IFAC Code of Ethics for Professional Accountants - Updated

1. Ethics & Governance for
Professional Accountants
Paper presented by CPA Joseph Sheffu
NBAA Seminar on Accounting &
Auditing Issues
3rd – 6th Feb.2021
Malaika Beach Resort & Hotel - Mwanza

2. Agenda
 Accounting and the Society
 Public Interest Framework
 Ethics – Overview of Code of Ethics for Professional
Accountants
 Governance Principles
IFAC’s Good Practice Guidance on our role
titled “Evaluating and Improving Governance
in Organisations, 2009”

3. Financial Reporting Ecosystem.
Audited
Financial
Reports
Shareholders
Customers
Banks
Suppliers
Investors
Trade Unions
Civil
Societies
Communities
Regulators
Competitors
Oversight
Bodies

4. Accounting and the Society
What Is the Accountancy Profession For?
 We support market systems and economy
 Technocrats and trusted advisors
 Society needs information and advice that supports
important decisions that affect organisations, people
and their lives, and society as a whole
 With the privileges and benefits that accompany CPA
status come a variety of obligations, foremost of which
is the obligation to put the good of society ahead of
personal interests.

5. Accounting and the Society
What Is the Accountancy Profession For?
 Provide, analyse, interpret information to management for
formulation of strategy, planning, decision-making and control
 Measuring performance, record financial transactions and
communicate to stakeholders
 Managing risks, providing internal control and business
assurance
 Creating value through effective use of resources (financial
and non financial) through (a) understanding of drivers of value
to stakeholders and (b) organisational innovation

6. Accounting and the Society
What Is the Accountancy Profession For?
 An understanding of ethics and governance is essential
to CPAs.
 If CPA are to effectively support management in
discharging their stewardship functions then they should
demonstrate a deeper better understanding of ethics
and corporate governance frameworks and mechanisms
and be proficient in regulatory regimes, compliance
requirements to ensure lawful, ethical and effective
corporate behavior and operations.

7. Accounting and the Society
What Is the Accountancy Profession For?
 Should have knowledge to identify and resolve
professional and ethical issues
 Should beware of pressures that can them in their
working life
 Should know what one must do to promote the
confidence and trust of society and hence fulfils the role
as a positive social force

8. Public Interest Obligation
 The accounting profession is the clearest and most
important case of a profession whose role is paramount for
the economic function; whose commitment to the public
interest is an explicit responsibility; and whose
“professionalism” is embedded and articulated in its Code of
Ethics.
 The effects of ethical behavior in accounting are far
reaching in the economy.
 For sustainability of our profession depends on a our Ethical
conduct. Be seen and be perceived as ethical. Making
judgments that embody ethical fundamental principles

9. IFAC’s Public Interest Framework (3 criteria)
 Must be mindful of the wider economic, political, and
cultural implications of our work.
 Serving the public interest should be evaluated against 3
criteria. Enabling us to assess whether or not (and the
degree to which) any policy, action, process or condition is
in the public interest.
 1. Consideration of costs and benefits for society as a
whole
 2. Adherence to democratic principles and processes
 3. Respect for cultural and ethical diversity

10. IFAC’s Public Interest Framework (3 criteria)
 All 3 criteria must be met for us to conclude public
interest is served.
 However, the three criteria may not always be met to the
same degree, in which case determining what is in the
public interest involves a balance, or trade-off, between
the three.

11. What is “Interest” - are all things valued by
society.
 Providing sound financial and business reporting to
stakeholders - all parties in the marketplace directly and
indirectly impacted by that reporting;
 Facilitating the comparability of financial reporting and
auditing across different jurisdictions;
 Reducing economic uncertainty in the marketplace and
throughout the financial infrastructure (e.g., banking,
insurance, investment firms, etc.);
 Requiring that CPAs apply high standards of ethical behavior
and professional judgment

12. What is “Interest” - are all things valued by
society.
 Specifying appropriate educational requirements and
qualifications for CPAs (NBAA emanated from public interest);
 CPAs to enable governments and public sector organizations to
provide their constituencies with sound fiscal information and
decision-making; and
 Providing CPAs in business with the knowledge, judgment, and
the means to contribute to sound corporate governance and
performance management for the organizations they serve.

13. Some societal challenges CPAs face
 Public higher expectations of our role, can be unfair
 Flawed/outdated laws and regulations e.g. Public Finance &
Tax statutes that have “gaps”
 Political interference and lack of appreciation of our role
 Ineffective Board/Oversight Boards
 Human Capital deficiency, e.g. Parliamentarians, no CPAs
 Bureaucracy in public services delivery;
 Corruption, state capture
 Lack of whistleblower protection

14. Have strong influence, powerful role,
can be abused
 CPA are part of the chain of Command
 Direct involved in the preparation of strategic plans,
budgets, procurement plans, forecasts and projections
 Being part of the Approval Process for major finance
activities
 Being part of the Authorised Signatories signing Cheques
even where one is not an approver of the spending

15. Have strong influence, powerful role,
can be abused
 Enabler/Disabler of Fraud; by our action or inaction
 Direct involved in preparation of financial reports aimed
for other users. Messengers of good or bad news
 Forefront in the design, implementation of defense
systems
 Cut across all operations. Called upon to help support answer
queries by Board, oversight

16. Ethical Dilemmas, Examples
 Temptations to manipulate financial results – drivers:
Incentive, valuation gains, dividends, competition –
market leadership, avoid back consequences e.g. breach
of debt covenants
 CEO/CFO instructing subordinate employee (revenue
accountant) to record revenue transaction in an incorrect
manner e.g. ignoring cut-off to boost revenues for the
current year end. Management receives a bonus for the
boosted revenue and the subordinate receives
recognition in an upcoming performance review.

