LECTURE 2: ETHICS FOR

PROFESSIONAL ACCOUNTANTS

Learning objectives
After studying this lecture, students should be able to:
 Explain what ethics means to an accountant.
 Explain purpose and content of the IESBA Code of Ethics for
Professional Accountants.
 Identify and discuss the fundamental principles of ethics as
described by the IESBA Code of Ethics.
 Discuss what threats to the fundamental principles are.
 Define safeguards and give some examples.
 Explain the concept of independence and identify the principles-
based approach for resolving the attendant issues.
 Differentiate between ‘independence of mind’ and ‘independence
in appearance’.
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 2.1. 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.

2.1. WHAT ARE ETHICS?

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 2.1. WHAT ARE ETHICS?

Ethics in the Accounting Profession

• The attitude and behaviour of professional accountants in

providing auditing and assurance services have an impact
on the economic well-being of their community and
country.

• The distinguishing mark of the profession is acceptance of

its responsibility to the public.

=> The professional auditors’ responsibility is not to satisfy

only their client or employer, but to consider the public
interest.

2.2. IESBA’S CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

International Ethics Standards Board for Accountants (IESBA)

issue Code of Ethics for Professional Accountants
The Code is divided into three parts:
 Part A establishes the fundamental principles of professional
ethics for professional accountants and provides a conceptual
framework for applying those principles. (including: threats &
safeguards)

 Parts B and C illustrate how the conceptual framework is to be

applied in specific situations.
o Part B applies to professional accountants in public practice
o Part C applies to professional accountants in business.

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 2.2. IESBA’S CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

Conceptual Framework Approach

• Rather than a list of rules that must be obeyed to be an ethical

accountant, the so-called ‘rule based’ approach which holds sway
in many countries, the IESBA and IFAC have chosen to use a
‘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.

2.2. IESBA’S CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

There are five fundamental principles of ethics:

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)

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  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 judgments.

In the auditing sense, bias is associated with money and

personal association, e.g. if possible gains of wealth,
prospects of a better income or personal relationships as with
family or friends are involved, this may bias the auditor’s
work. There exist religious and cultural biases that may also
affect an auditor’s work.
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 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 services
based on current developments in practice, legislation and
techniques and act diligently and in accordance with
applicable technical and professional standards.

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  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.

Disclosure of confidential information

May be disclosed when disclosure is authorised by the

client, required by law (e.g. evidence in legal proceedings),
where there is a professional duty or right to disclose (such
as in a peer review quality control programme) or to comply
with technical standards or ethics requirements.
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 Professional Behavior: A professional accountant should

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

 Professional behaviour that discredits the profession example

In marketing and promoting themselves and their work,

professionals should be honest and truthful and not:
• make exaggerated claims for the services they are able to
offer, the qualifications they possess, or experience they
have gained; or
• make disparaging references or unsubstantiated
comparisons to the work of others.

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 Choose the best response.
When a member observes the profession's technical and
ethical standards and strives to continually improve her
competence and quality of services, she is exercising
A) due care.
B) integrity.
C) independence.
D) objectivity.

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2.2. IESBA’S CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

 Threats to the Fundamental Principles

Threats fall into one or more of the following categories:

 Self-interest threats
 Self-review threats
 Advocacy threats
 Familiarity threats
 Intimidation threats

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  Self-interest threat
Self-interest threat – the threat that a financial or other interest will
inappropriately influence a professional accountant’s judgment or
behavior;
Examples of circumstances that create self-interest threats
• A member of the assurance team having a direct financial interest
in the assurance client.
• A firm having undue dependence on total fees from a client.
• A member of the assurance team having a significant close
business relationship with an assurance client.
• A firm being concerned about the possibility of losing a
significant client.
• A member of the audit team entering into employment
negotiations with the audit client.
• Contingent fees relating to an assurance engagement.
• … 15

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 Self-review threat
Self-review threat – the threat that a professional accountant will not
appropriately evaluate the results of a previous judgment made, or an
activity performed by the accountant or by another individual within
the accountant’s firm or employing organization, on which the
accountant will rely when forming a judgment as part of performing a
current activity;
Examples of circumstances that create self-review threats
• A firm issuing an assurance report on the effectiveness of the
operation of financial systems after designing or implementing
the systems.
• A firm having prepared the original data used to generate
records that are the subject matter of the assurance engagement.
• A member of the assurance team being, or having recently
been, a director or officer of the client.
• …
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  Advocacy threat
Advocacy threat – the threat that a professional accountant will
promote a client’s or employing organization’s position to the
point that the accountant’s objectivity is compromised;

Examples of circumstances that create Advocacy threat

• Selling, underwriting or otherwise promoting financial
securities or shares of an assurance client;
• Acting as the client’s advocate in a legal proceeding.
• …

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 Familiarity Threat
Familiarity threat – the threat that due to a long or close relationship
with a client, or employing organization, a professional accountant
will be too sympathetic to their interests or too accepting of their
work;
Examples of circumstances that create Familiarity threat

• A member of the engagement team having an immediate family member

or close family member who is a director or officer of the assurance
client.
• A member of the engagement team having a close family member who
is an employee of the assurance client and in a position to significantly
influence the subject matter of the assurance engagement.
• A professional accountant accepting gifts from a client.
• Senior personnel having a long association with the assurance client.
• …
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  Intimidation Threat
Intimidation threat – the threat that a professional accountant will
be deterred from acting objectively because of actual or perceived
pressures, including attempts to exercise undue influence over the
accountant

Examples of circumstances that create Intimidation threat

• A firm being threatened with dismissal from a client engagement.
• 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 for a particular transaction.
• A firm being threatened with litigation by the client.
• A firm being pressured to reduce inappropriately the extent of
work performed in order to reduce fees.
• …
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There are various general threats to independence recognised by ethical

codes.
Requirements: For the following two examples, select the type of
threat which might arise in that situation.

