Introduction to Rules of Professional Conduct
The Rules of Professional Conduct apply to accountancy students, graduates and members. Their objective is to ensure that proper standards of professional conduct are observed. They give fundamental principles and specific guidance statements.
ACCA P7 Lecture Index
1 Rules of Professional Conduct
2 Professional Responsibility and Liability
3 Regulatory Environment
4 Practice Management
5 Audit Process
7 Evaluation and Review
8 Audit of Financial Statements
9 Group Audits
10 The external audit report
11 Audit Related Services (Non Audit Services)
12 Assurance Services
13 Prospective Financial Information (PFI)
14 Internal Audit
15 Outsourced Finance and Accounting Functions
16 Social and Environmental Audits
The Fundamental Principles
Behave with integrity in all professional, business and personal financial relationships. Integrity implies not merely honesty but fair dealing and truthfulness.
Strive for objectivity in all professional and business judgements. Objectivity is the state of mind which has regard to all considerations relevant to the task in hand but no other.
Not accept or perform work which they are not competent to undertake unless they obtain such advice and assistance as will enable them competently to carry out their work.
Carry out their professional work with due skill, care, diligence and expedition and with proper regard for the technical and professional standards expected of them as members.
Behave with courtesy and consideration towards all those with whom they come into contact during the course of performing their work.
The Specific Guidance Statements
These deal with the specific areas where independence may be threatened.
- Integrity, Objectivity and Independence
- Professional Duty of Confidentiality
- Changes in Professional Appointments
- Books, Documents and Papers
- Corporate Financial Advice
- Conflicts of Interest
Integrity, objectivity and independence
The Rules of Professional Conduct state that “A member’s objectivity must be beyond question. This can only be assured if the member is, and is seen to be, independent”.
Common threats to independence are:
– undue dependence on an any single client or group of clients
– overdue fees
– family and other personal relationships
– beneficial interests in shares and other investments
– acceptance of goods, services or hospitality.
What practical steps can a firm take to maintain independence in each of these situations?
Another threat to independence is the provision of other services to clients. The Rules of Professional Conduct state that it is right that members should provide other services for their clients. However, care must be taken not to perform executive functions or make executive decisions. Also, the preparation of accounting records for a public limited company is only allowed in exceptional circumstances.
What are the benefits of providing other services to clients?
What are the drawbacks, and how can these be overcome?
Auditors may be asked to provide “specialist valuations” which could impair their objectivity.
“Specialist valuations” include actuarial valuations, valuations of intellectual property and brands, other intangible assets, property and unquoted investments.
The Rules of Professional Conduct state that a member should be independent when carrying out a specialist valuation, the results of which may be included in financial statements or public documents.
Audit firms are often asked to give an opinion on the application of financial reporting standards or principles to specific circumstances or transactions of an entity which they don’t audit.
The firm should contact the auditor so that they can be made aware of any relevant facts.
The firm should, with the client’s permission, provide a copy of their opinion to the auditor.
The IFAC code of ethics
The fundamental principles are similar to ACCA guidance. The notable difference is the reference to confidentiality.
Integrity: As ACCA guidance.
Objectivity: As ACCA guidance.
Professional competence and due care: As ACCA guidance.
Confidentiality: A professional accountant should respect the confidentiality of information acquired during the course of performing professional services and should not use or disclose any such information without proper and specific authority or unless there is a legal or professional right or duty to disclose.
Professional behaviour: A professional accountant should act in a manner consistent with the good reputation of the profession and refrain from any conduct which might bring discredit to the profession.
A professional accountant should carry out professional services in accordance with the relevant technical and professional standards.
The Code recognises that the objectives of the accounting profession are to work to the highest standards of professionalism, to attain the highest levels of performance, and generally to meet the public interest requirement. These objectives require four basic needs to be met.
In the whole of society, there is a need for credibility in information and information systems.
There is a need for individuals who can clearly be identified by clients, employers and other interested parties as professional people in the accountancy field.
Quality of services
There is a need for assurance that all services obtained from a professional accountant are carried out to the highest standards of performance.
Users of the services of professional accountants should be able to feel confident that there exists a framework of professional ethics which governs the provision of those services.
Professional fees should be a fair reflection of the value of the professional services performed for the client. They should normally be computed on the basis of appropriate rates per hour or per day for the time of each person engaged in performing professional services.
In reply to public advertisement or an unsolicited request to make a submission or submit a tender, a professional accountant in public practice should, if the appointment may result in the replacement of another professional accountant, state in the submission or tender that, before acceptance, the opportunity to contact the other accountant is required so that enquiries may be made as to whether there are any professional reasons why the appointment should not be accepted. If the submission or tender is successful, the existing accountant should then be contacted.
