3.

PROFESSIONAL CODE OF ETHICS AND BEHAVIOUR

ACCOUNTANCY AS A PROFESSION

Professional accountants are required to observe proper standards of

professional conduct whether or not the standards required are written down in
the rules or are not written.

Accountants are specifically required to refrain from misconduct which is

difficult to define precisely but which includes any act or default which is likely
to bring discredit on himself, his professional body or the profession generally.

FUNDAMENTAL PRINCIPLES OF PROFESSIONAL ETHICS

1. Integrity- accountants shall be straight forward and honest in all

professional and business relationships.

2. Objectivity – accountants shall not allow bias, conflicts of interest or

undue influence of others to override professional or business
judgements.

3. Professional competence and due care – accountants have a

continuing duty to maintain professional knowledge and skill at
the level required to ensure that client or employer receives competent
professional services based on current developments in practice,
legislation, and techniques. Accountants shall act diligently and in
accordance with applicable technical and professional standards.

4. Confidentiality – accountants shall 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 or unless there is a legal or
professional right or duty to disclose. Confidential information acquired
as a result of professional or business relationships must not be used
for the personal advantage of accountants or third parties.

5. Professional behaviour – accountants shall comply with relevant

laws and regulations and avoid any action that discredits the
profession.

DUE SKILL AND CARE

- Accountants should carry out their professional work with due skill, care,
diligence and expedition and with regard to the technical and professional
standards expected of them as accountants.
- All accountants in public practise are required to provide services of
appropriate quality.

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- This relates to all services provided by the accountancy firm (external audit,
internal audit, tax, accounts preparation, etc).
- The degree of skill and care will depend on the work; a higher degree will be
required for work:
a) of specialised nature – (e.g. preparation of accounts before an
acquisition)
b) Where negligence is likely to cause substantial loss (e.g. in listed
companies)
- These particularly apply where the accountant represented himself as being
experienced.
- Auditors must use Auditing standards when seeking to satisfy themselves
that the matters upon which they report accurately reflect the financial state
of the client’s business.

INTEGRITY, OBJECTIVITY AND INDEPENDENCE

- An accountant’s objectivity must be beyond question if he is to report as an

auditor. Objectivity can only be assured if the member is and is seen to be
independent.

WHY DO INDEPENDENCE AND OBJECTIVITY MATTER SO MUCH

 The expectations of those directly affected, particularly the members of

the company. The audit should be able to provide objective assurance
that the directors can never provide on the accountants.
 The public interest - companies are public entities, governed by rules
requiring the disclosure of information.
 What can an Auditor do to preserve objectivity? The simply answer is to
withdraw from any engagement where there is a slightest threat to
objectivity.

THREATS TO INTEGRITY INDEPENDENCE AND OBJECTIVITY

a) Undue dependence on the audit client

- Public perception of independence may be put in jeopardy if there are

recurring fees from one client or group of connected clients exceeds 15 %
of gross practice income or 10 % in the case of listed or other public
interest companies (sometimes 5 %).
- However, new practices may not be able to satisfy such criteria and care
will be necessary in such circumstances to safeguard independence.

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b) Overdue fees

- The existence of significant overdue fees from an audit client or group

of associated clients can be a threat or appear to be a threat to objectivity
similar to that of a loan.
- Firms must therefore ensure that overdue fees, along with fees from
current work could not be construed as a loan. These must be followed
up with the board before audit work for the following year commences.

c) Actual or threatened litigation.

- A firm’s objectivity may be violated or appear to be threatened when it is

involved in, or with litigation in relation to a client.
- This situation may cause the directors and the client to become
unwilling to disclose information to the auditor.
- Auditors should be cautious whenever it appears that litigation might
occur. This could lead to the firm to be under pressure to issue an
unmodified report in fear of bad publicity, losing client or the possibility
that it was found to have negligent.

d) Family and other personal relationships.

- A members objectivity may be threatened or appear to be threatened as a

consequence of a family or other close personal or business
relationship.
- It is desirable to avoid professional relationships where personal
relationships exist.
- Problems arise if an officer or senior employee of an audit client is closely
connected with the partner or senior staff member responsible for the
conduct of the audit.

