p1 lecture final completed

8/4/2019 P1 Lecture Final Completed

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PART E: PROFESSIONAL VALUES ANDETHICS

Lecture 17

ETHICS AND PROFESSIONAL PRACTICE


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LECTURE 17ETHICS AND PROFESSIONAL PRACTICE

Corporate Code Of Ethics

Professional Code of Ethics

Independence and Conflicts of Interest

Practical situations and approach to examquestions


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CORPORATE CODE OF ETHICS

Organisations have responded to pressures to be

seen to act ethically by publishing ethical codes,setting out their values and responsibilitiestowards stakeholders.

CODE OF CONDUCT

It is a series of statements setting out thecompanys values and explaining how it sees its

responsibilities towards the stakeholders andhow the employees of the company will behave.


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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


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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


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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


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PROFESSIONAL CODE OF ETHICS

Apply to the individual behaviour of professionaland are often based on principles supplementedby guidance on threats and safeguards.

Good examples of professional Code of Ethics are:

IFAC Code of Ethics for ProfessionalAccountants and

ACCA Code of Ethics and Conduct.


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Professional Codes stress the importance of

public interest since the job they perform is ofmuch interest to the public.

Most Codes set out:

Fundamental principles

Threats to compliance

Safeguards

Ethical conflict resolution


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Fundamental principles:

Integritystraightforwardness / honesty Objectivity intellectual honesty, avoid bias

when dealing with various issues

Professional competence and due caremaintain knowledge / comply with standards,avoid accepting engagements when they cannot be performed competently.

Confidentiality not disclosing to third parties orusing information obtained during the course ofthe professional engagement .

Professional behaviour- avoid action that mightdiscredit the profession.


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Principles based code Vs Rules based code

Avoids narrow minded rules

Not a black and white approach that may notcover all situations

Flexible to respond to changes in individualsituations

Can accommodate changing environment.

Can include some guidance

A minimum standard of behaviour is expected

Examples to show how the principles are applied


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BUT

Requires good knowledge and understandingof the principles

Difficult to enforce legally because sometimesthey are subject to different interpretation.

International codes can not capture regionalvariations in beliefs and practices

Illustrative examples may be mistakenlyinterpreted.


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Threats:

Self -interest threat putting the interest of theprofessional person above the interest of the clienti.e. financial interest

Self-review threat the difficulty of the professional

person to review his/her own work and remainobjective i.e. Preparation and review of financialstatements

Advocacy threat create from conflicts since theprofessional person cannot act both in favour andagainst the clients best interest i.e. litigation issues

Familiarity threat-- when the professional is tooclose to the client and as a result too sympathetictowards its needs resulting in losing his/her

objectivity.


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Intimidation threat when the client due to its

size, big name, dominant personality of seniormanagement can intimidate the professionalperson i.e. threat to replace the professionalperson due to disagreement.


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Safeguards

1.Professional safeguards Entry requirements

Training requirements

CPD requirements

Professional standards

Professional monitoring

Disciplinary procedures

External reviews


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Safeguards

2.Workplace safeguards Peer reviews / supervision

Independent consultations

Partner/staff rotation

Discussion/disclosure to audit committee

Reperformance by another firm


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Ethical conflict resolution professional

accountants should consider:1.The facts of the situation

2.The ethical issues involved

3.Related fundamental principles4.Established internal procedures

5.Alternative courses of action and theconsequences of each.


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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


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PROFESSIONAL CODE OF ETHICSSelf-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


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PROFESSIONAL CODE OF ETHICSSelf-interest threats

Financial interest threat

Not allow to have direct or indirect financial interest in aclient

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.


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PROFESSIONAL CODE OF ETHICSSelf-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.


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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 auditsystem.

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 apartner.

Not entitled to any benefits unless contractual

Removed from the engagement if employment negotiations aretaken place.


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Partner on client Board

Partner or employee should not serve on theclients board.

It can be the secretary if the role is strictlyadministrative.

Note however corporate governance codesrequire company secretary role to bebeyond the administrative tasks.


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Personal & Family relationships.

The individuals responsibilities on the assignmentand 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 proceduresthat require staff to disclose such relationships.


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Gifts and hospitality.

Unless the gift is clearly insignificant shouldnot be accepted.


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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.


