Code of Ethics and Conduct, Schemes and Mind Maps of Ethics

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Code of Ethics and Conduct 1 Code of Ethics and Conduct Contents 2 Table of Contents GUIDE TO THE ACCA CODE OF ETHICS AND CONDUCT 4 SECTION A: INTERNATIONAL CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (INCLUDING INTERNATIONAL INDEPENDENCE STANDARDS) 11 PREFACE 15 PART 1 – COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK 16 PART 2 – PROFESSIONAL ACCOUNTANTS IN BUSINESS 32 PART 3 – PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE 69 INTERNATIONAL INDEPENDENCE STANDARDS (PARTS 4A AND 4B) 124 PART 4A – INDEPENDENCE FOR AUDIT AND REVIEW ENGAGEMENTS 124 PART 4B – INDEPENDENCE FOR ASSURANCE ENGAGEMENTS OTHER THAN AUDIT AND REVIEW ENGAGEMENTS 203 GLOSSARY, INCLUDING LISTS OF ABBREVIATIONS 239 EFFECTIVE DATE 253 SECTION B: PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE 254 SECTION B1 PROFESSIONAL DUTY OF CONFIDENCE IN RELATION TO DEFAULTS AND UNLAWFUL ACTS OF CLIENTS AND OTHERS 256 SECTION B2: ANTI-MONEY LAUNDERING 277 SECTION B3: WHISTLEBLOWING RESPONSIBILITIES PLACED ON AUDITORS 282 SECTION B4: DESCRIPTIONS OF PROFESSIONAL ACCOUNTANTS AND FIRMS AND THE NAMES OF PRACTISING FIRMS 286 SECTION B5: LEGAL OWNERSHIP OF, AND RIGHTS OF ACCESS TO, BOOKS, FILES, WORKING PAPERS AND OTHER DOCUMENTS 295 SECTION B6: RETENTION PERIODS FOR BOOKS, FILES, WORKING PAPERS AND OTHER DOCUMENTS 300 SECTION B7: ACTIVITIES THROUGH CORPORATE OR NON-CORPORATE ORGANISATIONS 302 SECTION B8: THE OBLIGATIONS OF CONSULTANTS 305 SECTION B9: PROFESSIONAL LIABILITY OF ACCOUNTANTS AND AUDITORS 306 SECTION B10: THE INCAPACITY OR DEATH OF A PRACTITIONER 312 SECTION B11: ESTATES OF DECEASED PERSONS 317 Guide to the ACCA Code of Ethics and Conduct 5 8. ACCA registered students, affiliates and members are required to observe proper standards of conduct. The Code applies to all ACCA registered students, affiliates and members in relation to all matters connected to their professional lives. This means that in matters connected to their professional lives, they must refrain from taking any action which amounts to a departure from the standards set out in this Code. In both their professional and personal lives, they must also refrain from what is described in ACCA’s bye-law 8 as misconduct. 9. Registered students and affiliates are bound by the ethical requirements of ACCA, as affirmed by their signature on the application forms to be enrolled as registered students. 10. Registered students remain bound by ACCA’s ethical requirements during the period between successful completion of the examinations and their admission to membership (i.e. those having affiliate status). On admission to membership they become subject to the same requirements in their new capacity. Non-compliance with the Code 11. An ACCA registered student, affiliate or member who fails to comply with this Code (incorporating the IESBA code) will be liable to disciplinary action. Two committees have been appointed by Council to enforce ACCA’s ethical standards: Disciplinary Committee and Appeal Committee. The committees derive their powers from the bye-laws. Those failing to observe the standards expected of them may be required to answer a complaint before ACCA’s Disciplinary Committee. 12. It is not possible to specify all those combinations of circumstances in which a professional accountant may be held by Disciplinary Committee to have fallen below the standard expected. However, this section of the Rulebook (which may be added to or varied from time to time) sets out ACCA’s ethical requirements in relation to those professional situations that most commonly arise. Purpose of the Code 13. The Code sets out fundamental principles of ethics for professional accountants, reflecting the profession’s recognition of its public interest responsibility. These principles establish the standard of behavior expected of a professional accountant. The fundamental principles are: integrity, objectivity, professional competence and due care, confidentiality, and professional behavior. 14. The Code provides a conceptual framework that professional accountants are to apply in order to identify, evaluate and address threats to compliance with the fundamental principles. The Code sets out requirements and application material on various topics to help accountants apply the conceptual framework to those topics. Guide to the ACCA Code of Ethics and Conduct 6 15. In the case of audits, reviews and other assurance engagements, the Code sets out International Independence Standards, established by the application of the conceptual framework to threats to independence in relation to these engagements. How the Code is Structured 16. The Code is set out in three sections - Section A comprises the entire IESBA code, including some augmentations relevant to ACCA registered students, affiliates and members; Section B holds supplementary requirements and guidance relevant specifically to professional accountants in public practice, and Section C holds supplementary requirements relevant specifically to professional accountants in business. However, professional accountants may find the guidance in any part of the Code applicable to their specific circumstances. 17. The IESBA code contains the following material: • Part 1 – Complying with the Code, Fundamental Principles and Conceptual Framework, which includes the fundamental principles and the conceptual framework and is applicable to all professional accountants. • Part 2 – Professional Accountants in Business, which sets out additional material that applies to professional accountants in business when performing professional activities. Professional accountants in business include professional accountants employed, engaged or contracted in an executive or non-executive capacity in, for example: o Commerce, industry or service. o The public sector. o Education. o The not-for-profit sector. o Regulatory or professional bodies. Part 2 is also applicable to individuals who are professional accountants in public practice when performing professional activities pursuant to their relationship with the firm, whether as a contractor, employee or owner. • Part 3 – Professional Accountants in Public Practice, which sets out additional material that applies to professional accountants in public practice when providing professional services. • International Independence Standards, which sets out additional material that applies to professional accountants in public practice when providing assurance services, as follows: o Part 4A – Independence for Audit and Review Engagements, which applies when performing audit or review engagements. Guide to the ACCA Code of Ethics and Conduct 7 o Part 4B – Independence for Assurance Engagements Other than Audit and Review Engagements, which applies when performing assurance engagements that are not audit or review engagements. • Glossary, which contains defined terms (together with additional explanations where appropriate) and described terms which have a specific meaning in certain parts of the Code. For example, as noted in the Glossary, in Part 4A, the term “audit engagement” applies equally to both audit and review engagements. The Glossary also includes lists of abbreviations that are used in the Code and other standards to which the Code refers. 18. The IESBA code contains sections which address specific topics. Some sections contain subsections dealing with specific aspects of those topics. Each section of the IESBA code is structured, where appropriate, as follows: • Introduction – sets out the subject matter addressed within the section, and introduces the requirements and application material in the context of the conceptual framework. Introductory material contains information, including an explanation of terms used, which is important to the understanding and application of each Part and its sections. • Requirements – establish general and specific obligations with respect to the subject matter addressed. • Application material – provides context, explanations, suggestions for actions or matters to consider, illustrations and other guidance to assist in complying with the requirements. How to Use the Code 19. ACCA registered students, affiliates and members who are in doubt as to their correct course of action in particular cases may obtain further guidance from ACCA. It is advisable to seek guidance prior to embarking on a course of action. The Fundamental Principles, Independence and Conceptual Framework 20. The Code requires professional accountants to comply with the fundamental principles of ethics. The Code also requires them to apply the conceptual framework to identify, evaluate and address threats to compliance with the fundamental principles. Applying the conceptual framework requires exercising professional judgment, remaining alert for new information and to changes in facts and circumstances, and using the reasonable and informed third party test. 21. The conceptual framework recognizes that the existence of conditions, policies and procedures established by the profession, legislation, regulation, the firm, or the employing organization might impact the identification of threats. Those conditions, policies and procedures might also be a relevant factor in the professional accountant’s evaluation of whether a threat is at an acceptable level. When threats 10 Appendix OVERVIEW OF THE CODE PART 1 COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK (ALL PROFESSIONAL ACCOUNTANTS - SECTIONS 100 TO 199) PART 3 PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE (SECTIONS 300 TO 399) GLOSSARY (ALL PROFESSIONAL ACCOUNTANTS) PART 2 PROFESSIONAL ACCOUNTANTS IN BUSINESS (SECTIONS 200 TO 299) (PART 2 IS ALSO APPLICABLE TO INDIVIDUAL PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE WHEN PERFORMING PROFESSIONAL ACTIVITIES PURSUANT TO THEIR RELATIONSHIP WITH THE FIRM) INTERNATIONAL INDEPENDENCE STANDARDS (PARTS 4A AND 4B) PART 4A – INDEPENDENCE FOR AUDIT AND REVIEW ENGAGEMENTS (SECTIONS 400 TO 899) PART 4B – INDEPENDENCE FOR ASSURANCE ENGAGEMENTS OTHER THAN AUDIT AND REVIEW ENGAGEMENTS (SECTIONS 900 TO 999) Section A International Code of Ethics for Professional Accountants (including International Independence Standards) 11 SECTION A: INTERNATIONAL CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (INCLUDING INTERNATIONAL INDEPENDENCE STANDARDS) The ACCA Rulebook includes the International Code of Ethics for Professional Accountant (including International Independence Standards) of the International Ethics