Week 4 Professional codes of ethics

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Week 5 Professional Ethics

• Week 5 Professional Ethics and Codes of Conduct
• Describe the sources of, and enforcement
  mechanisms associated with professional ethics
  and codes of conduct.
• Define the fundamental concepts of professional
  ethics.
• Define the detailed requirements of, and
  illustrate and analyse the application of,
  professional ethics in the context of
  independence, objectivity and integrity.
• Distinguish between the elements of professional
  ethics applicable to internal auditors and those
  applicable to external auditors.
• Describe the responsibilities of internal and
  external auditors for the prevention and
  detection of fraud and error and in relation to
  laws and regulations.

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Week 5 Professional codes of ethics

• Sources and enforcement mechanisms
• Fundamental concepts
• Due care, skill and competence
• Rules of professional conduct
• Statement 1
• Integrity
• Objectivity
• Independence
• Threats to integrity, objectivity and
  independence

3
Sources and enforcement mechanisms

• Two sources of basic ethical principles
• ACCA Code of Ethics and Conduct
• APBs Ethical Standards for audits (an example of
  best practice).
• Note Under Section 3 of ACCAs Code of Ethics
  and Conduct
• Those (members of ACCA) failing to observe the
  standards expected of them may be required to
  answer a complaint before ACCAs Disciplinary
  Committee.

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ACCAs Code of Ethics Fundamental Principles

• Integrity honest and straightforward.
• Objectivity free from bias.
• Professional Competence and Due Care
  maintenance of professional knowledge and skill
  including adherence to technical and professional
  standards.
• Confidentiality unless disclosure is required
  by law or considered desirable in the public
  interest.
• Professional Behaviour compliance with relevant
  laws and regulations and avoidance poof behaviour
  that may discredit the profession.

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Due care

• Case law Kingston Cotton Mill case (1896)
• Watchdog not a bloodhound
• Reasonable skill care and caution
• Depending on the circumstances
• Increased complexity of corporate environment
• Case law Thomas Gerrard Son (1967)
• Standards of reasonable care and skill are more
  exacting today than they were in 1896.
• Case law Pacific Acceptance Corp Ltd. (1970)
• Auditing standards and professional regulations
  provide guidance but it is the courts that decide
  on due care.

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Integrity,Objectivity,Independence

• ACCA basic principle
• Independence states that a members objectivity
  must be beyond question if they are to report as
  auditor.
• Thus the member is and is seen to be independent.
• Note
• Legal independence relates to relationships that
  are prohibited.
• Professional independence is an attitude of mind!

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Compromising audit independence

• Self interest threat
• Self review threat
• Advocacy threat
• Familiarity threat
• Intimidation threat

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Securing the Independence

• Companies Act 1989 s.27
• Neither an officer or employee of the company,
  nor a partner or employee of an officer or
  employee of the company may be appointed as
  auditor.
• Companies Act 1985 s.389AB
• Disclosure of audit fees and expenses.
• Disclosure of non-audit services.
• Professional rules
• General safeguards
• Specific areas of risk

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General environmental safeguards

• Educational, training and experience
  requirements.
• CPD.
• Corporate governance regulations.
• Professional standards.
• Professional or regulatory monitoring.
• External review.
• Ethical code.
• Internal procedures.

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Specific areas of risk

• Financial involvement.
• Personal, family or business relationships.
• Employment or partner on client board.
• Favourable treatment (loans, gifts and
  hospitality).
• Litigation or other external pressures.
• Undue dependence on fees (includes overdue fees
  and lowballing).
• Provision of non-audit services.
• Recruitment.
• Note For all areas of risk, quality control
  procedures need to be in place.

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Areas of Risk members in practice

• Financial Involvement (depends on the persons
  role, materiality of the interest and the degree
  of control)
• The following should not have a direct financial
  interest or an indirect material financial
  interest in an audit client
• The audit/assurance firm.
• A member of the audit/assurance team.
• An immediate family member of a member of the
  audit/assurance team.

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Areas of Risk members in practice

• Family and other personal relationships
• Problems may arise where
• Someone in the practice is connected to the
  client by a mutual business interest.
• An officer or employee is closely connected with
  a partner or member of staff.
• Closely connected normally infers
• Spouse.
• Minor children (including stepchildren).
• A company in which the person has a 20 or more
  interest in that company.

