Ethics For Professional Accountants

Slide 3.
Ethics for Professional Accountants

Principles of Auditing: An Introduction to
International Standards on Auditing - Ch. 3
Rick Stephan Hayes,

Roger Dassen, Arnold Schilder,
Philip Wallage
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 3.2
WHAT ARE ETHICS?
E A sense of agreement in a society as to what

is right and wrong.
E 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.
Slide 3.3
Illustration 3.1
Slide 3.4
Objectives of Accountantancy Profession
 Generally, to meet the public’s interest

“A distinguishing mark of the accountancy
profession is its acceptance of the responsibility to
act in the public interest. Therefore, a professional
accountant’s responsibility is not exclusively to
satisfy the needs of an individual client or
employer.”
 To work to the highest standards of
professionalism
 To attain the highest levels of performance
Slide 3.5
PCAOB Ethics
• http://pcaobus.org/Standards/EI/Pages/default
.aspx General
• http://pcaobus.org/Standards/EI/Pages/ET101
.aspx Independence AICPA temporary
Slide 3.6
Figure 3.2 Not Applicable Any More
Slide 3.7
The Code is divided into three parts: A, B,

and C (Not in Text):
• Part A establishes the fundamental principles of

professional 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 certain situations.
• Part B applies to professional accountants in public
practice.
• Part C applies to professional accountants in
business.
Slide 3.8
Part A – Fundamental Principles

Part A establishes the fundamental principles of professional
ethics for professional accountants and provides a
conceptual framework that professional accountants shall
apply to:
(a) Identify threats to compliance with the fundamental
principles;
(b) Evaluate the significance of the threats identified; and
(c) Apply safeguards, when necessary, to eliminate the
threats or reduce them to an acceptable level.
Safeguards are necessary when the threats are not at a
level at which a reasonable and informed third party
would be likely to conclude, weighing all the specific facts
and circumstances available to the professional
accountant at that time, that compliance with the
fundamental principles is not compromised.
Slide 3.9
The IFAC Code of Ethics for Professional Accountants fundamental

principles for ALL Accountants:
1) Integrity (Sec 110)

2) Objectivity (Sec 120)
3) Professional Competence
and Due Care (Sec 130)
4) Confidentiality (Sec 140)
5) Professional Behavior
(Sec 150)
Slide 3.10
Principles
1) Integrity to be straightforward and

honest in all professional and business
relationships.
2) Objectivity: To not allow bias, conflict
of interest or undue influence of others to
override professional or business
judgments.
Slide 3.11
Principles
3) Professional Competence and Due Care:

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 and act
diligently and in accordance with applicable
technical and professional standards.
Slide 3.12
Principles
4) Confidentiality: To respect the confidentiality of
information acquired as a result of professional
and business relationships and, therefore, not
disclose any such information to third parties
without proper and specific authority, unless
there is a legal or professional right or duty to
disclose, nor use the information for the personal
advantage of the professional accountant or third
parties.
5) Professional Behavior: to comply with relevant
laws and regulations and avoid any action that
discredits the profession.
Slide 3.13
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.
• When an accountant identifies threats to compliance
with the fundamental principles and determines that
they are not at an acceptable level, he/she shall
determine whether appropriate safeguards are
available and can be applied to eliminate the threats
or reduce them to an acceptable level.
Slide 3.14
Threats and Safeguards

(no longer related just to Independence, but to ethics)
Compliance with the fundamental

principles may potentially be
threatened by a broad range
of circumstances. Many
threats fall into the following
categories:
• Intimidation threats
• Self-interest threats
• Self-review threats
• Advocacy threats
• Familiarity threats
Slide 3.15
Safeguards are
actions or other
measures that
may eliminate
threats or
reduce them to
an acceptable
level.
Slide 3.16
Figure 3.5
Slide 3.17
Intimidation Threat
Intimidation Threat occur when a

professional accountant may be
deterred from acting objectively by
threats, actual or perceived.
Slide 3.18
Examples of Intimidation Threats
Being threatened with dismissal from a client

engagement.
Being threatened with litigation.
Being pressured to reduce inappropriately the extent of
work performed in order to reduce fees.
An audit client indicating that it will not award a planned
non assurance contract to the firm if the firm continues to
disagree with the client’s accounting treatment.
A professional accountant feeling pressured to agree with
the judgment of a client employee because the employee
has more expertise on the matter in question.
A professional accountant being informed by a partner of
the firm that a planned promotion will not occur unless the
accountant agrees with an audit client’s inappropriate
accounting treatment.
Slide 3.19
Self-Interest Threat
A Self-interest threat – the threat that a financial

or other interest will inappropriately influence
the professional accountant’s judgment or
behavior.
Slide 3.20
Self Interest Threats Circumstances (In Part B)
• 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 assurance
engagement.
• Discovering a significant error when evaluating
the results of a previous professional service
performed by a member of the professional
accountant’s firm.
Slide 3.21
Self-Review Threat
Self-Review Threat – the threat that a

professional accountant will not
appropriately evaluate the results of a
previous judgment made or service
performed by him/her or by another
individual within the accountant’s firm, on
which the accountant will rely when
forming a judgment for the current audit.
Slide 3.22
Self-Review Threats Circumstances (In Part B)
• 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 assurance team being, or having
recently been, a director or officer of that client.
• A member of the assurance 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 information of the assurance
engagement.
Slide 3.23
Advocacy Threat
An Advocacy Threat – the treat that 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 an assurance
client;
Acting as an advocate on behalf of an assurance
client in litigation or disputes with third parties.
Slide 3.24
Familiarity Threat
Familiarity Threat ─ the threat that due to

a long or close relationship with a client or
employer, a professional accountant will
be too sympathetic to their interests or too
accepting of their work
Slide 3.25
Familiarity Threats Circumstances (In Part B)