Standards Board for Accountants (IESBA), published by the International Federation of Accountants (IFAC) in April 2018 and is used with permission of IFAC. Contact Permissions@ifac.org for permission to reproduce, store or transmit, or to make other similar uses of this document. The International Code of Ethics for Professional Accountant (including International Independence Standards) of the International Ethics Standards Board for Accountants (IESBA), published by the International Federation of Accountants (IFAC) in April 2018, is used by ACCA with permission of IFAC. Such use of IFAC’s copyrighted material in no way represents an endorsement or promotion by IFAC. Any views or opinions that may be included in the ACCA Rulebook are solely those of ACCA, and do not express the views and opinions of IFAC or any independent standard setting board supported by IFAC. Section A International Code of Ethics for Professional Accountants (including International Independence Standards) 12 TABLE OF CONTENTS PREFACE 15 PART 1 – COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK 16 SECTION 100: COMPLYING WITH THE CODE 16 SECTION 110: THE FUNDAMENTAL PRINCIPLES 18 SUBSECTION 111 – INTEGRITY 19 SUBSECTION 112 – OBJECTIVITY 19 SUBSECTION 113 – PROFESSIONAL COMPETENCE AND DUE CARE 20 SUBSECTION 114 – CONFIDENTIALITY 20 SUBSECTION 115 – PROFESSIONAL BEHAVIOR 22 SECTION 120: THE CONCEPTUAL FRAMEWORK 24 PART 2 – PROFESSIONAL ACCOUNTANTS IN BUSINESS 32 SECTION 200: APPLYING THE CONCEPTUAL FRAMEWORK – PROFESSIONAL ACCOUNTANTS IN BUSINESS 32 SECTION 210: CONFLICTS OF INTEREST 37 SECTION 220: PREPARATION AND PRESENTATION OF INFORMATION 40 SECTION 230: ACTING WITH SUFFICIENT EXPERTISE 45 SECTION 240: FINANCIAL INTERESTS, COMPENSATION AND INCENTIVES LINKED TO FINANCIAL REPORTING AND DECISION MAKING 47 SECTION 250: INDUCEMENTS, INCLUDING GIFTS AND HOSPITALITY 49 SECTION 260: RESPONDING TO NON-COMPLIANCE WITH LAWS AND REGULATIONS 55 SECTION 270: PRESSURE TO BREACH THE FUNDAMENTAL PRINCIPLES 65 PART 3 – PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE 69 SECTION 300: APPLYING THE CONCEPTUAL FRAMEWORK – PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE 69 SECTION 310: CONFLICTS OF INTEREST 76 SECTION 320: PROFESSIONAL APPOINTMENTS 85 SECTION 321: SECOND OPINIONS 91 Preface 15 PREFACE The IESBA develops and issues, under its own standard setting authority, the International Code of Ethics for Professional Accountants (including International Independence Standards) (“the Code”). The Code is for use by professional accountants around the world. The IESBA establishes the Code for international application following due process. The International Federation of Accountants (IFAC) establishes separate requirements for its member bodies with respect to the Code. Part 1 – Complying with the Code, Fundamental Principles and Conceptual Framework 16 PART 1 – COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK SECTION 100: COMPLYING WITH THE CODE General 100.1 A1 A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. A professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employing organization. Therefore, the Code contains requirements and application material to enable professional accountants to meet their responsibility to act in the public interest. 100.2 A1 The requirements in the Code, designated with the letter “R,” impose obligations. 100.2 A2 Application material, designated with the letter “A,” provides context, explanations, suggestions for actions or matters to consider, illustrations and other guidance relevant to a proper understanding of the Code. In particular, the application material is intended to help a professional accountant to understand how to apply the conceptual framework to a particular set of circumstances and to understand and comply with a specific requirement. While such application material does not of itself impose a requirement, consideration of the material is necessary to the proper application of the requirements of the Code, including application of the conceptual framework. R100.3 A professional accountant shall comply with the Code. There might be circumstances where laws or regulations preclude an accountant from complying with certain parts of the Code. In such circumstances, those laws and regulations prevail, and the accountant shall comply with all other parts of the Code. 100.3 A1 The principle of professional behavior requires a professional accountant to comply with relevant laws and regulations. Some jurisdictions might have provisions that differ from or go beyond those set out in the Code. Accountants in those jurisdictions need to be aware of those differences and comply with the more stringent provisions unless prohibited by law or regulation. 100.3 A2 A professional accountant might encounter unusual circumstances in which the accountant believes that the result of applying a specific requirement of the Code would be disproportionate or might not be in the public interest. In those circumstances, the accountant is encouraged to consult with ACCA. 100 Complying with the Code 17 Breaches of the Code R100.4 Paragraphs R400.80 to R400.89 and R900.50 to R900.55 address a breach of International Independence Standards. A professional accountant who identifies a breach of any other provision of the Code shall evaluate the significance of the breach and its impact on the accountant’s ability to comply with the fundamental principles. The accountant shall also: (a) Take whatever actions might be available, as soon as possible, to address the consequences of the breach satisfactorily; and (b) Determine whether to report the breach to the relevant parties. 100.4 A1 Relevant parties to whom such a breach might be reported include those who might have been affected by it, ACCA or another professional or regulatory body or an oversight authority. 110 The Fundamental Principles 20 SUBSECTION 113 – PROFESSIONAL COMPETENCE AND DUE CARE R113.1 A professional accountant shall comply with the principle of professional competence and due care, which requires an accountant to: (a) Attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organization receives competent professional service, based on current technical and professional standards and relevant legislation; and (b) Act diligently and in accordance with applicable technical and professional standards. 113.1 A1 Serving clients and employing organizations with professional competence requires the exercise of sound judgment in applying professional knowledge and skill when undertaking professional activities. 113.1 A2 Maintaining professional competence requires a continuing awareness and an understanding of relevant technical, professional and business developments. Continuing professional development enables a professional accountant to develop and maintain the capabilities to perform competently within the professional environment. 113.1 A3 Diligence encompasses the responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis. R113.2 In complying with the principle of professional competence and due care, a professional accountant shall take reasonable steps to ensure that those working in a professional capacity under the accountant’s authority have appropriate training and supervision. R113.3 Where appropriate, a professional accountant shall make clients, the employing organization, or other users of the accountant’s professional services or activities, aware of the limitations inherent in the services or activities. SUBSECTION 114 – CONFIDENTIALITY R114.1 A professional accountant shall comply with the principle of confidentiality, which requires an accountant to respect the confidentiality of information acquired as a result of professional and business relationships. An accountant shall: (a) Be alert to the possibility of inadvertent disclosure, including in a social environment, and particularly to a close business associate or an immediate or a close family member; 110 The Fundamental Principles 21 (b) Maintain confidentiality of information within the firm or employing organization; (c) Maintain confidentiality of information disclosed by a prospective client or employing organization; (d) Not disclose confidential information acquired as a result of professional and business relationships outside the firm or employing organization without proper and specific authority, unless there is a legal or professional duty or right to disclose; (e) Not use confidential information acquired as a result of professional and business relationships for the personal advantage of the accountant or for the advantage of a third party; (f) Not use or disclose any confidential information, either acquired or received as a result of a professional or business relationship, after that relationship has ended; and (g) Take reasonable steps to ensure that personnel under the accountant’s control, and individuals from whom advice and assistance are obtained, respect the accountant’s duty of confidentiality. 114.1 A1 Confidentiality serves the public interest because it facilitates the free flow of information from the professional accountant’s client or employing organization to the accountant in the knowledge that the information will not be disclosed to a third party. Nevertheless, the following are circumstances where professional accountants are or might be required to disclose confidential information or when such disclosure might be appropriate: (a) Disclosure is required by law, for example: (i) Production of documents or other provision of evidence in the course of legal proceedings; or (ii) Disclosure to the appropriate public authorities of infringements of the law that come to light; (b) Disclosure is permitted by law and is authorized by the client or the employing organization; and (c) There is a professional duty or right to disclose, when not prohibited by law: (i) To comply with the quality review of ACCA or another professional body; (ii) To respond to an inquiry or investigation by ACCA or another professional or regulatory body; 110 The Fundamental Principles 22 (iii) To protect the professional interests of a professional accountant in legal proceedings; or (iv) To comply with technical and professional standards, including ethics requirements. 