Professional Ethics

Topic 1
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Learning Objectives
1.
2.
3.
4.
5.
6.

7.

Distinguish ethical from unethical behavior in personal and

professional contexts.
Resolve ethical dilemmas using an ethical framework.
Explain the importance of ethical conduct for the accounting
profession.
Describe the purpose and content of the MIA By-Laws (on
Professional Conduct & ethics).
Describe factors in new MIA By-Laws B-1 (On Professional
Independence) that influence auditor independence.
Understand Sarbanes-Oxley Act and other SEC independence
requirements and other factors that influence auditor
independence.
Apply the MIA By-Laws and interpretations on independence and
explain their importance.
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Learning Objective 1

Distinguish ethical from unethical

behavior in personal and
professional contexts.

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What Are Ethics?

Ethics can be defined broadly as
a set of moral principles or values.
Each of us has such a set of values.
We may or may not have considered
them explicitly.

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Ethics vs Religion

Does ethics require religion?

When ethics and religion collide,
nobody wins;
when religion and ethics find room
for robust discussion and agreement,
we maximize the prospects
for constructive choices in our society.
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Illustrative Prescribed
Ethical Principles
Trustworthiness

Respect

Responsibility

Fairness

Caring

Citizenship

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Learning Objective 2

Resolve ethical dilemmas using

an ethical framework.

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Ethical Dilemmas
An ethical dilemma is a situation a person
faces in which a decision must be made
about appropriate behavior.

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Rationalizing
Unethical Behavior
Everybody does it.

If its legal, its ethical.

Likelihood of discovery and consequences

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Resolving Ethical Dilemmas

1. Obtain the relevant facts.

2. Identify the ethical issues from the facts.

3. Determine who is affected.

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Resolving Ethical Dilemmas

4. Identify the alternatives available to the
person who must resolve the dilemma.
5. Identify the likely consequence of each
alternative.
6. Decide the appropriate action.

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Relevant Facts
A staff person has been informed that
he will work hours without recording
them as hours worked.
Firm policy prohibits this practice.
Another staff person has stated that
this is common practice in the firm.
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Ethical Issue
Is it ethical for the staff person to work hours and
not record them as hours worked in this situation?
Who is affected?

How are they affected?

What alternatives does the staff person have?

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Learning Objective 3

Explain the importance of ethical

conduct for the accounting
profession.

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Special Need for Ethical Conduct

in Professions
Our society has attached a special
meaning to the term professional.
A professional is expected to conduct
himself or herself at a higher level
than most other members of society.

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Ethical Principles
1. Responsibilities:
Professionals should exercise sensitive and
moral judgments in all their activities.
2. The public interest:
Members should accept the obligation to act
in a way that will serve and honor the public.

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Ethical Principles
3. Integrity:
Members should perform all responsibilities
with integrity to maintain public confidence.
4. Objectivity and independence:
Members should be objective, independent,
and free of conflicts of interest.

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Ethical Principles
5. Due care:
Members should observe the professions
standards and strive to improve competence.
6. Scope and nature of services:
A member in public practice should observe
the Code of Professional Conduct.

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CPAs Encouraged to Conduct

Themselves at a High Level
CPA
examination

GAAS and
interpretations

Conduct of CPA firm personnel

Continuing education
requirements
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CPAs Encouraged to Conduct

Themselves at a High Level
Quality
control

Peer
review

Conduct of CPA firm personnel

Legal liability
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CPAs Encouraged to Conduct

Themselves at a High Level
PCAOB
and SEC

Division of
CPA firms

Conduct of CPA firm personnel

Code of Professional
Conduct
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Learning Objective 4

Describe the purpose and

content of the MIA By-Laws (on
Professional Conduct & ethics).

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MIA By-laws (On Professional

Conduct & Ethics)
Under Sec. 10(a) of the Accountants Act 1967
MIA is empowered to establish by-laws for
the indoctrination of sound professional
practice & the prevention of illegal &
dishonorable practices of the profession.
MIA By-laws provide the principles & ethical
rules MIA members must follow in
undertaking their professional work.

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FUNDAMENTA
L PRINCIPLES
OF ETHICS IN
ACCORDANCE
WITH MIA BYLAW
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Integrity
Professional
Competence
& Due Care

Objectivity
FUNDAMENTAL
PRINCIPLES OF
ETHICS IN
ACCORDANCE
WITH MIA BY-LAW

Professional
Behaviour

Confidentiality
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(1)
Integrity

(2)
Objectivity

Section 110.1- The principle of integrity imposes an obligation on

all professional accountant to be straightforward and honest in all
professional and business relationships.
Integrity also implies fair dealing and truthfulness.

