Professional Ethics and Codes of Conduct
1. RULES OF PROFESSIONAL CONDUCT
Members of association are required to observe proper standards of professional conduct and refrain from misconduct. Overseas members may follow the local ethics where the profession is controlled by a reputed professional body or law, i.e. the local law prevails on international law.
Fundamental Principles of Professional Conduct
Integrity should be maintained in all professional, business and personal financial relationships. It implies honesty, fair dealing and truthfulness.
There should be objectivity in all professional and business judgements.
One should not accept work which cannot be competently undertaken.
Due skill and care
Professional work should be carried out with due skill, care, diligence and expedition.
Courtesy and consideration
Towards all with whom they come into contact while performing work.
2. INTEGRITY, OBJECTIVITY AND INDEPENDENCE
A member’s objectivity must be beyond question which can only be assured if the member is, and is seen to be, independent.
Areas of risk to the independence
There are certain areas creating risk to the independence of a member of the association, some which are given below:
Undue dependence on an audit client
1. For audit and other recurring work paid by one client, or a group of connected clients, should not exceed 15% and for listed companies, it should not exceed 10% of the gross practicing income.
2. The desire not to lose a prestigious client
3. Fee income taken for non-recurring assignments, if taken with recurring work, could give rise to dependency.
The existence of significance overdue fees from an audit client or group of associated clients can be a threat of appear to be a threat to objectivity akin to that of a loan.
Actual or threatened litigation
A firm’s objectivity may be threatened or appear to be threatened when it is involved in, or even threatened with litigation in relation to a client.’
Litigation of any sort represents the breakdown of relationship between the auditor and the client which affects the independence of the auditor and also may cause the directors of the client company unwilling to present required record. Such litigation are not a result of merely late fee disputes.
Family and other personal relationships
Law prohibits the officer/employee of the company to accept the assignment to be an auditor of the company. A member should not also accept the assignment if he has been the officer/employee of the company in last 3 years. A practice should not report on a company if the company associated with the practice fills the appointment of secretary to the client.
Beneficial interest in shares and other investments
A member should not have a Personal Equity Plan (PEP) which has among its investments and audit client. Shares acquired by a partner should be disposed of at the earliest practicable date, or disengage from the assignment.
An auditor required to be a shareholder e.g. by constitution should not hold more than the minimum number of shares necessary to comply. The shareholding should be disclosed in the accounts, the directors’ report, or the auditor’s report.
Voting on audit appointments
A partner or member of staff who holds shares in a company which is an audit client of the practice should not vote at any general meeting in relation to the auditor’s
In respect of an audit client, a practice should not
Make a loan
Accept a loan
Information obtained in the course of the business should not be disclosed to the third parties without first obtaining the client’s permission.
Where there is a statutory right or duty to disclose
Under obligation of a court order
Confidentiality is an implied term of the contract between the auditor and client, because the public interest is at stake. Auditors are normally under no legal obligation to disclose defaults or unlawful acts to any one other than client’s management. Where there is a right to disclose, the disclosure should be made in pursuit of a public duty or professional obligation provided they are strongly recommended to take legal advice.
UK examples include actual of suspected offences of
In the ‘public interest’ to a person having proper interest to receive information e.g. the police
· To protect the auditor’s interests e.g. in defending against ACCA disciplinary proceedings
Authorized by statute
To non- governmental bodies
3.2 Improper Use of Information
A member acquiring information in the course of his or her professional work should neither use nor appear to use that information for his personal advantage or for the advantage of a third party.
When a member changes firm of employment, he should distinguish between:
Experience gained in the previous firm of employment; and
Confidential information acquired here
A member should not deal in the shares of a company with which he has a professional association as might make it appear that he was turning information obtained in his professional capacity to his own advantage.
4. CONFLICTS OF INTERESTS
Conflict may be:
Member v Client
Client v Client
4.1 Member v Client
Members should place clients’ interest before their own interest.
A firm should not accept or continue an engagement in which there is or is likely to be a significant conflict of interests between the firm and the client.
Any financial gain which accrues or is likely to accrue to the firm as a result of the engagement, other than properly earned fees etc., will always amount to a significant conflict of interests.
