Aa l3 Ethics F 2176724 S NTB
Aa l3 Ethics F 2176724 S NTB
Definition
•In general, governance responsibilities involve several oversight activities, including matters
relating to:strategy development and implementation;
•economic development, mergers and acquisitions;
•appointment of professional operating management executives;
•compensation of executives;
•risk and control systems and compliance with laws and regulations; and
•engaging internal auditors and independent external auditors.
Relevance
Virtually all corporate governance regulations are aimed at listed companies, where the
separation of ownership and control/management have, in several notorious cases (e.g. Enron,
Royal Bank of Scotland, Lehman Brothers), caused severe losses to the shareholders through
mismanagement of company resources, missed opportunities and poor decision-making or
fraudulent activities (including misleading and dishonest financial reporting).
Importance
Research has shown that entities that take good corporate governance practice seriously
are more prosperous over the long term than entities which do not.
•There is a risk that weak corporate governance will lead to financial losses, both for
entities and shareholders. Strong corporate governance helps reduce this risk.
OECD Overview
The mission of the Organisation for Economic Co-operation and Development (OECD) is to
promote policies designed to improve the economic and social well-being of people around
the world.
In 1999, the OECD released its Principles of Corporate Governance. The Principles are an
international corporate governance benchmark. They were last revised in 2015 to account for
recent developments in the corporate sector and capital markets.
UK Code Overview
Exam advice
The UK Corporate Governance Code is an examinable document as an example of best practice and can
be downloaded from www.frc.org.uk.
The UK Corporate Governance Code is a prime example of good corporate governance practice.
•It applies only to listed companies, but it can be used by any entity (private or public) as the basis for best
practice.
•It explains the concept of "comply or explain" and contains 18 Principles covering leadership, stakeholder
relations, board effectiveness, accountability, audit, risk and internal control and remuneration.
•It is supported by guidance, which boards and companies are encouraged to use in applying the Code’s
Principles on:
• Board effectiveness;
• Risk management and internal control (see s.2.5); and
• Audit committees (see s.3).
Division of Responsibilities
The chair:
Key Point
The chairman and CEO should not be the same individual.
Audit committee
For a listed company, an audit committee is how the board establishes "formal and transparent
arrangements" to meet the corporate reporting and risk management and internal control principles. It is
also best practice for unlisted and other entities.
•An audit committee should comprise at least three independent NEDs (two for a smaller company).
•At least one member must have recent and relevant financial experience.
•As a whole, the committee must have competence relevant to the sector in which the company operates.
Key Point
•Through the audit committee, external auditors are responsible and report to the shareholders, not the
executive management.
•The audit committee enhances the external auditor's independence and provides greater independence
for the internal auditor.
The audit committee’s role considers the risks and controls over the financial reporting process and the
tax, environmental, legal and other regulatory matters that have a material effect on the financial
statements.
Corporate Governance Deficiencies
During the audit of a new client, you listed the following corporate governance practices used by your client.
8.Management is required to
assess the effectiveness of
internal controls on an annual
basis.
1. Which statement regarding the composition of an audit committee in accordance with the
UK Corporate Governance Code is correct?
A.All directors must be executive
B.All directors must be non-executive
C.Some directors may be executive as long as three are non-executive
D.All non-executives must have recent and relevant financial experience
5. Who has ultimate responsibility for a company’s risk management and internal control systems?
A.The board of directors
B.Management
C.The audit committee
D.A risk management committee
Complying with the Code
Key Point
The Code establishes five fundamental principles:
1.integrity;
2.objectivity;
3.professional competence and due care;
4.confidentiality; and
5.professional behaviour.
All students and members of the Chartered Association (e.g. in practice, commerce, internal audit,
education) must observe proper standards of professional conduct and refrain from misconduct.
Failure to observe standards may result in disciplinary proceedings. The ACCA Code of Ethics and
Conduct can be downloaded from Code of Ethics and Conduct | ACCA Global.
