PROFESSIONAL PRACTICE &

CODES OF ETHICS  J'2011

Threats to
Code of Ethics for Code of Ethics conflicts of interest -
independence types :
Business Conduct relevant to the
Accounting FASSI i) compete directly
Profession 
ii) provide service
code of bis ethics for 2 or more
- voluntarily prepare conflicting clients
- outline firm's policy & expectations IFAC Code of Ethics Safeguards that
of orgz's values & e'yee behavior mitigate
threats to
- evy1 should comply (moral
minimum)
independence : safeguards - notify
Conceptual F/w (principle-based i) created by
- any breach - notified to s/hs
approach) profession,
- board & mgnt can focus on areas of
ethical risk , provide guidance to REI legislation &
e'yees on ethical issues, provide most appropriate as : reg additional
mechanisms to report unethical ii) within safeguards
1) impossible to define every
conduct, foster culture of honesty & assurance
situations (relate to
accountability client
2) principles with reasoned guidance confidentiality)
- code act as a reference point when
- iii) within
e'yee faced with dilemma as it is the
min std of acceptable behavior avoid arguments that any action not accounting firm
specifically prohibited is permissible own system &
- however personal ethics/HG is more
important 3) proactive procedures
4) recognises the commercial r/ship
last resort - resign
btw auditor & client always exists -
appointed by client
advantages : 5) non-audit services allowed when
- common value system adequate safeguards can be put in
- synchronize - all e'yee place
share same value vs
personal judgement
- guidance for dealing
with anamolies fundamental
(moral minimum) principles:
COPIP

limitations :
- mgnt's commitment
- senior mgnt
encourages behavior
not aligned with
company values - staff
not reprimanded -
stronger approval
- window dressing - not
real intention to change
behavior - PR exercise

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CODE OF ETHICS FOR BUSINESS CONDUCT

- Company voluntarily prepare code of business ethics

- Outline the firm’s policy and expectations concerning the orgz’s values and employee behavior
- Everyone, including the B.O.D, should be expected to comply with its guidelines - moral minimum
- Any breach of the code by the directors (tone at the top) should be notified to s/hs
- Such a code can focus the board & mgnt on areas of ethical risk, provide guidance to personnel to help them
recognize and deal with ethical issues, provide mechanisms (whistle blowing arrangement) to report
unethical conduct and help foster a culture of honesty & accountability
- However no code of bis ethics can replace the thoughtful behavior of an ethical director – importance of
human governance/personal ethics

DEFINITION

- The code represent the moral minimum that the respective staff must observe, thereby removing any
negative consequences associated with relativism & absolutism practice
- set a minimum standard of acceptable behavior
- guide organizational members in resolving ethical conflicts/issues such as :
 compliance with law
 misuse of funds
 company records
 conflicts of interest
 confidential info
 stakeholder relationships
 gift giving and receiving
 political contributions
- code of bis ethics – attempt to deter unethical behavior by specifying acceptable & unacceptable behavior
(moral minimum)
- when an employee faced with a dilemma, they must compare the dilemma with the guidelines contained in
the codes and make a decision to avoid possible violation of the code (the code is the reference point)

ADVANTAGES OF HAVING A CODE

- provide a common value system for all divisions to adopt – especially for companies that are decentralized/
fragmented into smaller divisions, where adequate supervision/guidance is lacking – code can synchronize
differences in practice and allow all e’yee to share same value rather than having to use personal judgment
- provide divisional managers with guidance in dealing with anomalies – moral minimum

LIMITATIONS OF THE CODE

- codes alone are insufficient to ensure employees behave ethically – most important factors in determining
the power of the code’s influence on employee behavior is management’s commitment to the code
(management must walk the talk – action – strong control environment)]
- senior mgnt encourages behavior that is not aligned with company values – means that employee concerned
are not reprimanded for failure to adhere to the code requirement – even a stronger approval for unethical
conduct
- window dressing – public relations exercise without any real intent to change behavior