Where any commission, fee or reward may be earned for the introduction of a client, or as a result of advice given to a client, the client should be informed in writing
That such commission etc. will be received; and
As soon as practicable, of its amount and terms.
4.2 Client v Client
A firm may has two or more clients whose interests may be in conflicts, provided that the firm’s work is so managed to avoid the interests of one client adversely affecting the others’. However, where the acceptance or continuance of engagement would materially affect the interests of any client, even with safeguards, the appointment should not be accepted or continued.
Managing conflict between client interests’
All reasonable steps should be taken to ascertain whether any conflict of interests exists or is likely to exist in the future.
Relationship with existing clients is undertaken before accepting a new assignment and regularly thereafter.
Over 2 years before ended relationship is unlikely to give rise to any conflict.
A material conflict of interests between the existing or potential clients have to be disclosed sufficiently providing room for them to have an informed decision whether to continue or discontinue their relationship with the firm.
Use different partners and teams of staff for different engagements.
No leakage of confidential information between different teams and sections of the firm.
Regular review of the situation by a senior partner or compliance officer not personally involved with either client.
Advising at least one or all clients to seek additional independent advice.
Disengagement, when necessary, should be done as speedily as is compatible with the interests of the clients concerned.
5. APPLICATION OF CODE TO INTERNAL AUDITORS
Code of Ethics
The purpose of the code of ethics of IIA is the globalisation and promotion of ethical culture in the profession of internal auditing. It applies to both individuals and the entities that provide internal auditing services.
The IIA code has two essential components:
Rules of conduct
Integrity establishes trust which provides the basis for reliance on their judgment.
Rules of Conduct
To perform work with honesty, diligence and responsibility
To observe the law and the profession
To respect and contribute to the legitimate and ethical objectives of the organisation
Judgements are not unduly influenced by the interests of the internal auditors or the others
Rule of conduct
Auditors are advised
Not to enter in such an activity or relationship (including conflicts of interests) that may impair an unbiased assessment
Not to accept anything that may impair any professional judgment
To disclose all material facts that may distort the reporting of activities under review, if not disclosed
Impairments to organisational independence and individual objectivity may include:
Personal conflicts of interests
Resource limitations (funding)
Restrictions to access to records, personnel and properties
Respecting the value and ownership of information received
Rule of conduct
Information acquired in the course of profession should be used carefully and protected
Not to use the information for personal use in a manner prohibited by law or fatal to the organisational legitimate and ethical objectives
Applying the knowledge, skill and professional expertise up to the best they are needed
Rule of conduct
To perform internal auditing services in accordance with the Standards for the Professional Practice of Internal Auditing
· To engage only those services for which they have sufficient skills, knowledge and experience
To continuously improve the efficiency of their services
Concept Clearing Questions (CCQs)
1. The audit senior of Neutron, a limited liability company, celebrating weekend left the audit files in the boot of his car overnight. There is no other audit staff available that the client considers being capable of replacing him on the assignment.
2. A part-time partner in Spoile and Co. is also a councilor in the local authority. He has been acting for Radnor Ltd. Whose business venture now requires planning permission from the local authority. The partner sits in the planning committee and recently vigorously opposed a similar application.
3. In an effort to reduce audit fees your client, Finders Ltd., has employed an accountant on a temporary basis t assist you with your audit work. The client feels that it will be cheaper for the temporary accountant to perform some of the audit testing, replacing one member of your staff.
4. Trainees of Porthouse, a firm of Certified Accountants, have been offered overdraft facilities up to $3,000, on student terms, by a client bank.
Define the fundamental concepts of professional ethics.
Define the applications of the code. (Hint: to internal and external auditors)
Define the detailed requirements of, and illustrate and analyze the application of, professional ethics in the context of independence, objectivity and integrity.
Define the detailed requirements of, and illustrate and analysis the application of, professional ethics in the context of confidentiality and conflict of interests, with reference to the independent auditing.
Distinguish between the elements of professional ethics applicable to internal auditors and those applicable to internal auditors.
Discuss the principles and rules of conduct of Integrity, Objectivity, Confidentiality and Competence with reference to internal auditing.
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