1) The audit senior assigned to the audit of Loesdon Ltd has recently
become engaged to the finance director’s daughter.
A Self-interest
B Familiarity
C Advocacy
2) The finance director of Litten Ltd has recently informed the audit
engagement partner that Litten Ltd will be seeking a stock exchange
listing. The finance director has implied that Litten Ltd will want to use
the firm for significant amounts of advisory work in relation to the
listing, but joked at the same time that ‘clean bills of health’ would be
crucial from now on.
D Self-interest
E Familiarity
F Self-review
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 The following are examples of situations in which an audit firm might
be faced with threats to its independence.
Requirements: For each example, select the type of threat which that
situation best illustrates.

1) The finance director of Fussy Ltd has requested that the audit team
for the current year audit be the same as the team which performed last
year’s audit.
A Self-review
B Familiarity
C Intimidation

2) The finance director of Pernickety Ltd has told the audit manager that
they are not happy with the proposed audit opinion and are likely to
seek a second opinion.
D Self-review
E Familiarity
F Intimidation

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2.2. IESBA’S CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

 Safeguards

Safeguards fall into two broad categories:

• Safeguards created by the profession, legislation or
regulation; and
• Safeguards in the work environment.

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  Safeguards created by the Profession, Legislation or
Regulation

Examples:
• Educational, training and experience requirements to
become a certified member of the profession;
• Continuing education requirements;
• Professional accounting, auditing and ethics standards and
monitoring and disciplinary processes;
• Peer review of quality control; and
• Professional rules or legislation governing the
independence requirements of the firm.

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 Safeguards within the Work Environment

Comprise:
 Firm-wide safeguards and
 Engagement-specific safeguards.

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  Safeguards within the Work Environment
 Firm-wide safeguards
Examples:
• Leadership of the firm that stresses the importance of compliance with
the fundamental principles and requires that members of an assurance
team act in the public interest.
• Policies and procedures to implement and monitor quality control of
engagements.
• Policies and procedures that will enable the identification of interests or
relationships between the firm or members of engagement teams and
clients.
• Using different partners and engagement teams with separate reporting
lines for the provision of non-assurance services to an assurance client.
• ….
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 Safeguards within the Work Environment

 Engagement- specific safeguards

Examples:
• Using an additional professional accountant not on the assurance team
to review the work done.
• Consulting an outside third party (e.g. a committee of independent
directors or a professional regulatory body).
• Rotation of senior assurance team personnel.
• Communicating to the audit committee the nature of services provided
and fees charged.
• Involving another audit firm to perform or re-perform part of the
assurance engagement.
• ….
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 Resolution of Ethical Conflicts

1) If the matter remains unresolved, the

professional accountant should consult with
other appropriate persons within the firm
2) Where a matter involves a conflict with, or
within, an organization, consult with those
charged with governance of the organization,
such as the board of directors or the audit
committee.
3) If a significant conflict cannot be resolved,
obtain professional advice from the relevant
professional body or legal advisors.
4) If, after exhausting all relevant possibilities,
the ethical conflict remains unresolved, a
professional accountant should, where
possible, refuse to remain associated with the
matter creating the conflict..

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2.3. INDEPENDENCE

• The independence of the auditor from the firm that he is

auditing is one of the basic requirements to keep public
confidence in the reliability of the audit report.
• IFAC strongly believes that a high-quality principles-based
approach to independence will best serve the public interest
by eliciting thoughtful auditor assessment of the particular
circumstances of each engagement.
• The conceptual framework involves two views of
independence to which the auditor must comply:
(1) Independence of mind and
(2) Independence in appearance.

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 2.3. INDEPENDENCE

 Independence of mind

Independence of mind is a state of mind that allows to

draw conclusions that are unaffected by influences that
compromise professional judgment.
Independence in mind allows the professional accountant
to act with integrity, objectivity, and professional scepticism.

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2.3. INDEPENDENCE

 Independence in appearance

Independence in appearance involves avoidance of

significant circumstances that a reasonable informed third
party, considering all the facts and circumstances, might
conclude that the professional accountant's integrity,
objectivity or professional scepticism has been compromised.

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 2.3. INDEPENDENCE

The Ethics Code discusses independence in assurance services

in terms of a principles- based approach that takes into
account threats to independence, accepted safeguards and the
public interest.

A professional accountant shall use professional judgement in

applying this conceptual framework to:
 Identify threats to independence;
 Evaluate the significance of the threats identified; and
 Apply safeguards, when necessary, to eliminate the
threats or reduce them to an acceptable level.

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Choose the best response.

An auditor strives to achieve independence in appearance to
(1) comply with auditing standards related to audit
performance.
(2) become independent in fact.
(3) maintain public confidence in the profession.
(4) maintain an unbiased mental attitude.

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 Choose the best response.
The CPA firm will lose its independence if
A) a staff auditor providing audit services to the client
acquires stock in that client.
B) a staff tax preparer who provides 15 hours of non-audit
services to the client acquires stock in that client.
C) an audit manager in an office different than the office
providing audit services has a direct, immaterial financial
interest in the audit client.
D) a covered member has an indirect, immaterial financial
interest in an audit client.

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Discussion:
If an action is considered legal, it must also be considered
ethical?

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