threats and Safeguards

6.1. Objectivity (and Independence)
Some of the most common matters encountered in exams include:

Threat

Familiarity Threat

Risk

Safeguards

Working with the same

client for many years,
or offering a wide
range of services

Engagement partner rotation every 5 years

for listed companies and 10 years for nonlisted companies

- Chinese walls
Self Review Threat

Offering a range of
services to a client,
such as tax advice and
audit together

- Quality Review Partner

- Accounting and auditing for a listed
company is disallowed

- No audit team member should own shares

in a client they work on

Self Interest Threat

Owning shares or
having other business
relationships with a
client (such as a joint
venture)

- No partner in the audit firm should have

shares in any client of the firm
- If shares are inherited they should be
disposed of as soon as possible
- Audit firm should not enter into a Joint
Venture with a client unless the audit firm
has no control and the relationship is
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immaterial to both parties

- Integrity of management should be

questioned
Intimidation Threat

Advocacy Threat

Client threatens to
change or sue the
existing auditors

Client asks the auditor

to testify in court to
help the client

- Consider resigning from the engagement

- Consider communicating the matter to the
shareholders using a letter of
circumstances

- Such requests should be declined if

possible as the auditor is seen to be
protecting the client
- If necessary to testify, state only facts, and
no opinions
- Consider resigning from the engagement

Management Threat

The auditor also offers

IT or HR services and
recommends a specific
software package or a
specific person to the
client

- Auditor should only provide a shortlist of

potential packages or persons
- Final decision should be made by
management
- Use separate teams (Chinese Walls)

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6.2. Controversial Areas

1. The provision of other services
No obvious rules from ACCA are provided.
Accounting for listed companies not allowed unless in an emergency.
Matters to consider:

The perception that the company gave its auditors some lucrative consultancy work
in exchange for a clean audit report
Self-review threat

2. Opinion shopping
If a company is not happy with the audit opinion from its current auditors may
approach other auditors for second opinion.

Matters to consider:

The other auditors may give negligent opinion to get the client
The current auditors may be put under pressure to accept the second opinion (in
order not to lose the client)

3. Takeover bids (acquisitions)

It is possible that both companies are audited by the same firm. There would be a
conflict of interest if the audit firm were to advise both companies during the bid
period.

It is not improper for the firm to remain as auditor of both companies, but the Rules
state that firms should not act as lead advisers for any of the parties involved in such
a situation.

4. Share issues
Firms should not underwrite or sponsor issues to the public by clients which they
audit. Financial involvement of this kind would endanger the independence of the
audit firm.
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5. Joint Ventures
Audit firms should not enter into a joint venture with a client unless:
1 - the audit firm has no control within the joint venture, and
2 - the interests are immaterial for both parties.

6. Lowballing
Charging a price that is too low see chapter 5 for details

7. Conflict of Interest
A conflict of interest is a situation in which someone in a position of trust, such as an
auditor, has competing professional or personal interests with another party.

Members and firms should not accept or continue engagements in which there are, or
are likely to be, significant conflicts of interest between members, firms and clients.
There are two situations:

Member vs. Client

When members compete directly with a client or have a joint venture or similar
arrangement with a major competitor of a client.
E.g. both client & audit firm are bidding for the acquisition of an educational centre

Client vs. Client

When auditors perform services for clients whose interests are in conflict, or the clients
are in dispute with each other in relation to the matter or transaction in question (auditors
work for both).
The problem is the potential leakage of information from one client to another
(confidentiality). Firms may be forced into a position where they may have to choose
between the interests of different clients.

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In cases where a conflict of interest is identified, auditors should, depending on the
situation:

Notify the client of the member's business interest

Notify all known relevant parties that the member is acting for two or more
parties
Notify the client that the member does not act exclusively for any one client in the
provision of proposed services

and obtain their consent Transparency!!!!

