Professional Documents
Culture Documents
OVERVIEW
Objective
To explain the professional codes of ethics and conduct under which students and
members of the ACCA operate.
Introduction
Fundamental principles
Conceptual framework
risks
Conceptual framework
safeguards
Ethical conflict resolution
INTEGRITY
OBJECTIVITY &
INDEPENDENCE
ACCA CODE OF
ETHICS AND
CONDUCT
Improper disclosure
Improper use
Principles
Fees and pricing
Gifts and hospitality
Financial interest
Family and other personal relationship
Loans and guarantees
Overdue fees
Provision of other services to assurance clients
Long association with assurance clients
Recent employment with an assurance client
Future employment with an assurance client
Close business relationships
Actual or threatened litigation
Serving on the board of an assurance client
Second opinions
INDEPENDENCE
IN OTHER ROLES
CONFLICTS OF
INTEREST
CONFIDENTIALITY
Two types
Member v client
Client v client
Professional roles
Business roles
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1.1
Introduction
As a member of the IFAC, the ACCAs Code of Ethics and Conduct, is based on the
Code of Ethics of the IFAC and applies to all Students and Members of the Association
(in practice, commerce, or any other environment, e.g. internal audit, education) in that
they are required to observe proper standards of professional conduct and refrain from
misconduct. Failure to observe standards may result in disciplinary proceedings.
1.2
Fundamental Principles
1.2.1
Integrity
Members should not be associated with (eg sign off) reports, returns, communications
or other information where they believe that the information:
For example:
In the context of an audit under ISA, this means that if the financial statements
contain a material error that the directors refuse to change, the auditor would
qualify their opinion.
In the context of other work, e.g. preparing a cash flow forecast, if asked to verify
data that is misleading, the member would refuse to accept the engagement or
withdraw as soon as they become aware that the data is misleading and the client
refuses to change.
1.2.2
Objectivity
Members should not allow bias, conflicts of interest or undue influence of others to
override their professional and business judgments.
Objectivity is a state of mind, which ensures the member is not compromised having
regard to all considerations relevant for professional judgment, but no other (e.g.
personal interests). This presupposes intellectual honesty.
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1.2.3
Members work and advice given must reflect current developments in practice,
legislation, applications, techniques and professional standards.
Members must obtain and maintain the relevant knowledge and skill to ensure the
provision of competent and professional service levels (e.g. through continuing
professional development). This also requires the exercise of sound judgment in
applying professional knowledge & skill and the need to act diligently in accordance
with applicable technical and professional standards.
The requirements of each assignment must be fully understood such that the member
and assignment staff will act carefully, thoroughly and on a timely basis if unable to
do so, the assignment should not be accepted. Thus members must also ensure that all
others working under their authority have the appropriate training and supervision.
1.2.4
1.2.5
Professional behaviour
All relevant laws and regulations should be complied with and any action that brings
discredit to the profession should be avoided. Members must show professional
courtesy and consideration.
In marketing and promoting themselves and their work, members should not bring the
profession in disrepute. Members should be honest and truthful and not:
1.3
make exaggerated claims for the services they are able to offer (e.g. claim to be able
to carry out statutory audits when they do not hold statutory recognition as an
auditor) the qualifications they possess (e.g. claim to be qualified when still a
student) or experience they have gained; or
Conceptual framework
The many environments in which ACCA members operate (e.g. practice, commerce,
industry, financial services, local government, education etc) may often give rise to
specific threats to compliance with the Fundamental Principles.
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It allows members to consider the risks they face and to match those risks with the
appropriate action. It is not a set of rules within a fixed framework as ACCA members
need to be flexible within their operating environment in order to ensure the
Fundament Principles are not compromised.
If identified threats are other than clearly insignificant, members must implement
safeguards to eliminate the threats or reduce them to an acceptable level so that
compliance with the Fundamental Principles is not compromised.
Whilst examples are used to illustrate the application of the framework, they do not
cover all possibilities faced by members. The framework should be applied to the
particular circumstances faced. Where a situation cannot be aligned with the examples
given within the framework, the underlying concept is always if in doubt, avoid, do
not do.
1.4
Threats
Compliance with the Fundamental Principles may potentially be threatened by a broad
range of circumstances. Many threats fall into the following categories:
self-interest;
self-review;
advocacy;
familiarity;
intimidation.
