25.

CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

Introduction
The mission of International Federation of Accountants (IFAC) is worldwide development and enhancement of an accountancy profession with harmonized standards, able to provide services of consistently high quality in the public interest. In pursuing this mission, IFAC Board established Ethics Committee to develop and issue high quality ethical standards and other pronouncements for professional accountants for use around the world. NBAA is a member of IFAC hence may apply agreed standards. Acceptance of the responsibility to act in the public interest is the distinguishing mark of the accountancy profession. Therefore, a professional accountants responsibility is not exclusively to satisfy the needs of an individual client or employer but to serve the public interest. Principles of professional ethics for professional accountants There are 6 fundamental principles, which a professional accountant (in public practice or in business) should comply: 1. Integrity 2. Objectivity 3. Professional competence and due care 4. Confidentiality 5. Professional behavior 6. Technical standards 1. Professional integrity Professional integrity refers honesty, fair dealing, trustworthy and free from conflict of interest. Professional accountant should be straightforward and honest in all professional and business relationships. It also refers to personal qualities and attributes that are considered essential for the auditor. These include probity, transparency, correct interpretation of facts, ability to make fair decisions, and ability to exercise reasonable skill, care and caution. Auditors conduct is essential. Regardless of the service or capacity, professional auditors should protect the integrity of their professional services, and maintain objectivity in judgment. A professional accountant should not be associated with reports, returns, communications or other information where they believe that the information contains: (a) A materially false or misleading statement; (b) Statements or information furnished recklessly; or (c) Omits or obscures information required to be included where such omission or obscurity would be misleading. A professional accountant will not be considered to be in breach of above section if s/he provides a modified report in respect of that matter.

2. Professional objectivity Objectivity refers to the careful use of protracted procedures and test to arrive to a conclusion such that a similar independent test by another person would give the same conclusion. 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. Situations which may impair objectivity hence independence are discussed later on this chapter. It is impracticable to define and prescribe all such situations and circumstances which may compromise objectivity. 3. Professional competence and Due Care The principle of competence and due care imposes the following obligations to professionals: (a) To maintain professional knowledge and skill at the level required to ensure that clients or employers receive competent professional services and (b) To act diligently in accordance with applicable technical and professional standards when offering services. Professional competence refers to the ability to perform an audit job effectively, efficiently and economically. It is experienced based qualification. Professional auditors and accountants should not portray themselves as having expertise or experience they dont possess. Professional competence may be divided into 2 phases: (i) Attainment of professional competence: (ii) High standard of general education. For example passing professional examinations (CPA, ACCA, or its equivalent) and ensuring proper registration with respective accounting and auditing professional bodies. Relevant and adequate working experience.

Maintenance of professional competence: Continuing awareness of the developments in the profession by attending Continuing Professional Education program (CPE). It is 40 hours for auditors (CPA-PP) and 30 hours for accountants (CPA) per annum. It requires continuous awareness and an understanding of relevant technical professional and business developments to be able to perform outstandingly in a changing business environment. Appropriate trainings and supervision are regularly performed. Quality control on performance based on pronouncement at national and international level.

Diligence encompasses the responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely bias.

4. Confidentiality Professional accountants in business and in public practice should respect confidentiality of information acquired during the course of performing professional services and should not use or disclose or appear to use any such information without proper and specific authority or for personal advantage or advantage of the 3rd party unless there is a legal or professional right or duty to disclose. The principle requires not to: (a) Disclose outside the firm or employing organisation confidential information acquired as a result of professional and business relationships without proper and specific authority (b) Use confidential information acquired to their personal advantage or the advantage of third parties. Professionals have an obligation to respect the confidentiality of information about a clients or employers affairs acquired in the course of professional services. The duty of confidentiality continues even after the end of the relationship between the professional auditor and the client or employer. When confidential information can be disclosed The following are examples of circumstances which should be considered in determining whether confidential information may be disclosed: (a) When disclosure is authorized. When authorization to disclose is given by the client or the employer the interests of all the parties including those third parties whose interest might be affected should be considered. (b) When disclosure is required by law. Examples of when a professional accountant is required by law to disclose confidential information are : (i) To produce documents or to give evidence in the course of legal proceedings, and (ii) To disclose to the appropriate public authorities infringements of the law which come to light. (c) When there is a professional duty or right to disclose: (i) To comply with technical standards and ethics requirements, (ii) To protect the professional interests of a professional auditor in legal proceedings, (iii) To comply with the quality (or peer) review of a member body or professional body, and (iv) To respond to an inquiry or investigation by a member body or regulatory body. Factors to consider when disclosing confidential information In deciding whether to disclose confidential information, professional accountants should consider the following points:

