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,

Philip Wallage, Hans
Görtemakerr
[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?

• Ethics represent a set of moral principles, rules of conduct or
values. Ethics are a discipline dealing with values relating to
human conduct, with respect to rightness and wrongness of
certain actions and to the goodness and badness of the
motives and ends of such actions. Ethics apply when an
individual has to make a decision from various alternatives
regarding moral principles. All individuals an societies posses
a sense of ethics in that they have some sort of agreement as
to what right and wrong are, although this can be influenced
by cultural differences. Ethical questions you can think of are :
”Do I always have to keep may promise?” and ”Do I need to
put my own interest aside in favour of others?” iilustration
incorporates the characteristics most people associate with
ethical behaviour;
Slide 3.3
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 3.4
Illustration 3.1
Slide 3.5
History Ethics
• Philosophers today usually divide ethical theories into three
general subject areas: metaethics, normative ethics, and
applied ethics;
• Metaethics investigates where our ethical principles come
from, and what they mean. Are they merely social
inventions? Do they involve more than expression of our
individual emotions? Methaethics answers to these
questions focus on the issues on universal truths, the will of
God, the role of reason in ethical judgments, and the meaning
of ethical terms themseves;
• Normative ethics takes on a more practical task, which is to
arrive at moral standard that regulate right and wrong
conduct. This may involve articulating the good habits that we
should acquire, the duties that we should allow, or the
consequences of our behaviour on others;
Slide 3.6
• Finally, applied ethics involves examining specific

controversial issues, such as abortion, infanticide, animal
rights, environmental concerns, homosexuality, capital
punishment, or nuclear war;
• By using the conceptual tools of metaethics and
normative ethics discussions in applied ethics try to
resolve these controversial issues. The lines of distinction
between methaethics, normative ethics, and applied
ethics are often blurry. For example, these issue of
abortion is an applied ethical topic since it involves a
specific type of controversial behaviour. But it also
depends on more general normative principles, such as
right of self – rule and the right to life, which are litmus
test for determining the morality of that procedure. The
issue also rests on metaethics issues such as, “where do
rights come from?” and “What kinds of being have right?”
Slide 3.7
• Normative ethics involves arriving at moral standards right

and wrong conduct. In a sense, it a search for an ideal
litmus test of proper behavior. The Golden Rule is a
classic example of normative principle: we should do to
others what we would want others to do to us. Since I do
not want my neighbor to steal my car, than it is wrong for
me to steal her car. Since I would want people to feed me
if I was starving, then I should help feed starving people.
Using this same reasoning, I can theoretically determine
whether any possible whether any possible action is right
or wrong. So based on the Golden Rule, it would also be
wrong for me to lie to, harass, victimize, assault or kill
others. The Golden Rule is an example of a normative
theory that establishes a single principle against which
judge all actions. Other normative theories focus on a set
of foundational principles, or a set of good character traits.
Slide 3.8
• Ethics in the Accounting Profession

The attitude and behavior of professional accountants in
providing auditing and assurance services have an impact
on the economic well – being of their community and
country. Accountants can remain in this advantageous
position only by continuing to provide the public with these
unique services at a level that demonstrates that the
public confidence is well founded.
The distinguishing mark of the profession is acceptance of
its responsibility to the public. Therefore the standards of
the accountancy profession are heavily determined by the
public interest. One could say in accountancy “public and
the auditees are our clients and our main product is
credibility”
Slide 3.9
Objectives of Accountancy
•At this context that the International Ethics Standards Board
of Accountant (IESBA) Code of Ethics for Professional
Accountant states that it is an auditor’s responsibility to act
the public interest – it is a distinguishing mark of the
accountancy profession. The professional auditor’s
responsibility is not to satisfy only their client or employer,
but to consider the public interest;
•To achieve these objectives, the Code of Ethics suggest
several fundamental principles for professional accountant
and for those who understanding reporting assignments,
which is discussed in the balance of this discussion;
Slide 3.10
The International Ethics standards Board of

