Ethics For Professional Accountants

Slide 3.
Ethics for Professional Accountants

Principles of Auditing: An Introduction to
International Standards on Auditing - Ch. 3
Rick Stephan Hayes,

Roger Dassen, Arnold Schilder,
Philip Wallage
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 3.2
WHAT ARE ETHICS?
E A sense of agreement in a society as to what

is right and wrong.
E 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.
Slide 3.3
Illustration 3.1
Slide 3.4
Objectives of Accountantancy Profession
 To work to the highest standards of

professionalism
 To attain the highest levels of performance
 Generally, to meet the public’s interest
Slide 3.5
The Code is divided into three parts: A, B,

and C (Not in Text):
• Part A establishes the fundamental principles of

professional 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.
Slide 3.6
Figure 3.2 Not Applicable Any More
Slide 3.7
The IFAC Code of Ethics for Professional Accountants fundamental

principles for ALL Accountants:
1) Integrity (Sec 110)

2) Objectivity (Sec 120)
3) Professional Competence
and Due Care (Sec 130)
4) Confidentiality (Sec 140)
5) Professional Behavior
(Sec 150)
Slide 3.8
Principles
1) Integrity A professional accountant should

be straightforward and honest in performing
professional services.
2) Objectivity: A professional accountant
should not allow bias, conflict of interest or
undue influence of others to override
professional or business judgments.
Slide 3.9
Principles
3) 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.
Slide 3.10
Principles
4) 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.
5) Professional Behavior: A professional
accountant should comply with relevant
laws and regulations and should avoid any
action that discredits the profession.
Slide 3.11
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.
Slide 3.12
Threats and Safeguards

(no longer related just to Independence, but to ethics)
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
Slide 3.13
Figure 3.5
Slide 3.14
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;
Slide 3.15
Self Interest Threats Circumstances (In Part B)
• 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 assurance
engagement.
• A loan to or from an assurance client or any of its
directors or officers.
Slide 3.16
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.
Slide 3.17
Self-Review Threats Circumstances (In Part B)
• The discovery of a significant error during a re-evaluation of

the work of the public 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 assurance team being, or having recently
been, a director or officer of that client.
• A member of the assurance 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 assurance engagement.
Slide 3.18
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 an assurance
client;
Acting as an advocate on behalf of an assurance
client in litigation or disputes with third parties.
Slide 3.19
Familiarity Threat
Familiarity Threat occurs when, by virtue of

a close relationship with an assurance
client, its directors, officers or employees,
an auditor becomes too sympathetic to the
client’s interests.
Slide 3.20
Familiarity Threats Circumstances (In Part B)

 Immediate family member or close family member
who is a director, officer, or influential employee of
the assurance client;
 A member of the assurance team having a close
family member who, as an employee of the
assurance 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 assurance client or an employee in a
position of significant influence;
 Long association of a senior member of the
assurance team with the assurance client
 Acceptance of gifts or hospitality, unless the value
is clearly insignificant, from the assurance client,
its directors, officers or employees.
Slide 3.21
Intimidation Threat
Intimidation Threat occur when a professional

accountant may be deterred from acting
objectively by threats, 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.
Slide 3.22
Safeguards
Safeguards that may eliminate or reduce such

threats to an acceptable level fall into two
broad categories:
(1) Safeguards created by the profession, legislation
or regulation;
(2) Safeguards in the work environment.
Slide 3.23
Safeguards created by the profession, legislation or

regulation include:
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 procedures
External review by a third party of the reports,
returns, communications or information produced
by a professional accountant.
Slide 3.24
Firm-wide safeguards in the work environment may

include:
 Leadership that stresses the importance of

compliance with the fundamental principles
and the duty to act in the public interest.
 Quality control policies
 Documented independence policies
 Policies against reliance on revenue received
from a single client.
Slide 3.25
Resolution of Ethical Conflicts

1. If the matter remains unresolved, the
professional accountant should
consult with other appropriate
persons within the firm
2. 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.
3. If a significant conflict cannot be
resolved, obtain professional advice
from the relevant professional body
or legal advisors.
4. 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.
.
Slide 3.26
PART B Contents
Slide 3.27
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.
Slide 3.28
Changes in a Professional Appointment
Before accepting an appointment involving

services that were carried out by another the
proposed accountant should:
Request permission from the
client to contact former auditor
directly
Contact existing auditor before
beginning audit.
Slide 3.29
Information from Existing Auditor
Once client permission is obtained, the existing

accountant should provide information honestly
and unambiguously.
If the proposed accountant is unable to
communicate with the existing accountant, the
proposed accountant 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 account is no longer required to
provide information in writing or regarding
reasons not to take an audit.
Slide 3.30
Conflicts of Interest
An accountant
should take
reasonable steps
to identify
circumstances
that could pose a
conflict of interest.
Slide 3.31
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 accountant, describing
the limitations surrounding any opinion and
providing the existing accountant with a copy
of the opinion may be required.
Slide 3.32
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.
Slide 3.33
Commissions, Referral Fees, and Contingent Fees

$ A accountant in public
practice should not pay or
receive a referral fee or
commission, unless 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.
Slide 3.34
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.
Slide 3.35
What Advertising Cannot Do
An accountant should not bring the profession

into disrepute when marketing professional
services. 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.
Slide 3.36
Example of Bad Advertising
“At our firm we believe the financial success of any

business requires regular monitoring and attention to
the smallest detail. Without the objective oversight of
a practiced eye, huge opportunities can slip by
unnoticed, and minor problems can quickly evolve
into significant issues. That’s why the experts at our
firm maintain a close relationship with our clients all
year round, rather than merely reviewing financial
records annually.”
Slide 3.37
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.
Slide 3.38
Custody of Client Assets

