Ethics and Acceptance of Appointment The IFAC and ACCA codes and conceptual Framework

IFAC, through the International Ethics Standards Board for Accountants, has issued a code of ethics, as has the ACCA. The ACCA Code of Ethics and the IFAC codes have the same roots and are to all intent and purposes identical. Both follow a conceptual framework which identifies: Fundamental principles of ethical behaviour Potential threats to ethical behaviour Possible safeguards which can be implemented to counter the threats.

Professional bodies like the ACCA therefore reserve the right to discipline members who infringe the rules through a process of: Disciplinary hearings which can result in: - Fines - Suspension of membership - Withdrawal of membership

The Fundamental Principles (PICCO) Professionalism Integrity Competence Confidentiality Objectivity

Professionalism members should comply with the relevant laws and regulations and should avoid any action that discredits the profession.

Integrity members should be straightforward and honest in all personal, business and professional relationships Competence members have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques Confidentiality members should respect the confidentiality of information acquired as a result of profesional and business relationships and should not disclose any such information to third parties without proper and specific authority or unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of profesional and business relationships should not be used for th personal advantage of the member or third parties. Objectivity members should not allow bias, conflict of interest or undue influence of others to override professional or business judgements.

Threats to Objectivity 1. 2. 3. 4. 5. Self-Interest Self- Review Advocacy Familiarity Intimidation

Self-Interest Threat This occurs when an auditor has a beneficial interest in a clients performance. Auditor or a member of their family owns shares in a client. They would directly benefit from increases in clients profit and would be reluctant to raise any concerns that could adversely affect the performance of the client. When a firm is dependent upon one client for a significant proportion of its total fee income. This firm may not raise issues with the client for fear of losing them. The acceptance of gifts and hospitality . This could be perceived as bribery to keep quiet about issues in the financial statements.

Self-review Threats This occurs when an auditor has to review work that they previously performed. E.g if the external auditor prepared the financial statements and then audited them. There is a risk that the auditor would not identify any shortcomings in their own work for fear of penalty (either financial or reputational)

Advocacy Threats This can occur when the auditor is asked to promote or represent their client in some way. In this situation the auditor would have to be biased in favour of the client and therefore cannot be objective. This could happen if the client asked the auditor to promote their shares for a stock exchange listing or if the client asked the auditor to represent them in court. Familiarity Threat This occurs when the auditor is too sympathetic or trusting of the client because of a close relationship with them. This may be because a close relative or friend of the auditor works in a key role for the client. The ausitor may trust their friend or relative not to make mistakes and therefore not review their work as thorough as they should. As a result material errors may go undetected in the financia statements. This can also arise after a long association with the client. Intimidation Threat Clients may try to harass or bully auditors into giving preferential audit reports. They may use the fees as leverage. The auditor should not give in to such pressure and, in the circumstances, may choose to resign from such client.

Identifying the threats In order to guard against these threats, real or perceived, firms should establish procedures to enable them to: Identify possible threats Evaluate the risk arising from the threat Evaluate whether the necessary safeguards are in place; and Take corrective action if necessary

This would normally be done through the use of checklists and would be considered at these vital junctures: On acceptance of a new audit client At the planning stage of an audit At the completion stage of the audit Whenever additional, non audit services are provided to an audit client; and If any event, or change in circumstances, occur to either the auditor or the client

Possible Safeguards General safeguards, as recommended by ACCA Safeguards created by the profession. Include: education, training and experience requirements for entry into the profession; continuing professional development requirements, corporate governance, regulations; professional standards; monitoring; external review of work and reports; and disciplinary action Safeguards in the work environment. These include oversight structures, ethics and conduct programmes; recruitment procedures; strong ethical leadership; policies and procedures to promote quality control; and culture.

Safeguards created by individuals. These include complying with professional development requirements; keeping records of contentious issues; using a mentor; and keeping in contact with professional bodies. Common safeguards that should be employed by auditors include: Monitoring fees received from significant clients in comparison to total fees to reduce perception of dependence on clients; Rotating senior audit staff on an engagement after a fixed period to reduce familiarity threat; Using separate teams (and partners) where additional services are offered to audit clients to reduce self review threat; Using independent partners to review work where any ethical threat is identified Not accepting gifts or hospitality, unless it is considered by a partner to be modest; Not engaging in any business or financial relationship with a client; Not allowing individuals with personal or family ties to a client to be involved in the audit of that company Not providing accountancy or internal audit services for listed audit clients Maintaining an up to date engagement letter; and In case where no safeguards are considered sufficient the auditor should resign

Confidentiality External auditors are in a uniquen position of having a legal right of access to all information about their clients. The audit team members should not disclose any information to those outside of the audit team. Engagement Letter Sent before the audit Specifies the nature of the contract between the audit firm and the client It minimises the risk of misunderstanding of the auditors role

Should be reviewed every year to ensure it is up to date but not necessarily renewed unless there are changes to the terms of engagement Many firms send a new letter of engagement to clients to emphasize the importance of such

Reasons for change in audit engagements Changes to statutory duties due to new legislation Changes to professional duties, perhaps due to new ISAs Changes to other services as requested by clients The contents of the engagement letter ISA 210 Agreeing the Terms of Audit Engagements states that the engagement letter should include the following: The objective and scope of the audit The responsibilities of the auditor The responsibilities of management The identificationof an applicable financial reporting framework; and Reference to the expected form and content of any reports to be issued The engagement letter may also include: The unavoidable risk that some material misstatements may go undetected due to the inherent limitations in an audit Arrangements regarding the planning and performance of the audit; The expectation that management will provide written representations The agreement of management to inform the auditor of facts that may affect the financial statements; The basis on which fees are computed and billling arrangements; A request for management to acknowledge receipt of the engagement letter and to agree the terms outlined Agreements concerning the involvement of auditors experts and internal auditors; and Restrictions to the auditors liabiity