(a) Whether the interests of all parties, including 3rd parties whose interest may be affected,
could be harmed if the client or employer consents to the disclosure of information by the professional accountants (b) The type of communication that is expected and to whom it is addressed; in particular, professional accountants should be satisfied that the parties to whom the communication is addressed are appropriate recipients. (c) Whether all the relevant information is known and substantiated, to the extent it is practicable; when the situation involves unsubstantiated facts, incomplete information or

unsubstantiated conclusions, professional Judgment should be used in determining the type of disclosures to be made if any. 5. Professional Behavior The principle of professional behavior imposes an obligation on professional accountants to comply with relevant laws and regulations and avoid any action that may bring discredit to profession. This includes actions which a reasonable and informed third party, having knowledge of all relevant information, would conclude negatively affects the good reputation of the profession. Advertising and solicitation Whether or not advertising and solicitation by CPAPP are permitted is a matter IFAC member bodies to determine based upon the legal, social and economic conditions of a country. In marketing and promoting themselves and their work, professional accountants should not bring the profession into disrepute. Professional Accountants in Public Practice should be honest and truthful and should not: (a) (b) (c) (d) Make exaggerated claims for services offers, Make exaggerated claims for qualification possessed or Make exaggerated claims for experience gained; or Make disparaging reference to unsubstantiated comparisons to the work of another. In short not allowed to degrade other members (e) Make unjustified claims to be an expert or specialist in a particular field of accountancy (f) Imply the ability to influence any court, tribunal, regulatory agency or similar body or official (g) Create a false, deceptive or unjustified expectations of favorable results Publicity by Professional Accountants in Public Practice in a Non Advertising Environment When advertising is not permitted, publicity by individual professional accountants in public practice is acceptable provided that: (a) It has as its object the notification to the public or such sectors of the public as are concerned, of matters of fact in a manner that is not false, misleading or deceptive; (b) It is in good taste; (c) It is professionally dignified, and (d) It avoids frequent repetition of, and any undue prominence being given to the name of the professional accountant in public practice. Examples of allowable publicity by accountants in public practice 1. Appointments and Awards It is in the interests of the public and profession that any appointment or other activity of a professional accountant in a matter of national or local importance, or the award of any distinction to a professional accountant, should receive publicity and that membership of the professional body should be mentioned. However, professional accountant should not make use appointments for personal professional advantages.

2. Professional Accountants seeking employment or business Professional accountant may inform the media that he or she is looking for employment of an accountancy nature. 3. Directories A professional accountant may be listed in a directory provided that neither directory itself nor the entry could reasonably be regarded as a promotional advertisement for those listed therein. Entries should be limited to name, address, location description and other information necessary to enable user of directory to make contact. 4. Books, Articles, Interviews, Lectures, Radio and Television Appearances Professional accountants who authored books or articles on articles may state their name and professional qualifications and give the name of the organization but shall not give any information as to the services that firm provides. Similar for lectures, interview, radio or television programs. 5. Training Courses, Seminars, etc Professional accountants may invite clients, staff or other accountant to attend training courses or seminars conducted for the assistance of staff. The requirement should in no way prevent professional accountants from providing training services to other professional bodies, associations or educational institutions which run courses for their members or the public. However, undue prominence should not be given to the name of a professional accountant in any booklets or documents issued in connection therewith. 6. Booklets and Documents Containing Technical Information Booklets and other documents bearing the name of a professional accountant and giving technical information for the assistance of staff or clients may be issued to such persons or to other professional accountants. Other persons should not be issued with such booklets or documents except in response to an unsolicited request. 7. Staff Recruitment Genuine vacancies for staff may be communicated to the public through any medium in which comparable staff vacancies normally appear. Advertisement should not contain any promotional materials and should not be any suggestion that the services offered are superior to those offered by other professional accountants in public practice as a consequence of size, associations, or for any other reasons. 8. Publicity on Behalf of Clients A professional accountant in public practice may publicize on behalf of clients, primarily for staff. However, the professional accountant in public practice should ensure that the emphasis in the publicity id directed towards the objectives to be achieved for the client.

