A new era for ethics?

Code of ethiCs

A new era for ethics?

We explore the conceptual framework of the new International Code of Ethics for Professional Accountants and how this will impact practitioners.

As all practising accountants will

be aware, the last few years have not been easy for the reputation of our profession. In the UK, the collapse of Carillion Plc was followed by months of media comment and a government Select Committee report into the corporate failure. This lack of confidence in the ethics of accounting firms has driven the review of the functioning of the audit market and may see some substantial changes to audit practices over the next few years.

This focus on the conduct of auditing firms is by no means limited to isolated cases of Big Four audits of public interest entities (PIEs) causing concern – and the problems relate to audits throughout the world. It is against this evidence of concerns over the quality of accounting ethics that the new International Code of Ethics for Professional Accountants was published last year, coming into force on 15 June 2019. But does this affect you if you are working as an accountant in business preparing reports and supporting your organisation? Or if you are providing accountancy and assurance services to smaller entities not classed as public interest? And if you are studying

A lack of confidence in the ethics of accounting firms has driven the review of the audit market and may see some substantial changes to audit practices.”

to be a member of the Association of International Accountants what do you need to know?

Jules and Erskine (2018) published a very useful overview of the key areas of focus for practitioners in SMEs and SMPs. This highlights that:

“The fundamental principles within the Code – integrity, objectivity, professional competence and due care, confidentiality and professional behaviour – establish the standard of behaviour expected of a professional accountant (PA) and it reflects the profession’s recognition of its public interest responsibility. Those fundamental principles, as well as the categories of threats to them – self-review, self-interest, advocacy, familiarity and intimidation threats – are unchanged. Also unchanged are the overarching requirements to apply the conceptual framework to comply with the fundamental principles and, where applicable, be independent.”

This may mean that a headline scan of the Code may lull one into a false sense of confidence, believing that fundamentally nothing has changed – leading to a business as usual approach to ethics in practice which is not the intent of the new provisions!

10

ISSUE 106 | AIAWORLDWIDE.COM

Code of ethics

AIAWORLDWIDE.COM | ISSUE 106 11 istockphoto/joecicak

Code of ethiCs

the substantive revisions There are a number of very important developments to the Code which, if adopted correctly, should do much to resolve some of the problems in ethics evidenced in recent scandals, and also help to re-establish the reputation of the accounting profession. The International Ethics Standards Board for Accountants (IESBA) launched the Code in April 2018 with the statement:

“While the fundamental principles of ethics have not changed, major revisions have been made to the unifying conceptual framework – the approach used by all professional accountants to identify, evaluate and address threats to compliance with the fundamental principles and, where applicable, independence.”

The substantive revisions to the Code consist of the following:

● an enhanced conceptual framework, which includes extensive revisions to “safeguards” throughout the Code thatare better aligned to threats;

● strengthened independence provisions regarding long association of personnel with audit clients;

12

The conceptual framework outlines a threestep approach involving identifying, evaluating and addressing threats to compliance with the fundamental principles.”

● strengthened provisions relating to offering and accepting inducements, including gifts and hospitality that apply to both PAs in business (PAIBs) and PAs in public practice (PAPPs);

● strengthened provisions dedicated to PAIBs, including: a. a new section relating to pressure to breach the fundamental principles; and b. revised provisions relating to the preparation and presentation of information;

● clarifications about the applicability of PAIB provisions to PAPPs;

● new material to emphasise the importance of understanding facts and circumstances when exercising professional judgment; and

● new material to explain how compliance with the fundamental principles supports the exercise of professional scepticism in an audit or other assurance engagements.

the conceptual framework This article is the first of a short series exploring the new Code and focuses at the changes to the conceptual framework. “The conceptual framework is a set of principles-based provisions in section 120 of the conceptual framework of the Code that all PAs are required to apply to deal with ethics and independence issues. It applies to all PAs and outlines a three-step approach involving identifying, evaluating and addressing threats to compliance with the fundamental principles and, where applicable, independence.” (IESBA,

2018)

This three-step process articulates the stages of ethical decision making formally within the Code, reflecting the extensive work in this area by academics such as Libby Thorne and Mary Beth Armstrong during the late 20th century. It is notable that the Code does not insert the idea of moral courage as a key stage. In the theory around ethical decision making, there is an acceptance that before behaving appropriately (addressing threats) there is another key stage required to determine the next action; namely, in the commitment and courage to do the right thing.

