PART E: PROFESSIONAL VALUES AND ETHICS

Lecture 17 ETHICS AND PROFESSIONAL PRACTICE

LECTURE 17 ETHICS AND PROFESSIONAL PRACTICE

Corporate Code Of Ethics Professional Code of Ethics Independence and Conflicts of Interest Practical situations and approach to exam questions

CORPORATE CODE OF ETHICS Organisations have responded to pressures to be seen to act ethically by publishing ethical codes, setting out their values and responsibilities towards stakeholders. CODE OF CONDUCT It is a series of statements setting out the companys values and explaining how it sees its responsibilities towards the stakeholders and how the employees of the company will behave.

CORPORATE CODE OF ETHICS However issuing the Code of Ethics is not enough. The Code should be backed by: Commitment by senior management Staff to understand the importance of ethics Staff to be committed to ethics
Detailed guidance Recruitment / selection / induction Training Reward schemes Whistle blowing procedures Ethical departments / audits

CORPORATE CODE OF ETHICS

Problems with codes of ethics Inflexible Clarity difficult to achieve completely unambiguous wording Irrelevancy - Ethical problems encounter by employees - Inconsistent with organistion culture

- Senior managers not seen as promoting ethical

codes

CORPORATE CODE OF ETHICS Content of Code of Ethics Ethical principles Commitment required from employees Compliance with laws Treatment of customers Treatment of suppliers Commitment to a fair competition Commitment to the environment Commitment to community

PROFESSIONAL CODE OF ETHICS Apply to the individual behaviour of professional and are often based on principles supplemented by guidance on threats and safeguards. Good examples of professional Code of Ethics are: IFAC Code of Ethics for Professional Accountants and ACCA Code of Ethics and Conduct.

PROFESSIONAL CODE OF ETHICS Professional Codes stress the importance of public interest since the job they perform is of much interest to the public. Most Codes set out: Fundamental principles Threats to compliance Safeguards Ethical conflict resolution

PROFESSIONAL CODE OF ETHICS Fundamental principles: Integrity straightforwardness / honesty Objectivity intellectual honesty, avoid bias when dealing with various issues Professional competence and due care maintain knowledge / comply with standards, avoid accepting engagements when they can not be performed competently. Confidentiality not disclosing to third parties or using information obtained during the course of the professional engagement . Professional behaviour- avoid action that might discredit the profession.

PROFESSIONAL CODE OF ETHICS Principles based code Vs Rules based code Avoids narrow minded rules Not a black and white approach that may not cover all situations Flexible to respond to changes in individual situations Can accommodate changing environment. Can include some guidance A minimum standard of behaviour is expected Examples to show how the principles are applied

PROFESSIONAL CODE OF ETHICS

BUT Requires good knowledge and understanding of the principles Difficult to enforce legally because sometimes they are subject to different interpretation. International codes can not capture regional variations in beliefs and practices Illustrative examples may be mistakenly interpreted.

PROFESSIONAL CODE OF ETHICS

Threats: Self -interest threat putting the interest of the professional person above the interest of the client i.e. financial interest Self-review threat the difficulty of the professional person to review his/her own work and remain objective i.e. Preparation and review of financial statements Advocacy threat create from conflicts since the professional person cannot act both in favour and against the clients best interest i.e. litigation issues Familiarity threat-- when the professional is too close to the client and as a result too sympathetic towards its needs resulting in losing his/her objectivity.

PROFESSIONAL CODE OF ETHICS Intimidation threat when the client due to its size, big name, dominant personality of senior management can intimidate the professional person i.e. threat to replace the professional person due to disagreement.

PROFESSIONAL CODE OF ETHICS Safeguards 1. Professional safeguards

Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External reviews

PROFESSIONAL CODE OF ETHICS Safeguards 2. Workplace safeguards

Peer reviews / supervision Independent consultations Partner/staff rotation Discussion/disclosure to audit committee Reperformance by another firm

PROFESSIONAL CODE OF ETHICS Ethical conflict resolution professional accountants should consider: 1. The facts of the situation 2. The ethical issues involved 3. Related fundamental principles 4. Established internal procedures 5. Alternative courses of action and the consequences of each.

PROFESSIONAL CODE OF ETHICS Problems with ethical codes: Inflexible and impractical

Perceived as irrelevant
Does not contribute to profit making Not enforced so ignored

Contrary to business culture

At odds with management behaviour

PROFESSIONAL CODE OF ETHICS

Self-interest threats
Financial Interest Close business relationships Employment with assurance company Partner on clients board Family and personal relationships Gifts and hospitality Loans and guarantees Overdue fees % of contingent fees High % of fees Lowballing Recruitment

PROFESSIONAL CODE OF ETHICS

Self-interest threats Financial interest threat
Not allow to have direct or indirect financial interest in a client The assurance firm Partners in the same office A member of the assurance team An immediate family member Safeguards: Action to be taken Dispose the interest Remove from the team Inform clients audit committee Use an independent partner to review.

