PROFESSIONAL
ETHICS OF
ACCOUNTANTS
GROUP 2 :
MUTIA SHARIFA
ZULMAR
2210533038
RAHMA YONA MARSA
2210532004
SHABINA HUMAIRA
M
2210532039
DEFINITION
a professional is a member of an occupational group, who does the following:
1. Sees other members, including those employed elsewhere, as
peers/colleagues.
2. Exercises judgment when performing specialized tasks and follows relevant
professional standards.
3. Accepts the profession’s agreement to work in a morally permissible way
(usually as set out in the profession’s code of ethics) as an obligation of his or
her role
DEFINITION
Ethics can be broadly defined as a set of moral principles or
values
Professional ethics are the morally permissible standards of conduct that
apply to the members of a particular profession. Given their position of trust,
professionals are expected to conduct themselves at a higher level than most
other members of society.
A set of standards & rules, adopted by organizations to assist its members in
understanding the difference between right & wrong and in applying that
understanding to their decisions.
The fundamental ethical principles are an important part of the
PA’s ethical decision process. Choosing the right principles
requires knowledge of professional standards, responsibilities,
and expectations of ethical conduct, an understanding of the
consequences, and the ability to recognize an ethical dilemma.
Further, public accountants must not only be able to recognize
and resolve an ethical dilemma but they must take the
appropriate ethical action
FRAMEWORK FOR ETHICAL
DECISION MAKING
Identify who is
affected and how
each is affected
Obtain relevant
facts and identify
the issues
Identify the
ethical issues
Consider and
evaluate
courses
of action
Implement
the
course of
action
ETHICAL BLIND SPOT
ethical blind spot is unconscious judgmental tendencies that can hinder the
ethical decision making process or cause the decision maker to fail to recognize
the ethical dimension of a choice.
Ethical blind spots are perhaps worse than rationalizations because the decision
maker is unaware of the blind spot and it can inhibit the auditor from even
recognizing an ethical dilemma in the first place.
PROFESSIONAL GUIDANCE IN ETHICAL
CONDUCT
auditors’ decisions are made with consideration of the rules of professional
conduct.
The CPA code applies to all members and firms irrespective of the type of
services being provided and is not restricted only to those in public practice.
PUBLIC PROTECTION
Section 200 of the Code of Professional Conduct represents the standards of
conduct that ensure the protection of the public interest and the maintenance of
the profession’s reputation.
Rule 201—Maintenance of Good Reputation of the
Profession
The rules of accounting bodies in Canada require their members to
behave in the best interests of their profession and the public interest. This
means accountants should not take advantage of the trust placed in
them. An accountant should not be publicly critical of a colleague (i.e., by
making a complaint about th colleague’s behaviour to their professional
body or by being critical, as a successor auditor, to the new client) without
giving the colleague a chance to explain his or her actions first.
Rule 202—Integrity, Due Care, and Objectivity
Members must always remain objective, act with integrity, and
continually assess and manage the risks to objectivity and
integrity. The Code states that the requirement to be objective is
not the same as independence. Objectivity is a state of mind.
Independence is not only a state of mind; it also includes the
appearance of independence, in the view of a reasonable
observer
Rule 203—Professional Competence
Professional accoun- tants are required to attend a certain number of
continuing professional education courses a year.
An auditor should not undertake an audit of a client unless that auditor has
knowl- edge both of that client’s business and industry, and of the technical
aspects of the audit.
Rule 204—Independence
The value of auditing depends heavily on the public’s per- ception of the independence
of auditors. The reason that many diverse users are will- ing to rely upon the PA’s audit
opinion as to the fairness of financial statements is that users expect the PA to have an
unbiased viewpoint. The rules of professional conduct require members who are
engaged in the practice of public accounting to be indepen- dent when they perform
assurance services and specified auditing procedures engage- ments.
Rule 205—False and Misleading Documents and Oral
Representations
No mem- bers, whether in public accounting or industry, can sign or associate with
false or misleading information (this includes letters, reports, and written or oral
statements) or fail to reveal material omissions from financial statements.
Rule 206—Compliance with Professional Standards
PAs are required to comply with professional standards when preparing and auditing
financial statements. These stan- dards include the standards of the professional
body but, more importantly, account- ing standards and GAAS as set out in the CPA
Canada Handbook—Assurance.
Rule 208—Confidentiality of Information
The rules of conduct for PAs state that members shall not disclose any confidential client
information or employer informa- tion without the specific consent of the client or employer.
The rules also prohibit using confidential or inside information to earn profits or benefits. The
confidential- ity requirement applies to all services provided by public accounting firms,
including tax and management service
Rule 210—Conflicts of Interest
If an auditor is asked to provide assurance services for two or more clients who
are competitors, then the auditor needs to obtain consent from each client and
must also use procedures to protect confidential information.