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CODE OF ETHICS RELEVANT TO THE ACCOUNTING PROFESSION 

- IFAC Code of Ethics for PA establishes :

a) Fundamental principles of ethics for PA
b) Conceptual framework to assist PA

- The contents – the Code is divided into three parts :

a) Part A applies to all PAs
 Sets out the fundamental principles
 Explains the framework approach (principle-based approach)
b) Part B applies to PAs in public practice (actg firm) exam
c) Part C applies to PAs in business
 Part B & C – illustrate the application of the principles

- Conceptual Framework for Professional Ethics

 Framework approach
 Principle-based approach

 REI
Step 3 Respond to the threats by applying safeguards to remove/eliminate them to acceptable level
Safeguards – control/measures : (i) within A/C firm (ii) within client company
(iii) laws & reg & prof bodies
Step 2 Evaluate the significance of the threats
Step 1 Identifying the threats to independence
Threats – FASSI (Familiarization ; Advocacy ; Self-review ; Self-interest ; Intimidation)

 Most appropriate to adopt as :

1) It is impossible to define every situation that creates threats to compliance with the fundamental
principles and specify the appropriate mitigating action. The detailed rules-based approach –
incomprehensive – complex to cope with all possible circumstances – completely missing the
problem – sometimes imposing inappropriate solutions
2) A set of principles supported by reasoned guidance avoids the argument that any course of
conduct not specifically prohibited is permissible, avoid encouraging a search for ways around
the rules (looking for loopholes)
3) Good guidance should be proactive – to require the PA to identify and address risks not merely
passively to comply with a set of specific rules which may be arbitrary
4) This approach recognizes the reality that the auditor is not wholly independent of his client as
auditor is appointed by client, but the threats to independence must be managed to clearly
insignificant levels (conceptual f/w recognizes that the commercial r/ship always exist, but
cannot cross the line)
5) Non-audit services can be performed where adequate safeguards can be put in place.
Nonetheless, where adequate safeguards cannot be put in place, the guidance does include
specific prohibitions

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- Fundamental principles of ethics for PA Exam : elaborate & explain
 COPIP
 Confidentiality
1) The principle
 PA should respect the confidentiality of info acquired as a result of prof & bis r/ships
 PA should not disclose any such info to third parties without proper & specific authority –
client’s consent need to be obtained/authorized by client or employer
 However, there is exceptions where PA can disclose such info :
a) Legal requirement
Obligated to disclose (obligatory disclosure) :
i) Audit clients in regulated industries such as banking, financial institution,
insurance etc whereby the prevailing laws & reg require the auditor to report
any known or suspected malpractices involving the client to the authority
(laws override ethics)
ii) PA was served with a summon (known as a subpoena) to act as witness in a
court case involving the client. Failure to disclose info in this case can lead to
obstruction of justice which is an offence punishable in law
b) Professional right/duty to disclose
Voluntary disclosure where not prohibited by law :
i) To comply with quality review of a member body/prof body
ii) To comply with ethics requirements – where public interest require such
disclosure
iii) To respond to an inquiry/investigation by a member body/regulatory body
iv) To protect the prof interests of a PA in legal proceedings
iii) &iv) the disclosure of info in these cases is to help clear the name of the PA.
otherwise, he/she may be implicated in cases involving the client
 PA should not use the confidential info acquired as a result of prof & bis r/ships for personal
advantage of the PA or third parties
 The need to comply with the principles of confidentiality continues even after the end of
r/ships btw a PA and a client or employer – lifetime commitment. When PA changes
employment or acquires a new client – entitled to use prior XP which will not bring
disadvantage to the client/employer
2) Factors to consider before disclosure
a) Cost & benefit of disclosure (utilitarianism) – whether the interests of all parties including
third parties whose interests may be affected, could be harmed if the client or employer
consents to the disclosure
b) Whether all the relevant info is known or substantiated – otherwise PA can be sued for
defaming/tarnishing the client’s reputation
c) Communicate to appropriate recipient – should the conclusion be not substantiated i.e.
suspect only, the disclosures should be made internally to the audit committee instead of
external regulatory body

 Objectivity
PA should not allow prejudice or bias, conflict of interest or undue influence of others to override
prof/bis judgements