Section 120.1- The principle of objectivity imposes an obligation on

all professional accountants not to compromise their professional or
business judgment because of bias, conflict of interest or the undue
influence of others.

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(3)
Professional
Competence
and Due Care

Section 130.1- The principle of professional competence and due care imposes
the following obligations on professional accountants:
(a) To maintain professional knowledge and skill at the level required to ensure
that clients or employers receive competent professional service; and
(b) To act diligently in accordance with applicable technical and professional
standards when providing professional services.

Auditor should carry out professional work in accordance with the technical &
professional standards relevant to that work.
The auditor shall perform his work and prepare the auditors report with due
care.
Auditor should not accept work unless competent to undertake it.
An auditor must comply with all the standards and guidelines, approved by
MIA.
A competent auditor can perform his work with due care.

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(4)
Confidentiality

Section 140.1- The principle of confidentiality imposes an obligation on all

professional accountants to refrain from:
(a) Disclosing outside the firm or employing organization confidential
information acquired as a result of professional and business relationships
without proper and specific authority or unless there is a legal or professional
right or duty to disclose; and
(b) Using confidential information acquired as a result of professional and
business relationships to their personal advantage or the advantage of third
parties.

Auditor should respect the confidentiality of information acquired in

the course of his work.
The auditor should not disclose any such information to a third party
without specific authority or unless there is a legal or professional
duty to disclose.
An auditor shall treat as confidential any information about a clients
business affairs acquired for his personal advantage or the
advantage of third party.

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(5)
Professional
Behavior-

Section 150.1- The principle of professional behavior imposes an

obligation on professional accountants to comply with relevant laws
and regulations in addition to these By-Laws and avoid any action that
the professional accountant knows or should know may discredit the
profession.

Auditor should at all times carry out his work

professionally and should conduct himself in a manner
that is consistent with good reputation of the profession.

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End of Lecture 1

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Learning Objective 5

Describe factors in new MIA ByLaws B-1 (On Professional

Independence) that influence
auditor independence.

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Professional independence
Independence is the cornerstone of the auditing
profession.
The fact of independence depends on the auditors
integrity, objectivity and strength of character.
Companies Act and s.290 of the Code stipulate
principles, rules and guidelines.

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Professional Independence
The value of auditing depends heavily on the
publics perception of the independence of
auditors.
Independence in fact
Independence in appearance

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Threats to independence
Self-interest
threats

Self-review
threats

Intimidation
threats

Advocacy
threats

Familiarity
threats

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Types of threats
Self-interest threats are as a result of financial or other
interests of a member or of an immediate or close
family member
Self-review threats may occur when a previous
judgement needs to be re-evaluated by the member
responsible for that judgement

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Types of threats
Advocacy threats may occur when a member promotes
a position of opinion to the point that subsequent
objectivity may be compromised
Familiarity threats may occur when, because of a close
relationship, a member becomes too sympathetic to
the interests of others

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Types of threats
Intimidation threats may occur when a member may be
deterred from acting objectively by actual or perceived
threats
Public practice behaviour threats may occur as a result
of inappropriate marketing of professional services
and products

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Safeguards
Safeguards may eliminate or reduce threats to an
acceptable level
Safeguards are created by the profession, legislation
or regulation
Examples: continuing professional development
requirements, corporate governance regulations,
professional standards

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Officer of
a
Company

Other
Provision

Factor that
influence
auditor
independence

Non
audit
services

Financial
Interest

Audit
committee
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(1) OFFICER OF A COMPANY

Section 290.103(1)(c)

A member in public practice is prohibited from

accepting appointment as auditor of a
company if he/she is an officer of the company.
A member who is a partner ,employer or
employee of an officer of the company is also
prohibited from acting as auditor of the
company.
A member may no longer be an officer of the
company , but past association may also affect
his or her independence.

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CONT

Thus, the by-law prohibit members from accepting

appointment if within the past 12 months he or she
has been associated with the company directly, such
as an officer or the employee of the company, or
indirectly, such as in the employment of the an officer
of the company.

This is because of self-review threat, when a member

of the assurance team was previously an employee of
the assurance client and thus has significant
influence on the assurance engagement decision.

The safeguard for this threat is to reduce the threat to

insignificant level.