Integrity
In all professional, business, personal and financial relationships, the professional accountant should
be straightforward and honest. This implies fair dealing, truthfulness and having the strength of
character to act appropriately, even when facing pressure to do otherwise or when doing so creates
potential adverse personal or organisational consequences.
Activity 1 Integrity
Describe THREE situations in which the integrity of a professional accountant may be threatened.
Possible answer for activity 1
1.As an auditor, if a set of financial statements contain a material misstatement that the directors
refuse to change, an unmodified opinion would not be issued.
2.In the context of other work (e.g. preparing a cash flow forecast), if asked to verify misleading data,
the member would refuse to accept the engagement or withdraw as soon as he becomes aware that
the data is misleading and the client refuses to change.
3.For an accountant in business, being asked by the CFO to sign off on management accounts for the
bank that contain significant differences from the underlying records.
Objectivity
The professional accountant’s exercise of professional or business judgements must not be compromised by:
•bias;
•conflict of interest; or
•undue influence of, or undue reliance on, individuals, organisations, technology and other factors.
Key Point
A professional accountant should not undertake a professional activity if a circumstance or relationship
unduly influences the accountant’s professional judgment regarding that activity.
Professional Competence and Due Care
•Attain and maintain the level of professional knowledge and skill required to ensure their competence based
on current standards and relevant legislation; and
•Act diligently and in accordance with applicable technical and professional standards.
Diligence encompasses the responsibility to act according to the assignment’s requirements carefully,
thoroughly and on a timely basis.
Confidentiality
The principle of confidentiality requires an accountant to respect the confidentiality of information acquired as
a result of professional and business relationships.
An accountant must be alert to the possibility of inadvertent disclosure (e.g. in a social environment and to close
business associates or family members).
Key Point
Confidential information should not be:
•disclosed to third parties without proper and specific authority or unless there is a legal,
professional right or duty to disclose;
•used for any personal advantage or the advantage of a third party.
Professional Behaviour
An accountant must:
•comply with relevant laws and regulations; and
•avoid any conduct that might discredit the profession.
In marketing and promoting themselves and their work, professional accountants should not bring the
profession into disrepute. They should be honest and truthful and not make:
Compliance with the fundamental principles may potentially be threatened by a broad range of
circumstances which generally fall into one or more of the following categories:
•Self-interest threat;
•Self-review threat;
•Advocacy threat;
•Familiarity threat; and
•Intimidation threat.
The term "management threat" is widely used to describe the threats that arise when an audit firm
undertakes an activity that is management's responsibility. However, it is not a separate category of
threat in the Code.
Key Point
A circumstance might create more than one threat, and a threat might affect compliance with more
than one fundamental principle.
Self-Interest Threat
A self-interest threat may occur due to the financial or other interests of the professional
accountant (including immediate or close family members). For example:
2.Douglas Lu, the auditor of Ayeland Bank, is also a customer of the bank. Ayeland Bank has
offered Douglas Lu preferential rates on his loan and overdraft facilities.
3.Tucker Chartered Accountants, a relatively new audit firm, is conducting the audit for
Tubbletown Co. During a recent conversation, Tubbletown’s CEO wished Tucker success in its
future ventures and promised to take up the offer of non-audit services from Tucker if an
unmodified audit opinion is issued on completion of the audit.
Self-Review Threat
•A self-review threat may arise when a professional accountant does not appropriately evaluate the results
of a previous judgment made by either themselves or another individual within their firm or employing
organisation, which they will rely on when forming a judgment in providing a current service.
2.Mariana, the audit manager for the statutory audit of Ruger Co, was previously engaged as
a non-executive director of Ruger and the chair of Ruger’s audit committee.
Advocacy Threat
An advocacy threat is created when the professional accountant promotes a client's or employer's
position or opinion to the point that subsequent objectivity may be compromised. If the position has
changed later, there may be pressure to ignore that change.
2.Balsyer Co, impressed with the quality of work performed by TT Chartered Accountants on its
statutory audit, has invited TT to be its reporting accountants for its upcoming initial public offering (IPO)
and accompanying promotions to institutional investors.
