Ch 6 professional accounting in the public interest

TABLE 6.1
WHAT MAKES A PROFESSION
Essential Features

(Bayles)

 Extensive training
 Provision of important services to society
 Training and skills largely intellectual in character
Typical Features
 Generally licensed or certified
 Represented by organisations, associations, or institutes
 Autonomy
Foundation of Ethical Values

(Behrman)

 Significantly delineated by and founded on ethical considerations rather
than techniques or tools


TABLE 6.2
FEATURES, DUTIES, RIGHTS, & VALUES OF THE ACCOUNTING PROFESSION
Features
 Provision of important fiduciary services to society – use of fiduciary per text
 Extensive knowledge and skill are required
 Training and skills required are largely intellectual in character
 Overseen by self-regulating membership organisations
 Accountable to governmental authority
Duties essential to a fiduciary relationship
 Continuing attention to the needs of clients and other stakeholders

 Development and maintenance of required knowledge and skills, including professional scepticism
 Maintenance of the trust inherent in a fiduciary relationship by behaviour exhibiting responsible values
 Maintenance of an acceptable personal reputation
 Maintenance of a credible reputation as a profession
Rights permitted in most jurisdictions
 Ability to hold oneself out as a designated professional to render important fiduciary services
 Ability to set entrance standards and examine candidates
 Self-regulation and discipline based on codes of conduct
 Participation in the development of accounting and audit practice
 Access to some or all fields of accounting and audit endeavour
Values necessary to discharge duties and maintain rights
 Honesty
 Integrity
 Objectivity, based on independent judgement
 Desire to exercise due care and professional scepticism
 Competence
 Confidentiality
 Commitment to place the needs of the public, the client, the profession, and the employer or firm before the
professional's own self-interest


TABLE 6.4
NATIONAL & INTERNATIONAL ACCOUNTING
ORGANIZATIONS OPERATING IN NORTH AMERICA
NAME

DESIGNATION

PRIME MANDATE(S)

LOCATION

American Institute of Certified
Public Accountants (AICPA)

CPA

Auditing, management
accounting

United States, some
Canadian
provinces

Institute of Management
Accountants (IMA)

CMA

Management
accounting

United States

Canadian Institute of Chartered
Accountants (CICA)

CA

Auditing, management

accounting

Canada

Society of Management
Accountants of Canada (SMAC)

CMA

Management
accounting

Canada

Certified General Accountants
Association of Canada (CGAAC)

CGA

Management accounting,
auditing

Canada,
some provinces


TABLE 6.7
FUNDAMENTAL PRINCIPLES IN CODES OF CONDUCT
FOR PROFESSIONAL ACCOUNTANTS
Members should:

 act in the public interest,
 at all times maintain the good reputation of the profession and its ability
to serve the public interest,
 perform with:
 integrity
 objectivity & independence
 professional competence, due care, and professional skepticism
 confidentiality, and
 not be associated with any misleading information or misrepresentation.


TABLE 6.8
IFAC 2005 CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS
FUNDAMENTAL PRINCIPLES – SECTION 100.4
A professional accountant is required to comply with the following fundamental principles:
(a) Integrity - A professional accountant should be straightforward and honest in all professional
and business relationships.
(b) Objectivity - A professional accountant should not allow bias, conflict of interest or undue
influence of others to override professional or business judgments.
(c) 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.
(d) 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.
(e) Professional Behavior - A professional accountant should comply with relevant laws and
regulations and should avoid any action that discredits the profession.


TABLE 6.9
POSSIBLE SANCTIONS FOR UNETHICAL BEHAVIOR UNDER PROFESSIONAL
ACCOUNTING CODES OF CONDUCT & REGULATORY AUTHORITIES
LEVIABLE ON THE
PROFESSIONAL

ACCOUNTING FIRM

Caution

Yes

Yes

Reprimand

Yes

Yes

Review by peer

Yes

Yes

Requirement to complete courses

Yes

No

Suspension:
 for a specified period
 for an indefinite period
 until specific requirements are completed
 from appearing before regulatory agencies (SEC, OSC)
 from auditing SEC or OSC registrant companies

Yes
Yes
Yes
Yes
Yes

No/Yes*
No
No
Yes
Yes

Expulsion from membership

Yes

No

Compensation for damage

Yes

Yes

Fine

Yes

Yes

Costs of hearing

Yes

Yes

Ancillary orders
 for community work
 financial support, etc.

Yes
Yes

No
Yes

. * The SEC has suspended a firm’s ability to audit SEC registrants and/or take on new clients
Source: Distillation of discipline cases from North American jurisdictions


TABLE 6.10
THE MACDONALD COMMISSION:
OVERVIEW OF PRINCIPAL RECOMMENDATIONS
Recommendations to strengthen auditor independence/integrity:
 Improvement of auditor relationships (#11)
 Strengthen professional standards (7)
 Strengthen professional code of conduct (3)
Recommendations to strengthen auditor professionalism:
 Increase responsiveness to public concerns (6)
 Emphasize vital role of professional judgment (4)
 Improve self-regulation (2)
Recommendations to improve financial disclosure:
 Expand accounting standards and improve financial disclosures (13)
 Greater auditor responsibility for those disclosures (2)
Recommendations to lessen public misunderstanding of the auditor's role:
 Publish a statement of management responsibility (24)
 Expand audit report to clarify auditor's role and the level of assurance
the audit provides (25)
 Audit committee to report annually to shareholders (3)
SOURCE:

The Macdonald Commission: Report of the Commission to Study the Public's Expectation of Audits, CICA, Toronto, June 1988.


