On 17th December 2018, the Competition and Markets Authority (CMA) published an update paper outlining serious competition concerns and proposing changes to legislation to improve the audit sector for the benefit of savers and investors alike.

Week2a_Rulesofprofessionalconduct_Lecture.pdf

Home >Business & Finance homework help >Management homework help >On 17th December 2018, the Competition and Markets Authority (CMA) published an update paper outlining serious competition concerns and proposing changes to legislation to improve the audit sector for the benefit of savers and investors alike.

Use with Auditing 10e by Alan Millichamp and John Taylor

ISBN 9781408044087

Use with Auditing 10e by Alan Millichamp and John Taylor

ISBN 9781408044087

Week 2a – Rules of professional conduct

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Ethics

To retain credibility it is important that accountants act within an ethical code

This is contained in an ethical framework (ACCA Codes of Ethics and Conduct) – based on fundamental principles

The approach is not rules based – it requires members to be self regulating

You must know the ACCA fundamental principles

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Rules-based or principles-based approach?

Rules based

• Certainty

• Definite prohibitions

• Capable of interpretation

• Can’t deal with any situation

• Inflexible

Principles • Flexible – capable of fitting

changing situations and circumstances

• Can be applied across boundaries

• Onus on auditor to prove considered everything

• Can include specific prohibitions

• Lack of precision may lead to ‘interpretations’ of rules

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Conceptual framework – principles based

▪ Requires auditor to consider each case independently

▪ Prevents legalistic interpretations

▪ Flexible

▪ Accommodates changing business environment

▪ Can include prohibitions

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ACCA fundamental principles

▪ Integrity – straightforwardness & honesty

▪ Objectivity – lack of bias or undue influence

▪ Competence and due care

▪ Confidentiality

▪ Professional behaviour

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APB guidance – re IFAC Code of Ethics

• Accountability – have regard to wider public interest as well as interests of clients

• Integrity – honesty, fairness, truthfulness

• Objectivity and independence – impartial opinions not affected by bias, prejudice, compromise and conflicts of interest

• Competence – professional skill

• Rigour – thoroughness in approach

• Clear and effective communication – a clear expression of opinion

• Association – allowing reports to be included in larger documents as long as there is no inconsistency

• Provide value – add to reliability and quality of financial reporting

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Safeguards

Safeguards – within profession: ▪ Entry requirements

▪ CPE

▪ Corporate governance regulations

▪ Professional standards

▪ Professional monitoring

▪ External reviews

Safeguards within audit firm ▪ Review and quality control

▪ Rotation

▪ Consulting with 3rd party

▪ Disclosure of services provided and fees

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Threats to compliance

Main threats to auditor independence

• Self interest – e.g. having financial interest in client

• Self review – auditing own work

• Advocacy – e.g. representing client at tribunal

• Familiarity – getting ‘too close’ to client

• Intimidation threat – bullying by client, threats to withdraw, etc.

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Independence

Independence must not only exist but must be seen to exist

Auditors must not only approach assignments with an independent mind, they must also ensure that their independence is not seen to be compromised in any way

3-step approach –

▪ Identify threats

▪ Evaluate significance of threat

▪ Identify and apply safeguards to eliminate or reduce risk to acceptable level

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Confidentiality

Clearly all information derived from a client is confidential

Exceptions: • Where ordered by the court

• Where client is suspect of involvement in terrorism, money laundering , drug trafficking, etc.

• Where client not considered to be a proper person to carry on business in areas of banking , insurance or financial services

• As required by law

• In members interest – e.g. to defend action

• In public interest – not defined

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Tricky areas

▪ Fees – overdependence on one client

▪ Self review – auditing own accounts

▪ Advocacy – promoting client

▪ Familiarity – acting for clients with family involvement, becoming too friendly with client, close business relationships

▪ Intimidation – threat of loss of business

▪ Legal action – if threatened with legal action by client auditor may lose impartiality in reporting

▪ Conflicts of interest – must avoid ‘acting for both sides’

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Risk area – fees

• Fees – 15% rule (10% for listed companies) of gross practice income – if one office is affected but not practice as a whole transfer reporting to another office. If > 15% should institute independent quality control review procedures

• APB requirement is for fees above 5% - engagement partner should disclose to ethics partner or senior partners

• Unpaid fees may be construed as loans

• Cannot accept percentage or contingent fee arrangements where fee is contingent on result of assurance work

• Lowballing – not allowed – must be able to justify and prove validity of any tender for work

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Risk areas – self-interest threat – relationships

Closely connected with a person is – spouse, minor child, company where hold more than a 20% interest (Note: can’t have a beneficial interest in shares of an audit client)

Connected with a practice – partner (or if corporate practice a director or shareholder), person connected to a partner, employee

Note these are not exhaustive and individuals must make own judgement e.g. in the case of close friends, etc.

