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SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT 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 CONFIDENTIALITY 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 Two types Member v client Client v client Professional roles Business roles 0401 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT CODE OF ETHICS AND CONDUCT 1.1 Introduction As a member of the IFAC, the ACCA’s 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 The Code provides five fundamental principles (integrity, objectivity, professional competence and due care, confidentiality and professional behaviour) and a conceptual framework to assist ALL students and members in applying the principles, regardless of the areas of work undertaken 1.2 Fundamental Principles 1.2.1 Integrity In all professional, business, personal and financial relationships, members should be straightforward and honest This implies honesty, fair dealing and truthfulness Members should not be associated with (eg sign off) reports, returns, communications or other information where they believe that the information: contains materially false or misleading statements; contains statements or information furnished recklessly; or omits or obscures information required to be included where such omission or obscurity would be misleading 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 0402 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT 1.2.3 Professional competence and due care 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 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 Where appropriate, clients, employers or other users of professional services, must be made aware of limitations inherent in the services to avoid the misinterpretation of an expression of opinion as an assertion of fact (eg in the engagement letter and/or report) 1.2.4 Confidentiality (see also Section 3) Information acquired as a result of professional and business relationships is confidential and should not be disclosed to any third parties without proper and specific authority (e.g from the client) or unless there is a legal, professional right, or duty to disclose Confidential information acquired as a result of professional and business relationships should not be used for any personal advantage of a member or any third party 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: make exaggerated claims for the services they are able to offer (e.g claim to be able to carry out statutory audits when they 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 make disparaging references or unsubstantiated comparisons to the work of others (e.g “we are the best, better than all the rest”) 1.3 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 0403 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT The Conceptual Framework assists members (through guidance and illustrative examples) to identify, evaluate and respond to threats to compliance with the Fundamental Principles, rather than merely following rules (which are unlikely to be appropriate for every situation and could thus be avoided) 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 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, 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 May occur as a result of the financial or other interests of members (including immediate or close family of the member) eg: 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 0404 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT 1.4.2 Self-review threat May arise when a previous judgment needs to be re-evaluated by individuals responsible for that judgment The original judgment may have been made, for example, by the individual or by others within the individual’s organisation 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; reporting on the operation of systems after being involved in their design or implementation; the discovery of a significant error during a re-evaluation of the work being undertaken by the member; 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; an analyst, or member of a board, audit committee or audit firm being in a position to exert direct and significant influence over the financial reports 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) It is natural for members to advocate their client’s/employer’s position and there is nothing improper in this provided it does not result in misleading information being given There could be circumstances, however, where this may not be acceptable and these include: commenting publicly on future events in particular circumstances, having made assertions without detailing the assumptions; where information is incomplete or advocating an argument which is unlawful; promoting shares in a listed audit client or a client seeking to list; acting as an advocate on behalf of an assurance client in litigation or disputes with third parties 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) 0405 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT There is a significant risk that professional scepticism will not be applied by the member Examples of circumstances that may create familiarity threats include: a member in a position to influence business decisions, financial (or non-financial) reporting (e.g the audit report) having an immediate or close family who is in a position to benefit from that influence (e.g a director or shareholder); over-familiarity with the management of the organisation such that professional judgement could be compromised; long association with business contacts influencing business decisions; acceptance of gifts or preferential treatment, unless the value is clearly insignificant; a former partner of the engagement firm being a director, officer or employee of a client in a position to exert direct influence over the subject matter of the engagement 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: threat of dismissal or replacement of the member (as an employee or auditor) or