Code of Professional Conduct and Ethics

1
Code of Professional Conduct and Ethics
Public Accountants Conference 24 July 2007
2
Outline

• Introduction
• Outline of proposed Code of Ethics
• Key Changes in proposed Code

3
Why the Code of Ethics is important

• Foundation of public confidence in public
  accountants.
• It assures the public that public accountants
  will undertake their work with
• Integrity,
• Objectivity,
• Competence and due care,
• Confidentiality, and
• Proper professional behaviour.

4
Background

• Ethics Sub-Committee appointed in 2006 to review
  the current ACRA Code.
• Recommending a code based on the IFAC Code of
  Ethics, with some Singapore modifications.
• The IFAC Code is an internationally reputable
  benchmark adopted by the profession.

5
Overview of IFAC Code

• Re-affirms existing fundamental principles of
  ethics.
• Enhanced, structured framework to assist
  identification, evaluation and response to
  threats to compliance.
• Obligation to assess and mitigate risks.

6
IFAC comprises three parts

• A General Principles
• Principles, threats, safeguards
• B Professional Accountants in Public Practice
  (Application)
• Application guidance, general and specific
  application, extensive section on independence
• C Professional Accountants in Business
• Not to be adopted by ACRA.

7
IFAC Outline (A B)
A Fundamental Principles
Part B Application Guidance
Fundamental principles (Similar to ACRA)
Integrity Objectivity Competence due care
Confidentiality Professional Behaviour Conceptua
l framework Identify, evaluate address
threats to principles Guidance threats
(Similar to ACRA) Guidance - safeguards
General Appointment Conflicts Second
opinions Fees / remuneration Marketing
Gifts and hospitality Custody of client
assets Objectivity All services Independence
assurance engagement 24 situations
8
IFAC Outline - Independence
Conceptual Framework
Application Rules and Guidance

• Financial interests
• Loans guarantees
• Relationships
• business/family/personal
• Employment, serving as officer/director
• Long association of senior personnel
• Recent service
• Non-assurance services
• Preparation of accounts, valuation,
• legal services, internal audit, IT, tax.
• Fees/pricing Size/contingent/overdue
• Gifts hospitality
• Litigation

Assurance client Financial statement audit
client Other assurance clients Entities of
Significant Public Interest Related entity
To be independent - Firm - Network firm -
Members of assurance teams - Immediate family -
Close family
9
PART A Principles and Conceptual Framework

• PAs must assess whether the fundamental
  principles are threatened.
• If threat identified, PAs must apply safeguards
  to eliminate the threat or reduce the threat to
  an insignificant level.

10
PART A Principles and Conceptual Framework

• The test of when to evaluate and apply ethics
  procedures is whether the PA knows, or could
  reasonably be expected to know, of circumstances
  or relationships that may compromise compliance.
  
• Decisions to proceed with engagement must be
  documented.

11
E.g. Principle 1

• Integrity
• 110.1 The principle of integrity imposes an
  obligation on all public accountants to be
  straightforward and honest in professional and
  business relationships. Integrity also implies
  fair dealing and truthfulness.
• 110.2 A public accountant should not be
  associated with reports, returns, communications
  or other information where they believe that the
  information
• Contains a materially false or misleading
  statement
• Contains statements or information furnished
  recklessly or
• Omits or obscures information required to be
  included where such omission or obscurity would
  be misleading.
• 110.3 A public accountant will not be considered
  to be in breach of paragraph 110.2 if the public
  accountant provides a modified report in respect
  of a matter contained in paragraph 110.2.

12
IFAC Outline (A B)
A Fundamental Principles
Part B Application Guidance
Fundamental principles (Similar to ACRA)
Integrity Objectivity Competence due care
Confidentiality Behaviour Conceptual
framework Identify, evaluate address threats
to principles Guidance threats (Similar to
ACRA) Guidance - safeguards
General Appointment Conflicts Second
opinions Fees / remuneration Marketing
Gifts and hospitality Custody of client
assets Objectivity All services Independence
assurance engagement 24 situations
13
Part B Guidance on Threatsand Safeguards

• Non-exhaustive application guidance describing
  typical circumstances that may create threats,
  and corresponding safeguards.
• Not sufficient to comply with examples should
  apply framework to the particular circumstances.
• Some situations such a threat they amount to
  prohibition, regardless of materiality (e.g.
  auditor having any financial interest in client).