Familiarity Threat
A familiarity threat can arise when a professional accountant, because of a long or close relationship, becomes
too sympathetic to the interests of a client or employer or too willing to accept their work and explanations.
Key Point
There is a significant risk that professional scepticism will not be sufficiently applied.
•Over-familiarity (e.g. close or immediate family member) with management such that professional judgement
could be compromised;
•Long association with business contacts influencing business decisions;
•Acceptance of gifts or preferential treatment, unless the value is insignificant; and
•A former partner of the audit firm becoming a director, officer or employee of a client in a position to exert
direct influence over the financial statements (or other subject matter of the engagement).
Example 4 Familiarity Threats
1.The CEO of Rublus Co is also the wife of the engagement partner for the company’s statutory audit.
2.Patrick, a former partner in Delim & Co has joined Pack Co as finance director. Patrick was the audit
engagement partner of Pack Co in previous years and Delim & Co is still Pack Co’s auditor this year.
Intimidation Threat
An intimidation threat arises where the professional accountant may be deterred from acting objectively
by actual or perceived pressures, including attempts to exercise undue influence over the accountant.
•the threat of dismissal (as an employee) or replacement (as an auditor), for example, over a
disagreement about the application of an accounting principle;
•a dominant personality attempting to influence the presentation of financial information or controlling
relations with auditors (e.g. their appointment);
•being threatened with litigation; and
•being pressurised to reduce necessary work to reduce costs or fees.
Example 5 Intimidation Threats
1.The finance director of Belmont Co has informed the auditor that the company might start looking for a
new auditor in the event of an unfavourable audit opinion.
2.Balsi Co’s management has informed the auditor, Truf & Co, that it would hold Truf & Co liable for any
drop in share price if the audit opinion is unfavourable.
Addressing Threats
1. Eliminate the circumstances, including interests or relationships, that are creating the threats;
For example, a member of the audit team may sell any direct holdings in a client’s shares before the
commencement of the audit.
2. Apply safeguards, where available and capable of being applied, to reduce the threats to an
acceptable level; or
3. Decline or end the specific professional activity. This may be the only course of action (i.e. when a
threat cannot be eliminated or reduced to an acceptable level through safeguards).
For example, an auditor may decline to advise a client on a takeover bid where the target company is
another audit client.
Definition
Safeguards – actions, individually or in combination, taken by the professional accountant that
effectively eliminate threats to compliance with the fundamental principles or reduce them to an
acceptable level.
Key Point
The professional accountant’s action is not a safeguard unless it is effective.
Independence, Objectivity and Integrity
Independence is a requirement for all professional accountants and their firms when performing audit engagements.
Key Point
An auditor's integrity and objectivity must be beyond question. Objectivity can only be assured if the auditor is,
and is seen to be, as independent as possible.
Inducements, including Gifts and Hospitality
The professional accountant must comply with relevant laws and regulations that prohibit the offer or
acceptance of inducements in certain circumstances (e.g. those related to bribery and corruption).
A firm or audit team member must not accept gifts and hospitality from an audit client unless the value
is trivial and inconsequential.
Any gift that is intended to influence behaviour improperly should not be accepted (even if the value
is trivial and inconsequential).
Fees
Fees for professional services are usually negotiated with and paid by an audit client. This practice is
generally recognised and accepted by intended users of financial statements. However, it creates a self-
interest threat and might create an intimidation threat to independence.
The level of threats created will depend on many factors, for example:
Factors that are relevant in evaluating the level of self-interest and intimidation threats created by the level of
the audit fee paid by the audit client include:
Actions that might be safeguards to address such threats include having an appropriate reviewer who does
not take part in the audit engagement:
•assess the reasonableness of the fee proposed, having regard to the scope and complexity of the
engagement;
•review the work performed.
Contingent Fees
Definition
Contingent fees – fees calculated on a predetermined basis relating to the outcome of a transaction or
the result of the services performed.
