ethics and governance.
Module 05 APES 110 Applied ACCT20080 Ethics and Governance
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Learning Objectives: After completing this module, you should be able to:
1. Explain the threats applicable to accountants in public practice, and identify appropriate safeguards
2. Explain the threats applicable to accountants in business, and identify appropriate safeguards
3. Apply the conceptual framework contained within APES 110 to situations in public practice and in business
4. Explain the consequences of not complying with APES 110 in public practice and in business.
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Part B: Members in Public Practice "Members in public practice" refers to members who are working in public accounting firms performing any role or task for that firm. Public accounting firms have particular duties towards the public interest in that they must provide advice and perform their duties to a very high technical, professional and ethical standard.
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Part B of APES 110 is split into three major sections: • Paragraphs 200–280 provide guidance for accountants in public
practice, • Paragraphs 290.x provide specific guidance for auditors in terms of
safeguarding their independence, and • Paragraphs 291.x provide similar guidance on independence for
accountants engaged in other assurance tasks. The paragraphs prefixed by 290 and 291 will not be covered by this unit, as they have already been dealt with in other units.
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Guidance to members in public practice
Paragraphs 200–280 offer specific guidance for accountants in public practice. The scenarios presented here are in no way meant to be exhaustive; that is, they are provided for guidance and do not represent every possible situation an accountant could face in public practice. They are, however, designed in such a way that they can be similar to most real-life situations the accountant will face, and should provide useful clarity and guidance for all other situations whenever such guidance is needed.
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Threats & safeguards
The Introduction to Part B provides a reminder of the general Threats an accountant might face and the Safeguards the accountant has available. These have already been discussed in this study guide's presentation of Part A of APES 110, so they are presented here only as a reminder and to inform you that this discussion is also repeated in Part B of APES 110.
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Threats
• Self-interest • Self-review • Advocacy • Familiarity • Intimidation
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Examples of self-interest threats:
• A member of the Assurance Team having a Direct Financial Interest in the Assurance Client.
• A Firm having undue dependence on total fees from a client. • A member of the Assurance Team having a significant close
business relationship with an Assurance Client. • A Firm being concerned about the possibility of losing a significant
client.
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Examples of self-review threats
• A Firm issuing an assurance report on the effectiveness of the operation of financial systems after designing or implementing the systems.
• A Firm having prepared the original data used to generate records that are the subject matter of the Assurance Engagement.
• A member of the Assurance Team being, or having recently been, a Director or Officer of the client.
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Examples of advocacy threats
• The Firm promoting shares in an Audit Client. • A Member acting as an advocate on behalf of an Audit Client in
litigation or disputes with third parties.
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Examples of familiarity threats
• A member of the Engagement Team having a Close or Immediate Family member who is a Director or Officer of the client.
• A member of the Engagement Team having a Close or Immediate Family member who is an employee of the client who is in a position to exert significant influence over the subject matter of the engagement.
• A Director or Officer of the client or an employee in a position to exert significant influence over the subject matter of the engagement having recently served as the Engagement Partner.
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Some more examples of the familiarity threat:
• A Member accepting gifts or preferential treatment from a client, unless the value is trivial or inconsequential.
• Senior personnel having a long association with the Assurance Client.
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Examples of intimidation threats
• A Firm being threatened with dismissal from a Client Engagement. • An Audit Client indicating that it will not award a planned non-
assurance contract to the Firm if the Firm continues to disagree with the client‘s accounting treatment for a particular transaction.
• A Firm being threatened with litigation by the client.
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Some more examples of the familiarity threat:
• A Firm being pressured to reduce inappropriately the extent of work performed in order to reduce fees.
• A Member feeling pressured to agree with the judgment of a client employee because the employee has more expertise on the matter in question.
• A Member being informed by a partner of the Firm that a planned promotion will not occur unless the Member agrees with an Audit Client‘s inappropriate accounting treatment.
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Threats to which fundamental principles?
Threats often impact upon more than one fundamental principle, but which one or ones depend upon the context of the specific threat. As a very rough guide, however, you might find the following generalisations useful:
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Using the safeguards matrix
The affect of threats on the fundamental principles can be summarised in this matrix. However, this is a guide and the accountant needs to carefully examine each situation.
Principles\Threats Self-interest Self-review Advocacy Familiarity Intimidation
Integrity X X X
Objectivity X X X X X
Professional competence X X X
Confidentiality X
Professional behaviour X X
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Safeguards
Paragraph 200.9 states that safeguards that may eliminate threats to an Acceptable Level fall into two broad categories:
1. Safeguards created by the profession (such as knowledge of APES 110), legislation or regulation, and
2. Safeguards in the work environment (which could be either the accountant's work environment or the client's).
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200.10–200.15: Examples of safeguards
You must read your copy of APES 110 together with the study guide. APES 110 offers a very comprehensive overview that really cannot be improved upon. Therefore, the study guide will not attempt to do so.