Remember that these apply to all members, not only those in practice but also those
employed in industry, commerce etc.
1.4.1
Self-interest threat
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loans or guarantees;
close personal or business relationships;
financial interest in a client;
gifts and hospitality;
incentive compensation arrangements;
concern over employment security;
commercial pressure from outside the employing organisation;
interest in transactions with the company;
inappropriate use of corporate assets.
1.4.2
Self-review threat
Circumstances which may give rise to self-review threats include, but are not limited to:
providing a service to a client that will then be subject to review as part of the
assurance engagement;
a member of an engagement team who was previously employed by the client and
was in a position to have had direct influence on the subject matter of the
engagement;
business decisions or data being subject to review and justification by the same
person responsible for making those decisions or preparing those data;
1.4.3
Advocacy threat
Occurs when members promote a position or opinion to the point that subsequent
objectivity may be compromised (e.g. stating publicly a given opinion on a future
position and then having to audit that position at a later date when it has changed and
there is potential pressure to ignore the change).
There could be circumstances, however, where this may not be acceptable and these
include:
1.4.4
Familiarity threat
Can arise where members, because of a close relationship, become too sympathetic to
the interests of others (e.g. auditor and director are related).
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There is a significant risk that professional scepticism will not be applied by the
member. Examples of circumstances that may create familiarity threats include:
1.4.5
Intimidation threat
Will occur where members may be deterred from acting objectively by threats, actual or
perceived, direct or indirect. Examples of circumstances that may create intimidation
threats include:
1.5
Safeguards
The nature of the safeguards to be applied will vary depending on the circumstances
(demonstrating the approach of the conceptual framework).
Safeguards that may eliminate or reduce to acceptable levels the threats faced by
members fall into three broad categories:
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1.5.1
Includes:
Educational, training and experience requirements for entry into the profession.
Professional standards.
1.5.2
Includes:
Using different partners and engagement teams with separate reporting lines for
the provision of non-assurance services to the client.
Discussing ethical issues with those charged with governance of the client.
Disclosing to those charged with governance of the client the nature of the services
provided and extent of fees charged.
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1.5.3
Includes:
1.5.4
Other safeguards
1.6
relevant facts;
the ethical issues involved;
the fundamental principles involved;
established procedures followed;
action followed and outcome;
alternative courses of action and their consequences; and
internal and external sources of consultation (e.g. ethics partner; audit committee).
If, after exhausting all relevant possibilities, the ethical conflict remains unresolved,
members should, where possible, refuse to remain associated with the matter creating
the conflict.
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2.1
Principle
The Fundamental Principles require that a members integrity and objectivity must be
beyond question. This can only be assured if the member is, and is seen to be, as
independent as possible.
Independence requires:
Members who provide assurance services must be independent of the assurance client
(be they responsible for the subject information or the subject matter), regardless of the
type of assignment, i.e. assertion or direct reporting.
Members who provide other services (e.g. taxation services, compilation of accounts,
corporate advisory services) to non-assurance clients, may none the less under specific
circumstances, find their perceived objectivity under threat because of the nature their
work and of their relationship with a client, e.g. a brother who is asked to prepare a
company cash flow forecast by his sister who is a director of that company.
The following examples describe specific circumstances and relationships that may
cause threats to independence. Whilst they mainly relate to members in practice (i.e.
audit and assurance) they can equally apply to the provision of non-assurance services
and members in industry, commerce etc.
2.2
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A similar threat may also be created when the fees generated by the assurance client
represent a large proportion of the revenue of an individual partner.
Every firm should consider its own circumstances to determine an appropriate level
beyond which objectivity may be considered to be impaired. In addition, firms are
obliged to consider the appropriateness of accepting an assurance engagement where
fees would exceed a lower specified limit. Effectively, this lower level acts as a trigger
point to consider appropriate safeguards.
To safeguard objectivity, the ACCA state that fee income for audit and other recurring
work paid by one client (or a group of connected clients) should not exceed the
following % of gross practice income (and individual partners total fee income).
Extreme
5%
10%
Other clients
10%
15%
Note that these are extreme levels firms may set levels that are lower to reflect
their particular circumstances.
Criterion does not initially apply to new practices. An initial period of time should
be given to allow the practice to grow to a reasonable level.
The propriety of accepting or retaining clients should be reviewed against the lower
% figures and safeguards set up if engagement accepted/retained.