Key Point
A firm must not charge directly or indirectly a contingent fee for an audit engagement.
Contingent fees are also prohibited for non-assurance services (NAS) to audit clients if:
The level of the self-interest threat might be increased if fees payable by an audit client are
overdue during the period of the audit engagement.
It is generally expected that the firm will obtain payment of such fees before the audit report is
issued.
Factors that are relevant in evaluating the level of such a self-interest threat include:
•the significance of the overdue fees to the firm;
•the length of time the fees have been overdue; and
•the ability and willingness of the audit client to pay the overdue fees.
When for each of two consecutive years, the total fees from a PIE client represent more than 15% of the firm’s
total fees, the firm must:
•determine whether, prior to issuing the audit opinion on the second year’s financial statements, a “pre-issuance
review” (equivalent to an engagement quality review) might be a safeguard to reduce the threats to an acceptable
level; and
•if so, apply it.
Definition
Public interest entity (PIE) – a listed entity, or an entity required by a regulator to be audited as if it were
listed, or an entity of significant public interest due to size or business (e.g. banks).
Key Point
If these circumstances continue for five consecutive years, the firm must cease to be the auditor after the
audit opinion for the fifth year is issued.
•a regulatory professional body in the relevant jurisdiction agrees that there is a compelling reason to
continue “having regard to the public interest”; and
•a pre-issuance review is performed before the audit opinion is issued on the sixth and any subsequent
year’s financial statements.
Fee Dependency – Not PIEs
When for each of five consecutive years, the total fees from a not PIE client represent more
than 30% of the firm’s total fees, the firm must determine whether either of the following actions might
reduce the threats to an acceptable level, and if so, apply it:
•prior to issuing the audit opinion for the fifth year, a professional accountant who is not a member of
the firm, reviews that year’s audit work; or
•after the fifth year’s audit opinion has been issued (and before the sixth year’s), a professional
accountant reviews the fifth year’s audit work.
Actual or Threatened Litigation
Actual or threatened litigation typically involves the issue (or threat) of a writ against the firm for
negligence or failure to conduct activities professionally resulting in a breakdown of trust.
When litigation with an audit client occurs or appears likely, self-interest and intimidation threats are
created.
Financial interests may be held and controlled directly (e.g. personal shareholdings) or indirectly (e.g.
through a pension fund).
Holders of a relevant interest (e.g. direct interest or material indirect interest) in an assurance client are
at risk, and the self-interest threat should be assessed.
If held, there are no safeguards that would reduce the threat to an acceptable level, so:
•the individual must dispose of the interest; or
•the firm disengage from the audit; or
•the audit team member/partner resigns from the firm.
Family and Other Personal Relationships
Personal relationships (e.g. through mutual business interests or close friendship) or family relationships
(e.g. by marriage or birth) between a member of the audit team and a client's directors, officers and other
employees create self-interest, familiarity or intimidation threats.
The more senior the individuals involved, the greater the threat. Therefore, an individual cannot be a
member of an audit team if an immediate family member:
Suggest how the threats arising in each of the following situations should be addressed:
1.A trainee's uncle is a director of an assurance client.
2.A trainee's friend from university is the credit controller of an audit client.
3.An audit manager's fiancée is the credit controller of an audit client.
4.A partner's sister is a director of a company.
Loans and guarantees to an audit client by a firm, audit team member or immediate family are prohibited unless
immaterial to both:
•the firm (or individual) making the loan or guarantee; and
•the client.
Loans and guarantees from an audit client that is not a bank (or similar institution) are similarly prohibited.
Where the client is a bank (or similar institution), loans (including mortgages, bank overdrafts and credit card
balances) and guarantees cannot be accepted unless made under routine lending procedures, terms and
conditions. Even in this situation, a self-interest threat may arise if the loan is material to the loan recipient.
Where such loans are material, safeguards are required to address the self-interest threat (e.g. an independent
review of audit work).
Many firms prohibit their partners (and the firm) from having any material loan from financial institution clients.
