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Chapter 4 - Professional Ethics

ACCA's Five Fundamental Principles of Professional Ethics

Principles Explanation

1. Integrity ACCA members should be straightforward and honest

2. Objectivity ACCA members shall not allow bias, conflicts of interest or undue
influence

3. Professional competence ACCA member should maintain professional knowledge and skill
and due care

4. Confidentiality

5. Professional behavior Members shall comply with relevant laws and regulations and avoid
any action that discredits the profession.

Confidentiality

Confidentiality requires members to refrain from disclosing information except if:

a) Disclosure is permitted by law
b) Authorized by the client or the employer
Voluntary disclosure and obligatory disclosure

Voluntary disclosure is applicable where it is in public interest or disclosure is reasonably necessary to protect
the member's interests, for example to enable him to sue for fees or defend an action for, say, negligence.

The ACCA guidance states that there are several factors that the member should take into account when
deciding whether to make disclosure in public interest. These are:
a) The size of the amount involved
b) Extent of likely financial damage
c) Whether members of the public are likely to be affected
d) The possibility or likelihood of repetition
e) The gravity of the matter

Obligatory disclosure – If the employee or auditor suspects money laundering, it should be reported to the
authorities.

Threats to independence
1. Self-interest
2. Self-review
3. Advocacy
4. Familiarity
5. Intimidation

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Self-interest Threat and the safeguards to avoid the self-interest threats

Threats Safeguards
Financial Interests Disposing of the interest.
The ACCA does not allow the following to own a
direct or indirect financial interest in a client: Removing the individual from the team if required.
a) The audit firm
b) A member of the audit team Keeping the client's audit committee informed of the
c) An immediate family member of a member situation.
of the audit team

Close Business Relationships If material – not allowed.

The ACCA does not allow the following to have close
business relationship with the client: Otherwise, remove the individual from the team.
a) The audit firm
b) A member of the audit team
c) An immediate family member of a member
of the audit team
Example:
• Having a financial interest in a joint venture
• Firm acting as distributor or marketer for the
client

Employment with an Audit Client Remove the individual from the audit team.
A member of the audit team entering into
employment negotiations with the audit client. A review of any significant judgments made by that
individual while on the team.

Family and Personal Relationships Remove the individual from the team.
Family or close personal relationships between audit
firm and client staff could seriously threaten
independence.

“Auditor may place his/her family relationship

above the needs of the users of the financial
statements”.

Gifts and Hospitality Unless the value of the gift/hospitality is trivial and
inconsequential, a firm or a member of an audit team
should not accept the gift or hospitality.

Loans and Guarantees Acceptable if loan is from a financial institution client

under normal lending terms.

Overdue Fees Discuss with those charged with governance the

reasons why the payments have not been made.
“A self-interest threat can arise if the fees remain
outstanding, as the auditor may feel pressure to Should agree a revised payment schedule which will
agree to certain accounting adjustments in order to result in the fees being settled before much more
have the previous year and this year’s audit fee paid. work is performed for the current year audit.
In addition, outstanding fees could be perceived as

a loan to a client which is strictly prohibited .

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Contingent Fees Not permitted.

Contingent fees are fees calculated on a
predetermined basis relating to the outcome or
result of a transaction or the result of the work
performed.

High Percentage of Fees For audit clients that are public interest entities, the
When a firm receives a high proportion of its fee Code states that where total fees from the client
income from just one audit client, there is a self- represent more than 15% of the firm’s total fees for
interest or intimidation threat. two consecutive years, the firm shall:

Auditor will become overly reliant on the client a) Disclose this to those charged with
compromising objectivity. governance.
b) Arrange for a review to be conducted, either
by an external professional accountant or by
a regulatory body.

If total fees significantly exceed 15%, then a pre-

issuance review will be required.
Low-balling Maintaining records such that the firm is able to
When a firm quotes a significantly lower fee level for demonstrate that appropriate staff and time are
an audit service than would have been charged by the allocated to the engagement.
predecessor firm, there is a significant self-interest
threat. Complying with all applicable auditing standards,
guidelines and quality control procedures.

Partner on the client board Not allowed

“The audit firm may be perceived as performing

the role of management by attending board
meetings and this threatens objectivity”.

