Chapter 3
Professional ethics
1 Introduction
All members and students of the ACCA must follow the provisions of the Code of Ethics and Conduct ('the Code'). Note that it applies to:
- Students
- ACCA members acting as auditors
- ACCA members acting in some other accounting role.
Failure to comply with the Code can lead to fines, to members being excluded from membership, or to students being removed from the student register.
Ethics are not just an ‘add on’: they are fundamental to being an ACCA member or student. If poor ethical standards were allowed, then accountants lose much of their value. They might be technically able to prepare or audit financial statements, but it the financial statements lack credibility what is their point? Ethics give added value. Not only can the accountant prepare financial information, but that information is also more reliable (and so more valuable) because it has been prepared by someone adhering to ethical standards.
2 Conceptual framework
The Code includes a conceptual framework to professional ethics that:
- Establishes five fundamental principles to be followed
- Identifies and evaluates threats to compliance with the fundamental principles, and categorises those threats
- Addresses threats to compliance with the fundamental principles.
You might feel that some of the examples of threats described below are trivial, but it is important that the accountant is seen to be acting ethically and that there is no danger of a suspicion of unethical conduct.
Applying the conceptual framework requires:
- Exercising professional judgment;
- Remaining alert for new information and to changes in facts and circumstances; and
- Using the “reasonable and informed third party test”.
The exercise of professional judgment involves the application of relevant training, professional knowledge, skill and experience relevant to the facts and circumstances. It is essential to making informed decisions about the courses of actions available that are appropriate in the circumstances.
The reasonable and informed third party test asks whether this hypothetical person, who weighs all the relevant facts and circumstances known to the accountant, would draw the same conclusion as the accountant.
3 Fundamental principles, threats and safeguards
3.1 Fundamental principles
| Principle | Meaning |
|---|---|
| 1 Integrity | Members should be straightforward and honest in business and professional relationships. Integrity is more than honesty. It also means sticking up for what you believe is right and following up areas of concern. For example, you would not be acting with integrity if, upon seeing what might be a fraudulent transaction you decide to not investigate it further ie you ‘turn a blind eye’. |
| 2 Objectivity | Members should not allow bias, conflicts of interest or undue influence to interfere with their professional or business judgment. For example, if you were producing a budget that will be used for a purchaser of the business, it will be difficult to be objective as there will be an understandable desire to draft an optimistic budget. |
| 3 Professional conduct and due care | Members must keep up-to-date with legislation, accounting standards, auditing standards and so on. Members must ensure that enough time, resources and care are devoted to tasks so that they are carried out correctly. |
| 4 Confidentiality | Accountants frequently have access to confidential information. Auditors see financial results before shareholders; accountant in business might see everyone’s remuneration. Therefore, accountants must not disclose information unless: They have the client’s permission to do so. For example, the audit firm might have been asked to carry out tax computations and to submit these to the tax authorities. There is a legal or professional right or duty to disclose information. For example, many countries have anti-money laundering legislation which compels auditors to alert the authorities if they have even a suspicion of money laundering. A right to disclose information can arise if the audit firm had to defend itself in court against allegations of negligence. A public duty to disclose information. The concept of public interest is not defined by statute, and an auditor would be advised to seek legal advice on these matters. For example, is there a public duty to disclose that a client pays staff below minimum wages. You might think that morality is of disclosure, but the auditor’s prime duty is to report on the financial statements, not to be a watchdog for every breach of rules and regulations. |
| 5 Professional behaviour | Members must avoid any action that would bring the profession into disrepute. For example, being found guilty of theft (or even fare evasion) could land a member or student in trouble with the ACCA. |
Although not listed as one of the fundamental ethical principles, the concept of independence is very important. It is more difficult to act with integrity and objectivity if you are not independent from a client. The ACCA’s code of ethics and conduct requires members not only to be independent but also to be seen to be independent.
3.2 Threats
| Category | Meaning |
| 1 Self-interest | For example, financial self-interest |
| 2 Self review | For example, checking your own work and verifying your own judgments and decisions |
| 3 Advocacy | For example, promoting a client to others |
| 4 Familiarity | For example, personal relationships that can interfere with objectivity and professional scepticism (i.e. an attitude that includes a questioning mind and a critical assessment of evidence) |
| 5 Intimidation | For example, a physical threat (thankfully rare) or the threat of losing your job |
3.3 Safeguards
The professional accountant uses the reasonable and informed third party test to evaluate whether a threat is at an acceptably low level. If it is not, the threat must be addressed by:
- Eliminating the circumstance that creates the threat(s); or
- Applying safeguards, where available, to reduce the threats to an acceptable level; or
- Declining or ending the specific professional activity.