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Areas of Risk members in practice

• Beneficial interests in shares and other
  investments
• A practice should ensure
• It does not have as an audit client a company in
  which any partner or anyone closely connected
  with a partner holds shares or has a beneficial
  interest in shares.
• Shares inherited or acquired on marriage should
  be sold at the earliest opportunity.

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Areas of Risk members in practice

• Employment of partners by an audit client /
  serving on the clients board
• A key audit partner should not accept a
  management position with a client.
• Unless at least two years have elapsed since the
  conclusion of the audit.
• Generally speaking, an audit partner should not
  serve on the board of an audit client.

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Areas of Risk members in practice

• Loans
• Independence is under threat if
• A practice makes a loan or guarantees borrowings
  by an audit client.
• Accepts a loan from a client.
• Have borrowing or other obligations guaranteed by
  a client.
• Loans from audit clients who are banks and are
  made on normal commercial terms are acceptable
  (if material the threat to independence needs to
  be reduced).

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Areas of Risk members in practice

• Goods and services i.e. gifts hospitality
• Objectivity may be seen to be threatened by
  accepting goods or services or hospitality.
• Again someone closely connected to the practice
  threatens objectivity.
• Modest values excepted.

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Areas of Risk members in practice

• Actual or threatened litigation
• Clearly if there is litigation or threaten
  litigation between the auditor and client,
  objectivity is threatened.
• Client may in this case withhold information from
  the auditor, given the adversarial position.
• Affected individuals should be removed from the
  assignment, proper disclosures made and perhaps
  involve additional unconnected professional staff.

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Areas of Risk members in practice

• Undue dependence on an audit client
• Impairment of independence if revenue from client
  is in excess of 15 of the practices total
  revenue.
• Where the public interest is involved e.g. plcs
  the appropriate figure is reduced to 10.
• Once the 15 rule is exceeded this should trigger
  review procedures within the practice.

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Areas of Risk members in practice

• Overdue fees
• The existence of overdue fees can be a threat to
  objectivity.
• They could be regarded as a significant loan.

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Areas of Risk members in practice

• Lowballing
• Where an audit firm quotes a significantly lower
  fee than the predecessor auditor.
• This could be regarded as a self interest threat
  and quality control procedures need to be in
  place.

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Areas of Risk members in practice

• Contingent fees
• An audit firm should not accept an audit
  assignment where the fees are contingent on the
  outcome.

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Areas of Risk members in practice

• Provision of other services to audit clients
• Care taken not to perform management functions
  (management threat!).
• No conflict between the audit and other services.
• Careful not to drift beyond the advisory role.
• According to ACCAs Code of Ethics you can
  perform routine accounting, bookkeeping and
  payroll services provided there are reasonable
  safeguards (different staff involvement) but may
  not provide these services when dealing with a
  listed company, except in an emergency.

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Quality Control

• ISA 220 Quality Control for audits of historical
  financial information.
• Applicable to the individual audit engagement.
• Engagement partner has overall responsibility
• Compliance with ethical standards.
• Independence requirements.
• Acceptance and continuance of clients.
• Capabilities and competence of audit team.
• Timing, direction, supervision and performance.
• In line with professional standards, legal and
  regulatory requirements.
• Appropriate consultation procedures.
• Proper quality control review.

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Improving Independence

• Mandatory rotation.
• Appointment by state agency.
• Peer review.
• Shareholder panel.
• Audit committees.

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Rotation of audit partners

• The engagement partner should be replaced
• Within 5 years.
• They must also not return for a further 5 years.

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Difficulties with rotation

• Client relationship
• Built up over a number of years
• Learning curve problem
• Time taken to amass knowledge of client
• Costs involved
• Who is going to incur these the client ?

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The idea of a profession

• The dictionary definition of a profession
• is a calling or vocation involving some branch
  of learning
• Clearly, accountancy in the broad sense involves
  a body of knowledge.
• The idea of profession rests on the following
  premises.

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The idea of a profession

• A recognisable discrete body of knowledge
• An educational process
• A system of examinations
• A system of licensing practitioners
• A professional association
• A sense of responsibility to society
• A code of ethics
• A set of technical standards

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Fundamental principles the auditing profession
must adhere to

• Behave with integrity in all professional,
  business and personal financial relationships.
• Strive for objectivity in all professional and
  business judgements,
• Objectivity is the state of mind which has regard
  to all considerations relevant to the task in
  hand
• It presumes intellectual honesty.

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Fundamental principles the auditing profession
must adhere to

• Refusal of performance of work in which there is
  not a competency to undertake unless such advice
  and assistance are available to enable this
  competency.
•  Carry out professional work with due skill,
  care, diligence and expedition and with proper
  regard for the technical and professional
  standards expected.

