TABLE 6.1 WHAT MAKES A PROFESSION Essential Features (Bayles)  Extensive training  Provision of important services to society  Training and skills largely intellectual in character Typical Features  Generally licensed or certified  Represented by organisations, associations, or institutes  Autonomy Foundation of Ethical Values (Behrman)  Significantly delineated by and founded on ethical considerations rather than techniques or tools TABLE 6.2 FEATURES, DUTIES, RIGHTS, & VALUES OF THE ACCOUNTING PROFESSION Features  Provision of important fiduciary services to society – use of fiduciary per text  Extensive knowledge and skill are required  Training and skills required are largely intellectual in character  Overseen by self-regulating membership organisations  Accountable to governmental authority Duties essential to a fiduciary relationship  Continuing attention to the needs of clients and other stakeholders  Development and maintenance of required knowledge and skills, including professional scepticism  Maintenance of the trust inherent in a fiduciary relationship by behaviour exhibiting responsible values  Maintenance of an acceptable personal reputation  Maintenance of a credible reputation as a profession Rights permitted in most jurisdictions  Ability to hold oneself out as a designated professional to render important fiduciary services  Ability to set entrance standards and examine candidates  Self-regulation and discipline based on codes of conduct  Participation in the development of accounting and audit practice  Access to some or all fields of accounting and audit endeavour Values necessary to discharge duties and maintain rights  Honesty  Integrity  Objectivity, based on independent judgement  Desire to exercise due care and professional scepticism  Competence  Confidentiality  Commitment to place the needs of the public, the client, the profession, and the employer or firm before the professional's own self-interest TABLE 6.4 NATIONAL & INTERNATIONAL ACCOUNTING ORGANIZATIONS OPERATING IN NORTH AMERICA NAME DESIGNATION PRIME MANDATE(S) LOCATION American Institute of Certified Public Accountants (AICPA) CPA Auditing, management accounting United States, some Canadian provinces Institute of Management Accountants (IMA) CMA Management accounting United States Canadian Institute of Chartered Accountants (CICA) CA Auditing, management accounting Canada Society of Management Accountants of Canada (SMAC) CMA Management accounting Canada Certified General Accountants Association of Canada (CGAAC) CGA Management accounting, auditing Canada, some provinces TABLE 6.7 FUNDAMENTAL PRINCIPLES IN CODES OF CONDUCT FOR PROFESSIONAL ACCOUNTANTS Members should:  act in the public interest,  at all times maintain the good reputation of the profession and its ability to serve the public interest,  perform with:  integrity  objectivity & independence  professional competence, due care, and professional skepticism  confidentiality, and  not be associated with any misleading information or misrepresentation TABLE 6.8 IFAC 2005 CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS FUNDAMENTAL PRINCIPLES – SECTION 100.4 A professional accountant is required to comply with the following fundamental principles: (a) Integrity - A professional accountant should be straightforward and honest in all professional and business relationships (b) Objectivity - A professional accountant should not allow bias, conflict of interest or undue influence of others to override professional or business judgments (c) Professional Competence and Due Care - A professional accountant has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques A professional accountant should act diligently and in accordance with applicable technical and professional standards when providing professional services (d) Confidentiality - A professional accountant should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of the professional accountant or third parties (e) Professional Behavior - A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession TABLE 6.9 POSSIBLE SANCTIONS FOR UNETHICAL BEHAVIOR UNDER PROFESSIONAL ACCOUNTING CODES OF CONDUCT & REGULATORY AUTHORITIES LEVIABLE ON THE PROFESSIONAL ACCOUNTING FIRM Caution Yes Yes Reprimand Yes Yes Review by peer Yes Yes Requirement to complete courses Yes No Suspension:  for a specified period  for an indefinite period  until specific requirements are completed  from appearing before regulatory agencies (SEC, OSC)  from auditing SEC or OSC registrant companies Yes Yes Yes Yes Yes No/Yes* No No Yes Yes Expulsion from membership Yes No Compensation for damage Yes Yes Fine Yes Yes Costs of hearing Yes Yes Ancillary orders  for community