a close or immediate family member, over a disagreement about the application of an accounting principle or the way in which financial and performance information is to be reported; a dominant personality attempting to influence the decision-making process, for example with regard to the awarding of contracts or presentation of financial information, or controlling relations with auditors or other oversight bodies; being threatened with litigation; coming under pressure to reduce necessary work to ensure a reduction in fees 1.5 Safeguards The nature of the safeguards to be applied will vary depending on the circumstances (demonstrating the approach of the conceptual framework) In exercising their judgement, members should consider what a reasonable and informed third party, having knowledge of all relevant information, including the significance of the threat and the safeguards applied, would conclude to be acceptable or unacceptable Safeguards that may eliminate or reduce to acceptable levels the threats faced by members fall into three broad categories: safeguards created by the profession, legislation or regulation; safeguards in the work environment; safeguards created by the individual 0406 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT 1.5.1 Safeguards created by the profession, legislation or regulation Includes: Educational, training and experience requirements for entry into the profession Continuing professional development/education (CPD/CPE) requirements Corporate governance regulations Professional standards Professional or regulatory monitoring and disciplinary procedures External review by a legally empowered third party of the reports, returns, communications or information produced by a member 1.5.2 Safeguards in the work environment Includes: The employing organisation’s systems of corporate oversight or other oversight structures, e.g audit committee and “whistle blowing” rights The employing organisation’s ethics and conduct programmes including leadership that stresses the importance of ethical behaviour and the expectation that employees will act in an ethical manner (e.g ethical culture cascading down from top management) Recruitment procedures in the employing organisation emphasising the importance of employing high-calibre, competent staff Strong internal controls Appropriate disciplinary processes Policies and procedures to implement and monitor the quality of employee performance Policies and procedures to implement and monitor the quality control of engagements Using different partners and engagement teams with separate reporting lines for the provision of non-assurance services to the client Policies and procedures to prohibit individuals who are not members of an engagement team from inappropriately influencing the outcome of the engagement Timely communication of the employing organisation’s policies and procedures, and any changes to them, to all employees The provision of appropriate training and education to employees 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 0407 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT Policies and procedures to empower employees to communicate to senior levels (including governance) any ethical issues that concern them This includes informing employees of the procedures open to them Consultation with another appropriate professional accountant 1.5.3 Safeguards created by the individuals Includes: Complying with continuing professional development requirements Keeping records of contentious issues and approach to decision-making Maintaining a broader perspective on how similar organisations function through establishing business relationships with other professionals Using an independent mentor Maintaining contact with legal advisors and professional bodies 1.5.4 Other safeguards Certain safeguards may increase the likelihood of identifying or deterring unethical behaviour Such safeguards, which may be created by the accounting profession, legislation, regulation or an employing organisation, include, but are not restricted to: effective, well-publicised complaints systems which enable colleagues and employers to draw attention to unprofessional or unethical behaviour; an explicitly stated duty to report breaches of ethical requirements 1.6 Ethical conflict resolution In resolving ethical conflicts it is important to record the process and outcome, e.g.: 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) Where a significant conflict cannot be resolved, consideration should be given to consulting legal advisors and/or the ACCA Such consultation can be taken without breaching confidentiality (e.g on a ‘no names’ basis) Care should be taken to ensure that those consulted are also bound by similar ethical rules 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 0408 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT Members may determine that, in the circumstances, it is appropriate to withdraw from the engagement team or specific assignment, or to resign altogether from the engagement, the firm or the employing organisation INTEGRITY, OBJECTIVITY AND INDEPENDENCE 2.1 Principle The Fundamental Principles require that a member’s 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: Independence of mind - the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement, allowing an individual to act with integrity and exercise objectivity and professional scepticism Independence in appearance - the avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firm's, or a member of the assurance team's, integrity, objectivity or professional scepticism had been compromised 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 As, in an assurance engagement, “members express 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” it is logical that the assurance provider be independent of the assurance client 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 Fees and pricing When the total fees generated by an assurance client represent a large proportion of a