The%20Code%20of%20Ethics%20for%20Professional%20Accountants

The Code of Ethics for Professional Accountants

Introduction

The need for professional ethics

The purpose of assurance engagements is to increase the confidence of end users of information by reducing their level of risk. It therefore follows that the user needs to trust the professional who is providing the assurance. In order to be trusted the auditor needs to be independent of their clients and be sufficiently competent and diligent to complete their assignments satisfactorily.

The last thirty years has witnessed a number of high profile corporate scandals that have had far reaching implications for companies, economies and accountancy firms. Enron and Worldcom are perhaps two of the most high profile examples from recent times.

To improve the image of the profession and to restore trust between users of accountancy services and the practitioners, it is vital that accountants operate (and are perceived to operate) according to an accepted code of ethics.

Whilst it is expected that practitioners apply the spirit of the code to every day practice the framework and principles would be of little use if they could not be enforced.

The fundamental principles

• Objectivity: members should not allow bias, conflicts of interest or undue influence of others to override professional or business judgements.
• Professional behaviour: members should comply with relevant laws and regulations and should avoid any action that discredits the profession.
• Professional competence and due care: members have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. Members should act diligently and in accordance with applicable technical and professional standards when providing professional services.
• Integrity: members should be straightforward and honest in all professional and business relationships.
• Confidentiality: members 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 or 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 members or third parties.

Practitioners needs to 'behave and be seen to behave' in an ethical, professional manner. This means complying with the Code of Ethics in every professional situation.

Threats to objectivity/independence

The following are all examples of behaviour that could threaten the practitioner's objectivity or independence from their clients:

Self interest threat

This occurs when an auditor has a beneficial interest in a client's performance. Examples include:

• When the auditor or a member of their family owns shares in a client. They would directly benefit from increases in client profits and would be reluctant to raise any concerns that could adversely affect the performance of the client.
• When a firm is dependent upon one client for a significant proportion of their total fee income. The firm may not raise issues with the client for fear of losing them.
• The acceptance of gifts and hospitality. This could be perceived as bribery to keep quiet about issues in the financial statements

Self review threat

This occurs when an auditor has to review work that they previously performed. For example: if the external auditor prepared the financial statements and then audited them.

There is a risk that the auditor would not identify any shortcomings in their own work for fear of penalty (either financial or reputational).

Advocacy threat

This can occur when the auditor is asked to promote or represent their client in some way. In this situation the auditor would have to be biased in favour of the client and therefore cannot be objective. This could happen if the client asked the auditor to promote their shares for a stock exchange listing or if the client asked the auditor to represent them in court.

Familiarity threat

This occurs when the auditor is too sympathetic or trusting of the client because of a close relationship with them. This may be because a close friend or relative of the auditor works in a key role for the client. The auditor may trust their friend or relative to not make mistakes and therefore not review their work as thoroughly as they should and as a result allow material errors to go undetected in the financial statements. This can also arise after a long association with a client.

Intimidation threat

Clients may try to harass or bully auditors into giving preferential audit reports. They may use the fee as leverage. The auditor should not give in to such pressure and, in the circumstances, may choose to resign from such a client.

Confidentiality

External auditors are in a unique position of having a legal right of access to all information about their clients. The client must be able to trust the auditor not to disclose anything about their business to anyone as it could be detrimental to their operations.

As a basic rule, members of an audit team should not disclose any information to those outside of the audit team, whether or not they work for the same firm. There is little point using different teams for different work assignments if staff from different teams are disclosing information to each other!

Information should only be disclosed under certain circumstances. In some circumstances the auditor must disclose the information and in others the auditor may chose to disclose the information, as follows:

Public interest

• Whether or not it is in the public interest is difficult to prove and the auditor must proceed with caution if thinking of disclosing information for this reason. Such examples could include fraud, environmental pollution, or simply companies acting against the public good.

Legal advice should be sought beforehand to avoid the risk of being sued. Matters to consider before disclosing information in the public interest are whether that matter is likely to be repeated and how serious the effects of the client's  actions are.

Conflicts of interest

Any advice given should be in the best interests of the client. However, where clients' interests conflict (for example, clients in the same line of business), the firm's work should be arranged to avoid the interests of one being adversely affected by those of another.

The steps to be taken by the auditor are:

• once a conflict is noted, you should advise both clients of the situation
• reassure the client that adequate safeguards will be implemented, e.g. separate engagement leaders for each, separate teams, to prevent the transfer of client information between teams and a second partner review
• suggest they seek additional independent advice
• if adequate safeguards can't be implemented, the auditor should resign.

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