114.1 A2 In deciding whether to disclose confidential information, factors to consider, depending on the circumstances, include: • Whether the interests of any parties, including third parties whose interests might be affected, could be harmed if the client or employing organization consents to the disclosure of information by the professional accountant. • Whether all the relevant information is known and substantiated, to the extent practicable. Factors affecting the decision to disclose include: o Unsubstantiated facts. o Incomplete information. o Unsubstantiated conclusions. • The proposed type of communication, and to whom it is addressed. • Whether the parties to whom the communication is addressed are appropriate recipients. R114.2 A professional accountant shall continue to comply with the principle of confidentiality even after the end of the relationship between the accountant and a client or employing organization. When changing employment or acquiring a new client, the accountant is entitled to use prior experience but shall not use or disclose any confidential information acquired or received as a result of a professional or business relationship. SUBSECTION 115 – PROFESSIONAL BEHAVIOR R115.1 A professional accountant shall comply with the principle of professional behavior, which requires an accountant to comply with relevant laws and regulations and avoid any conduct that the accountant knows or should know might discredit the profession. A professional accountant shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession, and as a result would be incompatible with the fundamental principles. 115.1 A1 Conduct that might discredit the profession includes conduct that a reasonable and informed third party would be likely to conclude adversely affects the good reputation of the profession. 120 The Conceptual Framwork 25 R120.4 When dealing with an ethics issue, the professional accountant shall consider the context in which the issue has arisen or might arise. Where an individual who is a professional accountant in public practice is performing professional activities pursuant to the accountant’s relationship with the firm, whether as a contractor, employee or owner, the individual shall comply with the provisions in Part 2 that apply to these circumstances. R120.5 When applying the conceptual framework, the professional accountant shall: (a) Exercise professional judgment; (b) Remain alert for new information and to changes in facts and circumstances; and (c) Use the reasonable and informed third party test described in paragraph 120.5 A4. Exercise of Professional Judgment 120.5 A1 Professional judgment involves the application of relevant training, professional knowledge, skill and experience commensurate with the facts and circumstances, including the nature and scope of the particular professional activities, and the interests and relationships involved. In relation to undertaking professional activities, the exercise of professional judgment is required when the professional accountant applies the conceptual framework in order to make informed decisions about the courses of actions available, and to determine whether such decisions are appropriate in the circumstances. 120.5 A2 An understanding of known facts and circumstances is a prerequisite to the proper application of the conceptual framework. Determining the actions necessary to obtain this understanding and coming to a conclusion about whether the fundamental principles have been complied with also require the exercise of professional judgment. 120.5 A3 In exercising professional judgment to obtain this understanding, the professional accountant might consider, among other matters, whether: • There is reason to be concerned that potentially relevant information might be missing from the facts and circumstances known to the accountant. • There is an inconsistency between the known facts and circumstances and the accountant’s expectations. • The accountant’s expertise and experience are sufficient to reach a conclusion. • There is a need to consult with others with relevant expertise or experience. 120 The Conceptual Framwork 26 • The information provides a reasonable basis on which to reach a conclusion. • The accountant’s own preconception or bias might be affecting the accountant’s exercise of professional judgment. • There might be other reasonable conclusions that could be reached from the available information. Reasonable and Informed Third Party 120.5 A4 The reasonable and informed third party test is a consideration by the professional accountant about whether the same conclusions would likely be reached by another party. Such consideration is made from the perspective of a reasonable and informed third party, who weighs all the relevant facts and circumstances that the accountant knows, or could reasonably be expected to know, at the time the conclusions are made. The reasonable and informed third party does not need to be an accountant, but would possess the relevant knowledge and experience to understand and evaluate the appropriateness of the accountant’s conclusions in an impartial manner. Identifying Threats R120.6 The professional accountant shall identify threats to compliance with the fundamental principles. 120.6 A1 An understanding of the facts and circumstances, including any professional activities, interests and relationships that might compromise compliance with the fundamental principles, is a prerequisite to the professional accountant’s identification of threats to such compliance. The existence of certain conditions, policies and procedures established by the profession, legislation, regulation, the firm, or the employing organization that can enhance the accountant acting ethically might also help identify threats to compliance with the fundamental principles. Paragraph 120.8 A2 includes general examples of such conditions, policies and procedures which are also factors that are relevant in evaluating the level of threats. 120.6 A2 Threats to compliance with the fundamental principles might be created by a broad range of facts and circumstances. It is not possible to define every situation that creates threats. In addition, the nature of engagements and work assignments might differ and, consequently, different types of threats might be created. 120.6 A3 Threats to compliance with the fundamental principles fall into one or more of the following categories: (a) Self-interest threat – the threat that a financial or other interest will inappropriately influence a professional accountant’s judgment or behavior; 120 The Conceptual Framwork 27 (b) Self-review threat – the threat that a professional accountant will not appropriately evaluate the results of a previous judgment made; or an activity performed by the accountant, or by another individual within the accountant’s firm or employing organization, on which the accountant will rely when forming a judgment as part of performing a current activity; (c) Advocacy threat – the threat that a professional accountant will promote a client’s or employing organization’s position to the point that the accountant’s objectivity is compromised; (d) Familiarity threat – the threat that due to a long or close relationship with a client, or employing organization, a professional accountant will be too sympathetic to their interests or too accepting of their work; and (e) Intimidation threat – the threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the accountant. 120.6 A4 A circumstance might create more than one threat, and a threat might affect compliance with more than one fundamental principle. Evaluating Threats R120.7 When the professional accountant identifies a threat to compliance with the fundamental principles, the accountant shall evaluate whether such a threat is at an acceptable level. Acceptable Level 120.7 A1 An acceptable level is a level at which a professional accountant using the reasonable and informed third party test would likely conclude that the accountant complies with the fundamental principles. Factors Relevant in Evaluating the Level of Threats 120.8 A1 The consideration of qualitative as well as quantitative factors is relevant in the professional accountant’s evaluation of threats, as is the combined effect of multiple threats, if applicable. 120.8 A2 The existence of conditions, policies and procedures described in paragraph 120.6 A1 might also be factors that are relevant in evaluating the level of threats to compliance with fundamental principles. Examples of such conditions, policies and procedures include: • Corporate governance requirements. • Educational, training and experience requirements for the profession. 120 The Conceptual Framwork 30 Professional Skepticism 120.13 A1 Under auditing, review and other assurance standards, including those issued by the IAASB, professional accountants in public practice are required to exercise professional skepticism when planning and performing audits, reviews and other assurance engagements. Professional skepticism and the fundamental principles that are described in Section 110 are inter-related concepts. 120.13 A2 In an audit of financial statements, compliance with the fundamental principles, individually and collectively, supports the exercise of professional skepticism, as shown in the following examples: • Integrity requires the professional accountant to be straightforward and honest. For example, the accountant complies with the principle of integrity by: (a) Being straightforward and honest when raising concerns about a position taken by a client; and (b) Pursuing inquiries about inconsistent information and seeking further audit evidence to address concerns about statements that might be materially false or misleading in order to make informed decisions about the appropriate course of action in the circumstances. In doing so, the accountant demonstrates the critical assessment of audit evidence that contributes to the exercise of professional skepticism. • Objectivity requires the professional accountant not to compromise professional or business judgment because of bias, conflict of interest or the undue influence of others. For example, the accountant complies with the principle of objectivity by: (a) Recognizing circumstances or relationships such as familiarity with the client, that might compromise the accountant’s professional or business judgment; and (b) Considering the impact of such circumstances and relationships on the accountant’s judgment when evaluating the sufficiency and appropriateness of audit evidence related to a matter material to the client's financial statements. In doing so, the accountant behaves in a manner that contributes to the exercise of professional skepticism. 