TABLE 6.11
IFAC 2005 CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

FRAMEWORK – CONTENTS
Page
PREFACE..................................................................................................................................... 2
PART A: GENERAL APPLICATION OF THE CODE
100 Introduction and Fundamental Principles ................................................................. 4
110 Integrity ...................................................................................................................... 9
120 Objectivity ................................................................................................................... 10
130 Professional Competence and Due Care.................................................................. 11
140 Confidentiality ............................................................................................................ 12
150 Professional Behavior ................................................................................................ 14
PART B: PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE
200 Introduction.................................................................................................................. 16
210 Professional Appointment........................................................................................... 21
220 Conflicts of Interest ..................................................................................................... 24
230 Second Opinions ......................................................................................................... 26
240 Fees and Other Types of Remuneration..................................................................... 27
250 Marketing Professional Services................................................................................. 29
260 Gifts and Hospitality .................................................................................................... 30
270 Custody of Clients Assets .......................................................................................... 31
280 Objectivity–All Services.............................................................................................. 32
290 Independence–Assurance Engagements .................................................................. 33
PART C: PROFESSIONAL ACCOUNTANTS IN BUSINESS
300 Introduction................................................................................................................... 79
310 Potential Conflicts........................................................................................................ 83
320 Preparation and Reporting of Information .................................................................. 85
330 Acting with Sufficient Expertise................................................................................... 86
340 Financial Interests ...................................................................................................... 87
350 Inducements ............................................................................................................... 89
DEFINITIONS............................................................................................................................... 91
EFFECTIVE DATE....................................................................................................................... 95

FIGURE 6.1
IFAC 2005 CODE OF ETHICS FRAMEWORK

Duty to Society,
Serve the Public Interest

(S 100.1)

Compliance with Fundamental Principles
Integrity, Objectivity
Professional Competence & Due Care
Confidentiality, Professional Behavior

(S 100.4)

Threats to Compliance with Fundamental Principles
Identify, Evaluate, Eliminate or Reduce Threats to
(S 100.5)
Acceptable Levels by Applying Safeguards
And Resolving any Conflicts in Application
(S 100.16)
Threats (S 100.10)
Self-Interest, Self-review
Advocacy, Familiarity, Intimidation

Safeguards (S 100.11 & 12)
Professional Codes, Training or Standards
Legislation, Regulation, In Client, Firm or Business

Source: IFAC Code of Ethics for Professional Accountants, June 2005 (Section number).


TABLE 6.12
THREATS TO NONCOMPLIANCE – INDEPENDENT JUDGEMENT
Compliance with fundamental principles may be threatened by a broad range of
circumstances. Many threats fall into the following categories:
(a) Self-interest threats, which may occur as a result of the financial or other
interests of a professional accountant or of an immediate or close family
member;
(b) Self-review threats, which may occur when a previous judgment needs to be
reevaluated by the professional accountant responsible for that judgment;
(c) Advocacy threats, which may occur when a professional accountant
promotes a position or opinion to the point that subsequent objectivity may
be compromised;
(d) Familiarity threats, which may occur when, because of a close relationship, a
professional accountant becomes too sympathetic to the interests of
others; and
(e) Intimidation threats, which may occur when a professional accountant may
be deterred from acting objectively by threats, actual or perceived.
IFAC 2005 Code of Ethics for Professional Accountants, Section 100.10


TABLE 6.13
SAFEGUARDS REDUCING THE RISK OF CONFLICT OF INTEREST SITUATIONS
Safeguards Created by the Profession, Legislation, or Regulation
 Education, training, experience requirement for entry
 Continuing education
 Professional standards, monitoring, and disciplinary processes

 External review by a legally empowered third party of the reports, returns, communications or information
produced by a professional accountant.
 External review of firm’s quality control system
 Legislation governing independence requirements of the firm
IFAC Code, S 100.12
Safeguards Within a Client
 Appointment of auditors ratified/approved by other than management
 Client has competent staff to make managerial decisions
 Internal procedures to ensure objective choices in commissioning non-assurance engagements
 A corporate governance structure, such as the audit committee, that provides appropriate oversight and
communications regarding a firm’s services
IFAC Code, 200.15
Safeguards Within a Professional Accounting Firm’s Own Systems and Procedures
 Leadership stressing importance of independence, and expectation of service/action in the public interest
 Policies and procedures to implement and monitor control of assurance engagements
 Documented independence policies regarding the identification and evaluation of threats to independence;
applications of safeguards to eliminate or reduce those threats to an acceptable level
 Policies and procedures to monitor and manage the reliance on revenue from a single assurance client
 Using partners with separate reporting lines for the provision of non-assurance services to an assurance client
 Six other firm-wide and nine other specific items
IFAC Code, 200.12


FIGURE 6.2
IFAC CODE’S FRAMEWORK FOR INDEPENDENT JUDGMENT

Protect the Public Interest
Professional Service to Clients

Independence of Mind and Appearance

(S 290.8)

Independent Judgment

Integrity

Objectivity

Professional
Skepticism

Source: IFAC Code of Ethics for Professional Accountants, 2005, S 290.8 & Independence Definition


TABLE 6.14
CONFLICTS OF INTEREST FOR PROFESSIONAL ACCOUNTANTS:
CATEGORIES, SPHERES OF ACTIVITY AFFECTED, AND EXAMPLES
STAKEHOLDER
CATEGORY

SPHERE OF ACTIVITY
AFFECTED

EXAMPLES

Self vs. others

Services offered
Improper use of influence
Misuse of information

Conflicting services, shaving quality
Improper purchases of client goods
Improper investments by relatives

Self & others
vs. others

Services offered

Overinvolvement with management
or directors erodes objectivity

Client vs. client
Employer vs. employer

Services offered

Serving competing clients
at the same time

Stakeholder
vs. stakeholder

Misuse of information
(confidentiality)

Whistle-blowing, reporting to
government or regulators