17. Ethical Dilemmas, Examples
 Breach of laws and regulations e.g. Tax laws, involuntary due to
cash flows, voluntary due to other incentives
 Our business tends to have net VAT input position each month
meaning we always have to pay VAT to TRA. Our debtors mostly
Government institutions do not pay us timely whereas we have
to pay net VAT input within 17 days of end of month regardless
of whether our debtors have paid us. Failure to remit VAT
timely would result in punitive financial penalty. Pretty unfair
since TRA is part of the Government who owes us money.
 CFO dilemma is whether to quantify the penalty and accrue as
liability and later settle with TRA or ignore until found out by
TRA? Should the Board be made aware of the actions?

18. IESBA’s New Code of Ethics for Professional
Accountants (June 2019)

19. IESBA’s New Code of Ethics for Professional
Accountants (June 2019)
 Authorised Spending

20. Overarching Requirements (ORs) /
5+1 Fundamental Principles (FP)
THE
CONCEPTUAL
FRAMEWORK
Integrity
Objectivity Confidentiality
Professional
Behavior
Independence
Prof.
Competence
& Due Care

21. Enhanced Conceptual Framework
 Dedicated provisions
that apply to all
CPAs, in all
circumstances when
dealing with Ethics
& Independence
(E/I)
 Establishing
exhaustive list of all
E/I circumstances is
impractical
Evaluate
Threats
Address
Threats
Identify
Threat
• Exercise
professional
judgement
• Remain alert for
new information
and changes in
facts and
circumstances
• Use the reasonable
and informed third
party test

22. The Conceptual Framework

23. What are the Threats?

24. Enhanced Conceptual Framework
 Steps of the Conceptual Framework

25. Key Enhancements to Conceptual Framework
 Identified threats that are not at acceptable level must be
addressed in one of the 3 ways:
Eliminate the circumstances creating threats
Apply safeguards; or
Decline or end engagement/activity
 Emphasis that if threats cannot be addressed, CPA must decline
or stop
 New requirements to “step back” in forming overall conclusion

26. Other substantive revisions – CPA-IBs
Preparing and presentation of information
 More comprehensive provisions addressing CPA-IBs’
responsibilities when preparing or presenting information
 Prohibition on exercising discretion when preparing or
presenting information with intent to mislead or inappropriate
influence contractual or regulatory outcomes
 Enhanced guidance to assist CPA-IB in disassociating from
misleading information

27. Other substantive revisions – CPA-IBs
Pressure to Breach Fundamental Principles
 Prohibition on allowing pressure
from others to result in a breach of
Fundamental principles
 Prohibition on placing pressure on
others that would lead them to
breach Fundamental Principles
 Guidance to assist in navigating
situations involving pressure
 Give examples of ‘Pressure’ Red
Flags

28. Other substantive revisions – CPA-IBs & CPA-PPs
Inducements, Incl. Gift & Hospitality
 Clarifications about appropriate
boundaries for offering and
accepting of inducements
 Prohibition on offering or accepting
inducements with intent to
improperly influence behavior
 Application of conceptual framework
when no actual or perceived
improper intent

29. Other substantive revisions – Independence
Long Association
 Strengthen general provisions addressing long association
 A strengthened Partner rotation regime for PIE audits,
including:
Extant Revised
7 years time-on: all KAPs No change
2 years cooling-off: all KAPs
5 years cooling-off: EP
3 years cooling-off: EQCR
2 years cooling-off: KAPs

30. Other substantive revisions
Applicability of CPA-IB provisions to CPA-PPs
 New requirement and clearer guidance for CPA-PPs that
relevant CPA-IB provisions in Part 2 are applicable to them
when they perform professional activities pursuant to their
relationship with the Firm, whether as:
Whether as contractor, employees or owners of the firm
 Illustrations of situations in which provision in part 2 apply to a
CPA-PP.