120 The Conceptual Framwork 31 • Professional competence and due care requires the professional accountant to have professional knowledge and skill at the level required to ensure the provision of competent professional service, and to act diligently in accordance with applicable standards, laws and regulations. For example, the accountant complies with the principle of professional competence and due care by: (a) Applying knowledge that is relevant to a particular client’s industry and business activities in order to properly identify risks of material misstatement; (b) Designing and performing appropriate audit procedures; and (c) Applying relevant knowledge when critically assessing whether audit evidence is sufficient and appropriate in the circumstances. In doing so, the accountant behaves in a manner that contributes to the exercise of professional skepticism. Part 2 – Professional Accountants in Business 32 PART 2 – PROFESSIONAL ACCOUNTANTS IN BUSINESS SECTION 200: APPLYING THE CONCEPTUAL FRAMEWORK – PROFESSIONAL ACCOUNTANTS IN BUSINESS Introduction 200.1 This Part of the Code sets out requirements and application material for professional accountants in business when applying the conceptual framework set out in Section 120. It does not describe all of the facts and circumstances, including professional activities, interests and relationships, that could be encountered by professional accountants in business, which create or might create threats to compliance with the fundamental principles. Therefore, the conceptual framework requires professional accountants in business to be alert for such facts and circumstances. 200.2 Investors, creditors, employing organizations and other sectors of the business community, as well as governments and the general public, might rely on the work of professional accountants in business. Professional accountants in business might be solely or jointly responsible for the preparation and reporting of financial and other information, on which both their employing organizations and third parties might rely. They might also be responsible for providing effective financial management and competent advice on a variety of business-related matters. 200.3 A professional accountant in business might be an employee, contractor, partner, director (executive or non-executive), owner-manager, or volunteer of an employing organization. The legal form of the relationship of the accountant with the employing organization has no bearing on the ethical responsibilities placed on the accountant. 200.4 In this Part, the term “professional accountant” refers to: (a) A professional accountant in business; and (b) An individual who is a professional accountant in public practice when performing professional activities pursuant to the accountant’s relationship with the accountant’s firm, whether as a contractor, employee or owner. More information on when Part 2 is applicable to professional accountants in public practice is set out in paragraphs R120.4, R300.5 and 300.5 A1. 200 Applying the Conceptual Framework – Professional Accountants in Business 35 200.7 A2 The professional accountant’s evaluation of the level of a threat is also impacted by the nature and scope of the professional activity. 200.7 A3 The professional accountant’s evaluation of the level of a threat might be impacted by the work environment within the employing organization and its operating environment. For example: • Leadership that stresses the importance of ethical behavior and the expectation that employees will act in an ethical manner. • Policies and procedures to empower and encourage employees to communicate ethics issues that concern them to senior levels of management without fear of retribution. • Policies and procedures to implement and monitor the quality of employee performance. • Systems of corporate oversight or other oversight structures and strong internal controls. • Recruitment procedures emphasizing the importance of employing high caliber competent personnel. • Timely communication of policies and procedures, including any changes to them, to all employees, and appropriate training and education on such policies and procedures. • Ethics and code of conduct policies. 200.7 A4 Professional accountants might consider obtaining legal advice where they believe that unethical behavior or actions by others have occurred, or will continue to occur, within the employing organization. Addressing Threats 200.8 A1 Sections 210 to 270 describe certain threats that might arise during the course of performing professional activities and include examples of actions that might address such threats. 200.8 A2 In circumstances where a professional accountant in business believes that, after exhausting all relevant possibilities, the matter remains unresolved, the professional accountant shall, where possible, disassociate himself from the matter. The professional accountant may also consider whether, in the circumstances, it is appropriate to withdraw from the specific project. In extreme situations, if the circumstances that created the threats cannot be eliminated and safeguards are not available or capable of being applied to reduce the threat to an acceptable level, it might be appropriate for a professional accountant to resign from the employing organization. 200 Applying the Conceptual Framework – Professional Accountants in Business 36 Communicating with Those Charged with Governance R200.9 When communicating with those charged with governance in accordance with the Code, a professional accountant shall determine the appropriate individual(s) within the employing organization’s governance structure with whom to communicate. If the accountant communicates with a subgroup of those charged with governance, the accountant shall determine whether communication with all of those charged with governance is also necessary so that they are adequately informed. 200.9 A1 In determining with whom to communicate, a professional accountant might consider: (a) The nature and importance of the circumstances; and (b) The matter to be communicated. 200.9 A2 Examples of a subgroup of those charged with governance include an audit committee or an individual member of those charged with governance. R200.10 If a professional accountant communicates with individuals who have management responsibilities as well as governance responsibilities, the accountant shall be satisfied that communication with those individuals adequately informs all of those in a governance role with whom the accountant would otherwise communicate. 200.10 A1 In some circumstances, all of those charged with governance are involved in managing the employing organization, for example, a small business where a single owner manages the organization and no one else has a governance role. In these cases, if matters are communicated with individual(s) with management responsibilities, and those individual(s) also have governance responsibilities, the professional accountant has satisfied the requirement to communicate with those charged with governance. Advisory Services 200.11 Professional accountants in business faced with an ethical problem may call upon ACCA for confidential advice. 200.12 Professional accountants are also referred to guidance ACCA has issued for professional accountants in business to assist them in discharging their professional obligations. This can be viewed at https://www.accaglobal.com/uk/en/member/regulation/factsheets.html. 200.13 There are also independent organisations which have been established to provide support for employees troubled by ethical dilemmas at work, such as Public Concern at Work (www.pcaw.co.uk) in the United Kingdom, which can provide more detailed guidance on the requirements of the whistleblowing legislation. 210 Conflicts of Interest 37 SECTION 210: CONFLICTS OF INTEREST Introduction 210.1 Professional accountants are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats. 210.2 A conflict of interest creates threats to compliance with the principle of objectivity and might create threats to compliance with the other fundamental principles. Such threats might be created when: (a) A professional accountant undertakes a professional activity related to a particular matter for two or more parties whose interests with respect to that matter are in conflict; or (b) The interest of a professional accountant with respect to a particular matter and the interests of a party for whom the accountant undertakes a professional activity related to that matter are in conflict. A party might include an employing organization, a vendor, a customer, a lender, a shareholder, or another party. 210.3 This section sets out specific requirements and application material relevant to applying the conceptual framework to conflicts of interest. Requirements and Application Material General R210.4 A professional accountant shall not allow a conflict of interest to compromise professional or business judgment. 210.4 A1 Examples of circumstances that might create a conflict of interest include: • Serving in a management or governance position for two employing organizations and acquiring confidential information from one organization that might be used by the professional accountant to the advantage or disadvantage of the other organization. • Undertaking a professional activity for each of two parties in a partnership, where both parties are employing the accountant to assist them to dissolve their partnership. • Preparing financial information for certain members of management of the accountant’s employing organization who are seeking to undertake a management buy-out. 220 Preparation and Presentation of Information 40 SECTION 220: PREPARATION AND PRESENTATION OF INFORMATION Introduction 220.1 Professional accountants are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats. 220.2 Preparing or presenting information might create a self-interest, intimidation or other threats to compliance with one or more of the fundamental principles. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances. Requirements and Application Material General 220.3 A1 Professional accountants at all levels in an employing organization are involved in the preparation or presentation of information both within and outside the organization. 220.3 A2 Stakeholders to whom, or for whom, such information is prepared or presented, include: • Management and those charged with governance. • Investors and lenders or other creditors. • Regulatory bodies. This information might assist stakeholders in understanding and evaluating aspects of the employing organization’s state of affairs and in making decisions concerning the organization. Information can include financial and non-financial information that might be made public or used for internal purposes. Examples include: • Operating and performance reports. • Decision support analyses. • Budgets and forecasts. • Information provided to the internal and external auditors. • Risk analyses. • General and special purpose financial statements. 