4 - 1

Results from the original reseach
2
3
Case Description
1 Stealing to save a life
Whistle-blowing
Facilitation payment
Yes No
29% 67%
69% 27%
98% 0%
No answer
4%
4%
2%
4 - 2

Ethics – a system or code of conduct based on moral duties and obligations that indicate how an individual should behave in society
Our society has attached a special meaning to the term professional.
A professional is expected to conduct himself at a higher level than most other members of society.
4 - 3

MIA By-laws
(on Professional Conduct & Ethics)
• Effective from 2007
• Divided into 3 main parts:
 Part A: Applicable to all members
 Part B: Applicable to professional accountants in public practice
 Part C: Applicable to professional accountants in business
4 - 4

Integrity
Objectivity
Professional competence & due care
Confidentiality
Professional behaviour
4 - 5

• Straightforward, honest, fair dealing, truthfulness
• Should not be associated with reports (or any information) where they believe that the information:
1. Contains a materially false or misleading statement
2. Contain statements or information furnished recklessly
3. Omits/obscures information required to be included, where such omission/obscurity would be misleading
4 - 6

• Do not compromise professional/business judgment because of bias, conflict of interest , undue influence of others.
• Relationships that bias/unduly influence professional judgment should be avoided.
4 - 7

Professional Competence & Due Care
• Must maintain professional knowledge & skill
• Must act diligently according to technical/prof standards
• Competency attained through formal education, practical training, experience, CPE (must be maintained thereafter)
• Must ensure that those working under his authority have appropriate training & supervision
• May conduct additional research or consult with other professionals during engagement
4 - 8

Continuing Professional Education
(CPE)
• For maintenance of technical knowledge & competency
• Structured learning  courses, conferences, seminars, study programs, study for postqualification courses/degrees, writing of technical articles/papers/books, member of MIA committee
• Unstructured  private reading/study, technical research for practical work
4 - 9

Continuing Professional Education
(CPE) (Contd.)
• At least 120 CPE credit hours for every rolling 3 calendar year period (i.e.40 hours per year)
• 60 hours  structured & verifiable
• At least 20 hours of structured & verifiable training should be obtained each calendar year
• CPE audit will be conducted by random
4 - 10

• Cannot disclose confidential info while acting in professional capacity, and also even in a social environment.
• Must maintain confidentiality disclosed by a prospective client, employer, info within a firm/orgn
• Must ensure that staff maintain confidentiality as well
• Confidentiality continues even after the end of relationships between accountant & client/employer
• Cannot use info for personal gain/ advantage of
3 rd party
4 - 11

• May be required to disclose confidential info when:
1. Permitted by law & is authorised by client/employer
2. Required by law, e.g. to produce documents for legal proceedings , disclosure to public authorities about any law infringements
3. To comply with quality review or respond to an inquiry/investigation of a prof body , to protect the prof interests of a prof accountant, to comply with technical standards & ethics requirements
4 - 12

• Must comply with relevant laws & regulations
• Avoid any action that discredits the profession
• In promoting themselves, they should not:
1. Make exaggerated claims about their service, their qualifications & experience.
2. Make disparaging references or unsubstantiated comparisons to the work of others.
4 - 13

• Framework vs a set of rules
• Impossible to define every situation that may arise which would threaten compliance with fundamental principles
• Professional accountant must evaluate every threat accordingly
4 - 14

1. Self-interest threats
2. Self-review threats
3. Advocacy threats
4. Familiarity threats
5. Intimidation threats
4 - 15

Measures that may reduce or eliminate threats to compliance to an acceptable level
IFAC Code classifies safeguards into:
1. Created by the profession, legislation or regulation
2. In the work environment (office code of ethic)
4 - 16

1. Consider relevant facts, the ethical issues involved, fundamental principles which are related, established internal procedures & alternative courses of action.
2. Consult with appropriate persons for help.
3. Consider consulting those charged with governance (e.g. BOD or Audit Committee).
4. Document the issue, details of discussions held, decisions taken.
5. Obtain professional advice from professional body/legal advisors.
6. Withdraw from engagement/resign.
4 - 17