31. Other substantive revisions
Professional judgement and professional Scepticism
 New guidance:
For all CPAs to emphasize the
importance of obtaining an
understanding of the facts and
circumstances when exercising
professional judgement
For CPA-PP - that explains how
compliance with the FPs supports
the exercise of professional
skepticism

32. Examples of threats -CPAIB & CPAPP
CPAIB CPAPP
Conflict of Interest X X
Preparation and presentation of Information X
Acting with Sufficient Expertise X
Financial Interests, Compensation, Incentives linkedX X
Inducements, Gifts & Hospitality X X
Responding to NOCLAR X
Pressure to Breach Fundamental Principles X

33. Examples of threats -Unique to CPAPP
Second Opinion X
Fees and Other Type of Remunerations X
Custody of Client's Assets X
Actual & Threatened Litigation X
Business Relationship X
Family and Personal Relationship X
Recent Services with Audit Client X
Serving as Director X
Employments with Client X
Temporary Assignments X
Long Association of Personnel with audit client X

34. Examples of threats - CPAPP
NON AUDIT SERVICES – largely prohibited – with
exceptions
Accounting & Booking X
Administrative Support X
Valuation services X
Tax services X
Internal Audit X
IT Services X
Litigation support X
Legal services X
Recruitment services X
Corporate Finance X

35. Understanding the Accountant’s Role in
Corporate Governance

36. Understanding the Accountant’s Role
in Corporate Governance
 Accountants are the Promoters, Enforcers and
Gatekeepers of Good Corporate Governance
and Financial Reporting
 IFAC had developed a Good Practice Guidance
on our role titled “Evaluating and Improving
Governance in Organisations, 2009”

37. Understanding the Accountant’s Role
in Corporate Governance
 Different organisation take different culture and
approach to corporate governance
 Various Corporate Governance frameworks have been
developed locally and internationally
 Good corporate governance is generally linked to good
corporate performance

38. Governance: Conformity Vs. Performance
 Most organisation have governance structures in place
 At its basic, they focus on Conformity with Laws and
Regulations
 However, intention is to also focus in enabling
organisation to improve performance
 Good Corporate Governance is creating a balance
between Conformity and Performance
 Successful organisation adhere to good corporate
governance principles, periodical evaluate, benchmark
against frameworks, best practices evolve with changes
in environment

39. Governance Framework - Definitions
 Governance: set of responsibilities and practices
exercised by the board and executive management
(Governing body) with goals to (i) provide strategic
direction (ii) ensuring objectives are met (iii) manage
risks (iv) responsible utilisation of resources
 Conformity: compliance with laws, regulations, best
practices, codes and provide assurance to stakeholders in
general
 Performance: policies and procedures that (a) focus on
opportunities and risks, strategy, value creation, and
resource utilisation, and (b) guide an organisation’s
decision-making.

40. Governance Framework
 Principle-based guidance
framework composed of
two dimensions i.e. the
Performance &
Conformance which
together they represent
the entire value
creation, resource
utilisation, and
accountability framework
of an organisation
 Both historical and
forward looking

41. Governance Framework:
Conformance
 Concerning with Compliance with laws and regulations
 Concerning risk management – strategic, tactical and
operational policies
 Focusing on achieving goals – effectively and efficiently
 Systems for financial and non financial reporting works
 Management fiduciary responsibilities met
 Fraud, criminal preventions

42. Governance Framework:
Performance
 Organisation is a business – must make profits,
create/add value/wealth, return to stakeholders
 Establish robust decision-making process, incl.
determination of risk appetite. Oversight strategy
implementation
 Alignment of business operations, models, resource
utilisation with strategic direction and organisation’s
risk appetite
 Reacting to changing dynamics

43. 12 Key Principles (IFAC guidance)
1. The creation and optimization of sustainable stakeholder value
should be the objective of governance.
2. Good governance should appropriately balance the interests of
stakeholders.
3. The performance and conformance dimensions of governance are
both important to optimize stakeholder value.
4. Good governance should be fully integrated into the organization.
5. The governing body should be properly constituted and
structured to achieve an appropriate balance between performance
and conformance.

44. 12 Key Principles (IFAC guidance)
6. The governing body should establish a set of fundamental
values by which the organization operates.
7. The governing body should understand the organization’s
business model, its operating environment, and how sustainable
stakeholder value is created and optimized.
8. The governing body should provide strategic direction and
oversight in both the performance and conformance dimensions.
9. Effective and efficient enterprise risk management should
form an integral part of an organization’s governance system.
10. Resource utilization should align with strategic direction.

45. 12 Key Principles (IFAC guidance)
11. The governing body should periodically measure and
evaluate the organization’s strategic direction and
business operations, and follow up with appropriate actions
to ensure appropriate progress and continued alignment with
objectives.
12. The governing body should ensure that reasonable
demands from stakeholders for information are met, and
that the information provided is relevant, understandable,
and reliable.

46. Conclusion
 Most Corporate failures globally are attributed to
Corporate Governance failure including unethical
conduct
 CPAs should always be conscious of their unique public
interest obligations
 CPAs should understand that they serves two masters –
the profession Vs. what is expected by their employers
 CPAs have to be conscious of their individual actions or
inaction and implication to the profession as a whole

47. Conclusion
 All should regularly update and enhance their
knowledge of emerging Ethics and Corporate Governance
developments
 The International Code of Ethics for Professional
Accountants, including International Independence
Standards, establishes the standard of behavior
expected of a CPA. That is our public interest
responsibility.
 We should regularly evaluate our organisations for
effectiveness in these aspects