chapter 14
Codes of professional ethics
Contents
Introduction
Examination context
Topic List
1
Professional ethics
2
IFAC Code
3
ICAEW Code
4
APB Ethical Standards
Summary and Self-test
Answers to Self-test
Answer to Interactive question
251
Assurance
Introduction
Learning objectives
`
Be aware of the key ethical codes to which ICAEW members are subject and the sources
that influence them
`
Understand the difference between principles and rules based systems
`
Understand why ethics are important to accountants
`
Know the key features of IFAC and ICAEW Codes
`
Know the fundamental principles of IFAC and ICAEW Codes
Tick off
Specific syllabus references for this chapter are : 4a, b, c, d, e.
Practical significance
Professional ethics is of critical importance to accounting professionals. Remember in Chapter 1 where we
set out that one reason people seek assurance from accountants is that they are independent, impartial
people? That is due to their code of ethics. Ethical issues are important for all accountants, from trainees to
partners.
Stop and think
What ethical issues might arise for trainees that are less likely to arise for partners? And vice versa?
Working context
If a trainee in practice is at a client carrying out assurance work, he could be faced with ethical decisions,
such as if client staff are trying to influence him as to the appropriateness of a particular accounting policy,
in which case he should refer the matter to his assurance senior.
Syllabus links
You will build on the principles of professional ethics you learn here in your Audit and Assurance paper.
252
CODES OF PROFESSIONAL ETHICS
14
Examination context
Exam requirements
Ethics is 20% of the syllabus, and therefore in the sample paper, there were ten questions on ethics. These
were a combination of questions about general ethical concepts and principles, which we shall look at in this
chapter, and more detailed ethical threats and safeguards, which we shall look at in the next two chapters.
In the assessment, candidates may be required to:
`
State the role of ethical codes and their importance to the profession
`
Recognise the differences between a rules based ethical code and one based upon a set of principles
`
Identify the key features of the system of professional ethics adopted by IFAC and ICAEW
`
Identify the fundamental principles underlying the IFAC and the ICAEW Code of Ethics
253
Assurance
1 Professional ethics
Section overview
1.1
`
Accountants require an ethical code because they hold positions of trust, and people rely on them.
`
Accountants work in the public interest, which extends beyond clients to people associated with
those clients and the general community.
`
ICAEW members are subject to ICAEW guidance (influenced by IFAC guidance) and APB standards.
`
Guidance tends to be issued in the form of principles rather than hard and fast rules.
Need for ethics
Professional accountants have a responsibility to consider the public interest and maintain the reputation of
the accounting profession. Personal self-interest must not prevail over these duties. The IFAC and ICAEW
Codes of Ethics help accountants to meet these obligations by setting out ethical guidance to be followed.
Acting in the public interest involves having regard to the legitimate interests of clients, government,
financial institutions, employees, investors, the business and financial community and others who rely upon
the objectivity and integrity of the accounting profession to support the propriety and orderly functioning of
commerce.
In summary, then, the key reason accountants need to have an ethical code is that people rely on them
and their expertise. It is important to note that this reliance extends beyond clients to the general
community.
Accountants deal with a range of issues on behalf of clients. They often have access to confidential and
sensitive information. Auditors (and other assurance providers) claim to give an independent view. It is
therefore critical that accountants (particularly those giving assurance) are independent.
Compliance with a shared set of ethical guidelines gives protection to accountants as well, as they cannot be
accused of behaving differently from (that is, less well than) other accountants.
1.2
Sources of ethical guidance
ICAEW members (and trainees) and employees of member firms are subject to the ICAEW Code of Ethics.
This is influenced by the guidance of IFAC (the International Federation of Accountants, of which ICAEW is
a member). You should be aware of this body as it is the same body that issues International Standards on
Auditing, which we have been studying in this Study Manual.
UK auditors are also subject to the APB's Ethical Standards. The APB is the Auditing Practices Board in the
UK, which also issues auditing standards (adopted from IFAC, which creates them).
1.3
Rules or principles–based guidance?
The ethical guidance we shall look at tends to be in the form of a principles-based framework. It contains
some rules (as we shall see in the next chapter), but in the main it is flexible guidance. It can be seen as
being a framework of principles rather than a set of rules. There are a number of advantages of a
framework of principles over a system of ethical rules, which are outlined in the following table.
254
Factor
Explanation
Active
consideration and
demonstration of
conclusions
A framework of principles places the onus on the accountant to actively
consider independence for every given situation, rather than just agreeing a
checklist of forbidden items. It also requires him to demonstrate that a
responsible conclusion has been reached about ethical issues.
CODES OF PROFESSIONAL ETHICS
Factor
Explanation
Broad
interpretation of
ethical situations
A principles-based framework prevents auditors interpreting legalistic
requirements narrowly to get around ethical requirements. There is an element
to which rules engender deception whereas principles encourage compliance.
Individual
situations covered
A principles-based framework allows for the variations that are found in
individual situations. Each situation is likely to be different.
Flexible to
changing situation
A principles-based framework can accommodate a rapidly changing environment,
such as the one that assurance providers are involved in.
