ETHICAL ISSUES

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 OBJECTIVES
• Sources of guidance
• Integrity, objectivity and independence
• Approach of the guidance
• Specific problem areas
• Confidentiality

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 SOURCE OF GUIDANCE
• EC Recommendation “Statutory auditors
independence in the EU” (2002)

• IFAC Code of Ethics for Professional

Accountants (2009).

• APB Ethical standards (first issued December

2004, later revised).

• Professional bodies.
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 ASB ETHICAL STANDARDS
ES 1 Integrity, objectivity and independence.

ES2 Financial, business, employment and personal

relationships

ES3 Long association with the audit engagement

ES4 Fees, remuneration and evaluation policies, litigation,

gifts and hospitality

ES5 Non-audit services provided to audit clients

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 ES1 INTEGRITY, OBJECTIVITY
AND INDEPENDENCE

Integrity Broad range of qualities

Objectivity State of mind

Independence Freedom from situations

which undermine perceived objectivity

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 APPROACH OF THE GUIDANCE
• Principles approach

• Identification of threats to independence

and safeguards which can be used to
negate or reduce them.

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 THREATS
• Self interest.

• Self review.

• Management

• Advocacy.

• Familiarity or trust.

• Intimidation.
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EXAMPLES OF SAFEGUARDS
• Remove individual from team

• Decline to provide certain services

• Dispose of financial interests

• Reviews by second partner

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 IS IT BEING FOLLOWED?
“We identified a number of instances where audit
teams did not appear to understand or appreciate
the importance of this approach.

We are concerned that, more than seven years after

the Ethical Standards were introduced, we are not
able to report any improvement in this area”

AIU Report, 2011/12

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 ES 2: RELATIONSHIPS
• Financial relationships
– Shares

• Employment relationships
– Employed by both auditor and client

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 ES 3 LONG ASSOCIATION
• Knowledge of client v threats

• Unlisted clients

• Listed clients

• Audit firm rotation?

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 ES 4: REMUNERATION
Audit fees:

•Method of determining

•Proportion of fee income of firm

•Predatory pricing (lowballing)

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 NON AUDIT SERVICES
1. Why do companies buy non-audit
services from their auditor, rather than
another firm?

2. What threats may arise from the auditor

providing non-audit services?

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 NON AUDIT SERVICES
May 2009 Treasury Select Committee Report on
banking crisis

Aug 2009 KPMG won Rentokil audit

2010 & 11 AIU reports critical of Big Four

2009-2010 APB consultation

2011 EU proposes ban 14

 ES 5: NON AUDIT SERVICES
Audit firm
• Audit engagement partner to be informed of
potential other services
• Assess threats and safeguards
• Discuss with Ethics Partner
• Some services cannot be provided
• Inform client
• Documentation
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 ES 5: NON AUDIT SERVICES
Client
• Audit Committee to consider

• Analysis of fees paid to auditors in annual

report

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 CONFIDENTIALITY
• Implied term of the audit contract

• Maintain both within and outside the firm

• Do not use any information gained in

course of work for personal advantage

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