EACG2708

LEARING UNIT 3
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CODE OF PROFESSIONAL
CONDUCT
 INTRODUCTION

Where does the Code of Professional Conduct come from?

The importance of the CPC: The public interest

The public relies directly and indirectly on the members of the accounting profession:
• Banks and shareholders place reliance on audited financial statements
• Financial executives contribute to the effective and efficient use of the organisation's
resources and good corporate governance
• Internal auditors to ensure internal controls
• Tax experts to establish confidence in the tax system

A distinguishing mark of the accounting profession:

• Professional accountants should ensure their services are delivered in accordance with the
highest ethical and professional standards.
• Acceptance of the responsibility to act in the public interest.

DEFINITIONS
GENERAL APPLICATION OF THE CODE

Code establishes the FUNDAMENTAL PRINCIPLES:

• The code is not a set of rules and laws but establishes fundamental principles of ethical
behaviour that professional accountants should demonstrate.
• Situations may arise that can threaten a professional accountant’s ability to demonstrate (or
comply with) the fundamental principles.
• The professional accountant may have already breached the fundamental principles by acting
(or not acting) in a certain way.

Responsibility of the profession:

• A professional accountant is responsible to act in the best interest of the public (protect the
interest of the public).
• This means that a professional accountant’s responsibility is not exclusively to satisfy the
needs of an individual client or employing organisation.
• Should a professional accountant be in an unusual situation where complying with the
requirements and application material of the CPC might not be in the best interest of the
public, the professional accountant should consult with a professional or regulatory body.
• The CPC sets out a conceptual framework that guides a professional accountant on how the
professional accountant should respond to any threats of complying with the fundamental
principles.

FUNDAMENTAL PRINCIPLES

A professional accountant shall comply with the five (5)

fundamental principles of professional ethics:
 Five Fundamental Principles
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A professional accountant shall be straightforward, honest, fair and truthful in all his/her
dealings.
> Should not be associated with information they believe:
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o Contains a materially false or misleading statement;

o Contains statements or information provided recklessly; and
o Omits information where such obscurity would be misleading
> Becomes aware that he has been associated with such information
- take steps to
section II disassociate himself therefrom.

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Should not allow bias, conflict of interest, or undue influence of others to override or
compromise professional or business judgements.
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Shall not undertake a professional activity (work) if a circumstance or relationship unduly

influences the professional accountant’s professional judgement.

Section 112

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Maintain : Maintain professional knowledge and skill at a level which ensures that clients
or employers receive competent professional service.
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Carry out : Act diligently and in accordance with the applicable technical and professional
standards.
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Lifelong learning : Must remain up to date with the relevant technical, professional and
business developments.
Section 113 >
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Ensure that those working under the authority of the professional accountant have
appropriate training and supervision.
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Should not undertake or continue with an engagement which the professional accountant
is not competent to perform unless he obtains advice and assistance which enables the
professional accountant to carry out the engagement satisfactorily.

The professional accountant shall not disclose confidential information acquired as a result of
a professional or business relationship without the proper authority or unless there is a legal or
professional duty to do so.

Should maintain confidentiality: Must NOT use confidential information:

o In a social environment o For personal advantage; or
Section 114 o Amongst business associates o Advantage of a third party
o Amongst immediate family members
o Within a firm or organisation
o Of a prospective client or employer
o After a client or employer relationship has ended

The principle requires that a professional accountant:

Comply with all relevant laws and regulation; and
Avoid any action which the professional accountant knows or should know that may bring the
discredit to the profession should the actions become public knowledge.

Publicity, advertising and solicitation:

Professional accountants are entitled to market and promote themselves and their
Section 115
firm, but in doing so must:
Not bring the profession into discredit
Be honest and truthful
Not make exaggerated claims for the services offered
Not make despairing references or unsubstantiated comparisons to the work of others.

Membership of multiple firms

o A professional accountant may be a member of more than one firm which offers professional
accounting services.
o Ensure a clear distinction between the different firms.

Signing reports or certificates.

o The professional accountant must not delegate to any person (who is not a director or fellow
partner) the power to sign audit, review or other assurance reports or certificates which are
require by law to be signed by the professional accountant responsible for the engagement.
o Restriction may be waived ONLY in emergency cases.
Additional Requirement: Independence
• Requirement for professional accountants who provide assurance engagements (E.g., audits,
independent reviews, or other assurance activities).
• Not a principle, but a higher requirement (required by law).
• Linked to the fundamental principle of Objectivity.

Professional Scepticism
There is a requirement that a professional accountant in public practice should apply professional
scepticism when carrying out their work.