A company planning to seek a listing will be public interest in the period before it is
listed (because publicity leading up to flotation will be in the public eye).
taking steps to reduce dependency on the client, e.g. expansion of client base
through organic or merger growth;
quality control review procedures, e.g. second independent partner review at the
planning and completion stages where a fee breaches the lower review %.
Fee income on non-recurring assignments, if taken together with recurring work, could
give rise to dependency. This would particularly be the case if the non-recurring work,
whilst of a different nature each year, effectively contributes a consistent base % of fee
income from the client.
2.3
Initiate
review
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Unless the value is clearly insignificant, a firm or a member of the assurance team
should not accept such gifts or hospitality as the threats to independence cannot be
reduced to an acceptable level by the application of any safeguard.
A similar consideration will apply to gifts and hospitality made to the close family of a
member of the assurance team, unless they receive the benefit in their own right and not
because of their connection with the assurance team member.
2.4
Financial interests
In general, consider the nature of the financial interest, including the role of the
individual holding the interest. This includes direct control over the interest, e.g.
personal holding of shares, and an interest over which there is no control, an indirect
interest, e.g. unit trust or pension fund.
The partner must dispose of the investment or the firm disengage from the assurance
assignment or the client.
require disposal of the holding by the employee or their immediate family member;
or
remove the employee from the assignment (usually the action taken).
Where assurance staff (or their immediate family) do hold investments in assurance
clients, they must not be assigned to such clients.
A principal safeguard is the annual declaration by all partners and staff that they, and
their immediate family, do not have a financial interest in any assurance clients. This is
supplemented by informing partners and staff of new assurance clients (on a regular
basis) and the requirement for partners and assurance staff to inform the compliance
partner of any financial interest.
If the relevant interest was received by way of gift, inheritance, etc the above procedures
also apply. In addition, consider further action to take, based on circumstances, e.g.
independent review of past work carried out by employee if they knew that they were
due the inheritance plus any disciplinary action for their not informing the firm.
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2.5
Safeguards include:
ensuring that the individual does not deal with the areas of responsibility of the
client employee;
The more senior the employee within the client and/or the more senior the member of
the assurance team, the greater the need to apply the strongest safeguard, i.e. removal of
the employee from the assurance team or resignation. For example:
a juniors uncle is a director of an assurance client will mean that the junior should
not be a member of the assurance team;
a juniors girlfriend who is the credit controller will mean that, if the junior remains
on the team, they will not be involved in dealing with sales or receivables;
the seniors girlfriend who is the credit controller will mean that they should not be
involved with the assignment as they will be responsible for setting and reviewing
the work of the team member who carries out work on the credit area;
a partners sister is a director of a company, means that the firm should not provide
assurance services to the company. If requested to tender for the audit, the firm
should decline. If the sister is recruited as a director by the company, which is
already an audit client, the firm should resign the audit.
Where other partners and employees have personal or immediate family relationships
with assurance clients (for who they do not act) self-interest, familiarity or intimidation
threats may still arise.
The safeguards put in place (including resignation from the assignment or the client)
will depend on the closeness of the relationship and the respective positions within the
client and firm.
It is important, that as part of its safeguards, the firm should have procedures for
partners and employees to declare such personal and immediate family relationships,
e.g. annual declarations and regular notification of new clients.
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2.6
make a loan
accept a loan
guarantee borrowings
unless the loan/guarantee is immaterial to both the firm (and partners) and the
assurance client. There are no safeguards that would bring the threat to independence
to an acceptable level.
Where the client is a commercial financial institution (e.g. a bank) the firm, partners,
employees of the firm (including engagement staff) and their immediate family may
have deposits, overdraft facilities and standard loans (e.g. car, mortgage loans, credit
card balances) provided the terms, arrangements and conditions are at arms length and
generally available to all clients of the institution.
Where deposits made by the firm or loans to the firm by the client bank are material,
safeguards should be put in place to bring the self-interest threat to an acceptable level.
Such safeguards include review of the assurance assignment by an external,
independent professional.
Note that many firms specifically prohibit their partners (and the firm) from taking any
form of material loan from financial institution clients. This is particularly the case for
the engagement partners. Where a loan is material to an employee (which is likely to be
the case), that employee would not be assigned to the audit of the bank concerned.