Enforcement & Disciplinary Action
• MIA (Disciplinary) Rules 2002
• Investigation Committee
Investigates any complaint referred to it and determines whether or not the matter is to be referred to the Disciplinary Committee.
May dismiss the complaint if insufficient grounds
May not give a reason for dismissal
• Disciplinary Board – disciplines members by:
Termination of membership, suspension, cancellation of practising certificate, fine not exceeding RM5,000, admonition, payment of investigation costs, education
• Disciplinary Appeal Board
May confirm, reverse, vary the decision of the
Disciplinary Committee. Decision is final.
4 - 18

Independence in auditing means taking an unbiased viewpoint in performing audit tests, evaluating the results, and issuing the audit report.
Independence of mind
Independence in appearance
4 - 19

Different levels of independence requirements:
Type of engagement
Audit
Other assertion-based assurance engagements
Who must be independent:
Members of the audit team, the firm, network firms
Members of the audit team, the firm
Direct reporting assurance engagement
Members of the audit team, the firm
Restricted use reports Members of the team & their immediate & close family. Firm must have no financial interest.
4 - 20

Examples Threats to independence
Self-interest  members of firm can benefit from financial interest in assurance client
Direct financial interest
& material indirect financial interest
Loan/guarantee to/from client
Overdependence on total fees on client
Close business relationship
Contingent fees
4 - 21

Threats Examples
Self-review Judgement of previous audit may influence current audit.
Auditor was previously an officer of the audit client, or was in a position to influence the subject matter of the engagement, e.g. financial statements.
4 - 22

Threats
Advocacy
Examples
Auditor acts as a promoter of shares
(& etc) on behalf of the audit client.
Familiarity Auditor sympathetic to client’s interests because of close relationship, e.g. family connections, close friends, long term relationship
Intimidation Threats of firm dismissal, replacement because of disputes.
4 - 23

Safeguards against threats to independence
Safeguards
Profession, legislation, regulation
Examples
Professional standards, entry requirements to profession, CPE, independent requirements required by law
 professional code of ethics (MIA By-Laws)

Companies Act 1965 – prohibitions against appointment as auditors
4 - 24

Safeguards against threats to independence (Contd.)
Safeguards
Within assurance client
Within firm’s own systems
(audit firm)
Examples
Good corporate governance structure – effective audit committee, competent management, policies for fair financial reporting, transparent relationship with auditors
Quality control procedures, policies to identify non-independent interests or relationships, use of separate reporting lines for performance of non-audit engagements, removal of ‘offending’ individual from team, rotation of senior personnel, additional professional accountant to review
4 - 25

- Self-interest & familiarity threats
- But depends on the nature, value & intent behind the offer
- If offer is made in the normal course of business without specific intent to influence decision-making or to obtain information  not a significant threat
- Intimidation threat when there is a possibility of such offers being made public
- Should not accept any gift/hospitality unless value is insignificant
4 - 26

Read Chapter 9, pages 646-656
4 - 27

• Self-interest threat. But need to evaluate role of person holding financial interest, materiality of interest, type of financial interest (direct or indirect), degree of control/influence over interest
• For ALL assurance clients:
Member of team or their immediate family member has a direct/material indirect FI in assurance client (even if received as inheritance or gift)
Close family member with direct/material indirect FI
Sell direct FI, sell indirect FI or sell enough so that FI is immaterial, remove member from team
Close family member may sell direct FI/indirect FI or sell enough so that FI is immaterial, discuss the matter with those charged with CG, involve additional professional accountant to review work, remove member from team
4 - 28

1. Partners + immediate family members outside the assurance team
2. Partners + managerial employees providing nonassurance services
3. Individuals who have a close personal relationship with a team member
Existence of threat depends on firm’s organisational, operating & reporting structure & nature of relationship between the individual & team member.
Policies to restrict people from holding such interests, discuss matter with those charged with governance, involve additional accountant to review work.
4 - 29

• For audit clients: If a firm/network firm has
 A direct FI  must sell FI
 A material indirect FI  sell FI or reduce to immaterial level
 A material FI in an entity that has a controlling interest in audit client  sell FI or reduce to immaterial level
• Other partners & their immediate family (not on the audit team), partners & managerial employees who provide non-assurance services to the client cannot hold a FI in the audit client
4 - 30