firm’s total fees, the dependence on that client (or client group) and concern about the possibility of losing the client may create a self-interest threat 0409 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT 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 partner’s total fee income) Initiate review Extreme Listed and other public interest companies 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”) Safeguards when initiating a fee level review include: 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 Gifts and hospitality Accepting gifts or hospitality from an assurance client may create self-interest and familiarity threats 0410 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT 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 The person or firm asked for a second opinion must: seek the client’s 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 client’s permission If communication with the current accountant/auditor is refused, a second opinion should not be given Where a hypothetical position is put, the person/firm asked to comment on this position should ensure that the nature of their opinion is made clear and that it is based on the hypothetical position put to them Professional scepticism should be applied as to the nature of the hypothetical position CONFIDENTIALITY Two aspects 3.1 Improper disclosure 0424 3.2 Improper use SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT 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 client’s 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 client’s permission; there is a requirement made by law, e.g under obligation of a court order; to comply with quality control reviews of regulatory bodies, e.g ACCA (usually included within the letter of engagement); or to respond to an inquiry or investigation by ACCA or other regulatory body (again, included within a letter of engagement) 3.1.2 General position Confidentiality is an implied term of a contract between an auditor and client It is in the public interest that this professional duty of confidence exists Auditors are normally under NO legal obligation to disclose defaults or unlawful acts (or suspicions thereof) to anyone other than the client’s management, unless specifically required to 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 UK examples include actual or suspected offences of: 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 0425 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT 3.1.4 Voluntary disclosure In certain circumstances, information may be disclosed whatever its nature Categories of disclosure include: in the “public interest” to a person having proper interest to receive information, e.g the police; the stock exchange where the client is listed Care must be taken to ensure that the concept of “public interest” can be appropriately applied; to protect the auditor’s interests, e.g in defending against ACCA disciplinary proceedings; and authorised by statute Illustration During the current year’s 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 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 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 Improper use of information 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 0426 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT 3.2.2 Examples When a member changes firm or employment he should distinguish between experience gained in the previous firm or employment; and confidential information and documents acquired there 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 Members should place clients’ interests before their own A firm should not accept or continue an engagement in which there is or is likely to be a significant conflict of interests between the firm and the client 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 Safeguards include disclosing to the client, in writing that such commission, etc will be received; as soon as practicable, of its amount and terms; and obtaining advance agreement from the client for the referral arrangement and fee 0427 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT 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 firm’s work should be so managed to avoid the interests of one client adversely affecting those of another Where the acceptance or continuance of an engagement would, even with safeguards, materially prejudice the interests of any client the appointment should not be accepted or continued 4.3.2 Managing conflict between clients’ interests All reasonable steps should be taken to ascertain whether any conflict of interests exists or is likely to arise in the future Relationships with existing clients need to be considered before accepting a new appointment and regularly thereafter A relationship which ended over years before is unlikely to give rise to conflict 4.3.3 Disclosure A material conflict of interests between existing or potential clients should be sufficiently disclosed to all clients involved so that they may make an informed decision whether to engage or continue their relationship with the firm 4.3.4 Safeguards Use different partners and teams of staff for different engagements Standing instructions etc to prevent leakage of confidential information between different teams and sections within the firm (application of “Chinese walls”) Use of confidentiality agreements signed by employees and partners of the firm Regular review of the situation by a senior partner or compliance officer not personally involved with either client Advising at least one or all clients to seek additional independent advice 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 0428 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT 4.3.5 Disengagement When necessary should be done as speedily as is compatible with the interests of the clients concerned Illustration All of the current Big 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 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 – 0429 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT (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) Trainees of Porterhouse, a firm of Certified Accountants, have been offered overdraft facilities up to $3,000, on student terms, by a client bank Comment – Conclusion – INDEPENDENCE IN OTHER PROFESSIONAL AND BUSINESS ROLES 5.1 Other professional roles 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 Independence in the strict sense (as applicable to assurance engagements) is not essential However, many of the factors discussed above are still a threat to objectivity and appropriate safeguards must be considered 0430 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT Typical examples are illustrated below 5.1.1 Family and personal relationships An objective approach to any assignment may be threatened or appear to be threatened as a consequence of a family or other close personal or business relationship 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: initial consideration as to whether it is proper to accept appointment in the context of any conflict of interest which may exist; adequate disclosure of every such conflict to all relevant parties; continual review of the appropriateness of continuing to act, including, if necessary, arrangements to consult with another professional accountant outside the firm 5.1.2 Loans and guarantees Loans, or a guarantee of a loan, to or from any client constitute a threat or an apparent threat to objectivity The considerations for assurance clients apply to all clients In addition, as with assurance clients, any significant overdue fees may also be considered as a loan 5.1.3 Gifts and hospitality 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 Beneficial interests in shares and other investments Any investment in any client, which may cause the accountant’s objectivity to be called into doubt, must be avoided 5.2 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 0431 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT The following provides an overview of the ACCA ethical responsibilities of members in business, e.g as an internal auditor, financial or management accountant 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 Independence is not an end in itself, it is merely a means of securing a more important result, namely an objective approach to work The requirement for objectivity is of equal importance to all members 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 member’s employer should no more affect the objectivity of a member’s 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 If members in business are instructed or encouraged to engage in any activity which is unlawful, they are entitled, and required, to decline 5.2.4 Potential conflicts As a consequence of their responsibilities to their employing organisation, members may find themselves under pressure to act or behave in ways that could directly or indirectly threaten compliance with the fundamental principles Such pressure may be explicit or implicit; it may come from supervisors, managers, directors or other individuals within the employing organisation Examples of conflicting acts include: acting contrary to law, regulation, technical or professional standards; facilitating unethical or unlawful earnings management strategies; lying to, or otherwise intentionally misleading others, e.g auditors, regulators; issuing, or otherwise being associated with, a financial or non-financial report that materially misrepresents the facts 0432 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT Safeguards that may be used include: obtaining advice where appropriate from within the employing organisation, an independent professional advisor or a relevant professional body (eg ACCA); the existence of a formal dispute resolution process within the employing organisation; and seeking legal advice (but without breaching confidentiality) 5.2.5 Preparation and reporting of information Information (e.g financial and management) should be prepared or presented fairly, objectively, honestly and in accordance with relevant professional standards so that the information will be understood in its context Self-interest and/or intimidation threats to objectivity, competence and performance may arise through pressure (by others, e.g superiors, or for personal gain) to produce misleading information or become associated with such information produced by others Safeguards include consultation procedures with superiors, audit committees, ACCA If safeguards prove inappropriate, the individual concerned should refuse to be associated with the misleading information and consider informing appropriate authorities, seeking legal advice or resigning 5.2.6 Financial interests In certain circumstances, the financial interests of employees (e.g shares, options, bonuses), or knowledge of financial interests of close family members, could give rise to threats of self-interest and confidentiality, e.g price sensitive information Safeguards include: policies and procedures for a committee independent of management to determine the level or form of remuneration of senior management; 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; internal and external audit procedures; up-to-date education on ethical issues and the legal restrictions and other regulations around potential insider trading 5.2.7 Inducements Members or close family of the member may be offered an inducement intended to encourage unethical behaviour Inducements may take various forms, including gifts, hospitality, preferential treatment and inappropriate appeals to friendship or loyalty Self-interest threats to objectivity or confidentiality are created where an inducement is made in an attempt to unduly influence actions or decisions, encourage illegal or dishonest behaviour or obtain confidential information 0433 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT Intimidation threats to objectivity or confidentiality are created if such an inducement is accepted and it is followed by threats to