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(2) FINANCIAL INTEREST

Section 290.104

A member is prohibited from accepting

appointment as an auditor
if he/she has any
direct/indirect interest in shares of the company.
An indirect interest in shares refers to shareholding
by a member spouse, dependent son or daughter.

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CONT

Although shareholding, direct or indirect, is generally not

permitted, the by-law gives some flexibility for financial interest
if the amount is not material and safeguards are available to
eliminate the threat or reduce it to an acceptable level.

Financial interest can be included under self-interest threat

when a member of the assurance team has a financial interest
which may provided conflict of interest when doing assurance
jobs.

The safeguard suggested by MIA By Law is to dispose of the

financial interest before the member become part of the
assurance team, whether full dispose or at an acceptable level
or remove the member from the assurance team.

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(3) NON-AUDIT SERVICES

Section 290.158
Professional independence mainly focus on
the non-audit services rendered by the
auditors audit clients.
The auditors should know their financial
dependency when provide non-audit services
to their clients.
If significant, they should reduce to an
acceptable level and if not, they should not
accept those services.

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(4) OTHER PROVISION

Professional independence also prohibits an
auditor from providing services to promote illegal
activities of a client.
By-Law 2-11 states:No member shall give any
assistance or his services by the use of his name
or in any other manner to advance or promote
any illegal activities of a client.
A member is also prohibited from associating with
any statements or reports that are believed to be
false or misleading.(By-law 5-4A).
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CONT

Independence of an auditor may be considered to be impaired if

there are unpaid fees for professional services provided.

An auditor may decline appointment to a client if the client has not

paid the fees due on statutory audits for two consecutive financial
years.(By-Law 5-4A)

In fact, very low total fees than the predecessor auditor and
contingent fees may also affect independence.

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CONT

The new by-laws state that financial dependency exists

when the total fees of one assurance client exceeds
15% of the audit firms total fees in every year of two
consecutive financial periods.

The same applies if a large portion of fees is paid to an

individual partner.

For all these circumstance, there is no safeguard to

reduce to an acceptable level.

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CONT

Under the law on loans to and from clients, a member in public

practice is prohibited from indebted to a client in a sum
exceeding RM2,500[(Section 290,103(I)(b)].

Under Section 290.126-290.131 a member in public practice is

prohibited from:
1. Making a loan to client;
2. Guaranteeing a clients borrowings;
3. Accepting a loan from client;
4. Having borrowings guaranteed by a client unless the
loan or guarantee is immaterial.

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5) AUDIT COMMITTEE

Section 290.29-290.30
An audit committee is a selected number of members of a
companys board of directors whose responsibilities include
helping auditors remain independent of management.

typical audit committee decides such things as which audit firm

to retain and the scope of services the audit firm is to perform
subject to the provisions of the Companies Act 1965.

It meets periodically with the audit firm to discuss audit progress

and findings, and helps resolve conflicts between the auditors and
management

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Cont

Audit committee are looked upon with the favour by most auditor,
users and management.

For small companies, having audit committee would be rather

costly.

In Malaysia, an audit committee is required for all companies listed

on the Bursa Malaysia Securities.

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Cont..
Under Bursa Malaysia requirements:
a) comprise at least three
director
b) all members must not be
executive directors of the
company or any related
corporations.

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Learning Objective 6
Understand Sarbanes-Oxley Act and other SEC
independence requirements and other factors
that influence auditor independence.

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Sarbanes-Oxley Act and SEC

Provisions Addressing Auditor
Independence
The SEC adopted rules strengthening auditor
independence in January 2003 Consistent with
the requirements of the Sarbanes-Oxley Act.
The Sarbanes-Oxley Act and the revised SEC
rules further restrict, but do not completely
eliminate the type of nonaudit services
that can be provided to the public.
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Sarbanes-Oxley Act and SEC

Provisions Addressing Auditor
Independence
Prohibited Services
1. Bookkeeping and other accounting services
2. Financial information systems design and implementation
3. Appraisal or valuation services
4. Actuarial services
5. Internal audit outsourcing
6. Management of human resource functions
7. Broker or dealer or investment adviser
or investment banker services
8. Legal and expert services unrelated to the audit
9. Any other service that the PCAOB determines
by regulation is impermissible
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Audit Committees
An audit committee is a selected number
of members of a companys board of directors
whose responsibilities include helping
auditors remain independent of management.
Most audit committees are made up of three
to five or sometimes as many as seven
directors who are not a part of company
management
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Audit Committees
The Sarbanes-Oxley Act requires that all
members of the audit committee
be independent.

