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Ethics
Introduction
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The law regulates some aspects of auditing to a degree
Company law regulates the requirement for external auditing BUT
Internal auditing is not normally subject to statutory regulation
...

Such professional regulations therefore apply to
o both external auditors & assurance providers
o & internal auditors
...


The fundamental principles
1
...


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Integrity implies not just honesty but also:
fair dealing &
Truthfulness
...


2
...


3
...


Members should act diligently & in accordance with applicable



technical &
Professional standards
...
Confidentiality
Members should respect the confidentiality of information acquired as a result of



professional &
business relationships

& should not disclose such information to third parties



without authority or
Unless there is a legal or professional right or duty to disclose
...


5
...

They should behave with



courtesy &
consideration

Towards all with whom they come into contact in a professional capacity
...

This requirement reinforces a basic principle of the law of contract as it operates in many countries –
That a contract for the provision of services should be performed with a reasonable degree of skill & care
...

The implication is that audit work performed by an auditor for a client must be adapted to the specific
circumstances & characteristics of the client
...


Consequences of failure to exercise a proper degree of care

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There may be legal claims against the auditor in the law of contract or the law of tort
...
)
There may be disciplinary proceedings against the auditor by ICAP
...


Professional competence
Professional competence may be divided into two separate phases:



Attainment
Subsequent maintenance - After initial training Accountants must undertake ‘continuing professional
development (CPD)’ to maintain an understanding of relevant:
 technical,
 professional and
My work may have errors and my
 Business developments
...

 clients,
 employers or
 other users of the professional services
Aware of limitations inherent in the services to avoid misinterpretation
...
This approach
identifies the following five potential categories of threats to the fundamental principles
...

If identified threats are anything but clearly insignificant,



members must implement safeguards to eliminate the threats or
reduce them to an acceptable level

So that compliance with the fundamental principles is not compromised
...


‘Principles-based’ approach to ethics
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This framework approach recognizes that it is impossible to define every situation that creates threats and specify
the appropriate mitigating action
...

An accountant may inadvertently violate a provision of the Code
...


Threats
1
...

An immediate family member is defined by the Code as a spouse (or equivalent) or dependent
...


Circumstances which may give rise to this threat:
1
...

3
...


financial interests, loans or guarantees
incentive-based fee arrangements
close personal or business relationships
undue dependence on fees from a client




10% of after-tax profit
If modified opinion, 3 lac,
otherwise 6 lac
...

This would threaten the fundamental principle of objectivity
...


2
...


Similarity b/w 3 & 4 – The member of assurance team
has been previously employed by client
...
the discovery of a significant error during a re-evaluation of
the work undertaken by the member [ignoring own mistakes]
2
...
A member of the assurance team being, or having recently
been a director or officer of the 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
5
...


If small position, threat arises only if
accounting/finance related
...
Again, this would threaten the fundamental principle of
objectivity
...

3
...

Although it is natural for members to support their client’s or employer’s position,
This could mean that they adopt a position so closely aligned with that



of their client or
their employer

That there is an actual or perceived threat to the fundamental principle of objectivity
...

2
...

4
...


Examples:
A client entity may ask its audit firm to represent it in a legal dispute with the tax authorities about the amount of tax
payable
...

Supporting the client in a legal case may lead to a perceived loss of independence

4
...

Circumstances which may give rise to this threat:
1
...
Having close personal relationship with director or officer of client or an employee being in a position to exert
direct and significant influence over the subject matter of the engagement
3
...
A former partner of the firm being a director or officer of the client or an employee being in a position to exert
direct and significant influence over the subject matter of the engagement
...
There is a risk that the individual will become too familiar with the
audit client and its management, and may then be unable to take an objective view and make objective decisions
concerning the audit
...
Intimidation threats
Intimidation threats occur when a member’s conduct is influenced by fear or threats
...
threat of dismissal or replacement of the member, or a close family member, over a disagreement about the
application of an accounting principle or the way in which information is to be reported
2
...
being threatened with litigation
4
...

Examples:
A strong finance director may intimidate junior members of the audit team and persuade them not to report errors
found during their testing
...


Safeguards
Safeguards which may remove or reduce threats to members fall into three categories:

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

safeguards created by the profession, legislation or regulation
safeguards in the work environment
Safeguards created by the individual
...

2
...

