Code of Ethics for Professional
Accountants
A Presentation By
Nasir U Ahmed, FCA
Member Council, ICAB
21 December 2008
WHAT ARE ETHICS ?

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A sense of agreement in a society as to what is right
and wrong.
Ethics represent a set of moral principles, rules of
conduct or values.
Ethics apply when an individual has to make a decision
from various alternatives regarding moral principles.
Objectives of Professional
Accountants

work to the highest standards of professionalism

attain the highest levels of performance, and

meet the public’s interest
The Code of Ethics (A, B, and C)

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Part A establishes the fundamental principles of
ethics for professional accountants and provides a
conceptual framework for applying those principles.
Parts B and C illustrate how the conceptual
framework is to be applied in specific situations.
• Part B applies to professional accountants in
public practice.
• Part C applies to professional accountants in
business.
IFAC Code of Ethics - fundamental
principles for all Accountants:

Integrity (Sec 110)

Objectivity (Sec 120)

Professional Competence and Due Care (Sec 130)

Confidentiality (Sec 140)

Professional Behavior (Sec 150)
Continuation…
Integrity The principle of integrity imposes an
obligation on all professional accountants to be
straightforward
and
honest
in
performing
professional services. It also implies fair dealing and
truthfulness.
Objectivity: The principle of objectivity imposes on
all professional accountant not to compromise their
professional or business judgment because of bias,
conflict of interest or undue influence of others.
Continuation…
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.
Continuation…
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.
Professional Behavior: A professional accountant
should comply with relevant laws and regulations and
should avoid any action that discredits the profession.
Conceptual Framework Approach


A conceptual framework requires a professional
accountant to identify, evaluate and address threats
to compliance with the fundamental principles, rather
than merely comply with a set of specific rules which
may be arbitrary.
If threats to ethics are not clearly insignificant, a
professional accountant should apply safeguards to
eliminate the threats or reduce them to an
acceptable level.
Threats and Safeguards
Compliance with the fundamental principles may
potentially be threatened by a broad range of
circumstances. Many threats fall into the following
categories:

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
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Self-interest threats
Self-review threats
Advocacy threats
Familiarity threats
Intimidation threats
Continuation…
Self-Interest Threat
A Self-interest threat occurs as a result of the
financial or other interests of a professional
accountant or of an immediate or close family
member;
Self Interest Threats Circumstances
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A financial interest in a client or jointly holding a financial
interest with a client.
Undue dependence on total fees from a client.
Having a close business relationship with a client.
Concern about the possibility of losing a client.
Potential employment with a client.
Contingent fees relating to an engagement.
A loan to or from a client or any of its directors or officers.
Self-Review Threat
Self-Review Threat occurs occur when a previous
judgment needs to be re-evaluated by the
professional accountant responsible for that
judgment.
Self-Review Threats Circumstances
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The discovery of a significant error during a re-evaluation of the
work of the auditor.
Reporting on the operation of financial systems after being
involved in their design or implementation.
Having prepared the original data used to generate records that
are the subject matter of the engagement.
A member of the team being, or having recently been, a director
or officer of that client.
A member of the team being, or having recently been, employed
by the client in a position to exert direct and significant influence
over the subject matter of the engagement.
Performing a service for a client that directly affects the subject
matter of the engagement.
Advocacy Threat
An Advocacy Threat occurs when a professional
accountant promotes a position or opinion to the
point that subsequent objectivity may be
compromised.
Examples of circumstances that create advocacy
threats :
Selling, underwriting or otherwise dealing in financial
securities or shares of a client;
Acting as an advocate on behalf of a client in
litigation or disputes with third parties.
Familiarity Threat
Familiarity Threat occurs when, by virtue of a
close relationship with a client, its directors, officers
or employees, an auditor becomes too sympathetic to
the client’s interests.
Familiarity Threats Circumstances