Companies must disclose whether or not

the audit committee includes at least
one financial expert.
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Conflicts Arising from

Employment Relationships
The SEC has added a one year cooling off
period before a member of the audit
engagement team can work for the
client in certain key management positions.

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Partner Rotation

The Sarbanes-Oxley Act requires that

the lead and concurring audit partner
rotate off the audit engagement
after a period of five years.

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Ownership Interests

SEC rules adopted in 2000 on financial

relationships narrow the restrictions on
ownership in clients to those persons
who can influence the audit.

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Other Issues

Shopping for accounting principles

Engagement and payment of

audit fees by management

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End of Lecture 2

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Learning Objective 7
Apply the MIA By-Laws and
interpretations on independence and
explain their importance.

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Competence
A member should have formal education in accounting,
adequate practical experience for the work being
performed and continuing professional education.
MIA by-laws provide that a member must not undertake
professional work which he or she is not competent to
perform. When in doubt, a member should obtain the
necessary advice and assistance to enable him or her
to carry out the work competently (Section 210.9).

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Due Care
The member is a professional responsible for fulfilling
his or her duties diligently and carefully.
An accountant should observe the professionals
technical and ethical standards, strive continually to
improve competence and the quality of services
through Continuing Professional education (CPE) and
discharge professional responsibility to the best of his
or her ability (section 410).

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Continuing Professional Education

(CPE)
CPE is necessary because of the rapid changes and expansion in
the knowledge that is required of accountants in order for them to
discharge their professional obligations effectively and
responsibly.
A CPE programme normally
unstructured learning.

comprises

structured

and

Structured CPE learning obtained through courses,

conferences and seminars or from post-graduate studies.
Unstructured CPE learning includes private study and technical
research for practical work
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Method Of Practice

Prohibits a member from using a trade name to practice the

profession (By-Law Section 500.2)
A member in public practice is not allowed to practise as a
chartered accountant or licensed accountant other than:
(a) in his or her own name, or
(b) in the name or names of his or her partner or partners, being
chartered accountants or licensed accountants; or
(c) in the name of a firm existing at the time of the coming into
operation of the Act or formed thereafter provided that the
partners in Malaysia are eligible to be registered as
chartered accountants or licensed accountants

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By-law section 500.7 Every professional accountant

prior to commencement of public practice should apply
to the Institute for approval of the proposed name of
the intended firm or practice.
By-law section 500.3 (2) - A member in public practice
should not report or express an opinion on financial
statements examined for the purposes of such report
or opinion by a person other than a staff or member of
his or her firm, unless such other person is also a
member in public practice, except for entities which
are incorporated or operating outside Malaysia.

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By-law Section 420.4 - Every member in public practice

who signs any reports or other documents in a
professional capacity either as an individual or for and
on behalf of the firm shall only use the designations
Chartered Accountant or Chartered Accountants or
"Licensed Accountant" or "Licensed Accountants" to
describe that member in public practice or the firm in
the report or documents.

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Advertising
Communication use of various media,
such as newspaper, magazine, radio, TV
to the public of info about the services of
the Chartered Accountant (CA) firm.

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Publicity
The communication by any means, to the
public of info about a member or member firm
which is not designed for the deliberate
promotion of the member or member firm.

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Solicitation
Consist of various means that CA use to engage new
clients other than accepting clients that approach the
firm.
Examples - taking prospective client to lunch to explain
the firms services or, offering seminars on current tax
law changes to potential clients, and advertisements in
the Yellow Pages of the telephone directory.

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Advertising, Publicity & Solicitation

(MIA By-Laws)

Section 250.2 - A professional accountant in public

practice shall not bring the profession into disrepute
when advertising or marketing public practice
services. The professional accountant in public
practice shall be honest and truthful and not:
(a) Make exaggerated claims for services offered,
qualifications possessed or experience gained;
(b) Make disparaging references to unsubstantiated
comparisons to the work of another.

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Advertising, Publicity & Solicitation

(MIA BY-LAWS)
Section 250.3 - if the professional accountant
in public practice is in doubt whether a
proposed form of advertising or marketing is
appropriate, the professional accountant in
public practice shall consider guidance from
the Institute.

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Advertising, Publicity & Solicitation

(MIA BY-LAWS)

Section 150.2 - In advertising, marketing or

promoting themselves and their work, professional
accountants shall not bring the profession into
disrepute and shall ensure that such advertisement,
marketing or promotional material is:
(a) professionally dignified and in good taste; and
(b) carried out in accordance with the relevant
legislation where applicable.