Accountants (IESBA) Code of Ethics for
Professional Accountant
• The Ethical guidance is set out by IESBA which reports its
recommendations to the IFAC Board after research and
appropriate exposure of draft guidance. The guidance is
incorporated into the Handbook of the Code of Ethics for
Professional Accountants (the Code). The Code is intended
to serve as a model on which to base national ethical
guidance. It sets standards of conduct for professional
accountants and states the fundamental principles that
should be observed by professional accountants in order to
achieve common objectives;
Slide 3.11
The Code is divided into three parts: A, B,

and C:
• 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 certain situations.
• Part B applies to professional accountants in public
practice.
• Part C applies to professional accountants in
business.
Slide 3.12
Part A – Fundamental Principles

Part A establishes the fundamental principles of professional
ethics for professional accountants and provides a
conceptual framework that professional accountants shall
apply to:
(a) Identify threats to compliance with the fundamental
principles;
(b) Evaluate the significance of the threats identified; and
(c) Apply safeguards, when necessary, to eliminate the
threats or reduce them to an acceptable level.
Safeguards are necessary when the threats are not at a
level at which a reasonable and informed third party
would be likely to conclude, weighing all the specific facts
and circumstances available to the professional
accountant at that time, that compliance with the
fundamental principles is not compromised.
Slide 3.13
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.
• When an accountant identifies threats to compliance
with the fundamental principles and determines that
they are not at an acceptable level, he/she shall
determine whether appropriate safeguards are
available and can be applied to eliminate the threats
or reduce them to an acceptable level.
Slide 3.14
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 3.15
Principles
1) Integrity to be straightforward and

honest in all professional and business
relationships.
2) Objectivity: To not allow bias, conflict
of interest or undue influence of others to
override professional or business
judgments.
Slide 3.16
Objectivity
In the auditing sense bias is
associated with money and
personal association, e.g., if
possible gains of wealth, prospects
of a better income, or personal
relationships as with family or
friends are involved, this may bias
the auditor’s work. There exist
religious and cultural biases that
may also affect an auditor’s work
and these biases have been well
studied.
Slide 3.17
Principles
3) Professional Competence and Due Care:

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 and act
diligently and in accordance with applicable
technical and professional standards.
Slide 3.18
Principles
4) Confidentiality: To 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, unless
there is a legal or professional right or duty to
disclose, nor use the information for the personal
advantage of the professional accountant or third
parties.
5) Professional Behavior: to comply with relevant
laws and regulations and avoid any action that
discredits the profession.
Slide 3.19
Disclosure of Confidential Information
May be disclosed when disclosure is authorized

by the client, required by law (eg evidence in
legal proceedings), where there is a
professional duty or right to disclose (such as
in a peer review quality control program) or to
comply with technical standards or ethics
requirements.
Slide 3.20
Professional Behavior that discredits the

profession example
In marketing and promoting themselves and
their work, professionals should be honest and
truthful and not:
Make exaggerated claims for the services they
are able to offer, the qualifications they
possess, or experience they have gained; or
 Make disparaging references or
unsubstantiated comparisons to the work of
others.
Slide 3.21
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:
• Intimidation threats
• Self-interest threats
• Self-review threats
• Advocacy threats
• Familiarity threats
Slide 3.22
Safeguards are
actions or other
measures that
may eliminate
threats or
reduce them to
an acceptable
level.
Slide 3.23
Intimidation Threat
Intimidation Threat -occurs
when a member of the
assurance team may be
deterred from acting
objectively and exercising
professional skepticism by
threats, actual or perceived,
from the directors, officers or
employees of an assurance
client.
Slide 3.24
Examples of Intimidation Threats
Being threatened with dismissal from a client engagement.

Being threatened with litigation.
Being pressured to reduce inappropriately the extent of
work performed in order to reduce fees.
An audit client indicating that it will not award a planned
non assurance contract to the firm if the firm continues to
disagree with the client’s accounting treatment.
A professional accountant feeling pressured to agree with
the judgment of a client employee because the employee
has more expertise on the matter in question.
A professional accountant being informed by a partner of
the firm that a planned promotion will not occur unless the
accountant agrees with an audit client’s inappropriate
accounting treatment.
Slide 3.25
Self-Interest Threat
A Self-interest threat occurs when an auditor

