Professional Ethics

The Duties of an Accountant. The Accounting Profession has the following features:• An established body of knowledge• Organized bodies to exercises its authority• Community sanction concerning its control over memberships and accreditation• A high image in society through professional culture.

Professional CultureEvery profession operates through a network of groups such as professional firms,

universities and professional bodies that act a focus of common interests and aims.

It has values, norms and symbols of practice.

It includes the maintenance of:• Competence in the field of expertise and knowledge• Integrity in client dealings• Objectivity in offering of services• Confidentiality in client matters• Discipline over member who do not discharge the duties according to public

expectations

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Professional Ethics

The Nature of EthicsEthics provides a framework of beliefs and a reasoned and systematic analysis of decisions, in

order to help individuals acquire the skills and insights necessary for ethical decision making. Such individuals are able to:

• Make competent decisions by learning, practice, trial-and-error and life experiences• Determine whose interests are at stake and identify one’s obligations• Identify problems clearly• Identify and prioritize the ethical principles relevant to a specific problem• Take account of experience and consider a variety of possible options for decision and

action• Act with resolve an d in pursuit of clear, achievable objectives and carry our the action

objectively through to its conclusion

Professional Ethics and Ethical Codes for AccountantsProfessional ethics extend beyond moral principles. They include standards of behavior. The

following fundamental principles apply:• Integrity (the professional accountant should be straightforward and honest)• Objectivity (should not allow bias, conflict of interest or undue influence to override

professional or business judgments)• Professional competence and due care (must have knowledge and skill. Should act

diligently and according to professional standards)• Confidentiality (should respect information acquired during business conduct)• Professional Behavior (should comply with relevant laws and regulation and avoid acts

discrediting the profession)

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Professional Ethics

Professional IndependenceIndependence is the cornerstone of the auditing profession. Without it, there is lack of impact

and credibility.Some key areas of risk and examples of guidance:• Fees: There are limits to recurring fees. For UK (10% for plc’s and 15% for private

companies for audit and other services)• Fees: Should be collected promptly and in accordance with engagement letter. Otherwise,

they can be considered a loan.• Actual/threatened litigation: Causes a breakdown of the client/auditor relationship; the

auditor should resign.• Family and other personal relationships: Should be avoided.• Financial interests in audit clients: Should not be held; the auditor should dispose shares

of his client at earliest opportunity.• Loans and guarantees: Should be neither given nor received. Gifts and hospitality: Should

be accepted only if on normal terms and the benefit is clearly insignificant• Long association of senior personnel: This should be rotated. In the UK this is limited to 5

years.• Recruitment services: Where assistance is required (e.g. appointment of financial

director) the client should decide.• Employment with the customer: A two year gap is required.• Provision of nonaudit services to audit clients: May be undertaken, depending on the

nature of service provided. Care is needed and professional guidance is necessary.

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Professional Ethics

Fraud, Illegal Acts and Money LaunderingDetection of fraud and error was the original primary objective of audit. Although currently

this has been replaced by the “true and fair” view of the financial statements, several users still consider fraud detection among the primary goals of the audit.

Fraud: An intentional act by management, governors, employees or third parties, involving use of deception to obtain an unjust or illegal advantage.

Fraudulent financial reporting:• Falsification or alteration of records or other documents• Willful misrepresentation or omission of transactions or the entity’s state of affairs• Intentional misapplication of accounting policies.Fraudulent misappropriation of assets:• False or misleading. documents or records in order to conceal missing or devalued assets.

Fraud detectionThe auditor must be alert to the possibility of fraud and assess the risk it might occur.The auditor should consider:• Incentives• Opportunities• Rationalizations

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Professional Ethics

Incentives:Threats to profits or financial stability Increased competition

Changes in technologyDeclining demandNegative cash flowsChanges in regulations

Pressure to meet third party expectations Expectations of investment analystsNeed to raise additional funds

Threat to persona finances of management Performance related paySignificant financial interests

OpportunitiesNature of industry or its operations Related party transactions

Accounting estimates significant in financial recordingManagement dominated by an individual or small group

Ineffective monitoring Ultimate ownership unclearComplex organizational structure Unduly complex structure

High turnover of senior managementPoor interim reporting structure

Deficient control Ineffective accounting. IT or internal auditstaff

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Professional Ethics

Rationalization:Those involved in a fraud are able to rationalize fraudulent act as being consistent with their

personal code of ethics. Some people possess an attitude, character or set of ethical values that allows them to knowingly and intentionally commit a dishonest act.

Poor communication of entity’s ethical valuesKnown history of violation of laws and regulationsExcessive interests in maintaining share price or meeting analysts’ expectationsFailure to correct know control weaknessesStrained relationship between management and auditor

When there is an assessed risk of materially misstated financial statements due to fraud, auditors should pay particular attention to:

• Revenue recognition• Management estimates • Unusual transactions

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Professional Ethics

Noncompliance with Law and RegulationsAuditors may not always possess the knowledge to detect illegal acts.

There are three principal categories of illegal act:• Form content and preparation of financial statements• Having a fundamental effect on operations, a branch of which would jeopardize the

viability of the entity • Equal employment opportunity, occupational health and safety and environmental

protection

In presence of a material irregularity, the auditors must consider matters such as:• The effect on financial statements or audit report• Evaluate the internal control, the possibility of recurrence of the same of similar

irregularities and the need for further audit procedures• Management’s proposed actions to prevent recurrence• Public interest implications

Money LaunderingThis includes all forms of handling or possessing criminal property (criminal activities,

terrorism, tax evasion, bribery or corruptions etc).This could be quite complex and involve operations in several countries and jurisdictions. The

auditor should report any suspicious action. The auditor must report any suspicious actions.

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