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    • International Federation of Accountants 545 Fifth Avenue, 14th Floor New York, New York 10017 USAThis publication was prepared by the International Federation of Accountants (IFAC).Its mission is to serve the public interest, strengthen the worldwide accountancyprofession and contribute to the development of strong international economies byestablishing and promoting adherence to high-quality professional standards, furtheringthe international convergence of such standards and speaking out on public interestissues where the profession’s expertise is most relevant.This publication may be downloaded free-of-charge from the IFAC websitehttp://www.ifac.org. The approved text is published in the English language.IFAC welcomes any comments you may have regarding this handbook. Comments maybe sent to the address above or emailed to IAASBpubs@ifac.org.Copyright © January 2006 by the International Federation of Accountants (IFAC). Allrights reserved. Permission is granted to make copies of this work provided that suchcopies are for use in academic classrooms or for personal use and are not sold ordisseminated and provided further that each copy bears the following credit line:“Copyright © by the International Federation of Accountants. All rights reserved. Usedby permission.” Otherwise, written permission from IFAC is required to reproduce,store or transmit this document, except as permitted by law. Contactpermissions@ifac.org.ISBN: 1-931949-52-2
    • HANDBOOK OF INTERNATIONAL AUDITING, ASSURANCE, AND ETHICS PRONOUNCEMENTS 2006 EDITIONScope of the HandbookThis handbook brings together for continuing reference background information on theInternational Federation of Accountants (IFAC) and the currently effectivepronouncements on auditing, assurance, and ethics issued by IFAC as of January 1,2006. In this handbook, the text of pronouncements that become effective at a date afterJanuary 1, 2006 has been shaded.How this Handbook is ArrangedThe contents of the handbook are arranged by section as follows:Changes of Substance from the 2005 Edition of the Handbook and Recent Developments ...................................................................... 1Background Information on the International Federation of Accountants ..... 5Ethics ............................................................................................................. 11Auditing, Assurance, and Related Services ................................................... 219
    • CHANGES CHANGES OF SUBSTANCE FROM THE 2005 EDITION OF THE HANDBOOK AND RECENT DEVELOPMENTSReferencesThis handbook contains references to the International Auditing Practices Committee(IAPC) of the International Federation of Accountants (IFAC). As of April 1, 2002 theInternational Auditing and Assurance Standards Board (IAASB) of IFAC replaced theIAPC.This handbook also contains references to the International Accounting StandardsCommittee (IASC). As of April 1, 2002 the International Financial Reporting Standards(IFRSs) (previously referred to as International Accounting Standards (IASs)) are issuedby the International Accounting Standards Board (IASB). References to IASs andIFRSs are to the IASs and IFRSs in effect at the date of preparing a pronouncement.Accordingly, readers are cautioned that, where a revised IAS or IFRS has been issuedsubsequently, reference should be made to the most recent IAS or IFRS.Pronouncements Issued by the IAASBAdditionsThe following additions have been made in this edition of the handbook:• The Glossary of Terms has been updated.• International Standard on Auditing (ISA) 230 (Revised), “Audit Documentation.” ISA 230 (Revised) is effective for audits of financial information for periods beginning on or after June 15, 2006. ISA 230, “Documentation,” remains in effect and is retained in this handbook, but will be withdrawn when ISA 230 (Revised) becomes effective.• ISA 230 (Revised) gave rise to conforming amendments1 to ISA 200, “Objective and General Principles Governing an Audit of Financial Statements,” ISA 330, “The Auditor’s Procedures in Response to Assessed Risks,” and International Standard on Quality Control (ISQC) 1, “Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information and Other Assurance and Related Services Engagements.” The conforming amendments are reflected in the appendices to ISA 200, ISA 330 and ISQC 1. The conforming amendments to ISA 200 and ISA 330 are effective for audits of financial statements for periods beginning on or after June 15, 2006. Systems for quality control in compliance with ISQC 1, as amended, are required to be established by June 15, 2006.1 “Conforming amendment” means an amendment to an existing Standard arising from the revision of an other Standard or the development of a new Standard. 1 CHANGES
    • CHANGES OF SUBSTANCE AND RECENT DEVELOPMENTS• International Standard on Review Engagements (ISRE) 2410, “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” is effective for reviews of interim financial information for periods beginning on or after December 15, 2006.• ISRE 2410 gave rise to conforming amendments to ISA 210, “Terms of Audit Engagements,” and ISRE 2400, “Engagements to Review Financial Statements.” The conforming amendments are reflected in the appendices to ISA 210 and ISRE 2400. The conforming amendments to ISA 210 are effective for audits of financial statements for periods beginning on or after December 15, 2006. The conforming amendments to ISRE 2400 are effective for reviews of financial statements for periods beginning on or after December 15, 2006.Withdrawals• ISA 220, “Quality Control for Audit Work” was withdrawn in June 2005 when ISA 220 (Revised), “Quality Control for Audits of Historical Financial Information” became effective.Small Entity Audit ConsiderationsFor ISAs issued subsequent to March 2003, whenever necessary, small entity auditconsiderations are included in the body of those ISAs. Guidance contained in IAPS1005, “The Special Considerations in the Audit of Small Entities” is withdrawn whenrevisions to related ISAs become effective. Accordingly, readers are cautioned that, inaddition to the guidance in IAPS 1005, reference should be made to the small entityaudit considerations included in ISAs issued subsequent to March 2003.Exposure DraftsThe IAASB has issued exposure drafts on the following:• ISA 260 (Revised), “Communications with Those Charged with Governance”• ISA 320 (Revised), “Materiality in the Identification and Evaluation of Misstatements”• ISA 540 (Revised), “Auditing Accounting Estimates and Related Disclosures (Other than Those Involving Fair Value Measurements and Disclosures)”• ISA 550 (Revised), “Related Parties”• ISA 600 (Revised), “The Audit of Group Financial Statements”• ISA 701, “The Independent Auditor’s Report on Other Historical Financial Information”• ISA 705, “Modifications to the Opinion in the Independent Auditor’s Report”• ISA 706, “Emphasis of Matter Paragraphs and Other Matters Paragraphs in the Independent Auditor’s Report”CHANGES 2
    • CHANGES OF SUBSTANCE AND RECENT DEVELOPMENTS CHANGES• ISA 800, “The Independent Auditor’s Report on Summary Audited Financial Statements”• Improving the Clarity of IAASB Standards – a draft of four ISAs written in an improved styleOn the basis of consultations, the IAASB is confident that the basis for improving theclarity of its Standards explained in the Exposure Draft is appropriate and will receivesufficiently wide acceptance. The comment period for the Exposure Draft closes onFebruary 28, 2006. It can be downloaded from the IAASB’s website athttp://www.iaasb.org.Once finalized, the IAASB intends to apply the new drafting conventions to as manyStandards as practicable in the shortest possible time, without compromising dueprocess. The IAASB’s initial focus will be on ISAs, as opposed to the otherInternational Standards, reflecting the importance that audits conducted in accordancewith ISAs have to the public interest.The IAASB project to improve the clarity of its Standards will have a significant effecton the ISAs to be included in future editions of this handbook.For additional information on recent developments and to obtain final pronouncementsissued subsequent to December 31, 2005 or outstanding exposure drafts visit theIAASB’s website at http://www.iaasb.org.Pronouncements Issued by the International Ethics StandardsBoard for AccountantsAdditionsDuring 2005 the International Ethics Standards Board for Accountants (IESBA) issued arevised Code of Ethics for Professional Accountants (the Code) establishing aconceptual framework for all professional accountants to ensure compliance with thefive fundamental principles of professional ethics. The revised Code is effective on June30, 2006. Section 290 is applicable to assurance engagements when the assurance reportis dated on or after June 30, 2006. Earlier application is encouraged.Recent Exposure DraftsThe IESBA has issued as exposure draft proposing a revision to the network firmdefinition contained in Section 290.For additional information on recent developments and to obtain final pronouncementsissued subsequent to December 31, 2005 or outstanding exposure drafts visit theIESBA’s page on the IFAC website at http://www.ifac.org/. 3 CHANGES
    • CHANGES OF SUBSTANCE AND RECENT DEVELOPMENTSInternational Professional Practice Statement 1International Professional Practice Statement (IPPS) 1, “Assuring the Quality ofProfessional Services” was issued by the IFAC Council in August 1999. IPPS 1 wassuperseded by Statement of Membership Obligation 1, “Quality Assurance,” when itbecame effective on December 31, 2005. The Statements of Membership Obligationscan be downloaded from IFAC’s website at http://www.ifac.org.CHANGES 4
    • BACKGROUND INFORMATION ON THE INTERNATIONAL FEDERATION OF ACCOUNTANTSThe OrganizationThe International Federation of Accountants (IFAC) is the worldwide organization forthe accountancy profession. Founded in 1977, its mission is “to serve the public interest,IFAC will continue to strengthen the worldwide accountancy profession and contributeto the development of strong international economies by establishing and promotingadherence to high-quality professional standards, furthering the internationalconvergence of such standards and speaking out on public interest issues where the IFACprofession’s expertise is most relevant.”IFAC’s governing bodies, staff and volunteers are committed to the values of integrity,transparency and expertise. IFAC also seeks to reinforce professional accountants’adherence to these values, which are reflected in the IFAC Code of Ethics forProfessional Accountants.Primary ActivitiesServing the Public InterestIFAC provides leadership to the worldwide accountancy profession in serving the publicinterest by:• Developing, promoting and maintaining global professional standards and a Code of Ethics for Professional Accountants of a consistently high-quality;• Actively encouraging convergence of professional standards, particularly, auditing, assurance, ethics, education, and financial reporting standards;• Seeking continuous improvements in the quality of auditing and financial management;• Promoting the values of the accountancy profession to ensure that it continually attracts high caliber entrants;• Promoting compliance with membership obligations; and• Assisting developing and emerging economies, in cooperation with regional accounting bodies and others, in establishing and maintaining a profession committed to quality performance and in serving the public interest.Contributing to the Efficiency of the Global EconomyIFAC contributes to the efficient functioning of the international economy by:• Improving confidence in the quality and reliability of financial reporting;• Encouraging the provision of high-quality performance information (financial and non-financial) within organizations; 5 IFAC
    • BACKGROUND INFORMATION ON THE INTERNATIONAL FEDERATION OF ACCOUNTANTS• Promoting the provision of high-quality services by all members of the worldwide accountancy profession; and• Promoting the importance of adherence to the Code of Ethics for Professional Accountants by all members of the accountancy profession, including members in industry, commerce, the public sector, the not-for-profit sector, academia, and public practice.Providing Leadership and SpokesmanshipIFAC is the primary spokesperson for the international profession and speaks out on awide range of public policy issues, especially those where the profession’s expertise ismost relevant, as well as on regulatory issues related to auditing and financial reporting.This is accomplished, in part, through outreach to numerous organizations that rely onor have an interest in the activities of the international accountancy profession.MembershipIFAC is comprised of 163 member bodies from every part of the globe, representingmore than 2.5 million accountants in public practice, industry and commerce, the publicsector, and education. No other accountancy body in the world and few otherprofessional organizations have the broad-based international support that characterizesIFAC.IFAC’s strengths derive not only from its international representation, but also from thesupport and involvement of its individual member bodies, which are themselvesdedicated to promoting integrity, transparency, and expertise in the accountancyprofession, as well as from the support of regional accountancy bodies.Standard-Setting InitiativesIFAC has long recognized the need for a globally harmonized framework to meet theincreasingly international demands that are placed on the accountancy profession,whether from the business, public sector or education communities. Major componentsof this framework are the Code of Ethics for Professional Accountants, InternationalStandards on Auditing (ISAs), International Education Standards and InternationalPublic Sector Accounting Standards (IPSASs).IFAC standard-setting boards, described below, follow a due process that supports thedevelopment of high-quality standards in the public interest in a transparent, efficient,and effective manner. These standard-setting boards all have Consultative AdvisoryGroups, which provide public interest perspectives, and include public members.IFAC’s Public Interest Activity Committees (PIACs) – the International Auditing andAssurance Standards Board, International Accounting Education Standards Board,International Ethics Standards Board for Accountants and the Compliance AdvisoryPanel – are subject to oversight by the international Public Interest Oversight Board(PIOB) for the accountancy profession (see below).IFAC 6
    • BACKGROUND INFORMATION ON THE INTERNATIONAL FEDERATION OF ACCOUNTANTSThe terms of reference, due process and operating procedures of the IFAC standard-setting boards are available from the IFAC website at http://www.ifac.org.IFAC actively supports convergence to ISAs and other standards developed by theIFAC standard-setting boards and the International Accounting Standards Board.Auditing and Assurance ServicesThe International Auditing and Assurance Standards Board (IAASB) develops ISAs andInternational Standards on Review Engagements, which deal with the audit and reviewof historical financial statements; and International Standards on AssuranceEngagements, which deal with assurance engagements other than the audit or review of IFAChistorical financial information. The IAASB also develops related practice statements.These standards and statements serve as the benchmark for high-quality auditing andassurance standards and statements worldwide. They establish standards and provideguidance for auditors and other professional accountants, giving them the tools to copewith the increased and changing demands for reports on financial information, andprovide guidance in specialized areas.In addition, the IAASB develops quality control standards for firms and engagementteams in the practice areas of audit, assurance and related services.EthicsThe Code of Ethics for Professional Accountants, developed by IFAC’s InternationalEthics Standards Board for Accountants (formerly the Ethics Committee), establishesethical requirements for professional accountants and provides a conceptual frameworkfor all professional accountants to ensure compliance with the five fundamentalprinciples of professional ethics. These principles are integrity, objectivity, professionalcompetence and due care, confidentiality, and professional behavior. Under theframework, all professional accountants are required to identify threats to thesefundamental principles and, if there are threats, apply safeguards to ensure that theprinciples are not compromised. A member body of IFAC or firm may not apply lessstringent standards than those stated in the Code.Public Sector AccountingIFAC’s International Public Sector Accounting Standards Board (IPSASB) focuses onthe development of high-quality financial reporting standards for use by public sectorentities around the world. It has developed a comprehensive body of IPSASs setting outthe requirements for financial reporting by governments and other public sectororganizations. The IPSASs represent international best practice in financial reporting bypublic sector entities. In many jurisdictions, the application of the requirements ofIPSASs will enhance the accountability and transparency of the financial reportsprepared by governments and their agencies.The IPSASs are contained in the 2006 edition of IFAC’s Handbook of InternationalPublic Sector Accounting Pronouncements and are also available from the IFAC 7 IFAC
    • BACKGROUND INFORMATION ON THE INTERNATIONAL FEDERATION OF ACCOUNTANTSwebsite at http://www.ifac.org. French and Spanish translations of the IPSASs are alsoavailable for download from the IFAC website.EducationWorking to advance accounting education programs worldwide, IFAC’s InternationalAccounting Education Standards Board (IAESB) (formerly the Education Committee)develops International Education Standards, setting the benchmarks for the education ofmembers of the accountancy profession. All member bodies are required to comply withthose standards, which address the education process leading to qualification as aprofessional accountant as well as the ongoing continuing professional development ofmembers of the profession. The IAESB also develops other guidance to assist memberbodies and accounting educators implement and achieve best practice in accountingeducation.This handbook does not contain the International Education Standards, which areavailable from the IFAC website at http://www.ifac.org.Support for Professional Accountants in BusinessBoth IFAC and its member bodies face the challenge of meeting the needs of anincreasing number of accountants employed in business and industry, the public sector,education and the not-for-profit sector. These accountants now comprise more than 50percent of the membership of member bodies. IFAC’s Professional Accountants inBusiness (PAIB) Committee develops guidance to assist member bodies in addressing awide range of professional issues, encourages and supports high-quality performance byprofessional accountants in business and strives to build public awareness andunderstanding of the work they provide.Small- and Medium-Sized PracticesIFAC is also focused on providing best practice guidance to another growingconstituency: small- and medium-sized practices (SMPs). IFAC’s SMP Committee(formerly the SMP Permanent Task Force) develops papers on topics of global concernand provides input in the development of international standards and on the work of theIFAC standard-setting boards. The committee also investigates ways in which IFAC,together with its member bodies, can respond to the needs of accountants operating insmall and medium enterprises and practices.Developing NationsIFAC’s Developing Nations Committee (formerly the Developing Nations PermanentTask Force) supports the development of the accountancy profession in all regions ofthe world by representing and addressing the interests of developing nations and byproviding guidance to strengthen the accountancy profession worldwide. The committeealso seeks resources and development assistance from member bodies and otherorganizations on their behalf.IFAC 8
    • BACKGROUND INFORMATION ON THE INTERNATIONAL FEDERATION OF ACCOUNTANTSIFAC Member Body Compliance ProgramAs part of the Member Body Compliance Program, IFAC members and associates(mostly national professional institutes) are required to demonstrate how they have usedbest endeavors, subject to national laws and regulations, to implement the standardsissued by IFAC and the International Accounting Standards Board. The program, whichis overseen by IFAC’s Compliance Advisory Panel, also seeks to determine howmember bodies have met their obligations with respect to quality assurance andinvestigation and disciplinary programs for their members as set out in IFAC’sStatements of Membership Obligations (SMOs). The SMOs serve as the foundation ofthe Compliance Program and provide clear benchmarks to current and potential member IFACbodies to assist them in ensuring high-quality performance by professional accountants.This handbook does not contain the SMOs, which are available from the IFAC websiteat http://www.ifac.org.Regulatory FrameworkIn November 2003, IFAC, with the strong support of member bodies and internationalregulators, approved a series of reforms to increase confidence that the activities ofIFAC are properly responsive to the public interest and will lead to the establishment ofhigh-quality standards and practices in auditing and assurance.The reforms provide for the following: more transparent standard-setting processes,greater public and regulatory input into those processes, regulatory monitoring, publicinterest oversight, and ongoing dialogue between regulators and the accountancyprofession. This is accomplished through the following structures:Public Interest Oversight Board (PIOB)—Established in February 2005, the PIOBoversees IFAC’s standard-setting activities in the areas of auditing and assurance, ethics– including independence – and education, as well as the IFAC Member BodyCompliance Program. The PIOB is comprised of eight representatives and two observermembers nominated by international regulators and institutions.Monitoring Group (MG)—The MG comprises international regulators and relatedorganizations. Its role is to update the PIOB regarding significant events in theregulatory environment. It is also the vehicle for dialogue between regulators and theinternational accountancy profession.IFAC Regulatory Liaison Group (IRLG)—The IRLG includes the IFAC President,Deputy President, Chief Executive, the Chairs of the IAASB, the Transnational AuditorsCommittee, the Forum of Firms, and up to four other members designated by the IFACBoard. It works with the MG and addresses issues related to the regulation of theprofession.IFAC Structure and OperationsGovernance of IFAC rests with its Board and Council. The IFAC Council comprisesone representative from each member body. The Board is a smaller group responsible 9 IFAC
    • BACKGROUND INFORMATION ON THE INTERNATIONAL FEDERATION OF ACCOUNTANTSfor policy setting. As representatives of the worldwide accountancy profession, Boardmembers take an oath of office to act with integrity and in the public interest.IFAC is headquartered in New York City and is staffed by accounting and otherprofessionals from around the world.IFAC Website, Copyright and TranslationIFAC makes its guidance widely available by enabling individuals to freely downloadall publications from its website (http://www.ifac.org) and by encouraging its memberbodies, regional accountancy bodies, standard setters, regulators and others to includelinks from their own websites, or print materials, to the publications on IFAC’s website.The IFAC Policy Statement, Permissions Policy for Publications Issued by theInternational Federation of Accountants, outlines its policy with regard to copyright.IFAC recognizes that it is important that preparers and users of financial statements,auditors, regulators, lawyers, academia, students, and other interested groups in non-English speaking countries have access to its standards in their native language. TheIFAC Policy Statement, Translation of Standards and Guidance Issued by theInternational Federation of Accountants, outlines its policy with regard to translation ofits standards.This handbook does not contain these policy statements. However, they are availablefrom the IFAC website at http://www.ifac.org. The website also features additionalinformation about IFAC’s structure and activities.IFAC 10
    • ETHICS CONTENTS PageCode of Ethics for Professional Accountants (Issued July 1996; Revised January 1998, November 2001 and June 2004) ...................................... 12Code of Ethics for Professional Accountants (Issued June 2005) .................. 109For additional information on recent developments and to obtain final pronouncementsissued subsequent to December 31, 2005 or outstanding exposure drafts visit theIESBA’s page on the IFAC website at http://www.ifac.org/. ETHICS TABLE OF CONTENTS 11 ETHICS
    • July 1996 Revised January 1998, November 2001 and June 2004 CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (This Code is effective but will be withdrawn on June 30, 2006 when the Code issued in June 2005 becomes effective)♦ CONTENTS PageDefinitions ...................................................................................................... 14Introduction .................................................................................................... 19The Public Interest ......................................................................................... 20Objectives ...................................................................................................... 21Fundamental Principles .................................................................................. 22The Code ........................................................................................................ 23PART A—APPLICABLE TO ALL PROFESSIONAL ACCOUNTANTS1. Integrity and Objectivity................................................................... 252. Resolution of Ethical Conflicts ........................................................ 263. Professional Competence ................................................................. 284. Confidentiality ................................................................................. 295. Tax Practice ..................................................................................... 316. Cross Border Activities ................................................................... 337. Publicity ........................................................................................... 34PART B—APPLICABLE TO PROFESSIONAL ACCOUNTANTSIN PUBLIC PRACTICE8. Independence ................................................................................... 35 Application of Principles to Specific Situations .............................. 50 Section 8 Interpretations .................................................................. 859. Professional Competence and Responsibilities Regarding the Use of Non-Accountants............................................................. 8710. Fees and Commissions ..................................................................... 88♦ See page 109. The Code issued in June 2005 is effective on June 30, 2006.ETHICS 12
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS11. Activities Incompatible with the Practice of Public Accountancy ....... 9112. Clients’ Monies ................................................................................ 9213. Relations with Other Professional Accountants in Public Practice ................................................................................. 9414. Advertising and Solicitation ............................................................ 100PART C—APPLICABLE TO EMPLOYED PROFESSIONALACCOUNTANTS15. Conflict of Loyalties ........................................................................ 10516. Support for Professional Colleagues ............................................... 10617. Professional Competence ................................................................ 10718. Presentation of Information ............................................................. 108 ETHICS 13 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSDefinitionsIn this Code of Ethics for Professional Accountants the following expressions appearin bold type when they are first used and have the following meanings assigned tothem:Advertising The communication to the public of information as to the services or skills provided by professional accountants in public practice with a view to procuring professional business.Audit client An entity in respect of which a firm conducts an audit engagement. When the audit client is a listed entity, audit client will always include its related entities.Audit engagement An assurance engagement to provide a high level of assurance that financial statements are free of material misstatement, such as an engagement in accordance with International Standards on Auditing. This includes a statutory audit which is an audit required by national legislation or other regulation.Assurance client An entity in respect of which a firm conducts an assurance engagement.Assurance engagement An engagement conducted to provide: (a) A high level of assurance that the subject matter conforms in all material respects with identified suitable criteria; or (b) A moderate level of assurance that the subject matter is plausible in the circumstances. This would include an engagement in accordance with the International Standard on Assurance Engagements issued by the International Auditing and Assurance Standards Board or in accordance with specific standards for assurance engagements issued by the International Auditing and Assurance Standards Board such as an audit or review of financial statements in accordance with International Standards on Auditing.Assurance team (a) All professionals participating in the assurance engagement; (b) All others within a firm who can directly influence the outcome of the assurance engagement, including: 14 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS • Those who recommend the compensation of, or who provide direct supervisory, management or other oversight of the assurance engagement partner in connection with the performance of the assurance engagement. For the purposes of an audit engagement this includes those at all successively senior levels above the lead engagement partner through the firm’s chief executive; • Those who provide consultation regarding technical or industry specific issues, transactions or events for the assurance engagement; and • Those who provide quality control for the assurance engagement; and (c) For the purposes of an audit client, all those within a network firm who can directly influence the ETHICS outcome of the audit engagement.Client account Any bank account which is used solely for the banking of clients’ monies.Clients’ monies Any monies – including documents of title to money e.g., bills of exchange, promissory notes, and documents of title which can be converted into money e.g., bearer bonds – received by a professional accountant in public practice to be held or paid out on the instruction of the person from whom or on whose behalf they are received.Close family A parent, non-dependent child or sibling.Direct financial interest A financial interest: • Owned directly by and under the control of an individual or entity (including those managed on a discretionary basis by others); or • Beneficially owned through a collective investment vehicle, estate, trust or other intermediary over which the individual or entity has control.Directors and officers Those charged with the governance of an entity, regardless of their title, which may vary from country to country. 15 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSEmployed professional A professional accountant employed in industry,accountant commerce, the public sector or education.Existing accountant A professional accountant in public practice currently holding an audit appointment or carrying out accounting, taxation, consulting or similar professional services for a client.Financial interest An interest in an equity or other security, debenture, loan or other debt instrument of an entity, including rights and obligations to acquire such an interest and derivatives directly related to such interest.Firm (a) A sole practitioner, partnership or corporation of professional accountants; (b) An entity that controls such parties; and (c) An entity controlled by such parties.Immediate family A spouse (or equivalent) or dependent.Independence Independence is: (a) Independence of mind – the state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism; and (b) Independence in appearance – the avoidance of facts and circumstances that are so significant a reasonable and informed third party, having knowledge of all relevant information, including any safeguards applied, would reasonably conclude a firm’s, or a member of the assurance team’s, integrity, objectivity or professional skepticism had been compromised.Indirect financial A financial interest beneficially owned through ainterest collective investment vehicle, estate, trust or other intermediary over which the individual or entity has no control.Lead engagement In connection with an audit, the partner responsible forpartner signing the report on the consolidated financial statements of the audit client, and, where relevant, the partner responsible for signing the report in respect of any entity whose financial statements form part of theETHICS 16
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS consolidated financial statements and on which a separate stand-alone report is issued. When no consolidated financial statements are prepared, the lead engagement partner would be the partner responsible for signing the report on the financial statements.Listed entity An entity whose shares, stock or debt are quoted or listed on a recognized stock exchange, or are marketed under the regulations of a recognized stock exchange or other equivalent body.Network firm An entity under common control, ownership or management with the firm or any entity that a reasonable and informed third party having knowledge of all relevant information would reasonably conclude as being part of the firm nationally or internationally.Objectivity A combination of impartiality, intellectual honesty and a freedom from conflicts of interest.Office A distinct sub-group, whether organized on geographical or practice lines. ETHICSPractice A sole practitioner, a partnership or a corporation of professional accountants which offers professional services to the public.Professional accountant Those persons, whether they be in public practice, (including a sole practitioner, partnership or corporate body), industry, commerce, the public sector or education, who are members of an IFAC member body.Professional accountant Each partner or person occupying a position similar toin public practice that of a partner, and each employee in a practice providing professional services to a client irrespective of their functional classification (e.g., audit, tax or consulting) and professional accountants in a practice having managerial responsibilities. This term is also used to refer to a firm of professional accountants in public practice.Professional services Any service requiring accountancy or related skills performed by a professional accountant including accounting, auditing, taxation, management consulting and financial management services.Publicity The communication to the public of facts about a professional accountant which are not designed for the deliberate promotion of that professional accountant. 17 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSReceiving accountant A professional accountant in public practice to whom the existing accountant or client of the existing accountant has referred audit, accounting, taxation, consulting or similar appointments, or who is consulted in order to meet the needs of the client.Related entity An entity that has any of the following relationships with the client: (a) An entity that has direct or indirect control over the client provided the client is material to such entity; (b) An entity with a direct financial interest in the client provided that such entity has significant influence over the client and the interest in the client is material to such entity; (c) An entity over which the client has direct or indirect control; (d) An entity in which the client, or an entity related to the client under (c) above, has a direct financial interest that gives it significant influence over such entity and the interest is material to the client and its related entity in (c); and (e) An entity which is under common control with the client (hereinafter a “sister entity”) provided the sister entity and the client are both material to the entity that controls both the client and sister entity.Solicitation The approach to a potential client for the purpose of offering professional services.ETHICS 18
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSIntroduction 1. The International Federation of Accountants (IFAC) believes that due to national differences of culture, language, legal and social systems, the task of preparing detailed ethical requirements is primarily that of the member bodies in each country concerned and that they also have the responsibility to implement and enforce such requirements. 2. However, IFAC believes that the identity of the accountancy profession is characterized worldwide by its endeavor to achieve a number of common objectives and by its observance of certain fundamental principles for that purpose. 3. IFAC, therefore, recognizing the responsibilities of the accountancy profession as such, and considering its own role to be that of providing guidance, encouraging continuity of efforts, and promoting harmonization, has deemed it essential to establish an international Code of Ethics for Professional Accountants to be the basis on which the ethical requirements (code of ethics, detailed rules, guidelines, standards of conduct, etc.) for professional accountants* in each country should be founded. 4. This international Code is intended to serve as a model on which to base ETHICS national ethical guidance. It sets standards of conduct for professional accountants and states the fundamental principles that should be observed by professional accountants in order to achieve common objectives. The accountancy profession throughout the world operates in an environment with different cultures and regulatory requirements. The basic intent of the Code, however, should always be respected. It is also acknowledged that, in those instances where a national requirement is in conflict with a provision in the Code, the national requirement would prevail. For those countries that wish to adopt the Code as their own national Code, IFAC has developed wording which may be used to indicate the authority and applicability in the country concerned. The wording is contained in the IFAC Statement of Policy of Council** Preface to Ethical Requirements of (Name of Member Body). Section 8 of this Code establishes a conceptual framework for independence* requirements for assurance engagements* that is the international standard on which national standards should be based. Accordingly, no member body or firm* is allowed to apply less stringent standards than those stated in that section. However, if member bodies or firms are prohibited from complying with certain parts of Section 8 by law or regulation, they should comply with all other parts of that section.* See Definitions.** Effective May 2000, the IFAC Council was renamed the IFAC Board. 19 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS 5. Further, the Code is established on the basis that unless a limitation is specifically stated, the objectives and fundamental principles are equally valid for all professional accountants, whether they be in public practice,* industry, commerce, the public sector or education. 6. A profession is distinguished by certain characteristics including: • Mastery of a particular intellectual skill, acquired by training and education;1 • Adherence by its members to a common code of values and conduct established by its administrating body, including maintaining an outlook which is essentially objective; and • Acceptance of a duty to society as a whole (usually in return for restrictions in use of a title or in the granting of a qualification). 7. Members’ duty to their profession and to society may at times seem to conflict with their immediate self interest or their duty of loyalty to their employer. 8. Against this background it is beholden on member bodies to lay down ethical requirements for their members to ensure the highest quality of performance and to maintain public confidence in the profession.The Public Interest 9. A distinguishing mark of a profession is acceptance of its responsibility to the public. The accountancy profession’s public consists of clients, credit grantors, governments, employers, employees, investors, the business and financial community, and others who rely on the objectivity* and integrity of professional accountants to maintain the orderly functioning of commerce. This reliance imposes a public interest responsibility on the accountancy profession. The public interest is defined as the collective well- being of the community of people and institutions the professional accountant serves. 10. A professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employer. The standards of the accountancy profession are heavily determined by the public interest, for example:1 For details of the education requirements recommended and prescribed by IFAC, reference should be made to the statements developed by the Accounting Education Standards Board, including International Education Standards, International Education Guidelines and International Education Papers.* See Definitions.ETHICS 20