PROFESSIONAL CODE OF ETHICS

Self-interest threats of independence
Close business relationship.

Material financial interest in Joint venture Combine market services and products Distribution or marketing arrangements. The materiality of the relationship is important. If such a relationship exists it should be terminated.

PROFESSIONAL CODE OF ETHICS Self-interest threats of independence

Employment with client.

Staff to be transferred between the client and the firm. Try to impress the future possible employer-Affects objectivity. A former partner turned Finance director.-Knowledge of the audit system. Possible safeguards. Modify assurance plan A person with sufficient Experience undertakes the audit. Review work my another accountant. Quality control review. At least two years elapsed before a senior position is taken by a partner. Not entitled to any benefits unless contractual Removed from the engagement if employment negotiations are taken place.

PROFESSIONAL CODE OF ETHICS

Self-interest threats of independence

Partner on client Board

Partner or employee should not serve on the clients board. It can be the secretary if the role is strictly administrative. Note however corporate governance codes require company secretary role to be beyond the administrative tasks.

PROFESSIONAL CODE OF ETHICS Self-interest threats of independence

Personal & Family relationships.

The individuals responsibilities on the assignment and the closeness of the relationship must be considered. If influence considered significant the person should be removed from the assignment. Safeguards The firm should have quality control procedures that require staff to disclose such relationships.

PROFESSIONAL CODE OF ETHICS

Self-interest threats of independence

Gifts and hospitality.

Unless the gift is clearly insignificant should not be accepted.

PROFESSIONAL CODE OF ETHICS

Self-interest threats of independence

Loans and guarantees

The client is a bank OR Other situations. Immaterial amounts and under normal commercial terms not considered as a threat to independence. If amounts material then a review from another partner in another office will reduce the risk. Loans to members of the firm if under commercial terms not considered a threat. Any loans from clients that are not a bank should not be made.

PROFESSIONAL CODE OF ETHICS

Self-interest threats of independence
Overdue fees Safeguards

Discuss the matter with the audit committee or other involved in governance Resigned if matter not resolved. Contingent fees Fee calculated on a predetermined basis relating to the outcome. Such armaments is not appropriate and should not be made

PROFESSIONAL CODE OF ETHICS

Self-interest threats of independence

High % of fees

Firm should be alert in such situations The structure of the firm and the length of time the firm is operating is significant factors to determine whether this is a threat to independence. Possible safeguards. Discuss with audit committee Take steps to reduce dependency External /internal quality control Consult independent party ACCA

ETHICS AND PROFESSIONAL PRACTICE

Self-review threat of independence Self review threat Refers to the treat of independence where the assurance firm provides services other than assurance services to an assurance client. Remember that in the USA the Sarbanes Oxley rule considers auditors that offer certain non audit services to listed companies as being non independent. The ACCA & IFAC rules provide guidance to members regarding non-audit services. A distinction need to be made between Public interest company and small owner-managed business.

ETHICS AND PROFESSIONAL PRACTICE

Self-review threat of independence

Recent services with assurance company General other services Preparing accounting records and FS Valuation services Tax services Internal audit services Corporate finance Other services

ETHICS AND PROFESSIONAL PRACTICE

Self-review threat of independence

Recent service with assurance company

Been a director or officer or an employee of the assurance company before the assurance engagement the previous two years. Safeguards Obtaining quality control review of the individuals work Discussing the issue with the audit committee

ETHICS AND PROFESSIONAL PRACTICE

Self-review threat of independence

General services
The services stated below should not be offered Authorise, execute or consummate a transaction Determine which recommendation to be implemented. Report in a management capacity to those charged with governance. Services involved with the safeguarding of the companys assets, supervising client employees and preparing source documents on behalf of the client may be allowed but the following safeguards should be considered.

ETHICS AND PROFESSIONAL PRACTICE

Self-review threat of independence

Safeguards
No assurance team staff are used Involving an independent professional accountant to advice Quality control policies over staff to determine what they can do for the client Making the appropriate disclosure to those charge with governance. Resigning for assurance assignment if required.

