Slide 3.1 Ethics for Professional Accountants Principles of Auditing: An Introduction to International Standards on Auditing - Ch Rick Stephan Hayes, Philip Wallage, and Hans Gortemaker [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.2 WHAT ARE ETHICS? E A sense of agreement in a society as to what is right and wrong E Ethics represent a set of moral principles, rules of conduct or values – Ethics apply when an individual has to make a decision from various alternatives regarding moral principles [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.3 Illustration 3.1 [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.4 Objectives of Accountantancy Profession  Generally, to meet the public’s interest “A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest Therefore, a professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employer.” Code of Ethics [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.5 PCAOB Ethics – US Classes • ET Section 100 INDEPENDENCE, INTEGRITY, AND OBJECTIVITY • Independence ET Section 101 http://pcaobus.org/Standards/EI/Pages/ET101.a spx • Integrity and Objectivity ET Section 102 http://pcaobus.org/Standards/EI/Pages/ET102.a US classes spx [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.6 The Code is divided into three parts: A, B, and C: • Part A establishes the fundamental principles of professional ethics for professional accountants and provides a conceptual framework for applying those principles • Parts B and C illustrate how the conceptual framework is to be applied in certain situations • Part B applies to professional accountants in public practice • Part C applies to professional accountants in business [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.7 Part A – Fundamental Principles Part A establishes the fundamental principles of professional ethics for professional accountants and provides a conceptual framework that professional accountants shall apply to: (a) Identify threats to compliance with the fundamental principles; (b) Evaluate the significance of the threats identified; and (c) Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level Safeguards are necessary when the threats are not at a level at which a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances available to the professional accountant at that time, that compliance with the fundamental principles is not compromised [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.8 Conceptual Framework Approach • A conceptual framework requires a professional accountant to identify, evaluate and address threats to compliance with the fundamental principles, rather than merely comply with a set of specific rules which may be arbitrary • When an accountant identifies threats to compliance with the fundamental principles and determines that they are not at an acceptable level, he/she shall determine whether appropriate safeguards are available and can be applied to eliminate the threats or reduce them to an acceptable level [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.9 The IFAC Code of Ethics for Professional Accountants fundamental principles for ALL Accountants: 1) Integrity (Sec 110) 2) Objectivity (Sec 120) 3) Professional Competence and Due Care (Sec 130) 4) Confidentiality (Sec 140) 5) Professional Behavior (Sec 150) [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.10 Principles 1) Integrity to be straightforward and honest in all professional and business relationships 2) Objectivity: To not allow bias, conflict of interest or undue influence of others to override professional or business judgments [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.57 Business, Family and Personal Relationships A close business relationship between a firm, or a member of the audit team, or a member of that individual’s immediate family, and the audit client or its management, arises from a commercial relationship or common financial interest and may create self-interest or intimidation threats The business relationship must not be entered into because NO safeguards would be sufficient and the individual with the relationship must be removed from the audit team [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.58 Provision of Non-assurance Services to Audit Clients Providing non-assurance services to assurance clients may create threats to the independence of the firm or members of the audit team Providing certain non-assurance services to an audit client may create a threat to independence so significant that no safeguards could reduce the threat to an acceptable level Examples: services that assume a management responsibility, bookkeeping, tax planning that impacts the financial statements, internal audit services, IT, valuation, legal, corp finance [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.59 Independence in the Sarbanes-Oxley Act of 2002 Prohibited non-audit service contemporaneously with the audit include: 1)bookkeeping or other services related to the accounting records or financial statements of the audit client; 2)financial information systems design and implementation; 3)appraisal or valuation services, fairness opinions, or contribution-inkind reports; 4)actuarial services; 5)internal audit outsourcing services; 6)management functions or human resources; 7)broker or dealer, investment adviser, or investment banking services; 8)legal services and expert services unrelated to the audit; and 9)any other service that the Board determines, by regulation, is impermissible US classes [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.60 Fees Professional fees should be a fair reflection of the value of the professional service performed for the client, taking into account the skill and knowledge required, the level of training and experience of the persons performing the services, the time necessary for the services and the degree of responsibility that performing those services entails The IESBA Ethics Code discusses threats to independence in pricing auditing services in terms of size, whether fees are overdue, and contingent fees [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.61 Size of client fees and unpaid fees • If an audit client is a public interest entity and, for two consecutive years, the total fees from the client represent more than 15% of the total fees received by the audit firm, the firm must disclose to the audit client that fact and discuss safeguards it will apply • The Code warns that a self-interest threat may be created if fees due from an assurance client for professional services remain unpaid for a long time [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.62 Compensation and Evaluation Policies A self-interest threat is created when a member of the audit team or a key audit partner is evaluated on or compensated for selling nonassurance