Recruitment services Listed clients: not allowed for directors or senior

positions related to financial statements preparation

Audit firm can undertake roles such as reviewing a

shortlist of other candidates.

However, they must ensure that they are not seen to

undertake management decisions and so must not
make the final decision on who is appointed.

Compensation and Evaluation Policies (when a A key audit partner shall not be evaluated on or
member of the audit team is evaluated on or compensated based on that partner’s success in
compensated for selling non-assurance services to selling non-assurance services to the partner’s audit
that audit client.) client.

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Self-review Threats and related safeguards

Threats Safeguards
Recent Service with an Audit Client Remove the individual from the audit team
Individuals who have been a director or officer of the
audit client, or an employee in a position to exert
direct and significant influence over the preparation
of the accounting records or financial statements in
the period covered by the audit report should not be
assigned to the audit team.

Preparing Accounting Records and Financial Listed Companies – Not permitted

Statements Other Companies – Permitted with the following
safeguards:
a) Using staff members other than audit team
members to carry out work
b) Obtaining client approval for work
undertaken
c) Independent review by a professional
accountant

Valuation Services Audit firms should not carry out valuations on

Valuation services mean finding the value of an asset, matters which will be material to the financial
liability or business. statements which involve a significant degree of
subjectivity.

If the valuation is for an immaterial matter, the audit

firm should apply safeguards such as:
a) Review by an independent professional
accountant
b) Confirming that the client understands the
valuation and the assumptions used
c) Ensuring the client acknowledges
responsibility for the valuation
d) Using separate personnel for the valuation
and the audit

Tax return preparation Does not affect independence. Hence permitted.

Tax calculations for the purpose of preparing the Public Companies – Not permitted
accounting entries. Other Companies - Permitted
Tax planning and other tax advisory services Permitted.
But the audit firm must use separate personnel for
tax planning and audit services.
Assistance in the resolution of tax disputes Not permitted. An audit firm cannot act as an
advocate and auditor at the same time.
“Outcome of these issues may have a material
impact on the financial statements, resulting in a
self-review threat.
Internal Audit Services Listed Companies – Not permitted if the service
relates to internal control over financial reporting.
Other companies – Permitted but use separate
teams.
Temporary staff assignments Remove the individual from the audit team.
The lending of staff by a firm to an audit client

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Advocacy Threat

Advocacy threats arise in those situations where the audit firm promotes a position or opinion to the point that
subsequent objectivity is compromised. No safeguards exists for advocacy threat.
Examples:
a) Commenting publicly on future events in particular circumstances, having made assertions without
detailing the assumptions
b) Acting as an advocate on behalf of an audit client
c) Representing client before authorities such as tax authorities
d) Promotion of shares of a listed audit client – attending meting of prospective investors

Familiarity Threat
Having personal, family or close business relationship
Having an audit client for a long period of time may create a familiarity threat to independence as “auditor may
not retain professional scepticism and objectivity”.
Rules for Listed Companies
If an individual is a key audit partner for seven years, they must be rotated off the audit for two years.
If key audit partner’s continuity is particularly beneficial to audit quality, and there is some unforeseen
circumstance (such as the intended engagement partner becoming seriously ill), then the key audit partner can
remain on the audit for an additional year, making eight years in total.
Other companies – Permitted with the following safeguards
a) Rotating the senior personnel off the audit team
b) Independent review by a professional accountant
c) Regular independent internal or external quality reviews of the engagement

Intimidation Threat
An intimidation threat arises when members of the audit team may be deterred from acting objectively.
These could arise from family and personal relationships, litigation, or close business relationships. These are
also examples of self-interest threats.
Management imposes limitations to audit such as shorter audit time period is also an intimidation threat.
Safeguards:
a) Disclosing to the audit committee the nature and extent of the litigation
b) Removing specific affected individuals from the engagement team
c) Review by an independent professional accountant

Question Practice
September/December 2015
June 2015
September 2016 (OTQ)
March/June 2017 CBE
March/June 2019 CBE (OTQ)

AA Short Notes Kappan’s School of Accountancy & Management Basil Neelambra