ETHICS AND PROFESSIONAL PRACTICE

Self-review threat of independence
Preparing accounting records and F/S Significant risk exists since the accountant will audit his own work. For public interest company the service regarding the preparation of accounting records should not be offered. However assisting clients in the preparation of the F/S is routine service for the assurance firm. Safeguards Using staff other than the assurance team staff Obtain clients approval- Audit committee. Do not determine or change JE without clients consent. Do not authorise or approve transactions. Do not prepare source documents

ETHICS AND PROFESSIONAL PRACTICE

Self-review threat of independence
Valuation services These should not be carries out by audit firms if the valuation will be material to the financial statement. If the valuation not material the service may be offered provided the following safeguards are applied to reduce the risk to an acceptable level. Safeguards Second partner review Ensure client understand the valuation and assumptions Ensure clients acknowledge responsibility of the valuation Using separate personnel for the valuation and the audit.

ETHICS AND PROFESSIONAL PRACTICE

Self-review threat of independence
Corporate finance An assurance firm is not allowed to Promote, deal or underwrite an assurance clients shares Commit the client to a transaction or consummate a transaction on the client behalf. Other services such as defining corporate strategy, identifying possible sources of capital and advice on reconstruction may be provided is carried out by different staff and no mismanagement decisions are taken on behalf of the client.

ETHICS AND PROFESSIONAL PRACTICE

Self-review threat of independence
Taxation services Generally not seen to impair independence and can be provided Internal audit services Can be provided (not in the USA) provided the client understand that he is responsible for establishing monitoring and maintaining the system. The board and/or the audit committee approve the work of the internal audit team The assurance company staff implementing the internal audit system is not involve in the assurance assignment.

ETHICS AND PROFESSIONAL PRACTICE

Self-review threat of independence
Other services IT services Temporary staff cover Litigation support Legal services. If such assignments are undertaken the assurance firm should ensure that adequate safeguards are in place to reduce the threat of independence. Otherwise they should not be undertaken.

ETHICS AND PROFESSIONAL PRACTICE

Advocacy threat of independence
Advocacy threat: Arises in situations where the assurance firm is in a position of taking the clients part in a destitute or acting as their advocate. Offering legal services Provide evidence as expert wildness Self-review threat Represent client with negotiations with bank Safeguards Different department offering the service Disclosures to audit committees Withdraw from the assignment if risk to independence too high.

ETHICS AND PROFESSIONAL PRACTICE

Familiarity threat of independence A serious threat of independence may arise if the assurance firms staff becomes over familiar with the client and its staff such as Family and personal relationships Employment with assurance client Recent service with assurance client Most of the risks above covered under self-interest guidelines

ETHICS AND PROFESSIONAL PRACTICE

Familiarity threat of independence Long association with an assurance client. The long relationship of senior staff with assurance clients may be a serious threat of independence. Safeguards: Monitor the relationship between staff and clients staff Rotate senior staff and partner of the assurance team Involve second partner review Obtaining internal quality control review.

ETHICS AND PROFESSIONAL PRACTICE

Intimidation threat of independence
Intimidation threat
The client threatens to replace the assurance firm due to disagreement relating to audit report or due to work not carried out properly. The client request second opinion from another firm Related to self interest threats, since the assurance firm stands to To loose the client Have bad publicity Assurance firm found negligent leading to compensations and other problems. The audit firm may be under pressure to issue an unqualified report that otherwise will not be issued.

ETHICS AND PROFESSIONAL PRACTICE

Intimidation threat of independence
Safeguards Disclose to the audit committee the nature and extent of litigation. Remove affected individuals from the assignment Involving an additional professional accountant on the team to review work done Resign from the assignment if the litigation is material. If a firm asked for second opinion must seek permission from the client to communicate with the appointed auditor. Take great care if asked to give second opinion.

ETHICS AND PROFESSIONAL PRACTICE Conflict of interest

1. 2.

Conflict of interest may arise between

Members of the assurance firm and clients interests Conflict of interests between different clients In the case of significant conflict between members and client the member should refuse or discontinue the assurance assignment. In the case of conflict between clients the firm must ensure that the fact that the firm is auditing both clients is not a subject for a dispute otherwise the assignment should not be accepted or discontinue.

ETHICS AND PROFESSIONAL PRACTICE Conflict of interest

When the audit firm considers the acceptance of a client in direct competition with another client the following safeguards should be applied. Safeguards. Notify the existing client affected and ask his consent. Notify all known parties affected that the member acts on behalf of two or more parties in respect of a matter that a possible conflict of interest may arise. Notify existing and potential clients that the member does not act exclusively for any one client Using separate audit teams for the assignments Set procedures to prevent access to information

 Safeguards Confidentiality agreements signed by partners and staff Regular review of the safeguards by independent partner Advise on or both parties to seek additional independence advice.

ETHICS AND PROFESSIONAL PRACTICE Conflict of interest

Practical situations and Examination approach to Questions on ethics