This is particularly the case for the engagement partners. Where a loan is material to an employee (which is
likely to be the case), that employee would not be assigned to the audit of the financial institution concerned.
Provision of Non-assurance Services to Assurance Clients
There is no objection to providing non-assurance services (NAS) to audit clients. In doing so, the firm better
understands its clients' processes, controls, business and financial risks. However, auditors are barred from
providing additional NAS to listed company clients in some jurisdictions.
Under corporate governance codes (e.g. the UK Corporate Governance Code), audit committees must
specifically approve non-audit services provided by auditors, ensuring that independence has not been
impaired and that there is no threat to any fundamental principle.
Key Point
Where the Code expressly prohibits the provision of a NAS to an audit client, that is regardless of the
materiality of the outcome or results of the NAS on the financial statements.
Key Point
If a threat cannot be reduced to an acceptable level by applying safeguards, the NAS cannot be provided.
Prohibition on Assuming Management Responsibilities
Key Point
A firm must not assume management responsibility for an audit client.
Assuming management responsibility in providing a NAS creates self-review and self-interest threats. It
can also create familiarity threat and even advocacy threat (because the firm becomes too closely aligned
with the views and interests of management).
Key Point
To avoid assuming management responsibility when providing any NAS to an audit client, the firm must be
satisfied that management makes all judgments and decisions that are the proper responsibility of
management.
Accounting and Bookkeeping Services – Self-review Threat
Key Point
Such services must not be provided to a PIE audit client.
Valuation Services – Self-review or Advocacy Threat
A valuation involves making assumptions about future developments and applying specific methodologies
and techniques to compute a particular value, or range of values, for an asset, a liability or the whole or
part of an entity.
PIE Not-PIE
•Preparing tax calculations (current and deferred) for the accounting entries that will be subsequently audited
creates a self-review threat.
• This is prohibited for a PIE audit client, if material;
• Appropriate safeguards should be applied to a not-PIE audit client.
•Tax advisory and tax planning services comprise a broad range of services which might create a self-
review or advocacy threat.
• Such services that might create a self-review threat for a PIE are prohibited;
• Where permitted, as well as the usual safeguards, the firm may obtain “preclearance” from the tax
authorities.
•For tax services involving valuations, the provisions of the Code for valuation services may apply
•Providing assistance in the resolution of tax disputes to an audit client might create a self-review or
advocacy threat. For example, when the tax authorities have notified the client that arguments on a
particular issue have been rejected and either the tax authority or the client refers the matter to a tribunal
or court.
Key Point
•A firm must not assist in the resolution of any tax dispute which involves:Acting as an advocate for the
audit client before a tribunal or court;
•Amounts which are material to the financial statements.
Internal Audit – Self-review Threat
Many internal audit services will not be directly related to the financial systems and preparation of the
financial statements. They may be undertaken without threat to independence by the external auditors.
For a PIE audit client, internal audit services that relate to the following are prohibited:
•internal controls over financial reporting;
•financial accounting systems that generate information for the client's accounting records or financial
statements; or
•amounts or disclosures that relate to the financial statements.
For not-PIE audit clients, professionals who are not audit team members may perform the service as a
safeguard.
IT Systems Services – Self-review Threat
Providing services to an audit client that involve the design and implementation of financial
information technology systems that generate information forming part of that client's financial
statements, may create a self-review threat.
For a PIE audit client, a firm cannot provide services that involve designing or implementing IT
systems that:
•form part of the internal controls over financial reporting; or
•generate information for the client's accounting records or financial statements.
Recruiting Services – Self-interest, Familiarity or Intimidation Threats
The recruitment of senior management for an audit client may create current or future self-interest,
familiarity and intimidation threats.
Key Point
An audit firm is prohibited from acting as a negotiator on an audit client’s behalf.
The following recruiting services are prohibited for any audit client for the positions of director, officer or
senior management in a position to exert significant influence over the accounting records or financial
statements:
•Using professionals who are not members of the audit team to perform the service;
•Independent review of the audit work or service.