Rule 211—Duty to Report Breaches of the CPA Code
The CPA Code of Conduct of the professional accounting bodies requires
members who are aware of another mem- ber’s breach of the rules to report
to the profession’s discipline committee after first advising the member of
the intent to make a report
Rule 215—Contingent Fees
The charging of a fee based on the outcome of an audit, such as the granting
of a loan by a bank, could easily impair the auditor’s indepen- dence.
Contingent fees are prohibited for audits, reviews, compilation engagements,
and any other engagements that require the auditor to be objective.
Rule 217—Advertising, Solicitation, and Endorsements
A profession’s reputation is not enhanced if the members openly solicit one
another’s clients or engage in advertising that is overly aggressive, selflaudatory, or critical of other members of the profession or that makes claims
that cannot be substantiated.
Rule 218—Retention of Documentation and Working
Papers
The PA has an obligation to retain documents for a reasonable period
of time. This is necessary to properly carry out professional services as
well as in case of litigation, practice inspections, or disci- plinary
hearings.
Professional Colleagues
The preamble of the CPA Code of Conduct emphasizes that the following
fundamen- tal principles should guide collegial relations: that client
interests are placed ahead of the interest of the member or firm and that
professional courtesy and cooperation are expected at all times. The two
rules :
• Rule 302—Communication with Predecessor
• Rule 303—Provision of Client Information
THE INDEPENDENCE STANDARD FOR
ASSURANCE ENGAGEMENTS
A. Are Services or Circumstances Prohibited?
Prohibitions serve as an effective means to prevent independence threats.
In some cases, the prohibition does not mean that the firm cannot take on
the engagement; rather, it means that the individual affected cannot take
part in the engagement.
THE INDEPENDENCE STANDARD FOR
ASSURANCE ENGAGEMENTS
B. Prohibitions for All Assurance Engagements
The following are prohibitions applicable to all assurance engagements:
• Members of the engagement team (and immediate family members) may
not have a direct or material indirect financial interest in the entity subject to
the assurance engagement.
• The firm or members of the engagement team may not have a loan from or a
loan guaranteed by the entity (except in normal course of business, e.g., a
bank).
• The firm and members of the engagement team cannot have a close
business relationship with the entity, a related entity, or management (unless
the financial interest is immaterial)
THE INDEPENDENCE STANDARD FOR
ASSURANCE ENGAGEMENTS
B. Prohibitions for All Assurance Engagements
The following are prohibitions applicable to all assurance engagements:
•Members of the engagement team may not have an immediate family
member who is an officer or director of the client, who is in a position to exert
significant influence over the subject matter, or who has an accounting role or
financial reporting oversight role.
• A member of the engagement team must not serve as a director or officer
during the period covered by the assurance report.
• Members and firms are prohibited from performing management functions
(unless the entity’s management directs and supervises their work).
THE INDEPENDENCE STANDARD FOR
ASSURANCE ENGAGEMENTS
B. Prohibitions for All Assurance Engagements
The following are prohibitions applicable to all assurance engagements:
• Members of the engagement team must obtain client approval for making
journal entries and accounting classifications. The creation of original or source
documents such as cheques and invoices is prohibited.
• Members and students on the engagement team and the firm may not
accept other than insignificant gifts or hospitality from the assurance client.
• Key audit partners cannot be evaluated or compensated based on selling non
assurance services. (Key audit partners include the lead engagement partner,
the engagement quality control reviewer, and other partners who make key
decisions or judgments with respect to the audit.)
Prohibitions Specific to Listed Entities
The following prohibitions are only applicable to listed entities:
• A member or a firm cannot perform an audit if a person who would participate
in the audit is an officer or director or is in a financial reporting oversight role of the
entity (unless a year has elapsed since the date the financial statements were filed
with the relevant securities regulator).
• The firm cannot perform an audit if the chief executive officer (CEO) of the
audit firm is an officer or director or is in a financial reporting oversight role of
the entity, unless a year has elapsed since the person was the CEO of the firm.
• Key audit partners must leave the audit team after seven years. Lead partners
cannot participate in the engagement for that particular company until five years
have elapsed, and other key partners must wait until two years have elapsed.
Prohibitions Specific to Listed Entities
The following prohibitions are only applicable to listed entities:
• Unless specific measures are taken, firms are prohibited from performing
the financial statement audit if 15 percent of the firm’s total revenue comes
from a listed entity for two consecutive years.
• Firms cannot provide actuarial or human resources services, and they
cannot provide tax calculations for purposes of preparing audit entries. In the
case of valuation services, if they will be subject to audit procedures, they are
prohibited regardless of materiality
C. Identify Threats
• Self-interest threat—a threat to independence where the member
has a financial interest in the client or in the financial results of the client.
2. Advocacy threat—a threat to independence where the firm or
member is perceived to promote (or actually does promote) the client’s position.
3. Self-review threat—a threat to independence where the PA is in the position
of having to audit his or her own work during the period.
4. Familiarity threat—a threat to independence that occurs when
it is difficult to behave with professional skepticism during the engagement.
5. Intimidation threat—a threat to independence that occurs when the client
intimidates the public accounting firm or its staff with respect to the content of
the financial statements or with respect to the conduct of the audit.