KEY POINT

Audit firms should always place (existing) clients

interests before their own

Safeguards for Conflicts of Interest:

Use different partners and teams of staff for different engagements (Chinese
walls)
Give instructions and take necessary steps to avoid leakage of confidential
information between teams
In depth client screening before accepting appointment
Regular review of the situation by a senior partner or compliance officer
Suggest that at least one of the clients should seek additional advice (as a final
resort)

8. Detailed Threats and Safeguards

8.1. Self Interest Threat

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RISK
1.1
Financial
Interest

EXAMPLE
Direct/ indirect financial interest
in a client by:
- the firm
- the partner

SAFEGUARD
- Dispose of interest( if by
firm/partner/immediate family)
- Remove from the audit team
- Inform the client of the interest
- Use an independent partner to review the
work performed

- a member of the audit team

- an immediate family member of
any of the above
(spouse or dependent minor
child)

1.2
Close business
relationships
(+ intimidation
threat)

- A joint venture between the

client and the firm/director

- Should drop any such venture or end the

assurance provision

- Combine a product from a client

with a product from the firm

- remove the member from the audit team

- A firm distributes clients

products and vice versa

- purchase goods from client at arms length

(unless the number of transactions are
substantial)

- Other commercial transactions

eg renting office space to/from
client

1.3

- Dual employment

- Dual employment is not allowed

Employment with
a client

- A member of the audit team

may try to impress possible
future employer

- Modify the assurance strategy

(+ self-review,
intimidation and
familiarity threat)

- An ex partner, now a Financial

Director in a client has too much
knowledge of our systems
Factors to consider:
- the individuals role in the client
- the influence on the assurance
service he had previously
- length of time since individual
has left

- senior person on the job has at least as

much knowledge and experience as the exmember
- reconsider the audit team composition
- involve an external accountant to review
- quality review of the work performed
- if the ex member was the audit partner in
the last 2 years, then firm must resign
- an ex member now working for a client
should not receive any payment from the
firm nor should he be owed big amounts
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1.4

- should not serve on the board, unless he is

the company Secretary

A partner is on
client board

1.5
Family and
personal
relationship

Close family of 1st degree

(parent, child, sibling)

Consider:
- individuals responsibility on

- if a director is a family member of a

member of the audit team, then the member
must be removed from the team
- even if the employee is not part of the audit
team, still must consider independence

assurance engagement

- the firm must have procedures to report

family relations

closeness of the relationship

- perform a quality control review

- discuss it with the audit committee

1.6

Gifts by client.

Gifts and
Hospitality

Consider:

- decline the gift

- value (to the recipient)

- frequency, nature and cost
- to immediate family

1.7

- the client is a bank

Bank:

Loans and

- the client is not a bank

- if the amount borrowed from the client is

immaterial and at commercial terms then it
is ok

Guarantees

- if the amount is material, then an

independent review must be carried
Not Bank:
- the firm, its staff and their family must not
enter into any loan relationship with a client

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1.8

- Must always ask for settlement before

issuing the audit report of the next year

Overdue fees
(+intimidation
threat)

1.9
Percentage or
contingency fees

1.10
High % of fees

Firms fees relate to the outcome

of the work

- must not enter in any assurance

engagement with contingency fees

Large proportion of firms total

fees comes from one client.
Consider:

- Discuss with the audit committee

- structure of audit firm

- length the audit firm has been
trading

- Steps to decrease dependency

- Quality control reviews
- Consult with 3rd party (ICAEW)
- when the annual income exceeds 10% (5%
for listed) then the firm must review that
there is no threat to independence and
appropriate safeguards must be
implemented

For Listed Cos the % must be disclosed to

the Board and the firm must reduce nonaudit work provided. If the company is not
listed, then we must carry an independent
quality review and disclose fact to ethics
partner

- Presumption of dependency when fees

regularly exceed 15% (or 10% for listed)
there is a presumption that safeguards
cannot be adequate to reduce the risk to an
acceptable level (so remove the risk
altogether)

1.11
Lowballing

Fees quoted are significantly

lower in order to gain the tender

- the firm must demonstrate and record that

appropriate staff and time is spent on the
audit
- compliance with all standards, guidelines
and control procedures
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8.2. Self Review Threat

RISK
2.1
Service with
an assurance
client
(+ self-interest,
familiarity)

EXAMPLE
- When the employee has worked
with the client in a significant
position

- when audit staff is loaned to

clients

- the member of the audit team

used to work for the client more
than 2 years ago, but he held a
significant position

2.2
Preparing
accounting
records and
Financial
Statements

Usually the auditor assists the

management and gives advice
about accounting treatments

SAFEGUARD
- if the audit staff worked with the client in
the last 2 years, then the member should
be taken off the audit team or not audit his
activities

- Not allowed unless the audit staff is to

perform non-managerial functions

- perform quality review of that persons

work
- discuss with the audit committee

Ensure the risk is at an acceptable level by:

- using staff that is not part of the audit
team to do accounts prep
- have policies that prohibit staff to make
managerial decisions on behalf of the client
(ensure have Informed management at
client)
- the data for the entries is provided by the
client
- assumptions in the accounts are
made/agreed by the client
- for listed companies, it is not allowed