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Advertising, Publicity & Solicitation

(MIA BY-LAWS)
The permission to seek publicity & to advertise comes with certain
provisions:
1.
be consistent with the good reputation of the accountancy
profession and & does not bring discredit to the member, the
institute or to the profession;
2.
portray the truth - contain only facts & must not be misleading or
deceptive;
3.
be in good taste & professionally dignified;
4.
no exaggerations in terms of claims of the services offered, the
qualifications or experience;
5.
avoid belittling, or claiming superiority over other members or their
work;
6.
not contain unjustified claims to be an expert or specialist in a
particular area; and
7.
be carried out in accordance with the applicable legislation.
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FEES &
COMMISSION
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PROFESSIONAL
FEE

COMMISSION

4
CATEGORIES
OF FEE &
COMMISSION

CONTINGENT
FEE

SHARING
FEE

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Fees & Commission (MIA By-laws)

Professional Fees
By-law 240.1 A member is entitled to charge
fees which are considered appropriate for
the professional services but he should not
propose to a client loss fees or free
services. This is to avoid undercutting which
could lead to a compromise or a lowering of
the professional standards.

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Fees & Commission (MIA By-laws)

MIA By-law 240.2A provides that the
professional fees should be a fair reflection of
the value of the work performed for the client,
taking into account:
- skill & knowledge required
- level of training & experience of
the
persons required for the work
- time required by each person
- degree of responsibility & urgent
that the work requires.
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Fees & Commission (MIA By-laws)

Contingent fee
By-law 240.3 contingent fees are widely
used for certain types of non-assurance
engagements. They may, however, create
threats to compliance with the fundamental
principles in certain circumstances. They
may create a self-interest threat to
objectivity.

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Cont
The existence and significance of such threats will depend on
factors including:
The nature of the engagement.
The range of possible fee amounts.
The basis for determining fee.
Whether the outcome or result of the transaction is to be
reviewed by an independent third party.

a)
b)
c)
d)

For Example : suppose a CA firm is permitted to charge

a fee of RM5000 if an unqualified opinion is provided,
but only RM2500 if opinion is qualified. Such an
agreement may affect the auditors objectivity and
tempts him or her to issue a wrong opinion.
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Fees & Commission (MIA By-laws)

Sharing of fee
By-law 11-3(1) a member in public practice must
not allow the participation in the profits of his or her
professional work by any person other than a
regular member of the staff or another member in
public practice without the consent of the client
By-law 11-3(2) the payment to a retiring partner, is
exempted from the above restriction.

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Fees & Commission (MIA By-laws)

Commission
The objective of the by-law generally is to
discourage the payment or acceptance of
commission by members in their dealings ,
as such a practice may lead to a
compromise in ethical and professional
standards.

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The rule on commission

(By-law 240.5-240.8 )
MIA By-law 240.5) In certain circumstances , a
professional accountant in public practice may receive
a referral fee or commission relating to a client.
For example : where the professional accountant in
public practice does not provide the specific service
required, a fee may be received for referring a
continuing client to another professional accountant in
public practice or other expert.

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MIA By-law 240.6 A professional accountant in

public practice may also pay a referral fee to
obtain a client, for example, where the client
continues as a client of another professional
accountant in public practice but requires
specialist services not offered by the existing
accountant.
The payment of such a referral fee may also
creates a self-interest threat to objectivity and
professional competence and due care.

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MIA By-law 240.7 The significance of the threat shall be

evaluated and safeguards applied when necessary to
eliminate the threat or reduce it to an acceptable level.
Examples of such safeguards include :
Disclosing to the client any arrangements to pay a
referral fee to another professional accountant for the
work referred.
Disclosing to the client any arrangements to receive a
referral fee for referring the client to another
professional accountant in public practice.
Obtaining advance agreement from the client for
commission arrangements in connection with the sale
by a third party of goods or services to the client.

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MIA By-law 240.8 A professional accountant

in public practice may purchase all part of
another firm on the basis that payment will
be made to individuals formerly owning the
firm or to their heirs or estates. Such
payments are not regarded as commission or
referral fees for the purpose of paragraph
240.5-240.7 above.

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Changes In Professional Appointment

This by-law provides guidance on matters relating to
changes in the professional appointment which is
particularly important in cases where there is
disagreement between the existing accountant and the
client over the application of technical or ethical
principles in the course of work.
MIA By-law 210.10 provides the course of action to be
taken by both the existing auditor as well as the
proposed auditor in a proposed change in professional
appointment.
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End of Chapter 1

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