220 Preparation and Presentation of Information 41 • Tax returns. • Reports filed with regulatory bodies for legal and compliance purposes. 220.3 A3 For the purposes of this section, preparing or presenting information includes recording, maintaining and approving information. R220.4 When preparing or presenting information, a professional accountant shall: (a) Prepare or present the information in accordance with a relevant reporting framework, where applicable; (b) Prepare or present the information in a manner that is intended neither to mislead nor to influence contractual or regulatory outcomes inappropriately; (c) Exercise professional judgment to: (i) Represent the facts accurately and completely in all material respects; (ii) Describe clearly the true nature of business transactions or activities; and (iii) Classify and record information in a timely and proper manner; and (d) Not omit anything with the intention of rendering the information misleading or of influencing contractual or regulatory outcomes inappropriately. 220.4 A1 An example of influencing a contractual or regulatory outcome inappropriately is using an unrealistic estimate with the intention of avoiding violation of a contractual requirement such as a debt covenant or of a regulatory requirement such as a capital requirement for a financial institution. Use of Discretion in Preparing or Presenting Information R220.5 Preparing or presenting information might require the exercise of discretion in making professional judgments. The professional accountant shall not exercise such discretion with the intention of misleading others or influencing contractual or regulatory outcomes inappropriately. 220.5 A1 Examples of ways in which discretion might be misused to achieve inappropriate outcomes include: • Determining estimates, for example, determining fair value estimates in order to misrepresent profit or loss. • Selecting or changing an accounting policy or method among two or more alternatives permitted under the applicable financial reporting 220 Preparation and Presentation of Information 42 framework, for example, selecting a policy for accounting for long- term contracts in order to misrepresent profit or loss. • Determining the timing of transactions, for example, timing the sale of an asset near the end of the fiscal year in order to mislead. • Determining the structuring of transactions, for example, structuring financing transactions in order to misrepresent assets and liabilities or classification of cash flows. • Selecting disclosures, for example, omitting or obscuring information relating to financial or operating risk in order to mislead. R220.6 When performing professional activities, especially those that do not require compliance with a relevant reporting framework, the professional accountant shall exercise professional judgment to identify and consider: (a) The purpose for which the information is to be used; (b) The context within which it is given; and (c) The audience to whom it is addressed. 220.6 A1 For example, when preparing or presenting pro forma reports, budgets or forecasts, the inclusion of relevant estimates, approximations and assumptions, where appropriate, would enable those who might rely on such information to form their own judgments. 220.6 A2 The professional accountant might also consider clarifying the intended audience, context and purpose of the information to be presented. Relying on the Work of Others R220.7 A professional accountant who intends to rely on the work of others, either internal or external to the employing organization, shall exercise professional judgment to determine what steps to take, if any, in order to fulfill the responsibilities set out in paragraph R220.4. 220.7 A1 Factors to consider in determining whether reliance on others is reasonable include: • The reputation and expertise of, and resources available to, the other individual or organization. • Whether the other individual is subject to applicable professional and ethics standards. Such information might be gained from prior association with, or from consulting others about, the other individual or organization. Addressing Information that Is or Might be Misleading R220.8 When the professional accountant knows or has reason to believe that the information with which the accountant is associated is misleading, the accountant shall take appropriate actions to seek to resolve the matter. 230 Acting with Sufficient Expertise 45 SECTION 230: ACTING WITH SUFFICIENT EXPERTISE Introduction 230.1 Professional accountants are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats. 230.2 Acting without sufficient expertise creates a self-interest threat to compliance with the principle of professional competence and due care. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances. Requirements and Application Material General R230.3 A professional accountant shall not intentionally mislead an employing organization as to the level of expertise or experience possessed. 230.3 A1 The principle of professional competence and due care requires that a professional accountant only undertake significant tasks for which the accountant has, or can obtain, sufficient training or experience. 230.3 A2 A self-interest threat to compliance with the principle of professional competence and due care might be created if a professional accountant has: • Insufficient time for performing or completing the relevant duties. • Incomplete, restricted or otherwise inadequate information for performing the duties. • Insufficient experience, training and/or education. • Inadequate resources for the performance of the duties. 230.3 A3 Factors that are relevant in evaluating the level of such a threat include: • The extent to which the professional accountant is working with others. • The relative seniority of the accountant in the business. • The level of supervision and review applied to the work. 230.3 A4 Examples of actions that might be safeguards to address such a self-interest threat include: • Obtaining assistance or training from someone with the necessary expertise. 230 Acting with Sufficient Expertise 46 • Ensuring that there is adequate time available for performing the relevant duties. R230.4 If a threat to compliance with the principle of professional competence and due care cannot be addressed, a professional accountant shall determine whether to decline to perform the duties in question. If the accountant determines that declining is appropriate, the accountant shall communicate the reasons. Other Considerations 230.5 A1 The requirements and application material in Section 270 apply when a professional accountant is pressured to act in a manner that might lead to a breach of the principle of professional competence and du 240 Financial Interests, Compensation and Incentives linked to Financial Reporting and Decision Making 47 SECTION 240: FINANCIAL INTERESTS, COMPENSATION AND INCENTIVES LINKED TO FINANCIAL REPORTING AND DECISION MAKING Introduction 240.1 Professional accountants are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats. 240.2 Having a financial interest, or knowing of a financial interest held by an immediate or close family member might create a self-interest threat to compliance with the principles of objectivity or confidentiality. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances. Requirements and Application Material General R240.3 A professional accountant shall not manipulate information or use confidential information for personal gain or for the financial gain of others. 240.3 A1 Professional accountants might have financial interests or might know of financial interests of immediate or close family members that, in certain circumstances, might create threats to compliance with the fundamental principles. Financial interests include those arising from compensation or incentive arrangements linked to financial reporting and decision making. 240.3 A2 Examples of circumstances that might create a self-interest threat include situations in which the professional accountant or an immediate or close family member: • Has a motive and opportunity to manipulate price-sensitive information in order to gain financially. • Holds a direct or indirect financial interest in the employing organization and the value of that financial interest might be directly affected by decisions made by the accountant. • Is eligible for a profit-related bonus and the value of that bonus might be directly affected by decisions made by the accountant. • Holds, directly or indirectly, deferred bonus share rights or share options in the employing organization, the value of which might be affected by decisions made by the accountant. 250 Inducements, including Gifts and Hospitality 50 Inducements Prohibited by Laws and Regulations R250.5 In many jurisdictions, there are laws and regulations, such as those related to bribery and corruption, that prohibit the offering or accepting of inducements in certain circumstances. The professional accountant shall obtain an understanding of relevant laws and regulations and comply with them when the accountant encounters such circumstances. Inducements Not Prohibited by Laws and Regulations 250.6 A1 The offering or accepting of inducements that is not prohibited by laws and regulations might still create threats to compliance with the fundamental principles. Inducements with Intent to Improperly Influence Behavior R250.7 A professional accountant shall not offer, or encourage others to offer, any inducement that is made, or which the accountant considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behavior of the recipient or of another individual. R250.8 A professional accountant shall not accept, or encourage others to accept, any inducement that the accountant concludes is made, or considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behavior of the recipient or of another individual. 250.9 A1 An inducement is considered as improperly influencing an individual’s behavior if it causes the individual to act in an unethical manner. Such improper influence can be directed either towards the recipient or towards another individual who has some relationship with the recipient. The fundamental principles are an appropriate frame of reference for a professional accountant in considering what constitutes unethical behavior on the part of the accountant and, if necessary by analogy, other individuals. 