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS • Independent auditors help to maintain the integrity and efficiency of the financial statements presented to financial institutions in partial support for loans and to stockholders for obtaining capital; • Financial executives serve in various financial management capacities in organizations and contribute to the efficient and effective use of the organization’s resources; • Internal auditors provide assurance about a sound internal control system which enhances the reliability of the external financial information of the employer; • Tax experts help to establish confidence and efficiency in, and the fair application of, the tax system; and • Management consultants have a responsibility toward the public interest in advocating sound management decision making. 11. Professional accountants have an important role in society. Investors, creditors, employers and other sectors of the business community, as well as the government and the public at large rely on professional accountants for sound financial accounting and reporting, effective financial management and competent advice on a variety of business and taxation matters. The ETHICS attitude and behavior of professional accountants in providing such services have an impact on the economic well-being of their community and country. 12. Professional accountants can remain in this advantageous position only by continuing to provide the public with these unique services at a level which demonstrates that the public confidence is firmly founded. It is in the best interest of the worldwide accountancy profession to make known to users of the services provided by professional accountants that they are executed at the highest level of performance and in accordance with ethical requirements that strive to ensure such performance. 13. In formulating their national code of ethics, member bodies should therefore consider the public service and user expectations of the ethical standards of professional accountants and take their views into account. By doing so, any existing “expectation gap” between the standards expected and those prescribed can be addressed or explained.Objectives 14. The Code recognizes that the objectives of the accountancy profession are to work to the highest standards of professionalism, to attain the highest levels of performance and generally to meet the public interest requirement set out above. These objectives require four basic needs to be met: 21 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS • Credibility In the whole of society there is a need for credibility in information and information systems. • Professionalism There is a need for individuals who can be clearly identified by clients, employers and other interested parties as professional persons in the accountancy field. • Quality of Services There is a need for assurance that all services obtained from a professional accountant are carried out to the highest standards of performance. • Confidence Users of the services of professional accountants should be able to feel confident that there exists a framework of professional ethics which governs the provision of those services.Fundamental Principles 15. In order to achieve the objectives of the accountancy profession, professional accountants have to observe a number of prerequisites or fundamental principles. 16. The fundamental principles are: • Integrity A professional accountant should be straightforward and honest in performing professional services.* • Objectivity A professional accountant should be fair and should not allow prejudice or bias, conflict of interest or influence of others to override objectivity. • Professional Competence and Due Care A professional accountant should perform professional services with due care, competence and diligence and has a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent* See Definitions.ETHICS 22
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS professional service based on up-to-date developments in practice, legislation and techniques. • Confidentiality A professional accountant should respect the confidentiality of information acquired during the course of performing professional services and should not use or disclose any such information without proper and specific authority or unless there is a legal or professional right or duty to disclose. • Professional Behavior A professional accountant should act in a manner consistent with the good reputation of the profession and refrain from any conduct which might bring discredit to the profession. The obligation to refrain from any conduct which might bring discredit to the profession requires IFAC member bodies to consider, when developing ethical requirements, the responsibilities of a professional accountant to clients, third parties, other members of the accountancy profession, staff, employers, and the general public. ETHICS • Technical Standards A professional accountant should carry out professional services in accordance with the relevant technical and professional standards. Professional accountants have a duty to carry out with care and skill, the instructions of the client or employer insofar as they are compatible with the requirements of integrity, objectivity and, in the case of professional accountants in public practice,* independence (see Section 8 below). In addition, they should conform with the technical and professional standards promulgated by: ° IFAC (e.g., International Standards on Auditing); ° International Accounting Standards Board; ° The member’s professional body or other regulatory body; and ° Relevant legislation.The Code 17. The objectives as well as the fundamental principles are of a general nature and are not intended to be used to solve a professional accountant’s ethical problems in a specific case. However, the Code provides some guidance as to the application in practice of the objectives and the fundamental* See Definitions. 23 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS principles with regard to a number of typical situations occurring in the accountancy profession. 18. The Code set out below is divided into three parts: • Part A applies to all professional accountants unless otherwise specified. • Part B applies only to those professional accountants in public practice. • Part C applies to employed professional accountants,∗ and may also apply, in appropriate circumstances, to accountants employed in public practice.∗ See Definitions.ETHICS 24
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSPART A—APPLICABLE TO ALL PROFESSIONALACCOUNTANTSSECTION 1Integrity and Objectivity 1.1 Integrity implies not merely honesty but fair dealing and truthfulness. The principle of objectivity imposes the obligation on all professional accountants to be fair, intellectually honest and free of conflicts of interest. 1.2 Professional accountants serve in many different capacities and should demonstrate their objectivity in varying circumstances. Professional accountants in public practice undertake assurance engagements, and render tax and other management advisory services. Other professional accountants prepare financial statements as a subordinate of others, perform internal auditing services, and serve in financial management capacities in industry, commerce, the public sector and education. They also educate and train those who aspire to admission into the profession. Regardless of service or capacity, professional accountants should protect the integrity of their professional services, and maintain objectivity in their judgment. ETHICS 1.3 In selecting the situations and practices to be specifically dealt within ethics requirements relating to objectivity, adequate consideration should be given to the following factors: (a) Professional accountants are exposed to situations which involve the possibility of pressures being exerted on them. These pressures may impair their objectivity. (b) It is impracticable to define and prescribe all such situations where these possible pressures exist. Reasonableness should prevail in establishing standards for identifying relationships that are likely to, or appear to, impair a professional accountant’s objectivity. (c) Relationships should be avoided which allow prejudice, bias or influences of others to override objectivity. (d) Professional accountants have an obligation to ensure that personnel engaged on professional services adhere to the principle of objectivity. (e) Professional accountants should neither accept nor offer gifts or entertainment which might reasonably be believed to have a significant and improper influence on their professional judgment or those with whom they deal. What constitutes an excessive gift or offer of entertainment varies from country to country but professional accountants should avoid circumstances which would bring their professional standing into disrepute. 25 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 2Resolution of Ethical Conflicts 2.1 From time to time professional accountants encounter situations which give rise to conflicts of interest. Such conflicts may arise in a wide variety of ways, ranging from the relatively trivial dilemma to the extreme case of fraud and similar illegal activities. It is not possible to attempt to itemize a comprehensive check list of potential cases where conflicts of interest might occur. The professional accountant should be constantly conscious of and be alert to factors which give rise to conflicts of interest. It should be noted that an honest difference of opinion between a professional accountant and another party is not in itself an ethical issue. However, the facts and circumstances of each case need investigation by the parties concerned. 2.2 It is recognized, however, that there can be particular factors which occur when the responsibilities of a professional accountant may conflict with internal or external demands of one type or another. Hence: • There may be the danger of pressure from an overbearing supervisor, manager, director* or partner; or when there are family or personal relationships which can give rise to the possibility of pressures being exerted upon them. Indeed, relationships or interests which could adversely influence, impair or threaten a professional accountant’s integrity should be discouraged. • A professional accountant may be asked to act contrary to technical and/or professional standards. • A question of divided loyalty as between the professional accountant’s superior and the required professional standards of conduct could occur. • Conflict could arise when misleading information is published which may be to the advantage of the employer or client and which may or may not benefit the professional accountant as a result of such publication. 2.3 In applying standards of ethical conduct professional accountants may encounter problems in identifying unethical behavior or in resolving an ethical conflict. When faced with significant ethical issues, professional accountants should follow the established policies of the employing organization to seek a resolution of such conflict. If those policies do not resolve the ethical conflict, the following should be considered:* See Definitions.ETHICS 26
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (a) Review the conflict problem with the immediate superior. If the problem is not resolved with the immediate superior and the professional accountant determines to go to the next higher managerial level, the immediate superior should be notified of the decision. If it appears that the superior is involved in the conflict problem, the professional accountant should raise the issue with the next higher level of management. When the immediate superior is the Chief Executive Officer (or equivalent) the next higher reviewing level may be the Executive Committee, Board of Directors, Non- Executive Directors, Trustees, Partners’ Management Committee or Shareholders. (b) Seek counseling and advice on a confidential basis with an independent advisor or the applicable professional accountancy body to obtain an understanding of possible courses of action. (c) If the ethical conflict still exists after fully exhausting all levels of internal review, the professional accountant as a last resort may have no other recourse on significant matters (e.g., fraud) than to resign and to submit an information memorandum to an appropriate representative of that organization. ETHICS2.4 Furthermore, in some countries local laws, regulations or professional standards may require certain serious matters to be reported to an external body such as an enforcement or supervisory authority.2.5 Any professional accountant in a senior position should endeavor to ensure that policies are established within his or her employing organization to seek resolution of conflicts.2.6 Member bodies are urged to ensure that confidential counseling and advice is available to members who experience ethical conflicts. 27 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 3Professional Competence 3.1 Professional accountants should not portray themselves as having expertise or experience they do not possess. 3.2 Professional competence may be divided into two separate phases: (a) Attainment of professional competence The attainment of professional competence requires initially a high standard of general education followed by specific education, training and examination in professionally relevant subjects, and whether prescribed or not, a period of work experience. This should be the normal pattern of development for a professional accountant. (b) Maintenance of professional competence (i) The maintenance of professional competence requires a continuing awareness of developments in the accountancy profession including relevant national and international pronouncements on accounting, auditing and other relevant regulations and statutory requirements. (ii) A professional accountant should adopt a program designed to ensure quality control in the performance of professional services consistent with appropriate national and international pronouncements.ETHICS 28
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 4Confidentiality 4.1 Professional accountants have an obligation to respect the confidentiality of information about a client’s or employer’s affairs acquired in the course of professional services. The duty of confidentiality continues even after the end of the relationship between the professional accountant and the client or employer. 4.2 Confidentiality should always be observed by a professional accountant unless specific authority has been given to disclose information or there is a legal or professional duty to disclose. 4.3 Professional accountants have an obligation to ensure that staff under their control and persons from whom advice and assistance is obtained respect the principle of confidentiality. 4.4 Confidentiality is not only a matter of disclosure of information. It also requires that a professional accountant acquiring information in the course of performing professional services does neither use nor appear to use that information for personal advantage or for the advantage of a third party. ETHICS 4.5 A professional accountant has access to much confidential information about a client’s or employer’s affairs not otherwise disclosed to the public. Therefore, the professional accountant should be relied upon not to make unauthorized disclosures to other persons. This does not apply to disclosure of such information in order properly to discharge the professional accountant’s responsibility according to the profession’s standards. 4.6 It is in the interest of the public and the profession that the profession’s standards relating to confidentiality be defined and guidance given on the nature and extent of the duty of confidentiality and the circumstances in which disclosure of information acquired during the course of providing professional services shall be permitted or required. 4.7 It should be recognized, however, that confidentiality of information is part of statute or common law and therefore detailed ethical requirements in respect thereof will depend on the law of the country of each member body. 4.8 The following are examples of the points which should be considered in determining whether confidential information may be disclosed: (a) When disclosure is authorized. When authorization to disclose is given by the client or the employer the interests of all the parties including those third parties whose interests might be affected should be considered. 29 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (b) When disclosure is required by law. Examples of when a professional accountant is required by law to disclose confidential information are: (i) To produce documents or to give evidence in the course of legal proceedings; and (ii) To disclose to the appropriate public authorities infringements of the law which come to light. (c) When there is a professional duty or right to disclose: (i) To comply with technical standards and ethics requirements; such disclosure is not contrary to this section; (ii) To protect the professional interests of a professional accountant in legal proceedings; (iii) To comply with the quality (or peer) review of a member body or professional body; and (iv) To respond to an inquiry or investigation by a member body or regulatory body. 4.9 When the professional accountant has determined that confidential information can be disclosed, the following points should be considered: (a) Whether or not all the relevant facts are known and substantiated, to the extent it is practicable to do so; when the situation involves unsubstantiated fact or opinion, professional judgment should be used in determining the type of disclosure to be made, if any; (b) What type of communication is expected and the addressee; in particular, the professional accountant should be satisfied that the parties to whom the communication is addressed are appropriate recipients and have the responsibility to act on it; and (c) Whether or not the professional accountant would incur any legal liability having made a communication and the consequences thereof. In all such situations, the professional accountants should consider the need to consult legal counsel and/or the professional organization(s) concerned.ETHICS 30
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 5Tax Practice 5.1 A professional accountant rendering professional tax services is entitled to put forward the best position in favor of a client, or an employer, provided the service is rendered with professional competence, does not in any way impair integrity and objectivity, and is in the opinion of the professional accountant consistent with the law. Doubt may be resolved in favor of the client or the employer if there is reasonable support for the position. 5.2 A professional accountant should not hold out to a client or an employer the assurance that the tax return prepared and the tax advice offered are beyond challenge. Instead, the professional accountant should ensure that the client or the employer are aware of the limitations attaching to tax advice and services so that they do not misinterpret an expression of opinion as an assertion of fact. 5.3 A professional accountant who undertakes or assists in the preparation of a tax return should advise the client or the employer that the responsibility for the content of the return rests primarily with the client or employer. The professional accountant should take the necessary steps to ensure that the ETHICS tax return is properly prepared on the basis of the information received. 5.4 Tax advice or opinions of material consequence given to a client or an employer should be recorded, either in the form of a letter or in a memorandum for the files. 5.5 A professional accountant should not be associated with any return or communication in which there is reason to believe that it: (a) Contains a false or misleading statement; (b) Contains statements or information furnished recklessly or without any real knowledge of whether they are true or false; or (c) Omits or obscures information required to be submitted and such omission or obscurity would mislead the revenue authorities. 5.6 A professional accountant may prepare tax returns involving the use of estimates if such use is generally acceptable or if it is impractical under the circumstances to obtain exact data. When estimates are used, they should be presented as such in a manner so as to avoid the implication of greater accuracy than exists. The professional accountant should be satisfied that estimated amounts are reasonable under the circumstances. 5.7 In preparing a tax return, a professional accountant ordinarily may rely on information furnished by the client or employer provided that the information appears reasonable. Although the examination or review of 31 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS documents or other evidence in support of the information is not required, the professional accountant should encourage, when appropriate, such supporting data to be provided. In addition, the professional accountant: (a) Should make use of the client’s returns for prior years whenever feasible; (b) Is required to make reasonable inquiries when the information presented appears to be incorrect or incomplete; and (c) Is encouraged to make reference to the books and records of the business operations. 5.8 When a professional accountant learns of a material error or omission in a tax return of a prior year (with which the professional accountant may or may not have been associated), or of the failure to file a required tax return, the professional accountant has a responsibility to: (a) Promptly advise the client or employer of the error or omission and recommend that disclosure be made to the revenue authorities. Normally, the professional accountant is not obligated to inform the revenue authorities, nor may this be done without permission. (b) If the client or the employer does not correct the error the professional accountant: (i) Should inform the client or the employer that it is not possible to act for them in connection with that return or other related information submitted to the authorities; and (ii) Should consider whether continued association with the client or employer in any capacity is consistent with professional responsibilities. (c) If the professional accountant concludes that a professional relationship with the client or employer can be continued, all reasonable steps should be taken to ensure that the error is not repeated in subsequent tax returns. (d) Professional or statutory requirements in some countries may also make it necessary for the professional accountant to inform the revenue authorities that there is no longer any association with the return or other information involved and that acting for the client or employer has ceased. In these circumstances, the professional accountant should advise the client or employer of the position before informing the authorities and should give no further information to the authorities without the consent of the client or employer unless required to do so by law.ETHICS 32
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 6Cross Border Activities 6.1 When considering the application of ethical requirements in cross border activities a number of situations may arise. Whether a professional accountant is a member of the profession in one country only or is also a member of the profession in the country where the services are performed should not affect the manner of dealing with each situation. 6.2 A professional accountant qualifying in one country may reside in another country or may be temporarily visiting that country to perform professional services. In all circumstances, the professional accountant should carry out professional services in accordance with the relevant technical standards and ethical requirements. The particular technical standards which should be followed are not dealt within this section. In all other respects, however, the professional accountant should be guided by the ethical requirements set out below. 6.3 When a professional accountant performs services in a country other than the home country and differences on specific matters exist between ethical requirements of the two countries the following provisions should be ETHICS applied: (a) When the ethical requirements of the country in which the services are being performed are less strict than the IFAC Code of Ethics, then the IFAC Code of Ethics should be applied. (b) When the ethical requirements of the country in which services are being performed are stricter than the IFAC Code of Ethics, then the ethical requirements in the country where services are being performed should be applied. (c) When the ethical requirements of the home country are mandatory for services performed outside that country and are stricter than set out in (a) and (b) above, then the ethical requirements of the home country should be applied. (In the case of cross border advertising and solicitation see also Section 14 paragraph 14.4 and 14.5 below.) 33 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 7Publicity* 7.1 In the marketing and promotion of themselves and their work, professional accountants should: (a) Not use means which brings the profession into disrepute; (b) Not make exaggerated claims for the services they are able to offer, the qualifications they possess, or experience they have gained; and (c) Not denigrate the work of other accountants.* See Definitions.ETHICS 34
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSPART B—APPLICABLE TO PROFESSIONALACCOUNTANTS IN PUBLIC PRACTICESECTION 8Independence 8.1 It is in the public interest and, therefore, required by this Code of Ethics, that members of assurance teams,* firms and, when applicable, network firms* be independent of assurance clients.* 8.2 Assurance engagements are intended to enhance the credibility of information about a subject matter by evaluating whether the subject matter conforms in all material respects with suitable criteria. The International Standard on Assurance Engagements issued by the International Auditing and Assurance Standards Board describes the objectives and elements of assurance engagements to provide either a high or a moderate level of assurance. The International Auditing and Assurance Standards Board has also issued specific standards for certain assurance engagements. For example, International Standards on Auditing provide specific standards for audit (high level assurance) and review (moderate level assurance) of ETHICS financial statements. Paragraphs 8.3 through 8.6 are taken from the International Standard on Assurance Engagements and describe the nature of an assurance engagement. These paragraphs are presented here only to describe the nature of an assurance engagement. To obtain a full understanding of the objectives and elements of an assurance engagement it is necessary to refer to the full text contained in the International Standard on Assurance Engagements. 8.3 Whether a particular engagement is an assurance engagement will depend upon whether it exhibits all the following elements: (a) A three party relationship involving: (i) A professional accountant; (ii) A responsible party; and (iii) An intended user; (b) A subject matter; (c) Suitable criteria; (d) An engagement process; and (e) A conclusion.* See Definitions. 35 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS The responsible party and the intended user will often be from separate organizations but need not be. A responsible party and an intended user may both be within the same organization. For example, a governing body may seek assurance about information provided by a component of that organization. The relationship between the responsible party and the intended user needs to be viewed within the context of a specific engagement. 8.4 There is a broad range of engagements to provide a high or moderate level of assurance. Such engagements may include: • Engagements to report on a broad range of subject matters covering financial and non-financial information; • Attest and direct reporting engagements; • Engagements to report internally and externally; and • Engagements in the private and public sector. 8.5 The subject matter of an assurance engagement may take many forms, such as the following: • Data (for example, historical or prospective financial information, statistical information, performance indicators). • Systems and processes (for example, internal controls). • Behavior (for example, corporate governance, compliance with regulation, human resource practices). 8.6 Not all engagements performed by professional accountants are assurance engagements. Other engagements frequently performed by professional accountants that are not assurance engagements include: • Agreed-upon procedures; • Compilation of financial or other information; • Preparation of tax returns when no conclusion is expressed, and tax consulting; • Management consulting; and • Other advisory services. 8.7 This section of the Code of Ethics (this section) provides a framework, built on principles, for identifying, evaluating and responding to threats to independence. The framework establishes principles that members of assurance teams, firms and network firms should use to identify threats to independence, evaluate the significance of those threats, and, if the threats are other than clearly insignificant, identify and apply safeguards to eliminate the threats or reduce them to an acceptable level. Judgment isETHICS 36
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS needed to determine which safeguards are to be applied. Some safeguards may eliminate the threat while others may reduce the threat to an acceptable level. This section requires members of assurance teams, firms and network firms to apply the principles to the particular circumstances under consideration. The examples presented are intended to illustrate the application of the principles in this section and are not intended to be, nor should they be interpreted as, an exhaustive list of all circumstances that may create threats to independence. Consequently, it is not sufficient for a member of an assurance team, a firm or a network firm merely to comply with the examples presented, rather they should apply the principles in this section to the particular circumstances they face.A Conceptual Approach to Independence 8.8 Independence requires: (a) Independence of Mind The state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism. ETHICS (b) Independence in Appearance The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firm’s, or a member of the assurance team’s, integrity, objectivity or professional skepticism had been compromised. 8.9 The use of the word “independence” on its own may create misunderstandings. Standing alone, the word may lead observers to suppose that a person exercising professional judgment ought to be free from all economic, financial and other relationships. This is impossible, as every member of society has relationships with others. Therefore, the significance of economic, financial and other relationships should also be evaluated in the light of what a reasonable and informed third party having knowledge of all relevant information would reasonably conclude to be unacceptable. 8.10 Many different circumstances, or combination of circumstances, may be relevant and accordingly it is impossible to define every situation that creates threats to independence and specify the appropriate mitigating action that should be taken. In addition, the nature of assurance engagements may differ and consequently different threats may exist, requiring the application of different safeguards. A conceptual framework that requires firms and members of assurance teams to identify, evaluate and address threats to independence, rather than merely comply with a set of specific rules which may be arbitrary, is, therefore, in the public interest. 37 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS 8.11 This section is based on such a conceptual approach, one that takes into account threats to independence, accepted safeguards and the public interest. Under this approach, firms and members of assurance teams have an obligation to identify and evaluate circumstances and relationships that create threats to independence and to take appropriate action to eliminate these threats or to reduce them to an acceptable level by the application of safeguards. In addition to identifying and evaluating relationships between the firm, network firms, members of the assurance team and the assurance client, consideration should be given to whether relationships between individuals outside of the assurance team and the assurance client create threats to independence. 8.12 This section provides a framework of principles that members of assurance teams, firms and network firms should use to identify threats to independence, evaluate the significance of those threats, and, if the threats are other than clearly insignificant, identify and apply safeguards to eliminate the threats or reduce them to an acceptable level, such that independence of mind and independence in appearance are not compromised. 8.13 The principles in this section apply to all assurance engagements. The nature of the threats to independence and the applicable safeguards necessary to eliminate the threats or reduce them to an acceptable level differ depending on the characteristics of the individual engagement: whether the assurance engagement is an audit engagement* or another type of engagement; and in the case of an assurance engagement that is not an audit engagement, the purpose, subject matter and intended users of the report. A firm should, therefore, evaluate the relevant circumstances, the nature of the assurance engagement and the threats to independence in deciding whether it is appropriate to accept or continue an engagement, as well as the nature of the safeguards required and whether a particular individual should be a member of the assurance team. 8.14 Audit engagements provide assurance to a wide range of potential users; consequently, in addition to independence of mind, independence in appearance is of particular significance. Accordingly, for audit clients,* the members of the assurance team, the firm and network firms are required to be independent of the audit client. Similar considerations in the case of assurance engagements provided to non-audit assurance clients require the members of the assurance team and the firm to be independent of the non- audit assurance client. In the case of these engagements, consideration should be given to any threats that the firm has reason to believe may be created by network firm interests and relationships.* See Definitions.ETHICS 38
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS 8.15 In the case of an assurance report to a non-audit assurance client expressly restricted for use by identified users, the users of the report are considered to be knowledgeable as to the purpose, subject matter and limitations of the report through their participation in establishing the nature and scope of the firm’s instructions to deliver the services, including the criteria by which the subject matter are to be evaluated. This knowledge and enhanced ability of the firm to communicate about safeguards with all users of the report increase the effectiveness of safeguards to independence in appearance. These circumstances may be taken into account by the firm in evaluating the threats to independence and considering the applicable safeguards necessary to eliminate the threats or reduce them to an acceptable level. At a minimum, it will be necessary to apply the provisions of this section in evaluating the independence of members of the assurance team and their immediate and close family. * Further, if the firm had a material financial interest,* whether direct or indirect, in the assurance client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. Limited consideration of any threats created by network firm interests and relationships may be sufficient. 8.16 Accordingly: ETHICS (a) For assurance engagements provided to an audit client, the members of the assurance team, the firm and network firms are required to be independent of the client; (b) For assurance engagements provided to clients that are not audit clients, when the report is not expressly restricted for use by identified users, the members of the assurance team and the firm are required to be independent of the client; and (c) For assurance engagements provided to clients that are not audit clients, when the assurance report is expressly restricted for use by identified users, the members of the assurance team are required to be independent of the client. In addition, the firm should not have a material direct or indirect financial interest* in the client.* See Definitions. 39 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSThese independence requirements for assurance engagements are illustrated asfollows: Type of Assurance Engagement Client Non-audit – Non-audit – Audit not restricted use restricted use Audit client Assurance team, firm and network firms Non-audit Assurance team and firm Assurance team and assurance has no material financial firm client interest 8.17 The threats and safeguards identified in this section are generally discussed in the context of interests or relationships between the firm, network firms, a member of the assurance team and the assurance client. In the case of a listed audit client, the firm and any network firms are required to consider the interests and relationships that involve that client’s related entities. Ideally those entities and the interests and relationships should be identified in advance. For all other assurance clients, when the assurance team has reason to believe that a related entity* of such an assurance client is relevant to the evaluation of the firm’s independence of the client, the assurance team should consider that related entity when evaluating independence and applying appropriate safeguards. 8.18 The evaluation of threats to independence and subsequent action should be supported by evidence obtained before accepting the engagement and while it is being performed. The obligation to make such an evaluation and take action arises when a firm, a network firm or a member of the assurance team knows, or could reasonably be expected to know, of circumstances or relationships that might compromise independence. There may be occasions when the firm, a network firm or an individual inadvertently violates this section. If such an inadvertent violation occurs, it would generally not compromise independence with respect to an assurance client provided the firm has appropriate quality control policies and procedures in place to promote independence and, once discovered, the violation is corrected promptly and any necessary safeguards are applied. 8.19 Throughout this section, reference is made to significant and clearly insignificant threats in the evaluation of independence. In considering the significance of any particular matter, qualitative as well as quantitative* See Definitions.ETHICS 40