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 Professional competence & due care
1) Professional competence
 Divided into two separate phase :
a) Attainment of prof competence
b) Maintenance of prof competence – require the PA to participate in continuing prof
education (CPE)
 to maintain prof knowledge & skill at the lvl req’d to ensure that a client or employer
receives the advantage of competent prof service based on current developments in
practice, legislation and techniques
 competent prof service requires the exercise of sound judgment in applying prof
knowledge & skill in the performance of such service
2) Due care
 To act diligently in accordance with applicable technical & prof stds in all prof & bis r/ships
 Diligence encompasses the responsibility to act in accordance with the requirements of an
assignment, carefully, thoroughly and on a timely basis
 Due care vs negligence – negligence means failure to observe the duty of care & skills
expected of a PA (care – carefulness ; skills – competency – knowledge & XP)

 Integrity
1) PA should be straightforward & honest in all prof & bis r/ships
2) Also implies fair dealing and truthfulness (fair dealing – no self interest)
3) PA should not be associated with info where they believe/knowingly :
a) Contains a materially false sttm
b) Contains sttms or info furnished recklessly (errors)
c) Info incomplete – omission of info – misleading
4) However, PA will not be considered in breach of integrity if he/she provides a modified report
in respect of the matters mentioned above

 Professional behavior
1) PA should :
a) Comply with relevant laws & regulations
b) Avoid any action that discredits the profession
2) Eg : advertising/marketing

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THREATS TO INDEPENDENCE (FASSI)

Familiarity
- Close relationship with an assurance client, its directors, officers or employees – this threat will only arise if
the close r/ship is involving senior member of the audit staff and senior client mgnt
(senior employee : in a position to exert direct & significant influence over the subject matter of the
assurance engagement)
- PA become too sympathetic to the client’s interest
- Examples :
a) Immediate family member – spouse & children
b) Close family member – relatives
c) Long association  exam most
d) A former partner of the firm being a director, officer of the assurance client or an e’yee in a position to
exert direct & significant influence over the subject matter of the assurance engagement
(partner in an accounting firm  senior position in client company)

[ (a)&(b) family/blood relationship ; (c) friendship ; (d) business relationship ]

e) Gifts & hospitality depends upon :

 Value – modest
 Intention
 Nature – client own product OR purchased items

Advocacy
- Promote assurance client’s position or opinion (want client to be seen favourably) to the point that
subsequent objectivity may be compromised – bias/conflicts of interest/subject to pressure
- Examples :
a) Promote shares
b) Acting as an advocate on behalf of client in litigation / in resolving disputes with third parties
(may withheld certain info – compromised)

Self-interest
- Place own interest over interest of other stakeholders – conflict of interest
- Examples :
a) Financial interest :
i) Shareholding
ii) Loan given/received
direct financial interest – significant sholding – able to exercise influence on client ;
material indirect financial interest – cannot influence
b) Guarantee
c) Undue dependence on total fees from an assurance client – this threat will only be applicable if the fees
are recurring
d) Concern about possibility of losing the engagement - due to own personal worry (vs intimidation threat)
e) Close business relationship (familiarity threat  self interest threat)
f) Potential employment with an assurance client – PA will not pose sensitive Q in order to please the client
g) Contingent fees - fee payable by the client is depended on the occurrence or non-occurrence of some
future event – fees should be pre-determined based on time spent and seniority of staff assigned and
should not be based on performance of client

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Self-review
- Occurs when :
a) Provision of non-audit services – the product/judgment of the previous engagement needs to be re-
evaluated in reaching conclusions on the assurance engagement
b) a member of the assurance team was previously a director or officer of the assurance client or was
an employee in position to exert direct & significant influence over the subject matter of the
assurance engagement
(senior position in client company  accounting firm)
This threat will be valid if no cooling period is being observed by the ex-director/officer before
he/she is assigned to audit the previous company
- examples :
a) provision of non-audit service that directly affect the subject matter of the assurance engagement –
outcome of non-audit services is included in the F/S & subject to audit
b) involved in preparation of client’s F/S – including preparation of original data or other records that are
the subject matter of the assurance engagement
c) member of assurance team, having recently been director/officer/employee of the client