2.7
Overdue fees
Can be a self-interest threat where fees remain unpaid for a significant period of time,
particularly where prior year fees have not been settled by the time of the current years
report.
Safeguards include:
2.8
requiring the payment of overdue fees before the issue of any further reports;
discussing the level of outstanding fees with audit committees or those charged
with governance;
Consideration must also be given to determine if the overdue fees are effectively a loan,
and therefore if it is appropriate for the firm to continue to act for the client.
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However, in some jurisdictions (e.g. the USA under the Sarbanes-Oxley Act) auditors
are specifically barred from providing additional assurance and non-assurance services
to their listed company clients.
The following general safeguards are relevant when providing other services:
policies within the assurance client regarding the oversight responsibility for
provision of non-assurance services by the firm (e.g. audit committee approval only
if satisfied auditors independence will not be impaired);
discussing independence issues related to the provision of the services with those
charged with governance, such as the audit committee;
disclosing to those charged with governance, such as the audit committee, the
nature and extent of fees charged.
Under the ACCA Code, the following activities would generally create self-interest or
self-review threats that are so significant that only avoidance of the activity or refusal to
perform the assurance engagement would reduce the threats to an acceptable level:
2.8.1
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The ACCA specifically bars members from preparing accounting records and financial
statements (except to assist in emergency situations) for listed or public interest clients
where they will also conduct the audit. To do so may impair (or appear to impair) the
independence of the auditor.
2.8.2
Accounts preparation members are not part of the assurance engagement team;
No managerial decisions made by the preparation team;
No authorising or approving transactions by the preparation team;
Source data must be originated or changed only by the client;
Underlying assumptions originated and approved by the client;
Client acceptance of the responsibility for records as its own;
Client approval for any proposed journals, analysis or other changes impacting on
the financial statements.
Internal audit
Internal audit provide a broad range of services to their organisations (see Session 33).
Many of these will not be related to the financial systems and may be undertaken
without threat to independence by the external auditors.
However, the provision of internal audit services to an audit client relating to the
internal controls (including business risk and financial controls) financial systems and
financial statements will create a self-review threat.
The firm must consider the threats and proceed with caution before taking on internal
audit services relating to internal control, financial systems and financial statements.
Safeguards include:
ensuring the audit client recognises its responsibility for internal audit activities
and acknowledges its responsibility for establishing, maintaining and monitoring
the system of internal controls (e.g. in the engagement letter);
the audit client, the audit committee or supervisory body approves the scope, risk
and frequency of internal audit work;
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employees used by the audit firm and their internal reporting lines, should be
different to those for the audit assignment;
the audit client evaluates the adequacy of the internal audit procedures performed
and the findings resulting from the performance of those procedures by, among
other things, obtaining and acting on reports from the firm; and
the findings and recommendations resulting from the internal audit activities are
reported appropriately to the audit committee or supervisory body.
2.8.3
Valuation services
A self-review threat may be created when a firm performs a valuation for an audit client
that is to be incorporated into the clients financial statements to be audited by the firm.
Where the valuation is material to the financial statements and involves a significant
degree of subjectivity (e.g. a pension fund actuarial valuation or fair value based on cash
flows), the self-review threat created cannot be reduced to an acceptable level by the
application of any safeguard.
Such valuation services should not therefore be provided. Alternatively, the firm could
withdraw from the audit engagement.
Where the valuation is not material or does not involve subjectivity, the valuation may
be undertaken provided the self-review threat can be reduced to an acceptable level.
confirming with the audit client their understanding of the underlying assumptions
of the valuation and the methodology to be used and obtaining approval for their
use;
obtaining the audit client's acknowledgement of responsibility for the results of the
work performed by the firm; and
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In determining if the safeguards would be effective, the following matters should also
be considered:
the extent of the client's knowledge, experience and ability to evaluate the issues
concerned, and the extent of their involvement in determining and approving
significant matters of judgement;
2.8.4
IT systems services
The provision of services to an audit client that involve the design and implementation
of financial information technology systems that are used to generate information
forming part of that clients financial statements, may create a self-review threat.
the audit client makes all management decisions with respect to the design and
implementation process;
the audit client evaluates the adequacy and results of the design and
implementation of the system;
the audit client is responsible for the operation of the system (hardware or
software) and the data used or generated by the system; and
employees used by the audit firm and their internal reporting lines, are different to
those for the audit assignment.
