Review of Part C of the Code
Jim Gaa
IESBA December 2012
New York, USA
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Review of Part C of the Code
• To inform the development of IESBA’s Strategy and Work Plan
• Preliminary Report to June IESBA
• Survey to identify priorities: August
• Presentation to PAIB Committee: September
• Presentation to CAG: September
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Review of Part C of the Code
Working Group Membership
• Jim Gaa (Chair)
• Larry Kean (SME -- USA)
• Alice McCleary (Board member)
• Ian Rushby (PAIB Committee -- UK)
• Lisa Snyder (Technical Adviser)
• Significant input from PAIB/SME perspective
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Review of Part C of the Code
Recommendations
• 3 highest priority issues
• 3 important issues to draw to attention of IESBA
• 4 lower priority issues to be aware of
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Review of Part C of the Code
Highest Priority Issues
• Pressure by Superiors and Others to Engage in Unethical or Illegal Acts (Sections 310, 320, and 340).
• Preparing and Reporting of Information (Section 320)
• Faithful representation
• Professional and financial reporting standards
• Dissociation
• Earnings Management
• Facilitation payments and bribes (Section 350:
Inducements)
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Review of Part C of the Code
Pressure by Superiors
• Top issue according to working group surveys
• Sections 310, 320 and 340 need to be combined
• 340 is too narrowly described
• Many PAIBs not involved in reporting and pressures are not limited to reporting
• Pressure is from corporate culture, bullying and threats of job loss. Not only personal financial gain
• Motivations in Section 340 should be expanded
• No guidance requiring a senior PAIB not to inappropriately pressure subordinates.
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Review of Part C of the Code
Preparing and Reporting of Information:
Faithful representation:
Only a brief mention of the PAIB’s responsibility.
The structure of a revised principle-based section would be (a)a more positive and fuller statement of the responsibility of PAIBs to prepare and report information that is a faithful representation of economic events and state of affairs, (b) a discussion of the threats to providing such depictions (including the motives for altering or manipulating the information), and (c) presentation of safeguards.
Need to build on, but not overlap with, the work of financial reporting standard setters.
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Review of Part C of the Code
Preparing and Reporting of Information
Professional and financial reporting standards
• Clarify the intent of the requirement that information be prepared or presented fairly and honestly (in addition to be in accordance with professional standards); and
• If and, if so, how the “relevant professional standards” in
320.1 are intended to differ from the “applicable financial reporting standards” in 320.2 and if no difference is intended, to delete one or the other.
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Review of Part C of the Code
Preparing and Reporting of Information
Dissociation
Unclear how a PAIB can dissociate from misleading reports, either internal or external, other than by resigning.
Provide guidance on how a PAIB can practically dissociate from misleading reports.
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Review of Part C of the Code
Preparing and Reporting of Information
Earnings Management
• Earnings management ranges from ethically neutral, to unethical to fraudulent. Examples include reducing expenditure to increase profits, prudent accounting policies and financial engineering to misrepresent results.
• Explore whether it is possible to describe or define earnings management in a way that supports guidance in the Code
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Review of Part C of the Code
Facilitation payments and bribes
• Perennial Problem
• Section 350 is focussed on receiving offers. Increase the emphasis on making offers to align more closely with practical challenges faced by
PAIBs.
• Consider whether additional guidance that recognizes the diversity of cultures would be helpful to PAIBs working across different cultures and jurisdictions.
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Review of Part C of the Code
Three Other Important Issues
• Scope of Part C is sufficient: “Business Ethics” are not
Part C specific.
• Specific Guidance Relevant to Professional Accountants in the Public Sector? Explicit consideration of relevant issues but no separate “Part D”
• Clarify applicability of Part C to Professional Accountants in Public Practice: Quick Fix?
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Review of Part C of the Code
Lower priority issues for the future
• Conflicting Business Partner vs. Controller roles
• Independence requirements for internal auditors
• Advocacy threats to fundamental principles
• Other matters raised by respondents
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Review of Part C of the Code
Discussion of Recommendations
• Pressure by Superiors and Others to Engage in Unethical or Illegal Acts.
• Preparing and Reporting of Information
• Faithful representation
• Professional and financial reporting standards
• Dissociation
• Earnings Management
• Facilitation payments and bribes
•
Scope/Public Sector/Public Practice
• Lower priority issues
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