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Self-interest threats of independence

Overdue fees

Safeguards

Discuss the matter with the audit committee orother 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


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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 determinewhether 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


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ETHICS AND PROFESSIONAL PRACTICESelf-review threat of independence

Self review threat Refers to the treat of independence where the

assurance firm provides services other thanassurance services to an assurance client.

Remember that in the USA the Sarbanes Oxleyrule considers auditors that offer certain non auditservices to listed companies as being nonindependent.

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-managedbusiness.


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Recent services with assurance company General other services

Preparing accounting records and FS

Valuation services Tax services

Internal audit services

Corporate finance

Other services


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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


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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 chargedwith governance.

Services involved with the safeguarding of thecompanys assets, supervising client employees and

preparing source documents on behalf of the clientmay be allowed but the following safeguards shouldbe considered.


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Safeguards No assurance team staff are used

Involving an independent professional accountant to

advice

Quality control policies over staff to determine whatthey can do for the client

Making the appropriate disclosure to those charge

with governance. Resigning for assurance assignment if required.


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Preparing accounting records and F/S

Significant risk exists since the accountant will audit his ownwork. For public interest company the service regarding thepreparation 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


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Valuation services

These should not be carries out by audit firms if thevaluation will be material to the financial statement.

If the valuation not material the service may be offered

provided the following safeguards are applied to reducethe 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.


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Corporate finance

An assurance firm is not allowed to

Promote, deal or underwrite an assurance clientsshares

Commit the client to a transaction or consummate atransaction on the client behalf.

Other services such as defining corporate strategy,identifying possible sources of capital and advice onreconstruction may be provided is carried out bydifferent staff and no mismanagement decisions aretaken on behalf of the client.


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Taxation services

Generally not seen to impair independence and canbe provided

Internal audit services

Can be provided (not in the USA) provided the clientunderstand that he is responsible for establishingmonitoring and maintaining the system.

The board and/or the audit committee approve thework of the internal audit team

The assurance company staff implementing theinternal audit system is not involve in the assuranceassignment.


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Other services

IT services

Temporary staff cover

Litigation support

Legal services.

If such assignments are undertaken the assurancefirm should ensure that adequate safeguards are inplace to reduce the threat of independence. Otherwisethey should not be undertaken.


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ETHICS AND PROFESSIONAL PRACTICEAdvocacy threat of independence

Advocacy threat: Arises in situations where theassurance firm is in a position of taking the clients partin a destitute or acting as their advocate.

Offering legal services

Provide evidence as expert wildness Represent client with negotiations with bank

Safeguards

Different department offering the service

Disclosures to audit committees

Withdraw from the assignment if risk to independencetoo high.

Self-review threat


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ETHICS AND PROFESSIONAL PRACTICEFamiliarity threat of independence

A serious threat of independence may arise if theassurance firms staff becomes over familiar with theclient 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-interestguidelines


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ETHICS AND PROFESSIONAL PRACTICEFamiliarity threatof independence

Long association with an assurance client.

The long relationship of senior staff withassuranceclients 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.


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ETHICS AND PROFESSIONAL PRACTICEIntimidation 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 carriedout 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 andother problems.

The audit firm may be under pressure to issue an unqualifiedreport that otherwise will not be issued.


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ETHICS AND PROFESSIONAL PRACTICEIntimidation threat of independence

Safeguards

Disclose to the audit committee the nature and extentof litigation.

Remove affected individuals from the assignment

Involving an additional professional accountant on theteam to review work done

Resign from the assignment if the litigation is material.

If a firm asked for second opinion must seekpermission from the client to communicate with theappointed auditor.

Take great care if asked to give second opinion.


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ETHICS AND PROFESSIONAL PRACTICEConflict of interest

Conflict of interest may arise between

1. Members of the assurance firm and clients interests

2. Conflict of interests between different clients

In the case of significant conflict between membersand client the member should refuse or discontinuethe assurance assignment.

In the case of conflict between clients the firm mustensure that the fact that the firm is auditing bothclients is not a subject for a dispute otherwise theassignment should not be accepted or discontinue.


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When the audit firm considers the acceptance of aclient in direct competition with another client thefollowing safeguards should be applied.

Safeguards.

Notify the existing client affected and ask his consent.

Notify all known parties affected that the member actson behalf of two or more parties in respect of a matterthat a possible conflict of interest may arise.

Notify existing and potential clients that the memberdoes not act exclusively for any one client

Using separate audit teams for the assignments

Set procedures to prevent access to information


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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.


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Practical situationsand

Examination approach toQuestions on ethics

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