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Chapter Ethics, Independence and Corporate Governance Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-1 Learning Objective 1: The Nature and Importance of Professional Ethics • Ethics: – – Concerned with the requirements for the general wellbeing, prosperity, health and happiness of people Requires knowledge of moral principles, and skills in applying them to problems and decisions Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-2 Ethical rules The establishment of ethical codes and disciplinary rules does not necessarily create an ethical culture or ensure the moral integrity of employees • A.1 of the Joint Code of Professional Conduct (CPC) of ICAA and CPA Australia (from July 2006 reference is to Section A of APES 110 “Code of Ethics for Profession Accountants” issued by the Accounting Professional and Ethical Standards Board - APESB) indicates that members are expected to comply with the spirit as well as the letter of the rules • Failure to observe expected standards can result in disciplinary procedures and sanctions • Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-3 Learning Objective 2: Ethical Theory • Teleological ethics – deals with consequences or outcomes of actions – • Deontological ethics – based on duties and rights – • generally, if benefits of proposed action outweighs costs, the decision is morally correct duties and rights set down in rules which must be followed Virtue ethics – focus on personal qualities, such as the integrity of the decision-maker Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-4 Learning Objective 3: Accounting Bodies’ Code of Ethics • • • Joint CPC (APES 110) sets out main ethical pronouncements that relate to the undertaking of an audit AUS 202 (ISA 200) requires that auditors comply with ethical rules Joint CPC consists of six sections, including: – – Section B: Fundamental Principles of Professional Conduct; Section F: Professional Statements, including F1 Professional Independence, and F7 Incompatible Business (APES 110 covers similar issues to the CPC, but in a different structure) Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-5 Purpose of the code of ethics Code of Ethics — formal, systematic statement of rules and principles developed by the community to promote its well-being and punish undermining behaviour • The code therefore: • – – – makes explicit the values implicitly required; indicates how members should act toward one another; provides basis for sanctions Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-6 CPC Section B (APES 110 Section 100): Fundamental Principles Eight fundamental principles contained in the codes of ethics: Public interest Integrity Objectivity Independence Confidentiality Compliance with technical and professional standards Professional competence and due care Ethical behaviour (Part A of APES 110 includes integrity, objectivity, professional competence and due care, confidentiality and professional behaviour) Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-7 Learning Objective 4: Applying Ethics • Sound ethical decision making is dependent on: – – – knowledge of the basic principles on which moral values and rules are based; competence in decision making; and the ability to choose appropriate policies and decision procedures in different situations Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-8 Ethical decision models • Three main models: – – – American Accounting Association Model Mary Guy Model Laura Nash Model Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-9 Learning Objective 5: Corporate Governance • Corporate Governance — system by which companies are directed and controlled Concerned primarily with management and stewardship issues including: – – – – corporate strategy succession planning integrity of internal control structure and remuneration policy Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-10 Learning Objective 7: The Importance of Audit Independence Independence is a very key characteristic of an audit or assurance service provider; • In order that auditors can add credibility to financial report or other subject matter, they needs to remain independent; • One of the eight fundamental ethical requirements of CPC (APES 110); and • Test for independence is a reasonable person test – would a reasonable person having access to all facts consider that the auditor was independent? • Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-20 Independence – Corporations Act 2001 • s 307C – Independence declaration – • Auditors must give directors a written declaration of their independence, and this is to be included in the directors’ report s 324CA – Conflict of interest – Auditor must take reasonable steps to ensure conflict of interest situation ceases to exist Conflict of interest is where members of audit team are not capable of exercising objective and impartial judgment, as judged by a reasonable person Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-21 Independence – Corporations Act 2001 (Cont.) • s 300 (1)(ca) - former auditors Directors report is to include names of each officer of client who was a former partner or director of current auditor • s 324CI - member of audit firm cannot become director, company secretary or senior management of a client until two years after ceasing to be with audit firm • s 324DA - rotation of audit partners Lead or review partner for five successive years cannot play a significant role in the audit of that entity for at least another two successive years Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-22 Independence – Corporations Act 2001 (Cont.) • s 300(11)(B) - non audit services Boards of all listed companies are required to provide a statement in their annual report identifying all non-audit services provided by an audit firm, fee, and explanation why provision of service did not impair independence Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-23 Auditor’s appointment • S 327B - shareholders are responsible for the appointment of auditor: – • Auditor is in breach of independence requirements if, while auditing at a time that a s 324CH(1) relationship exists, auditor is aware of relationship and does not take all reasonable steps to discontinue audit S 324CH(1) relationships include: Auditor or immediate family member being an officer or auditcritical member (influencing financial report) of client – Auditor cannot provide remuneration to officer or audit-critical employee for acting as consultant – Auditor cannot have an investment in client – Auditor cannot owe more than $5,000 to a client (unless a housing loan on normal terms) – Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-24 Auditors removal and resignation Removal – Difficult to remove auditor • S 329 – Requires a resolution of company at a general meeting of which special notice is given Auditor entitled to make written representation and speak at general meeting A copy of notice must be sent to ASIC • Resignation – Auditor can resign Must have written consent from ASIC Application outlines reason, and ASIC must approve the reason Designed to ensure independence and integrity of audit function is maintained • Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-25 Right of access to records and reasonable fees Section 310 provides further protection to the auditor by giving the right of access at all reasonable times to the accounting and other records and registers, and an entitlement to require from any officer of the company such information and explanations as required for the purposes of audit • Section 331 states that the auditor is entitled to receive reasonable fees and expenses for the work carried out • Collectively, these provisions assist an auditor to maintain actual and perceived independence, and attempt to create, as far as possible a suitable environment for an audit process that is free from undue influence and obstruction • Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-26 Independence – ethical requirements Emphasises both: – – perceived independence – how others will view the auditor; and actual independence – state of mind of the auditor Whether the auditor can actually eliminate bias and personal interest from their decisions, and not succumb to any pressures or influences Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-27 Learning Objective 8: Recent Developments in Auditor Independence • • • • • • Ramsay Report (Aust) – issued October 2001 IFAC independence rules – adopted in Australia in CPC F.1 – 2002 Sarbanes-Oxley Act (USA) – 2002 Joint Committee of Public Accounts and Auditors (Australia) – 2002 HIH Royal Commission – 2003 Corporate Law Economic Reform Program (CLERP 9) (Australia) – 2002-4 Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-28 CPC F1/ APES 110 Section 290: Threats to Independence • • • • • Self-interest threats – auditor could benefit from a financial interest in the client Self-review threats – auditor could have to re-evaluate their own work Advocacy threats – auditor could promote the audit client’s point of view and compromise objectivity Familiarity threats – auditor may become too sympathetic to the client’s interests Intimidation threats –auditor may be deterred from acting objectively by actual or perceived threats from client Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-29 CPC F1 /APES 110 Section 290: Safeguards Safeguards fall into three broad categories For an auditor these are: – – – – Safeguards created by the profession, legislation or regulation – education, professional standards, monitoring and disciplinary processes, and inspections and reviews Safeguards within the audit client – competent employees, corporate governance structures Safeguards within the audit firm – quality control, policies and procedures The safeguards are aimed at reducing or resolving circumstances that pose threats Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-30 Learning Objective 9: Major Threats to Auditor Independence Auditor employment relationships • Financial and business relationships • Provision of non-audit services, including: • – – – – – – • preparing financial reports taxation internal audit design of systems legal services corporate finance These threats are major reasons for recent changes to legislation Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-31 Learning Objective 10: Suggestions for Improving Auditor Independence • • • • • • Establishment of a Public Oversight Board, to reduce the perception of auditors setting standards for their own profession; In Australia, the FRC now acts as a Public Oversight Board; Strengthening the role of audit committee; Rotation of audit partners and audit firms; Audit firm independence boards; Client policies, such as restricting other services provided by audit firm Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-32 Learning Objective 11: Fee Determination Audit fees should be commensurate with service provided Thus, should reflect time taken to audit, and knowledge, skills and expertise required • Auditor should not enter into fee arrangements that may compromise independence • Fees for a period should not be dependent on fees from provision of future audits or other services • Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-33 Obtaining clients Advertising, publicity and solicitation are permitted provided they are not false, misleading, deceptive or otherwise reflect adversely on the profession • Competing for prospective clients through tenders is now quite common • Auditors should be careful of audit clients that are opinion shopping • Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 3-34 ... (APES 110) sets out main ethical pronouncements that relate to the undertaking of an audit AUS 202 (ISA 200) requires that auditors comply with ethical rules Joint CPC consists of six sections, including:... Corporations Act; • Decision to blow the whistle is not easy for an auditor; • AUS 210/ASA 240 (ISA 240) also provide guidance • Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a
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