Intimidation
- occurs when a member of the assurance team may be deterred from acting objectively and exercising prof
skepticism by threats, actual or perceived, from the dirs, officers or e’yees of an assurance client
- examples :
a) threat of replacement over a disagreement with the application of an accounting principle
b) pressure to reduce inappropriately the extent of work performed in order to reduce fees – happen when
client put audit out to tender

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SAFEGUARDS THAT MITIGATE THREATS TO INDEPENDENCE
a) within accounting firm
b) within client company
c) laws & reg & professional bodies

- when threats are identified, appropriate safeguards should be applied to eliminate such threats or reduce
them to an acceptable level

Safeguards created by the profession, legislation or regulation

- external review of a firm’s QC system
- legislation governing the independence requirements of the firm eg Companies Act

Safeguards within the assurance client

- client has employees competent to make managerial decision – as such the PA will not be involved in making
decision for the client and thus avoid the possible self-review threat
- Audit committee – provides appropriate oversight

Safeguards within the firm’s own systems and procedures

1) Firm-wide safeguards
2) Engagement-specific safeguards (for indv assignments) exam
a) An additional PA to review the work done or otherwise advise as necessary – known as hot review if it is
carried out before the issuance of the audit report
b) Consulting a third party – such as another PA, professional regulatory body, or a committee of
independent directors
c) Rotation of senior personnel
d) Discuss independence issues with the audit committee or others charged with governance (AC endorsed
the EA)
e) Disclose to AC or others charged with governance, the nature of services provided and extent of fees
charged
f) Policies & procedures to ensure members of the assurance team do not make or assume responsibility
for mgnt decisions for the assurance clients
g) Another firm to perform or re-perform part of the assurance engagement – ensure same results obtained
h) Delegate the provision of non-audit services to another firm
i) Remove individual from assurance team when that indv’s financial interest/relationship create a threat
to independence – this safeguard will be applicable if the firm staff are required to make voluntary
declaration of their interest with the client company

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CONFLICTS OF INTEREST tested once
- self-interest threat to objectivity

- Types of conflicts :
a) PA compete directly with a client or have JV or similar arrangements with major competitors of that
client – confidential info used for personal advantage
b) Perform services for clients whose interests are in conflict with each other in relation to the matter or
transaction in question – this situation happen when firm accept appointment by 2 or more clients who
are in conflict.
An example of such conflict of interest include providing service to help the client to prepare tender
documentation for a similar contract / negotiating dispute involving two or more of our clients.
If one of them is existing client – notification can be used ; If two are new clients – reject both to avoid
accused of favoritism.
Audit 2 or more clients in same industry – erection of Chinese wall – therefore no need inform ; unlike
other services such as tender (competing) , negotiating dispute as mentioned above.

- Safeguards :
a) For conflict (a), PA shall notify all relevant parties that they have relationships with clients or third parties
that could give rise to conflicts of interest
b) For conflict (b), PA shall notify all relevant parties that they are acting for 2 or more parties in respect of
a matter where their respective interests are in conflict, and obtain their consent that they may so act

Such safeguards however may be precluded in some circumstances due to the constraints of confidentiality

- Additional safeguards (relate to confidentiality to overcome the conflicts) :

1) use separate engagement teams with separate internal reporting lines – however Prince Jeffrey vs
KPMG (modern gadgets)
2) procedures to prevent access to info – only allowed to engagement team
eg strict physical separation of such teams, confidential & secure data filing
3) policy on confidentiality within actg firm – clear guidelines for engagement team members on issues of
security & confidentiality
4) regular review of the application of the safeguards by a senior indv not involved with either client
engagement – monitoring – ensure no compromisation
5) policies & procedures for dealing with conflicts of interest – such policy & procedure is a form of risk
mgnt for the firm

- where safeguards does not work, PA should conclude that it is not appropriate to accept a specific
engagement or that PA should resign from one or more conflicting engagements (last resort)