14
E.g. Guidance on Client Acceptance (p.21)

• 210.1 Before accepting a new client relationship,
  a public accountant should consider whether
  acceptance would create any threats to compliance
  with the fundamental principles. Potential
  threats to integrity or professional behavior may
  be created from, for example, questionable issues
  associated with the client (its owners,
  management and activities).
• 210.2 Client issues that, if known, could
  threaten compliance with the fundamental
  principles include, for example, client
  involvement in illegal activities (such as money
  laundering), dishonesty or questionable financial
  reporting practices.
• 210.3 The significance of any threats should be
  evaluated. If identified threats are other than
  clearly insignificant, safeguards should be
  considered and applied as necessary to eliminate
  them or reduce them to an acceptable level.
• 210.4 Appropriate safeguards may include
  obtaining knowledge and understanding of the
  client, its owners, managers and those
  responsible for its governance and business
  activities, or securing the clients commitment
  to improve corporate governance practices or
  internal controls.
• 210.5 Where it is not possible to reduce the
  threats to an acceptable level, a public
  accountant should decline to enter into the
  client relationship.

15
Level of threat and safeguard to be applied
depends on
ASSURANCE CLIENTS
Client Side
Financial Statement Audit Clients
OTHERS
ESPI
Others
Rules and Guidance
Applicable Rules
Plus more
Plus more
16
Materiality when to apply Safeguards

• IFAC Code requires more judgement
• The test on what would be unacceptable
• . what a reasonable and informed third party
  having knowledge of all relevant information,
  including safeguards applied, would reasonably
  conclude to be unacceptable.
• Safeguards must address threats, unless clearly
  insignificant (trivial and inconsequential).
• Proposed that some specific thresholds be retained

17
E.g. Financial Interests (p.47)

• Provisions Applicable to All Assurance Clients
• 290.106 If a member of the assurance team, or
  their immediate family member, has a direct
  financial interest?, or a material indirect
  financial interest, in the assurance audit
  client, the self-interest threat created would be
  so significant the only safeguards available to
  eliminate the threat or reduce it to an
  acceptable level would be to
• Dispose of the direct financial interest prior to
  the individual becoming a member of the assurance
  team
• Dispose of the indirect financial interest in
  total or dispose of a sufficient amount of it so
  that the remaining interest is no longer material
  prior to the individual becoming a member of the
  assurance team or
• Remove the member of the assurance team from the
  assurance engagement.

18
Some key points
19
Part A

• Recommend adopt Part A in entirety without
  modification to not add/detract from IFAC
  principles avoid repetition and preserve
  integrity of remainder which flows from the
  fundamental principles.

20
Financial Interests Non-assurance team
membersand family
CURRENT 5 Cap on interest in client or related
entities and close business relationships. IFAC
More comprehensive risk-based framework taking
into account direct and indirect interests,
materiality, types of clients and
ESPI. Material Not defined in absolute terms.
Threats to independence must be insignificant
i.e. trivial and inconsequential.
21
Entities of Significant Public Interest

• Current Additional requirements for Public
  Company clients.
• IFAC Listed Companies, may be extended to ESPI
  e.g. regulated financial institutions and
  charities.
• Recommended extension to ESPI.
• Consultation includes questions on how to define
  ESPI

22
Providing Accounting Services to
subsidiaries/divisions

• 1. IFAC no distinction between foreign and local
  subsidiaries
• Proposed IFAC
• 2. Current dollar limit on fees for services
  provided to subsidiaries/divisions.
• IFAC fees must be clearly insignificant
• Considered it useful to define clearly
  insignificant as no more than the current
  prescribed maximum level.

23
Providing Internal Audit Services and IT
Services to ESPI audit clients

• Current prohibits provision of internal audit
  services and IT services to public company audit
  clients
• IFAC does not distinguish ESPI allows provision
  to all audit clients with safeguards.
• For public interest, to retain the prohibition on
  the provision of internal audit services and IT
  Services to ESPI audit clients.

24
Proportion of Fees

• Current and IFAC require review/safeguards when
  fees from one client reach a certain proportion.
• Current Specifies levels at which safeguards
  must be applied, including with regard to
  non-audit fees.
• IFAC does not specific levels or cover
  proportion of non-audit fees compared to audit
  fees.
• Considered beneficial to retain the levels of
  fees at which safeguards should be considered,
  (including on non-audit services.)

25
Gifts and Hospitality from audit clients

• Current Maximum 200 of gifts and hospitality.
• IFAC Value must be clearly insignificant.
• Proposed IFAC

26
New addition

• Custody of Client Assets
• No equivalent in current Code.
• Prohibits Public Accountants from assuming
  custody of client monies or other assets unless
  permitted to do so by law and, if so, in
  compliance with any additional legal duties.

27
To Delete

• Provisions in current ACRA Code with no direct
  equivalent in IFAC, and considered not necessary
  to retain
• Client solicitation, encroachment and referrals
  (although IFAC covers generally)
• Method of practice
• Prospectuses and other Documents

28

• Thank you more details can be found in the
  consultation paper - we look forward to your
  comments
• (by 24 September, via the ACRA website at
  http//www.acra.gov.sg/feedback)