 To 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
Slide 3.39
Objectivity – All Services
When providing any professional service the

auditor should consider whether there are threats
to compliance with the fundamental principle of
objectivity resulting from having interests in, or
relationships with, a client or directors, officers or
employees.
In an assurance service the auditor is required to
be independent of the assurance client.
Independence of mind and in appearance is
necessary to express a conclusion, and be seen
to express a conclusion, without bias, conflict of
interest or undue influence of others.
Slide 3.40
Independence—Assurance Engagements
In the case of an assurance engagement it is in

the public interest and, therefore, required by
the Code of Ethics, that members of
assurance teams, firms and, when applicable,
network firms be independent of assurance
clients
Slide 3.41
Independence
• Independence involves independence in
appearance and independence in mind.
• Independence in Appearance : The avoidance of
facts and circumstances that are so significant
that a reasonable and informed third party,
having knowledge of all relevant information,
including safeguards applied, would reasonably
conclude a firm’s, or a member of the assurance
team’s, integrity, objectivity or professional
skepticism had been compromised.
• Independence of Mind The state of mind that
permits the expression of a conclusion without
being affected by influences that compromise
professional judgment, allowing an individual to
act with integrity, and exercise objectivity and
professional skepticism.
Slide 3.42
Independence in the Sarbanes-Oxley Act of 2002

TITLE II – AUDITOR INDEPENDENCE
Sec. 201. Services outside the scope of practice of auditors.
Sec. 202. Pre-approval requirements.
Sec. 203. Audit partner rotation.
Sec. 204. Auditor reports to audit committees.
Sec. 205. Conforming amendments.
Sec. 206. Conflicts of interest.
Sec. 207. Study of mandatory rotation of registered public accounting
firms.
Sec. 208. Commission authority.
Sec. 209. Considerations by appropriate State regulatory authorities.
Slide 3.43
Independence in the Sarbanes-Oxley Act of 2002

Prohibited non-audit service contemporaneously with the audit include:
(1) bookkeeping or other services related to the accounting records or
financial statements
of the audit client;
(2) financial information systems design and implementation;
(3) appraisal or valuation services, fairness opinions, or contribution-in-
kind reports;
(4) actuarial services;
(5) internal audit outsourcing services;
(6) management functions or human resources;
(7) broker or dealer, investment adviser, or investment banking services;
(8) legal services and expert services unrelated to the audit; and
(9) any other service that the Board determines, by regulation, is
impermissible. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 3.44
PCAOB Ethics and Independence rules concerning

independence, tax services, and contingent fees (Not
in Text)
 Not independent if the audit firm provided
any service or product to an audit client
for a contingent fee or a commission.
 Not independent if the firm provided
assistance in planning, or provided tax
advice on, certain types of potentially
abusive tax transactions to an audit client
or persons employed by that client and
must seek audit committee approval for
any tax services
 Firms must be independent of their audit
clients throughout the audit period
Slide 3.45
Part B of the Code illustrates how the

conceptual framework contained in Part A is
to be applied by professional accountants in
public practice.
Slide 3.46
Examples Part B
Slide 3.47
Slide 3.48
Slide 3.49
Part C of the Code illustrates

how the conceptual framework
contained in Part A is to be
applied by professional
accountants in business.
Slide 3.50
Examples in Part C
Slide 3.51
Thank You for Your Attention
Any Questions?

Ethics For Professional Accountants

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Slide 3.

Ethics for Professional Accountants

Rick Stephan Hayes,

WHAT ARE ETHICS?

E A sense of agreement in a society as to what

Objectives of Accountantancy Profession

 To work to the highest standards of

The Code is divided into three parts: A, B,

• Part A establishes the fundamental principles of

Figure 3.2 Not Applicable Any More

The IFAC Code of Ethics for Professional Accountants fundamental

1) Integrity (Sec 110)

1) Integrity A professional accountant should

3) Professional Competence and Due Care: A

Conceptual Framework Approach

Threats and Safeguards

Compliance with the

A Self-interest threat occurs as a result of the

Self Interest Threats Circumstances (In Part B)

• A financial interest in a client or jointly holding a

Self-Review Threat occurs occur when a

Self-Review Threats Circumstances (In Part B)

• The discovery of a significant error during a re-evaluation of

Familiarity Threat occurs when, by virtue of

Familiarity Threats Circumstances (In Part B)

Intimidation Threat occur when a professional

Safeguards that may eliminate or reduce such

Safeguards created by the profession, legislation or

Educational, training and experience

Firm-wide safeguards in the work environment may

 Leadership that stresses the importance of

Resolution of Ethical Conflicts

• Client Acceptance - consider whether

Changes in a Professional Appointment

Before accepting an appointment involving

Information from Existing Auditor

Once client permission is obtained, the existing

Fees and Other Types of Remuneration

An auditor may quote whatever fee deemed to

Commissions, Referral Fees, and Contingent Fees

Advertising and Marketing

When a professional accountant in public

What Advertising Cannot Do

An accountant should not bring the profession

Example of Bad Advertising

“At our firm we believe the financial success of any

Gifts and Hospitality

Custody of Client Assets

Objectivity – All Services

When providing any professional service the

In the case of an assurance engagement it is in

Independence in the Sarbanes-Oxley Act of 2002

Independence in the Sarbanes-Oxley Act of 2002

PCAOB Ethics and Independence rules concerning

Part B of the Code illustrates how the

Part C of the Code illustrates

Thank You for Your Attention

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