work  financial support, etc Yes Yes No Yes * The SEC has suspended a firm’s ability to audit SEC registrants and/or take on new clients Source: Distillation of discipline cases from North American jurisdictions TABLE 6.10 THE MACDONALD COMMISSION: OVERVIEW OF PRINCIPAL RECOMMENDATIONS Recommendations to strengthen auditor independence/integrity:  Improvement of auditor relationships (#11)  Strengthen professional standards (7)  Strengthen professional code of conduct (3) Recommendations to strengthen auditor professionalism:  Increase responsiveness to public concerns (6)  Emphasize vital role of professional judgment (4)  Improve self-regulation (2) Recommendations to improve financial disclosure:  Expand accounting standards and improve financial disclosures (13)  Greater auditor responsibility for those disclosures (2) Recommendations to lessen public misunderstanding of the auditor's role:  Publish a statement of management responsibility (24)  Expand audit report to clarify auditor's role and the level of assurance the audit provides (25)  Audit committee to report annually to shareholders (3) SOURCE: The Macdonald Commission: Report of the Commission to Study the Public's Expectation of Audits, CICA, Toronto, June 1988 TABLE 6.11 IFAC 2005 CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS FRAMEWORK – CONTENTS Page PREFACE PART A: GENERAL APPLICATION OF THE CODE 100 Introduction and Fundamental Principles 110 Integrity 120 Objectivity 10 130 Professional Competence and Due Care 11 140 Confidentiality 12 150 Professional Behavior 14 PART B: PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE 200 Introduction 16 210 Professional Appointment 21 220 Conflicts of Interest 24 230 Second Opinions 26 240 Fees and Other Types of Remuneration 27 250 Marketing Professional Services 29 260 Gifts and Hospitality 30 270 Custody of Clients Assets 31 280 Objectivity–All Services 32 290 Independence–Assurance Engagements 33 PART C: PROFESSIONAL ACCOUNTANTS IN BUSINESS 300 Introduction 79 310 Potential Conflicts 83 320 Preparation and Reporting of Information 85 330 Acting with Sufficient Expertise 86 340 Financial Interests 87 350 Inducements 89 DEFINITIONS 91 EFFECTIVE DATE 95 FIGURE 6.1 IFAC 2005 CODE OF ETHICS FRAMEWORK Duty to Society, Serve the Public Interest (S 100.1) Compliance with Fundamental Principles Integrity, Objectivity Professional Competence & Due Care Confidentiality, Professional Behavior (S 100.4) Threats to Compliance with Fundamental Principles Identify, Evaluate, Eliminate or Reduce Threats to (S 100.5) Acceptable Levels by Applying Safeguards And Resolving any Conflicts in Application (S 100.16) Threats (S 100.10) Self-Interest, Self-review Advocacy, Familiarity, Intimidation Safeguards (S 100.11 & 12) Professional Codes, Training or Standards Legislation, Regulation, In Client, Firm or Business Source: IFAC Code of Ethics for Professional Accountants, June 2005 (Section number) TABLE 6.12 THREATS TO NONCOMPLIANCE – INDEPENDENT JUDGEMENT Compliance with fundamental principles may be threatened by a broad range of circumstances Many threats fall into the following categories: (a) Self-interest threats, which may occur as a result of the financial or other interests of a professional accountant or of an immediate or close family member; (b) Self-review threats, which may occur when a previous judgment needs to be reevaluated by the professional accountant responsible for that judgment; (c) Advocacy threats, which may occur when a professional accountant promotes a position or opinion to the point that subsequent objectivity may be compromised; (d) Familiarity threats, which may occur when, because of a close relationship, a professional accountant becomes too sympathetic to the interests of others; and (e) Intimidation threats, which may occur when a professional accountant may be deterred from acting objectively by threats, actual or perceived IFAC 2005 Code of Ethics for Professional Accountants, Section 100.10 TABLE 6.13 SAFEGUARDS REDUCING THE RISK OF CONFLICT OF INTEREST SITUATIONS Safeguards Created by the Profession, Legislation, or Regulation  Education, training, experience requirement for entry  Continuing education  Professional standards, monitoring, and disciplinary processes  External review by a legally empowered third party of the reports, returns, communications or information produced by a professional accountant  External review of firm’s quality control system  Legislation governing independence requirements of the firm IFAC Code, S 100.12 Safeguards Within a Client  Appointment of auditors ratified/approved by other than management  Client has competent staff to make managerial decisions  Internal