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS factors should be taken into account. A matter should be considered clearly insignificant only if it is deemed to be both trivial and inconsequential.Objective and Structure of this Section 8.20 The objective of this section is to assist firms and members of assurance teams in: (a) Identifying threats to independence; (b) Evaluating whether these threats are clearly insignificant; and (c) In cases when the threats are not clearly insignificant, identifying and applying appropriate safeguards to eliminate or reduce the threats to an acceptable level. In situations when no safeguards are available to reduce the threat to an acceptable level, the only possible actions are to eliminate the activities or interest creating the threat, or to refuse to accept or continue the assurance engagement. 8.21 This section outlines the threats to independence (paragraphs 8.28 through 8.33). It then analyzes safeguards capable of eliminating these threats or reducing them to an acceptable level (paragraphs 8.34 through 8.47). It ETHICS concludes with some examples of how this conceptual approach to independence is to be applied to specific circumstances and relationships. The examples discuss threats to independence that may be created by specific circumstances and relationships (paragraphs 8.100 onwards). Professional judgment is used to determine the appropriate safeguards to eliminate threats to independence or to reduce them to an acceptable level. In certain examples, the threats to independence are so significant the only possible actions are to eliminate the activities or interest creating the threat, or to refuse to accept or continue the assurance engagement. In other examples, the threat can be eliminated or reduced to an acceptable level by the application of safeguards. The examples are not intended to be all- inclusive. 8.22 When threats to independence that are not clearly insignificant are identified, and the firm decides to accept or continue the assurance engagement, the decision should be documented. The documentation should include a description of the threats identified and the safeguards applied to eliminate or reduce the threats to an acceptable level. 8.23 The evaluation of the significance of any threats to independence and the safeguards necessary to reduce any threats to an acceptable level, takes into account the public interest. Certain entities may be of significant public interest because, as a result of their business, their size or their corporate status they have a wide range of stakeholders. Examples of such entities might include listed companies, credit institutions, insurance companies, 41 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS and pension funds. Because of the strong public interest in the financial statements of listed entities, certain paragraphs in this section deal with additional matters that are relevant to the audit of listed entities. Consideration should be given to the application of the principles set out in this section in relation to the audit of listed entities to other audit clients that may be of significant public interest.National Perspectives 8.24 This section establishes a conceptual framework for independence requirements for assurance engagements that is the international standard on which national standards should be based. Accordingly, no member body or firm is allowed to apply less stringent standards than those stated in this section. When, however, member bodies or firms are prohibited from complying with certain parts of this section by law or regulation they should comply with all other parts of this section. 8.25 Certain examples in this section indicate how the principles are to be applied to listed entity* audit engagements. When a member body chooses not to differentiate between listed entity audit engagements and other audit engagements, the examples that relate to listed entity audit engagements should be considered to apply to all audit engagements. 8.26 When a firm conducts an assurance engagement in accordance with the International Standard on Assurance Engagements or with specific standards for assurance engagements issued by the International Auditing and Assurance Standards Board such as an audit or review of financial statements in accordance with International Standards on Auditing, the members of the assurance team and the firm should comply with this section unless they are prohibited from complying with certain parts of this section by law or regulation. In such cases, the members of the assurance team and the firm should comply with all other parts of this section. 8.27 Some countries and cultures may have set out, either by legislation or common practice, different definitions of relationships from those used in this section. For example, some national legislators or regulators may have prescribed lists of individuals who should be regarded as close family that differ from the definition contained in this section. Firms, network firms and members of assurance teams should be aware of those differences and comply with the more stringent requirements.Threats to Independence 8.28 Independence is potentially affected by self-interest, self-review, advocacy, familiarity and intimidation threats.* See Definitions.ETHICS 42
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS 8.29 “Self-Interest Threat” occurs when a firm or a member of the assurance team could benefit from a financial interest in, or other self-interest conflict with, an assurance client. Examples of circumstances that may create this threat include, but are not limited to: • A direct financial interest or material indirect financial interest in an assurance client; • A loan or guarantee to or from an assurance client or any of its directors or officers;* • Undue dependence on total fees from an assurance client; • Concern about the possibility of losing the engagement; • Having a close business relationship with an assurance client; • Potential employment with an assurance client; and • Contingent fees relating to assurance engagements. 8.30 “Self-Review Threat” occurs when (1) any product or judgment of a previous assurance engagement or non-assurance engagement needs to be ETHICS re-evaluated in reaching conclusions on the assurance engagement or (2) when a member of the assurance team was previously a director or officer of the assurance client, or was an employee in a position to exert direct and significant influence over the subject matter of the assurance engagement. Examples of circumstances that may create this threat include, but are not limited to: • A member of the assurance team being, or having recently been, a director or officer of the assurance client; • A member of the assurance team being, or having recently been, an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement; • Performing services for an assurance client that directly affect the subject matter of the assurance engagement; and • Preparation of original data used to generate financial statements or preparation of other records that are the subject matter of the assurance engagement.* See Definitions. 43 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS 8.31 “Advocacy Threat” occurs when a firm, or a member of the assurance team, promotes, or may be perceived to promote, an assurance client’s position or opinion to the point that objectivity may, or may be perceived to be, compromised. Such may be the case if a firm or a member of the assurance team were to subordinate their judgment to that of the client. Examples of circumstances that may create this threat include, but are not limited to: • Dealing in, or being a promoter of, shares or other securities in an assurance client; and • Acting as an advocate on behalf of an assurance client in litigation or in resolving disputes with third parties. 8.32 “Familiarity Threat” occurs when, by virtue of a close relationship with an assurance client, its directors, officers or employees, a firm or a member of the assurance team becomes too sympathetic to the client’s interests. Examples of circumstances that may create this threat include, but are not limited to: • A member of the assurance team having an immediate family* member or close family member who is a director or officer of the assurance client; • A member of the assurance team having an immediate family member or close family member who, as an employee of the assurance client, is in a position to exert direct and significant influence over the subject matter of the assurance engagement; • A former partner of the firm being a director, officer of the assurance client or an employee in a position to exert direct and significant influence over the subject matter of the assurance engagement; • Long association of a senior member of the assurance team with the assurance client; and • Acceptance of gifts or hospitality, unless the value is clearly insignificant, from the assurance client, its directors, officers or employees. 8.33 “Intimidation Threat” occurs when a member of the assurance team may be deterred from acting objectively and exercising professional skepticism by threats, actual or perceived, from the directors, officers or employees of an assurance client.* See Definitions.ETHICS 44
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS Examples of circumstances that may create this threat include, but are not limited to: • Threat of replacement over a disagreement with the application of an accounting principle; and • Pressure to reduce inappropriately the extent of work performed in order to reduce fees.Safeguards 8.34 The firm and members of the assurance team have a responsibility to remain independent by taking into account the context in which they practice, the threats to independence and the safeguards available to eliminate the threats or reduce them to an acceptable level. 8.35 When threats are identified, other than those that are clearly insignificant, appropriate safeguards should be identified and applied to eliminate the threats or reduce them to an acceptable level. This decision should be documented. The nature of the safeguards to be applied will vary depending upon the circumstances. Consideration should always be given to what a reasonable and informed third party having knowledge of all relevant information, including safeguards applied, would reasonably conclude to be ETHICS unacceptable. The consideration will be affected by matters such as the significance of the threat, the nature of the assurance engagement, the intended users of the assurance report and the structure of the firm. 8.36 Safeguards fall into three broad categories: (a) Safeguards created by the profession, legislation or regulation; (b) Safeguards within the assurance client; and (c) Safeguards within the firm’s own systems and procedures. The firm and the members of the assurance team should select appropriate safeguards to eliminate or reduce threats to independence, other than those that are clearly insignificant, to an acceptable level. 8.37 Safeguards created by the profession, legislation or regulation, include: • Educational, training and experience requirements for entry into the profession; • Continuing education requirements; • Professional standards and monitoring and disciplinary processes; • External review of a firm’s quality control system; and • Legislation governing the independence requirements of the firm. 45 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS 8.38 Safeguards within the assurance client, include: • When the assurance client’s management appoints the firm, persons other than management ratify or approve the appointment; • The assurance client has competent employees to make managerial decisions; • Policies and procedures that emphasize the assurance client’s commitment to fair financial reporting; • Internal procedures that ensure objective choices in commissioning non-assurance engagements; and • A corporate governance structure, such as an audit committee, that provides appropriate oversight and communications regarding a firm’s services. 8.39 Audit committees can have an important corporate governance role when they are independent of client management and can assist the Board of Directors in satisfying themselves that a firm is independent in carrying out its audit role. There should be regular communications between the firm and the audit committee (or other governance body if there is no audit committee) of listed entities regarding relationships and other matters that might, in the firm’s opinion, reasonably be thought to bear on independence. 8.40 Firms should establish policies and procedures relating to independence communications with audit committees, or others charged with governance. In the case of the audit of listed entities, the firm should communicate orally and in writing at least annually, all relationships and other matters between the firm, network firms and the audit client that in the firm’s professional judgment may reasonably be thought to bear on independence. Matters to be communicated will vary in each circumstance and should be decided by the firm, but should generally address the relevant matters set out in this section. 8.41 Safeguards within the firm’s own systems and procedures may include firm- wide safeguards such as: • Firm leadership that stresses the importance of independence and the expectation that members of assurance teams will act in the public interest; • Policies and procedures to implement and monitor quality control of assurance engagements; • Documented independence policies regarding the identification of threats to independence, the evaluation of the significance of these threats and the identification and application of safeguards to eliminateETHICS 46
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS or reduce the threats, other than those that are clearly insignificant, to an acceptable level; • Internal policies and procedures to monitor compliance with firm policies and procedures as they relate to independence; • Policies and procedures that will enable the identification of interests or relationships between the firm or members of the assurance team and assurance clients; • Policies and procedures to monitor and, if necessary, manage the reliance on revenue received from a single assurance client; • Using different partners and teams with separate reporting lines for the provision of non-assurance services to an assurance client; • Policies and procedures to prohibit individuals who are not members of the assurance team from influencing the outcome of the assurance engagement; • Timely communication of a firm’s policies and procedures, and any changes thereto, to all partners and professional staff, including appropriate training and education thereon; ETHICS • Designating a member of senior management as responsible for overseeing the adequate functioning of the safeguarding system; • Means of advising partners and professional staff of those assurance clients and related entities from which they must be independent; • A disciplinary mechanism to promote compliance with policies and procedures; and • Policies and procedures to empower staff to communicate to senior levels within the firm any issue of independence and objectivity that concerns them; this includes informing staff of the procedures open to them.8.42 Safeguards within the firm’s own systems and procedures may include engagement specific safeguards such as: • Involving an additional professional accountant to review the work done or otherwise advise as necessary. This individual could be someone from outside the firm or network firm, or someone within the firm or network firm who was not otherwise associated with the assurance team; • Consulting a third party, such as a committee of independent directors, a professional regulatory body or another professional accountant; • Rotation of senior personnel; 47 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS • Discussing independence issues with the audit committee or others charged with governance; • Disclosing to the audit committee, or others charged with governance, the nature of services provided and extent of fees charged; • Policies and procedures to ensure members of the assurance team do not make, or assume responsibility for, management decisions for the assurance client; • Involving another firm to perform or re-perform part of the assurance engagement; • Involving another firm to re-perform the non-assurance service to the extent necessary to enable it to take responsibility for that service; and • Removing an individual from the assurance team, when that individual’s financial interests or relationships create a threat to independence. 8.43 When the safeguards available, such as those described above, are insufficient to eliminate the threats to independence or to reduce them to an acceptable level, or when a firm chooses not to eliminate the activities or interests creating the threat, the only course of action available will be the refusal to perform, or withdrawal from, the assurance engagement.Engagement Period 8.44 The members of the assurance team and the firm should be independent of the assurance client during the period of the assurance engagement. The period of the engagement starts when the assurance team begins to perform assurance services and ends when the assurance report is issued, except when the assurance engagement is of a recurring nature. If the assurance engagement is expected to recur, the period of the assurance engagement ends with the notification by either party that the professional relationship has terminated or the issuance of the final assurance report, whichever is later. 8.45 In the case of an audit engagement, the engagement period includes the period covered by the financial statements reported on by the firm. When an entity becomes an audit client during or after the period covered by the financial statements that the firm will report on, the firm should consider whether any threats to independence may be created by: • Financial or business relationships with the audit client during or after the period covered by the financial statements, but prior to the acceptance of the audit engagement; or • Previous services provided to the audit client.ETHICS 48
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS Similarly, in the case of an assurance engagement that is not an audit engagement, the firm should consider whether any financial or business relationships or previous services may create threats to independence. 8.46 If non-assurance services were provided to the audit client during or after the period covered by the financial statements but before the commencement of professional services in connection with the audit and those services would be prohibited during the period of the audit engagement, consideration should be given to the threats to independence, if any, arising from those services. If the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include: • Discussing independence issues related to the provision of the non- assurance services with those charged with governance of the client, such as the audit committee; • Obtaining the audit client’s acknowledgement of responsibility for the results of the non-assurance services; • Precluding personnel who provided the non-assurance services from participating in the audit engagement; and ETHICS • Engaging another firm to review the results of the non-assurance services or having another firm re-perform the non-assurance services to the extent necessary to enable it to take responsibility for those services. 8.47 Non-assurance services provided to a non-listed audit client will not impair the firm’s independence when the client becomes a listed entity provided: (a) The previous non-assurance services were permissible under this section for non-listed audit clients; (b) The services will be terminated within a reasonable period of time of the client becoming a listed entity, if they are impermissible under this section for listed audit clients; and (c) The firm has implemented appropriate safeguards to eliminate any threats to independence arising from the previous services or reduce them to an acceptable level.Effective Date 8.48 This section is applicable to assurance engagements when the assurance report is dated on or after December 31, 2004. Earlier application is encouraged. 49 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSApplication of Principles to Specific SituationsSubject Index ParagraphIntroduction .................................................................................................... 8.100 Financial Interests ................................................................................... 8.102 Provisions Applicable to All Assurance Clients ..................................... 8.104 Provisions Applicable to Audit Clients ................................................... 8.111 Provisions Applicable to Non-Audit Assurance Clients ......................... 8.120Loans and Guarantees .................................................................................... 8.124Close Business Relationships with Assurance Clients ................................... 8.130Family and Personal Relationships ................................................................ 8.133Employment with Assurance Clients ............................................................. 8.140Recent Service with Assurance Clients .......................................................... 8.143Serving as an Officer or Director on the Board of Assurance Clients ........... 8.146Long Association of Senior Personnel with Assurance Clients General Provisions .................................................................................. 8.150 Audit Clients that are Listed Entities ...................................................... 8.151Provision of Non-Assurance Services to Assurance Clients .......................... 8.155 Preparing Accounting Records and Financial Statements ...................... 8.163 General Provisions ........................................................................... 8.166 Audit Clients that are Not Listed Entities ........................................ 8.167 Audit Clients that are Listed Entities ............................................... 8.168 Emergency Situations ...................................................................... 8.170 Valuation Services .................................................................................. 8.171 Provision of Taxation Services to Audit Clients ..................................... 8.177 Provision of Internal Audit Services to Audit Clients ............................ 8.178 Provision of IT Systems Services to Audit Clients ................................. 8.184 Temporary Staff Assignments to Audit Clients ...................................... 8.189 Provision of Litigation Support Services to Audit Clients ...................... 8.190 Provision of Legal Services to Audit Clients .......................................... 8.193 Recruiting Senior Management .............................................................. 8.200ETHICS 50
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS Corporate Finance and Similar Activities ............................................... 8.201Fees and Pricing Fees—Relative Size ................................................................................ 8.203 Fees—Overdue ....................................................................................... 8.205 Pricing .................................................................................................... 8.206 Contingent Fees ...................................................................................... 8.207Gifts and Hospitality ...................................................................................... 8.210Actual or Threatened Litigation ..................................................................... 8.211 ETHICS 51 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSIntroduction 8.100 The following examples describe specific circumstances and relationships that may create threats to independence. The examples describe the potential threats created and the safeguards that may be appropriate to eliminate the threats or reduce them to an acceptable level in each circumstance. The examples are not all-inclusive. In practice, the firm, network firms and the members of the assurance team will be required to assess the implications of similar, but different, circumstances and relationships and to determine whether safeguards, including the safeguards in paragraphs 8.37 through 8.42 can be applied to satisfactorily address the threats to independence. Paragraphs 8.1 through 8.48 of this section provide conceptual guidance to assist in this process. 8.101 Some of the examples deal with audit clients while others deal with assurance clients that are not audit clients. The examples illustrate how safeguards should be applied to fulfill the requirement for the members of the assurance team, the firm and network firms to be independent of an audit client, and for the members of the assurance team and the firm to be independent of an assurance client that is not an audit client. The examples do not include assurance reports to a non-audit assurance client expressly restricted for use by identified users. As stated in paragraph 8.15 for such engagements, members of the assurance team and their immediate and close family are required to be independent of the assurance client. Further, the firm should not have a material financial interest, direct or indirect, in the assurance client.Financial Interests 8.102 A financial interest in an assurance client may create a self-interest threat. In evaluating the significance of the threat, and the appropriate safeguards to be applied to eliminate the threat or reduce it to an acceptable level, it is necessary to examine the nature of the financial interest. This includes an evaluation of the role of the person holding the financial interest, the materiality of the financial interest and the type of financial interest (direct or indirect). 8.103 When evaluating the type of financial interest, consideration should be given to the fact that financial interests range from those where the individual has no control over the investment vehicle or the financial interest held (e.g., a mutual fund, unit trust or similar intermediary vehicle) to those where the individual has control over the financial interest (e.g., as a trustee) or is able to influence investment decisions. In evaluating the significance of any threat to independence, it is important to consider the degree of control or influence that can be exercised over the intermediary, the financial interest held, or its investment strategy. When control exists, the financial interest should be considered direct. Conversely, when theETHICS 52
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS holder of the financial interest has no ability to exercise such control the financial interest should be considered indirect.Provisions Applicable to All Assurance Clients 8.104 If a member of the assurance team, or their immediate family member, has a direct financial interest, or a material indirect financial interest, in the assurance client, the self-interest threat created would be so significant the only safeguards available to eliminate the threat or reduce it to an acceptable level would be to: (a) Dispose of the direct financial interest prior to the individual becoming a member of the assurance team; (b) Dispose of the indirect financial interest in total or dispose of a sufficient amount of it so that the remaining interest is no longer material prior to the individual becoming a member of the assurance team; or (c) Remove the member of the assurance team from the assurance engagement. 8.105 If a member of the assurance team, or their immediate family member ETHICS receives, by way of, for example, an inheritance, gift or, as a result of a merger, a direct financial interest or a material indirect financial interest in the assurance client, a self-interest threat would be created. The following safeguards should be applied to eliminate the threat or reduce it to an acceptable level: (a) Disposing of the financial interest at the earliest practical date; or (b) Removing the member of the assurance team from the assurance engagement. During the period prior to disposal of the financial interest or the removal of the individual from the assurance team, consideration should be given to whether additional safeguards are necessary to reduce the threat to an acceptable level. Such safeguards might include: • Discussing the matter with those charged with governance, such as the audit committee; or • Involving an additional professional accountant to review the work done, or otherwise advise as necessary. 8.106 When a member of the assurance team knows that his or her close family member has a direct financial interest or a material indirect financial interest in the assurance client, a self-interest threat may be created. In evaluating the significance of any threat, consideration should be given to the nature of the relationship between the member of the assurance team and the close 53 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS family member and the materiality of the financial interest. Once the significance of the threat has been evaluated, safeguards should be considered and applied as necessary. Such safeguards might include: • The close family member disposing of all or a sufficient portion of the financial interest at the earliest practical date; • Discussing the matter with those charged with governance, such as the audit committee; • Involving an additional professional accountant who did not take part in the assurance engagement to review the work done by the member of the assurance team with the close family relationship or otherwise advise as necessary; or • Removing the individual from the assurance engagement. 8.107 When a firm or a member of the assurance team holds a direct financial interest or a material indirect financial interest in the assurance client as a trustee, a self-interest threat may be created by the possible influence of the trust over the assurance client. Accordingly, such an interest should only be held when: (a) The member of the assurance team, an immediate family member of the member of the assurance team, and the firm are not beneficiaries of the trust; (b) The interest held by the trust in the assurance client is not material to the trust; (c) The trust is not able to exercise significant influence over the assurance client; and (d) The member of the assurance team or the firm does not have significant influence over any investment decision involving a financial interest in the assurance client. 8.108 Consideration should be given to whether a self-interest threat may be created by the financial interests of individuals outside of the assurance team and their immediate and close family members. Such individuals would include: • Partners, and their immediate family members, who are not members of the assurance team; • Partners and managerial employees who provide non-assurance services to the assurance client; and • Individuals who have a close personal relationship with a member of the assurance team.ETHICS 54
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS Whether the interests held by such individuals may create a self-interest threat will depend upon factors such as: • The firm’s organizational, operating and reporting structure; and • The nature of the relationship between the individual and the member of the assurance team. The significance of the threat should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include: • Where appropriate, policies to restrict people from holding such interests; • Discussing the matter with those charged with governance, such as the audit committee; or • Involving an additional professional accountant who did not take part in the assurance engagement to review the work done or otherwise advise as necessary.8.109 An inadvertent violation of this section as it relates to a financial interest in ETHICS an assurance client would not impair the independence of the firm, the network firm or a member of the assurance team when: (a) The firm, and the network firm, have established policies and procedures that require all professionals to report promptly to the firm any breaches resulting from the purchase, inheritance or other acquisition of a financial interest in the assurance client; (b) The firm, and the network firm, promptly notify the professional that the financial interest should be disposed of; and (c) The disposal occurs at the earliest practical date after identification of the issue, or the professional is removed from the assurance team.8.110 When an inadvertent violation of this section relating to a financial interest in an assurance client has occurred, the firm should consider whether any safeguards should be applied. Such safeguards might include: • Involving an additional professional accountant who did not take part in the assurance engagement to review the work done by the member of the assurance team; or • Excluding the individual from any substantive decision-making concerning the assurance engagement. 55 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSProvisions Applicable to Audit Clients 8.111 If a firm, or a network firm, has a direct financial interest in an audit client of the firm the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. Consequently, disposal of the financial interest would be the only action appropriate to permit the firm to perform the engagement. 8.112 If a firm, or a network firm, has a material indirect financial interest in an audit client of the firm a self-interest threat is also created. The only actions appropriate to permit the firm to perform the engagement would be for the firm, or the network firm, either to dispose of the indirect interest in total or to dispose of a sufficient amount of it so that the remaining interest is no longer material. 8.113 If a firm, or a network firm, has a material financial interest in an entity that has a controlling interest in an audit client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. The only actions appropriate to permit the firm to perform the engagement would be for the firm, or the network firm, either to dispose of the financial interest in total or to dispose of a sufficient amount of it so that the remaining interest is no longer material. 8.114 If the retirement benefit plan of a firm, or network firm, has a financial interest in an audit client a self-interest threat may be created. Accordingly, the significance of any such threat created should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate the threat or reduce it to an acceptable level. 8.115 If other partners, including partners who do not perform assurance engagements, or their immediate family, in the office* in which the lead engagement partner* practices in connection with the audit hold a direct financial interest or a material indirect financial interest in that audit client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. Accordingly, such partners or their immediate family should not hold any such financial interests in such an audit client. 8.116 The office in which the lead engagement partner practices in connection with the audit is not necessarily the office to which that partner is assigned. Accordingly, when the lead engagement partner is located in a different office from that of the other members of the assurance team, judgment should be used to determine in which office the partner practices in connection with that audit.* See Definitions.ETHICS 56
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS 8.117 If other partners and managerial employees who provide non-assurance services to the audit client, except those whose involvement is clearly insignificant, or their immediate family, hold a direct financial interest or a material indirect financial interest in the audit client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. Accordingly, such personnel or their immediate family should not hold any such financial interests in such an audit client. 8.118 A financial interest in an audit client that is held by an immediate family member of (a) a partner located in the office in which the lead engagement partner practices in connection with the audit, or (b) a partner or managerial employee who provides non-assurance services to the audit client is not considered to create an unacceptable threat provided it is received as a result of their employment rights (e.g., pension rights or share options) and, where necessary, appropriate safeguards are applied to reduce any threat to independence to an acceptable level. 8.119 A self-interest threat may be created if the firm, or the network firm, or a member of the assurance team has an interest in an entity and an audit client, or a director, officer or controlling owner thereof also has an investment in that entity. Independence is not compromised with respect to ETHICS the audit client if the respective interests of the firm, the network firm, or member of the assurance team, and the audit client, or director, officer or controlling owner thereof are both immaterial and the audit client cannot exercise significant influence over the entity. If an interest is material, to either the firm, the network firm or the audit client, and the audit client can exercise significant influence over the entity, no safeguards are available to reduce the threat to an acceptable level and the firm, or the network firm, should either dispose of the interest or decline the audit engagement. Any member of the assurance team with such a material interest should either: (a) Dispose of the interest; (b) Dispose of a sufficient amount of the interest so that the remaining interest is no longer material; or (c) Withdraw from the audit.Provisions Applicable to Non-Audit Assurance Clients 8.120 If a firm has a direct financial interest in an assurance client that is not an audit client the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. Consequently, disposal of the financial interest would be the only action appropriate to permit the firm to perform the engagement. 8.121 If a firm has a material indirect financial interest in an assurance client that is not an audit client a self-interest threat is also created. The only action 57 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS appropriate to permit the firm to perform the engagement would be for the firm to either dispose of the indirect interest in total or to dispose of a sufficient amount of it so that the remaining interest is no longer material. 8.122 If a firm has a material financial interest in an entity that has a controlling interest in an assurance client that is not an audit client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. The only action appropriate to permit the firm to perform the engagement would be for the firm either to dispose of the financial interest in total or to dispose of a sufficient amount of it so that the remaining interest is no longer material. 8.123 When a restricted use report for an assurance engagement that is not an audit engagement is issued, exceptions to the provisions in paragraphs 8.104 through 8.108 and 8.120 through 8.122 are set out in 8.15.Loans and Guarantees 8.124 A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar institution, to the firm would not create a threat to independence provided the loan is made under normal lending procedures, terms and requirements and the loan is immaterial to both the firm and the assurance client. If the loan is material to the assurance client or the firm it may be possible, through the application of safeguards, to reduce the self-interest threat created to an acceptable level. Such safeguards might include involving an additional professional accountant from outside the firm, or network firm, to review the work performed. 8.125 A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar institution, to a member of the assurance team or their immediate family would not create a threat to independence provided the loan is made under normal lending procedures, terms and requirements. Examples of such loans include home mortgages, bank overdrafts, car loans and credit card balances. 8.126 Similarly, deposits made by, or brokerage accounts of, a firm or a member of the assurance team with an assurance client that is a bank, broker or similar institution would not create a threat to independence provided the deposit or account is held under normal commercial terms. 8.127 If the firm, or a member of the assurance team, makes a loan to an assurance client, that is not a bank or similar institution, or guarantees such an assurance client’s borrowing, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level, unless the loan or guarantee is immaterial to both the firm or the member of the assurance team and the assurance client.ETHICS 58