This requires the professional accountant to apply a questioning mind over the:
• Information provided by clients (Could they be possibly misleading me?); and
• The reliability of the supporting documentation (Could this document possibly be falsified?)
• Professional scepticism requires the professional accountant to remain alert for possible
fraud.

THREATS TO THE FUNDAMENTAL PRINCIPLES

• All professional accountants should adhere to the five fundamental principles in Part I of the
Code of Professional Conduct (CPC).
• Situations may arise, through a range of facts and circumstances, that can threaten a
professional accountant’s ability to comply with fundamental principles:
1. The professional accountant should identify the threats to compliance with the
fundamental principles.
2. When the professional identifies a threat to compliance with the fundamental principles,
the accountant shall evaluate whether the threat is at an acceptable level.
3. If not, the threat must be addressed!!!!
Threats to the Fundamental Principles
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Threat that a financial interest or other interest will influence the professional accountant’s
judgement or behaviour and lead him to act in his own self-interest.

For example:
• A professional accountant having a direct financial interest in a client.
• A professional accountant having a close business relationship with a client,
• A professional accountant having access to confidential information that might be used
for personal gain.

Threat that the professional accountant will not appropriately review the work due to having self-
prepared the work or someone in the same firm.

For example:
• A professional accountant who prepared the financial statements, is now part of the audit team
responsible for auditing those financial statements.
• A firm is responsible for providing assurance over the financial statements where the same firm
was responsible for implementing internal controls over the financial statements.

An advocacy threat is created when a professional accountant promotes a client’s (or employer)
position to a point that the professional accountant’s objectivity is compromised.

For example:
• A professional accountant values a client’s shares and then leads the negotiations on the sale
of the company.
• A professional accountant acting as an advocate on behalf of a client in litigation or disputes
with third parties.

Due to a long or close relationship with a client or employing organisation, a professional

accountant will be too sympathetic to their interest or too accepting of their work.

For example:
• The professional accountant accepts gifts from the client.
• There is an immediate- or close relationship between a member of the audit team and an
employee of the client responsible for the preparation of the financial statements.
• There is a long association between the engagement partner/manager and the client.

The professional accountant will be deterred from acting objectively because of actual or
perceived pressure.

For example:
• A professional accountant in business fails to report fraud out of fear that he might be
dismissed.
• An audit firm is being threatened with dismissal from the engagement.
• Pressure to accept an inappropriate decision on an accounting matter, is exerted by the
client’s financial manager on a young, inexperienced audit manager.
 CONCRPTUAL FRAMEWORK

• It is not possible and practical to write a rule for every type of scenario that can threaten a
professional accountant’s compliance with the fundamental principles.
• The conceptual framework was established to uphold the fundamental principles (much like
the framework of a house uploads the walls and the roof of the house).
• The conceptual framework should be used when the professional accountant has identified
that his/her compliance with the fundamental principles is being threatened due to something
that has not happened yet.

The Conceptual Framework requires that professional accountants:

1. Identify the Threat
2. Evaluate the Threat
3. Respond to the Threat

Em
Evaluating Threats

• The professional accountant should evaluate whether the threat to the fundamental principle
is at an acceptable level.
• There might always be a threat to the professional accountant complying with the
fundamental principles. Might not be possible to completely remove the threat.
• Acceptable level: Complying with the fundamental principles.
• Apply the reasonably informed third-party test to determine whether he/she complies with the
fundamental principles (threat at an acceptable level).

m
Addressing the threats

Is the Code of Conduct Applicable to trainee accountants?

The SAICA by-laws state that any improper conduct by a trainee accountant will be treated
as if a member perpetrated the improper conduct.
 PROFESSIONAL ACCOUNTANTS
IN PUBLIC PRACTICE

(S310) CONFLICT OF INTEREST

Step 1: Identify the • Juan’s wife (immediate family member) holds a significant financial investment in JH
Manufacturers. Juan is assisting his client, CompTech (Pty) Ltd, to evaluate whether to invest
threat in JH Manufacturers.
• This could possibly create a self-interest threat to Jaun’s Objectivity.

Explanation (only if required to explain):

• Jaun could possibly act in his wife’s interest (self-interest threat) and advice his client,
CompTech (Pty) Ltd to invest in JH Manufacturers Ltd, although this may not be the best
possible investment (Objectivity).
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• Immediate family member = spouse or dependent.

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• Close family member = parent, child, or sibling

• When we evaluate a threat, we need to consider whether the threat is at an acceptable

level (or not) and conclude.
Step 2: Evaluate the • Acceptable level = the professional accountant will be able to comply with the five
threat fundamental principles.
• Consider the reasonable informed third-party test to evaluate if the threat is at an
acceptable level (or not).