Adopting moral courage as an additional specific stage in the Code of Ethics for Professional Accountants was debated when the Institute of Chartered Accountants of Scotland (ICAS) launched its Power of One initiative, including this as an additional fundamental principle. Other accountancy bodies and the International Federation of Accountants (IFAC) have taken the view that moral courage is part of integrity and does not need to be separately articulated – although it is useful for us as practitioners to consider that part of acting with integrity requires the courage to do what we know to be correct.

ISSUE 106 | AIAWORLDWIDE.COM istockphoto/joecicak

Code of ethics

Stand back and think… The key change within this conceptual framework is the idea that practising accountants now have a requirement to “stand back” and think about whether the overall conclusions made, or actions taken, are appropriate to resolve the issue. One test the conceptual framework requires us to apply here is to consider what a reasonably informed third party (RITP) might also conclude, given the same information.

In the Code, this RITP test is made from the perspective of a RITP. It involves weighing all the relevant facts and circumstances that the practising accountant knows, or could reasonably be expected to know, at the time that the conclusions are made. The RITP does not need to be an accountant but should possess the relevant knowledge and experience to understand and evaluate the appropriateness of the conclusions in an impartial manner. Although it might be tempting to regard the RITP as a fellow accountant, this would be to miss a key attribute in this test – namely, that we are considering our actions from the perspective of the public interest we serve. Therefore, how our actions impact on the perceptions of the key stakeholders within that public interest is key.

This standing back is a key part of employing our professional scepticism and our objectivity but often in the pressure of our professional practice it can be difficult to find the head space and time to do so. This addition into the conceptual framework embeds it as a core and vitally important step that we must build into our professional schedules.

More specific safeguards As can be seen from the ongoing tranche of audit and accounting scandals, the safeguards

Standard setting bodies. The key change within the conceptual framework is the requirement for accountants to stand back and consider whether their actions are appropriate to resolve the issue.

❯

within the previous Codes seem to be either not sufficiently specific or effective. The new conceptual framework includes more specific and robust definitions of safeguards; namely, the “actions, either individually or in combination, that a PA takes that effectively reduce threats to compliance with the fundamental principles to an acceptable level”.

The key change here is an acceptance that not all threats can be addressed by safeguards – sometimes there is no action which can reduce the threat to an acceptable level – and that in certain circumstances the accountant must decline or end the professional activity or service. The enhanced conceptual framework emphasises that threats are addressed by eliminating the circumstances creating the threats; by applying safeguards where they are available or capable of reducing the identified threats to an acceptable level; or by declining or ending the specific professional activity or service. It is in the idea of acceptability that the RITP can be especially useful.

Jules and Erskine (2018) note that it is especially important to ensure that we understand “the distinction between safeguards and ‘conditions, policies and procedures’, which are in contrast routine in nature and may assist the PA in identifying and evaluating threats. The conceptual framework clarifies that the conditions, policies and procedures that are established by profession, legislation, regulation, the firm or the employing organisation to enhance PAs acting ethically are not safeguards because they are not specifically designed to deal with a particular threat.”

The final point within the conceptual framework to be emphasised in this article is the importance of the accountant remaining alert to changes in facts and circumstances that impact on our decision making.

We need to exercise professional judgment and apply the concept of the RITP upon all stages of identifying ethical threats, evaluating their significance and impact, and then addressing their resolution. This emphasises that our consideration of ethical issues within our work is an ongoing process and not to be confined to the initial stages of an assurance engagement or work project – or delegated to a pro forma checklist and consigned to the end of the file.

References

●●

International Ethics Standards Board for Accountants (2018) Handbook of the International Code of Ethics for Professional Accountants (IFAC)

●●

Jules D, and Erskine R (2018), The International Code of Ethics for Professional Accountants: Key Areas of Focus for SMEs and SMPs (IFAC) (bit.ly/2Sfpb5H)

●●

IFAC 2018 Global Ethics Board Releases Revamped Code of Ethics for Professional Accountants (bit.ly/2EBUcF6) ●

AIAWORLDWIDE.COM | ISSUE 106 13