- The following people will normally be regarded as closely connected with

a person:

a) The person’s spouse.

b) The person’s minor children, including minor step children.
c) A company in which she holds 20 % interest or more. (this
depends on the case in question, it can be just a shareholding in
most cases.)

- The following persons will be considered as being closely connected

with a practice:

a) A partner.
b) A person closely connected with a partner.
c) An employee of a practice.

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The above is not an exhaustive list. A firm should have quality control policies
and procedures under which staff should disclose if a close family member
employed by the firm is promoted to a position of significant influence on the
subject at matter.

e) Beneficial interest in shares and other investments

- In general, partners, their spouses and minor children should not

hold shares in or have other investments in client companies.
- An audit staff member should not be involved in an audit if the staff
member or some person connected him has a beneficial interest in
the audit client.
- Some company articles require the auditor to have a qualifying
shareholding.
In such cases, the minimum only should be held and the
shareholding should be disclosed in the accounts.
- If shares are acquired involuntarily (by marriage or inheritance) then
they should be disposed off at the earliest opportunity.
- Firms should also have quality control procedures requiring staff to
disclose relevant financial interests for themselves and close family
members. They should foster a culture of voluntary disclosure on an
on-going basis so that any potential problems are identified in a
timely manner.

f) Loans to and from Audit clients.

- An auditing practice or anyone closely connected with it should not

make loans to its clients nor receive loans from clients.
The same applies to guarantees.
- Overdue fees may in some circumstances constitute a loan.
- However loans with client financial institutions in the normal course
business do not impair independence. Similarly with audit team
staff members if the loans are at commercial rates.
- In this situation, the loan cannot be applied for partnership capital
and the partner concerned must not be the engagement partner.

g) Acceptance of goods and services.

- Goods and services should not be accepted by a practice or by

anyone closely connected with it unless the value of any benefit is
modest or it’s on normal commercial terms.
- Acceptance of undue hospitality poses a similar threat.
- Promotional materials like calendars, diaries, umbrella, etc. are
acceptable but holidays may not be.

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h) Associated firms/influences outside the practice.

- There is a risk of loss of objectivity due to pressures arising from

associated practises or organisations, or from other external sources
such as bankers, solicitors, government or those introducing
business (potential audit clients).
- Auditors should not allow their judgement to be swayed by the receipt
of commission, fee or other reward from a third party as a result of
advising a client to pursue one course rather than the other.

i) Employment with an audit client:

When a senior (partner) or influential person has been employed by the

client, other staff members of the audit firm may be intimidated. A more
experience person should be involved in the audit or the whole audit plan
be changed.

j) Temporary Staff assignments:

Staff may loaned to an audit client, but only for a short period of time.
Staff must not assume management responsibilities. Other safeguards
include not including the loaned staff in the audit team or not giving
them any responsibility over areas they were responsible for.

k) Partner on client board:

A partner or employee of an audit firm should not serve on the client

board of an audit but may be acceptable if they perform the role of
company secretary for an audit client, if the role is essentially
administrative.

l) Contingent fees:

A firm is not permitted to enter into any fee arrangement for an audit or
assurance engagement under which the amount of the fee is contingent
on the result of the assurance work. It would also be inappropriate to
accept a contingent fee for non-assurance work from client.

m) Low balling:

When an audit firm quotes significantly low fees that the predecessor
auditor, there is a significant self interest threat.

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Safeguards against loss of independence

i) Audit firms should review on an annual basis, every client to determine if

it is proper to accept or continue an audit engagement bearing in mind
actual or apparent threats to independence.

ii) Training is important to educate the audit firm’s staff member on

integrity and objectivity.

iii) Rotation of auditor appointments – It has been argued that the long term
nature of the company audit engagement tends to create a loss of auditor
independence, due to an increasing familiarity with the company’s
management and staff, which works against the shareholders and the
public’s interest. However, rotation of auditors may bring some
disadvantages like:
- High costs of recurring audits.
- Upsetting the audit client with continual changes of audit staff.
- The loss of trust and experience built over time and the risk to
audit effectiveness it would entail.
- The ability of rotating members of the audit staff and the
engagement partner.

iv) Audit Committees:

- One of the main reasons for audit committees arises from the
difficulty auditors have in combating instances where the
executive directors of a company are determined to mislead
them.
- An audit committee, with non executive directors of a client
company, will provide an independent communication channel
between the board and auditors.