Long Association of Senior Personnel
A familiarity threat arises when senior staff have been involved with an audit engagement for a significant
time.
A self-interest threat might be created due to an individual’s concern about losing a long-standing client or
interest in maintaining a close personal relationship with a member of senior management or TCWG. Such
threats might influence the individual’s judgment impairing objectivity and reducing professional
scepticism.
For a PIE, an individual cannot act in any of the following roles (or a combination thereof) for more than
seven cumulative years (the “time-on” period):
•The engagement partner;
•The individual responsible for the engagement quality review (see Chapter 5);
•Any other key audit partner role.
A familiarity or intimidation threat might be created if a director or officer of an audit client (or an
employee in a position to exert significant influence over the financial statements) was a partner of the
audit firm or a member of the audit team.
An audit team member who recently served as a director, officer or employee of the audit client might
create a self-interest, self-review or familiarity threat. Therefore, an audit team should not include an
individual who served with the audit client during the period covered by the audit report.
Serving as a Director
Serving as a director or officer of an audit client creates self-review and self-interest threats.
Key Point
A partner or employee of the firm must not serve as a director or officer of an audit client of the firm.
1.Trainees of Porterhouse, a firm of Certified Accountants, have been offered overdraft facilities up to $3,000,
on student terms, by a client bank.
2.Ambit Co is preparing to apply for listing (admission) to a recognised stock market while offering a proportion
of its shares to the public. The directors have asked Schilling & Co, as their auditors, to set up and maintain
the company's share register on a computer database.
3.Sean & Co is the auditor of Starck Co. During the current year, Starck has expanded rapidly, taken over
three other companies and is currently preparing to float a proportion of its shares on a recognised stock
exchange. As a result of several special assignments connected with these events, total fees from Starck
amount to 19% of the total fee income of Sean & Co for the year.
In addition, Sean & Co's senior tax manager owns a small number of shares in Starck, acquired several years
ago when the company issued shares under a business expansion scheme.
Answer to the situation 1
1.Comments - Loans (including overdrafts) on normal commercial terms may be accepted by staff
members (including trainees)."Student terms" may be standard commercial terms if the bank offers
them to all accountancy trainees, not just Porterhouse’s. If these terms are not normal commercial
terms, the next step is to determine if the benefit is more than "modest".
2.Conclusions - Porterhouse's engagement and compliance partners may decide that acceptance of
the offer will not appear to threaten objectivity even if the terms are special. However, as a safeguard,
it should be confirmed that the terms are no more favourable (or no less unfavourable!) than those
offered to other trainees. If more favourable, the loans (overdrafts) should be declined.
Answer to the situation 2
1.Comments - Provided this is a simple matter of entering data into the database and the directors
of Ambit have approved the specific programme used by the auditor, the nature of additional
service is unlikely to threaten objectivity (i.e. no managerial involvement).As a public interest
company (intention to list), recurring fees (audit + maintenance) should not exceed 15% of gross
practice income. In addition, a pre-issuance review of the audit file must occur.
1.Comments - Starck Co will become a public interest entity when the shares are listed. The 19% of total
fees may not affect independence if the recurring element is less than 15%. However, 19% may be
undesirably high in appearing to detract from objectivity.Safeguard: Ensure that the recurring element of the
fee will be less than 15% of the firm’s total fee income. If not, determine whether a “pre-issuance review” of
the audit might be a safeguard to reduce the threats to an acceptable level.
2.The scenario implies that Sean & Co permits non-partner staff to hold shares in clients. Accordingly, the
senior tax manager should not be involved with Starck’s audit (e.g. calculating tax liabilities, reviewing tax
audit working papers) to avoid a self-interest threat
3.Safeguard: Ensure that the senior tax manager does not have any involvement with the audit of Starck. If
he does, he must dispose of his shares immediately.
4.Staff involved in the special assignment should not have similar responsibilities on the audit to avoid a
self-review risk. The more senior the staff, the higher the familiarity risk.