Professional duty of confidentiality
The general rule is that information acquired in the course of professional work should not be disclosed to third parties without first obtaining the client’s permission.
There are two situations where disclosure, without the client’s permission, needs to be considered:
Obligatory – This is where members are bound to disclose information. This covers situations where they are compelled to disclose information under the process of law. For example, they could be served with a court summons or called as a witness.
Voluntary – These are situations where members are free to disclose information.
In the public interest. There is no definition of “public interest”. Therefore, legal advice should be taken in order to decide whether disclosure will be justified or not. Disclosure would only be acceptable where it is made to “one who has the proper interest to receive the information”.
To protect a member’s interest. For example, they might wish to defend themselves against a criminal charge or clear themselves of suspicion.
Authorised by statute. For example, they should report any non-compliance with law or regulation to the proper authority.
To non-governmental bodies. They could be approached by recognised but non- governmental bodies seeking information concerning acts of misconduct not amounting to a crime or civil wrong. If the body has statutory powers, they should comply and supply the relevant information.
Changes in professional appointments
When a prospective client approaches a member to act as auditor or adviser, the member must communicate with the existing auditor or adviser. The procedure is as follows.
Obtain the client’s permission to communicate with the existing auditor or adviser.
If permission is refused, decline the invitation.
If permission is granted, write to the existing auditor or adviser requesting information that may help with making a decision on acceptance of the invitation.
When the existing auditor or adviser receives the request, they should seek permission from the client to respond. If the client refuses to give permission, the prospective auditor or adviser should be informed and they should decline the invitation.
When permission is granted, all reasonable information should be provided to enable the prospective auditor or adviser to make an informed decision.
If the existing auditor fails to reply, the member should send a further letter by registered post or recorded delivery.
This letter should state that, unless a reply is received within a stated period, the member will assume that there are no matters of which they should be made aware and, at the end of the stated period, will proceed to accept the invitation.
Once a new auditor or adviser has been appointed, the former auditor or adviser should ensure that all books and papers belonging to the client are promptly transferred. In particular the following should be provided:
a copy of the last set of financial statements, formally approved by the client; and
a detailed trial balance that is in agreement with those financial statements.
Books, documents and papers
The general principle is that documents belonging to the client must be given to the client or their legal agents on request. Clients have no rights of access to documents belonging to the audit firm.
This distinction is a legal one. If the audit firm is acting on behalf of their clients, as their agents, then the documents produced belong to the client. This would cover the preparation of accounting records and tax returns. With the audit, however, the audit firm acts on its own behalf. Therefore, the client has no rights to the documents produced.
Audit working papers should be retained for a period sufficient to meet the needs of the practice and in accordance with legal and professional requirements of record retention.
Right of Lien
Generally, in the event that fees are not paid, members may exercise a lien over certain books and papers upon which they have been working. This right of particular lien exists when, usually, all of the following conditions apply.
The documents retained must be the client’s property
They must have come into the member’s possession by proper means
The member must have done work on the documents and issued a fee note
The fees for which the lien is exercised must be outstanding in respect of work on the documents and not in respect of other unrelated work
A lien cannot be exercised over books or documents of a registered entity which have to be available for public inspection or which have to be kept at the entity’s registered office.
Conflicts of interest
Conflict between members’ and clients’ interests
Audit firms must always place their clients’ interests before their own. Therefore, they should not accept or continue engagements where there are significant conflicts of interest between the firm and its clients.
Any form of financial gain which accrues, or is likely to accrue, to firms as a result of engagements, otherwise than in the form of fees or other reward from clients, or concession properly earned, will amount to a significant conflict of interest.
Conflicts between the interests of different clients
There is nothing improper in firms having two or more clients whose interests may conflict, provided the work that the firm undertakes is not, in itself, likely to be the subject of dispute between those clients.
The firm’s work should be managed so as 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.
The Rules of Professional Conduct suggest safeguards that can be instigated to manage conflicts which may arise. These are:
use different staff for each assignment;
carry out a regular review of the situation;
have instructions on maintaining confidentiality, and
advise one or both clients to seek additional independent advice.
Whenever a material conflict of interest between clients or potential clients is identified, sufficient disclosure should be made to the clients concerned so that they can make an informed decision as to whether to engage another firm or continue with the existing firm.
Corporate financial advice
The provision of corporate financial advice can give rise to independence problems and conflicts of interest.
As long as firms can maintain and demonstrate objectivity and integrity there can be no objection to their accepting these engagements.
All reasonable steps should be taken to avoid conflicts of interest. When it is clear that material conflicts of interest exist, the firm should decline to act as financial advisers.