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Risk areas – self-interest threat/staff movements

If audit partner or manager joins client – change procedures

and audit team

Remember two year rule – if member of client staff joins auditors can’t use on audit within two years

If lend staff to client – can’t use them on audit

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Risk areas – self-interest threat/financial

Can’t have interest in client’s shares - includes anyone connected with a partner and also includes staff

Can’t accept loans from clients (unless a bank on a commercial basis)

Can’t accept gifts or hospitality unless value is insignificant – remember rule about being seen to be independent

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Conflicts of interest

Can have two or more clients where interests may conflict

but – work of audit firm must be managed to ensure that interests of one client don’t adversely affect the other

If acceptance of appointment would materially affect interest of any client it must be declined

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Protection against conflicts

• Different partners and engagement teams

• Standing instructions – prevent leakage of information

• Chinese walls – confidentiality between teams in same firm

• Partner review

• Advise client to seek independent advice – if necessary

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Listed company rules – rotation

• Rotate engagement partner after no more than 5 years and no return for 5 years

• Other partners and person responsible for engagement quality control review rotated after no more than 7 years and no return for 2 years

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Intimidation threat – second opinions

If asked to give a second opinion – key issue

Ensure opinion is based on same facts as given to existing accountant

Safeguards: ▪ contact existing accountants

▪ explain any limitations on opinion

▪ give existing accountant copy

If client refuses contact consider not taking assignment

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Review

▪ Audit firm should have internal procedures to ensure processes are regularly reviewed and quality is maintained esp. for listed clients

▪ Risk evaluations should be carried out where independence may be compromised

▪ Consideration must be given to size and expertise in auditor’s practice

▪ Remember the ‘Know your client’ provisions

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Voluntary reporting

In public interest – where members of public are likely to be affected by something which is likely to be repeated and is serious. Report to relevant authority

To protect own interest – defence in a legal action or to sue for fees

To non-governmental bodies having statutory powers

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Money laundering

Financial action Task Force on Money Laundering (FATF) set up by G7 countries sets standards, studies techniques and monitors countrywide actions

Money Laundering Regulations 2003 – applies to all members in practice and in business

Also

Proceeds of Crime Act 2002

Criminal Justice Act 1993

Terrorism Act 2000

Serious Organised Crime and Police Act 2005

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Criminal property

▪ Property acquired by theft

▪ Tax evasion

▪ Bribery or corruption

▪ Saved costs from criminal failure to comply with a statutory requirement

Offences are ▪ Concealing or disguising criminal property or removing it from

jurisdiction of the court

▪ Acquiring using or possessing

▪ Tipping off

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Possible auditor offences

Failure to

▪ Appoint a Money Laundering Reporting Officer (MLRO)

▪ Implement control procedures in relation to money laundering

▪ Undertake customer due diligence CDD procedures

▪ To make a suspicion report to SOCA

▪ Comply with a direction not to proceed with a transaction nor relationship

▪ Maintain appropriate records

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MLRO

▪ Should be senior, experienced person

▪ If unavailable must have a reserve

▪ Must liaise with colleagues and receive reports

▪ Must make full reports to SOCA

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What to do

▪ Set up internal controls and policies to ensure continuing compliance

▪ Appoint a MLRO

▪ Establish systems for transactions

▪ Establish systems for verifying client identities – including inspecting identity documents, certificate of incorporation etc

▪ Set up internal Suspicious Transaction Reporting procedures

▪ Educate and train staff

▪ Maintain all records relating to client including records of identification – five years after end of relationship

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Danger signs

• Unusually large cash deposits

• Frequent transfers into foreign currency or transfers overseas

• Overseas business arrangements with no obvious commercial purpose

• Organisations which deal in cash reporting results far greater than actual level of activity

• Loans in cash repaid in cash

• Overseas ‘loans’ being repaid with no evidence of original receipt of funds

• Movement of funds through bank accounts with no obvious commercial purpose

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Small entities

There are some relaxations of these rules for small entities i.e. those below the audit thresholds (T/o £6.5m, assets £3.26m, <50 employees)

Principally –

▪ where fees are >15% don’t need quality control review

▪ can undertake non audit services where self review threat exists if client has capable management

▪ Can become more involved in management decisions as long as independence issues discussed with client

▪ 2yr rule not applied where audit partner appointed to key management position in client

Rules are contained in Ethical Standards – Provisions Available for Small Entities (ES PASE)

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Ethical standard on audit of small entities

Where these rules have been applied the auditors report must say so

Clearly unless shareholders are familiar with these rules this is of little practical value but does of course protect the auditor ( actually the financial statements should explain the circumstances)