5.Conclusions - Provided that the recurring element of fees does not exceed 15% of total fee income and
appropriate safeguards (as above) are implemented, any threats to the fundamental principles should have
been reduced to an acceptable level.
Second opinion
A second opinion is when a professional accountant is asked for an opinion on the application of
accounting, auditing, reporting or other standards or principles by an entity that is not an existing client.
This is also sometimes referred to as "opinion shopping".
Key Point
Providing a second opinion to an entity that is not an existing client may threaten compliance with the
fundamental principles, unless the advice sought is insignificant.
Threats to the Fundamental Principles
A self-interest threat to compliance with the principle of professional competence and due care
arises when the second opinion is not based on the same set of facts that were made available to the
existing accountant, or is based on inadequate evidence.
The second opinion may create undue pressure on the judgement and objectivity of the entity’s
appointed auditor (i.e. threatening another professional accountant’s independence).
Actions to Address
Examples of actions that might be safeguards to address such a self-interest threat include:
•Obtaining information from the current auditor with the client's permission.
•Describing the limitations surrounding any opinion in communications with the client.
•Providing the current auditor with a copy of the opinion.
Definition
Public interest – the collective well-being of the community of people and institutions the professional
accountant serves.
Example 6 Improper Disclosure
During the current year's interim audit, the auditor becomes aware that the client has misrepresented its
sales tax return to the tax authorities, resulting in an underpayment of sales tax. The client refuses to accept
the auditor's advice to notify the tax authorities and negotiate and correct the returns.
The auditor informs the client that he is no longer prepared to act for them in any professional capacity. He
also tells the client that he will be informing the taxation authorities that he no longer acts for the client.
Because of client confidentiality, he should not disclose to the tax authorities why he has resigned (unless the
client gives permission for him to do so, which is highly unlikely).
In addition, in certain jurisdictions (e.g. the UK), the deliberate underpayment of taxation is classified as
proceeds of crime and possibly money laundering. Therefore, the auditor is under a legal duty to report his
suspicions to the appropriate authorities (dealing with proceeds of crime), giving full details, even though he
does not provide a complete report to the taxation authorities.
A conflict of interest creates threats to compliance with the principle of objectivity (and might threaten
compliance with the other fundamental principles). Such threats might arise when there is a conflict
between:
1.the professional accountant's interests and the client's interests.
2.the interests of two or more clients.
Professional Accountant v Client
Key Points
•Professional accountants should place clients' interests before their own.
•Any financial gain that accrues or is likely to accrue to the firm as a result of the engagement
(other than properly earned fees, etc) will always amount to a significant conflict of interest.
Client v Client
Key points
•The firm's work should be managed to avoid the interests of one client adversely affecting those of
another.
•Where the acceptance or continuance of an engagement would, even with safeguards, materially
prejudice the interests of any client, the appointment should not be accepted or continued.
Safeguards include:
•Separate engagement teams are provided with clear policies and procedures for maintaining
confidentiality.
•Appropriate reviewer, who is not involved in providing the service or otherwise affected by the
conflict, reviews the work performed to assess whether the critical judgments and conclusions are
appropriate.
Example 7 Conflicts of Interest
All of the current Big Four firms were formed through the mergers of major firms (originally
referred to in the 1980s as the "Top 10"). As the number of audit and assurance firms
reduced, it was not uncommon for two major competitor companies to find that they became
clients of the same firm. Despite assurances given concerning the confidentiality of the
information and being able to minimise and control conflicts of interest, many competitor
companies decided that one of them would need to change advisers.
1. The directors of Exit Co, a listed company, have decided to issue an annual environmental and social
responsibility report and have asked the company’s auditors, Stu & Co, to provide an assurance report on it.
If accepted, the fee income from Exit Co would be slightly less than 15% of Stu & Co’s total fee income.
What should Stu & Co do now?
A.Resign from Exit Co
B.Decline the additional work
C.Rotate the audit engagement partner
D.Determine whether a pre-issuance review might be a safeguard
2. For which TWO of the following situations should an auditor make a VOLUNTARY disclosure?