Can incorporate
prohibitions
However, a principle-based framework can contain certain prohibitions where
these are necessary.
14
2 IFAC Code
Section overview
`
The IFAC Code contains a number of fundamental principles.
`
It also gives guidance on the meaning of independence and the approach accountants should take to
ethical questions.
`
The IFAC Code sets out a number of general threats to independence and categories of safeguards.
The IFAC Code contains a number of fundamental principles. It then goes on to outline key issues of ethics,
such as independence, and highlight general and specific threats to independence and the safeguards that can
be implemented to reduce those threats. A key issue to remember is that if it is impossible to reduce a
threat to an acceptable level, the threat must be avoided (for example, by not accepting an engagement).
2.1
Fundamental principles
The fundamental principles are:
2.2
`
Integrity. A professional accountant should be straightforward and honest in all professional and
business relationships.
`
Objectivity. A professional accountant should not allow bias, conflict of interest or undue influence
of others to override professional or business judgements.
`
Professional competence and due care. A professional accountant has a continuing duty to
maintain professional knowledge and skill at the level required to ensure that a client or employer
receives competent professional service based on current developments in practice, legislation and
techniques. A professional accountant should act diligently and in accordance with applicable technical
and professional standards when providing professional services.
`
Confidentiality. A professional accountant should respect the confidentiality of information acquired
as a result of professional and business relationships and should not disclose any such information to
third parties without proper and specific authority unless there is a legal or professional right or duty
to disclose. Confidential information acquired as a result of professional and business relationships
should not be used for the personal advantage of the professional accountant or third parties.
`
Professional behaviour. A professional accountant should comply with relevant laws and regulations
and should avoid any action that discredits the profession.
Independence
IFAC Code
It is in the public interest and, therefore, required by this Code of Ethics, that members of assurance teams,
firms and when applicable, network firms be independent of assurance clients.
255
Assurance
The Code discusses independence in the light of the wider term 'assurance engagements' rather than
focusing solely on audits.
The guidance states its purpose in a series of steps. It aims to help firms and members:
Step 1
Identify threats to independence
Step 2
Evaluate whether the threats are insignificant
Step 3
If the threats are not insignificant, identify and apply safeguards to eliminate risk, or reduce it to an
acceptable level.
It also recognises that there may be occasions where no safeguard is available. In such a situation, it is
only appropriate to
`
`
Eliminate the interest or activities causing the threat
Decline the engagement, or discontinue it
Definitions
Independence of mind: The state of mind that permits the expression of a conclusion without being
affected by influences that compromise professional judgement, allowing an individual to act with integrity,
and exercise objectivity and professional scepticism.
Independence in appearance: The avoidance of facts and circumstances that are so significant that a
reasonable and informed third party, having knowledge of all relevant information, including safeguards
applied, would reasonably conclude a firm's, or a member of the assurance team's, integrity, objectivity or
professional scepticism had been compromised.
The degree of independence required is highest for an audit engagement, with less stringent requirements
for non-audit engagements at an audit client, and engagements at non-audit clients.
2.3
Threats and safeguards
The following general points are made in the Code. We shall look at more specific guidance in the following
chapters.
There are five general sources of threat identified by the revised Code. The APB's Ethical Standard 1
identifies a sixth threat (the management threat):
`
Self-interest threat (for example, having a financial interest in a client)
`
Self-review threat (for example, auditing financial statements prepared by the firm)
`
Advocacy threat (for example, promoting the client's position by dealing in its shares)
`
Familiarity threat (for example, an audit team member having family at the client)
`
Intimidation threat (for example, threats of replacement due to disagreement)
`
Management threat (for example, doing work that should be carried out by management, such as
the design and implementation of IT systems)
There are two general categories of safeguard identified by the Code:
`
`
256
Safeguards created by the profession, legislation or regulation
Safeguards within the work environment
CODES OF PROFESSIONAL ETHICS
14
Examples of safeguards created by the profession, legislation or regulation:
`
Educational training and experience requirements for entry into the profession
`
Continuing professional development requirements
`
Corporate governance regulations
`
Professional standards
`
Professional or regulatory monitoring and disciplinary procedures
`
External review by a legally empowered third party of the reports, returns, communication or
information produced by a professional accountant
Examples of safeguards in the work environment:
`
Involving an additional professional accountant to review the work done or otherwise advise as
necessary
`
Consulting an independent third party, such as a committee of independent directors, a professional
regulatory body or another professional accountant
`
Rotating senior personnel
`
Discussing ethical issues with those in charge of client governance
`
Disclosing to those charged with governance the nature of services provided and extent of fees
charged
`
Involving another firm to perform or reperform part of the engagement
The team and the firm should be independent 'during the period of the engagement'.
The period of the engagement is from the commencement of work until the signing of the final report being
produced. For a recurring audit, independence may only cease on termination of the contract
between the parties.
3 ICAEW Code
Section overview
`
The ICAEW Code is relevant to professional accountants in all of their professional and business
activities.
`
The ICAEW Code incorporates the IFAC Code of Ethics, but also contains additional rules deemed
appropriate by the ICAEW.