make that offer public Safeguards include: refusal of the inducement where clearly not insignificant; communication channels to report to higher authorities, e.g management or audit committees; taking legal advice 5.2.8 Offering inducements Members should not offer an inducement (e.g a bribe or “consultancy fee”) to improperly influence the professional judgement of a third party or to obtain a financial or other reward for their business or themselves 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 Disclosing confidential information Confidentiality is the duty to keep private another person’s information given or obtained in confidence Such information acquired or received in the course of work must not be disclosed unless there is a right or obligation to so or consent from the employer to whom the duty of confidentiality is owed has been received The duty of confidentiality is not only to keep information confidential, but also to take all reasonable steps to preserve confidentiality However, under certain circumstances, the withholding of confidential information creates specific risks in relation to: being required by law to disclose information to the appropriate public authorities, for example in connection with anti-money laundering or anti-terrorist legislation; producing documents or other provision of evidence in the course of legal proceedings; being permitted by law to disclose and are authorised by the employer to so; believing that confidential information should be disclosed in the public interest, for example where the employing organisation has committed, or proposes to commit, a crime or fraudulent act; or having a professional duty or right to disclose, when not prohibited by law: to comply with technical standards and ethics requirements; to protect professional interests in legal proceedings; or to respond to an inquiry or investigation by ACCA or a regulatory body 0434 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT When considering to disclose confidential information in the public interest, the following factors must be taken into account: legal constraints and obligations (seek legal advice); 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 possibility or likelihood of repetition; the reliability and quality of the information available; and the reasons for the employer’s unwillingness to disclose matters to the relevant authority FOCUS You should now be able to: define and apply the fundamental principles of professional ethics of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour; define and apply the conceptual framework; and discuss the sources of, and enforcement mechanisms associated with, ACCA’s Code of Ethics and Conduct 0435 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT EXAMPLE SOLUTION Solution — 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 0436 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT (4) 19% of total fee income may not affect independence if recurring element is less than 10% (Company may have only recently become “public interest” thereby reducing a 15% fees limit to 10%.) However, 19% may be undesirably high in appearing to detract from objectivity Beneficial interest in shares does not affect independence because holder is tax (not audit) and manager (not partner) However, as the tax manager has an interest in understating the tax charge, objectivity may appear to be impaired Staff involved in the special assignment should not be responsible for the audit as a special relationship may be established Conclusion – If recurring element constitutes 5-10% gross practice income, can retain with safeguards Solution — Ethical issues (1) Objectivity appears to be threatened by personal relationship Even if credit controller is not regarded as a senior employee the senior’s objectivity may be impaired, e.g when reporting weaknesses in credit control Senior is not keeping audit working papers in safe custody – could result in breach of duty of confidentiality It is not up to the client to determine who is capable of undertaking the assignment – otherwise this would constitute undue influence No audit senior is irreplaceable Conclusion – Senior should be replaced immediately Audit timetable may have to be put back The Senior’s work should be reviewed as soon as possible and, if necessary, re-performed (2) A conflict of interest has arisen between partner and client She must declare her position to the client To abstain from debating or voting on this issue in council may be a breach of her duty as councillor Another partner within the firm may be able to assume responsibility to act for Radnor Ltd in this matter Conclusion – Client may not accept that any safeguards will resolve the conflict ∴ partner should disengage – if not removed (3) Qualifications held/previous experience of temporary accountant – is he competent? The degree of supervision and review of his work required may stretch resource of more senior audit staff Independence of temp may be impaired, e.g if an employee of the client rather than a temping agency His objectivity may be impaired, e.g if he will be recording transactions to be audited Conclusion – If suitable (e.g low risk) work could be allocated, the conduct of the audit may not be impaired 0437 SESSION 04 – PROFESSIONAL CODES OF ETHICS AND CONDUCT (4) Loans (including overdrafts) on normal commercial terms may be accepted by members of staff (including trainees) “Student terms” may be “normal commercial” if the bank offers them to all accountancy trainees – not just those of Porterhouse If not “normal commercial”, is benefit more than “modest”? Conclusion – Engagement and compliance partners may decide that acceptance of the offer will not appear to threaten objectivity even if the terms are special However, as a safeguard it should be confirmed that terms are no more favourable (or no less unfavourable!!) than those offered to other trainees 0438 ... situation and could thus be avoided) 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