9. Brochures and Firm Directories A professional accountant in public practice may issue to clients or, in response to an unsolicited request, to a non-client: (a) A factual and objectively worded account of the services provided; (b) A directory setting out names of partners, office addresses and firms associated firm and correspondents. 10. Stationery and Nameplates All stationery and nameplates of professional accountant in public practice should be of an acceptable standard and comply with law requirements. The designation of any services provided by the practice as being of specialist nature should not be permitted. 11. Newspapers Announcements Newspapers and magazines may be used to inform the public of the establishment of a new practice, of changes in the composition of a partnership of professional accountants in public practice, or of any alteration in the address of a practice. Such announcements should be limited to a bare statement of facts and consideration given to the appropriateness o the area of distribution of newspaper or magazine and number of insertions. Conflict of Loyalties to Employed Professional Accountants Professional accountants employed in public practice, industries, business, public sectors etc owe a duty of loyalty to their employers as well as to their profession. There may be times or situations or circumstances when the two are in conflict. An employees normal priority should be to support his or her organisations legitimate and ethical objectives and the rules and procedures drawn up in support of them. However, an employee can not legitimately be required to: Break the law Breach the rules and standards of profession Lie to or mislead (including misleading by keeping silent) those acting as auditors to the employer; or Put their name to or otherwise be associated with a statement which materially misrepresents the facts. Should there be a conflict, then, the matter should be resolved within the employees organisation, initially with the employees immediate superior and if not then it can be taken to higher management level or non executive directors. If the matter is still unresolved after exhausting all other relevant possibilities, the employee has no other recourse but to consider resignation. Employees should state their reasons for resignation but their duty of confidentiality normally precludes them from communicating the issue to other (unless legally or professionally required to do so.

Cross Boarder Activities When considering the application of ethical principles in cross boarder activities, a number of situations may arise. Which standards should be used in performing audit or accounting? When a professional accountant performs services in a country other than the home country and differences on specific matters exist between ethical requirements of the 2 countries the following provisions should be applied: (a) When the ethical requirements of the country in which services are being performed are less strict than the IFAC Code of Ethics, then, IFAC Code of Ethics should be applied. (b) When the ethical requirements of the country in which services are being performed are stricter than the IFAC Code of Ethics, then, ethical requirements in the country where services are performed should be applied. (c) When the ethical requirements of the home country are mandatory for service performed outside that country and are stricter than setout in (a) and (b) above, then the ethical requirements of the home country should be applied. 6. Technical Standards A professional accountant should carry out services in accordance with the relevant technical and professional standards with care and skill. In addition, they should also conform to standards set by: (a) International Federation of Accountants (IFAC). E.g. International Standards on Auditing (b) International Accounting Standard Board (IASB) e.g. International Financial Reporting Standards (c) The members professional body or other regulatory body e.g. NBAA (d) Relevant legislation. Threats to fundamental principles of professional code of ethics Compliance to the fundamental principles may potentially be affected by self-interest, selfreview, advocacy, familiarity and intimidation threats. (i) Self Interest Threat

Self Interest threat occurs when a firm or a member of the assurance team could benefit from a financial interest in, or other self-interest conflict with an assurance client. Examples of circumstances that may create self-interest threat include, but not limited to: (a) (b) (c) (d) (e) (f) (g) A direct financial interest or material indirect financial interest in an assurance client. A loan or guarantee to or from an assurance client or any of its directors or officers. Undue dependence on total fees from an assurance client. Concern about the possibility of losing the engagement. Having close business relationship with an assurance client. Potential employment with an assurance client. Contingent fees relating to assurance engagements.

(ii)

Self Review Threat

Self Review Threat occurs when (1) any product or judgment of a previous assurance engagement or non assurance engagement needs to be reevaluated in reaching conclusions on the assurance engagement or (2) when a member of the assurance tea was previously a director or officer of the assurance client or was an employee in a position to exert direct and significant influence over the subject matter of the assurance engagement. Examples of circumstances that may create this threat include, but are not limited to: (a) A member of the assurance team being, or having recently been, a director or officer of the assurance client. (b) A member of the assurance team being, or having recently been, an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement. (c) Performing services for an assurance client that directly affect the subject matter of the assurance engagement. (d) Preparation of original data used to generate financial statements or preparation of other records that are the subject matter of the assurance engagement.

(iii)

Advocacy Threat

Advocacy threat occurs when a firm, or a member of the assurance team, promotes, or may be perceived to promote, an assurance clients position or opinion to the point that objectivity may, or may be perceived to be, compromised. Such may be the case if a firm or a member of the assurance team were to subordinate their judgment to that of the client. Examples of circumstances that may create self-interest threat include, but not limited to: (a) Dealing in, or being a promoter of, shares or other securities in an assurance client, and (b) Acting as an advocate on behalf of an assurance client in litigation or in resolving disputes with third parties.

(iv)

Familiarity Threat

Familiarity threat occurs when, by virtue of a close relationship with an assurance client, its directors, officers or employees, a firm or a member of the assurance team becomes too sympathetic to the clients interests. Examples of circumstances that may create self-interest threat include, but not limited to:

(a) A member of the assurance team having an immediate family member or close family
(b) (c) (d) (e) member who is a director or officer of the assurance client. A member of the assurance team having an immediate family member or close family member who, as an employee of the assurance client, is in a position to exert direct and significant influence over the subject matter of the assurance engagement. A former partner of the firm being a director, officer of the assurance client or an employee in a position to exert direct and significant influence over the subject matter of the assurance engagement. Long association of a senior member of the assurance team with the assurance client. Acceptance of gifts or hospitality, unless the value is clearly insignificant, from the assurance client, its directors, officers or employees.