could benefit from a financial interest in, or
other self-interest conflict with, an assurance
client.
Slide 3.26
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.
• Discovering a significant error when evaluating
the results of a previous professional service
performed by a member of the professional
accountant’s firm.
Slide 3.27
Self-Review Threat
Self-Review Threat – occurs when (1)
results of a previous engagement
needs to be re-evaluated in reaching
conclusions on the present assurance
engagement or (2) when a member of
the assurance team previously was an
employee of the client (especially a
director or officer) in a position to exert
significant influence over the subject
matter of the assurance engagement.
Slide 3.28
Self-Review Threats
Circumstances (In Part B)
• 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 information of the assurance
engagement.
Slide 3.29
Advocacy Threat
An Advocacy Threat – occurs when a
member of the assurance team
promotes, or seems to promote, an
assurance client’s position or opinion.
That is, the auditor subordinates his
judgment to that of the client.
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 3.30
Familiarity Threat
Familiarity Threat ─ occurs when an

auditor becomes too sympathetic to the
client’s interests because he has a close
relationship with an assurance client, its
directors, officers or employees.
Slide 3.31
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 director or officer of the client or an employee in a
position to exert significant influence over the subject
matter of the engagement having recently served as
the engagement partner.
 Acceptance of gifts or preferential treatment from a
client, unless the value is trivial or inconsequential.
 Senior personnel having a long association with the
assurance client.
Slide 3.32
Immediate Family Member - US
Under PCAOB’s Rule

3501 Definitions,
“the term "immediate
family member"
means a person's
spouse, spousal
equivalent, and
dependents.” US classes
Slide 3.33
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 3.34
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 3.35
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 policies regarding the need to
identify threats to compliance with the
fundamental principles, evaluate the
significance of those threats, and apply
safeguards
 A disciplinary mechanism to promote
compliance with policies and procedures.
Slide 3.36
Examples of engagement-specific safeguards in the

work environment
 Having a professional accountant who was not

a member of the assurance team review the
assurance work performed or otherwise
advise as necessary.
 Consulting an independent third party, such as
a committee of independent directors, a
professional regulatory body or another
professional accountant.
 Discussing ethical issues with those charged
with governance of the client.
Slide 3.37
• Identify threats to compliance with
Slide 3.38
Objectives of Accountantancy Profession
 Generally, to meet the public’s interest

“A distinguishing mark of the
accountancy profession is its
acceptance of the responsibility to act
in the public interest. Therefore, a
professional accountant’s responsibility
is not exclusively to satisfy the needs of
an individual client or employer.” Code
of Ethics
Slide 3.39
PCAOB Ethics – US Classes
• ET Section 100 INDEPENDENCE,

INTEGRITY, AND OBJECTIVITY
• Independence ET Section 101

http://pcaobus.org/Standards/EI/Pages/ET101
.aspx
• Integrity and Objectivity ET Section 102

http://pcaobus.org/Standards/EI/Pages/ET102
.aspx
US classes
Slide 3.40
professional accountant in public practice

A professional accountant in
public practice is a
professional accountant,
irrespective of functional
classification (for example,
audit, tax or consulting) in a
firm that provides professional
services. This term is also used
to refer to a firm of professional
accountants in public practice.

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Slide 3.

Ethics for Professional Accountants

Rick Stephan Hayes,

What Are Ethics?

WHAT ARE ETHICS?

E A sense of agreement in a society as to what

• Finally, applied ethics involves examining specific

• Normative ethics involves arriving at moral standards right

• Ethics in the Accounting Profession

The International Ethics standards Board of

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

• Part A establishes the fundamental principles of

Part A – Fundamental Principles

Conceptual Framework Approach

The IFAC Code of Ethics for Professional Accountants fundamental

1) Integrity (Sec 110)

1) Integrity to be straightforward and

3) Professional Competence and Due Care:

Disclosure of Confidential Information

May be disclosed when disclosure is authorized

Professional Behavior that discredits the

Threats and Safeguards

Compliance with the fundamental

Examples of Intimidation Threats

Being threatened with dismissal from a client engagement.

A Self-interest threat occurs when an auditor

Self Interest Threats

• Reporting on the operation of financial systems after

Familiarity Threat ─ occurs when an

Familiarity Threats Circumstances (In Part B)

Immediate Family Member - US

Under PCAOB’s Rule

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

Examples of engagement-specific safeguards in the

 Having a professional accountant who was not

• Identify threats to compliance with

Objectives of Accountantancy Profession

 Generally, to meet the public’s interest

PCAOB Ethics – US Classes

• ET Section 100 INDEPENDENCE,

• Independence ET Section 101

• Integrity and Objectivity ET Section 102

professional accountant in public practice

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