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IFAC Code of Ethics: Key Principles & Threats

The IFAC Code of Ethics outlines fundamental principles for professional accountants, including integrity, objectivity, professional competence, confidentiality, and professional behavior. It also identifies threats to objectivity such as self-interest, self-review, management, advocacy, familiarity, and intimidation, along with safeguards to mitigate these threats. The document emphasizes the importance of maintaining ethical standards in accounting practices to ensure trust and professionalism in the field.

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52 views6 pages

IFAC Code of Ethics: Key Principles & Threats

The IFAC Code of Ethics outlines fundamental principles for professional accountants, including integrity, objectivity, professional competence, confidentiality, and professional behavior. It also identifies threats to objectivity such as self-interest, self-review, management, advocacy, familiarity, and intimidation, along with safeguards to mitigate these threats. The document emphasizes the importance of maintaining ethical standards in accounting practices to ensure trust and professionalism in the field.

Uploaded by

2420017
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

IFAC Code of Ethics – fundamental principles

The fundamental principles are:


• Integrity. A professional accountant should be straightforward and honest in all professional and business
relationships.
• Objectivity. A professional accountant should not allow bias, conflict of interest or undue influence of others
to override professional or business judgements.
• Professional competence and due care. A professional accountant has a continuing duty 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. A professional
accountant should act diligently and in accordance with applicable technical and professional standards when
providing professional services.
• Confidentiality. A professional accountant should respect the confidentiality of information acquired as a
result of professional and business relationships and should 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. Confidential
information acquired as a result of professional and business relationships should not be used for the personal advantage of
the professional accountant or third parties.

• Professional behaviour. A professional accountant should comply with relevant laws and regulations and
should avoid any action that discredits the profession.

IFAC Code of Ethics – threats to objectivity and independence


The self-interest threat
All firms face the self-interest threat, simply because the client pays the fee, and to lose a client may be
painful.
The risk is increased for audit engagements, because, although technically the auditor is appointed by and
reports to the shareholders, in practice the appointment depends on the client’s management. The auditor may
be tempted to allow inappropriate accounting treatments in order to keep the client.
• The self-review threat
It may be difficult for the firm to maintain its objectivity if any product or judgement made by the firm needs
to be challenged or re-evaluated at a later date.
Examples might be brand or company valuations or aggressive tax schemes. If the firm has valued a client’s
new subsidiary at a price which is questioned when it comes to the audit, there may be some embarrassment,
or the temptation to gloss over the differences in values.
Where the auditor also carries out accounting work on behalf of the client, this may seem innocent enough.
Indeed there may be perceived ethical advantages, because the accountant should be able to prepare the
accounts ‘properly’.
There will be a self-review threat where the accountant prepares financial statements and then acts as auditor,
effectively reviewing his own work. The auditor may not want to report mistakes that he, as accountant, had
made. Where accounts are prepared by auditing firms, another department always carries out the audit to
remove this threat. In some jurisdictions, auditors are not allowed to prepare financial statements for a client,
removing this threat completely.
But consider the position where the use of different accounting policies may give very different results, or
where different interpretations can be placed on treatments required by accounting standards.
• The management threat
A management threat arises when the audit firm undertakes work that involves making judgments and taking
decisions, which are the responsibility of management.
• The advocacy threat
The advocacy threat occurs where the professional adopts a stance arguing for or against the client’s point of
view, rather than taking a balanced (objective) position.
The advocacy threat is difficult to deal with because, surely, the professional adviser wants to give the client
the best possible support.
In a tax case, for example, is it not the tax consultant’s job to win on behalf of the client at all costs?
• The familiarity or trust threat

This recognises that, if the professional gets to know the client too well, objectivity may be threatened
because the auditor becomes too trusting of the client and professional scepticism is impaired.
This is also quite a difficult area. As we shall see in Chapter 8 the auditor needs to understand the client’s
business well. Changing the engagement partner may or may not enhance objectivity, but if it does, it may
open up greater audit risks due to lack of familiarity with the client’s business.
• The intimidation threat
This threat may range from the effective hi-jacking of the auditor’s professional qualification by clients with
criminal tendencies – something which the UK Government is concerned about as demonstrated by the antimoney
laundering regime they have introduced – to the bullying behaviour of a dominant personality who
insists on getting his (or her) own way. The situation may go as far as threatening the auditor with removal if
a qualified audit report is produced.

IFAC Code of Ethics – safeguards against the threats


There are a number of general safeguards against the threats which come from the environment in which the
professional accountant operates:
• Training
• ICAB also offers supports for its members and students – a counselling service.
The quality control systems in place at engagement, firm and profession levels including:
• Planning, supervision and review procedures
• Hot and cold file reviews
• Regulatory inspections
Procedures envisaged under the IFAC Ethical Standards for Auditors include:
• The overall control environment at the firm which ensures a professional approach towards ethical issues
• The segregation of duties between those engaged on audits and those providing non audit services
• Rotation of engagement partners and staff
• Procedures for evaluating the integrity of potential new clients
• The formal process of reviewing the appropriateness of the firm’s continuing in office before its name is
allowed to go forward for reappointment
• Staff recruitment procedures
• Regular completion of ‘fit and proper’ and independence declarations by partners and staff
• Staff training, development and performance appraisal
• Monitoring and evidencing the firm’s own systems.

Interactive question 4: Confidentiality [Difficulty level: Exam standard]


You are in the middle of an audit with a tight deadline, the manager is due to visit you at the client tomorrow and
you need to be home early to meet the builders at your new flat. You are considering taking the sales ledger and the
cash book home with you to finish the trade receivables section ready for the manager to review tomorrow.
What must you consider before you remove any client files from their offices?