procedures to ensure objective choices in commissioning non-assurance engagements  A corporate governance structure, such as the audit committee, that provides appropriate oversight and communications regarding a firm’s services IFAC Code, 200.15 Safeguards Within a Professional Accounting Firm’s Own Systems and Procedures  Leadership stressing importance of independence, and expectation of service/action in the public interest  Policies and procedures to implement and monitor control of assurance engagements  Documented independence policies regarding the identification and evaluation of threats to independence; applications of safeguards to eliminate or reduce those threats to an acceptable level  Policies and procedures to monitor and manage the reliance on revenue from a single assurance client  Using partners with separate reporting lines for the provision of non-assurance services to an assurance client  Six other firm-wide and nine other specific items IFAC Code, 200.12 FIGURE 6.2 IFAC CODE’S FRAMEWORK FOR INDEPENDENT JUDGMENT Protect the Public Interest Professional Service to Clients Independence of Mind and Appearance (S 290.8) Independent Judgment Integrity Objectivity Professional Skepticism Source: IFAC Code of Ethics for Professional Accountants, 2005, S 290.8 & Independence Definition TABLE 6.14 CONFLICTS OF INTEREST FOR PROFESSIONAL ACCOUNTANTS: CATEGORIES, SPHERES OF ACTIVITY AFFECTED, AND EXAMPLES STAKEHOLDER CATEGORY SPHERE OF ACTIVITY AFFECTED EXAMPLES Self vs others Services offered Improper use of influence Misuse of information Conflicting services, shaving quality Improper purchases of client goods Improper investments by relatives Self & others vs others Services offered Overinvolvement with management or directors erodes objectivity Client vs client Employer vs employer Services offered Serving competing clients at the same time Stakeholder vs stakeholder Misuse of information (confidentiality) Whistle-blowing, reporting to government or regulators [...]... FIGURE 6. 2 IFAC CODE’S FRAMEWORK FOR INDEPENDENT JUDGMENT Protect the Public Interest Professional Service to Clients Independence of Mind and Appearance (S 290.8) Independent Judgment Integrity Objectivity Professional Skepticism Source: IFAC Code of Ethics for Professional Accountants, 2005, S 290.8 & Independence Definition TABLE 6. 14 CONFLICTS OF INTEREST FOR PROFESSIONAL ACCOUNTANTS: CATEGORIES,... 6. 13 SAFEGUARDS REDUCING THE RISK OF CONFLICT OF INTEREST SITUATIONS Safeguards Created by the Profession, Legislation, or Regulation  Education, training, experience requirement for entry  Continuing education  Professional standards, monitoring, and disciplinary processes  External review by a legally empowered third party of the reports, returns, communications or information produced by a professional. .. and communications regarding a firm’s services IFAC Code, 200.15 Safeguards Within a Professional Accounting Firm’s Own Systems and Procedures  Leadership stressing importance of independence, and expectation of service/action in the public interest  Policies and procedures to implement and monitor control of assurance engagements  Documented independence policies regarding the identification and... EXAMPLES Self vs others Services offered Improper use of influence Misuse of information Conflicting services, shaving quality Improper purchases of client goods Improper investments by relatives Self & others vs others Services offered Overinvolvement with management or directors erodes objectivity Client vs client Employer vs employer Services offered Serving competing clients at the same time Stakeholder... system  Legislation governing independence requirements of the firm IFAC Code, S 100.12 Safeguards Within a Client  Appointment of auditors ratified/approved by other than management  Client has competent staff to make managerial decisions  Internal procedures to ensure objective choices in commissioning non-assurance engagements  A corporate governance structure, such as the audit committee, that... to independence; applications of safeguards to eliminate or reduce those threats to an acceptable level  Policies and procedures to monitor and manage the reliance on revenue from a single assurance client  Using partners with separate reporting lines for the provision of non-assurance services to an assurance client  Six other firm-wide and nine other specific items IFAC Code, 200.12 FIGURE 6. 2... management or directors erodes objectivity Client vs client Employer vs employer Services offered Serving competing clients at the same time Stakeholder vs stakeholder Misuse of information (confidentiality) Whistle-blowing, reporting to government or regulators