4
...


educational, training and experience requirements for entry into the profession
continuing professional development requirements
corporate governance regulations
professionals standards (such as ISAs)
professional or regulatory monitoring and disciplinary procedures (such as ICAP’s own disciplinary procedures) [
ICAP team does yearly qualitative audit of audit firm]
6
...
[such as FBR]
Safeguards in the work environment (for the audit firm - practice)
1
...
recruitment procedures, ensuring that only high-caliber, competent staff are Recruited [PwC test – English skills +
honesty test]
3
...
strong internal controls [Strong controls]
5
...
policies and procedures to implement and monitor the quality of employee performance
7
...
documented policies regarding the identification of threats to compliance with the fundamental principles, the
evaluation of those threats and the implementation of appropriate safeguards [no threats, safeguards applied]
9
...
the use of different partners and engagement teams for the provision of non-assurance services to assurance
clients [to avoid a self-review threat]
11
...
policies and procedures to give employees the power to report ethical issues to senior staff at the employing firm,
without fear of retribution from those about whom they are making the report [Juniors free to talk to ethics
partner]
13
...
disclosing to the client the nature of the services provided and the fees charged (this could be done via the audit
committee) [to avoid intimidation threat]
15
...
[when stuck somewhere]
Safeguards created by the individual – Category C
 Comply with CPD requirements
 keeping records of contentious issues [important judgments] and approach to decision-making
 having a broader perspective on how other organizations operate by forming business relationships with other
professionals [ how others deal with threat]
 using an independent mentor – [be in track]
 keeping in contact with legal advisors and professional bodies

Independence, objectivity and integrity
Actual and perceived independence
For an

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audit or
other assurance report

to be of value, the assurance provider :



must be independent (actual independence), and also – Independence in mind
must be seen to be independent (perceived independence)
...


In particular, the assurance work must not be influenced by the opinions and views of the management of the client
company
...

Result
Independence of the assurance provider (and in particular, of a statutory auditor) is a matter of public confidence in the
assurance or audit process
...


Such situations are referred to as threats to independence
...

ICAP Code

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Although the ICAP Code provides a conceptual framework,
which recognizes that it is impossible to define every situation that creates threats and specify the appropriate
safeguards,
specific guidance is provided in a number of key areas where:
o independence may be under threat,
o or may be seen to be under threat
...


Threat
Self interest
Familiarity
Self interest
Self interest
Self interest
Self-review
Familiarity
Self-review
Familiarity
Intimidation

Confidentiality
Introduction
One of the five fundamental principles of the ICAP Code of Ethics is that of confidentiality
...


Circumstances where you
can disclose

In addition, information gained when acting in a professional capacity should not be disclosed in order to:



gain a personal advantage, or
gain an advantage for another party
...

If the client cannot be assured of the confidentiality of this information, he may be unwilling to provide the
auditors with all the information that they need
...


Social Environment
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A chartered accountant should maintain confidentiality even in a social environment
...

It can be all too easy in a relaxed social environment, particularly with colleagues, to forget one’s duty of
confidentiality
...


Other than clients
Scope of the duty of Confidentiality per the Code not only covers existing clients
...


Within firm or employing organization
A chartered accountant should also consider the need to maintain confidentiality of information within the firm or
employing organization
...

Solution: In such a scenario the audit firm should use separately staffed audit teams and implement other safeguards to
prevent the internal disclosure of confidential information
...

End of Relationship
The need to comply with the principle of confidentiality continues even after the end of relationships between a
chartered accountant and

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a client
or employer
...


The chartered accountant should not, however, use or disclose any confidential information either acquired or received
as a result of a professional or business relationship
...

Where one of these exceptions applies, the member
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

may be required to disclose the information to a third party,
or may voluntarily choose to disclose confidential information
...
g
...
g
...
g
...
Whether the interests of

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all parties,
including third parties

whose interests may be affected,
could be harmed if the client or employer consents to the disclosure of information by the chartered accountant;
2
...
The type of communication
that is expected and
to whom it is addressed;




in particular, chartered accountants should be satisfied that the parties to whom the communication is addressed are
appropriate recipients
...

Consider the following:
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Relevant facts;
Ethical issues involved;
Fundamental principles related to the matter in question;
Established internal procedures; and
Alternative courses of action
...


If the matter remains unresolved, the chartered accountant should consult with other appropriate persons within the firm or employing
organization for help in obtaining resolution
...
Issues and relevant discussions should be documented

Non-resolution
If a significant conflict cannot be resolved, a chartered accountant may wish to obtain professional advice from the appropriate committee of the
Institute or legal advisors, and thereby obtain guidance on ethical issues without breaching confidentiality
...

The chartered accountant may determine that, in the circumstances, it is appropriate to




withdraw
o from the engagement team or
o specific assignment,
or to resign altogether from the
o engagement,
o the firm or
o the employing organization

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