2.3
Valuation
Services
(+ management
threat)

Making assumptions for future

developments, methodologies,
techniques in order to calculate a
value for an asset or a liability or
the business in general

- second partner review

Eg provisions

- use different staff for valuation and audit

- client understands the valuation and

assumptions used
- client is responsible for the valuation

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2.4

- advise on a specific issue

- tax services provided by different staff

Taxation services

- substantial tax planning

(+ self-review,

- the firm promotes tax structures

which influence the financial
statements

- tax services reviewed by an independent

partner

Self-interest,
management,
Advocacy)

- obtain external tax advice

- tax computations reviewed by
independent staff

Should not:
-Accept to promote tax advice where in
doubt of accounting treatment
-Accept to provide services on a contingent
fee basis where engagement is material to
the firm/ tax laws are still uncertain
-If in tax advice, seek to take management
role
-Tax advice and representation in court
where issue is material

2.5
Internal audit
services

The management of the company

is responsible for establishing,
maintaining and monitoring the
system of internal controls

(+ management
threat)

- an employee of the client is appointed as

internal audit officer
- the client approves all the work of the
internal audit
- the firm must refuse if for the audit it relies
too much on the internal audit work
performed by the firm
- the firm must refuse if in providing the
internal audit services it will perform a
managerial role

2.6
Corporate finance
services
(+ advocacy)

- promote, deal or underwrite

clients shares

- not allowed
- not allowed

- commit, effect a transaction on

behalf of the client
Other services:
- defining corporate strategies
- identifying source of capital

For other services:

- use different staff
- no management decisions are taken by
the firm

- provide structuring advice

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2.7
Information
technology

- designing and implementing an

IT system

- not allowed if the firm undertakes the role

of management

(+ self-review,
management)
- provision of off the shelf
packages

2.8
Litigation support
services

- not allowed if the system is a significant

part of the accounting system

- offering themselves as expert

witnesses in a court case against
client

- allowed

- if it involves a subjective estimation of a

likely outcome not allowed

(+self-review,
management,
advocacy)

8.3. Advocacy Threat

RISK
3.1
Contingency
Fees

3.2
Legal Services

3.3
Corporate
finance

EXAMPLE
Contingency fees depending on
the outcome of a possible
situation eg obtaining finance

Defend the client on a case in

which the firm had offered legal
services

SAFEGUARD
- use different departments to carry out the
work
- disclose to clients audit committee
- withdraw from engagement if risk to
independence is too high
- Cannot act as advocates in a resolution of
a dispute material to FS.

The firm is involved in advising on

debt restructuring or bank
negotiations for the client.

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8.4. Familiarity Threat

RISK
4.1
Family / close
relation with
the client

4.2

EXAMPLE

SAFEGUARD

Examples as above

Where the independence is

jeopardized by the audit firm
becoming over familiar with the
client. In this case there is the risk
of loss of professional skepticism

Employment
with client

4.3
Recent service
with client

4.4
Long
association
with client

When the senior members of staff

have a long association with the
client

- rotating senior audit staff

- independent (internal) quality control
For Listed companies:
- the partner and staff for quality control
review must rotate every 7 years and not
return for 2 years
- the audit engagement partner must
rotate every 5 years and not return for 5
years
- if the quality control partner becomes the
audit engagement partner, the combined
service is for maximum 7 years
- a key audit partner (coordinator of a group
audit) must rotate every 7 years and not
return for 2 years
For any company
- where the audit engagement partner has
held the role for 10 years, consideration
must be given not only to independency but
also to perceived independency.

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4.5

Helping the client with recruitment

Recruitment

- only allowed in drawing short list with the

clients criteria
- Not allowed for listed companies

(also
management,
familiarity,
self-interest,
intimidation)

8.5. Intimidation Threat

RISK

EXAMPLE

SAFEGUARD

Actual and threatened litigation

when the client threatens to sue
or sues for work performed,
therefore there is risk of losing the
client, bad publicity etc
- disclose to audit committee of the client
5.2
Close
business
relations

- removing affected individuals from the

team
- involving an additional professional
accountant to review the work

5.3
Family and
personal
relations

5.4
Assurance
staff working
for client

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8.6. Management Threat

RISK
6.1
Management
threat

EXAMPLE
Big cross over with self-review.

It is the threat of making, or

appear to be making,
management decisions.

SAFEGUARD
- ensure that there is informed
management at the client, one which
receives results from non-audit services
and makes its own decisions

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