(v)

Intimidation Threat

Intimidation threat occurs when a member of the assurance team may be deterred from acting objectively and exercising professional skepticism by threats, actual or perceived, from the directors, officers of employees of an assurance client. Examples of circumstances that may create self-interest threat include, but not limited to: (a) Threat of replacement over a disagreement with the application of accounting principles and (b) Pressure to reduce inappropriately the extent of work performed in order to reduce fees. How to safeguard auditors independence The firm and members of the assurance team have a responsibility to remain independent by taking into account the context in which they practice, the threats to independence and the safeguards available to eliminate the threats or reduce them to an acceptable level. Independence safeguards fall into 3 broad categories: (a) Safeguards created by the profession, legislation or regulation: Educational, training and experience requirements for entry into the profession. Continuing education requirements. Professional standards and monitoring and disciplinary processes External review of a firms quality control system. Legislations governing the independence requirements of the firm.

(b) Safeguards within the assurance client: When the assurance clients management appoints the firm, persons other than management ratify or approve the appointment. The assurance client has competent employees to make management decisions. Policies and procedures that emphasize the assurance clients commitment to fair financial reporting. Internal procedures ensure objective choices in commissioning non assurance engagement, and A corporate governance structure, such as an audit committee, that provides appropriate oversight and communication regarding a firms service.

(c) Safeguards within the firms own systems and procedures: Firm leadership that stresses the importance of independence and the expectation that members of assurance teams will act in the public interest. Policies and procedures to implement and monitor quality control of assurance 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. Internal policies and procedures to monitor compliance with firm policies and procedures as they relate to independence. Policies and procedures that will enable the identification of interests or relationships between the firm or members of the assurance team and assurance clients. Policies and procedures to monitor and, if necessary, manage the reliance on revenue received from a single assurance client. Using different partners and teams with separate reporting lines for the provision of non assurance services to an assurance client. Policies and procedures to prohibit individuals who are not members of the assurance team from influencing the outcome of the assurance engagement. Timely communication of the firms policies and procedures and any changes thereto, to all partners and professional staff, including appropriate training and education thereon. Designation a member of senior management as responsible for overseeing the adequate functioning of the safeguarding system. A disciplinary mechanism to promote compliance with policies and procedures. Policies and procedures to empower staff to communicate to senior levels within the firm any issue of independence and objectivity that concerns them, this includes informing staff of the procedures open to them.

Professional independence Independence may be defined as an attitude of mind characterized by integrity and an objective approach to professional work. It can not be measured easily. Independence can also be defined as a quality which permits an individual to apply unbiased judgment and objective consideration to established facts in arriving at an opinion or decision. The use of the word independence on its own may create misunderstandings. Standing alone, the word may lead observers to suppose that a person exercising professional judgment out to be free from all economic, financial and other relationships. This is impossible, as every member of society has relationships with others. Therefore, the significance of economic, financial and other relationships should also be evaluated in the light of what a reasonable and informed third party having knowledge of all relevant information would reasonably conclude to be unacceptable. A conceptual framework that requires firms and members of assurance teams to identify, evaluate and address threats to independence, rather than merely comply with a set of specific rules which may be arbitrary is, therefore, in the public interest. Independence requires: (a) Independence of Mind The state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectively and professional skepticism. Professional Skepticism Professional skepticism means the auditor makes a critical assessment, with a questioning mind, of the validity of audit evidence obtained and is alert to audit evidence that contradicts

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or brings into question the reliability of documents and responses to inquiries and other information obtained from management and those charged with governance. For example, an attitude of professional skepticism is necessary throughout the audit process for the auditor to reduce the risk of overlooking unusual circumstances, of over generalizing when drawing conclusions from audit observations, and of using faulty assumptions in determining the nature, timing and extent of the audit procedures and evaluation the results thereof. (b) Independence of 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 firms, or a member of the assurance teams integrity, objectivity or professional skepticism had been compromised. Dimensions of independence There are three dimensions of independence as mentioned by Mautz and Sharaf): 1. Programming independence This means that the auditor has the right to perform any work he considers necessary to form his opinion. The auditor is free to decide the extent and nature of tests required and the extent of any enquiries he makes within the overall bounds of the engagement. 2. Investigative independence This is used to describe the auditors right of access to all the records of the business being audited. This includes all books, reports and documents, both financial and otherwise. There must be no control or undue influence in the selection of activities, personal relationships, and managerial polices to be examined. 3. Reporting independence This means that the auditor is free to include any statements in his report setting out his opinion on financial statement and present shortcomings discovered which he considers necessary without any pressures being imposed upon him and the audit assignment.

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