CONFLICT OF INTEREST

- Conflict of interest can arise between the auditor and his client/or
between two clients.
- The auditor should not act for both parties if the parties are in dispute.
Examples of conflict of interest include:

a) Multiple Services

- Provision of other services to clients. This could be acceptable as long

as it does not involve making executive decisions or performing
executive functions like deciding on a dividend.
- Provision of other services – these may include:

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  Tax returns
 Payroll services
 IT Services
 Recruitment
 Management consultancy.

- The problems that may arise are the perception that the
company gave its auditors some lucrative consultancy work in
exchange for a clean audit report.
- However, provision of other services may have the following

Advantages to the audit firm:

- Increased confidence in work prepared.
- Enhanced experience to audit staff (accounting & tax)
- Smooth seasonal audit work.

Advantages to the client:

- Increased trust in single advisor.
- Overall cost of all activities may be lower.

Safeguards:
- Use of engagement letters which separately identify non audit
services.
- Separate departments. For each service provided within the firm
(consultancy, tax, audit, etc).

b) Preparation of accounting records. In general, the accounting records of

public company clients should not be prepared by the auditor.
c) No employee in the audit firm should be involved in the audit if he has,
in the accounting period, or in the previous two years been an officer or
employee of that company.
d) Auditors should not accept liquidatorships of client companies with a
three year gap between assignments.

CONFIDENTIALITY

- Information obtained in the course of professional work should not be

disclosed except where:
i) Consent has been obtained from the client, employer or other proper
source.
ii) There is public duty to disclose.
iii) There is a legal or professional right or duty to disclose.
- Auditors acquiring information in the course of professional
work should neither use nor appear to use that information for
their personal advantage or the advantage of a third party.

Recognised exceptions:

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- If an auditor knows, suspects his client to have committed treason, drug
trafficking or terrorist offences, he is obliged to disclose all the information
at his disposal to a competent authority.
- Disclosure is required by the standards.
- Disclosure is necessary to protect the auditor’s interests, for example to
enable him to sue for fees or defend an action for say, negligence.
- Disclosure is compelled or required by process of law eg:
 Production of documents or other provision of evidence in the course of
legal proceedings or,
 Disclosure to the appropriate authorities of infringements of the law that
come to light.
- There is a public duty to disclose, say where an offence has been committed
which is contrary to public interest.
- Disclosure to non-governmental bodies which have statutory powers to
compel disclosure (environmental authorities).

CLIENT ACCEPTANCE AND TENDERING PROCEDURES

Tendering:
- Many large companies invite tenders for their audit work. The directors
have an opportunity to compare the level of fees.
- Audit firms which tender for such audits will usually give at least an
indication of the level of fees in the next few years and the rate of increase.
- In all situations, the auditors should quote a fee based on the estimated
hours worked by each member of staff required on the audit.
- They may also charge a premium for more complex audit. Generally a
tender will include:
 The level of expertise each firm has in the industry.
 Similar companies audited by each firm.
 National and international presence.
 The proposed fee.

Appointment Ethics:
This section covers the procedure that the auditors must take to ensure that
their appointment is valid and are clear to act.

Procedures auditors must take before accepting nomination:

- The auditors must ensure that they are professionally qualified to act as
auditor for the client.
This includes ensuring that there is no independence or other ethical
problems that may arise.
- Ensure that existing resources are adequate. Consider available time, staff
and technical expertise.
- Obtain references of the directors of the company to ascertain if the
directors are not personally known.
- Communicate with present auditors. Enquire if there are any reasons /
circumstances behind the change which the new auditors ought to know.