Ethical Standards 1 Integrity, objectivity and Independence The audit firm shall establish policies and procedures to ensure that the firm, and all those involved in the audit, act with integrity, objectivity and independence; The leadership of the audit firm shall take responsibility for establishing a control environment that places adherence to ethical principles above commercial considerations; The audit firm shall designate an ethics partner The audit firm shall establish policies and procedures to prevent employees from taking decisions that are the responsibility of management of the audited entity; The audit firm shall establish policies and procedures to assess the significance of threats to the auditors objectivity; (i) When considering whether to accept or retain an audit or non-audit service; (ii) When planning the audit (iii) When forming an opinion on the financial statements; and (iv) When potential threats are reported. The audit engagement partner shall not accept or shall not continuean audit engagement if he or she concludes that any threats to the auditors objectivity and independence cannot be reduced to an acceptable level In the case of listed companies the engagement quality control review shall: (i) Consider the audit firms compliance with APB Ethical Standards; and (ii) Form an independent opinion as to the appropriateness and adequacy of the safeguards applied.

Ethical Standards 2 financial, business, employment and personal relationships The audit firm, or employees, shall not hold any financial interest in the audited entity Audit firms and employees shall not make loan to, or guarantee the borrowings of, and audited entity (and vice versa); Audit firms and employees shall not enter into business relationships with the audited entity An audit firm ahall not second partners or employees to an audit client unless: (i) The agreement is for a short period of time; and (ii) The audited entity agrees that the individual concerned will not hold a management position

Where a partner or employee returns to a firm on completion of a secondment to an audit client, that individual shall not be given any role involving any function or activity that they performed or supervised during that assignment Where a partner joins an audited entity, the audit firm shall take action to ensure that no connections remain between the firm and the individual; Where a partner leaves a firm and is appointed as a director or to a key management position with an audited entity, having acted as audit engagement partner at any time in the two years prior to this appointment, the firm shall resign as auditor. A partner, or employee of the audited firm who undertakes audit work, shall not accept appointment: (i) To the board of directors of the audited entity; or (ii) To any subcommittee of the board

ES 3 Long association with the audit engagement The audit firm shall establish policies and procedures to monitor the length of time that senior staff serve as members of the audit engagement team for each audit; Where senior staff have a long association with the sudit, the audit firm shall assess the threats to the auditors objectivity and independence and shall apply safegaurds to reduce the threats to an acceptable level. Where appropriate safeguards cannot be applied, the audit firm shall either resign as auditors or not stand for reappointment, as appropriate; Once an audit engagement partner has held this role for ten years, careful consideration must be given as to whether their objectivity would be perceived to be impaired In the case of listed companies the audit firm shall establish policies and procedures to ensure that no one shall act as audit engagement partner for more than five years; and In the case of listed companies, the audit engagement partner shall review the safeguards put in place to address the threats arising where senior staff have been involved in the audit a period longer than seven years.

ES 4 fees, remunerationa dn evaluation policies, litigation, gifts and hospitality The audit engagement partner shall ensure that audit fees are not influenced or determined by the provision of non-audit services; An audit shall not be undertaken on a contingent fee basis Audit fee for the previous audit and the arrangements for its payment shall be agreed with the audited entity before the audit firm formally accepts appointment as auditor in respect of the following period; Where it is expected that the total fees receivable from a listed audited entity witll regularly exceed 10% of the annual fee income (15% if not listed) of the audit firm, the firm shll not act as the auditor of that entity; The audit firm shall establish policies and procedures to ensure that the objectives and appraisal of members of the audit team do not include selling non-audit services.

Where litigation with a client is already in progress, or where it is probable, the audit firm shall either not continue with or not accept the audit engagement. The audit firm, including employees, shall not accept gifts from the audited entity, unless the value is clearly insignificant; and Audit firm employees shall not accept hospitality from the audited entity, unless it is reasonable in terms of its frequency, nature and cost.

ES 5 non-audit services provided to audited entities Before the audit firm accepts a proposed engagement to provide non-audit services to an audit client, the audit engagement partner shall: (i) Consider whether a reasonable third party would regard the objectives of the proposed engagement as being inconsistent with the objectives of the audit; (ii) Identify and assess any threats to the auditors objectivity, including and perceived loss of ndepndence; and (iii) Identify and assess the effectiveness of the available safeguards to eliminate the threats or reduce them to an acceptable level. Where the audit partner considers it probable that a reasonable third party would regard the objectives of the proposed non-audit service engagement as being inconsistent with the objectives of the audit, the auditor shall either: (i) Not undertake the non-audit service engagement; or (ii) Not accept or withdraw from the audit engagement

Specifically, the audit firm shall not undertake an engagement to provide internal audit services to an audited entity where it is reasonably foreseeable that: (i) For the purpose of the audit of the financial statements, the auditor would place significant reliance on the internal audit work performed by the audit firm; or (ii) For the purpose of the internal audit services, the audit firm would undertake part of the role of management. The audit firm shall undertake an engagement to design, provide or implement information technology systems for an audited entity where: (i) The systems concerned would be important to any significant part of the accounting system and the auditor would place significant reliance upon them as part of the audit of the financial statements; or (ii) For the purpose of the information technology services, the audit firm would undertake part of the role of management ES - Provisions Available for Small Entities (PASE) When auditing the financial statements of a small entity the audit firm is not required to: Comply with the requirement that an external independent quality control review is performed; Apply safeguards to address self-review threat provided;

(i) (ii)

The audited entity has informed management; and The audit firm extends the cyclical inspection of completed engagements that is performed for quality control purposes