Immediate family member or close family member
who is a director, officer, or influential employee of
the assurance client;
A member of the assurance team having a 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
engagement;
A director or officer of the client or an employee in a
position to exert significant influence over the subject
matter of the engagement having recently served as
the engagement partner.
Acceptance of gifts or preferential treatment from a
client, unless the value is trivial or inconsequential.
Senior personnel having a long association with the
assurance client.
Slide 3.26
Safeguards
Safeguards that may eliminate or reduce such

threats to an acceptable level fall into two
broad categories:
(1) Safeguards created by the profession,
legislation or regulation;
(2) Safeguards in the work environment.
Slide 3.27
Safeguards created by the profession, legislation or

regulation include:
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.
Slide 3.28
Firm-wide safeguards in the work environment may

include:
 Leadership that stresses the importance of

compliance with the fundamental principles
and the duty to act in the public interest.
 Quality control policies
 Documented independence policies
 Policies against reliance on revenue received
from a single client.
 A disciplinary mechanism to promote
compliance with policies and procedures.
Slide 3.29
Examples of engagement-specific safeguards in the

work environment
 Having a professional accountant who was not

a member of the assurance team review the
assurance work performed or otherwise
advise as necessary.
 Consulting an independent third party, such as
a committee of independent directors, a
professional regulatory body or another
professional accountant.
 Discussing ethical issues with those charged
with governance of the client.
Slide 3.30
Resolution of Ethical Conflicts

• Where a matter involves a conflict
with, or within, an organization, a
professional accountant shall
determine whether to 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, a professional accountant
may consider obtaining
professional advice from the
relevant professional body or from
legal advisors.
• If, after exhausting all relevant
possibilities, the ethical conflict
remains unresolved, a professional
accountant shall refuse to remain
associated with the matter creating
the conflict. He/she may decide to
withdraw from the engagement
team or specific assignment.
Slide 3.31
PART B Contents
Slide 3.32
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.
Slide 3.33
Changes in a Professional Appointment

An auditor who is asked to replace another
auditor shall determine whether there are any
reasons, professional or otherwise, for not
accepting the engagement.
This may require direct communication with
the existing auditor to establish the facts and
circumstances regarding the proposed change
so that the replacement auditor can decide
whether it would be appropriate to accept the
engagement.
Slide 3.34
Safeguards for Accepting an Audit

Engagement
Safeguards, including the following ,shall be

applied to eliminate any threats or reduce them
to an acceptable level:
– Before accepting the engagement state that contact
with the existing accountant will be requested
– Asking the existing accountant to provide known
information on any facts or circumstances thatthe
proposed accountant needs to be aware of before
deciding whether to accept the engagement; or
– Obtaining necessary information from other
sources. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 3.35
Information from Existing Auditor
Once client permission is obtained, the existing

accountant should provide information honestly
and unambiguously.
If the proposed accountant is unable to
communicate with the existing accountant, the
proposed accountant 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 predecessor accountant/auditor is no longer
required to provide information in writing or
regarding reasons not to take an audit.
Slide 3.36
Conflicts of Interest
An accountant
should take
reasonable steps
to identify
circumstances
that could pose a
conflict of
interest.
Slide 3.37
Second Opinions
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 accountant, describing
the limitations surrounding any opinion and
providing the existing accountant with a copy
of the opinion may be required.
Slide 3.38
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.
Slide 3.39
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.
Slide 3.40
What Advertising Cannot Do
An accountant should not bring the profession

into disrepute when marketing professional
services. 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.
Slide 3.41
Example of Bad Advertising
“At our firm we believe the financial success of any

business requires regular monitoring and attention to
the smallest detail. Without the objective oversight of
a practiced eye, huge opportunities can slip by
unnoticed, and minor problems can quickly evolve
into significant issues. That’s why the experts at our
firm maintain a close relationship with our clients all
year round, rather than merely reviewing financial
records annually.”
Slide 3.42
Gifts and Hospitality

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.
Slide 3.43
Custody of Client Assets