In this scenario, the factors that we need to consider (evaluate):

• The value of the financial investment (significant or not)
• The type of service the professional accountant will be rendering (role of the professional
accountant)
• The value of the financial investment (significant or not)
• Mr Juan’s wife has a significant investment in JH Manufacturers.
• The type of service the professional accountant will be rendering (role of the professional
accountant)
• Mr Juan will be evaluating the possible investment in JH Manufacturers. His role could
impact whether or not CompTech (Pty) Ltd invests in JH Manufacturers.

Conclusion:
The threat is therefore NOT at an acceptable level.
 Evaluating the threat
• Existence of separate functions in the firm
• Policies and Procedures to limit access to client files
• Confidentiality agreements signed by staff
• Separation of confidential information by the firm
• Training and communication provided by the firm

Step 3: Addressing Because the threat is not at an acceptable level, the professional accountant is required to address
the threat the threat by:
1.Removing facts or circumstances creating the threat
Remove Juan from the engagement.
Have his wife dispose of her financial interest.

2.Reducing the threat to an acceptable level by applying appropriate safeguards.

Having the work done be reviewed by an independent senior who is not involved.

3.Declining or ending the engagement

If facts or circumstances cannot be eliminated, the professional accountant should consider
declining or ending the professional service.

(S330) FEES AND OTHER REMUNERATION

A professional accountant is entitled to be remunerated fairly but must charge appropriate fees
(e.g., not over or undercharged).

How does a fee structure work?

• A threat can be created when a professional accountant, in an attempt to secure a client,
quotes a fee so low that it will be challenging to perform the engagement according to the
applicable standards.
• A professional accountant quoting a fee lower than a competitor is not a threat, but the fact
that the professional accountant might breach the fundamental principles does create a
threat.

Step 1: Identify the > The

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fee quotes to Alpha Group (Pty) Ltd (which is based on the number of hours they would
need to complete the engagement) was reduced by 25%.
threat > This could possibly create a self-interest threat to Professional Competence and Due Care.
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Explanation: This may make it difficult to perform to prepare the financial statement in
accordance with the International Financial Reporting Standards (IFRS) (Technical and
professional standards).
Note: Professional accountant quoting a fee lower than a competitor is not a threat, but the
fact that the professional accountant might breach professional behaviour does create a
threat.
Step 2: Evaluate the Factor to consider:
threat Does the client know what services they will receive?
? Are the fees charged determined by a regulator board?
The threat is not at an acceptable level as the work will not be performed with the required
degree of skill and supervision as can be expected of a professional accountant (in
accordance with Technical and professional standards).

Step 3: Addressing the Removing the facts/circumstances creating the threat:

Quote an appropriate fee based on the work that will be required.
threat
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Apply safeguards to reduce the threat to an acceptable level:

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- Make the client aware of the terms of the engagement, the basis on which
the fees were prepared, and which services are covered.
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Having an appropriate reviewer review the work (this will cost more)

Decline or end the specific professional activity:

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If facts or circumstances cannot be eliminated, the professional accountant should consider
declining or ending the professional service.

Contingent Fees:
• Contingent fees are fees calculated on a predetermined basis dependent on the outcome of
the work or services performed.
• Contingent fees are acceptable for a range of non-assurance services.
• Contingent fees for assurance services are not permitted.
• Contingent fees for tax returns are not permitted.

Referral Fees/commissions:
A professional accountant may receive or pay fair referral fees, but it should not compromise
compliance with the fundamental principles.
 (S340) INDUCEMENTS LIKE GIFTS AND HOSPITALITY

Your client offered you and your partner have been offered an all-expenses paid holiday to
Step 1: Identify the Mauritius. This constitutes gifts and hospitality.
threat > This could possibly create a self-interest threat, and familiarity threat to Integrity, Objectivity and
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Professional Behaviour.
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Possible intimidation threat if the client threatens to expose the professional accountant who has
accepted the gift.

Explanation:
⑧
This could cause the professional accountant to not be straightforward and honest in
his/her business dealings (Integrity).
⑧ This could influence the professional accountant’s ability to act with professional
judgement and professional scepticism (Objectivity).
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If the public found out, this could bring disrepute to the profession / could be contrary to laws
and regulations (Professional Behaviour).

Factor to consider:
Step 2: Evaluate the > Intention of person(s) giving the gift/hospitality
threat >
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Value of the gift and/or hospitality
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> Laws and regulations prohibiting the acceptance of such gifts and hospitality.

If the professional accountant or third party conclude that the gifts and hospitality is made to
influence the behaviour of the person receiving the gift or hospitality = threat not at an acceptable
level.

Conclusion:
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The threat is not at an acceptable level as the value of the gifts and hospitality is clearly not trivial
(value).
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Trivial: “of little value or importance”

Removing the facts/circumstances creating the threat:

Step 3: Addressing The professional accountant should NOT accept the gift or hospitality.
the threat Explain to the client that the professional accountant cannot accept such a gift.