Note that the provision of services in connection with the assessment, design and
implementation of internal accounting controls and risk management controls is not
considered to create a threat to independence provided that the assignment team do not
perform managerial functions. However, consideration should be given to ensuring
that such team members are not part of the audit team.
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2.8.5
The lending of staff by a firm to an audit client may create a self-review threat when the
individuals are in a position to influence the preparation of a clients accounts or
financial statements.
In practice, such assistance may be given (particularly in emergency situations) but only
on the understanding that the personnel will not be involved in:
In addition such staff will not be involved in the audit of those areas and activities
undertaken whilst on the temporary assignment to the client.
It is important that the audit client acknowledges its responsibility for directing and
supervising the firms staff whilst on temporary assignment.
2.8.6
Care must be taken to ensure that no managerial decisions are taken by the firm during
the recruitment process. For example, services provided could cover reviewing the
professional qualifications of a number of applicants and providing advice on their
suitability for the post.
In addition, the firm could generally produce a short-list of candidates for interview,
provided it has been drawn up using criteria specified by the assurance client. In no
circumstances should the firm rank or identify the most suitable candidate.
2.9
Creates a familiarity risk where senior members of the assurance team are assigned to
one particular assignment for a significant period of time.
The significance of the threat should be evaluated and safeguards applied, e.g.
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For a listed entity or a significant public interest entity , the risk is significant and
specific rotation procedures must be applied:
Five year maximum rotation of engagement partner (who cannot return to the
engagement within five years).
Seven year maximum rotation of other key audit partners (who cannot return
within two years or as the engagement partner, within five years). Also applies to
the individual responsible for the engagement quality control review.
When an audit client becomes listed, it may be possible that the engagement
partner/key audit partner will have already exceeded their rotation period or will
have less than two years to run. In both circumstances, they are allowed to remain
with the client for a maximum of two more years and must then be rotated.
2.10
May create a self-interest, self-review and/or familiarity risk. Especially high risk
where the member of the assurance team has to, for example, report on subject matter
that they were responsible for whilst with the assurance client.
Any partner, manager or employee cannot be part of the assurance team during the
period for which a report is to be made, or at any time in the prior two years (i.e. three
years in total), if they were an officer or employee of the client, or they were seconded to
the client from the practice, and had direct and significant influence over the subject
matter of the assurance assignment.
For similar situations prior to the two year period, where the subject matter is currently
being reported on, the significance of any threat must be assessed and appropriate
safeguards applied, e.g. specific independent review of the work carried out by the
team member.
2.11
Because of the significance of the threats, a key audit partner of an audit client cannot
accept a key management position with that client until at least two years have elapsed
from the conclusion of the audit.
For other partners and staff of any assurance client (whether or not an audit is
conducted), the threat must be assessed taking into account:
the amount of any involvement the individual will have with the assurance team
and/or the subject matter;
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the length of time that has passed since the individual was a member of the
assurance team or firm; and
the former position of the individual within the assurance team or firm.
If the threat is more than insignificant, appropriate safeguards should be applied, eg:
In all cases:
the individual concerned is not entitled to any benefits or payments from the firm
(after they have left) unless these are made in accordance with fixed predetermined arrangements (e.g. partnership agreement);
any amount that is owed to the individual should not be of such significance to
threaten the firms independence (e.g. akin to a loan); and
the individual does not continue to participate or appear to participate in the firms
business or professional activities.
Similar threats will also apply when an employee of the firm participates in an
assurance engagement knowing that they will, or may be employed by the client (e.g.
having interviews).
2.12
A close business relationship between a firm or a member of the assurance team and the
assurance client or its management, will involve a commercial or common financial
interest and may create self-interest and intimidation threats. Examples include:
joint ventures with the client, directors, officers or employees who perform
managerial functions;
marketing arrangements between the firm and a client for a joint product or the
others products and services.
2.13
When litigation takes place, or appears likely, between the firm or a member of the
assurance team and the assurance client, a self-interest or intimidation threat may be
created.
Examples include the issue of a writ against the firm for negligence, allegations of
fraud/deceit by officers of the company.
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disclosing to the audit committee, or others charged with governance, the extent
and nature of the litigation;
if the litigation involves a member of the assurance team, removing that individual
from the assurance team; and
independent review of the work that was carried out and is subject to the litigation.
2.14
Serving on the board of an assurance client creates significant self-review and selfinterest threats.