250.9 A2 A breach of the fundamental principle of integrity arises when a professional accountant offers or accepts, or encourages others to offer or accept, an inducement where the intent is to improperly influence the behavior of the recipient or of another individual. 250.9 A3 The determination of whether there is actual or perceived intent to improperly influence behavior requires the exercise of professional judgment. Relevant factors to consider might include: • The nature, frequency, value and cumulative effect of the inducement. • Timing of when the inducement is offered relative to any action or decision that it might influence. 250 Inducements, including Gifts and Hospitality 51 • Whether the inducement is a customary or cultural practice in the circumstances, for example, offering a gift on the occasion of a religious holiday or wedding. • Whether the inducement is an ancillary part of a professional activity, for example, offering or accepting lunch in connection with a business meeting. • Whether the offer of the inducement is limited to an individual recipient or available to a broader group. The broader group might be internal or external to the employing organization, such as other customers or vendors. • The roles and positions of the individuals offering or being offered the inducement. • Whether the professional accountant knows, or has reason to believe, that accepting the inducement would breach the policies and procedures of the counterparty’s employing organization. • The degree of transparency with which the inducement is offered. • Whether the inducement was required or requested by the recipient. • The known previous behavior or reputation of the offeror. Consideration of Further Actions 250.10 A1 If the professional accountant becomes aware of an inducement offered with actual or perceived intent to improperly influence behavior, threats to compliance with the fundamental principles might still be created even if the requirements in paragraphs R250.7 and R250.8 are met. 250.10 A2 Examples of actions that might be safeguards to address such threats include: • Informing senior management or those charged with governance of the employing organization of the professional accountant or the offeror regarding the offer. • Amending or terminating the business relationship with the offeror. Inducements with No Intent to Improperly Influence Behavior 250.11 A1 The requirements and application material set out in the conceptual framework apply when a professional accountant has concluded there is no actual or perceived intent to improperly influence the behavior of the recipient or of another individual. 250 Inducements, including Gifts and Hospitality 52 250.11 A2 If such an inducement is trivial and inconsequential, any threats created will be at an acceptable level. 250.11 A3 Examples of circumstances where offering or accepting such an inducement might create threats even if the professional accountant has concluded there is no actual or perceived intent to improperly influence behavior include: • Self-interest threats o A professional accountant is offered part-time employment by a vendor. • Familiarity threats o A professional accountant regularly takes a customer or supplier to sporting events. • Intimidation threats o A professional accountant accepts hospitality, the nature of which could be perceived to be inappropriate were it to be publicly disclosed. 250.11 A4 Relevant factors in evaluating the level of such threats created by offering or accepting such an inducement include the same factors set out in paragraph 250.9 A3 for determining intent. 250.11 A5 Examples of actions that might eliminate threats created by offering or accepting such an inducement include: • Declining or not offering the inducement. • Transferring responsibility for any business-related decision involving the counterparty to another individual who the professional accountant has no reason to believe would be, or would be perceived to be, improperly influenced in making the decision. 250.11 A6 Examples of actions that might be safeguards to address such threats created by offering or accepting such an inducement include: • Being transparent with senior management or those charged with governance of the employing organization of the professional accountant or of the counterparty about offering or accepting an inducement. • Registering the inducement in a log maintained by the employing organization of the accountant or the counterparty. 260 Responding to Non-Compliance with Laws and Regulations 55 SECTION 260: RESPONDING TO NON-COMPLIANCE WITH LAWS AND REGULATIONS Introduction 260.1 Professional accountants are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats. 260.2 A self-interest or intimidation threat to compliance with the principles of integrity and professional behavior is created when a professional accountant becomes aware of non-compliance or suspected non-compliance with laws and regulations. 260.3 A professional accountant might encounter or be made aware of non- compliance or suspected non-compliance in the course of carrying out professional activities. This section guides the accountant in assessing the implications of the matter and the possible courses of action when responding to non-compliance or suspected non-compliance with: (a) Laws and regulations generally recognized to have a direct effect on the determination of material amounts and disclosures in the employing organization’s financial statements; and (b) Other laws and regulations that do not have a direct effect on the determination of the amounts and disclosures in the employing organization’s financial statements, but compliance with which might be fundamental to the operating aspects of the employing organization’s business, to its ability to continue its business, or to avoid material penalties. Objectives of the Professional Accountant in Relation to Non-compliance with Laws and Regulations 260.4 A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. When responding to non- compliance or suspected non-compliance, the objectives of the professional accountant are: (a) To comply with the principles of integrity and professional behavior; (b) By alerting management or, where appropriate, those charged with governance of the employing organization, to seek to: (i) Enable them to rectify, remediate or mitigate the consequences of the identified or suspected non-compliance; or 260 Responding to Non-Compliance with Laws and Regulations 56 (ii) Deter the non-compliance where it has not yet occurred; and (c) To take such further action as appropriate in the public interest. Requirements and Application Material General 260.5 A1 Non-compliance with laws and regulations (“non-compliance”) comprises acts of omission or commission, intentional or unintentional, which are contrary to the prevailing laws or regulations committed by the following parties: (a) The professional accountant’s employing organization; (b) Those charged with governance of the employing organization; (c) Management of the employing organization; or (d) Other individuals working for or under the direction of the employing organization. 260.5 A2 Examples of laws and regulations which this section addresses include those that deal with: • Fraud, corruption and bribery. • Money laundering, terrorist financing and proceeds of crime. • Securities markets and trading. • Banking and other financial products and services. • Data protection. • Tax and pension liabilities and payments. • Environmental protection. • Public health and safety. 260.5 A3 Non-compliance might result in fines, litigation or other consequences for the employing organization, potentially materially affecting its financial statements. Importantly, such non-compliance might have wider public interest implications in terms of potentially substantial harm to investors, creditors, employees or the general public. For the purposes of this section, non-compliance that causes substantial harm is one that results in serious adverse consequences to any of these parties in financial or non-financial terms. Examples include the perpetration of a fraud resulting in significant financial losses to investors, and breaches of environmental laws and regulations endangering the health or safety of employees or the public. 260 Responding to Non-Compliance with Laws and Regulations 57 R260.6 In some jurisdictions, there are legal or regulatory provisions governing how professional accountants are required to address non-compliance or suspected non-compliance. These legal or regulatory provisions might differ from or go beyond the provisions in this section. When encountering such non-compliance or suspected non-compliance, the accountant shall obtain an understanding of those legal or regulatory provisions and comply with them, including: (a) Any requirement to report the matter to an appropriate authority; and (b) Any prohibition on alerting the relevant party. 260.6 A1 A prohibition on alerting the relevant party might arise, for example, pursuant to anti-money laundering legislation. 260.7 A1 This section applies regardless of the nature of the employing organization, including whether or not it is a public interest entity. 260.7 A2 A professional accountant who encounters or is made aware of matters that are clearly inconsequential is not required to comply with this section. Whether a matter is clearly inconsequential is to be judged with respect to its nature and its impact, financial or otherwise, on the employing organization, its stakeholders and the general public. 260.7 A3 This section does not address: (a) Personal misconduct unrelated to the business activities of the employing organization; and (b) Non-compliance by parties other than those specified in paragraph 260.5 A1. The professional accountant might nevertheless find the guidance in this section helpful in considering how to respond in these situations. Responsibilities of the Employing Organization’s Management and Those Charged with Governance 260.8 A1 The employing organization’s management, with the oversight of those charged with governance, is responsible for ensuring that the employing organization’s business activities are conducted in accordance with laws and regulations. Management and those charged with governance are also responsible for identifying and addressing any non-compliance by: (a) The employing organization; (b) An individual charged with governance of the employing organization; (c) A member of management; or (d) Other individuals working for or under the direction of the employing organization. 