Apply safeguards to reduce the threat to an acceptable level:

No safeguards can be applied to reduce the threat to an acceptable level.

Decline or end the specific professional activity:

If facts or circumstances cannot be eliminated, the professional accountant should consider
declining or ending the professional service.
 NON-COMPLIANCE WITH LAWS
AND REGULATIONS

What is NOCLAR in terms of the CPC?

• The code provides guidance on what a professional accountant should do when he/she
encounters non-compliance to laws and regulations:
• To act in the best interest of the public
• No additional “detection” responsibility – remain alert!
• No additional knowledge is necessary (additional laws, etc.)

Objectives in relation to NOCLAR:

• Comply with the fundamental principles
• Alert management of the non-compliance
• Protect the public interest

Why is NOCLAR in the CPC?

• “A distinguishing mark of the accountancy profession is its acceptance of the responsibility to
act in the public interest”
• The objective of the Code is to get the right people to do the right things; i.e., management of
a company, with the oversight of those charged with governance (e.g., the board of
directors)”
• Management is ultimately responsible for addressing NOCLAR, and if management takes
timely action to rectify the matter, all is well”
• Confidentiality has always been a hallmark of the profession, and it will continue to be,
provided businesses behave appropriately”

Defining NOCLAR

*
• Act or Omission (Action taken or the lack thereof)
• Intentional or unintentional (It does not matter if you broke the law on purpose or not)
• Committed by:
- Client; or
- Employer; or
- Those charged with governance, management or other individuals working for
or under the direction of a client or employer;
• that is contrary to the prevailing laws or regulations, being;
- all laws and regulations which affect material amounts and disclosure in financial
statements;
- other laws and regulations that are fundamental to the entity’s business
The impact of non-compliance:
Non-compliance might result in fines, litigation or other consequences, potentially materially
affecting the financial statements.

Such non-compliance has wider public interest implications in terms of potentially causing
substantial harm to:
• Investors (shareholders);
• Creditors;
• Employees; or
• General Public

Causing substantial harm results in serious adverse consequences to any of the parties in financial
and non-financial terms.

Examples laws and regulations that could be transgressed:

Threats created by identifying a NOCLAR:

A self-interest threat or intimidation threat to compliance with the principles of integrity and
professional behaviour is created when a professional accountant becomes aware of non-
compliance or suspected non-compliance with laws and regulations.

Explanation:
• There is a self-interest threat as the professional accountant might place his personal interest
(in a promotion or a client) ahead of his integrity (to do the right thing) and professional
behaviour (comply with relevant laws and regulations).
• There is an Intimidation threat as the professional accountant might be threatened by a client
or an employer for loss of employment/income if the professional accountant reports the non-
compliance.

Scope OUT for NOCLAR:

We already had a look at what NOCLAR is and when a professional accountant has a duty to act.
In the following circumstances, there is no requirement or duty on
the professional accountant to act:
1. NOCLAR committed by an individual that is not the client or the employing organisation,
TCWG, management or other individuals working for or under the direction of the client or
the employing organisation.
2. Personal misconduct unrelated to the business activities.
3. Matters that are clearly inconsequential (Little or no impact on anyone or anything)
 Actions Required for NOCLAR

Step 1: Obtain an Obtain an understanding of the following:

understanding of the • Nature of the NOCLAR
matter • Requirements of the laws and regulations
• Potential Consequences
Apply knowledge, professional judgement and expertise
• To the extent of the professional accountant’s knowledge.
Consider consultation
• With legal counsel on a confidential basis

Step 2: Addressing the • Discuss the NOCLAR with those charged with governance
matter • Comply with relevant laws and regulations regarding the reporting
(disclosure) of NOCLAR
• Advice management to rectify, remediate or mitigate the consequences
of the NOCLAR
• Consider action to reduce the risk of re-occurrence
• Take actions to deter (prevent) if NOCLAR has not yet happened
• Consider whether the matter should be disclosed to the appropriate
authority
Step 3: Determining
whether further action
is needed

Step 4: Determine • Disclosing to the appropriate authority would not be allowed if doing so
whether to disclose would be contrary to law and regulation.
the matter to the • In deciding to disclose the matter, the professional accountant should
appropriate authority consider the actual or potential harm of the matter to stakeholders.

Step 5: Documentation The professional accountant should document:

• The matter (non-compliance);
• The results of discussions with superiors, those charged with
governance and other parties;
• How the above parties have responded to the matter;
• The courses of action considered, the professional judgements and the
decisions made;
• How the professional accountant is satisfied that all his responsibilities
have been fulfilled.