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210.1–210.5: Issues in client acceptance
The member in public practice must determine the existence of any possible threats to the fundamental principles before any acceptance of a client.
Possible safeguards include finding information about the client before acceptance, and securing the client's commitment to strong corporate governance and internal control systems.
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210.6–210.8: Issues in engagement acceptance
The accountant should only accept appointments that he or she is competent to fulfil (Fundamental Principle of professional competence & due care). A self-interest threat occurs if the accountant accepts an engagement knowing that questions about competence and due care exist.
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Examples of safeguards 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.
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More examples of client/engagement safeguards:
• 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 assets (APESB, 2010, pp. 28–29).
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210.9–AUST210.15: When there are changes in a professional appointment
The professional accountant must be alert when deciding whether to accept a new client who wants to move from the services of another accountant. Why does the prospective client want to change accountants? If a client is accepted without knowing all of the pertinent circumstances, this could be a threat to the accountant's professional competence and due care.
Generally, the most effective safeguards involve making contact with the client's previous accountant in order to determine the facts.
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Section 220: Conflicts of interest
In the normal conduct of a public practice, an accountant must be alert to the possibility of conflicts of interest arising. Sometimes they arise in the most unexpected places, and can arise simply from what seems the normal and ethical conduct of the practice's business. Paragraph 220.1 gives examples:
For example, a threat to objectivity may be created when a Member 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 Member 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 assets (APESB, 2010, p. 31).
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Evaluate before, not after
Before accepting or continuing a client relationship, the accountant must evaluate the threats created by the business relationship with the client or with third parties. Paragraph 220.3 gives examples of safeguards:
• 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
• Notifying all known relevant parties that the Member 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
• Notifying the client that the Member 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 assets (APESB, 2010, p. 31).
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More safeguards
Further safeguards to consider are provided in paragraph 220.4:
• The use of separate Engagement Teams; • Procedures to prevent access to information (e.g., strict physical separation of such teams, confidential and
secure data filing); • Clear guidelines for members of the Engagement Team on issues of security and confidentiality; • The use of confidentiality agreements signed by employees and partners of the Firm; and • Regular review of the application of safeguards by a senior individual not involved with relevant client
engagements (APESB, 2010, p. 31).
If a conflict of interest arises that cannot be eliminated or reduced to an acceptable level by applying safeguards, the specific engagement should not be accepted.
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Section 230: Second opinions
A request to provide a second opinion to a person or entity who is not the accountant's client carries risks of threats to the fundamental principle of professional competence and due care. The threats arise if the accountant is not aware of all of the circumstances under which the entity's existing accountant gave the initial opinion. A threat also exists if the accountant does not have all of the available evidence.
The accountant should request written permission from the person or entity to contact the existing accountant. The existing accountant should also be provided with a copy of the accountant's opinion. If the person of entity does not want to give this opinion, then the accountant should consider whether it is appropriate to give the second opinion.
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Section 240: Fees and other types of remuneration
It is vital that when negotiation a service or an engagement, the accountant quotes an appropriate and sufficient fee. Accountants are often under pressure to quote a fee that is below what is sufficient due to market pressures. This in itself is not unethical, but it can lead to threats to the fundamental principles. For example, if the fee is too low, it could lead to service delivery that is below the required technical and professional standards, which is a threat to professional skill and due care.
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Safeguards that are available include:
• Making the client aware of the terms of the engagement and, in 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 assets (APESB, 2010, p. 34).
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Section 250: The marketing of professional services Accountants seeking to advertise and promote their professional services need to be mindful of their obligation to maintain the fundamental principle of professional behaviour. The marketing of services can give rise to a threat of self-interest. APES 110 requires accountants to be honest and truthful:
The Member in Public Practice shall be honest and truthful and not: - Make exaggerated claims for services offered, qualifications possessed, or experience gained; or - Make disparaging references or unsubstantiated comparisons to the work of another. If the Member in Public Practice is in doubt about whether a proposed form of Advertising or marketing is appropriate, the Member in Public Practice shall consider consulting with the relevant professional body assets (APESB, 2010, p. 36).
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Section 280: Objectivity: a duty for all services
The fundamental principle of objectivity is so important that it rates its own section in APES 110. Before providing any services to a client or prospective client, the accountant must determine whether he/she (or even close/immediate family) has any relationship with the client, its directors, officers, or employees that could threaten objectivity.
Accountants undertaking assurance services must ensure that they are independent in both mind and appearance so that a final conclusion can be expressed free of bias, conflict of interest or any undue influence.