Answer to Interactive question 4


The auditor must obtain the client’s permission before removing any files from the client’s offices.

Three situations have arisen with audit clients of your firm.


(1) Due to cash flow difficulties, overdue fees from Doe Ltd have built up to include all bills submitted by
your firm in the last twelve months.
(2) The engagement partner of Ray Ltd has acted for the company for many years.
(3) To express his gratitude for the quality of service he has received from your firm, the managing director
of Mee Ltd has invited all partners and staff involved with his affairs for a golf day and dinner at an
exclusive club one weekend.
State the threats to objectivity that these matters represent and how the threats could influence objectivity
Murray case study: Ethical issues

You are an audit manager in Wimble & Co, a large audit firm which specialises in providing audit
and accountancy services to manufacturing companies. Murray Co has asked your firm to accept
appointment as external auditor. Murray Co manufactures sports equipment. Your firm also audits
Barker Co, another manufacturer of sports equipment, and | therefore your firm is confident it has the
experience to carry out the audit.

You have been asked to take on the role of audit manager for Murray Co, should your firm accept the
engagement. You own a small number of shares in Murray Co, as you used to be an employee of the
company. Don Henman, who has been the engagement partner for Barker Co for | twelve years, will
take the role of engagement partner for Murray Co. The audit senior will be Tim Andrews, as his sister is
the Financial Controller at Murray Co and therefore he knows the business well.

| | | | i | | Your firm recently purchased some bibs, footballs and other equipment | from Murray Co for
the firm's annual football tournament. Murray Co has | offered to provide this equipment free of
charge to the firm if they accept |t he role as auditor.

| | Murray Co would also like your firm to provide taxation and accounting services. Specifically, the
company would like you to prepare the financial statements and represent the company in a dispute
with the taxation authorities.

The fees for last year's audit of Barker Co have not yet been paid, and you have been asked by Don
Henman to look into the matter.

Required:

Explain the ethical threats which may affect the independence | of Wimble & Co in respect of
the audit of Murray Co or Barker Co, and for each threat identify ways in which the threat might |
be reduced.
Answer:

Common questions

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The self-review threat compromises an auditor's independence as it arises when an auditor is asked to review work that they themselves prepared, leading to potential bias and avoiding reporting errors. Measures suggested by IFAC to address this threat include segregation of duties such that different departments handle auditing and preparation of financial statements, as well as using different accounting policies or involving other firms to provide fresh viewpoints .

Several conflicts of interest arise for Wimble & Co: the audit manager's ownership of shares in Murray Co poses a self-interest threat; the offer of free sports equipment from Murray Co creates a self-interest threat; Tim Andrews' familial relationship with the Financial Controller of Murray Co presents a familiarity threat; and acting as both auditor and advocate in tax disputes introduces an advocacy threat. These issues can compromise independence and objectivity, and effective mitigation includes refusing offers of free goods, ensuring share divestment, and not involving personnel with close relationships in the audit .

Overdue audit fees create a self-interest threat because financial dependency on the client might tempt the firm to modify audit findings to secure payment and future engagements. IFAC recommends clear fee arrangements, possibly declining future work until fees are settled, and ensuring audit work's objectivity is not influenced by the pursuit of financial compensation .

The IFAC Code of Ethics emphasizes professional competence and objectivity, implying accountants must utilize unbiased judgment irrespective of varying accounting policies. Ethical dilemmas arise when choosing different policies that may benefit the client but jeopardize objectivity. The ethical resolution involves using consistent, clear-cut policies, thoroughly evaluating them against all professional standards, and opting for those that transparently reflect the financial standing without bias .

Training and development activities enhance the professional knowledge and awareness of ethical standards, helping auditors identify, manage, and mitigate ethical threats. IFAC stresses continuous education to ensure familiarity with current ethical practices, reinforcing the importance of objectivity and proper conduct. Proper training fosters an ethical culture within the firm, contributing to the overall effectiveness of its quality control systems .

Offering gifts creates a self-interest or advocacy threat because the audit firm may feel obliged to reciprocate the client's generosity, affecting impartiality and independence. IFAC suggests refusal of gifts exceeding a certain value and ensuring that any form of gratitude does not influence audit outcomes. Accepting gifts might compromise the auditor's objectivity and lead to questioning the integrity of the audit findings .

Familiarity or trust threat arises when the professional accountant becomes too trusting of the client due to developing a close relationship, impairing professional skepticism. This threat can be mitigated by rotating engagement partners and team members to bring in fresh perspectives, maintaining professional skepticism, and regularly reviewing ethical standards and procedures to ensure objectivity is not compromised .

Providing both audit and non-audit services presents self-review and management threats, as the firm may need to assess its own work or make management decisions. Safeguards include segregating teams for auditing and non-audit functions, ensuring independence in both processes, and adhering to strict standards that align with ethical codes, such as refraining from decision-making roles that blur professional boundaries .

Intimidation threats may lead an auditor to compromise on the audit quality due to fear of influence or coercion from aggressive clients. Safeguards against such threats include strong firm-wide policies supporting ethical behavior; backing auditors in resisting pressure; structured communication channels to escalate concerns; and potentially involving legal teams. Training in recognizing and managing these situations is crucial .

Safeguards against threats to an auditor's objectivity according to the IFAC Code of Ethics include: training and a counseling service provided by ICAB to its members, quality control systems at different levels such as engagement, firm, and profession levels, hot and cold file reviews, regulatory inspections, ensuring a professional approach towards ethical issues, segregation of duties between audit and non-audit services, rotation of engagement partners and staff, evaluating the integrity of potential new clients, reviewing the appropriateness of the firm's reappointment, and staff recruitment procedures .

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