Partners and employees of a firm cannot serve on the board of any of their firms
assurance clients.
Example 1
Required:
Comment and conclude on the following four situations.
(1)
Petr, a recently qualified member of ACCA, has decided to go into practice alone.
He already has a small private portfolio of $150,000 gross fee income but has now
been approached by his cousin to take over the audit of her company, the last audit
fee for which was $120,000. This will be by far his largest audit within his portfolio
of clients.
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Conclusion
(2)
Paine & Co has been requested by a long standing client to do a special investigation
into a foreign group of companies. The target group is based in Turkey where the
firm has no representation. The client is very keen to use the firm and are prepared
to pay not only for the cost of the investigation but also the additional costs of the
firm having to use temporary staff to service other existing clients. The firms gross
practice income is normally $7,500,000, the audit fee for this client is normally
$800,000. The extra service is expected to cost the client $1,600,000
Comment
Conclusions
(3)
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Ambit plc is preparing to apply for admission to a recognised stock market, at the
same time offering a proportion of its shares to the public. The directors have asked
Schilling & Co, as its auditors, to set up and maintain the companys share register
on a computer database.
Conclusion
(4)
Sean & Co are the auditors of Starck a.s. During the current year, Starck has
expanded rapidly, taken over three other companies and is currently preparing to
float a proportion of its shares on a recognised stock exchange. As a result of several
special assignments connected with these events, total fees from Starck amount to
19% of the total fee income of Sean & Co for the year.
In addition, Sean & Cos senior tax manager owns a small number of shares in
Starck, acquired several years ago when the company issued shares under a
business expansion scheme
Comment
Conclusion
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2.15
Second opinions
Occurs when an entity approaches an accounting firm who is not its auditor, for an
opinion on the application of accounting, auditing, reporting or other standards or
principles. Sometimes referred to as opinion shopping by the client.
Providing a second opinion to a company or an entity that is not an existing client, may
give rise to threats to compliance with the fundamental principles, unless the advice
sort is clearly insignificant.
For example, there may be a threat to professional competence and due care in
circumstances where the second opinion is not based on the same set of facts that were
made available to the existing accountant, or is based on inadequate evidence.
2.15.1
Risks
The firm may express an opinion which is not based on the facts as known to the
auditor.
The second opinion may create undue pressure on the judgement and objectivity of the
appointed auditor, thus threatening their independence.
2.15.2
Safeguards
seek the clients permission to contact the current accountant and/or auditor;
obtain all relevant information by contacting the accountant/auditor and asking for
any relevant facts; and
should be prepared to provide the accountant/auditor with their opinion, given the
clients permission.
CONFIDENTIALITY
Two aspects
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3.1
Improper disclosure
3.1.1
General principle
Information acquired in the course of professional work should not be disclosed to third
parties (including other clients and for use within other assignments) without first
obtaining the clients permission. For example, information obtained from one
assignment cannot be used within another, without obtaining the permission of the first
client, e.g. the knowledge that one client has going concern problems cannot be used to
assess debt collection by another client, unless such knowledge is within the public
domain.
Exceptions
there is a statutory right or duty to disclose without first obtaining the clients
permission;
to comply with quality control reviews of regulatory bodies, e.g. ACCA (usually
included within the letter of engagement); or
3.1.2
General position
Auditors are normally under NO legal obligation to disclose defaults or unlawful acts
(or suspicions thereof) to anyone other than the clients management, unless specifically
required to do so by law.
Where there is a right (as opposed to a duty), disclosure should only be made in pursuit
of a public duty or professional obligation.
3.1.3
Obligatory disclosure
money laundering;
proceeds of crime;
terrorism;
treason;
drug trafficking.
Members are strongly recommended to take legal advice before any action or inaction,
as in some cases it is a criminal offence to notify (tip off) the client of any suspicion or
knowledge of the offence.
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3.1.4
Voluntary disclosure
authorised by statute.
Illustration 1
During the current years interim audit, the auditor becomes aware that the
client has been misrepresenting their VAT return to the tax authorities
resulting in an underpayment of VAT. The client refuses to accept the advice
of the auditor to notify the VAT authorities, negotiate and correct their returns.
The auditor informs the client that they are no longer prepared to act for them
in any professional capacity. They also tell the client that they will be
informing the taxation authorities that they no longer act for the client.