 To 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
Slide 3.44
Objectivity – All Services
When providing any professional service the

auditor should consider whether there are threats
to compliance with the fundamental principle of
objectivity resulting from having interests in, or
relationships with, a client or directors, officers or
employees.
In an assurance service the auditor is required to
be independent of the assurance client.
Independence of mind and in appearance is
necessary to express a conclusion, and be seen
to express a conclusion, without bias, conflict of
interest or undue influence of others.
Slide 3.45
Independence—Assurance Engagements
In the case of an assurance engagement it is in

the public interest and, therefore, required by
the Code of Ethics, that members of
assurance teams, firms and, when applicable,
network firms be independent of assurance
clients.
Slide 3.46
Part B of the Code illustrates how the

conceptual framework contained in Part
A is to be applied by professional
accountants in public practice.
Slide 3.47
Slide 3.48
Independence Sec 290 continued
Slide 3.49
Independence
• Independence involves independence in
appearance and independence in mind.
• Independence in Appearance : The avoidance of
facts and circumstances that are so significant
that a reasonable and informed third party,
having knowledge of all relevant information,
including safeguards applied, would reasonably
conclude a firm’s, or a member of the assurance
team’s, integrity, objectivity or professional
skepticism had been compromised.
• Independence of Mind The state of mind that
permits the expression of a conclusion without
being affected by influences that compromise
professional judgment, allowing an individual to
act with integrity, and exercise objectivity and
professional skepticism.
Slide 3.50
Independence in the Sarbanes-Oxley Act of 2002

TITLE II – AUDITOR INDEPENDENCE
Sec. 201. Services outside the scope of practice of auditors.
Sec. 202. Pre-approval requirements.
Sec. 203. Audit partner rotation.
Sec. 204. Auditor reports to audit committees.
Sec. 205. Conforming amendments.
Sec. 206. Conflicts of interest.
Sec. 207. Study of mandatory rotation of registered public accounting
firms.
Sec. 208. Commission authority.
Sec. 209. Considerations by appropriate State regulatory authorities.
Slide 3.51
Independence in the Sarbanes-Oxley Act of 2002

Prohibited non-audit service contemporaneously with the audit include:
(1) bookkeeping or other services related to the accounting records or
financial statements of the audit client;
(2) financial information systems design and implementation;
(3) appraisal or valuation services, fairness opinions, or contribution-in-
kind reports;
(4) actuarial services;
(5) internal audit outsourcing services;
(6) management functions or human resources;
(7) broker or dealer, investment adviser, or investment banking services;
(8) legal services and expert services unrelated to the audit; and
(9) any other service that the Board determines, by regulation, is
impermissible.
Slide 3.52
PCAOB Ethics and Independence rules concerning

independence, tax services, and contingent fees (Not in Text)
 Not independent if the audit firm provided

any service or product to an audit client for
a contingent fee or a commission.
 Not independent if the firm provided
assistance in planning, or provided tax
advice on, certain types of potentially
abusive tax transactions to an audit client
or persons employed by that client and
must seek audit committee approval for
any tax services
 Firms must be independent of their audit
clients throughout the audit period
Slide 3.53
Part C of the Code

illustrates how the
conceptual framework
contained in Part A is to be
applied by professional
accountants in business.
Slide 3.54
Examples in Part C
Slide 3.55
Thank You for Your Attention
Any Questions?

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Slide 3.

Ethics for Professional Accountants

Rick Stephan Hayes,

WHAT ARE ETHICS?

E A sense of agreement in a society as to what

Objectives of Accountantancy Profession

 Generally, to meet the public’s interest

Figure 3.2 Not Applicable Any More

The Code is divided into three parts: A, B,

• Part A establishes the fundamental principles of

Part A – Fundamental Principles

The IFAC Code of Ethics for Professional Accountants fundamental

1) Integrity (Sec 110)

1) Integrity to be straightforward and

3) Professional Competence and Due Care:

Conceptual Framework Approach

Threats and Safeguards

Compliance with the fundamental

Intimidation Threat occur when a

Examples of Intimidation Threats

Being threatened with dismissal from a client

A Self-interest threat – the threat that a financial

Self Interest Threats Circumstances (In Part B)

• A financial interest in a client or jointly holding a

Self-Review Threat – the threat that a

Self-Review Threats Circumstances (In Part B)

• Reporting on the operation of financial systems after

Familiarity Threat ─ the threat that due to

Familiarity Threats Circumstances (In Part B)

Safeguards that may eliminate or reduce such

Safeguards created by the profession, legislation or

Educational, training and experience

Firm-wide safeguards in the work environment may

 Leadership that stresses the importance of

Examples of engagement-specific safeguards in the

 Having a professional accountant who was not

Resolution of Ethical Conflicts

• Client Acceptance - consider whether

Changes in a Professional Appointment

Safeguards for Accepting an Audit

Safeguards, including the following ,shall be

Information from Existing Auditor

Once client permission is obtained, the existing

Fees and Other Types of Remuneration

An auditor may quote whatever fee deemed to

Advertising and Marketing

When a professional accountant in public

What Advertising Cannot Do

An accountant should not bring the profession

Example of Bad Advertising

“At our firm we believe the financial success of any

Gifts and Hospitality

Custody of Client Assets

Objectivity – All Services

When providing any professional service the

In the case of an assurance engagement it is in

Part B of the Code illustrates how the

Independence Sec 290 continued

Independence in the Sarbanes-Oxley Act of 2002

Independence in the Sarbanes-Oxley Act of 2002

PCAOB Ethics and Independence rules concerning

 Not independent if the audit firm provided

Part C of the Code