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- Having negotiated these steps, the auditors will be in a position to accept
nomination, or not as the case may be.

Procedures for accepting nomination:

- The following procedures should be carried out after accepting nomination:

a) Ensure that the outgoing auditor’s removal / resignation has been

properly conducted in accordance with the law. (e.g. resignation letter,
etc.)
b) Ensure that the new auditor’s appointment is valid. The new auditors
should obtain a copy of the resolution passed at the general meeting
appointing them as company auditors.
c) Set up and submit a letter of engagement to the directors of the
company.

- Once a new appointment has taken place, the new auditors should obtain
all books and papers which belong to the client from the old auditors.

CLIENT SCREENING

- In risk management efforts, some audit firms, particularly larger firms, carry
out stringent checks on potential client companies and their management.
- Some of the basic factors for consideration are as follows:

a) Management integrity:
- This is particularly important if the company is controlled by one or a few
dominant personalities.

b) Risk:

The following factors may render a client to be categorised as,

Low risk:
- Good long term prospects.
- Well financed
- Strong internal controls
- Prudent accounting policies
- Competent, honest management.
- Few unusual transactions.

High risk
- Poor recent or forecast performance.
- Likely lack of finance
- Significant control weaknesses
- Questionable accounting policies
- Lack of finance director
- Significant related party transactions.

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 c) Ability to perform work

- The audit firm must have resources to perform the work properly as well
as any specialised knowledge or skills.
- Engagement economics – does it make economic sense to engage the
client.
- Relationship with client – long term relationship with client is usually
sought with better service.

Sources of information about new clients:

- Enquiries from bankers, solicitors, etc.

- Review of most recent annual accounts, credit rating and listing particulars.
- Previous auditors should disclose full all information.
- Review of rules and standards relating to the industry and the client.
- Once all the relevant procedures and information has taken place, the client
can be put forward for approval.
- For this, the engagement partner will complete a client acceptance form.

ENGAGEMENT LETTERS

An engagement letter should:

- Define clearly the extent of the auditors’ responsibility and so minimise the
possibility of any misunderstanding between the client and the auditors.
- Provide written confirmation of the auditor’s acceptance of the appointment,
the scope of the audit, the form of their report and the scope of any non-
audit services.

The content of the engagement letter should be discussed and agreed with the
client before it is sent.

- Engagement letters can be prepared for audit work and non audit work.
- Audit engagement letters should be sent to all new clients soon after
appointment of auditors before the commencement of the audit.
- Auditors should also consider sending an engagement letter to existing
clients to whom no letter has previously been sent.

Contents of an engagement letter:

(a) The boards responsible for proper accounting records and financial
statements which show a true and fair view and comply with the law.
(b) The auditors’ responsibility to report on the financial statements and on the
consistency of the directors’ report.

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(c) The scope of the auditors work.
- Auditing standards
- Accounting standards review.
- Collection of audit evidence.
- Tests and reliance on internal controls.
(d) The sending of the letter of weaknesses to management.
(e) Any special factors like:
- Relations with internal audit.
- Audit of divisions and branches.
- Involvement of other auditors, if any.
(f) The need for a letter of representation from management.

(g) Irregularities and fraud:

- That this is the directors’ primary responsibility.
- That the auditors must plan his audit to have a reasonable expectation
of discovering material misstatements in the accounts.
- Non reliance on the auditors to uncover irregularities and fraud.
(i) The fees and the basis on which they are charged.
(j) A request for written acknowledgement of the letter and that it creates
contractual obligation.
- An engagement letter should be reviewed annually to ensure that it
continues to reflect the client’s circumstances.
(k) Applicable reporting framework.
(l) Expected form and content of any reports.

The following factors may make the agreement of a new letter appropriate:

- Any indication that the client misunderstands the objective and scope of the
audit.
- Legal and contractual requirements.
- A recent change in senior management.
- Significant change in nature & size of the client.
- Change in financial reporting framework.
- Changes in other reporting requirements.
- Significant change in ownership.

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