• For non-audit clients: If a firm/network firm has
 A direct FI  must sell FI
 An material indirect FI  sell FI or reduce to immaterial level
 A material FI in an entity that has a controlling interest in non-audit client  sell FI or reduce to immaterial level
4 - 31

- Cannot provide or obtain a loan/guarantee to
OR from an assurance client (self-interest threat)
- But can obtain loans/guarantees from clients whose business is that of a lending institution
 must be normal commercial procedures, and amount of loan is immaterial
- If loan is material, may reduce self-interest threat by involving an additional professional accountant from outside the firm to review the work performed
• Applies to members of team & their immediate family
4 - 32

Close business relationships with clients
• Commercial/common FI  self-interest or intimidation threats
• E.g. joint ventures with clients
• Will be a threat if FI is material and relationship is significant
• Only courses action are to:
1. Terminate business relationship
2. Reduce magnitude of relationship
3. Refuse to perform engagement
4. In the case of an individual being involved, remove him from the team.
4 - 33

• Self-interest, familiarity or intimidation threats
1. Team member + immediate family member
2. Team member + close family member
3. Team member + any other persons having a close relationship with team member
4. Partner/employee of the firm, not a team member + director/officer/ employee of client
…who can exercise significant influence over the client company
Remove individual from engagement.
Structure the team so that individual does not deal with matters within the responsibility of the person in question.
4 - 34

Employment with assurance clients
• Self-interest, familiarity or intimidation threats
• When a previous team member is now an employee of the assurance client
• Especially when significant connections remain between the individual & the former firm
• Threat depends on position of individual now at the assurance client, amount of involvement he will have with the assurance team, length of time that has passed since he was with the assurance team, his former position at the assurance team
• Safeguards: modify the assurance plan for the assurance engagement, assign an assurance team who have sufficient experience in relation to the individual, additional professional accountant to review work, quality control review of engagement.
4 - 35

Employment with assurance clients
(Contd.)
• Further safeguards to reduce threat:
 The individual is not entitled to any benefits/payments from the firm unless these are made in accordance with fixed predetermined arrangements
 The individual does not continue to participate or appear to participate in the firm’s business or professional activities
• If the former lead engagement partner of the firm wants to join the BOD of the client, he must wait for 2 years from the date of the last assurance report for which he was responsible.
4 - 36

Recent service with assurance clients
• Self-interest, self-review & familiarity threats
• When an assurance team member was previously an employee with the assurance client
• Especially so when the subject matter has been prepared by him
During the period covered by the assurance report, a member of the assurance team had served as officer/director of the client
Firm must withdraw
Before the period covered by the assurance report, a member of the assurance team had served as officer/director of the client
Involve professional accountant to review work, discuss issue with those charged with governance
4 - 37

Long association with assurance clients
• Using same senior personnel on an assurance engagement over a long period of time
• Familiarity threat
• Safeguards:
 Rotate senior personnel
 Additional professional accountant to review work
 Independent internal quality review
• For listed & public interest companies, rotation of lead engagement partner after < 5 years ; same partner cannot resume as lead engagement partner until after
2 years
4 - 38

Provision of non-audit services to client – Accounting services
• Self-review threat – when the FS are subsequently audited by the firm
• CANNOT make management decisions on the client’s behalf, e.g
.
1. Determine/change journal entries or account classifications without the approval of client
2. Authorising/approving transactions
3. Preparing source documents, valuation assumptions & making changes to such documents or data.
• CAN give technical assistance & advice on accounting principles to promote fair presentation of FS
4 - 39

Provision of non-audit services to client – Accounting services
• For non-listed client, if the threat of self-review is not clearly significant, should have the following safeguards:
1. Ensure that services are not performed by members of the assurance team.
2. Have policies/procedures to prohibit individuals providing such services from making any managerial decisions
3. All source data & underlying assumptions to be originated by client
4. Obtaining audit client for approval for any proposed journal entries or other changes affecting the FS
• For listed audit clients, CANNOT provide accounting services.
4 - 40

