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Code of Ethics for

Professional Accountants

A Presentation

Nasir U Ahmed, FCA

Member Council, ICAB
21 December 2008


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

Objectives of Professional




attain the highest levels of performance, and

meet the publics interest


The Code of Ethics (A, B, and


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

IFAC Code of Ethics - fundamental

principles for all Accountants:

Integrity (Sec 110)

Objectivity (Sec 120)

Professional Competence and Due Care (Sec


Confidentiality (Sec 140)

Professional Behavior (Sec 150)


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

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


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

Conceptual Framework

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

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

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


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

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

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
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 clients interests.

Familiarity Threats

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
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 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 firms own systems and

Safeguards created by the profession,

legislation or regulation

requirements for entry into the profession.
Corporate governance regulations.
Professional standards.
Professional or regulatory monitoring and
disciplinary procedures
External review by a third party of the reports,
produced by a professional accountant.

Safeguards within the Client

When the clients management appoints the firm,

persons other than management ratify or approve the
The client has competent employees to make
managerial decisions;
Policies and procedures that emphasize the clients
commitment to fair financial reporting;
A corporate governance structure, such as an audit
committee, that provides appropriate oversight and
communications regarding a firms 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

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
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

Information from Existing


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

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

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

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

Specific Situations


The Code of Ethics, discusses a principles-based

framework for identifying, evaluating and
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.

Cross-Border Activities

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

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


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

employee(s) of a client.

financial interest in non-client

relationship with the client.

Responsibilities Regarding the Use of
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

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 accountants ability to conduct
his accounting practice according to ethical
principles, is inconsistent with public practice.


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
employers 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 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