In this chapter, the learning objectives are Know the definitions and general importance of ethics and professionalism, be able to explain three basic theories of ethical behavior, understand how to deal with ethical challenges through an example situation,...
Chapter Nineteen Professional Ethics, Independence and Quality Control © The McGraw-Hill Companies 2010 Ethics and Professional Behaviour Ethics Refers to a system or code of conduct based on moral duties and obligations that indicate how an individual should behave in society Professionalism Refers to the conduct, aims, or qualities that characterize or mark a profession or professional person © The McGraw-Hill Companies 2010 Theories of Ethical Behaviour Utilitarianism Recognizes that decision-making involves trade-offs between the benefits and burdens of alternative actions and focuses on the consequences and individuals affected Rights-Based Approach Assumes that individuals have certain rights and other individuals have a duty to respect those rights when making decisions Justice-Based Approach Is concerned with issues such as equity, fairness and impartiality © The McGraw-Hill Companies 2010 IFAC Code of Ethics for Professional Accountants © The McGraw-Hill Companies 2010 IFAC Code Part A: Fundamental Principles and Conceptual Framework Part A of the Code establishes the fundamental principles for professional accountants’ behaviour and the conceptual framework for applying those principles © The McGraw-Hill Companies 2010 IFAC Code of Ethics for Professional Accountants A professional accountant in public practice: A professional accountant, irrespective of functional classification (e.g audit, tax or consulting) in a firm that provides professional services Professional services: Services requiring accountancy or related skills performed by a professional accountant including accounting, auditing, taxation, management consulting and financial management services A professional accountant in business: A professional accountant employed or engaged in an executive or non-executive capacity in such areas as commerce, industry, service, the public sector, education, the not for profit sector, regulatory bodies or professional bodies, or a professional accountant contracted by such entities © The McGraw-Hill Companies 2010 Fundamental Principles Integrity Objectivity Professional Competence & Due Care Confidentiality © The McGraw-Hill Companies 2010 Professional Behaviour Fundamental Principles © The McGraw-Hill Companies 2010 Conceptual Framework Approach Threats are created by circumstances and relationships that could compromise an accountant’s ability to comply with the fundamental principles Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level Identify threats to compliance with the fundamental principles Evaluate the significance of the threats identified Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level © The McGraw-Hill Companies 2010 Conceptual Framework Approach • Establishes fundamental principles • Requires active consideration of issues • Requires judgement rather than literal interpretations encouraged by a pure rules approach • Can be applied to differing circumstances • Responsive to change © The McGraw-Hill Companies 2010 Taxation Services Tax return preparation Tax calculations for the purpose of preparing the accounting entries Tax planning and other tax advisory services Assistance in the resolution of tax disputes For public interest entity audit clients the firm shall ordinary not prepare such tax calculations of entries that are material to the financial statements A firm is not permitted to provide tax advice when the tax advice depends on a particular accounting treatment or presentation in the financial statements, and (a) the audit team has reasonable doubt as to the appropriateness of the related accounting treatment or presentation under the relevant financial reporting framework; and (b) the outcome or consequences of the tax advice will have a material effect on the financial statements © The McGraw-Hill Companies 2010 Internal Audit Services Internal audit services involve assisting the audit client in the performance of its internal audit activities In providing such services the firm shall not assume management responsibility Provision of internal audit services creates a selfreview threat to independence if the firm uses the internal audit work in the course of a subsequent external audit For public interest entity audit clients the firm shall not provide internal audit services that relate to a significant part of the internal controls over financial reporting; financial accounting systems that generate information that is, separately or in the aggregate, significant to the client’s accounting records or financial statements; or amounts or disclosures that are, separately or in the aggregate, material to the financial statements © The McGraw-Hill Companies 2010 IT System Services IT system services Provision of IT systems services related to information may create a self-review threat to technology (IT) systems independence when the system include the design or generate information that affects implementation of the accounting records or financial hardware statements or software systems For public interest entity audit clients the firm shall not provide services involving the design or implementation of IT systems that form a significant part of the internal control over financial reporting or generate information that is significant to the client’s accounting records or financial statements © The McGraw-Hill Companies 2010 Litigation Support Services Litigation support services include activities such as acting as an expert witness, calculating estimated damages or other amounts that might become receivable