Because of client confidentiality, they should not disclose to the tax authorities
the reason why they have resigned (unless the client gives permission for them
to do so which is highly unlikely).
In addition, in certain jurisdictions (e.g. the UK) the deliberate underpayment
of taxation is classified as proceeds of crime and possibly money laundering.
The auditor is therefore under a legal duty to fully report their suspicions to
the appropriate authorities (dealing with proceeds of crime) giving full details,
even though they do not give a full report to the taxation authorities.
Now, more than ever, it is essential for professional accountants to seek legal
advice in such circumstances.
3.2
3.2.1
Principle
A member acquiring information in the course of his or her professional work should
neither use nor appear to use that information for his personal advantage or for the
advantage of a third party.
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3.2.2
Examples
A member should not deal in the shares of a company with which he has a professional
association as it might make it appear that he was turning information obtained in his
professional capacity to his own advantage.
CONFLICTS OF INTEREST
4.1
Two types
4.2
Member v client
4.3
Client v client
The implications arising from possession and use of confidential information are separate
issues.
4.2
Member v client
4.2.1
Principle
Any financial gain which accrues or is likely to accrue to the firm as a result of the
engagement (other than properly earned fees etc) will ALWAYS amount to a significant
conflict of interest.
The test is whether a reasonable and informed third party, having knowledge of all
relevant information, including safeguards applied, would consider the conflict of
interest as likely to affect the judgement of members and firms.
4.2.2
Commission
Where any commission, referral fee or reward may be earned for the introduction of a
client, or as a result of advice given to a client, a self-interest threat arises.
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4.3
Client v client
4.3.1
General
There is nothing improper in a firm having two or more clients whose interests may be
in conflict.
However, the firms work should be so managed to avoid the interests of one client
adversely affecting those of another.
4.3.2
All reasonable steps should be taken to ascertain whether any conflict of interests exists
or is likely to arise in the future.
A relationship which ended over 2 years before is unlikely to give rise to conflict.
4.3.3
Disclosure
4.3.4
Safeguards
Regular review of the situation by a senior partner or compliance officer not personally
involved with either client.
Where a conflict of interest poses a threat to one or more of the fundamental principles,
including objectivity, confidentiality or professional behaviour, that cannot be
eliminated or reduced to an acceptable level through the application of safeguards,
members should conclude that it is not appropriate to accept a specific engagement or
that resignation from one or more conflicting engagements is required.
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4.3.5
Disengagement
When necessary should be done as speedily as is compatible with the interests of the
clients concerned.
Illustration 2
All of the current Big 4 firms were formed through the mergers of major firms
(originally referred to as the Top 10). As the number of audit & assurance
firms reduced, it was not uncommon for two major competitor companies to
find that they became clients of the same firm. Despite assurances given
concerning the confidentiality of information and being able to minimise and
control conflicts of interest, many competitor companies decided between
them that one of them would need to change advisors.
Example 2
Required:
Comment and conclude on the following situations:
Solution
(1)
The audit senior of Neutron, a limited liability company, is having an affair with
the credit controller and is staying with her during the week and leaving the audit
files in the boot of his car overnight. There are no other audit staff available that
the client considers to be capable of replacing him on the assignment.
Comment
Conclusion
(2)
A part-time partner in Spoils & Co is also a councillor in the local authority. She
has been acting for Radnor Ltd whose business venture now requires planning
permission from the local authority. The partner sits on the planning committee
and recently vigorously opposed a similar application.
Comment
Conclusion
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(3)
In an effort to reduce audit fees your client, Finders Ltd, has employed an
accountant on a temporary basis to assist you with your audit work. The client
feels that it will be cheaper for the temporary accountant to perform some of the
audit testing, replacing one member of your staff.
Comment
Conclusion
(4)
Conclusion
5.1
Covers work areas such as taxation services, preparation of accounts, cash flows,
corporate advisory services, management consultancy and reporting or secondment to
management with clients who are not assurance clients.
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5.1.1
In particular, problems may arise where a close family member, has a mutual business
interest with a client or with a director, officer or employee of a client.
Safeguards include:
5.1.2
In addition, as with assurance clients, any significant overdue fees may also be
considered as a loan.
5.1.3
Acceptance of gifts by the accountant, or their close family members, from clients may
give rise to self-interest threats or intimidation (e.g. threat to make knowledge of the gift
public).
