Code of Ethics for Professional Accountants Nasir U Ahmed, FCA Member Council, ICAB 21 December 2008 A Presentation By A Presentation By.

Code of Ethics for Professional Accountants

Nasir U Ahmed, FCAMember Council, ICAB

21 December 2008

A Presentation A Presentation ByByA Presentation A Presentation ByBy

WHAT ARE ETHICS ?

A sense of agreement in a society as to what is right and wrong.

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.

Objectives of Professional Accountants

work to the highest standards of professionalism

attain the highest levels of performance, and

meet the public’s interest

The Code of Ethics (A, B, and C)

Part A establishes the fundamental principles of 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 specific situations.

• Part B applies to professional accountants in public practice.

• Part C applies to professional accountants in business.

IFAC Code of Ethics - fundamental principles for all Accountants:

Integrity (Sec 110)

Objectivity (Sec 120)

Professional Competence and Due Care (Sec 130)

Confidentiality (Sec 140)

Professional Behavior (Sec 150)

Continuation…

Integrity The principle of integrity imposes an obligation on all professional accountants to be straightforward and honest in performing professional services. It also implies fair dealing and truthfulness.

Objectivity: The principle of objectivity imposes on all professional accountant not to compromise their professional or business judgment because of bias, conflict of interest or undue influence of others.

Continuation…

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.

Continuation…

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.

Professional Behavior: A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession.

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.

If threats to ethics are not clearly insignificant, a professional accountant should apply safeguards to eliminate the threats or reduce them to an acceptable level.

Threats and Safeguards

Compliance with the fundamental principles may potentially be threatened by a broad range of circumstances. Many threats fall into the following categories:

Self-interest threats Self-review threats Advocacy threats Familiarity threats Intimidation threats

Continuation…

Self-Interest Threat

A Self-interest threat occurs as a result of the financial or other interests of a professional accountant or of an immediate or close family member;

Self Interest Threats Circumstances

A financial interest in a client or jointly holding a financial interest with a client.

Undue dependence on total fees from a client. Having a close business relationship with a client. Concern about the possibility of losing a client. Potential employment with a client. Contingent fees relating to an engagement. A loan to or from a client or any of its directors or

officers.

Self-Review Threat

Self-Review Threat occurs occur when a previous judgment needs to be re-evaluated by the professional accountant responsible for that judgment.

Self-Review Threats Circumstances

The discovery of a significant error during a re-evaluation of the work of the auditor.

Reporting on the operation of financial systems after being involved in their design or implementation.

Having prepared the original data used to generate records that are the subject matter of the engagement.

A member of the team being, or having recently been, a director or officer of that client.

A member of the team being, or having recently been, employed by the client in a position to exert direct and significant influence over the subject matter of the engagement.

Performing a service for a client that directly affects the subject matter of the engagement.

Advocacy Threat

An Advocacy Threat occurs when a professional accountant promotes a position or opinion to the point that subsequent objectivity may be compromised.

Examples of circumstances that create advocacy threats :

Selling, underwriting or otherwise dealing in financial securities or shares of a client;

Acting as an advocate on behalf of a client in litigation or disputes with third parties.

Familiarity Threat

Familiarity Threat occurs when, by virtue of a close relationship with a client, its directors, officers or employees, an auditor becomes too

sympathetic to the client’s interests.

Familiarity Threats Circumstances

Immediate family member or close family member who is a director, officer, or influential employee of the client;

A member of the team having a close family member who, as an employee of the client, is in a position to exert direct and significant influence over the subject matter of the engagement;

A former partner of the firm being a director, officer of the client or an employee in a position of significant influence;

Long association of a senior member of the team with the client

Acceptance of gifts or hospitality, unless the value is clearly insignificant, from the client, its directors, officers or employees.

Intimidation Threat

Intimidation Threat occur when a professional accountant may be deterred from acting objectively by threats, either actual or perceived.

Examples of circumstances:Being threatened with dismissal or replacement in relation to a client engagement.Being threatened with litigation.Being pressured to reduce inappropriately the extent of work performed in order to reduce fees.

Safeguards

Safeguards that may eliminate or reduce such threats to an acceptable level fall into three broad categories:

Safeguards created by the profession, legislation or regulation;

Safeguards within the client; and Safeguards within the firm’s own systems and

procedures.

Safeguards created by the profession, legislation or regulation

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 proceduresExternal review by a third party of the reports, returns, communications or information produced by a professional accountant.

Safeguards within the Client

When the client’s management appoints the firm, persons other than management ratify or approve the appointment;

The client has competent employees to make managerial decisions;

Policies and procedures that emphasize the client’s commitment to fair financial reporting;

A corporate governance structure, such as an audit committee, that provides appropriate oversight and communications regarding a firm’s services.

Safeguards in the work environment

leadership that stresses the importance of independence and the expectation that members of the teams will act in the public interest.

Policies and procedures to implement and monitor quality control of the engagements;

Documented independence policies regarding the identification of threats to independence, the evaluation of the significance of these threats and the identification and application of safeguards to eliminate or reduce the threats, other than those that are clearly insignificant, to an acceptable level;

Resolution of Ethical Conflicts

If the matter remains unresolved, the professional accountant should consult with other appropriate persons within the firm

Where a matter involves a conflict with, or within, an organization, consult with those charged with governance of the organization, such as the board of directors or the audit committee.

If a significant conflict cannot be resolved, obtain professional advice from the relevant professional body or legal advisors.

If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a professional accountant should, where possible, refuse to remain associated with the matter creating the conflict.

Professional Appointment

Client Acceptance - consider whether acceptance would create any threats to compliance with the fundamental principles

Engagement Acceptance - agree to provide only those services that the accountant is competent to perform.