or payable as the result of litigation or other legal dispute, and assistance with document management and retrieval Litigation support services to an audit client may create may create a self-review or advocacy threat Where the result of a valuation for litigation support will have a direct effect on the financial statements, the requirements in the Code relating to valuation services are applicable © The McGraw-Hill Companies 2010 Recruiting Services Recruiting services include services such as reviewing the professional qualifications of applicants, interviewing candidates and providing advice on their suitability for the post Providing recruiting services to an audit client may create self-interest, familiarity or intimidation threats The significance of the threats will depend on factors such as the nature of the requested assistance and the role of the person to be recruited Safeguards shall be applied when necessary to reduce the threats to an acceptable level © The McGraw-Hill Companies 2010 Corporate Finance Services Corporate finance services comprise a broad range of services including assisting in developing corporate strategies, identifying possible targets for the client to acquire, advising on disposal transactions, assisting finance-raising transactions and providing structuring advice Providing corporate finance services to an audit client may create services may create advocacy or self-review threats Certain corporate finance services are not permitted, such as services involving promoting, dealing in or underwriting an audit client’s shares © The McGraw-Hill Companies 2010 Independence for Other Assurance Engagements An assurance engagement is an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria Many of the same circumstances and relationships discussed previously related to independence requirements for audits and reviews are also relevant for other assurance engagements Threats to independence typically arise more frequently and are of greater significance when a non-assurance service is provided to an audit client Thus, the provision of non-assurance services to audit clients is more restricted than to non-audit assurance clients © The McGraw-Hill Companies 2010 IFAC Code Part C: Professional Accountants in Business A professional accountant in business is an accountant holding membership in an IFAC body and is employed or engaged in an executive or non-executive capacity in an organization other than an audit firm Professional accountants in business must comply with the IFAC Code’s fundamental principles and apply the conceptual framework when threats to the principles exist © The McGraw-Hill Companies 2010 Threats: • Potential conflicts • Preparation and reporting of information • Acting with sufficient expertise • Financial interests • Inducements Auditor Independence in the EU From European Commission, Recommendation on Statutory Auditors’ Independence in the EU: A Set of Fundamental Principles (2002): ‘A principles-based approach to statutory auditors' independence is preferable to one based on detailed rules because it creates a robust structure within which statutory auditors have to justify their actions It also provides the audit profession and its regulators with the flexibility to react promptly and effectively to new developments in business and in the audit environment At the same time, it avoids the highly legalistic and rigid approach to what is and is not permitted which can arise in a rules-based regime A principles-based approach can cater for the almost infinite variations in individual circumstances that arise in practice and in the different legal environments throughout the EU Consequently, a principles-based approach will better serve the needs of European capital markets, as well as those of SMEs (small and medium sized enterprises).’ © The McGraw-Hill Companies 2010 Systems of Quality Control ISQC Quality Control for Firms That Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements Elements of systems of quality control: • Leadership responsibilities for quality within the firm • Relevant ethical requirements • Acceptance and continuance of client relationships and specific engagements • Human resources • Engagement performance • Monitoring © The McGraw-Hill Companies 2010 Elements of Systems of Quality Control © The McGraw-Hill Companies 2010 Selected Quality Control Policies and Procedures © The McGraw-Hill Companies 2010 Quality Control Programmes EU 8th Directive IFAC SMO Quality Assurance © The McGraw-Hill Companies 2010 European Commission, Recommendation on Quality Assurance for the Statutory Audit in the EU: Minimum Requirements Quality Control Programmes The objective of a quality assurance review is to: 1.Determine whether the member is subject to an adequate system of quality control 2.The system of quality control is in compliance with such system 3.The system of quality control has adhered to professional standards and applicable legal and regulatory requirements in performing engagements A member body shall choose either a cycle or risk-based approach for selecting members for review © The McGraw-Hill Companies 2010 End of Chapter 19 © The McGraw-Hill Companies 2010 ... non -assurance services to audit clients © The McGraw-Hill Companies 2010 Part B: Provisions of Non -Assurance Services – Types of Services and Circumstances • Preparing accounting records and. .. • Valuation services • Taxation services • Internal audit services • IT systems services • Litigation support services • Legal services • Recruiting services • Corporate finance services • Fees:... firm that provides professional services Professional services: Services requiring accountancy or related skills performed by a professional accountant including accounting, auditing, taxation,