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Examples of safeguards 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
assets (APESB, 2010, p. 39).
If safeguards cannot eliminate threats or reduce them to an acceptable level, then the accountant cannot undertake this service.
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Part C: Members in Business Part C is for all Members (remember, "Members" refers to members of organisations that have adopted APES 110) who are in business other than professional practice, audit or other assurance services.
A Member in Business may be a salaried employee, a partner, Director (whether executive or non-executive), an owner manager, a volunteer or another working for one or more employing organisation assets (APESB, 2010, p. 121).
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Part C is important because… Part C is important because of all of the stakeholders and community members who rely on us as professional accountants to provide advice, financial reports and other professional services (including financial management). The more senior the accountant is in an organisation, the greater the responsibility to act ethically:
A Member in Business may hold a senior position within an organisation. The more senior the position, the greater will be the ability and opportunity to influence events, practices and attitudes. A Member in Business is expected, therefore, to encourage an ethics-based culture in an employing organisation that emphasises the importance that senior management places on ethical behaviour. A Member in Business shall not knowingly 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 fundamental principles assets (APESB, 2010, p. 121).
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The conceptual framework in Part C
The conceptual framework from Part A applies in full to Part C. The same fundamental principles and threats exist, although, as with Part B, the safeguards that are available will depend upon the situation.
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Examples of circumstances that may create threats
Paragraph 300.8 supplies a list of possible circumstances for self-interest threats:
• Holding a Financial Interest in, or receiving a loan or guarantee from the employing organisation. • Participating in incentive compensation arrangements offered by the employing organisation. • Inappropriate personal use of corporate assets. • Concern over employment security. • Commercial pressure from outside the employing organisation assets (APESB, 2010, p. 122).
An accountant could be faced with a self-review threat, for example, if he or she is asked to report on the progress of a project the accountant had already supported through positive reports. See paragraph 300.9 for a similar example.
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Paragraph 300.10 offers an example of what is not an advocacy threat:
If the accountant is promoting the valid interests of his or her employer, this is not an advocacy threat. However, if an accountant promoted the acceptance of a project to his or her employer beyond the point supported by rational financial analysis, this may be an example of the advocacy threat. Another advocacy threat may be promoting the interests of a rival business over his or her employer's interests.
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Paragraph 300.11 offers examples of familiarity threats:
• Being responsible for the employing organisation‘s financial reporting when an Immediate or Close Family member employed by the entity makes decisions that affect the entity‘s financial reporting.
• Long association with business contacts influencing business decisions.
• Accepting a gift or preferential treatment, unless the value is trivial and inconsequential assets (APESB, 2010, p. 122).
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Paragraph 300.13 provides examples of intimidation threats
• Threat of dismissal or replacement of the Member in Business or a Close or Immediate Family member over a disagreement about the application of an accounting principle or the way in which financial information is to be reported.
• A dominant personality attempting to influence the decision making process, for example with regard to the awarding of contracts or the application of an accounting principle (APESB, 2010, p. 122).
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Examples of safeguards
As in Parts A and B, safeguards exist at the levels of:
1. The profession, legislation or regulation (refer to paragraph 100.14 of the Code), and
2. In the work environment.
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Examples of safeguards you might find in the work environment are provided in paragraph 300.14 of Part C
• The employing organisation‘s systems of corporate oversight or other oversight structures.
• The employing organisation‘s ethics and conduct programs. • Recruitment procedures in the employing organisation emphasising the
importance of employing high calibre competent staff. • Strong internal controls. • Appropriate disciplinary processes. • Leadership that stresses the importance of ethical behaviour and the
expectation that employees will act in an ethical manner.
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Safeguards cont'd
• Policies and procedures to implement and monitor the quality of employee performance.
• Timely communication of the employing organisation‘s policies and procedures, including any changes to them, to all employees and appropriate training and education on such policies and procedures.
• Policies and procedures to empower and encourage employees to communicate to senior levels within the employing organisation any ethical issues that concern them without fear of retribution.
• Consultation with another appropriate Member (APESB, 2010, p. 123).
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Finally, please pay particular attention to the requirements of paragraph 300.15
In circumstances where a Member in Business believes that unethical behaviour or actions by others will continue to occur within the employing organisation, the Member in Business may consider obtaining legal advice. In those extreme situations where all available safeguards have been exhausted and it is not possible to reduce the threat to an Acceptable Level, a Member in Business may conclude that it is appropriate to resign from the employing organisation assets (APESB, 2010, p. 123).
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References APESB. (2010). APES 110: Code of Ethics for Professional Accountants. Melbourne, VIC: Accounting Professional and Ethical Standards Board.
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