The ICAEW Code states that 'professional accountants are expected to follow the guidance contained in
the fundamental principles in all of their professional and business activities whether carried out with or
without reward and in other circumstances where to fail to do so would bring discredit to the profession.'
Therefore the Code may apply not only to the job of the professional accountant but also to the life of the
professional accountant, particularly if he is involved in matters relevant to his profession, such as keeping
the books for a private club of which he is a member.
The Code also states that professional accountants are required to follow the spirit as well as the letter of
the guidance. In other words, a specific matter being excluded from the guidance does not mean that the
accountant does not have to think about it; rather he must determine if the spirit of the guidance would
also apply to that situation.
The ICAEW Code implements the IFAC Code above so that following it ensures compliance with the IFAC
Code.
257
Assurance
4 APB Ethical Standards
Section overview
The APB has issued ethical standards with which UK auditors must comply when carrying out audits.
The ethical standards were drafted with the IFAC Code of Ethics in mind.
`
`
As noted above, the APB has issued ethical standards (ESs) with which UK auditors must comply when
carrying out UK audits. They are as follows:
`
`
`
`
`
ES 1: Integrity, Objectivity and Independence
ES 2: Financial, Business, Employment and Personal Relationships
ES 3: Long Association with the Audit Engagement
ES 4: Fees, Remuneration and Evaluation Policies, Litigation, Gifts and Hospitality
ES 5: Non-Audit Services Provided to Audit Clients
There is also an ES with provisions available for smaller entities, which is not examinable. This offers
exemptions and special rules to the auditors of smaller entities.
These standards were developed with regard to the IFAC Code of Ethics and also the EC Recommendation
on the independence of statutory audits.
Interactive question: Ethical codes
[Difficulty level: Exam standard]
There are two main approaches to a code of professional ethics: a rules based ethical code and a code
based on a set of principles.
Indicate whether the following statements are true or false.
(a)
A code based on a set of principles rather than rules is more
flexible in a rapidly changing environment.
True
False
(b) ICAEW's Code of Ethics is principles based.
True
False
(c)
True
False
A code based on a set of rules requires accountants to evaluate
and address threats to independence.
See Answer at the end of this chapter.
258
CODES OF PROFESSIONAL ETHICS
14
Summary and Self-test
Summary
Accountants require an ethical code because they hold positions of trust and
people rely on them
A principles based system:
– Allows flexibility
– Allows broad
interpretation
– Encourages evaluation
– Allows for individual
situations
– Can contain rules
The IFAC Code is principles based. It
contains a number of fundamental
principles and then goes on to focus on
the importance of independence, and
threats of self-interest, self-review,
advocacy, familiarity and intimidation
The ICAEW Code is
compulsory for members in
their professional lives and
where actions in their
personal life would discredit
the profession. It implements
the IFAC Code
The APB has issued ethical
standards with which UK
auditors must comply when
carrying out UK audits. They
also apply the principles of
the IFAC Code
Self-test
Answer the following questions.
1
Which two of the following statements are correct?
(a)
Accountants must have ethical codes because people rely on accountants.
Yes
No
(b) A set of ethical principles gives protection to accountants as it means they are all working to the
same guidelines.
Yes
No
(c)
Rules based codes provide better protection to users of accountancy services because every
potential situation arising is covered by them.
Yes
No
259
Assurance
2
Are the following statements true or false?
(a)
The principle of integrity can be defined as the accountant not allowing bias, conflict of interest
or undue influence of others to override his choice of actions.
True
False
(b) Accountants may use information obtained during the course of their professional work for
personal use so long as they do not disclose it to others in breach of their duty of confidentiality.
True
False
(c)
Professional accountants should be technically up to date so as to give appropriate advice to
clients.
True
False
3
The following are examples of which types of general threats to independence?
(a)
The financial statements of Dropdown Ltd have been prepared by Glazer Brothers, their audit
firm.
(b) Knowhow plc has intimated to the audit firm that if they do not receive an unqualified audit
report for the year 20X6, they may put the audit out to tender.
4
The ICAEW Code implements the IFAC Code.
True
False
5
The APB Ethical Standards apply to UK audits and assurance work.
True
False
Now, go back to the Learning Objectives in the Introduction. If you are satisfied you have achieved these
objectives, please tick them off.
260
CODES OF PROFESSIONAL ETHICS
14
Answers to Self-test
1
(a) and (b) are correct; (c) is incorrect, as this would be true of a principles based system, not a rules
based system.
2
(a) is false; this is a description of objectivity. (b) is false; accountants are not entitled to use
confidential information for their own personal good. (c) is true.
3
(a) Self-review
(b) Intimidation
4
True
5
False – they apply to UK audits only.
261
Assurance
Answer to Interactive question
Answer to Interactive question
1
(a)
True – it is an advantage of the principles based approach
(b) True – it implements the IFAC Code, which is principles based
(c)
262
False – a rules based system tends to remove the need to evaluate, as accountants can just check
whether certain rules are being met or not, rather than applying the principles to given situations.