Provision of non-audit services to client – Taxation services
• Compliance, planning, resolution of tax disputes, provision of formal tax opinion
• Not a threat
4 - 41

Provision of non-audit services to client – Internal audit services
• Self-review threat
• For listed companies, CANNOT perform internal audit services.
• For non-listed companies, if threat is not significant, safeguards would be to ensure that:
1.
Client is responsible for internal audit activities & acknowledges its responsibility
2.
Client has designated a competent employee to be responsible
3.
Audit client & the audit committee approves the scope, risk
& frequency of internal audit work
4.
Client evaluates the adequacy of the internal audit procedures & the findings
5.
Client ensures that the findings and recommendations are reported appropriately to the audit committee or BOD.
4 - 42

Provision of non-audit services to client – IT systems services
• Design and implementation of financial IT systems that are used to generate information forming part of a client’s FS  self-review threat
• Safeguards - ensuring that audit client:
 Is responsible for establishing and monitoring a system of internal controls
 Designates a competent employee to be responsible
 Makes all management decisions with respect to the D & I process
 Evaluates the adequacy & results of the D & I of the system
 Is responsible for the operation of the system
(hardware or software) & the data used or generated by the system.
4 - 43

Provision of non-audit services to client – IT systems services (Contd.)
• For listed entity or public interest entity - should not accept an engagement where:
 the systems are important to any significant part of the accounting system or to the production of the FS
 the engagement would lead to the firm’s personnel taking decisions which are mgt’s responsibility.
• Additional safeguards - ensuring that:
 Services performed by personnel with no involvement in the audit engagement
 audit is reviewed by an independent partner to ensure that the financial IT work performed has been properly and effectively assessed in the context of the audit.
4 - 44

Temporary staff assignments to audit clients
• The lending of staff by a firm to an audit client
• Self-review threat when the individual is in a position to influence the preparation of the
FS
• Can be done in an emergency
• But personnel cannot make management decisions , approve/sign agreements & exercise discretionary authority to commit client
4 - 45

- Self-interest or intimidation threats
- Client management and the assurance team must be completely honest with each other and there must be full disclosure regarding all aspects of a client’s business operations.
- The firm and the client’s management may be placed in adversarial positions by litigation, affecting management’s willingness to make complete disclosures.
4 - 46

Actual/threatened litigation (Contd.)
- Safeguards:
 Disclose to the audit committee or BOD the extent and nature of the litigation
 If the litigation involves a member of the assurance team, remove that individual from the assurance team
 Involve an additional independent professional accountant to review the work done
 Withdraw from, or refuse to accept, the assurance engagement.
4 - 47

Acts Discreditable to the Profession
• Retention of client records after a demand is made for them (except for exercise of right of lien)
• Making or permiting or directing another to make false and misleading entries in the FS or records of an entity
• Assisting clients to evade tax
• Issuing any cheque with the intention to defraud
• Carrying out his work negligently or incompetently
• Commit act that threatens integrity or objectivity or professional independence
• Attesting any statement which he knows to be false, incorrect or misleading
• Found guilty of criminal/civil proceedings before a
Court of law
• Declared a bankrupt in a Court of law
4 - 48

Question 1
• If yes, Mary should advise Anywhere and will work on her private time
• Not reasonable to receive remuneration and using the employer’s resources to earn additional income
• Mary chose not to disclose her own business
• Disobeys employer’s policy on e-mail usage
• Clients and employers have the right to receive a competent service
• Mary’s behaviour is inconsistent with the principles of integrity and professional competence and due care
• John lacks the necessary experience and skill
4 - 49

Question 2
• It is alright for Mary to provide her services to willing clients but must not violate professional and legal requirements
• Services provided should be of professional standard and quality
• Integrity?
• Solicitation?
4 - 50

Question 3
• What are the facts?
• What ethical issues?
• Conflict of interest – employer or clients
• What alternative courses of action?
• What action would you take if you were Mary?
4 - 51

Tips: 1) Indicate whether MIA by Law has been violated. Identify the threats.
2) Provide reason why the law was violated.
3) Explain safeguards available.
Practice: Tutorial questions 19-30 (pg. 664) and 19-33 (pg. 665) of your text book.
4 - 52