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS 8.128 Similarly, if the firm or a member of the assurance team accepts a loan from, or has borrowing guaranteed by, an assurance client that is not a bank or similar institution, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level, unless the loan or guarantee is immaterial to both the firm or the member of the assurance team and the assurance client. 8.129 The examples in paragraphs 8.124 through 8.128 relate to loans and guarantees between the firm and an assurance client. In the case of an audit engagement, the provisions should be applied to the firm, all network firms and the audit client.Close Business Relationships with Assurance Clients 8.130 A close business relationship between a firm or a member of the assurance team and the assurance client or its management, or between the firm, a network firm and an audit client, will involve a commercial or common financial interest and may create self-interest and intimidation threats. The following are examples of such relationships: • Having a material financial interest in a joint venture with the assurance client or a controlling owner, director, officer or other individual who ETHICS performs senior managerial functions for that client. • Arrangements to combine one or more services or products of the firm with one or more services or products of the assurance client and to market the package with reference to both parties. • Distribution or marketing arrangements under which the firm acts as a distributor or marketer of the assurance client’s products or services, or the assurance client acts as the distributor or marketer of the products or services of the firm. In the case of an audit client, unless the financial interest is immaterial and the relationship is clearly insignificant to the firm, the network firm and the audit client, no safeguards could reduce the threat to an acceptable level. In the case of an assurance client that is not an audit client, unless the financial interest is immaterial and the relationship is clearly insignificant to the firm and the assurance client, no safeguards could reduce the threat to an acceptable level. Consequently, in both these circumstances the only possible courses of action are to: (a) Terminate the business relationship; (b) Reduce the magnitude of the relationship so that the financial interest is immaterial and the relationship is clearly insignificant; or (c) Refuse to perform the assurance engagement. 59 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS Unless any such financial interest is immaterial and the relationship is clearly insignificant to the member of the assurance team, the only appropriate safeguard would be to remove the individual from the assurance team. 8.131 In the case of an audit client, business relationships involving an interest held by the firm, a network firm or a member of the assurance team or their immediate family in a closely held entity when the audit client or a director or officer of the audit client, or any group thereof, also has an interest in that entity, do not create threats to independence provided: (a) The relationship is clearly insignificant to the firm, the network firm and the audit client; (b) The interest held is immaterial to the investor, or group of investors; and (c) The interest does not give the investor, or group of investors, the ability to control the closely held entity. 8.132 The purchase of goods and services from an assurance client by the firm (or from an audit client by a network firm) or a member of the assurance team would not generally create a threat to independence providing the transaction is in the normal course of business and on an arm’s length basis. However, such transactions may be of a nature or magnitude so as to create a self-interest threat. If the threat created is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include: • Eliminating or reducing the magnitude of the transaction; • Removing the individual from the assurance team; or • Discussing the issue with those charged with governance, such as the audit committee.Family and Personal Relationships 8.133 Family and personal relationships between a member of the assurance team and a director, an officer or certain employees, depending on their role, of the assurance client, may create self-interest, familiarity or intimidation threats. It is impracticable to attempt to describe in detail the significance of the threats that such relationships may create. The significance will depend upon a number of factors including the individual’s responsibilities on the assurance engagement, the closeness of the relationship and the role of the family member or other individual within the assurance client. Consequently, there is a wide spectrum of circumstances that will need to be evaluated and safeguards to be applied to reduce the threat to an acceptable level.ETHICS 60
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS8.134 When an immediate family member of a member of the assurance team is a director, an officer or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement, or was in such a position during any period covered by the engagement, the threats to independence can only be reduced to an acceptable level by removing the individual from the assurance team. The closeness of the relationship is such that no other safeguard could reduce the threat to independence to an acceptable level. If application of this safeguard is not used, the only course of action is to withdraw from the assurance engagement. For example, in the case of an audit of financial statements, if the spouse of a member of the assurance team is an employee in a position to exert direct and significant influence on the preparation of the audit client’s accounting records or financial statements, the threat to independence could only be reduced to an acceptable level by removing the individual from the assurance team.8.135 When a close family member of a member of the assurance team is a director, an officer, or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement, threats to independence may be created. The significance of the threats will depend on factors such as: ETHICS • The position the close family member holds with the client; and • The role of the professional on the assurance team. The significance of the threat should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include: • Removing the individual from the assurance team; • Where possible, structuring the responsibilities of the assurance team so that the professional does not deal with matters that are within the responsibility of the close family member; or • Policies and procedures to empower staff to communicate to senior levels within the firm any issue of independence and objectivity that concerns them.8.136 In addition, self-interest, familiarity or intimidation threats may be created when a person who is other than an immediate or close family member of a member of the assurance team has a close relationship with the member of the assurance team and is a director, an officer or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement. Therefore, members of the assurance team are responsible for identifying any such persons and for consulting in accordance with firm procedures. The evaluation of the 61 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS significance of any threat created and the safeguards appropriate to eliminate the threat or reduce it to an acceptable level will include considering matters such as the closeness of the relationship and the role of the individual within the assurance client. 8.137 Consideration should be given to whether self-interest, familiarity or intimidation threats may be created by a personal or family relationship between a partner or employee of the firm who is not a member of the assurance team and a director, an officer or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement. Therefore partners and employees of the firm are responsible for identifying any such relationships and for consulting in accordance with firm procedures. The evaluation of the significance of any threat created and the safeguards appropriate to eliminate the threat or reduce it to an acceptable level will include considering matters such as the closeness of the relationship, the interaction of the firm professional with the assurance team, the position held within the firm, and the role of the individual within the assurance client. 8.138 An inadvertent violation of this section as it relates to family and personal relationships would not impair the independence of a firm or a member of the assurance team when: (a) The firm has established policies and procedures that require all professionals to report promptly to the firm any breaches resulting from changes in the employment status of their immediate or close family members or other personal relationships that create threats to independence; (b) Either the responsibilities of the assurance team are re-structured so that the professional does not deal with matters that are within the responsibility of the person with whom he or she is related or has a personal relationship, or, if this is not possible, the firm promptly removes the professional from the assurance engagement; and (c) Additional care is given to reviewing the work of the professional. 8.139 When an inadvertent violation of this section relating to family and personal relationships has occurred, the firm should consider whether any safeguards should be applied. Such safeguards might include: • Involving an additional professional accountant who did not take part in the assurance engagement to review the work done by the member of the assurance team; or • Excluding the individual from any substantive decision-making concerning the assurance engagement.ETHICS 62
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSEmployment with Assurance Clients 8.140 A firm or a member of the assurance team’s independence may be threatened if a director, an officer or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement has been a member of the assurance team or partner of the firm. Such circumstances may create self-interest, familiarity and intimidation threats particularly when significant connections remain between the individual and his or her former firm. Similarly, a member of the assurance team’s independence may be threatened when an individual participates in the assurance engagement knowing, or having reason to believe, that he or she is to, or may, join the assurance client some time in the future. 8.141 If a member of the assurance team, partner or former partner of the firm has joined the assurance client, the significance of the self-interest, familiarity or intimidation threats created will depend upon the following factors: (a) The position the individual has taken at the assurance client. (b) The amount of any involvement the individual will have with the assurance team. ETHICS (c) The length of time that has passed since the individual was a member of the assurance team or firm. (d) The former position of the individual within the assurance team or firm. The significance of the threat should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include: • Considering the appropriateness or necessity of modifying the assurance plan for the assurance engagement; • Assigning an assurance team to the subsequent assurance engagement that is of sufficient experience in relation to the individual who has joined the assurance client; • Involving an additional professional accountant who was not a member of the assurance team to review the work done or otherwise advise as necessary; or • Quality control review of the assurance engagement. In all cases, all of the following safeguards are necessary to reduce the threat to an acceptable level: 63 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (a) The individual concerned is not entitled to any benefits or payments from the firm unless these are made in accordance with fixed pre- determined arrangements. In addition, any amount owed to the individual should not be of such significance to threaten the firm’s independence. (b) The individual does not continue to participate or appear to participate in the firm’s business or professional activities. 8.142 A self-interest threat is created when a member of the assurance team participates in the assurance engagement while knowing, or having reason to believe, that he or she is to, or may, join the assurance client some time in the future. This threat can be reduced to an acceptable level by the application of all of the following safeguards: (a) Policies and procedures to require the individual to notify the firm when entering serious employment negotiations with the assurance client. (b) Removal of the individual from the assurance engagement. In addition, consideration should be given to performing an independent review of any significant judgments made by that individual while on the engagement.Recent Service with Assurance Clients 8.143 To have a former officer, director or employee of the assurance client serve as a member of the assurance team may create self-interest, self-review and familiarity threats. This would be particularly true when a member of the assurance team has to report on, for example, subject matter he or she had prepared or elements of the financial statements he or she had valued while with the assurance client. 8.144 If, during the period covered by the assurance report, a member of the assurance team had served as an officer or director of the assurance client, or had been an employee in a position to exert direct and significant influence over the subject matter of the assurance engagement, the threat created would be so significant no safeguard could reduce the threat to an acceptable level. Consequently, such individuals should not be assigned to the assurance team. 8.145 If, prior to the period covered by the assurance report, a member of the assurance team had served as an officer or director of the assurance client, or had been an employee in a position to exert direct and significant influence over the subject matter of the assurance engagement, this may create self-interest, self-review and familiarity threats. For example, such threats would be created if a decision made or work performed by the individual in the prior period, while employed by the assurance client, is toETHICS 64
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS be evaluated in the current period as part of the current assurance engagement. The significance of the threats will depend upon factors such as: • The position the individual held with the assurance client; • The length of time that has passed since the individual left the assurance client; and • The role the individual plays on the assurance team. The significance of the threat should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include: • Involving an additional professional accountant to review the work done by the individual as part of the assurance team or otherwise advise as necessary; or • Discussing the issue with those charged with governance, such as the audit committee.Serving as an Officer or Director on the Board of Assurance Clients ETHICS 8.146 If a partner or employee of the firm serves as an officer or as a director on the board of an assurance client the self-review and self-interest threats created would be so significant no safeguard could reduce the threats to an acceptable level. In the case of an audit engagement, if a partner or employee of a network firm were to serve as an officer or as a director on the board of an audit client the threats created would be so significant no safeguard could reduce the threats to an acceptable level. Consequently, if such an individual were to accept such a position the only course of action is to refuse to perform, or to withdraw from the assurance engagement. 8.147 The position of Company Secretary has different implications in different jurisdictions. The duties may range from administrative duties such as personnel management and the maintenance of company records and registers, to duties as diverse as ensuring that the company complies with regulations or providing advice on corporate governance matters. Generally this position is seen to imply a close degree of association with the entity and may create self-review and advocacy threats. 8.148 If a partner or employee of the firm or a network firm serves as Company Secretary for an audit client the self-review and advocacy threats created would generally be so significant, no safeguard could reduce the threat to an acceptable level. When the practice is specifically permitted under local law, professional rules or practice, the duties and functions undertaken 65 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS should be limited to those of a routine and formal administrative nature such as the preparation of minutes and maintenance of statutory returns. 8.149 Routine administrative services to support a company secretarial function or advisory work in relation to company secretarial administration matters is generally not perceived to impair independence, provided client management makes all relevant decisions.Long Association of Senior Personnel with Assurance ClientsGeneral Provisions 8.150 Using the same senior personnel on an assurance engagement over a long period of time may create a familiarity threat. The significance of the threat will depend upon factors such as: • The length of time that the individual has been a member of the assurance team; • The role of the individual on the assurance team; • The structure of the firm; and • The nature of the assurance engagement. The significance of the threat should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied to reduce the threat to an acceptable level. Such safeguards might include: • Rotating the senior personnel off the assurance team; • Involving an additional professional accountant who was not a member of the assurance team to review the work done by the senior personnel or otherwise advise as necessary; or • Independent internal quality reviews.Audit Clients that are Listed Entities2 8.151 Using the same lead engagement partner on an audit over a prolonged period may create a familiarity threat. This threat is particularly relevant in the context of the audit of listed entities and safeguards should be applied in such situations to reduce such threat to an acceptable level. Accordingly for the audit of listed entities: (a) The lead engagement partner should be rotated after a pre-defined period, normally no more than seven years; and2 See also Interpretation 2003-02 on page 85.ETHICS 66
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (b) A partner rotating after a pre-defined period should not participate in the audit engagement until a further period of time, normally two years, has elapsed. 8.152 When an audit client becomes a listed entity the length of time the lead engagement partner has served the audit client in that capacity should be considered in determining when the partner should be rotated. However, the partner may continue to serve as the lead engagement partner for two additional years before rotating off the engagement. 8.153 While the lead engagement partner should be rotated after such a pre- defined period, some degree of flexibility over timing of rotation may be necessary in certain circumstances. Examples of such circumstances include: • Situations when the lead engagement partner’s continuity is especially important to the audit client, for example, when there will be major changes to the audit client’s structure that would otherwise coincide with the rotation of the lead engagement partner; and • Situations when, due to the size of the firm, rotation is not possible or does not constitute an appropriate safeguard. ETHICS In all such circumstances when the lead engagement partner is not rotated after such a pre-defined period equivalent safeguards should be applied to reduce any threats to an acceptable level. 8.154 When a firm has only a few audit partners with the necessary knowledge and experience to serve as lead engagement partner on an audit client that is a listed entity, rotation of the lead partner may not be an appropriate safeguard. In these circumstances the firm should apply other safeguards to reduce the threat to an acceptable level. Such safeguards would include involving an additional professional accountant who was not otherwise associated with the assurance team to review the work done or otherwise advise as necessary. This individual could be someone from outside the firm or someone within the firm who was not otherwise associated with the assurance team.Provision of Non-Assurance Services to Assurance Clients3 8.155 Firms have traditionally provided to their assurance clients a range of non- assurance services that are consistent with their skills and expertise. Assurance clients value the benefits that derive from having these firms, who have a good understanding of the business, bring their knowledge and skill to bear in other areas. Furthermore, the provision of such non- assurance services will often result in the assurance team obtaining3 See also Interpretation 2003-01 on page 85. 67 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS information regarding the assurance client’s business and operations that is helpful in relation to the assurance engagement. The greater the knowledge of the assurance client’s business, the better the assurance team will understand the assurance client’s procedures and controls, and the business and financial risks that it faces. The provision of non-assurance services may, however, create threats to the independence of the firm, a network firm or the members of the assurance team, particularly with respect to perceived threats to independence. Consequently, it is necessary to evaluate the significance of any threat created by the provision of such services. In some cases it may be possible to eliminate or reduce the threat created by application of safeguards. In other cases no safeguards are available to reduce the threat to an acceptable level. 8.156 The following activities would generally create self-interest or self-review threats that are so significant that only avoidance of the activity or refusal to perform the assurance engagement would reduce the threats to an acceptable level: • Authorizing, executing or consummating a transaction, or otherwise exercising authority on behalf of the assurance client, or having the authority to do so. • Determining which recommendation of the firm should be implemented. • Reporting, in a management role, to those charged with governance. 8.157 The examples set out in paragraphs 8.163 through 8.202 are addressed in the context of the provision of non-assurance services to an assurance client. The potential threats to independence will most frequently arise when a non-assurance service is provided to an audit client. The financial statements of an entity provide financial information about a broad range of transactions and events that have affected the entity. The subject matter of other assurance services, however, may be limited in nature. Threats to independence, however, may also arise when a firm provides a non- assurance service related to the subject matter of a non-audit assurance engagement. In such cases, consideration should be given to the significance of the firm’s involvement with the subject matter of the non- audit assurance engagement, whether any self-review threats are created and whether any threats to independence could be reduced to an acceptable level by application of safeguards, or whether the non-assurance engagement should be declined. When the non-assurance service is not related to the subject matter of the non-audit assurance engagement, the threats to independence will generally be clearly insignificant. 8.158 The following activities may also create self-review or self-interest threats: • Having custody of an assurance client’s assets.ETHICS 68
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS • Supervising assurance client employees in the performance of their normal recurring activities. • Preparing source documents or originating data, in electronic or other form, evidencing the occurrence of a transaction (for example, purchase orders, payroll time records, and customer orders). The significance of any threat created should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate the threat or reduce it to an acceptable level. Such safeguards might include: • Making arrangements so that personnel providing such services do not participate in the assurance engagement; • Involving an additional professional accountant to advise on the potential impact of the activities on the independence of the firm and the assurance team; or • Other relevant safeguards set out in national regulations.8.159 New developments in business, the evolution of financial markets, rapid changes in information technology, and the consequences for management ETHICS and control, make it impossible to draw up an all-inclusive list of all situations when providing non-assurance services to an assurance client might create threats to independence and of the different safeguards that might eliminate these threats or reduce them to an acceptable level. In general, however, a firm may provide services beyond the assurance engagement provided any threats to independence have been reduced to an acceptable level.8.160 The following safeguards may be particularly relevant in reducing to an acceptable level threats created by the provision of non-assurance services to assurance clients: • Policies and procedures to prohibit professional staff from making management decisions for the assurance client, or assuming responsibility for such decisions. • Discussing independence issues related to the provision of non- assurance services with those charged with governance, such as the audit committee. • Policies within the assurance client regarding the oversight responsibility for provision of non-assurance services by the firm. • Involving an additional professional accountant to advise on the potential impact of the non-assurance engagement on the independence of the member of the assurance team and the firm. 69 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS • Involving an additional professional accountant outside of the firm to provide assurance on a discrete aspect of the assurance engagement. • Obtaining the assurance client’s acknowledgement of responsibility for the results of the work performed by the firm. • Disclosing to those charged with governance, such as the audit committee, the nature and extent of fees charged. • Making arrangements so that personnel providing non-assurance services do not participate in the assurance engagement. 8.161 Before the firm accepts an engagement to provide a non-assurance service to an assurance client, consideration should be given to whether the provision of such a service would create a threat to independence. In situations when a threat created is other than clearly insignificant, the non- assurance engagement should be declined unless appropriate safeguards can be applied to eliminate the threat or reduce it to an acceptable level. 8.162 The provision of certain non-assurance services to audit clients may create threats to independence so significant that no safeguard could eliminate the threat or reduce it to an acceptable level. However, the provision of such services to a related entity, division or discrete financial statement item of such clients may be permissible when any threats to the firm’s independence have been reduced to an acceptable level by arrangements for that related entity, division or discrete financial statement item to be audited by another firm or when another firm re-performs the non-assurance service to the extent necessary to enable it to take responsibility for that service.Preparing Accounting Records and Financial Statements 8.163 Assisting an audit client in matters such as preparing accounting records or financial statements may create a self-review threat when the financial statements are subsequently audited by the firm. 8.164 It is the responsibility of client management to ensure that accounting records are kept and financial statements are prepared, although they may request the firm to provide assistance. If firm, or network firm, personnel providing such assistance make management decisions, the self-review threat created could not be reduced to an acceptable level by any safeguards. Consequently, personnel should not make such decisions. Examples of such managerial decisions include: • Determining or changing journal entries, or the classifications for accounts or transaction or other accounting records without obtaining the approval of the audit client; • Authorizing or approving transactions; andETHICS 70
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS • Preparing source documents or originating data (including decisions on valuation assumptions), or making changes to such documents or data. 8.165 The audit process involves extensive dialogue between the firm and management of the audit client. During this process, management requests and receives significant input regarding such matters as accounting principles and financial statement disclosure, the appropriateness of controls and the methods used in determining the stated amounts of assets and liabilities. Technical assistance of this nature and advice on accounting principles for audit clients are an appropriate means to promote the fair presentation of the financial statements. The provision of such advice does not generally threaten the firm’s independence. Similarly, the audit process may involve assisting an audit client in resolving account reconciliation problems, analyzing and accumulating information for regulatory reporting, assisting in the preparation of consolidated financial statements (including the translation of local statutory accounts to comply with group accounting policies and the transition to a different reporting framework such as International Financial Reporting Standards), drafting disclosure items, proposing adjusting journal entries and providing assistance and advice in the preparation of local statutory accounts of subsidiary entities. These services are considered to be a normal part of the audit process and do not, ETHICS under normal circumstances, threaten independence.General Provisions 8.166 The examples in paragraphs 8.167 through 8.170 indicate that self-review threats may be created if the firm is involved in the preparation of accounting records or financial statements and those financial statements are subsequently the subject matter of an audit engagement of the firm. This notion may be equally applicable in situations when the subject matter of the assurance engagement is not financial statements. For example, a self- review threat would be created if the firm developed and prepared prospective financial information and subsequently provided assurance on this prospective financial information. Consequently, the firm should evaluate the significance of any self-review threat created by the provision of such services. If the self-review threat is other than clearly insignificant safeguards should be considered and applied as necessary to reduce the threat to an acceptable level.Audit Clients that are Not Listed Entities 8.167 The firm, or a network firm, may provide an audit client that is not a listed entity with accounting and bookkeeping services, including payroll services, of a routine or mechanical nature, provided any self-review threat created is reduced to an acceptable level. Examples of such services include: 71 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS • Recording transactions for which the audit client has determined or approved the appropriate account classification; • Posting coded transactions to the audit client’s general ledger; • Preparing financial statements based on information in the trial balance; and • Posting audit client approved entries to the trial balance. The significance of any threat created should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include: • Making arrangements so such services are not performed by a member of the assurance team; • Implementing policies and procedures to prohibit the individual providing such services from making any managerial decisions on behalf of the audit client; • Requiring the source data for the accounting entries to be originated by the audit client; • Requiring the underlying assumptions to be originated and approved by the audit client; or • Obtaining audit client approval for any proposed journal entries or other changes affecting the financial statements.Audit Clients that are Listed Entities 8.168 The provision of accounting and bookkeeping services, including payroll services and the preparation of financial statements or financial information which forms the basis of the financial statements on which the audit report is provided, on behalf of an audit client that is a listed entity, may impair the independence of the firm or network firm, or at least give the appearance of impairing independence. Accordingly, no safeguard other than the prohibition of such services, except in emergency situations and when the services fall within the statutory audit mandate, could reduce the threat created to an acceptable level. Therefore, a firm or a network firm should not, with the limited exceptions below, provide such services to listed entities which are audit clients. 8.169 The provision of accounting and bookkeeping services of a routine or mechanical nature to divisions or subsidiaries of listed audit clients would not be seen as impairing independence with respect to the audit client provided that the following conditions are met: (a) The services do not involve the exercise of judgment.ETHICS 72
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (b) The divisions or subsidiaries for which the service is provided are collectively immaterial to the audit client, or the services provided are collectively immaterial to the division or subsidiary. (c) The fees to the firm, or network firm, from such services are collectively clearly insignificant. If such services are provided, all of the following safeguards should be applied: (a) The firm, or network firm, should not assume any managerial role nor make any managerial decisions. (b) The listed audit client should accept responsibility for the results of the work. (c) Personnel providing the services should not participate in the audit.Emergency Situations 8.170 The provision of accounting and bookkeeping services to audit clients in emergency or other unusual situations, when it is impractical for the audit client to make other arrangements, would not be considered to pose an unacceptable threat to independence provided: ETHICS (a) The firm, or network firm, does not assume any managerial role or make any managerial decisions; (b) The audit client accepts responsibility for the results of the work; and (c) Personnel providing the services are not members of the assurance team.Valuation Services 8.171 A valuation comprises the making of assumptions with regard to future developments, the application of certain methodologies and techniques, and the combination of both in order to compute a certain value, or range of values, for an asset, a liability or for a business as a whole. 8.172 A self-review threat may be created when a firm or network firms performs a valuation for an audit client that is to be incorporated into the client’s financial statements. 8.173 If the valuation service involves the valuation of matters material to the financial statements and the valuation involves a significant degree of subjectivity, the self-review threat created could not be reduced to an acceptable level by the application of any safeguard. Accordingly, such valuation services should not be provided or, alternatively, the only course of action would be to withdraw from the audit engagement. 73 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS 8.174 Performing valuation services that are neither separately, nor in the aggregate, material to the financial statements, or that do not involve a significant degree of subjectivity, may create a self-review threat that could be reduced to an acceptable level by the application of safeguards. Such safeguards might include: • Involving an additional professional accountant who was not a member of the assurance team to review the work done or otherwise advise as necessary; • Confirming with the audit client their understanding of the underlying assumptions of the valuation and the methodology to be used and obtaining approval for their use; • Obtaining the audit client’s acknowledgement of responsibility for the results of the work performed by the firm; and • Making arrangements so that personnel providing such services do not participate in the audit engagement. In determining whether the above safeguards would be effective, consideration should be given to the following matters: (a) The extent of the audit client’s knowledge, experience and ability to evaluate the issues concerned, and the extent of their involvement in determining and approving significant matters of judgment. (b) The degree to which established methodologies and professional guidelines are applied when performing a particular valuation service. (c) For valuations involving standard or established methodologies, the degree of subjectivity inherent in the item concerned. (d) The reliability and extent of the underlying data. (e) The degree of dependence on future events of a nature which could create significant volatility inherent in the amounts involved. (f) The extent and clarity of the disclosures in the financial statements. 8.175 When a firm, or a network firm, performs a valuation service for an audit client for the purposes of making a filing or return to a tax authority, computing an amount of tax due by the assurance client, or for the purpose of tax planning, this would not create a significant threat to independence because such valuations are generally subject to external review, for example by a tax authority. 8.176 When the firm performs a valuation that forms part of the subject matter of an assurance engagement that is not an audit engagement, the firm should consider any self-review threats. If the threat is other than clearlyETHICS 74
