Ethics and Conduct of accounting profession
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CHAPTER04-EthicsandProfessionalJudgementinAccounting.pptxCOLLEGE OF BANKING AND FINANCIAL STUDIES UNDERGRADUATE DEGREE PROGRAMME B.Sc. in Accounting, Auditing and Finance Semester - 8
MODULE TITLE: ETHICS AND CONDUCT OF ACCOUNTING PROFESSION
Chapter 4: Ethics and Professional Judgement in Accounting
Learning Objectives
After studying Chapter 4, you should be able to:
Explain how professional judgement and skepticism influence ethical decision making
Discuss how the public interest may be affected by commercial activities of CPAs
Understand the importance of Code of Ethics.
Explain the fundamental ethical principles
Explain the threats and safeguards approach to independence
4.1 What is Professional Judgement In Accounting
Judgement is the process of reaching a decision or drawing a conclusion where there are several possible alternative solutions.
Judgement occur in a setting of uncertainty, risk and often conflict of interest.
Professional judgement is influenced by personal behaviour traits (attitudes and ethical values) as well as one’s knowledge of accounting and auditing issues in question
Professional judgement, which is the bedrock of the accounting and auditing profession, it is referenced through out the professional judgement.
Professional Judgement
Ability to diagnose
Ability to solve
Knowledge
Skills
+
=
Professional Judgement
4.1.1. KPMG Professional Judgment Framework
The KPMG framework identified five components of professional judgment that revolve around one’s mindset.
The components are;
Clarify issues and objectives
Consider alternatives
Gather and evaluate information
Reach conclusion
Articulate and document rationale.
Auditor should approach matters objectively and independently, with inquiring and incisive minds.
Professional Skepticism is required to avoid judgment traps and tendencies that leads to bias.
4.1.2. Professional Skepticism
In addition to possessing the requisite skills, the auditing standards stipulate that auditors must maintain professional skepticism, arguably one of the auditor’s most important responsibilities.
Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence.
The auditor uses the knowledge, skill, and ability called for by the profession of public accounting to diligently perform, in good faith and with integrity, the gathering and objective evaluation of evidence
An audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of professional skepticism.
In exercising professional skepticism, the auditor should not be satisfied with less than persuasive evidence because of a belief that management is honest.
4.2. Discuss How the Public Interest may be Affected by Commercial Activities of CPAs.
Professional judgement is what makes an accountant a professional and it underlies the fundamental obligation to protect public interest.
The auditor fulfills what Justice Burger calls “ a public watchdog function.”
Following the disclosure of numerous accounting scandal the public lost trust in the accounting profession. And professional bodies turned their attention to examining how to rebuild the public trust and confidence in financial reporting.
4.2. Discuss How the Public Interest may be Affected by Commercial Activities of CPAs.
Widely agreed that the purpose, nature, and responsibility of business are to maximize profit or shareholder value.
An accounting firm main function is to attesting to the truth and correctness of financial statements.
But to the extent that, an accounting firm is treated as a business, and it falls under the profit maximizing rubric
The movement in accounting from auditing and attesting functions to management consulting changed it from a profession
dedicated to public services
to a business committed to maximizing partner or shareholder wealth.
4.3 Global Code of Ethics
A code of ethics is a set of rules outlining the social norms and rules and responsibilities of, or proper practices for, an individual, party or organization.
Accountants have a responsibility to present the most truthful and accurate financial pictures of an organization.
As auditors, they have a responsibility to evaluate other accountants ’ pictures and attest to their truthfulness and accuracy.
The accounting profession has developed multiple codes of ethics that set the standards for accountants ’ behaviour, standards that require more than simply adhering to the letter of the law.
4.3.1. Importance of Codes of Ethics
Business Ethics mention the six ways that codes of conduct can be valuable:
A code can motivate through using peer pressure, by holding up a generally recognized set of behavioural expectations that must be considered in decision making.
A code can provide more stable permanent guides to right or wrong than do human personalities or continual ad hoc decisions.
Codes can provide guidance, especially in ambiguous situations.
Codes not only can guide the behaviour of employees, they can also control the autocratic power of employers.
Codes can help specify the social responsibilities of business itself.
Codes are clearly in the interest of business itself, for if businesses do not police themselves ethically, others will do it for them.
4.3.2 International Standards on Code of Ethics for Professional Accountants
International Federation of Accountants (IFAC)
Code of Ethics for Professional Accountants,
updated in 2009 by the
International Ethics Standards Board for Accountants (IESBA)
IESBA develops ethical standards and guidance for professional accountants.
The IESBA encourages member bodies to adopt high standards of ethics for their members and promotes good ethical practices globally.
4.3.3. International Federation of Accountants (IFAC)
The International Federation of Accountants (IAFC) is the worldwide organization for the accountancy profession.
Founded in 1977, its mission is to serve the public interest by continuing to strengthen the worldwide accountancy profession and contributing to the development of strong international economies
IFAC is comprised of over 175 members and associated in more than 130 countries and jurisdictions, representing almost 3 million accountants in public practice, education, government service, industry and commerce.
In order to reinforce professional accountants’ adherence to the values mentioned above IESBA issued the Code of Ethics for Professional Accountants.
4.3.4. Code of Ethics for Professional Accountants
IESBA Code of Ethics for Professional Accountants establishes ethical requirements for professional accountants.
A member body of IFAC or firm shall not apply less stringent standards than those stated in this code.