260 Responding to Non-Compliance with Laws and Regulations 60 disclosure of the matter to the employing organization’s external auditor, if any, is needed. 260.15 A1 Such disclosure would be pursuant to the senior professional accountant’s duty or legal obligation to provide all information necessary to enable the auditor to perform the audit. Determining Whether Further Action Is Needed R260.16 The senior professional accountant shall assess the appropriateness of the response of the accountant’s superiors, if any, and those charged with governance. 260.16 A1 Relevant factors to consider in assessing the appropriateness of the response of the senior professional accountant’s superiors, if any, and those charged with governance include whether: • The response is timely. • They have taken or authorized appropriate action to seek to rectify, remediate or mitigate the consequences of the non-compliance, or to avert the non-compliance if it has not yet occurred. • The matter has been disclosed to an appropriate authority where appropriate and, if so, whether the disclosure appears adequate. R260.17 In light of the response of the senior professional accountant’s superiors, if any, and those charged with governance, the accountant shall determine if further action is needed in the public interest. 260.17 A1 The determination of whether further action is needed, and the nature and extent of it, will depend on various factors, including: • The legal and regulatory framework. • The urgency of the situation. • The pervasiveness of the matter throughout the employing organization. • Whether the senior professional accountant continues to have confidence in the integrity of the accountant’s superiors and those charged with governance. • Whether the non-compliance or suspected non-compliance is likely to recur. • Whether there is credible evidence of actual or potential substantial harm to the interests of the employing organization, investors, creditors, employees or the general public. 260 Responding to Non-Compliance with Laws and Regulations 61 260.17 A2 Examples of circumstances that might cause the senior professional accountant no longer to have confidence in the integrity of the accountant’s superiors and those charged with governance include situations where: • The accountant suspects or has evidence of their involvement or intended involvement in any non-compliance. • Contrary to legal or regulatory requirements, they have not reported, or authorized the reporting of, the matter to an appropriate authority within a reasonable period. R260.18 The senior professional accountant shall exercise professional judgment in determining the need for, and nature and extent of, further action. In making this determination, the accountant shall take into account whether a reasonable and informed third party would be likely to conclude that the accountant has acted appropriately in the public interest. 260.18 A1 Further action that the senior professional accountant might take includes: • Informing the management of the parent entity of the matter if the employing organization is a member of a group. • Disclosing the matter to an appropriate authority even when there is no legal or regulatory requirement to do so. • Resigning from the employing organization. 260.18 A2 Resigning from the employing organization is not a substitute for taking other actions that might be needed to achieve the senior professional accountant’s objectives under this section. In some jurisdictions, however, there might be limitations as to the further actions available to the accountant. In such circumstances, resignation might be the only available course of action. Seeking Advice 260.19 A1 As assessment of the matter might involve complex analysis and judgments, the senior professional accountant might consider: • Consulting internally. • Obtaining legal advice to understand the accountant’s options and the professional or legal implications of taking any particular course of action. • Consulting on a confidential basis with a regulatory or professional body such as ACCA. Determining Whether to Disclose the Matter to an Appropriate Authority 260.20 A1 Disclosure of the matter to an appropriate authority would be precluded if doing so would be contrary to law or regulation. Otherwise, the purpose of 260 Responding to Non-Compliance with Laws and Regulations 62 making disclosure is to enable an appropriate authority to cause the matter to be investigated and action to be taken in the public interest. 260.20 A2 The determination of whether to make such a disclosure depends in particular on the nature and extent of the actual or potential harm that is or might be caused by the matter to investors, creditors, employees or the general public. For example, the senior professional accountant might determine that disclosure of the matter to an appropriate authority is an appropriate course of action if: • The employing organization is engaged in bribery (for example, of local or foreign government officials for purposes of securing large contracts). • The employing organization is regulated and the matter is of such significance as to threaten its license to operate. • The employing organization is listed on a securities exchange and the matter might result in adverse consequences to the fair and orderly market in the employing organization’s securities or pose a systemic risk to the financial markets. • It is likely that the employing organization would sell products that are harmful to public health or safety. • The employing organization is promoting a scheme to its clients to assist them in evading taxes. 260.20 A3 The determination of whether to make such a disclosure will also depend on external factors such as: • Whether there is an appropriate authority that is able to receive the information, and cause the matter to be investigated and action to be taken. The appropriate authority will depend upon the nature of the matter. For example, the appropriate authority would be a securities regulator in the case of fraudulent financial reporting or an environmental protection agency in the case of a breach of environmental laws and regulations. • Whether there exists robust and credible protection from civil, criminal or professional liability or retaliation afforded by legislation or regulation, such as under whistle-blowing legislation or regulation. • Whether there are actual or potential threats to the physical safety of the senior professional accountant or other individuals. 270 Pressure to Breach the Fundamental Principles 65 SECTION 270: PRESSURE TO BREACH THE FUNDAMENTAL PRINCIPLES Introduction 270.1 Professional accountants are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats. 270.2 Pressure exerted on, or by, a professional accountant might create an intimidation or other threat to compliance with one or more of the fundamental principles. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances. Requirements and Application Material General R270.3 A professional accountant shall not: (a) Allow pressure from others to result in a breach of compliance with the fundamental principles; or (b) Place pressure on others that the accountant knows, or has reason to believe, would result in the other individuals breaching the fundamental principles. 270.3 A1 A professional accountant might face pressure that creates threats to compliance with the fundamental principles, for example an intimidation threat, when undertaking a professional activity. Pressure might be explicit or implicit and might come from: • Within the employing organization, for example, from a colleague or superior. • An external individual or organization such as a vendor, customer or lender. • Internal or external targets and expectations. 270.3 A2 Examples of pressure that might result in threats to compliance with the fundamental principles include: • Pressure related to conflicts of interest: o Pressure from a family member bidding to act as a vendor to the professional accountant’s employing organization to select the family member over another prospective vendor. 270 Pressure to Breach the Fundamental Principles 66 See also Section 210, Conflicts of Interest. • Pressure to influence preparation or presentation of information: o Pressure to report misleading financial results to meet investor, analyst or lender expectations. o Pressure from elected officials on public sector accountants to misrepresent programs or projects to voters. o Pressure from colleagues to misstate income, expenditure or rates of return to bias decision-making on capital projects and acquisitions. o Pressure from superiors to approve or process expenditures that are not legitimate business expenses. o Pressure to suppress internal audit reports containing adverse findings. See also Section 220, Preparation and Presentation of Information. • Pressure to act without sufficient expertise or due care: o Pressure from superiors to inappropriately reduce the extent of work performed. o Pressure from superiors to perform a task without sufficient skills or training or within unrealistic deadlines. See also Section 230, Acting with Sufficient Expertise. • Pressure related to financial interests: o Pressure from superiors, colleagues or others, for example, those who might benefit from participation in compensation or incentive arrangements to manipulate performance indicators. See also Section 240, Financial Interests, Compensation and Incentives Linked to Financial Reporting and Decision Making. • Pressure related to inducements: o Pressure from others, either internal or external to the employing organization, to offer inducements to influence inappropriately the judgment or decision making process of an individual or organization. o Pressure from colleagues to accept a bribe or other inducement, for example to accept inappropriate gifts or entertainment from potential vendors in a bidding process. See also Section 250, Inducements, Including Gifts and Hospitality. 270 Pressure to Breach the Fundamental Principles 67 • Pressure related to non-compliance with laws and regulations: o Pressure to structure a transaction to evade tax. See also Section 260, Responding to Non-compliance with Laws and Regulations. 