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS insignificant, safeguards should be considered and applied as necessary to eliminate the threat or reduce it to an acceptable level.Provision of Taxation Services to Audit Clients 8.177 In many jurisdictions, the firm may be asked to provide taxation services to an audit client. Taxation services comprise a broad range of services, including compliance, planning, provision of formal taxation opinions and assistance in the resolution of tax disputes. Such assignments are generally not seen to create threats to independence.Provision of Internal Audit Services to Audit Clients 8.178 A self-review threat may be created when a firm, or network firm, provides internal audit services to an audit client. Internal audit services may comprise an extension of the firm’s audit service beyond requirements of generally accepted auditing standards, assistance in the performance of a client’s internal audit activities or outsourcing of the activities. In evaluating any threats to independence, the nature of the service will need to be considered. For this purpose, internal audit services do not include operational internal audit services unrelated to the internal accounting controls, financial systems or financial statements. ETHICS 8.179 Services involving an extension of the procedures required to conduct an audit in accordance with International Standards on Auditing would not be considered to impair independence with respect to an audit client provided that the firm’s or network firm’s personnel do not act or appear to act in a capacity equivalent to a member of audit client management. 8.180 When the firm, or a network firm, provides assistance in the performance of a client’s internal audit activities or undertakes the outsourcing of some of the activities, any self-review threat created may be reduced to an acceptable level by ensuring that there is a clear separation between the management and control of the internal audit by audit client management and the internal audit activities themselves. 8.181 Performing a significant portion of the audit client’s internal audit activities may create a self-review threat and a firm, or network firm, should consider the threats and proceed with caution before taking on such activities. Appropriate safeguards should be put in place and the firm, or network firm, should, in particular, ensure that the audit client acknowledges its responsibilities for establishing, maintaining and monitoring the system of internal controls. 8.182 Safeguards that should be applied in all circumstances to reduce any threats created to an acceptable level include ensuring that: 75 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (a) The audit client is responsible for internal audit activities and acknowledges its responsibility for establishing, maintaining and monitoring the system of internal controls; (b) The audit client designates a competent employee, preferably within senior management, to be responsible for internal audit activities; (c) The audit client, the audit committee or supervisory body approves the scope, risk and frequency of internal audit work; (d) The audit client is responsible for evaluating and determining which recommendations of the firm should be implemented; (e) The audit client evaluates the adequacy of the internal audit procedures performed and the findings resulting from the performance of those procedures by, among other things, obtaining and acting on reports from the firm; and (f) The findings and recommendations resulting from the internal audit activities are reported appropriately to the audit committee or supervisory body. 8.183 Consideration should also be given to whether such non-assurance services should be provided only by personnel not involved in the audit engagement and with different reporting lines within the firm.Provision of IT Systems Services to Audit Clients 8.184 The provision of services by a firm or network firm to an audit client that involve the design and implementation of financial information technology systems that are used to generate information forming part of a client’s financial statements may create a self-review threat. 8.185 The self-review threat is likely to be too significant to allow the provision of such services to an audit client unless appropriate safeguards are put in place ensuring that: (a) The audit client acknowledges its responsibility for establishing and monitoring a system of internal controls; (b) The audit client designates a competent employee, preferably within senior management, with the responsibility to make all management decisions with respect to the design and implementation of the hardware or software system; (c) The audit client makes all management decisions with respect to the design and implementation process; (d) The audit client evaluates the adequacy and results of the design and implementation of the system; andETHICS 76
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (e) The audit client is responsible for the operation of the system (hardware or software) and the data used or generated by the system. 8.186 Consideration should also be given to whether such non-assurance services should be provided only by personnel not involved in the audit engagement and with different reporting lines within the firm. 8.187 The provision of services by a firm, or network firm, to an audit client which involve either the design or the implementation of financial information technology systems that are used to generate information forming part of a client’s financial statements may also create a self-review threat. The significance of the threat, if any, should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate the threat or reduce it to an acceptable level. 8.188 The provision of services in connection with the assessment, design and implementation of internal accounting controls and risk management controls are not considered to create a threat to independence provided that firm or network firm personnel do not perform management functions.Temporary Staff Assignments to Audit Clients ETHICS 8.189 The lending of staff by a firm, or network firm, to an audit client may create a self-review threat when the individual is in a position to influence the preparation of a client’s accounts or financial statements. In practice, such assistance may be given (particularly in emergency situations) but only on the understanding that the firm’s or network firm’s personnel will not be involved in: (a) Making management decisions; (b) Approving or signing agreements or other similar documents; or (c) Exercising discretionary authority to commit the client. Each situation should be carefully analyzed to identify whether any threats are created and whether appropriate safeguards should be implemented. Safeguards that should be applied in all circumstances to reduce any threats to an acceptable level include: • The staff providing the assistance should not be given audit responsibility for any function or activity that they performed or supervised during their temporary staff assignment; and • The audit client should acknowledge its responsibility for directing and supervising the activities of firm, or network firm, personnel. 77 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSProvision of Litigation Support Services to Audit Clients 8.190 Litigation support services may include such activities as acting as an expert witness, calculating estimated damages or other amounts that might become receivable or payable as the result of litigation or other legal dispute, and assistance with document management and retrieval in relation to a dispute or litigation. 8.191 A self-review threat may be created when the litigation support services provided to an audit client include the estimation of the possible outcome and thereby affects the amounts or disclosures to be reflected in the financial statements. The significance of any threat created will depend upon factors such as: • The materiality of the amounts involved; • The degree of subjectivity inherent in the matter concerned; and • The nature of the engagement. The firm, or network firm, should evaluate the significance of any threat created and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate the threat or reduce it to an acceptable level. Such safeguards might include: • Policies and procedures to prohibit individuals assisting the audit client from making managerial decisions on behalf of the client; • Using professionals who are not members of the assurance team to perform the service; or • The involvement of others, such as independent experts. 8.192 If the role undertaken by the firm or network firm involved making managerial decisions on behalf of the audit client, the threats created could not be reduced to an acceptable level by the application of any safeguard. Therefore, the firm or network firm should not perform this type of service for an audit client.Provision of Legal Services to Audit Clients 8.193 Legal services are defined as any services for which the person providing the services must either be admitted to practice before the Courts of the jurisdiction in which such services are to be provided, or have the required legal training to practice law. Legal services encompass a wide and diversified range of areas including both corporate and commercial services to clients, such as contract support, litigation, mergers and acquisition advice and support and the provision of assistance to clients’ internal legal departments. The provision of legal services by a firm, or network firm, toETHICS 78
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS an entity that is an audit client may create both self-review and advocacy threats.8.194 Threats to independence need to be considered depending on the nature of the service to be provided, whether the service provider is separate from the assurance team and the materiality of any matter in relation to the entities’ financial statements. The safeguards set out in paragraph 8.160 may be appropriate in reducing any threats to independence to an acceptable level. In circumstances when the threat to independence cannot be reduced to an acceptable level the only available action is to decline to provide such services or withdraw from the audit engagement.8.195 The provision of legal services to an audit client which involve matters that would not be expected to have a material effect on the financial statements are not considered to create an unacceptable threat to independence.8.196 There is a distinction between advocacy and advice. Legal services to support an audit client in the execution of a transaction (e.g., contract support, legal advice, legal due diligence and restructuring) may create self- review threats; however, safeguards may be available to reduce these threats to an acceptable level. Such a service would not generally impair independence, provided that: ETHICS (a) Members of the assurance team are not involved in providing the service; and (b) In relation to the advice provided, the audit client makes the ultimate decision or, in relation to the transactions, the service involves the execution of what has been decided by the audit client.8.197 Acting for an audit client in the resolution of a dispute or litigation in such circumstances when the amounts involved are material in relation to the financial statements of the audit client would create advocacy and self- review threats so significant no safeguard could reduce the threat to an acceptable level. Therefore, the firm should not perform this type of service for an audit client.8.198 When a firm is asked to act in an advocacy role for an audit client in the resolution of a dispute or litigation in circumstances when the amounts involved are not material to the financial statements of the audit client, the firm should evaluate the significance of any advocacy and self-review threats created and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate the threat or reduce it to an acceptable level. Such safeguards might include: • Policies and procedures to prohibit individuals assisting the audit client from making managerial decisions on behalf of the client; or 79 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS • Using professionals who are not members of the assurance team to perform the service. 8.199 The appointment of a partner or an employee of the firm or network firm as General Counsel for legal affairs to an audit client would create self-review and advocacy threats that are so significant no safeguards could reduce the threats to an acceptable level. The position of General Counsel is generally a senior management position with broad responsibility for the legal affairs of a company and consequently, no member of the firm or network firm should accept such an appointment for an audit client.Recruiting Senior Management 8.200 The recruitment of senior management for an assurance client, such as those in a position to affect the subject of the assurance engagement, may create current or future self-interest, familiarity and intimidation threats. The significance of the threat will depend upon factors such as: • The role of the person to be recruited; and • The nature of the assistance sought. The firm could generally provide such services as reviewing the professional qualifications of a number of applicants and provide advice on their suitability for the post. In addition, the firm could generally produce a short-list of candidates for interview, provided it has been drawn up using criteria specified by the assurance client. The significance of the threat created should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. In all cases, the firm should not make management decisions and the decision as to whom to hire should be left to the client.Corporate Finance and Similar Activities 8.201 The provision of corporate finance services, advice or assistance to an assurance client may create advocacy and self-review threats. In the case of certain corporate finance services, the independence threats created would be so significant no safeguards could be applied to reduce the threats to an acceptable level. For example, promoting, dealing in, or underwriting of an assurance client’s shares is not compatible with providing assurance services. Moreover, committing the assurance client to the terms of a transaction or consummating a transaction on behalf of the client would create a threat to independence so significant no safeguard could reduce the threat to an acceptable level. In the case of an audit client the provision of those corporate finance services referred to above by a firm or a network firm would create a threat to independence so significant no safeguard could reduce the threat to an acceptable level.ETHICS 80
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS 8.202 Other corporate finance services may create advocacy or self-review threats; however, safeguards may be available to reduce these threats to an acceptable level. Examples of such services include assisting a client in developing corporate strategies, assisting in identifying or introducing a client to possible sources of capital that meet the client specifications or criteria, and providing structuring advice and assisting a client in analyzing the accounting effects of proposed transactions. Safeguards that should be considered include: • Policies and procedures to prohibit individuals assisting the assurance client from making managerial decisions on behalf of the client; • Using professionals who are not members of the assurance team to provide the services; and • Ensuring the firm does not commit the assurance client to the terms of any transaction or consummate a transaction on behalf of the client.Fees and PricingFees—Relative Size 8.203 When the total fees generated by an assurance client represent a large ETHICS proportion of a firm’s total fees, the dependence on that client or client group and concern about the possibility of losing the client may create a self-interest threat. The significance of the threat will depend upon factors such as: • The structure of the firm; and • Whether the firm is well established or newly created. The significance of the threat should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include: • Discussing the extent and nature of fees charged with the audit committee, or others charged with governance; • Taking steps to reduce dependency on the client; • External quality control reviews; and • Consulting a third party, such as a professional regulatory body or another professional accountant. 8.204 A self-interest threat may also be created when the fees generated by the assurance client represent a large proportion of the revenue of an individual partner. The significance of the threat should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and 81 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS applied as necessary to reduce the threat to an acceptable level. Such safeguards might include: • Policies and procedures to monitor and implement quality control of assurance engagements; and • Involving an additional professional accountant who was not a member of the assurance team to review the work done or otherwise advise as necessary.Fees—Overdue 8.205 A self-interest threat may be created if fees due from an assurance client for professional services remain unpaid for a long time, especially if a significant part is not paid before the issue of the assurance report for the following year. Generally the payment of such fees should be required before the report is issued. The following safeguards may be applicable: • Discussing the level of outstanding fees with the audit committee, or others charged with governance. • Involving an additional professional accountant who did not take part in the assurance engagement to provide advice or review the work performed. The firm should also consider whether the overdue fees might be regarded as being equivalent to a loan to the client and whether, because of the significance of the overdue fees, it is appropriate for the firm to be re- appointed.Pricing 8.206 When a firm obtains an assurance engagement at a significantly lower fee level than that charged by the predecessor firm, or quoted by other firms, the self-interest threat created will not be reduced to an acceptable level unless: (a) The firm is able to demonstrate that appropriate time and qualified staff are assigned to the task; and (b) All applicable assurance standards, guidelines and quality control procedures are being complied with.Contingent Fees 8.207 Contingent fees are fees calculated on a predetermined basis relating to the outcome or result of a transaction or the result of the work performed. For the purposes of this section, fees are not regarded as being contingent if a court or other public authority has established them.ETHICS 82
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS 8.208 A contingent fee charged by a firm in respect of an assurance engagement creates self-interest and advocacy threats that cannot be reduced to an acceptable level by the application of any safeguard. Accordingly, a firm should not enter into any fee arrangement for an assurance engagement under which the amount of the fee is contingent on the result of the assurance work or on items that are the subject matter of the assurance engagement. 8.209 A contingent fee charged by a firm in respect of a non-assurance service provided to an assurance client may also create self-interest and advocacy threats. If the amount of the fee for a non-assurance engagement was agreed to, or contemplated, during an assurance engagement and was contingent on the result of that assurance engagement, the threats could not be reduced to an acceptable level by the application of any safeguard. Accordingly, the only acceptable action is not to accept such arrangements. For other types of contingent fee arrangements, the significance of the threats created will depend on factors such as: • The range of possible fee amounts; • The degree of variability; ETHICS • The basis on which the fee is to be determined; • Whether the outcome or result of the transaction is to be reviewed by an independent third party; and • The effect of the event or transaction on the assurance engagement. The significance of the threats should be evaluated and, if the threats are other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threats to an acceptable level. Such safeguards might include: • Disclosing to the audit committee, or others charged with governance, the extent and nature of fees charged; • Review or determination of the final fee by an unrelated third party; or • Quality and control policies and procedures.Gifts and Hospitality 8.210 Accepting gifts or hospitality from an assurance client may create self- interest and familiarity threats. When a firm or a member of the assurance team accepts gifts or hospitality, unless the value is clearly insignificant, the threats to independence cannot be reduced to an acceptable level by the application of any safeguard. Consequently, a firm or a member of the assurance team should not accept such gifts or hospitality. 83 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSActual or Threatened Litigation 8.211 When litigation takes place, or appears likely, between the firm or a member of the assurance team and the assurance client, a self-interest or intimidation threat may be created. The relationship between client management and the members of the assurance team must be characterized by complete candor and full disclosure regarding all aspects of a client’s business operations. The firm and the client’s management may be placed in adversarial positions by litigation, affecting management’s willingness to make complete disclosures and the firm may face a self-interest threat. The significance of the threat created will depend upon such factors as: • The materiality of the litigation; • The nature of the assurance engagement; and • Whether the litigation relates to a prior assurance engagement. Once the significance of the threat has been evaluated the following safeguards should be applied, if necessary, to reduce the threats to an acceptable level: (a) Disclosing to the audit committee, or others charged with governance, the extent and nature of the litigation; (b) If the litigation involves a member of the assurance team, removing that individual from the assurance team; or (c) Involving an additional professional accountant in the firm who was not a member of the assurance team to review the work done or otherwise advise as necessary. If such safeguards do not reduce the threat to an appropriate level, the only appropriate action is to withdraw from, or refuse to accept, the assurance engagement.ETHICS 84
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSection 8 InterpretationsThese interpretations are directed towards the application of the IFAC Code ofEthics for Professional Accountants to the topics of the specific queriesreceived. Those subject to the regulations of other authoritative bodies, such asthe US Securities and Exchange Commission, may wish to consult with themfor their positions on these matters.Interpretation 2003-01The Provision of Non-Assurance Services to Assurance ClientsThe Code of Ethics for Professional Accountants addresses the issue of theprovision of non assurance services to assurance clients in paragraphs 8.155-8.202 inclusive. The Code does not currently include any transitionalprovisions relating to the requirements set out in these paragraphs however theEthics Committee 4 has concluded that it is appropriate to allow a transitionalperiod of one year, during which existing contracts to provide non assuranceservices for assurance clients may be completed if additional safeguards areput in place to reduce any threat to independence to an insignificant level. Thistransitional period commences on December 31, 2004 (or from the date ofimplementation of the Code for members of those IFAC member bodies which ETHICShave adopted an earlier implementation date).Interpretation 2003-02Lead Engagement Partner Rotation for Audit Clients that are Listed EntitiesThe Code of Ethics for Professional Accountants addresses the issue ofengagement partner rotation for financial statement audit clients that are listedentities in paragraphs 8.151-8.154.The paragraphs state that in the financial statement audit of a listed entity theengagement partner should be rotated after serving in that capacity for a pre-defined period, normally no more than seven years. They also state that somedegree of flexibility in timing of rotation may be necessary in certaincircumstances. The Ethics Committee 5 believes that the implementation (orearly adoption) of the Code constitutes an example of a circumstance in whichsome degree of flexibility over timing of rotation may be necessary.The Code does not currently include any transitional provisions relating tothese requirements. However, the Ethics Committee 6 has concluded that it isappropriate to allow a transitional period of two years. Consequently, on4 Now referred to as the International Ethics Standards Board for Accountants.5 See footnote 4.6 See footnote 4. 85 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSimplementation or early adoption of the Code, while the length of time theengagement partner has served the financial statement audit client in thatcapacity should be considered in determining when rotation should occur, thepartner may continue to serve as the engagement partner for two additionalyears from the date of implementation (or early adoption) before rotating offthe engagement. In such circumstances, the additional requirements ofparagraph 8.153 to apply equivalent safeguards in order to reduce any threatsto an acceptable level should be followed.ETHICS 86
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 9Professional Competence and Responsibilities Regarding the Useof Non-Accountants 9.1 Professional accountants in public practice should refrain from agreeing to perform professional services which they are not competent to carry out unless competent advice and assistance is obtained so as to enable them to satisfactorily perform such services. If a professional accountant does not have the competence to perform a specific part of the professional service, technical advice may be sought from experts such as other professional accountants, lawyers, actuaries, engineers, geologists, valuers. 9.2 In such situations, although the professional accountant is relying on the technical competence of the expert, the knowledge of the ethical requirements cannot be automatically assumed. Since the ultimate responsibility for the professional service rests with the professional accountant, the professional accountant should see that the requirements of ethical behavior are followed. 9.3 When using the services of experts who are not professional accountants, the professional accountant must take steps to see that such experts are ETHICS aware of ethical requirements. Primary attention should be paid to the fundamental principles in paragraph 16 of the Introduction to this Code. These principles would extend to any assignment in which such experts would participate. 9.4 The degree of supervision and the amount of guidance that will be needed will depend upon the individuals involved and the nature of the engagement. Examples of such guidance and supervision might include: • Asking individuals to read the appropriate ethical codes; • Requiring written confirmation of understanding of the ethical requirements; and • Providing consultation when potential conflicts arise. 9.5 The professional accountant should also be alert to specific independence requirements or other risks unique to the engagement. Such situations will require special attention and guidance/supervision to see that ethical requirements are met. For example, Section 8 of this Code requires all professionals participating in the assurance engagement to be independent of the assurance client. 9.6 If at any time the professional accountant is not satisfied that proper ethical behavior can be respected or assured, the engagement should not be accepted; or, if the engagement has commenced, it should be terminated. 87 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 10Fees and Commissions 10.1 Professional accountants in public practice who undertake professional services for a client, assume the responsibility to perform such services with integrity and objectivity and in accordance with the appropriate technical standards. That responsibility is discharged by applying the professional skill and knowledge which professional accountants in public practice have acquired through training and experience. For the services rendered, the professional accountant in public practice* is entitled to remuneration.Professional Fees 10.2 Professional fees should be a fair reflection of the value of the professional services performed for the client, taking into account: (a) The skill and knowledge required for the type of professional services involved; (b) The level of training and experience of the persons necessarily engaged in performing the professional services; (c) The time necessarily occupied by each person engaged in performing the professional services; and (d) The degree of responsibility that performing those services entails. 10.3 Professional fees should normally be computed on the basis of appropriate rates per hour or per day for the time of each person engaged in performing professional services. These rates should be based on the fundamental premise that the organization and conduct of the professional accountant in public practice and the services provided to clients are well planned, controlled and managed. They should take into account the factors set out in paragraph 10.2 and are influenced by the legal, social and economic conditions of each country. It is for each professional accountant in public practice to determine the appropriate rates. 10.4 A professional accountant in public practice should not make a representation that specific professional services in current or future periods will be performed for either a stated fee, estimated fee, or fee range if it is likely at the time of the representation that such fees will be substantially increased and the prospective client is not advised of that likelihood. 10.5 When performing professional services for a client it may be necessary or expedient to charge a pre-arranged fee, in which event the professional* See Definitions.ETHICS 88
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS accountant in public practice should estimate a fee taking into account the matters referred to in paragraphs 10.2 through 10.4. 10.6 It is not improper for a professional accountant in public practice to charge a client a lower fee than has previously been charged for similar services, provided the fee has been calculated in accordance with the factors referred to in paragraphs 10.2 through 10.4. Commentary The fact that a professional accountant in public practice secures work by quoting a fee lower than another is not improper. However, professional accountants in public practice who obtain work at fees significantly lower than those charged by an existing accountant,* or quoted by others, should be aware that there is a risk of a perception that the quality of work could be impaired. Accordingly, when deciding on a fee to be quoted to a client for the performance of professional services, a professional accountant should be satisfied that, as a result of the fee quoted: • The quality of work will not be impaired and that due care will be applied to comply with all professional standards and quality control ETHICS procedures in the performance of those services, and • The client will not be misled as to the precise scope of services that a quoted fee is intended to cover and the basis on which future fees will be charged. 10.7 As stated in paragraph 8.208: An assurance engagement should not be performed for a fee that is contingent on the result of the assurance work or on items that are the subject matter of the assurance engagement. Paragraph 8.209 provides guidance on threats that may be created if a non-assurance engagement is provide to an assurance client for a contingent fee, and the safeguards that may reduce the threats to an acceptable level. Commentary Fees should not be regarded as being contingent if fixed by a court or other public authority. Fees charged on a percentage or similar basis, except when authorized by statute or approved by a member body as generally accepted practice for certain professional services, should be regarded as contingent fees.* See Definitions. 89 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS 10.8 The foregoing paragraphs relate to fees as distinct from reimbursement of expenses. Out-of-pocket expenses, in particular traveling expenses, attributable directly to the professional services performed for a particular client would normally be charged to that client in addition to the professional fees. 10.9 It is in the best interests of both the client and the professional accountant in public practice that the basis on which fees are computed and any billing arrangements are clearly defined, preferably in writing, before the commencement of the engagement to help in avoiding misunderstandings with respect to fees. (For further guidance, refer to International Standard on Auditing 210, “Terms of Audit Engagements.”)Commissions 10.10 In those countries where payment and receipt of commissions are permitted, either by statute or by a member body, and the professional accountant in public practice accepts such a commission this fact should be disclosed to the client. 10.11 Subject to paragraph 10.10, a professional accountant in public practice should not pay a commission to obtain a client nor should a commission be accepted for referral of a client to a third party. A professional accountant in public practice should not accept a commission for the referral of the products or services of others. 10.12 Payment and receipt of referral fees between professional accountants in public practice when no services are performed by the referring accountant are regarded as commissions for the purpose of paragraph 10.11. 10.13 A professional accountant in public practice may enter into an arrangement for the purchase of the whole or part of an accounting practice requiring payments to individuals formerly engaged in the practice or payments to their heirs or estates. Such payments are not regarded as commissions for the purpose of paragraph 10.10.ETHICS 90
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 11Activities Incompatible with the Practice of Public Accountancy 11.1 A professional accountant in public practice should not concurrently engage in any business, occupation or activity which impairs or might impair integrity, objectivity or independence, or the good reputation of the profession and therefore would be incompatible with the rendering of professional services. 11.2 The rendering of two or more types of professional services concurrently does not by itself impair integrity, objectivity or independence. 11.3 The simultaneous engagement in another business, occupation or activity unrelated to professional services which has the effect of not allowing the professional accountant in public practice properly to conduct a professional practice in accordance with the fundamental ethical principles of the accountancy profession should be regarded as inconsistent with the practice of public accountancy. ETHICS 91 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 12Clients’ Monies 12.1 It is recognized that in some countries the law does not permit a professional accountant in public practice to hold clients’ monies;* in other countries there are legal duties imposed on professional accountants in public practice who do hold such monies. The professional accountant in public practice should not hold clients’ monies if there is reason to believe that they were obtained from, or are to be used for, illegal activities. 12.2 A professional accountant in public practice entrusted with monies belonging to others should: (a) Keep such monies separately from personal or firm monies; (b) Use such monies only for the purpose for which they are intended; and (c) At all times, be ready to account for those monies to any persons entitled to such accounting. 12.3 A professional accountant in public practice should maintain one or more bank accounts for clients’ monies. Such bank accounts may include a general client account* into which the monies of a number of clients may be paid. 12.4 Clients’ monies received by a professional accountant in public practice should be deposited without delay to the credit of a client account, or – if in the form of documents of title to money and documents of title which can be converted into money – be safeguarded against unauthorized use. 12.5 Monies may only be drawn from the client account on the instructions of the client. 12.6 Fees due from a client may be drawn from client’s monies provided the client, after being notified of the amount of such fees, has agreed to such withdrawal. 12.7 Payments from a client account shall not exceed the balance standing to the credit of the client. 12.8 When it seems likely that the client’s monies remain on client account for a significant period of time, the professional accountant in public practice should, with the concurrence of the client, place such monies in an interest bearing account within a reasonable time.* See Definitions.ETHICS 92
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS12.9 All interest earned on clients’ monies should be credited to the client account.12.10 Professional accountants in public practice should keep such books of account as will enable them, at any time, to establish clearly their dealings with clients’ monies in general and the monies of each individual client in particular. A statement of account should be provided to the client at least once a year. ETHICS 93 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 13Relations with Other Professional Accountants in Public PracticeAccepting New Assignments 13.1 The extension of the operations of a business undertaking frequently results in the formation of branches or subsidiary companies at locations where an existing accountant* does not practice. In these circumstances, the client or the existing accountant in consultation with the client may request a receiving accountant* practicing at those locations to perform such professional services as necessary to complete the assignment. 13.2 Referral of business may also arise in the area of special services or special tasks. The scope of the services offered by professional accountants in public practice continues to expand and the depth of knowledge which is needed to serve the public often calls for special skills. Since it is impracticable for any one professional accountant in public practice to acquire special expertise or experience in all fields of accountancy, some professional accountants in public practice have decided that it is neither appropriate nor desirable to develop within their firms the complete range of special skills which may be required. 13.3 Professional accountants in public practice should only undertake such services which they can expect to complete with professional competence. It is essential therefore for the profession in general and in the interests of their clients that professional accountants in public practice be encouraged to obtain advice when appropriate from those who are competent to provide it. 13.4 An existing accountant without a particular skill may however be reluctant to refer a client to another professional accountant in public practice who may possess that skill, because of the fear of losing existing business to the other professional accountant in public practice. As a result, clients may be deprived of the benefit of advice which they are entitled to receive. 13.5 The wishes of the client should be paramount in the choice of professional advisers, whether or not special skills are involved. Accordingly, a professional accountant in public practice should not attempt to restrict in any way the client’s freedom of choice in obtaining special advice, and when appropriate should encourage a client to do so. 13.6 The services or advice of a professional accountant in public practice having special skills may be sought in one or other of the following ways: (a) By the client:* See Definitions.ETHICS 94