Where gifts or hospitality which a reasonable and informed third party, having
knowledge of all relevant information, would consider clearly insignificant are made, it
may be concluded that the offer is made in the normal course of business without the
specific intent to influence decision making or to obtain information.
In general, gifts or hospitality should only, therefore, be accepted if the value of any
benefit is modest.
5.1.4
5.2
Any investment in any client, which may cause the accountants objectivity to be called
into doubt, must be avoided.
Business roles
Members in business are bound by the same fundamental principles and the same
standards of behaviour and competence as apply to all other members of ACCA. Being
an employee, they owe a duty of loyalty to their employers as well as to their
profession.
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5.2.1
Independence
The concept of independence, which is central to the role of members in public practice,
has no direct relevance to members in business, whose first duty is to their employer.
Members in business cannot be fully independent of their employers and thus it is all
the more important that they strive constantly to maintain objectivity in every aspect of
their work, e.g. an internal auditor will have a self-review threat if they are required to
audit any business function for which they have direct responsibility.
5.2.2
Objectivity
Objectivity is the state of mind which has regard to all considerations relevant to the
task in hand but no other. It presupposes intellectual honesty.
It follows that the interests of a members employer should no more affect the
objectivity of a members judgement in a professional matter than his/her own
interests.
5.2.3
Integrity
Members in business must observe the terms of their employment. These cannot,
however, require them to be implicated in dishonest transactions.
5.2.4
Potential conflicts
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5.2.5
5.2.6
Financial interests
Safeguards include:
disclosure of all relevant interests, and of any plans to trade in relevant shares, to
those charged with the governance of the employing organisation, in accordance
with any internal policies;
up-to-date education on ethical issues and the legal restrictions and other
regulations around potential insider trading
5.2.7
Inducements
Safeguards include:
5.2.8
Offering inducements
If the pressure to offer an inducement comes from the employing company, ethical
conflict resolution must be considered, which may well mean resignation from the
employment of the firm.
5.2.9
The duty of confidentiality is not only to keep information confidential, but also to take
all reasonable steps to preserve confidentiality.
being permitted by law to disclose and are authorised by the employer to do so;
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whether members of the public are likely to be adversely affected (is the matter
truly in the public interest?);
the gravity of the matter, for example the size of the amounts involved and the
extent of likely financial damage;
the reasons for the employers unwillingness to disclose matters to the relevant
authority.
FOCUS
You should now be able to:
discuss the sources of, and enforcement mechanisms associated with, ACCAs Code of
Ethics and Conduct.
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EXAMPLE SOLUTION
Solution 1 Undue dependence
(1) The 15% rule need not be applied when a practice is being established, but safeguards
are necessary.
Family relationship may cause a problem if a disagreement arises. Even if his cousin is
not considered to be a close family member, objectivity may still appear to be
threatened.
Safeguard arrangement for consultation and review of audit file with another
practitioner.
In due course Petr may have a qualified employee (for inclusion in the audit team) or
enter into a partnership (allowing rotation of engagement partner).
Competence to carry out the audit must also be considered. For Petr, this is a significant
audit and it is essential that he has the technical expertise (e.g. gained from his recent
employment) to carry out the work.
Conclusion Decline, unless safeguards and technical competence are adequate,.
(2) The 15% rule applies to recurring work. Nevertheless, objectivity should be reviewed
with respect to audit assignment as audit fee >10%. Total income from client in current
year is likely to create undue dependence: [(800k + 1,600k) (7,500k + 1,600k) 26%].
It is extremely unusual for the client to bear the additional costs to the practice caused
by its lack of resources. The partners must be absolutely convinced that they would be
able to resist any pressure that the client might exert before accepting.
Competence of temporary staff would need to be established.
Possible safeguard different staff members/partner assigned to audit and special
investigation.
Conclusions As existing clients, in particular, are likely to perceive undue dependence
special investigation should be declined. Engagement partner on audit should be
rotated.
(3) Resources required to set up (and subsequently maintain) the database may affect
service offered to other existing clients. In particular, database expertise will be
required.
Nature of additional service is unlikely to appear to threaten objectivity (e.g. no
managerial involvement).
As a plc, recurring fees (audit + maintenance) must not exceed 10% gross practice
income. Safeguards required if >5%.
Conclusion Additional service is likely to be acceptable within ethical constraints.
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