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Fundamental principles the auditing profession
must adhere to

• Behave with courtesy and consideration towards
  all with whom contact is made during performance
  of the work.

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Professional ethics for internal auditors

• As a member of ACCA (including students!!) you
  are bound by the same professional code of
  conduct.
• If an employed member you may not be seen as
  independent but should be objective and act with
  integrity.
• An internal auditor should still demonstrate
  honesty, objectivity and diligence and should be
  seen as independent and avoid any activity that
  may compromise their independence.

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Professional ethics for internal auditors

• Should avoid
• Conflicts of interest.
• Undue influences in the organisation.
• Undertaking non-audit duties where possible.
• Self review threats i.e auditing areas you had
  responsibility for.

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Fraud a controversial and evolving issue

• 1844 to 1920s primary audit objective.
• Kingston Cotton Mill 1896
• 1920s to 1960s steady erosion as an audit
  objective due to
• Complexity of systems
• Better internal controls
• Vast quantities of data
• Movement from meticulous checking to sampling
  plus review and evaluation of the effectiveness
  of the accounting system and the internal
  controls.
• Argument It is managements responsibility to
  detect fraud and error through maintaining a good
  system of internal control.

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Pressure to play a more active role

• ISA 240 Consideration of Fraud.
• Primary responsibility rests with both those
  charged with governance of the entity and of
  management.
• Inherent limitations of an audit mean that there
  is unavoidable risk that some material
  misstatements will not be detected.
• Risk of not detecting fraud is greater than not
  detecting error.
• Risk of not detecting management fraud is greater
  than employee fraud.

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ISA 240

• ISA 240 Consideration of Fraud.
• Auditors responsibilities
• Professional scepticism.
• Discussion among engagement team.
• Risk assessment procedures (ISA 315)
• Identification and assessment of the risks of
  material misstatement due to fraud.
• Responses to the risks of material misstatement
  due to fraud.
• Get management representations.
• Communications
• Unable to continue.
• NOTE THROUGHTOUT THE PROCESS DOCUMENTATION IS
  KEY!

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ISA 240

• Risk assessment procedures
• Make enquiries of management and those charged
  with governance.
• How do those charged with governance exercise
  oversight of management.
• Consider fraud risk factors.
• Consider unusual or unexpected relationships.
• Consider other information.

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ISA 240

• Communications
• Relates to ALL fraud identified
• Communicate asap to appropriate level of
  management.
• If management are involved communicate to those
  charged with governance.
• Regulatory Enforcement Authorities
• Maintenance of client confidentiality is a
  professional duty.
• Obtain legal advice
• Anti-money laundering legislation in UK and
  Ireland imposes a duty on auditors to report all
  suspicions.

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ISA 240

• Unable to continue engagement
• Consider professional and legal responsibilities
• Consider withdrawing
• Consider reporting

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Fraud and internal auditors

• IIA requires that internal auditors
• review the measures used to safeguard assets
  from various types of losses resulting from
  theft, fire, improper or illegal activities, and
  exposure to the elements.
• Internal auditors will need to have sufficient
  autonomy and authority to examine all aspects of
  business activity including management practices
  e.g. overriding control issues.

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ISA 250 Consideration of Laws and Regulations

• The purpose of this ISA
• Auditors should recognise that non-compliance by
  the entity with laws and regulations may
  materially affect the financial statements.
• Auditors need to review at the planning stage as
  well as throughout the audit.

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ISA 250 Consideration of Laws and Regulations

• Responsibility of management for compliance
• Monitoring legal requirements.
• Operating appropriate internal controls.
• Publicising a code of conduct.
• Ensuring employees are properly trained.
• Maintaining a register of significant laws which
  have to be complied with.

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ISA 250 Consideration of Laws and Regulations

• Indications of Non-Compliance
• Investigations by government departments.
• Payment of fines or penalties.
• Payments for unspecified services or loans.
• Sales commissions or fess which are excessive.
• Purchasing significantly above/below market
  price.
• Unusual payments in cash.

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ISA 250 Consideration of Laws and Regulations

• Complex corporate structures.
• Tax evasion e.g. under-declaration of income or
  over claiming of expenses.
• Existence of systems which fail to give adequate
  audit trail of transactions.
• Media comment.
• Transactions that appear to have no economic
  sense.
• Those charged with governance fail to provide
  necessary information and explanations.