services to that audit client [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.63 Actual or Threatened Litigation  When litigation takes place, or appears likely, between the audit firm or a member of the audit team and the audit client, self-interest an d intimidation threats are created  If safeguards not reduce the threats to an acceptable level, the only appropriate action is to withdraw from, or decline, the audit engagement [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.64 Independence requirements for assurance engagements that are not audit or review engagements The IESBA Code of Ethics for Professional Accountants Section 291 (see Illustration 3.4 for contents) addresses independence requirements for assurance engagements that are not audit or review engagements [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.65 Examples in Part C [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.66 Part C – employees, management, volunteers • Part C of the IESBA Code describes how the conceptual framework contained in Part A applies in certain situations to a salaried employee, a partner, director, an owner manager, or a volunteer (professional accountant in business) • Part C also addresses circumstances in which compliance with the fundamental principles may be compromised by potential conflicts, preparation and reporting information, acting with sufficient expertise, financial interests, and inducements [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.67 A professional accountant in business shall not knowingly engage in any business, occupation, or activity that impairs or might impair integrity, objectivity or the good reputation of the profession and as a result would be incompatible with the fundamental principles [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.68 Potential Conflicts • There may be times when responsibilities to an employing organization and professional obligations to comply with the fundamental principles are in conflict Pressure may be applied to act contrary to law or regulation or to technical or professional standards, or facilitate unethical or illegal earnings management strategies [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.69 Other Sections of Part C • There are other sections in Part C which address specific aspects of the work of professional accountants in business These sections include discussion of – preparation and reporting of information (Sec 320,), – acting with sufficient expertise (sec 330), – financial interests (Sec 340), – inducements (Sec 350), • We will not discuss these sections in this chapter [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.70 Enforcement of Ethical Requirements In many countries an auditor who violates the ethical standard may be disciplined by law or by the professional organization The penalties range from a reprimand to expulsion or fine International Ethics Standards Board of Accountants (IESBA) has no authority to require disciplinary action for violation of the Code of Ethics [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.71 Thank You for Your Attention Any Questions? [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 [...]... respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, 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, nor use the information for the personal advantage of the professional accountant or third parties 5) Professional Behavior: to... 2.1] © Pearson Education Limited 2007 Slide 3.33 professional accountant in public practice A professional accountant in public practice is a professional accountant, irrespective of functional classification (for example, audit, tax or consulting) in a firm that provides professional services This term is also used to refer to a firm of professional accountants in public practice [Hayes, Dassen, Schilder... Educational, training and experience requirements for entry into the profession Continuing professional development requirements Corporate governance regulations Professional standards Professional or regulatory monitoring and disciplinary procedures External review by a third party of the reports, returns, communications or information produced by a professional accountant [Hayes, Dassen, Schilder... Education Limited 2007 Slide 3.12 Principles 3) Professional Competence and Due Care: 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 and act diligently and in accordance with applicable technical and professional standards [Hayes, Dassen, Schilder... of engagement-specific safeguards in the work environment  Having a professional accountant who was not a member of the assurance team review the assurance work performed or otherwise advise as necessary  Consulting an independent third party, such as a committee of independent directors, a professional regulatory body or another professional accountant  Discussing ethical issues with those charged... work performed in order to reduce fees An audit client indicating that it will not award a planned non assurance contract to the firm if the firm continues to disagree with the client’s accounting treatment A professional accountant feeling pressured to agree with the judgment of a client employee because the employee has more expertise on the matter in question A professional accountant being informed... Safeguards for Accepting an Audit Engagement Safeguards, including the following ,shall be applied to eliminate any threats or reduce them to an acceptable level: – Before accepting the engagement state that contact with the existing accountant will be requested – Asking the existing accountant to provide known information on any facts or circumstances that the proposed accountant needs to be aware of before... Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.15 Professional Behavior that discredits the profession example In marketing and promoting themselves and their work, professionals should be honest and truthful and not: Make exaggerated claims for the services they are able to offer, the qualifications they possess, or experience they have gained;... Pearson Education Limited 2007 Slide 3.14 Disclosure of Confidential Information May be disclosed when disclosure is authorized by the client, required by law (eg evidence in legal proceedings), where there is a professional duty or right to disclose (such as in a peer review quality control program) or to comply with technical standards or ethics requirements [Hayes, Dassen, Schilder and Wallage, Principles... a client • Potential employment with a client • Contingent fees relating to an assurance engagement • Discovering a significant error when evaluating the results of a previous professional service performed by a member of the professional accountant’s firm [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 3.22 Self-Review