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (i) After prior discussion and consultation with the existing accountant; (ii) On the specific request or recommendation of the existing accountant; and (iii) Without reference to the existing accountant; or (b) By the existing accountant with due observance of the duty of confidentiality.13.7 When a professional accountant in public practice is asked to provide services or advice, inquiries should be made as to whether the prospective client has an existing accountant. In cases where there is an existing accountant who will continue to provide professional services, the procedures set out in paragraphs 13.8 through 13.14 should be observed. If the appointment will result in another professional accountant in public practice being superseded, the procedures set out in paragraphs 13.15 through13.26 should be followed.13.8 The receiving accountant should limit the services provided to the specific assignment received by referral from the existing accountant or the client unless otherwise requested by the client. The receiving accountant also has ETHICS the duty to take reasonable steps to support the existing accountant’s current relationship with the client and should not express any criticism of the professional services of the existing accountant without giving the latter an opportunity to provide all relevant information.13.9 A receiving accountant who is asked by the client to undertake an assignment of a type which is clearly distinct from that being carried out by the existing accountant or from that initially received by referral from the existing accountant or from the client, should regard this as a separate request to provide services or advice. Before accepting any appointments of this nature, the receiving accountant should advise the client of the professional obligation to communicate with the existing accountant and should immediately do so preferably in writing, advising of the approach made by the client and the general nature of the request as well as seeking all relevant information, if any, necessary to perform the assignment.13.10 Circumstances sometimes arise when the client insists that the existing accountant should not be informed. In this case, the receiving accountant should decide whether the client’s reasons are valid. In the absence of special circumstances a mere disinclination by the client for communication with the existing accountant would not be a satisfactory reason. 95 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS 13.11 The receiving accountant should: (a) Comply with the instructions received from the existing accountant or the client to the extent that they do not conflict with relevant legal or other requirements; and (b) Ensure, insofar as it is practicable to do so, that the existing accountant is kept informed of the general nature of the professional services being performed. 13.12 When there are two or more other professional accountants in public practice performing professional services for the client concerned it may be appropriate to notify only the relevant professional accountant in public practice depending on the specific services being performed. 13.13 When appropriate the existing accountant, in addition to issuing instructions concerning referred business, should maintain contact with the receiving accountants and cooperate with them in all reasonable requests for assistance. 13.14 When the opinion of a professional accountant, other than the existing accountant, is sought on the application of accounting, auditing, reporting or other standards or principles to specific circumstances or transactions, the professional accountant should be alert to the possibility of the opinion creating undue pressure on the judgment and objectivity of the accountant. An opinion given without full and proper facts can cause difficulty to the receiving accountant if the opinion is challenged or the receiving accountant is subsequently appointed by the company. Accordingly, the professional accountant should seek to minimize the risk of giving inappropriate guidance by ensuring that he or she has access to all relevant information. When there is a request for an opinion in the above circumstances there is a requirement for communication with the existing accountant. It is important that the existing accountant, with the permission of the client, provide the receiving accountant with all requested relevant information about the client. With the permission of the client, the receiving accountant should also provide a copy of the final report to the existing accountant. If the client does not agree to these communications, then the engagement should ordinarily not be performed.Superseding Another Professional Accountant in Public Practice 13.15 The proprietors of a business have an indisputable right to choose their professional advisers and to change to others should they so desire. While it is essential that the legitimate interests of the proprietors are protected, it is also important that a professional accountant in public practice who is asked to replace another professional accountant in public practice has the opportunity to ascertain if there are any professional reasons why the appointment should not be accepted. This cannot effectively be doneETHICS 96
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS without direct communication with the existing accountant. In the absence of a specific request, the existing accountant should not volunteer information about the client’s affairs.13.16 Communication enables a professional accountant in public practice to ascertain whether the circumstances in which a change in appointment is proposed are such that the appointment can properly be accepted and also whether there is a wish to undertake the engagement. In addition, such communication helps to preserve the harmonious relationships which should exist between all professional accountants in public practice on whom clients rely for professional advice and assistance.13.17 The extent to which an existing accountant can discuss the affairs of the client with the proposed professional accountant in public practice depends on: (a) Whether the client’s permission to do so has been obtained; and/or (b) The legal or ethical requirements relating to such disclosure which may vary by country.13.18 The proposed professional accountant in public practice should treat in the strictest confidence and give due weight to any information provided by the ETHICS existing accountant.13.19 The information provided by the existing accountant may indicate, for example, that the ostensible reasons given by the client for the change are not in accordance with the facts. It may disclose that the proposal to make a change in professional accountants in public practice was made because the existing accountants stood their ground and properly carried out the duties as professional accountants in public practice despite opposition or evasion on an occasion on which important differences of principles or practice have arisen with the client.13.20 Communication between the parties therefore serves: (a) To protect a professional accountant in public practice from accepting an appointment in circumstances where all the pertinent facts are not known; (b) To protect the minority proprietors of a business who may not be fully informed of the circumstances in which the change is proposed; and (c) To protect the interests of the existing accountant when the proposed change arises from, or is an attempt to interfere with, the conscientious exercise of the existing accountant’s duty to act as an independent professional. 97 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS 13.21 Before accepting an appointment involving recurring professional services hitherto carried out by another professional accountant in public practice, the proposed professional accountant in public practice should: (a) Ascertain if the prospective client has advised the existing accountant of the proposed change and has given permission, preferably in writing, to discuss the client’s affairs fully and freely with the proposed professional accountant in public practice; (b) When satisfied with the reply received from the prospective client, request permission to communicate with the existing accountant. If such permission is refused or the permission referred to in (a) above is not given, the proposed professional accountant in public practice should, in the absence of exceptional circumstances of which there is full knowledge, and unless there is satisfaction as to necessary facts by other means, decline the appointment; and (c) On receipt of permission, ask the existing accountant, preferably in writing: (i) To provide information on any professional reasons which should be known before deciding whether or not to accept the appointment and, if there are such matters; and (ii) To provide all the necessary details to be able to come to a decision. 13.22 The existing accountant, on receipt of the communication referred to in paragraph 13.21(c) should forthwith: (a) Reply, preferably in writing, advising whether there are any professional reasons why the proposed professional accountant in public practice should not accept the appointment; (b) If there are any such reasons or other matters which should be disclosed, ensure that the client has given permission to give details of this information to the proposed professional accountant in public practice. If permission is not granted, the existing accountant should report that fact to the proposed professional accountant in public practice; and (c) On receipt of permission from the client, disclose all information needed by the proposed professional accountant in public practice to be able to decide whether or not to accept the appointment, and discuss freely with the proposed professional accountant in public practice all matters relevant to the appointment of which the latter should be aware. 13.23 If the proposed professional accountant in public practice does not receive, within a reasonable time, a reply from the existing accountant and there isETHICS 98
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS no reason to believe that there are any exceptional circumstances surrounding the proposed change, the proposed professional accountant in public practice should endeavor to communicate with the existing accountant by some other means. If unable to obtain a satisfactory outcome in this way, the proposed professional accountant in public practice should send a further letter, stating that there is an assumption that there is no professional reason why the appointment should not be accepted and that there is an intention to do so.13.24 The fact that there may be fees owing to the existing accountant is not a professional reason why another professional accountant in public practice should not accept the appointment.13.25 The existing accountant should promptly transfer to the new professional accountant in public practice all books and papers of the client which are or may be held after the change in appointment has been effected and should advise the client accordingly, unless the professional accountant in public practice has a legal right to withhold them.13.26 Certain organizations, either because of legislative requirements or otherwise, call for submissions or tenders, e.g., competitive bids, in relation to professional services offered by accountants in public practice. In reply to ETHICS a public advertisement or an unsolicited request to make a submission or submit a tender, a professional accountant in public practice should, if the appointment may result in the replacement of another professional accountant in public practice, state in the submission or tender that before acceptance the opportunity to contact the other professional accountant in public practice is required so that inquiries may be made as to whether there are any professional reasons why the appointment should not be accepted. If the submission or tender is successful, the existing accountant should then be contacted. 99 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 14Advertising and Solicitation 14.1 Whether or not advertising* and solicitation* by individual professional accountants in public practice are permitted is a matter for member bodies to determine based upon the legal, social and economic conditions in each country. 14.2 When permitted, such advertising and solicitation should be aimed at informing the public in an objective manner and should be decent, honest, truthful and in good taste. Solicitation by the use of coercion or harassment should be prohibited. 14.3 Examples of activities which may be considered not to meet the above criteria include those that: • Create false, deceptive or unjustified expectations of favorable results; • Imply the ability to influence any court, tribunal, regulatory agency or similar body or official; • Consist of self-laudatory statements that are not based on verifiable facts; • Make comparisons with other professional accountants in public practice; • Contain testimonials or endorsements; • Contain any other representations that would be likely to cause a reasonable person to misunderstand or be deceived; and • Make unjustified claims to be an expert or specialist in a particular field of accountancy. 14.4 A professional accountant in public practice in a country where advertising is permitted should not seek to obtain an advantage by advertising in newspapers or magazines published or distributed in a country where advertising is prohibited. Similarly, a professional accountant in public practice in a country where advertising is prohibited should not advertise in a newspaper or magazine published in a country where advertising is permitted. 14.5 In situations where professional accountants in public practice in their international cross border activities violate the provisions of paragraph 14.4, contact should take place between the member body in the country in which the violation takes place and the member body of the home country of the* See Definitions.ETHICS 100
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS professional accountant in public practice to ensure that the member body in the home country is made aware of such violation. 14.6 It is clearly desirable that the public should be aware of the range of services available from a professional accountant. Accordingly there is no objection to a member body communicating such information to the public on an institutional basis, i.e., in the name of the member body.Publicity by Professional Accountants in Public Practice in a Non-AdvertisingEnvironment 14.7 When advertising is not permitted, publicity by individual professional accountants in public practice is acceptable provided: (a) It has as its object the notification to the public or such sectors of the public as are concerned, of matters of fact in a manner that is not false, misleading or deceptive; (b) It is in good taste; (c) It is professionally dignified; and (d) It avoids frequent repetition of, and any undue prominence being given to the name of the professional accountant in public practice. ETHICS 14.8 The examples which follow are illustrative of circumstances in which publicity is acceptable and the matters to be considered in connection therewith subject always to the overriding requirements mentioned in the preceding paragraph. Appointments and Awards It is in the interests of the public and the accountancy profession that any appointment or other activity of a professional accountant in a matter of national or local importance, or the award of any distinction to a professional accountant, should receive publicity and that membership of the professional body should be mentioned. However, the professional accountant should not make use of any of the aforementioned appointments or activities for personal professional advantage. Professional Accountants Seeking Employment or Professional Business A professional accountant may inform interested parties through any medium that a partnership or salaried employment of an accountancy nature is being sought. The professional accountant should not, however, publicize for subcontract work in a manner which could be interpreted as seeking to procure professional business. Publicity seeking subcontract work may be acceptable if placed only in the professional press and provided that neither the professional accountant’s name, address or telephone number appears in the publicity. A professional accountant may write a letter or make a direct 101 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS approach to another professional accountant when seeking employment or professional business. Directories A professional accountant may be listed in a directory provided neither the directory itself nor the entry could reasonably be regarded as a promotional advertisement for those listed therein. Entries should be limited to name, address, telephone number, professional description and any other information necessary to enable the user of the directory to make contact with the person or organization to which the entry relates. Books, Articles, Interviews, Lectures, Radio and Television Appearances Professional accountants who author books or articles on professional subjects, may state their name and professional qualifications and give the name of their organization but shall not give any information as to the services that firm provides. Similar provisions are applicable to participation by a professional accountant in a lecture, interview or a radio or television program on a professional subject. What professional accountants write or say, however, should not be promotional of themselves or their firm but should be an objective professional view of the topic under consideration. Professional accountants are responsible for using their best endeavors to ensure that what ultimately goes before the public complies with these requirements. Training Courses, Seminars, Etc. A professional accountant may invite clients, staff or other professional accountants to attend training courses or seminars conducted for the assistance of staff. Other persons should not be invited to attend such training courses or seminars except in response to an unsolicited request. The requirement should in no way prevent professional accountants from providing training services to other professional bodies, associations or educational institutions which run courses for their members or the public. However, undue prominence should not be given to the name of a professional accountant in any booklets or documents issued in connection therewith. Booklets and Documents Containing Technical Information Booklets and other documents bearing the name of a professional accountant and giving technical information for the assistance of staff or clients may be issued to such persons or to other professional accountants. Other persons should not be issued with such booklets or documents except in response to an unsolicited request.ETHICS 102
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSStaff RecruitmentGenuine vacancies for staff may be communicated to the public through anymedium in which comparable staff vacancies normally appear. The fact thata job specification necessarily gives some detail as to one or more of theservices provided to clients by the professional accountant in public practiceis acceptable but it should not contain any promotional element. Thereshould not be any suggestion that the services offered are superior to thoseoffered by other professional accountants in public practice as aconsequence of size, associations, or for any other reason.In publications such as those specifically directed to schools and otherplaces of education to inform students and graduates of career opportunitiesin the profession, services offered to the public may be described in abusinesslike way.More latitude may also be permissible in a section of a newspaper devotedto staff vacancies than would be allowed if the vacancy appeared in aprominent position elsewhere in a newspaper on the grounds that it wouldbe most unlikely that a potential client would use such media to select aprofessional adviser. ETHICSPublicity on Behalf of ClientsA professional accountant in public practice may publicize on behalf ofclients, primarily for staff. However, the professional accountant in publicpractice should ensure that the emphasis in the publicity is directed towardsthe objectives to be achieved for the client.Brochures and Firm DirectoriesA professional accountant in public practice may issue to clients or, inresponse to an unsolicited request, to a non-client:(a) A factual and objectively worded account of the services provided; and(b) A directory setting out names of partners, office addresses and names and addresses of associated firms and correspondents.Stationery and NameplatesStationery of professional accountants in public practice should be of anacceptable professional standard and comply with the requirements of thelaw and of the member body concerned as to names of partners, principalsand others who participate in the practice, use of professional descriptionsand designatory letters, cities or countries where the practice is represented,logotypes, etc. The designation of any services provided by the practice asbeing of specialist nature should not be permitted. Similar provisions, whereapplicable, should apply to nameplates. 103 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS Newspaper Announcements Appropriate newspapers or magazines may be used to inform the public of the establishment of a new practice, of changes in the composition of a partnership of professional accountants in public practice, or of any alteration in the address of a practice. Such announcements should be limited to a bare statement of facts and consideration given to the appropriateness of the area of distribution of the newspaper or magazine and number of insertions. Inclusion of the Name of a Professional Accountant in Public Practice in a Document Issued by a Client When a client proposes to publish a report by a professional accountant in public practice dealing with the client’s existing business affairs or in connection with the establishment of a new business venture, the professional accountant in public practice should take steps to ensure that the context in which the report is published is not such as might result in the public being misled as to the nature and meaning of the report. In these circumstances, the professional accountant in public practice should advise the client that permission should first be obtained before publication of the document. Similar consideration should be given to other documents proposed to be issued by a client containing the name of a professional accountant in public practice acting in an independent professional capacity. This does not preclude the inclusion of the name of a professional accountant in public practice in the annual report of a client. When professional accountants in their private capacity are associated with, or hold office in, an organization, the organization may use their name and professional status on stationery and other documents. The professional accountant in public practice should ensure that this information is not used in such a way as might lead the public to believe that there is a connection with the organization in an independent professional capacity.ETHICS 104
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSPART C—APPLICABLE TO EMPLOYEDPROFESSIONAL ACCOUNTANTSThe following sections contain guidance which is particularly relevant toprofessional accountants working in industry, commerce, the public sector oreducation. Professional accountants employed in public practice should be awarethey may find that the principles set out below are also of application to theirparticular circumstances. If professional accountants employed in practice are indoubt as to the applicability of any particular guidance, they should seek assistancefrom their professional body.SECTION 15Conflict of Loyalties 15.1 Employed professional accountants owe a duty of loyalty to their employer as well as to their profession and there may be times when the two are in conflict. An employee’s normal priority should be to support his or her organization’s legitimate and ethical objectives and the rules and procedures drawn up in support of them. However, an employee cannot legitimately be required to: ETHICS (a) Break the law; (b) Breach the rules and standards of their profession; (c) Lie to or mislead (including misleading by keeping silent) those acting as auditors to the employer; or (d) Put their name to or otherwise be associated with a statement which materially misrepresents the facts. 15.2 Differences in view about the correct judgment on accounting or ethical matters should normally be raised and resolved within the employee’s organization, initially with the employee’s immediate superior and possibly thereafter, where disagreement about a significant ethical issue remains, with higher levels of management or non executive directors. 15.3 If employed accountants cannot resolve any material issue involving a conflict between their employers and their professional requirements they may, after exhausting all other relevant possibilities, have no other recourse but to consider resignation. Employees should state their reasons for doing so to the employer but their duty of confidentiality normally precludes them from communicating the issue to others (unless legally or professionally required to do so). 15.4 For further guidance as to the considerations involved see Section 2— Resolution of Ethical Conflicts. 105 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 16Support for Professional Colleagues 16.1 A professional accountant, particularly one having authority over others, should give due weight for the need for them to develop and hold their own judgment in accounting matters and should deal with differences of opinion in a professional way.ETHICS 106
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 17Professional Competence 17.1 A professional accountant employed in industry, commerce, the public sector or education may be asked to undertake significant tasks for which he or she has not had sufficient specific training or experience. When undertaking such work the professional accountant should not mislead the employer as to the degree of expertise or experience he or she possesses, and where appropriate expert advice and assistance should be sought. ETHICS 107 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 18Presentation of Information 18.1 A professional accountant is expected to present financial information fully, honestly and professionally and so that it will be understood in its context. 18.2 Financial and non-financial information should be maintained in a manner that describes clearly the true nature of business transactions, assets or liabilities and classifies and records entries in a timely and proper manner, and professional accountants should do everything that is within their powers to ensure that this is the case.ETHICS 108
    • June 2005 CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (Effective June 30, 2006) CONTENTS PagePREFACE....................................................................................................... 111PART A: GENERAL APPLICATION OF THE CODE................................ 112100 Introduction and Fundamental Principles......................................... 113110 Integrity ............................................................................................ 119120 Objectivity ....................................................................................... 120130 Professional Competence and Due Care........................................... 121140 Confidentiality.................................................................................. 122150 Professional Behavior....................................................................... 124 ETHICSPART B: PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE .... 125200 Introduction ...................................................................................... 126210 Professional Appointment ................................................................ 132220 Conflicts of Interest ......................................................................... 136230 Second Opinions............................................................................... 138240 Fees and Other Types of Remuneration ........................................... 139250 Marketing Professional Services ...................................................... 141260 Gifts and Hospitality......................................................................... 142270 Custody of Clients Assets................................................................. 143280 Objectivity–All Services .................................................................. 144290 Independence–Assurance Engagements........................................... 145PART C: PROFESSIONAL ACCOUNTANTS IN BUSINESS.................... 197300 Introduction ...................................................................................... 198310 Potential Conflicts ............................................................................ 202320 Preparation and Reporting of Information ....................................... 204330 Acting with Sufficient Expertise ...................................................... 206 109 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)340 Financial Interests............................................................................. 208350 Inducements...................................................................................... 210DEFINITIONS................................................................................................ 212EFFECTIVE DATE........................................................................................ 218ETHICS 110
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)PREFACEThe mission of the International Federation of Accountants (IFAC), as set out in itsconstitution, is “the worldwide development and enhancement of an accountancyprofession with harmonized standards, able to provide services of consistently highquality in the public interest.” In pursuing this mission, the IFAC Board hasestablished the Ethics Standards Board for Accountants to develop and issue, underits own authority, high quality ethical standards and other pronouncements forprofessional accountants for use around the world.This Code of Ethics for Professional Accountants establishes ethical requirementsfor professional accountants. A member body of IFAC or firm may not apply lessstringent standards than those stated in this Code. However, if a member body orfirm is prohibited from complying with certain parts of this Code by law orregulation, they should comply with all other parts of this Code.Some jurisdictions may have requirements and guidance that differs from this Code.Professional accountants should be aware of those differences and comply with themore stringent requirements and guidance unless prohibited by law or regulation. ETHICS 111 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)PART A—GENERAL APPLICATION OF THE CODESection 100 Introduction and Fundamental Principles ....................................... 113Section 110 Integrity........................................................................................... 119Section 120 Objectivity....................................................................................... 120Section 130 Professional Competence and Due Care ......................................... 121Section 140 Confidentiality ................................................................................ 122Section 150 Professional Behavior ..................................................................... 124ETHICS 112
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)SECTION 100Introduction and Fundamental Principles100.1 A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore, a professional accountant’s* responsibility is not exclusively to satisfy the needs of an individual client or employer. In acting in the public interest a professional accountant should observe and comply with the ethical requirements of this Code.100.2 This Code is in three parts. Part A establishes the fundamental principles of professional ethics for professional accountants and provides a conceptual framework for applying those principles. The conceptual framework provides guidance on fundamental ethical principles. Professional accountants are required to apply this conceptual framework to identify threats to compliance with the fundamental principles, to evaluate their significance and, if such threats are other than clearly insignificant∗ to apply safeguards to eliminate them or reduce them to an acceptable level such that compliance with the fundamental principles is not compromised. ETHICS100.3 Parts B and C illustrate how the conceptual framework is to be applied in specific situations. It provides examples of safeguards that may be appropriate to address threats to compliance with the fundamental principles and also provides examples of situations where safeguards are not available to address the threats and consequently the activity or relationship creating the threats should be avoided. Part B applies to professional accountants in public practice.* Part C applies to professional accountants in business.* Professional accountants in public practice may also find the guidance in Part C relevant to their particular circumstances.Fundamental Principles100.4 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.∗ See Definitions. 113 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) (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. Each of these fundamental principles is discussed in more detail in Sections 110 – 150.Conceptual Framework Approach100.5 The circumstances in which professional accountants operate may give rise to specific threats to compliance with the fundamental principles. It is impossible to define every situation that creates such threats and specify the appropriate mitigating action. In addition, the nature of engagements and work assignments may differ and consequently different threats may exist, requiring the application of different safeguards. A conceptual framework that 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,∗ See Definitions.ETHICS 114
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) is, therefore, in the public interest. This Code provides a framework to assist a professional accountant to identify, evaluate and respond to threats to compliance with the fundamental principles. If identified threats are other than clearly insignificant, a professional accountant should, where appropriate, apply safeguards to eliminate the threats or reduce them to an acceptable level, such that compliance with the fundamental principles is not compromised.100.6 A professional accountant has an obligation to evaluate any threats to compliance with the fundamental principles when the professional accountant knows, or could reasonably be expected to know, of circumstances or relationships that may compromise compliance with the fundamental principles.100.7 A professional accountant should take qualitative as well as quantitative factors into account when considering the significance of a threat. If a professional accountant cannot implement appropriate safeguards, the professional accountant should decline or discontinue the specific professional service involved, or where necessary resign from the client (in the case of a professional accountant in public practice) or the employing organization (in the case of a professional accountant in ETHICS business).100.8 A professional accountant may inadvertently violate a provision of this Code. Such an inadvertent violation, depending on the nature and significance of the matter, may not compromise compliance with the fundamental principles provided, once the violation is discovered, the violation is corrected promptly and any necessary safeguards are applied.100.9 Parts B and C of this Code include examples that are intended to illustrate how the conceptual framework is to be applied. The examples are not intended to be, nor should they be interpreted as, an exhaustive list of all circumstances experienced by a professional accountant that may create threats to compliance with the fundamental principles. Consequently, it is not sufficient for a professional accountant merely to comply with the examples presented; rather, the framework should be applied to the particular circumstances encountered by the professional accountant.Threats and Safeguards100.10 Compliance with the fundamental principles may potentially be threatened by a broad range of circumstances. Many threats fall into the following categories: 115 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) (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 re-evaluated 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. Parts B and C of this Code, respectively, provide examples of circumstances that may create these categories of threats for professional accountants in public practice and professional accountants in business. Professional accountants in public practice may also find the guidance in Part C relevant to their particular circumstances.100.11 Safeguards that may eliminate or reduce such threats to an acceptable level fall into two broad categories: (a) Safeguards created by the profession, legislation or regulation; and (b) Safeguards in the work environment.100.12 Safeguards created by the profession, legislation or regulation include, but are not restricted to: • Educational, training and experience requirements for entry into the profession. • Continuing professional development requirements. • Corporate governance regulations. • Professional standards. • Professional or regulatory monitoring and disciplinary procedures.∗ See Definitions.ETHICS 116
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) • External review by a legally empowered third party of the reports, returns, communications or information produced by a professional accountant.100.13 Parts B and C of this Code, respectively, discuss safeguards in the work environment for professional accountants in public practice and those in business.100.14 Certain safeguards may increase the likelihood of identifying or deterring unethical behavior. Such safeguards, which may be created by the accounting profession, legislation, regulation or an employing organization, include, but are not restricted to: • Effective, well publicized complaints systems operated by the employing organization, the profession or a regulator, which enable colleagues, employers and members of the public to draw attention to unprofessional or unethical behavior. • An explicitly stated duty to report breaches of ethical requirements.100.15 The nature of the safeguards to be applied will vary depending on the circumstances. In exercising professional judgment, a professional accountant should consider what a reasonable and informed third party, ETHICS having knowledge of all relevant information, including the significance of the threat and the safeguards applied, would conclude to be unacceptable.Ethical Conflict Resolution100.16 In evaluating compliance with the fundamental principles, a professional accountant may be required to resolve a conflict in the application of fundamental principles.100.17 When initiating either a formal or informal conflict resolution process, a professional accountant should consider the following, either individually or together with others, as part of the resolution process: (a) Relevant facts; (b) Ethical issues involved; (c) Fundamental principles related to the matter in question; (d) Established internal procedures; and (e) Alternative courses of action. Having considered these issues, a professional accountant should determine the appropriate course of action that is consistent with the fundamental principles identified. The professional accountant should also weigh the consequences of each possible course of action. If the matter remains unresolved, the professional accountant should consult 117 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) with other appropriate persons within the firm* or employing organization for help in obtaining resolution.100.18 Where a matter involves a conflict with, or within, an organization, a professional accountant should also consider consulting with those charged with governance of the organization, such as the board of directors or the audit committee.100.19 It may be in the best interests of the professional accountant to document the substance of the issue and details of any discussions held or decisions taken, concerning that issue.100.20 If a significant conflict cannot be resolved, a professional accountant may wish to obtain professional advice from the relevant professional body or legal advisors, and thereby obtain guidance on ethical issues without breaching confidentiality. For example, a professional accountant may have encountered a fraud, the reporting of which could breach the professional accountant’s responsibility to respect confidentiality. The professional accountant should consider obtaining legal advice to determine whether there is a requirement to report.100.21 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. The professional accountant may determine that, in the circumstances, it is appropriate to withdraw from the engagement team∗ or specific assignment, or to resign altogether from the engagement, the firm or the employing organization.∗ See Definitions.ETHICS 118
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)SECTION 110Integrity110.1 The principle of integrity imposes an obligation on all professional accountants to be straightforward and honest in professional and business relationships. Integrity also implies fair dealing and truthfulness.110.2 A professional accountant should not be associated with reports, returns, communications or other information where they believe that the information: (a) Contains a materially false or misleading statement; (b) Contains statements or information furnished recklessly; or (c) Omits or obscures information required to be included where such omission or obscurity would be misleading.110.3 A professional accountant will not be considered to be in breach of paragraph 110.2 if the professional accountant provides a modified report in respect of a matter contained in paragraph 110.2. ETHICS 119 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)SECTION 120Objectivity120.1 The principle of objectivity imposes an obligation on all professional accountants not to compromise their professional or business judgment because of bias, conflict of interest or the undue influence of others.120.2 A professional accountant may be exposed to situations that may impair objectivity. It is impracticable to define and prescribe all such situations. Relationships that bias or unduly influence the professional judgment of the professional accountant should be avoided.ETHICS 120