Safeguards are defined as "actions, individually or in combination, taken by the professional accountant that effectively eliminate threats to compliance with the fundamental principles or reduce them to an acceptable level". Safeguards vary depending on the facts and circumstances.
4 Threats and how to address them
4.1 Self-interest threats
| Example of threat | How it can be avoided or reduced to an acceptable level |
| Financial interest arising from holding shares in a client. | Shares in clients must not be owned by members of the audit team or their immediate family members. |
| Contingent fees, such as an audit fee based on a percentage of revenue or profit reported in the financial statements. | Contingent fees for audit work are not permitted. |
| Gifts and hospitality, such the audit team being taken out to dinner by a client. | Gifts and hospitality should not be accepted unless clearly insignificant. |
| High fees from a single client. A very high fee from one client can mean that the auditor is very dependent on that client, is desperate to keep that client, and so will ‘go easy’ on the client. (Note also the intimidation threat later.) | Fees from any one client should be kept under review. If the client is a public interest client (such as a listed company) the fees from that client should not exceed 15% of the firm’s total fees. If the fees are greater than this, for two consecutive years, the audit should should undergo an independent quality control review. |
| Overdue fees. If an audit client still hasn’t paid last year’s fees, then the audit firm will want the client’s business to survive so that the fees are paid. This might lead to a 'clean' auditor's report when really there are problems. | The auditor should not commence an audit if fees are outstanding. |
| Loans from a client. | Unless it is the client’s normal business to make loans (for example, the client is a bank) and any loans are made on normal business terms, auditors should not accept loans from clients. |
| Accepting employment from a client. | Simultaneous employment with a client and the audit firm is not permitted. Additionally, if a lead audit partner leaves the partnership he or she should not join a public interest client as an employee until at least a year has passed. |
| A partner serving on the board of a client firm. | This is not permitted. |
4.2 Self review threats
| Example of threat | How it can be avoided or reduced to an acceptable level |
| Preparing financial statements then auditing them. | For non-public interest companies this is permitted provided completely separate teams are used for each function. In general, the auditor cannot provide accounting or bookkeeping services to or prepare financial statements for a public interest client. An exception to this is if the service is not material to the financial statements and a separate team provides the service. |
| Designing and implementing internal control systems. | An auditor cannot provide services that assume management responsibilities. Evaluating internal control is often an important audit procedure, so if the auditors had designed the controls they might be blind to any deficiencies – and they might be reluctant to subsequently criticise the system. |
| Valuation services. | Even if the audit firm were professionally competent to do so, valuing, for example, property for the purposes of financial statements that the firm subsequently audited is not permitted unless the valuation is not material to the financial statements |
| Temporary staff assignments to audit clients. | An audit firm may 'lend' staff to an audit client as long as they will not assume management responsibilities (however short the period of time) and the loaned staff is not a member of the audit team. |
4.3 Advocacy threats
| Example of threat | How it can be avoided or reduced to an acceptable level |
| Promoting the audit client to potential investors or supporting a client in a dispute (eg with a tax authority). | Auditors should avoid assignments likely to cause an advocacy threat. |
4.4 Familiarity threats
| Example of threat | How it can be avoided or reduced to an acceptable level |
| The audit partner is a close relative of the client’s finance director | Another partner should be the engagement partner (ie responsible for the audit). ‘Close relative’ is not defined. Does it include brother and sisters, children, nephews and nieces, remote cousins? Judgment must be used and the auditor must be seen to be independent. |
| Friendships. Familiarity threats can arise even if there is no legal relationship. | Familiarity is a matter of judgment, but the auditor being the life-long best friend of the finance director would be hard to justify. Familiarity can arise through long-association between audit and client staff. For public interest clients a partner cannot be in charge of the audit for more than seven consecutive years and there must be a gap of at least two years before further involvement. |
4.5 Intimidation threats
| Example of threat | How it can be avoided or reduced to an acceptable level |
| Actual or threatened litigation. For example, the client alleges that the auditor had been negligent over some matter in the past. | The only appropriate action may be to withdraw from the engagement and resign or not seek reappointment. |
| Threat to remove or not reappoint the auditor if the auditor's report is not 'clean'. | The firm should not be so financially dependent on the client that it cannot stand up to such a threat. |
Question 1
What are the five fundamental principles of the ACCA's Code of Ethics and Conduct?
Question 2
‘All students of ACCA are bound by its Code of Ethics and Conduct.’
Is this statement true or false?
Question 3
What is the conceptual framework?
Question 4
What are the categories of threat to an auditor’s independence?
Question 5
When may an auditor disclose confidential information about an audit client?
Question 6
Fees from a public interest entity should generally not exceed which of the following percentages of total fees?
A 5%
B 10%
C 15%
D 20%