Evaluate the Significance of the Threat
When the PA assesses the significance of the threat, she considers whether there
are any safeguards that will eliminate or reduce the threat to an acceptable level.
The Rules of Professional Conduct define an acceptable level as the level where a
reasonable observer would likely conclude that independence is not
compromised.
Identify and Apply Safeguards
Safeguards by the Profession and Legislation - include rules regarding partner
rotation, partner compensation, limits on the percentage of a firm’s revenue from
one client, and specific prohibited services.
Safeguards at the Client - Safeguards at clients can include policies that prohibit
certain services and/or that encourage ethical conduct.One of the key client
safeguards is competent accounting staff.The other key safeguards are related to
the audit committee.
Safeguards at the Firm - Public accounting firms have in place a range of
safeguards to ensure independence. These include employee training programs,
peer reviews,client acceptance, and continuance policies that help to identify
threats, and engagement quality reviews.
For Each Identified Independence Threat, Document
How It Was Resolved
For each new and ongoing assurance engagement, audit engagement
management, such as the partner and the manager, are required to
evaluate, in writing, the independence of the firm and the staff assigned to
the engagement. This formal independence threat analysis forms part of
the documentation for the engagement.
The documentation should include the threat, a description of the safeguard
to eliminate or reduce the threat to an acceptable level, and how that
safeguard
eliminates or reduces that threat to an acceptable level.
ENFORCEMENT OF THE CODE OF
PROFESSIONAL CONDUCT
Expectations gap is the gap between public expectations of the auditor’s
role and responsibilities and the auditor’s responsibilities per GAAS.
Reducing the Expectations Gap
The performance gap can be reduced by the following:
• Standard Setting—To address the deficient standards gap, the IAASB
and CPA Canada strive to set and revise standards. For example, the
auditing standards on auditor’s responsibility to detect fraud were issued
to address users’ needs and expectations of auditor performance
ENFORCEMENT OF THE CODE OF
PROFESSIONAL CONDUCT
Reducing the Expectations Gap
The performance gap can be reduced by the following:
• External Monitoring— external inspections conducted by provincial CPA
organizations and CPAB ensure public companies follow audit standards
and help them improve their level of performance. Further, in instances of
improper conduct and performance, there must be appropriate
sanctions.
• Firms’ Quality Control Systems—While external monitoring helps to
improve performance, to ensure that all public accountants perform their
work to a satisfactory standard on every audit, effective firms must have
effective quality control systems.
The reasonableness gap can be reduced by the following:
• Standard Setting—Revising and developing new standards to address
users’ needs and expectations also helps to address the reasonableness
gap.
• Educating Society about the Role of the Auditor—To reduce the
reasonableness gap, CPA Canada, leaders of public accounting firms,
and educators should educate investors and others who read financial
statements about the meaning of an auditor’s opinion, and the extent
and nature of auditors’ work.
AUDIT FAILURE AND AUDIT LIABILITY
Audit failure occurs when the auditor issues an inappropriate audit
opinion as the result of an underlying failure to comply with the
requirements of generally accepted auditing standards (GAAS).
Audit risk is the risk that the auditor will conclude that the financial
statements are fairly stated and an unqualified opinion can therefore be
issued when, in fact, they are materially misstated. Audit risk is
unavoidable, because auditors gather evidence on a test basis and
because well-concealed frauds are extremely difficult to detect.
MAJOR SOURCES OF AUDITOR LIABILITY
Auditors have a responsibility
under common law to fulfill
implied or expressed contracts
with clients. They have legal
liability to their clients for
negligence and/ or breach of
contract should they fail to
provide the services or should
they fail to exercise due care in
their performance.
HOW PUBLIC ACCOUNTANTS CAN MINIMIZE LITIGATION RISK
Public accountants may also take specific action to minimize their liability.
Below are some of the key actions:
• Deal only with clients possessing integrity. A PA firm needs procedures
to evaluate the integrity of clients and should dissociate itself from clients
found to be lacking integrity.
• Maintain independence. Independence is more than merely financial.
Independence requires an attitude of responsibility separate from the
client’s interest. The auditor must maintain an attitude of healthy
professional skepticism.
• Understand the client’s business. In several high-profile litigation cases,
the lack of knowledge of industry practices and client operations has been
a major factor in auditors failing to uncover misstatements.
• Perform quality audits. Quality audits require that auditors obtain
appropriate evidence and make appropriate judgments about the
evidence.
• Document the work properly. The preparation of good audit
documentation helps the auditor perform quality audits. If an auditor has
to defend an audit in court, quality audit documentation is essential, and
should include an engagement letter and a representation letter that
define the respective obligations of the client and the auditor.
• Exercise and maintain professional skepticism. Auditors are often liable
when they are presented with information indicating a problem that they
fail to recognize. Auditors need to strive to maintain a healthy level of
skepticism, one that keeps them alert to potential misstatements, so that
they can recognize misstatements when they exist.