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)SECTION 130Professional Competence and Due Care130.1 The principle of professional competence and due care imposes the following obligations on professional accountants: (a) To maintain professional knowledge and skill at the level required to ensure that clients or employers receive competent professional service; and (b) To act diligently in accordance with applicable technical and professional standards when providing professional services.130.2 Competent professional service requires the exercise of sound judgment in applying professional knowledge and skill in the performance of such service. Professional competence may be divided into two separate phases: (a) Attainment of professional competence; and (b) Maintenance of professional competence.130.3 The maintenance of professional competence requires a continuing ETHICS awareness and an understanding of relevant technical professional and business developments. Continuing professional development develops and maintains the capabilities that enable a professional accountant to perform competently within the professional environments.130.4 Diligence encompasses the responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis.130.5 A professional accountant should take steps to ensure that those working under the professional accountant’s authority in a professional capacity have appropriate training and supervision.130.6 Where appropriate, a professional accountant should make clients, employers or other users of the professional services aware of limitations inherent in the services to avoid the misinterpretation of an expression of opinion as an assertion of fact. 121 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)SECTION 140Confidentiality140.1 The principle of confidentiality imposes an obligation on professional accountants to refrain from: (a) Disclosing outside the firm or employing organization confidential information acquired as a result of professional and business relationships without proper and specific authority or unless there is a legal or professional right or duty to disclose; and (b) Using confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of third parties.140.2 A professional accountant should maintain confidentiality even in a social environment. The professional accountant should be alert to the possibility of inadvertent disclosure, particularly in circumstances involving long association with a business associate or a close or immediate family∗ member.140.3 A professional accountant should also maintain confidentiality of information disclosed by a prospective client or employer.140.4 A professional accountant should also consider the need to maintain confidentiality of information within the firm or employing organization.140.5 A professional accountant should take all reasonable steps to ensure that staff under the professional accountant’s control and persons from whom advice and assistance is obtained respect the professional accountant’s duty of confidentiality.140.6 The need to comply with the principle of confidentiality continues even after the end of relationships between a professional accountant and a client or employer. When a professional accountant changes employment or acquires a new client, the professional accountant is entitled to use prior experience. The professional accountant should not, however, use or disclose any confidential information either acquired or received as a result of a professional or business relationship.140.7 The following are circumstances where professional accountants are or may be required to disclose confidential information or when such disclosure may be appropriate: (a) Disclosure is permitted by law and is authorized by the client or the employer;∗ See Definitions.ETHICS 122
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) (b) Disclosure is required by law, for example: (i) Production of documents or other provision of evidence in the course of legal proceedings; or (ii) Disclosure to the appropriate public authorities of infringements of the law that come to light; and (c) There is a professional duty or right to disclose, when not prohibited by law: (i) To comply with the quality review of a member body or professional body; (ii) To respond to an inquiry or investigation by a member body or regulatory body; (iii) To protect the professional interests of a professional accountant in legal proceedings; or (iv) To comply with technical standards and ethics requirements.140.8 In deciding whether to disclose confidential information, professional accountants should consider the following points: ETHICS (a) Whether the interests of 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 professional accountant; (b) Whether all the relevant information is known and substantiated, to the extent it is practicable; when the situation involves unsubstantiated facts, incomplete information or unsubstantiated conclusions, professional judgment should be used in determining the type of disclosure to be made, if any; and (c) The type of communication that is expected and to whom it is addressed; in particular, professional accountants should be satisfied that the parties to whom the communication is addressed are appropriate recipients. 123 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)SECTION 150Professional Behavior150.1 The principle of professional behavior imposes an obligation on professional accountants to comply with relevant laws and regulations and avoid any action that may bring discredit to the profession. This includes actions which a reasonable and informed third party, having knowledge of all relevant information, would conclude negatively affects the good reputation of the profession.150.2 In marketing and promoting themselves and their work, professional accountants should not bring the profession into disrepute. Professional accountants should be honest and truthful and should not: (a) Make exaggerated claims for the services they are able to offer, the qualifications they possess, or experience they have gained; or (b) Make disparaging references or unsubstantiated comparisons to the work of others.ETHICS 124
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)PART B—PROFESSIONAL ACCOUNTANTS IN PUBLICPRACTICESection 200 Introduction................................................................................. 126Section 210 Professional Appointment........................................................... 132Section 220 Conflicts of Interest .................................................................... 136Section 230 Second Opinions ........................................................................ 138Section 240 Fees and Other Types of Remuneration ..................................... 139Section 250 Marketing Professional Services................................................. 141Section 260 Gifts and Hospitality ................................................................... 142Section 270 Custody of Client Assets............................................................. 143Section 280 Objectivity—All Services .......................................................... 144Section 290 Independence—Assurance Engagements ................................... 145 ETHICS 125 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)SECTION 200Introduction200.1 This Part of the Code illustrates how the conceptual framework contained in Part A is to be applied by professional accountants in public practice. The examples in the following sections are not intended to be, nor should they be interpreted as, an exhaustive list of all circumstances experienced by a professional accountant in public practice that may create threats to compliance with the principles. Consequently, it is not sufficient for a professional accountant in public practice merely to comply with the examples presented; rather, the framework should be applied to the particular circumstances faced.200.2 A professional accountant in public practice should not engage in any business, occupation or activity that impairs or might impair integrity, objectivity or the good reputation of the profession and as a result would be incompatible with the rendering of professional services.Threats and Safeguards200.3 Compliance with the fundamental principles may potentially be threatened by a broad range of circumstances. Many threats fall into the following categories: (a) Self-interest; (b) Self-review; (c) Advocacy; (d) Familiarity; and (e) Intimidation. These threats are discussed further in Part A of this Code. The nature and significance of the threats may differ depending on whether they arise in relation to the provision of services to a financial statement audit client,∗ a non-financial statement audit assurance client* or a non-assurance client.200.4 Examples of circumstances that may create self-interest threats for a professional accountant in public practice include, but are not limited to: • A financial interest* in a client or jointly holding a financial interest with a client. • Undue dependence on total fees from a client.∗ See Definitions.ETHICS 126
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) • Having a close business relationship with a client. • Concern about the possibility of losing a client. • Potential employment with a client. • Contingent fees* relating to an assurance engagement.∗ • A loan to or from an assurance client or any of its directors or officers.200.5 Examples of circumstances that may create self-review threats include, but are not limited to: • The discovery of a significant error during a re-evaluation of the work of the professional accountant in public practice. • Reporting on the operation of financial systems after being involved in their design or implementation. • Having prepared the original data used to generate records that are the subject matter of the engagement. • A member of the assurance team∗ being, or having recently been, a director or officer* of that client. ETHICS • 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. • Performing a service for a client that directly affects the subject matter of the assurance engagement.200.6 Examples of circumstances that may create advocacy threats include, but are not limited to: • Promoting shares in a listed entity* when that entity is a financial statement audit client. • Acting as an advocate on behalf of an assurance client in litigation or disputes with third parties.200.7 Examples of circumstances that may create familiarity threats include, but are not limited to: • A member of the engagement team having a close or immediate family relationship with a director or officer of the client. • A member of the engagement team having a close or immediate family relationship with an employee of the client who is in a∗ See Definitions. 127 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) position to exert direct and significant influence over the subject matter of the engagement. • A former partner of the firm being a director or officer of the client or an employee in a position to exert direct and significant influence over the subject matter of the engagement. • Accepting gifts or preferential treatment from a client, unless the value is clearly insignificant. • Long association of senior personnel with the assurance client.200.8 Examples of circumstances that may create intimidation threats include, but are not limited to: • Being threatened with dismissal or replacement in relation to a client engagement. • Being threatened with litigation. • Being pressured to reduce inappropriately the extent of work performed in order to reduce fees.200.9 A professional accountant in public practice may also find that specific circumstances give rise to unique threats to compliance with one or more of the fundamental principles. Such unique threats obviously cannot be categorized. In either professional or business relationships, a professional accountant in public practice should always be on the alert for such circumstances and threats.200.10 Safeguards that may eliminate or reduce threats to an acceptable level fall into two broad categories: (a) Safeguards created by the profession, legislation or regulation; and (b) Safeguards in the work environment. Examples of safeguards created by the profession, legislation or regulation are described in paragraph 100.12 of Part A of this Code.200.11 In the work environment, the relevant safeguards will vary depending on the circumstances. Work environment safeguards comprise firm-wide safeguards and engagement specific safeguards. A professional accountant in public practice should exercise judgment to determine how to best deal with an identified threat. In exercising this judgment a professional accountant in public practice should consider what a reasonable and informed third party, having knowledge of all relevant information, including the significance of the threat and the safeguards applied, would reasonably conclude to be acceptable. This consideration will be affected by matters such as the significance of the threat, the nature of the engagement and the structure of the firm.ETHICS 128
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)200.12 Firm-wide safeguards in the work environment may include: • Leadership of the firm that stresses the importance of compliance with the fundamental principles. • Leadership of the firm that establishes the expectation that members of an assurance team will act in the public interest. • Policies and procedures to implement and monitor quality control of engagements. • Documented policies regarding the identification of threats to compliance with the fundamental principles, the evaluation of the significance of these threats and the identification and the application of safeguards to eliminate or reduce the threats, other than those that are clearly insignificant, to an acceptable level. • For firms that perform assurance engagements, documented independence∗ policies regarding the identification of threats to independence, the evaluation of the significance of these threats and the evaluation and application of safeguards to eliminate or reduce the threats, other than those that are clearly insignificant, to an acceptable level. ETHICS • Documented internal policies and procedures requiring compliance with the fundamental principles. • Policies and procedures that will enable the identification of interests or relationships between the firm or members of engagement teams and clients. • Policies and procedures to monitor and, if necessary, manage the reliance on revenue received from a single client. • Using different partners and engagement teams with separate reporting lines for the provision of non-assurance services to an assurance client. • Policies and procedures to prohibit individuals who are not members of an engagement team from inappropriately influencing the outcome of the engagement. • Timely communication of a firm’s policies and procedures, including any changes to them, to all partners and professional staff, and appropriate training and education on such policies and procedures.∗ See Definitions. 129 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) • Designating a member of senior management to be responsible for overseeing the adequate functioning of the firm’s quality control system. • Advising partners and professional staff of those assurance clients and related entities from which they must be independent. • A disciplinary mechanism to promote compliance with policies and procedures. • Published policies and procedures to encourage and empower staff to communicate to senior levels within the firm any issue relating to compliance with the fundamental principles that concerns them.200.13 Engagement-specific safeguards in the work environment may include: • Involving an additional professional accountant to review the work done or otherwise advise as necessary. • Consulting an independent third party, such as a committee of independent directors, a professional regulatory body or another professional accountant. • Discussing ethical issues with those charged with governance of the client. • Disclosing to those charged with governance of the client the nature of services provided and extent of fees charged. • Involving another firm to perform or re-perform part of the engagement. • Rotating senior assurance team personnel.200.14 Depending on the nature of the engagement, a professional accountant in public practice may also be able to rely on safeguards that the client has implemented. However it is not possible to rely solely on such safeguards to reduce threats to an acceptable level.200.15 Safeguards within the client’s systems and procedures may include: • When a client appoints a firm in public practice to perform an engagement, persons other than management ratify or approve the appointment. • The client has competent employees with experience and seniority to make managerial decisions. • The client has implemented internal procedures that ensure objective choices in commissioning non-assurance engagements.ETHICS 130
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) • The client has a corporate governance structure that provides appropriate oversight and communications regarding the firm’s services. ETHICS 131 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)SECTION 210Professional AppointmentClient Acceptance210.1 Before accepting a new client relationship, a professional accountant in public practice should consider whether acceptance would create any threats to compliance with the fundamental principles. Potential threats to integrity or professional behavior may be created from, for example, questionable issues associated with the client (its owners, management and activities).210.2 Client issues that, if known, could threaten compliance with the fundamental principles include, for example, client involvement in illegal activities (such as money laundering), dishonesty or questionable financial reporting practices.210.3 The significance of any threats should be evaluated. If identified threats are other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate them or reduce them to an acceptable level.210.4 Appropriate safeguards may include obtaining knowledge and understanding of the client, its owners, managers and those responsible for its governance and business activities, or securing the client’s commitment to improve corporate governance practices or internal controls.210.5 Where it is not possible to reduce the threats to an acceptable level, a professional accountant in public practice should decline to enter into the client relationship.210.6 Acceptance decisions should be periodically reviewed for recurring client engagements.Engagement Acceptance210.7 A professional accountant in public practice should agree to provide only those services that the professional accountant in public practice is competent to perform. Before accepting a specific client engagement, a professional accountant in public practice should consider whether acceptance would create any threats to compliance with the fundamental principles. For example, a self-interest threat to professional competence and due care is created if the engagement team does not possess, or cannot acquire, the competencies necessary to properly carry out the engagement.210.8 A professional accountant in public practice should evaluate the significance of identified threats and, if they are other than clearlyETHICS 132
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) insignificant, safeguards should be applied as necessary to eliminate them or reduce them to an acceptable level. Such safeguards may include: • Acquiring an appropriate understanding of the nature of the client’s business, the complexity of its operations, the specific requirements of the engagement and the purpose, nature and scope of the work to be performed. • Acquiring knowledge of relevant industries or subject matters. • Possessing or obtaining experience with relevant regulatory or reporting requirements. • Assigning sufficient staff with the necessary competencies. • Using experts where necessary. • Agreeing on a realistic time frame for the performance of the engagement. • Complying with quality control policies and procedures designed to provide reasonable assurance that specific engagements are accepted only when they can be performed competently. ETHICS210.9 When a professional accountant in public practice intends to rely on the advice or work of an expert, the professional accountant in public practice should evaluate whether such reliance is warranted. The professional accountant in public practice should consider factors such as reputation, expertise, resources available and applicable professional and ethical standards. Such information may be gained from prior association with the expert or from consulting others.Changes in a Professional Appointment210.10 A professional accountant in public practice who is asked to replace another professional accountant in public practice, or who is considering tendering for an engagement currently held by another professional accountant in public practice, should determine whether there are any reasons, professional or other, for not accepting the engagement, such as circumstances that threaten compliance with the fundamental principles. For example, there may be a threat to professional competence and due care if a professional accountant in public practice accepts the engagement before knowing all the pertinent facts.210.11 The significance of the threats should be evaluated. Depending on the nature of the engagement, this may require direct communication with the existing accountant∗ to establish the facts and circumstances behind the∗ See Definitions. 133 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) proposed change so that the professional accountant in public practice can decide whether it would be appropriate to accept the engagement. For example, the apparent reasons for the change in appointment may not fully reflect the facts and may indicate disagreements with the existing accountant that may influence the decision as to whether to accept the appointment.210.12 An existing accountant is bound by confidentiality. The extent to which the professional accountant in public practice can and should discuss the affairs of a client with a proposed accountant will depend on the nature of the engagement and on: (a) Whether the client’s permission to do so has been obtained; or (b) The legal or ethical requirements relating to such communications and disclosure, which may vary by jurisdiction.210.13 In the absence of specific instructions by the client, an existing accountant should not ordinarily volunteer information about the client’s affairs. Circumstances where it may be appropriate to disclose confidential information are set out in Section 140 of Part A of this Code.210.14 If identified threats are other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate them or reduce them to an acceptable level.210.15 Such safeguards may include: • Discussing the client’s affairs fully and freely with the existing accountant. • Asking the existing accountant to provide known information on any facts or circumstances that, in the existing accountant’s opinion, the proposed accountant should be aware of before deciding whether to accept the engagement. • When replying to requests to submit tenders, stating in the tender that, before accepting the engagement, contact with the existing accountant will be requested so that inquiries may be made as to whether there are any professional or other reasons why the appointment should not be accepted.210.16 A professional accountant in public practice will ordinarily need to obtain the client’s permission, preferably in writing, to initiate discussion with an existing accountant. Once that permission is obtained, the existing accountant should comply with relevant legal and other regulations governing such requests. Where the existing accountant provides information, it should be provided honestly and unambiguously. If the proposed accountant is unable to communicate with the existing accountant, the proposed accountant should try to obtain informationETHICS 134
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) about any possible threats by other means such as through inquiries of third parties or background investigations on senior management or those charged with governance of the client.210.17 Where the threats cannot be eliminated or reduced to an acceptable level through the application of safeguards, a professional accountant in public practice should, unless there is satisfaction as to necessary facts by other means, decline the engagement.210.18 A professional accountant in public practice may be asked to undertake work that is complementary or additional to the work of the existing accountant. Such circumstances may give rise to potential threats to professional competence and due care resulting from, for example, a lack of or incomplete information. Safeguards against such threats include notifying the existing accountant of the proposed work, which would give the existing accountant the opportunity to provide any relevant information needed for the proper conduct of the work. ETHICS 135 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)SECTION 220Conflicts of Interest220.1 A professional accountant in public practice should take reasonable steps to identify circumstances that could pose a conflict of interest. Such circumstances may give rise to threats to compliance with the fundamental principles. For example, a threat to objectivity may be created when a professional accountant in public practice competes directly with a client or has a joint venture or similar arrangement with a major competitor of a client. A threat to objectivity or confidentiality may also be created when a professional accountant in public practice performs services for clients whose interests are in conflict or the clients are in dispute with each other in relation to the matter or transaction in question.220.2 A professional accountant in public practice should evaluate the significance of any threats. Evaluation includes considering, before accepting or continuing a client relationship or specific engagement, whether the professional accountant in public practice has any business interests, or relationships with the client or a third party that could give rise to threats. If threats are other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate them or reduce them to an acceptable level.220.3 Depending upon the circumstances giving rise to the conflict, safeguards should ordinarily include the professional accountant in public practice: (a) Notifying the client of the firm’s business interest or activities that may represent a conflict of interest, and obtaining their consent to act in such circumstances; or (b) Notifying all known relevant parties that the professional accountant in public practice is acting for two or more parties in respect of a matter where their respective interests are in conflict, and obtaining their consent to so act; or (c) Notifying the client that the professional accountant in public practice does not act exclusively for any one client in the provision of proposed services (for example, in a particular market sector or with respect to a specific service) and obtaining their consent to so act.220.4 The following additional safeguards should also be considered: (a) The use of separate engagement teams; and (b) Procedures to prevent access to information (e.g., strict physical separation of such teams, confidential and secure data filing); andETHICS 136
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) (c) Clear guidelines for members of the engagement team on issues of security and confidentiality; and (d) The use of confidentiality agreements signed by employees and partners of the firm; and (e) Regular review of the application of safeguards by a senior individual not involved with relevant client engagements.220.5 Where a conflict of interest poses a threat to one or more of the fundamental principles, including objectivity, confidentiality or professional behavior, that cannot be eliminated or reduced to an acceptable level through the application of safeguards, the professional accountant in public practice should conclude that it is not appropriate to accept a specific engagement or that resignation from one or more conflicting engagements is required.220.6 Where a professional accountant in public practice has requested consent from a client to act for another party (which may or may not be an existing client) in respect of a matter where the respective interests are in conflict and that consent has been refused by the client, then the professional accountant in public practice must not continue to act for one ETHICS of the parties in the matter giving rise to the conflict of interest. 137 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)SECTION 230Second Opinions230.1 Situations where a professional accountant in public practice is asked to provide a second opinion on the application of accounting, auditing, reporting or other standards or principles to specific circumstances or transactions by or on behalf of a company or an entity that is not an existing client may give rise to threats to compliance with the fundamental principles. For example, there may be a threat to professional competence and due care in circumstances where the second opinion is not based on the same set of facts that were made available to the existing accountant, or is based on inadequate evidence. The significance of the threat will depend on the circumstances of the request and all the other available facts and assumptions relevant to the expression of a professional judgment.230.2 When asked to provide such an opinion, a professional accountant in public practice should evaluate the significance of the threats and, if they are other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate them or reduce them to an acceptable level. Such safeguards may include seeking client permission to contact the existing accountant, describing the limitations surrounding any opinion in communications with the client and providing the existing accountant with a copy of the opinion.230.3 If the company or entity seeking the opinion will not permit communication with the existing accountant, a professional accountant in public practice should consider whether, taking all the circumstances into account, it is appropriate to provide the opinion sought.ETHICS 138
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)SECTION 240Fees and Other Types of Remuneration240.1 When entering into negotiations regarding professional services, a professional accountant in public practice may quote whatever fee deemed to be appropriate. The fact that one professional accountant in public practice may quote a fee lower than another is not in itself unethical. Nevertheless, there may be threats to compliance with the fundamental principles arising from the level of fees quoted. For example, a self-interest threat to professional competence and due care is created if the fee quoted is so low that it may be difficult to perform the engagement in accordance with applicable technical and professional standards for that price.240.2 The significance of such threats will depend on factors such as the level of fee quoted and the services to which it applies. In view of these potential threats, safeguards should be considered and applied as necessary to eliminate them or reduce them to an acceptable level. Safeguards which may be adopted include: • Making the client aware of the terms of the engagement and, in ETHICS particular, the basis on which fees are charged and which services are covered by the quoted fee. • Assigning appropriate time and qualified staff to the task.240.3 Contingent fees are widely used for certain types of non-assurance engagements. 1 They may, however, give rise to threats to compliance with the fundamental principles in certain circumstances. They may give rise to a self-interest threat to objectivity. The significance of such threats will depend on factors including: • The nature of the engagement. • The range of possible fee amounts. • The basis for determining the fee. • Whether the outcome or result of the transaction is to be reviewed by an independent third party.240.4 The significance of such threats should be evaluated and, if they are other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate or reduce them to an acceptable level. Such safeguards may include:1 Contingent fees for non-assurance services provided to assurance clients are discussed in Section 290 of this part of the Code. 139 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) • An advance written agreement with the client as to the basis of remuneration. • Disclosure to intended users of the work performed by the professional accountant in public practice and the basis of remuneration. • Quality control policies and procedures. • Review by an objective third party of the work performed by the professional accountant in public practice.240.5 In certain circumstances, a professional accountant in public practice may receive a referral fee or commission relating to a client. For example, where the professional accountant in public practice does not provide the specific service required, a fee may be received for referring a continuing client to another professional accountant in public practice or other expert. A professional accountant in public practice may receive a commission from a third party (e.g., a software vendor) in connection with the sale of goods or services to a client. Accepting such a referral fee or commission may give rise to self-interest threats to objectivity and professional competence and due care.240.6 A professional accountant in public practice may also pay a referral fee to obtain a client, for example, where the client continues as a client of another professional accountant in public practice but requires specialist services not offered by the existing accountant. The payment of such a referral fee may also create a self-interest threat to objectivity and professional competence and due care.240.7 A professional accountant in public practice should not pay or receive a referral fee or commission, unless the professional accountant in public practice has established safeguards to eliminate the threats or reduce them to an acceptable level. Such safeguards may include: • Disclosing to the client any arrangements to pay a referral fee to another professional accountant for the work referred. • Disclosing to the client any arrangements to receive a referral fee for referring the client to another professional accountant in public practice. • Obtaining advance agreement from the client for commission arrangements in connection with the sale by a third party of goods or services to the client.240.8 A professional accountant in public practice may purchase all or part of another firm on the basis that payments will be made to individuals formerly owning the firm or to their heirs or estates. Such payments are not regarded as commissions or referral fees for the purpose of paragraph 240.5-240.7 above.ETHICS 140
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)SECTION 250Marketing Professional Services250.1 When a professional accountant in public practice solicits new work through advertising∗ or other forms of marketing, there may be potential threats to compliance with the fundamental principles. For example, a self-interest threat to compliance with the principle of professional behavior is created if services, achievements or products are marketed in a way that is inconsistent with that principle.250.2 A professional accountant in public practice should not bring the profession into disrepute when marketing professional services. The professional accountant in public practice should be honest and truthful and should not: • Make exaggerated claims for services offered, qualifications possessed or experience gained; or • Make disparaging references to unsubstantiated comparisons to the work of another. If the professional accountant in public practice is in doubt whether a ETHICS proposed form of advertising or marketing is appropriate, the professional accountant in public practice should consult with the relevant professional body.∗ See Definitions. 141 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)SECTION 260Gifts and Hospitality260.1 A professional accountant in public practice, or an immediate or close family member, may be offered gifts and hospitality from a client. Such an offer ordinarily gives rise to threats to compliance with the fundamental principles. For example, self-interest threats to objectivity may be created if a gift from a client is accepted; intimidation threats to objectivity may result from the possibility of such offers being made public.260.2 The significance of such threats will depend on the nature, value and intent behind the offer. Where gifts or hospitality which a reasonable and informed third party, having knowledge of all relevant information, would consider clearly insignificant are made a professional accountant in public practice may conclude that the offer is made in the normal course of business without the specific intent to influence decision making or to obtain information. In such cases, the professional accountant in public practice may generally conclude that there is no significant threat to compliance with the fundamental principles.260.3 If evaluated threats are other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate them or reduce them to an acceptable level. When the threats cannot be eliminated or reduced to an acceptable level through the application of safeguards, a professional accountant in public practice should not accept such an offer.ETHICS 142
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)SECTION 270Custody of Client Assets270.1 A professional accountant in public practice should not assume custody of client monies or other assets unless permitted to do so by law and, if so, in compliance with any additional legal duties imposed on a professional accountant in public practice holding such assets.270.2 The holding of client assets creates threats to compliance with the fundamental principles; for example, there is a self-interest threat to professional behavior and may be a self interest threat to objectivity arising from holding client assets. To safeguard against such threats, a professional accountant in public practice entrusted with money (or other assets) belonging to others should: (a) Keep such assets separately from personal or firm assets; and (b) Use such assets only for the purpose for which they are intended; and (c) At all times, be ready to account for those assets, and any income, dividends or gains generated, to any persons entitled to such ETHICS accounting; and (d) Comply with all relevant laws and regulations relevant to the holding of and accounting for such assets.270.3 In addition, professional accountants in public practice should be aware of threats to compliance with the fundamental principles through association with such assets, for example, if the assets were found to derive from illegal activities, such as money laundering. As part of client and engagement acceptance procedures for such services, professional accountants in public practice should make appropriate inquiries about the source of such assets and should consider their legal and regulatory obligations. They may also consider seeking legal advice. 143 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)SECTION 280Objectivity—All Services280.1 A professional accountant in public practice should consider when providing any professional service whether there are threats to compliance with the fundamental principle of objectivity resulting from having interests in, or relationships with, a client or directors, officers or employees. For example, a familiarity threat to objectivity may be created from a family or close personal or business relationship.280.2 A professional accountant in public practice who provides an assurance service is required to be independent of the assurance client. Independence of mind and in appearance is necessary to enable the professional accountant in public practice to express a conclusion, and be seen to express a conclusion, without bias, conflict of interest or undue influence of others. Section 290 provides specific guidance on independence requirements for professional accountants in public practice when performing an assurance engagement.280.3 The existence of threats to objectivity when providing any professional service will depend upon the particular circumstances of the engagement and the nature of the work that the professional accountant in public practice is performing.280.4 A professional accountant in public practice should evaluate the significance of identified threats and, if they are other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate them or reduce them to an acceptable level. Such safeguards may include: • Withdrawing from the engagement team. • Supervisory procedures. • Terminating the financial or business relationship giving rise to the threat. • Discussing the issue with higher levels of management within the firm. • Discussing the issue with those charged with governance of the client.ETHICS 144