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Immediate family member or close family member who is a
director, officer, or influential employee of the client;
A member of the team having a close family member who,
as an employee of the client, is in a position to exert direct
and significant influence over the subject matter of the
engagement;
A former partner of the firm being a director, officer of the
client or an employee in a position of significant influence;
Long association of a senior member of the team with the
client
Acceptance of gifts or hospitality, unless the value is clearly
insignificant, from the client, its directors, officers or
employees.
Intimidation Threat
Intimidation Threat occur when a professional
accountant may be deterred from acting objectively by
threats, either actual or perceived.
Examples of circumstances:
Being threatened with dismissal or replacement in
relation to a client engagement.
Being threatened with litigation.
Being pressured to reduce inappropriately the
extent of work performed in order to reduce fees.
Safeguards
Safeguards that may eliminate or reduce such threats
to an acceptable level fall into three broad categories:

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Safeguards created by the profession, legislation or
regulation;
Safeguards within the client; and
Safeguards within the firm’s own systems and
procedures.
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 third party of the reports,
returns, communications or information produced by
a professional accountant.
Safeguards within the Client

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When the client’s management appoints the firm, persons
other than management ratify or approve the appointment;
The client has competent employees to make managerial
decisions;
Policies and procedures that emphasize the client’s
commitment to fair financial reporting;
A corporate governance structure, such as an audit
committee, that provides appropriate oversight and
communications regarding a firm’s services.
Safeguards in the work environment
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leadership that stresses the importance of independence and the
expectation that members of the teams will act in the public
interest.
Policies and procedures to implement and monitor quality control
of the engagements;
Documented independence policies regarding the identification of
threats to independence, the evaluation of the significance of
these threats and the identification and application of safeguards
to eliminate or reduce the threats, other than those that are
clearly insignificant, to an acceptable level;
Resolution of Ethical Conflicts
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If the matter remains unresolved, the professional
accountant should consult with other appropriate persons
within the firm
Where a matter involves a conflict with, or within, an
organization, consult with those charged with governance
of the organization, such as the board of directors or the
audit committee.
If a significant conflict cannot be resolved, obtain
professional advice from the relevant professional body
or legal advisors.
If, after exhausting all relevant possibilities, the ethical
conflict remains unresolved, a professional accountant
should, where possible, refuse to remain associated with
the matter creating the conflict.
Professional Appointment


Client Acceptance - consider whether acceptance
would create any threats to compliance with the
fundamental principles
Engagement Acceptance - agree to provide only
those services that the accountant is competent to
perform.
Changes in a Professional Appointment
Before accepting an appointment involving services
that were carried out by another, the proposed auditor
should:

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Request permission from the client to contact former
auditor directly;
Contact existing auditor before beginning audit.
Information from Existing Auditor
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Once the client permission is obtained, the existing
auditor should provide information honestly and
unambiguously.
If the proposed auditor is unable to communicate
with the existing auditor, the proposed auditor should
try to obtain information about any possible threats
by other means such as through inquiries of third
parties or background investigations on senior
management.
The existing auditor is no longer required to provide
information in writing or regarding reasons not to
take an audit.
Conflicts of Interest
A professional accountant in practice should take
reasonable steps to identify circumstances that could
pose a conflict of interest. Such circumstances may
give rise to threats to compliance with the
fundamental principles
Second Opinions
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Providing a second opinion on the application of
accounting, auditing, reporting or other standards or
principles by or on behalf of a company that is not an
existing client may cause threats to compliance with
the fundamental principles.
Safeguards such as seeking client permission to
contact the existing auditor, describing the limitations
surrounding any opinion and providing the existing
auditor with a copy of the opinion may be required.
Fees and Other Types of Remuneration
An auditor may quote whatever fee deemed to be
appropriate. However, a self-interest threat to
professional competence and due care is created if
the fee quoted is so low that it may be difficult to
perform the engagement.
Commissions, Referral Fees, and Contingent Fees
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A professional accountant in public practice should
not pay or receive a referral fee or commission,
unless he/she has established safeguards to
eliminate the threats or reduce them to an
acceptable level.
Contingent fees are widely used for certain types of
non-assurance engagements. They may, however,
give rise to self-interest threats to compliance with
the fundamental principles.
Advertising and Marketing
When a professional accountant in public practice
solicits new work through advertising or other forms
of marketing, there may be potential threats to
compliance with the fundamental principles.
What Advertising Cannot Do
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A professional accountant should not bring the
profession
into
disrepute
when
marketing
professional services. He/she should be honest and
truthful and should not:
Make exaggerated claims for services offered,
qualifications possessed or experience gained; or
Make disparaging references to unsubstantiated
comparisons to the work of another.
Gifts and Hospitality
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Self-interest threats to objectivity may be created if a
gift from a client is accepted; intimidation threats to
objectivity may result from the possibility of such
offers being made public.
Gifts or hospitality which are acceptable are those
which a reasonable and informed third party, having
knowledge of all relevant information, would consider
clearly insignificant.
Custody of Client Assets
 Safeguard against a self-interest threat to objectivity , a
professional accountant in public practice entrusted with
money (or other assets) belonging to others should:
 Keep such assets separately from personal or firm
assets; and
 Use such assets only for the purpose for which they
are intended.
 At all times, be ready to account for those assets,
and any income, dividends or gains generated.
 Comply with all relevant laws and regulations
relevant to the holding of and accounting for such
assets.
Application of Framework to Specific
Situations
The Code of Ethics, discusses a principles-based
framework for identifying, evaluating and responding
to threats. The framework establishes principles to
identify threats to ethics principles, evaluate the
significance of those threats, and, if the threats are
other than clearly insignificant, identify and apply
safeguards to eliminate the threats or reduce them to
an acceptable level.
Cross-Border Activities
An accountant may perform services in a country other
than his home country. If differences exist between
ethical requirements of the two countries, the strictest
provisions should be applied.
The IFAC Code prohibits the following nonaudit services for audit clients:
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Bookkeeping Services
Valuation services
Management decision making functions
Broker-dealer or investment advisor services
Litigation support
Financial involvement with a client
 direct financial interest in a client;
 indirect material financial interest
 loans to or from the client or any
director or major stockholder in
the client company;
 financial interest in a joint venture
with a client or employee(s) of a
client.
 financial interest in non-client with
investor or investee relationship
with the client.
Professional Competence and Responsibilities
Regarding the Use of Non-Accountants
If a professional accountant does not have the
competence to perform a specific part of the
professional service, technical advice may be sought
from experts such as other professional accountants,
lawyers, actuaries, engineers, geologists, and
evaluators. However, since the auditors have ultimate
responsibility for the service, it is his responsibility to
see that the requirements of ethical behavior are
followed.
Activities Incompatible with the Practice
of Public Accountancy
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A professional accountant in public practice should
not concurrently engage in any business, occupation
or activity that impairs or might impair integrity,
objectivity or independence, or the good reputation
of the profession.
The simultaneous engagement in another activity
unrelated to assurance or accounting services, which
reduces the accountant’s ability to conduct his
accounting practice according to ethical principles, is
inconsistent with public practice.
PROFESSIONAL
ACCOUNTANTS-IN SERVICE
Conflict of Loyalties
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Employed professional accountants owe a duty of
loyalty to their employer as well as to their profession
and there may be times when the two are in conflict.
An employee cannot legitimately be required to break
the law, breach the ethics, rules, and standards of
the accounting profession, lie to their employer’s
auditors, or be associated with a statement that
materially misrepresents the facts.
If employed accountants cannot resolve any material
issue involving a conflict between their employers
and their professional requirements they may have
no other recourse but to resign.
Support for Professional Colleagues and
Professional Competence
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Support for Professional Colleagues A professional
accountant, particularly one having authority over
others, should allow them to develop their own
judgment in accounting matters.
Professional Competence An accountant employed in
industry, commerce, the public sector or education
may be asked to undertake significant tasks for
which she has not had sufficient specific training or
experience. Where appropriate expert advice and
assistance should be sought.
Presentation of Information
A professional accountant is expected to present
financial information fully, honestly and professionally
and so that it will be understood in its context.
Disciplinary action and common sanctions

Disciplinary action ordinarily arises from such issues
as:
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failure to observe the required standard of professional care,
skills or competence;
non-compliance with rules of ethics and discreditable; or
dishonorable conduct.
Sanctions commonly imposed by disciplinary bodies
include:

reprimand, fine, payment of costs, withdrawal of practicing
rights, suspension, and expulsion from membership.