Some of the member body of IFAC
American Institute of Certified Public Accountants (AICPA) - USA
Institute of Management Accountants (IMA) - USA
Association of Accounting Technicians (AAT) - UK
Association of Chartered Certified Accountants (ACCA) - UK
Chartered Institute of Management Accountants (CIMA) – UK
Professional Accountancy Organization in Oman is Omani Association of Accountant, currently not a member of IAFC.
4.4. Fundamental Principles
The Professional accountant shall comply with the following fundamental principles
Integrity
Objectivity
Professional Competence and Due Care
Confidentiality
Professional Behaviour
4.4. Fundamental Principles
Integrity
To be straight forward and honest in all professional and business relationships
Objectivity
To not allow bias, conflict of interest or undue influence of others to override professional or business judgments
4.4. Fundamental Principles
Professional Competence and Due Care
To maintain professional knowledge and skill at the level required to ensure competent professional services based on current developments in practice, legislation and techniques
To act diligently in accordance with applicable technical and professional standards
4.4. Fundamental Principles
Confidentiality
To refrain from disclosing confidential information acquired as a result of professional and business relationships without proper and specific authority to disclose unless there is a legal or professional right or duty to disclose
To refrain from using confidential information acquired as a result of professional and business relationships for personal advantage or the advantage of third parties
4.4. Fundamental Principles
Professional behavior
Obligation to comply with relevant laws and regulations and avoid any action that discredits the profession
4.5. Conceptual Framework Approach – Threats and Safeguards
4.5. Conceptual Framework Approach – Threats and Safeguards
Threats are created by circumstances and relationships that could compromise an accountant’s ability to comply with the fundamental principles.
Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level
The steps of Risk based approach
Identifying and evaluating threats to independence
Determining whether safeguards already eliminate or sufficiently mitigate the identified risk
Determine whether independence is impaired
4.5.1 Threats to Independence
To appear to be independent, the CPA should avoid circumstances that might cause an informed third party to reasonably conclude that the integrity, objectivity or professional skepticism of a firm or member of the audit engagement team has been compromised
Threats to independence
Self-Review Threat
Advocacy Threat
Adverse Interest Threat
Familiarity Threat
Undue Influence Threat
Financial Self-Interest Threat
Management Participation Threat
Self Interest Threat
A self-interest threat is the threat that a financial or other interest will inappropriately influence the professional accountant's judgement or behavior.
Self-interest threats may arise as a result of the financial or other interests of members or of immediate or close family and are summarized in the diagram below.
Self Review Threat
A Self-review threat occur when a CPA reviews evidence during an attest engagement that is based on her own or her firm’s non-attest work. The key area in which there is likely to be a self-review threat is where an assurance firm provides services other than assurance services to an assurance client (providing multiple services).
Eg: Preparing source documents used to generate the client’s financial statements
Advocacy Threat
An advocacy threat occurs when a CPA promotes an attest client’s interests or position in such a way that objectivity may be, or may be perceived to be, compromised.
Eg: Promoting the client’s securities as part of an initial public offering
Eg. when a firm offered legal services to a client and, say, defended them in a legal case or
provided evidence on their behalf as an expert witness.
Eg. If the firm carried out corporate finance work for the client, for example, if the audit firm was involved in advice on debt reconstruction and negotiated with the bank on the client’s behalf.
.
Familiarity Threat
A familiarity threat arises where independence is jeopardised by the audit firm and its staff becoming over familiar with the client and its staff. There is a substantial risk of loss of professional scepticism in such circumstances.
We have already discussed some examples of when this risk arises, because very often a familiarity threat arises in conjunction with a self-interest threat.
Eg: A CPA on the attest engagement team whose spouse is the client’s CEO.
Intimidation Threat
An intimidation threat arises when members of the assurance team have reason to be intimidated by client staff.
| Examples of intimidation threats |
| A threat of dismissal from a client engagement, if it continues to disagree with the client/plans to modify the auditor's report |
| A threat of not giving a firm a contract for non-assurance work |
| A threat of litigation by the client |
| Pressure to reduce the amount of work done in order to reduce fees |
| Pressure to agree with the client because the client has more experience on the matter |
| A partner within the firm telling a member of the audit team that they will not be promoted if they disagree with the client |
4.5.1 Threats to Independence
Undue Influence Threat
An undue influence threat results from an attempt by the management of an attest client or other interested parties to coerce the CPA or excessive influence over the CPA
Eg: A threat to replace the CPA or CPA firm because of a disagreement with the client over the application of an accounting principle.
Financial Statement Threat
The threat that a financial or other interest will inappropriately influence the professional accountant’s judgement or behavior.
Examples: Having a loan from the client, from an officer or director of the client.
4.5.1 Threats to Independence
Management Participation Threat
A management participation threat occurs when a CPA takes on the role of client management or otherwise performs management functions on behalf of an attest client.
Adverse Interest Threat
An adverse interest threat occurs when a CPA takes actions that are in opposition to an attest client’s interests or positions.
Eg: Commencing or the expressed intention to commence, litigation by either the client or the CPA against the other.
https://www.coursera.org/lecture/auditing-part1-conceptual-foundations/threats-to-independence-3Lldj
4.5.2. Safeguards
Two categories:
Safeguards
Created by the profession, legislation or regulation
In the work environment
4.5.2 Safeguards created by the profession, legislation or regulation
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.
External review by a legally empowered third party of the reports, returns, communications or information produced by a professional accountant.
Examples of Safeguards in Work Environment
Reference
Steven , M. M., & Roselyn, E. M. (2017). Ethical Obligation and Decision Making in Accounting (4 ed.). New York: McGraw- Hill Education.
ACCA BPP P7 Study Text.