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)SECTION 290Independence—Assurance Engagements290.1 In the case of an assurance engagement it is in the public interest and, therefore, required by this Code of Ethics, that members of assurance teams,* firms and, when applicable, network firms∗ be independent of assurance clients.290.2 Assurance engagements are designed to enhance intended users’ degree of confidence about the outcome of the evaluation or measurement of a subject matter against criteria. The International Framework for Assurance Engagements (the Assurance Framework) issued by the International Auditing and Assurance Standards Board describes the elements and objectives of an assurance engagement, and identifies engagements to which International Standards on Auditing (ISAs), International Standards on Review Engagements (ISREs) and International Standards on Assurance Engagements (ISAEs) apply. For a description of the elements and objectives of an assurance engagement reference should be made to the Assurance Framework.290.3 As further explained in the Assurance Framework, in an assurance ETHICS engagement the professional accountant in public practice expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.290.4 The outcome of the evaluation or measurement of a subject matter is the information that results from applying the criteria to the subject matter. The term “subject matter information” is used to mean the outcome of the evaluation or measurement of subject matter. For example: • The recognition, measurement, presentation and disclosure represented in the financial statements* (subject matter information) result from applying a financial reporting framework for recognition, measurement, presentation and disclosure, such as International Financial Reporting Standards, (criteria) to an entity’s financial position, financial performance and cash flows (subject matter). • An assertion about the effectiveness of internal control (subject matter information) results from applying a framework for evaluating the effectiveness of internal control, such as COSO or CoCo, (criteria) to internal control, a process (subject matter).∗ See Definitions. 145 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)290.5 Assurance engagements may be assertion-based or direct reporting. In either case they involve three separate parties: a public accountant in public practice, a responsible party and intended users.290.6 In an assertion-based assurance engagement, which includes a financial statement audit engagement,∗ the evaluation or measurement of the subject matter is performed by the responsible party, and the subject matter information is in the form of an assertion by the responsible party that is made available to the intended users.290.7 In a direct reporting assurance engagement the professional accountant in public practice either directly performs the evaluation or measurement of the subject matter, or obtains a representation from the responsible party that has performed the evaluation or measurement that is not available to the intended users. The subject matter information is provided to the intended users in the assurance report.290.8 Independence requires: Independence of Mind The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism. Independence in Appearance The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firm’s, or a member of the assurance team’s, integrity, objectivity or professional skepticism had been compromised.290.9 The use of the word “independence” on its own may create misunderstandings. Standing alone, the word may lead observers to suppose that a person exercising professional judgment ought to be free from all economic, financial and other relationships. This is impossible, as every member of society has relationships with others. Therefore, the significance of economic, financial and other relationships should also be evaluated in the light of what a reasonable and informed third party having knowledge of all relevant information would reasonably conclude to be unacceptable.290.10 Many different circumstances, or combination of circumstances, may be relevant and accordingly it is impossible to define every situation that creates threats to independence and specify the appropriate mitigating∗ See Definitions.ETHICS 146
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) action that should be taken. In addition, the nature of assurance engagements may differ and consequently different threats may exist, requiring the application of different safeguards. A conceptual framework that requires firms and members of assurance teams to identify, evaluate and address threats to independence, rather than merely comply with a set of specific rules which may be arbitrary, is, therefore, in the public interest.A Conceptual Approach to Independence290.11 Members of assurance teams, firms and network firms are required to apply the conceptual framework contained in Section 100 to the particular circumstances under consideration. In addition to identifying relationships between the firm, network firms, members of the assurance team and the assurance client, consideration should be given to whether relationships between individuals outside of the assurance team and the assurance client create threats to independence.290.12 The examples presented in this section are intended to illustrate the application of the conceptual framework and are not intended to be, nor should they be interpreted as, an exhaustive list of all circumstances that may create threats to independence. Consequently, it is not sufficient for ETHICS a member of an assurance team, a firm or a network firm merely to comply with the examples presented, rather they should apply the framework to the particular circumstances they face.290.13 The nature of the threats to independence and the applicable safeguards necessary to eliminate the threats or reduce them to an acceptable level differ depending on the characteristics of the individual assurance engagement: whether it is a financial statement audit engagement or another type of assurance engagement; and in the latter case, the purpose, subject matter information and intended users of the report. A firm should, therefore, evaluate the relevant circumstances, the nature of the assurance engagement and the threats to independence in deciding whether it is appropriate to accept or continue an engagement, as well as the nature of the safeguards required and whether a particular individual should be a member of the assurance team.Assertion-Based Assurance EngagementsFinancial Statement Audit Engagements290.14 Financial statement audit engagements are relevant to a wide range of potential users; consequently, in addition to independence of mind, independence in appearance is of particular significance. Accordingly, for financial statement audit clients, the members of the assurance team, the firm and network firms are required to be independent of the financial statement audit client. Such independence requirements include 147 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) prohibitions regarding certain relationships between members of the assurance team and directors, officers and employees of the client in a position to exert direct and significant influence over the subject matter information (the financial statements). Also, consideration should be given to whether threats to independence are created by relationships with employees of the client in a position to exert direct and significant influence over the subject matter (the financial position, financial performance and cash flows).Other Assertion-Based Assurance Engagements290.15 In an assertion-based assurance engagement where the client is not a financial statement audit client, the members of the assurance team and the firm are required to be independent of the assurance client (the responsible party, which is responsible for the subject matter information and may be responsible for the subject matter). Such independence requirements include prohibitions regarding certain relationships between members of the assurance team and directors, officers and employees of the client in a position to exert direct and significant influence over the subject matter information. Also, consideration should be given to whether threats to independence are created by relationships with employees of the client in a position to exert direct and significant influence over the subject matter of the engagement. Consideration should also be given to any threats that the firm has reason to believe may be created by network firm interests and relationships.290.16 In the majority of assertion-based assurance engagements, that are not financial statement audit engagements, the responsible party is responsible for the subject matter information and the subject matter. However, in some engagements the responsible party may not be responsible for the subject matter. For example, when a professional accountant in public practice is engaged to perform an assurance engagement regarding a report that an environmental consultant has prepared about a company’s sustainability practices, for distribution to intended users, the environmental consultant is the responsible party for the subject matter information but the company is responsible for the subject matter (the sustainability practices).290.17 In those assertion-based assurance engagements that are not financial statement audit engagements, where the responsible party is responsible for the subject matter information but not the subject matter the members of the assurance team and the firm are required to be independent of the party responsible for the subject matter information (the assurance client). In addition, consideration should be given to any threats the firm has reason to believe may be created by interests and relationships between a member of the assurance team, the firm, a network firm and the party responsible for the subject matter.ETHICS 148
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)Direct Reporting Assurance Engagements290.18 In a direct reporting assurance engagement the members of the assurance team and the firm are required to be independent of the assurance client (the party responsible for the subject matter).Restricted Use Reports290.19 In the case of an assurance report in respect of a non-financial statement audit client expressly restricted for use by identified users, the users of the report are considered to be knowledgeable as to the purpose, subject matter information and limitations of the report through their participation in establishing the nature and scope of the firm’s instructions to deliver the services, including the criteria against which the subject matter are to be evaluated or measured. This knowledge and the enhanced ability of the firm to communicate about safeguards with all users of the report increase the effectiveness of safeguards to independence in appearance. These circumstances may be taken into account by the firm in evaluating the threats to independence and considering the applicable safeguards necessary to eliminate the threats or reduce them to an acceptable level. At a minimum, it will be necessary to apply the provisions of this section in evaluating the independence of members of ETHICS the assurance team and their immediate and close family. Further, if the firm had a material financial interest, whether direct or indirect, in the assurance client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. Limited consideration of any threats created by network firm interests and relationships may be sufficient.Multiple Responsible Parties290.20 In some assurance engagements, whether assertion-based or direct reporting, that are not financial statement audit engagements, there might be several responsible parties. In such engagements, in determining whether it is necessary to apply the provisions in this section to each responsible party, the firm may take into account whether an interest or relationship between the firm, or a member of the assurance team, and a particular responsible party would create a threat to independence that is other than clearly insignificant in the context of the subject matter information. This will take into account factors such as: • The materiality of the subject matter information (or the subject matter) for which the particular responsible party is responsible; and • The degree of public interest associated with the engagement. If the firm determines that the threat to independence created by any such interest or relationship with a particular responsible party would be 149 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) clearly insignificant it may not be necessary to apply all of the provisions of this section to that responsible party.Other Considerations290.21 The threats and safeguards identified in this section are generally discussed in the context of interests or relationships between the firm, network firms, members of the assurance team and the assurance client. In the case of a financial statement audit client that is a listed entity, the firm and any network firms are required to consider the interests and relationships that involve that client’s related entities. Ideally those entities and the interests and relationships should be identified in advance. For all other assurance clients, when the assurance team has reason to believe that a related entity∗ of such an assurance client is relevant to the evaluation of the firm’s independence of the client, the assurance team should consider that related entity when evaluating independence and applying appropriate safeguards.290.22 The evaluation of threats to independence and subsequent action should be supported by evidence obtained before accepting the engagement and while it is being performed. The obligation to make such an evaluation and take action arises when a firm, a network firm or a member of the assurance team knows, or could reasonably be expected to know, of circumstances or relationships that might compromise independence. There may be occasions when the firm, a network firm or an individual inadvertently violates this section. If such an inadvertent violation occurs, it would generally not compromise independence with respect to an assurance client provided the firm has appropriate quality control policies and procedures in place to promote independence and, once discovered, the violation is corrected promptly and any necessary safeguards are applied.290.23 Throughout this section, reference is made to significant and clearly insignificant threats in the evaluation of independence. In considering the significance of any particular matter, qualitative as well as quantitative factors should be taken into account. A matter should be considered clearly insignificant only if it is deemed to be both trivial and inconsequential.Objective and Structure of this Section290.24 The objective of this section is to assist firms and members of assurance teams in: (a) Identifying threats to independence;∗ See Definitions.ETHICS 150
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) (b) Evaluating whether these threats are clearly insignificant; and (c) In cases when the threats are not clearly insignificant, identifying and applying appropriate safeguards to eliminate or reduce the threats to an acceptable level. Consideration should always be given to what a reasonable and informed third party having knowledge of all relevant information, including safeguards applied, would reasonably conclude to be unacceptable. In situations when no safeguards are available to reduce the threat to an acceptable level, the only possible actions are to eliminate the activities or interest creating the threat, or to refuse to accept or continue the assurance engagement.290.25 This section concludes with some examples of how this conceptual approach to independence is to be applied to specific circumstances and relationships. The examples discuss threats to independence that may be created by specific circumstances and relationships (paragraphs 290.100 onwards). Professional judgment is used to determine the appropriate safeguards to eliminate threats to independence or to reduce them to an acceptable level. In certain examples, the threats to independence are so significant the only possible actions are to eliminate the activities or ETHICS interest creating the threat, or to refuse to accept or continue the assurance engagement. In other examples, the threat can be eliminated or reduced to an acceptable level by the application of safeguards. The examples are not intended to be all-inclusive.290.26 Certain examples in this section indicate how the framework is to be applied to a financial statements audit engagement for a listed entity. When a member body chooses not to differentiate between listed entities and other entities, the examples that relate to financial statement audit engagements for listed entities should be considered to apply to all financial statement audit engagements.290.27 When threats to independence that are not clearly insignificant are identified, and the firm decides to accept or continue the assurance engagement, the decision should be documented. The documentation should include a description of the threats identified and the safeguards applied to eliminate or reduce the threats to an acceptable level.290.28 The evaluation of the significance of any threats to independence and the safeguards necessary to reduce any threats to an acceptable level, takes into account the public interest. Certain entities may be of significant public interest because, as a result of their business, their size or their corporate status they have a wide range of stakeholders. Examples of such entities may include listed companies, credit institutions, insurance companies, and pension funds. Because of the strong public interest in the financial statements of listed entities, certain paragraphs in this section 151 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) deal with additional matters that are relevant to the financial statement audit of listed entities. Consideration should be given to the application of the framework in relation to the financial statement audit of listed entities to other financial statement audit clients that may be of significant public interest.290.29 Audit committees can have an important corporate governance role when they are independent of client management and can assist the Board of Directors in satisfying themselves that a firm is independent in carrying out its audit role. There should be regular communications between the firm and the audit committee (or other governance body if there is no audit committee) of listed entities regarding relationships and other matters that might, in the firm’s opinion, reasonably be thought to bear on independence.290.30 Firms should establish policies and procedures relating to independence communications with audit committees, or others charged with governance of the client. In the case of the financial statement audit of listed entities, the firm should communicate orally and in writing at least annually, all relationships and other matters between the firm, network firms and the financial statement audit client that in the firm’s professional judgment may reasonably be thought to bear on independence. Matters to be communicated will vary in each circumstance and should be decided by the firm, but should generally address the relevant matters set out in this section.Engagement Period290.31 The members of the assurance team and the firm should be independent of the assurance client during the period of the assurance engagement. The period of the engagement starts when the assurance team begins to perform assurance services and ends when the assurance report is issued, except when the assurance engagement is of a recurring nature. If the assurance engagement is expected to recur, the period of the assurance engagement ends with the notification by either party that the professional relationship has terminated or the issuance of the final assurance report, whichever is later.290.32 In the case of a financial statement audit engagement, the engagement period includes the period covered by the financial statements reported on by the firm. When an entity becomes a financial statement audit client during or after the period covered by the financial statements that the firm will report on, the firm should consider whether any threats to independence may be created by: • Financial or business relationships with the audit client during or after the period covered by the financial statements, but prior to the acceptance of the financial statement audit engagement; orETHICS 152
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) • Previous services provided to the audit client. Similarly, in the case of an assurance engagement that is not a financial statement audit engagement, the firm should consider whether any financial or business relationships or previous services may create threats to independence.290.33 If a non-assurance service was provided to the financial statement audit client during or after the period covered by the financial statements but before the commencement of professional services in connection with the financial statement audit and the service would be prohibited during the period of the audit engagement, consideration should be given to the threats to independence, if any, arising from the service. If the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards may include: • Discussing independence issues related to the provision of the non- assurance service with those charged with governance of the client, such as the audit committee; • Obtaining the client’s acknowledgement of responsibility for the ETHICS results of the non-assurance service; • Precluding personnel who provided the non-assurance service from participating in the financial statement audit engagement; and • Engaging another firm to review the results of the non-assurance service or having another firm re-perform the non-assurance service to the extent necessary to enable it to take responsibility for the service.290.34 A non-assurance service provided to a non-listed financial statement audit client will not impair the firm’s independence when the client becomes a listed entity provided: (a) The previous non-assurance service was permissible under this section for non-listed financial statement audit clients; (b) The service will be terminated within a reasonable period of time of the client becoming a listed entity, if they are impermissible under this section for financial statement audit clients that are listed entities; and (c) The firm has implemented appropriate safeguards to eliminate any threats to independence arising from the previous service or reduce them to an acceptable level. 153 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)Application of Framework to Specific SituationsContents ParagraphIntroduction ................................................................................................. 290.100Financial Interests ....................................................................................... 290.104 Provisions Applicable to all Assurance Clients ................................... 290.106 Provisions Applicable to Financial Statement Audit Clients ............... 290.113 Provisions Applicable to Non-Financial Statement Audit Assurance Clients ................................................................................ 290.122Loans and Guarantees ................................................................................. 290.126Close Business Relationships with Assurance Clients ................................ 290.132Family and Personal Relationships ............................................................. 290.135Employment with Assurance Clients .......................................................... 290.143Recent Service with Assurance Clients ....................................................... 290.146Serving as an Officer or Director on the Board of Assurance Clients ........ 290.149Long Association of Senior Personnel with Assurance Clients General Provisions ............................................................................... 290.153 Financial Statement Audit Clients that are Listed Entities .................. 290.154Provision of Non-Assurance Services to Assurance Clients ....................... 290.158 Preparing Accounting Records and Financial Statements ................... 290.166 General Provisions ........................................................................ 290.169 Financial Statement Audit Clients that are not Listed Entities ..... 290.170 Financial Statement Audit Clients that are Listed Entities ........... 290.171 Emergency Situations ................................................................... 290.173 Valuation Services ............................................................................... 290.174 Provision of Taxation Services to Financial Statement Audit Clients . 290.180 Provision of Internal Audit Services to Financial Statement Audit Clients ........................................................................................... 290.181 Provision of IT Systems Services to Financial Statement Audit Clients ........................................................................................... 290.187 Temporary Staff Assignments to Financial Statement Audit Clients .. 290.192ETHICS 154
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) Provision of Litigation Support Services to Financial Statement Audit Clients ................................................................................. 290.193 Provision of Legal Services to Financial Statement Audit Clients ...... 290.196 Recruiting Senior Management ........................................................... 290.203 Corporate Finance and Similar Activities ............................................ 290.204Fees and Pricing Fees—Relative Size ............................................................................. 290.206 Fees—Overdue .................................................................................... 290.208 Pricing ................................................................................................. 290.209 Contingent Fees ................................................................................... 290.210Gifts and Hospitality ................................................................................... 290.212Actual or Threatened Litigation .................................................................. 290.214 ETHICS 155 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)Introduction290.100 The following examples describe specific circumstances and relationships that may create threats to independence. The examples describe the potential threats created and the safeguards that may be appropriate to eliminate the threats or reduce them to an acceptable level in each circumstance. The examples are not all inclusive. In practice, the firm, network firms and the members of the assurance team will be required to assess the implications of similar, but different, circumstances and relationships and to determine whether safeguards, including the safeguards in paragraphs 200.12-200.15 can be applied to satisfactorily address the threats to independence.290.101 Some of the examples deal with financial statement audit clients while others deal with assurance engagements for clients that are not financial statement audit clients. The examples illustrate how safeguards should be applied to fulfill the requirement for the members of the assurance team, the firm and network firms to be independent of a financial statement audit client, and for the members of the assurance team and the firm to be independent of an assurance client that is not a financial statement audit client. The examples do not include assurance reports to a non-financial statement audit client expressly restricted for use by identified users. As stated in paragraph 290.19 for such engagements, members of the assurance team and their immediate and close family are required to be independent of the assurance client. Further, the firm should not have a material financial interest, direct or indirect, in the assurance client.290.102 The examples illustrate how the framework applies to financial statement audit clients and other assurance clients. The examples should be read in conjunction with paragraphs 290.20 which explain that, in the majority of assurance engagements, there is one responsible party and that responsible party comprises the assurance client. However, in some assurance engagements there are two responsible parties. In such circumstances, consideration should be given to any threats the firm has reason to believe may be created by interests and relationships between a member of the assurance team, the firm, a network firm and the party responsible for the subject matter.290.103 Interpretation 2005-01 to this section provides further guidance on the application of the independence requirements contained in this section to assurance engagements that are not financial statement audit engagements.Financial Interests290.104 A financial interest in an assurance client may create a self-interest threat. In evaluating the significance of the threat, and the appropriate safeguards to be applied to eliminate the threat or reduce it to an acceptable level, itETHICS 156
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) is necessary to examine the nature of the financial interest. This includes an evaluation of the role of the person holding the financial interest, the materiality of the financial interest and the type of financial interest (direct or indirect).290.105 When evaluating the type of financial interest, consideration should be given to the fact that financial interests range from those where the individual has no control over the investment vehicle or the financial interest held (e.g., a mutual fund, unit trust or similar intermediary vehicle) to those where the individual has control over the financial interest (e.g., as a trustee) or is able to influence investment decisions. In evaluating the significance of any threat to independence, it is important to consider the degree of control or influence that can be exercised over the intermediary, the financial interest held, or its investment strategy. When control exists, the financial interest should be considered direct. Conversely, when the holder of the financial interest has no ability to exercise such control the financial interest should be considered indirect.Provisions Applicable to all Assurance Clients290.106 If a member of the assurance team, or their immediate family member, has a direct financial interest,∗ or a material indirect financial ETHICS interest,* in the assurance client, the self-interest threat created would be so significant the only safeguards available to eliminate the threat or reduce it to an acceptable level would be to: (a) Dispose of the direct financial interest prior to the individual becoming a member of the assurance team; (b) Dispose of the indirect financial interest in total or dispose of a sufficient amount of it so that the remaining interest is no longer material prior to the individual becoming a member of the assurance team; or (c) Remove the member of the assurance team from the assurance engagement.290.107 If a member of the assurance team, or their immediate family member receives, by way of, for example, an inheritance, gift or, as a result of a merger, a direct financial interest or a material indirect financial interest in the assurance client, a self-interest threat would be created. The following safeguards should be applied to eliminate the threat or reduce it to an acceptable level: (a) Disposing of the financial interest at the earliest practical date; or∗ See Definitions. 157 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) (b) Removing the member of the assurance team from the assurance engagement. During the period prior to disposal of the financial interest or the removal of the individual from the assurance team, consideration should be given to whether additional safeguards are necessary to reduce the threat to an acceptable level. Such safeguards might include: • Discussing the matter with those charged with governance, such as the audit committee; or • Involving an additional professional accountant to review the work done, or otherwise advise as necessary.290.108 When a member of the assurance team knows that his or her close family member has a direct financial interest or a material indirect financial interest in the assurance client, a self-interest threat may be created. In evaluating the significance of any threat, consideration should be given to the nature of the relationship between the member of the assurance team and the close family member and the materiality of the financial interest. Once the significance of the threat has been evaluated, safeguards should be considered and applied as necessary. Such safeguards might include: • The close family member disposing of all or a sufficient portion of the financial interest at the earliest practical date; • Discussing the matter with those charged with governance, such as the audit committee; • Involving an additional professional accountant who did not take part in the assurance engagement to review the work done by the member of the assurance team with the close family relationship or otherwise advise as necessary; or • Removing the individual from the assurance engagement.290.109 When a firm or a member of the assurance team holds a direct financial interest or a material indirect financial interest in the assurance client as a trustee, a self-interest threat may be created by the possible influence of the trust over the assurance client. Accordingly, such an interest should only be held when: (a) The member of the assurance team, an immediate family member of the member of the assurance team, and the firm are not beneficiaries of the trust; (b) The interest held by the trust in the assurance client is not material to the trust; (c) The trust is not able to exercise significant influence over the assurance client; andETHICS 158
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) (d) The member of the assurance team or the firm does not have significant influence over any investment decision involving a financial interest in the assurance client.290.110 Consideration should be given to whether a self-interest threat may be created by the financial interests of individuals outside of the assurance team and their immediate and close family members. Such individuals would include: • Partners, and their immediate family members, who are not members of the assurance team; • Partners and managerial employees who provide non-assurance services to the assurance client; and • Individuals who have a close personal relationship with a member of the assurance team. Whether the interests held by such individuals may create a self-interest threat will depend upon factors such as: • The firm’s organizational, operating and reporting structure; and • The nature of the relationship between the individual and the ETHICS member of the assurance team. The significance of the threat should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include: • Where appropriate, policies to restrict people from holding such interests; • Discussing the matter with those charged with governance, such as the audit committee; or • Involving an additional professional accountant who did not take part in the assurance engagement to review the work done or otherwise advise as necessary.290.111 An inadvertent violation of this section as it relates to a financial interest in an assurance client would not impair the independence of the firm, the network firm or a member of the assurance team when: (a) The firm, and the network firm, have established policies and procedures that require all professionals to report promptly to the firm any breaches resulting from the purchase, inheritance or other acquisition of a financial interest in the assurance client; (b) The firm, and the network firm, promptly notify the professional that the financial interest should be disposed of; and 159 ETHICS
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006) (c) The disposal occurs at the earliest practical date after identification of the issue, or the professional is removed from the assurance team.290.112 When an inadvertent violation of this section relating to a financial interest in an assurance client has occurred, the firm should consider whether any safeguards should be applied. Such safeguards might include: • Involving an additional professional accountant who did not take part in the assurance engagement to review the work done by the member of the assurance team; or • Excluding the individual from any substantive decision-making concerning the assurance engagement.Provisions Applicable to Financial Statement Audit Clients290.113 If a firm, or a network firm, has a direct financial interest in a financial statement audit client of the firm the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. Consequently, disposal of the financial interest would be the only action appropriate to permit the firm to perform the engagement.290.114 If a firm, or a network firm, has a material indirect financial interest in a financial statement audit client of the firm a self-interest threat is also created. The only actions appropriate to permit the firm to perform the engagement would be for the firm, or the network firm, either to dispose of the indirect interest in total or to dispose of a sufficient amount of it so that the remaining interest is no longer material.290.115 If a firm, or a network firm, has a material financial interest in an entity that has a controlling interest in a financial statement audit client, the self- interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. The only actions appropriate to permit the firm to perform the engagement would be for the firm, or the network firm, either to dispose of the financial interest in total or to dispose of a sufficient amount of it so that the remaining interest is no longer material.290.116 If the retirement benefit plan of a firm, or network firm, has a financial interest in a financial statement audit client a self-interest threat may be created. Accordingly, the significance of any such threat created should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate the threat or reduce it to an acceptable level.ETHICS 160
    • CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (EFFFECTIVE JUNE 30, 2006)290.117 If other partners, including partners who do not perform assurance engagements, or their immediate family, in the office* in which the engagement partner∗ practices in connection with the financial statement audit hold a direct financial interest or a material indirect financial interest in that audit client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. Accordingly, such partners or their immediate family should not hold any such financial interests in such an audit client.290.118 The office in which the engagement partner practices in connection with the financial statement audit is not necessarily the office to which that partner is assigned. Accordingly, when the engagement pa