Changes in a Professional Appointment

Before accepting an appointment involving services that were carried out by another, the proposed auditor should:

Request permission from the client to contact former auditor directly;

Contact existing auditor before beginning audit.

Information from Existing Auditor

Once the client permission is obtained, the existing auditor should provide information honestly and unambiguously.

If the proposed auditor is unable to communicate with the existing auditor, the proposed auditor should try to obtain information about any possible threats by other means such as through inquiries of third parties or background investigations on senior management.

The existing auditor is no longer required to provide information in writing or regarding reasons not to take an audit.

Conflicts of Interest

A professional accountant in practice should take reasonable steps to identify circumstances that could pose a conflict of interest. Such circumstances may give rise to threats to compliance with the fundamental principles

Second Opinions

Providing a second opinion on the application of accounting, auditing, reporting or other standards or principles by or on behalf of a company that is not an existing client may cause threats to compliance with the fundamental principles.

Safeguards such as seeking client permission to contact the existing auditor, describing the limitations surrounding any opinion and providing the existing auditor with a copy of the opinion may be required.

Fees and Other Types of Remuneration

An auditor may quote whatever fee deemed to be appropriate. However, a self-interest threat to professional competence and due care is created if the fee quoted is so low that it may be difficult to perform the engagement.

Commissions, Referral Fees, and Contingent Fees

A professional accountant in public practice should not pay or receive a referral fee or commission, unless he/she has established safeguards to eliminate the threats or reduce them to an acceptable level.

Contingent fees are widely used for certain types of non-assurance engagements. They may, however, give rise to self-interest threats to compliance with the fundamental principles.

Advertising and Marketing

When a professional accountant in public practice solicits new work through advertising or other forms of marketing, there may be potential threats to compliance with the fundamental principles.

What Advertising Cannot Do

A professional accountant should not bring the profession into disrepute when marketing professional services. He/she should be honest and truthful and should not:

Make exaggerated claims for services offered, qualifications possessed or experience gained; or

Make disparaging references to unsubstantiated comparisons to the work of another.

Gifts and Hospitality

Self-interest threats to objectivity may be created if a gift from a client is accepted; intimidation threats to objectivity may result from the possibility of such offers being made public.

Gifts or hospitality which are acceptable are those which a reasonable and informed third party, having knowledge of all relevant information, would consider clearly insignificant.

Custody of Client Assets

Safeguard against a self-interest threat to objectivity , a professional accountant in public practice entrusted with money (or other assets) belonging to others should: Keep such assets separately from personal or firm

assets; and Use such assets only for the purpose for which

they are intended. At all times, be ready to account for those assets,

and any income, dividends or gains generated. Comply with all relevant laws and regulations

relevant to the holding of and accounting for such assets.

Application of Framework to Specific Situations

The Code of Ethics, discusses a principles-based framework for identifying, evaluating and responding to threats. The framework establishes principles to identify threats to ethics principles, evaluate the significance of those threats, and, if the threats are other than clearly insignificant, identify and apply safeguards to eliminate the threats or reduce them to an acceptable level.

An accountant may perform services in a country other than his home country. If differences exist between ethical requirements of the two countries, the strictest provisions should be applied.

Cross-Border Activities

The IFAC Code prohibits the following non-audit services for audit clients:

Bookkeeping Services Valuation services Management decision making functions Broker-dealer or investment advisor services Litigation support

Financial involvement with a client

direct financial interest in a client; indirect material financial interest

loans to or from the client or any director or major stockholder in the client company;

financial interest in a joint venture with a client or employee(s) of a client.

financial interest in non-client with investor or investee relationship with the client.

Professional Competence and Responsibilities Regarding the Use of Non-Accountants

If a professional accountant does not have the competence to perform a specific part of the professional service, technical advice may be sought from experts such as other professional accountants, lawyers, actuaries, engineers, geologists, and evaluators. However, since the auditors have ultimate responsibility for the service, it is his responsibility to see that the requirements of ethical behavior are followed.

Activities Incompatible with the Practice of Public Accountancy

A professional accountant in public practice should not concurrently engage in any business, occupation or activity that impairs or might impair integrity, objectivity or independence, or the good reputation of the profession.

The simultaneous engagement in another activity unrelated to assurance or accounting services, which reduces the accountant’s ability to conduct his accounting practice according to ethical principles, is inconsistent with public practice.

PROFESSIONAL ACCOUNTANTS-IN SERVICE

Conflict of Loyalties

Employed professional accountants owe a duty of loyalty to their employer as well as to their profession and there may be times when the two are in conflict.

An employee cannot legitimately be required to break the law, breach the ethics, rules, and standards of the accounting profession, lie to their employer’s auditors, or be associated with a statement that materially misrepresents the facts.

If employed accountants cannot resolve any material issue involving a conflict between their employers and their professional requirements they may have no other recourse but to resign.

Support for Professional Colleagues and Professional Competence

Support for Professional Colleagues A professional accountant, particularly one having authority over others, should allow them to develop their own judgment in accounting matters.

Professional Competence An accountant employed in industry, commerce, the public sector or education may be asked to undertake significant tasks for which she has not had sufficient specific training or experience. Where appropriate expert advice and assistance should be sought.

Presentation of Information

A professional accountant is expected to present financial information fully, honestly and professionally and so that it will be understood in its context.

Disciplinary action and common sanctions

Disciplinary action ordinarily arises from such issues as:

failure to observe the required standard of professional care, skills or competence;

non-compliance with rules of ethics and discreditable; or dishonorable conduct.

Sanctions commonly imposed by disciplinary bodies include:

reprimand, fine, payment of costs, withdrawal of practicing rights, suspension, and expulsion from membership.