270.3 A3 Factors that are relevant in evaluating the level of threats created by pressure include: • The intent of the individual who is exerting the pressure and the nature and extent of the pressure. • The application of laws, regulations, and professional standards to the circumstances. • The culture and leadership of the employing organization including the extent to which they reflect or emphasize the importance of ethical behavior and the expectation that employees will act ethically. For example, a corporate culture that tolerates unethical behavior might increase the likelihood that the pressure would result in a threat to compliance with the fundamental principles. • Policies and procedures, if any, that the employing organization has established, such as ethics or human resources policies that address pressure. 270.3 A4 Discussing the circumstances creating the pressure and consulting with others about those circumstances might assist the professional accountant to evaluate the level of the threat. Such discussion and consultation, which requires being alert to the principle of confidentiality, might include: • Discussing the matter with the individual who is exerting the pressure to seek to resolve it. • Discussing the matter with the accountant’s superior, if the superior is not the individual exerting the pressure. • Escalating the matter within the employing organization, including when appropriate, explaining any consequential risks to the organization, for example with: o Higher levels of management. o Internal or external auditors. o Those charged with governance. • Disclosing the matter in line with the employing organization’s policies, including ethics and whistleblowing policies, using any established mechanism, such as a confidential ethics hotline. 300 Applying the Conceptual Framework – Professional Accountants in Public Practice 70 Requirements and Application Material General R300.4 A professional accountant shall comply with the fundamental principles set out in Section 110 and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to compliance with the fundamental principles. R300.5 When dealing with an ethics issue, the professional accountant shall consider the context in which the issue has arisen or might arise. Where an individual who is a professional accountant in public practice is performing professional activities pursuant to the accountant’s relationship with the firm, whether as a contractor, employee or owner, the individual shall comply with the provisions in Part 2 that apply to these circumstances. 300.5 A1 Examples of situations in which the provisions in Part 2 apply to a professional accountant in public practice include: • Facing a conflict of interest when being responsible for selecting a vendor for the firm when an immediate family member of the accountant might benefit financially from the contract. The requirements and application material set out in Section 210 apply in these circumstances. • Preparing or presenting financial information for the accountant’s client or firm. The requirements and application material set out in Section 220 apply in these circumstances. • Being offered an inducement such as being regularly offered complimentary tickets to attend sporting events by a supplier of the firm. The requirements and application material set out in Section 250 apply in these circumstances. • Facing pressure from an engagement partner to report chargeable hours inaccurately for a client engagement. The requirements and application material set out in Section 270 apply in these circumstances. Identifying Threats 300.6 A1 Threats to compliance with the fundamental principles might be created by a broad range of facts and circumstances. The categories of threats are described in paragraph 120.6 A3. The following are examples of facts and circumstances within each of those categories of threats that might create 300 Applying the Conceptual Framework – Professional Accountants in Public Practice 71 threats for a professional accountant when undertaking a professional service: (a) Self-interest Threats • A professional accountant having a direct financial interest in a client. • A professional accountant quoting a low fee to obtain a new engagement and the fee is so low that it might be difficult to perform the professional service in accordance with applicable technical and professional standards for that price. • 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. • A professional accountant discovering a significant error when evaluating the results of a previous professional service performed by a member of the accountant’s firm. (b) Self-review Threats • A professional accountant issuing an assurance report on the effectiveness of the operation of financial systems after implementing the systems. • A professional accountant having prepared the original data used to generate records that are the subject matter of the assurance engagement. (c) Advocacy Threats • A professional accountant promoting the interests of, or shares in, a client. • A professional accountant acting as an advocate on behalf of a client in litigation or disputes with third parties. • A professional accountant lobbying in favor of legislation on behalf of a client. (d) Familiarity Threats • A professional accountant having a close or immediate family member who is a director or officer of the client. • A director or officer of the client, or an employee in a position to exert significant influence over the subject matter of the engagement, having recently served as the engagement partner. 300 Applying the Conceptual Framework – Professional Accountants in Public Practice 72 • An audit team member having a long association with the audit client. (e) Intimidation Threats • A professional accountant being threatened with dismissal from a client engagement or the firm because of a disagreement about a professional matter. • A professional accountant feeling pressured to agree with the judgment of a client because the client has more expertise on the matter in question. • A professional accountant being informed that a planned promotion will not occur unless the accountant agrees with an inappropriate accounting treatment. • A professional accountant having accepted a significant gift from a client and being threatened that acceptance of this gift will be made public. Evaluating Threats 300.7 A1 The conditions, policies and procedures described in paragraph 120.6 A1 and 120.8 A2 might impact the evaluation of whether a threat to compliance with the fundamental principles is at an acceptable level. Such conditions, policies and procedures might relate to: (a) The client and its operating environment; and (b) The firm and its operating environment. 300.7 A2 The professional accountant’s evaluation of the level of a threat is also impacted by the nature and scope of the professional service. The Client and its Operating Environment 300.7 A3 The professional accountant’s evaluation of the level of a threat might be impacted by whether the client is: (a) An audit client and whether the audit client is a public interest entity; (b) An assurance client that is not an audit client; or (c) A non-assurance client. For example, providing a non-assurance service to an audit client that is a public interest entity might be perceived to result in a higher level of threat to compliance with the principle of objectivity with respect to the audit. 300.7 A4 The corporate governance structure, including the leadership of a client might promote compliance with the fundamental principles. Accordingly, a 300 Applying the Conceptual Framework – Professional Accountants in Public Practice 75 • Separating teams when dealing with matters of a confidential nature might address a self-interest threat. 300.8 A3 The remaining sections of Part 3 and International Independence Standards describe certain threats that might arise during the course of performing professional services and include examples of actions that might address threats. Appropriate Reviewer 300.8 A4 An appropriate reviewer is a professional with the necessary knowledge, skills, experience and authority to review, in an objective manner, the relevant work performed or service provided. Such an individual might be a professional accountant. Communicating with Those Charged with Governance R300.9 When communicating with those charged with governance in accordance with the Code, a professional accountant shall determine the appropriate individual(s) within the entity's governance structure with whom to communicate. If the accountant communicates with a subgroup of those charged with governance, the accountant shall determine whether communication with all of those charged with governance is also necessary so that they are adequately informed. 300.9 A1 In determining with whom to communicate, a professional accountant might consider: (a) The nature and importance of the circumstances; and (b) The matter to be communicated. 300.9 A2 Examples of a subgroup of those charged with governance include an audit committee or an individual member of those charged with governance. R300.10 If a professional accountant communicates with individuals who have management responsibilities as well as governance responsibilities, the accountant shall be satisfied that communication with those individuals adequately informs all of those in a governance role with whom the accountant would otherwise communicate. 300.10 A1 In some circumstances, all of those charged with governance are involved in managing the entity, for example, a small business where a single owner manages the entity and no one else has a governance role. In these cases, if matters are communicated to individual(s) with management responsibilities, and those individual(s) also have governance responsibilities, the professional accountant has satisfied the requirement to communicate with those charged with governance. 310 Conflicts of Interest 76 SECTION 310: CONFLICTS OF INTEREST Introduction 310.1 Professional accountants are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats. 310.2 A conflict of interest creates threats to compliance with the principle of objectivity and might create threats to compliance with the other fundamental principles. Such threats might be created when: (a) A professional accountant provides a professional service related to a particular matter for two or more clients whose interests with respect to that matter are in conflict; or (b) The interests of a professional accountant with respect to a particular matter and the interests of the client for whom the accountant provides a professional service related to that matter are in conflict. 310.3 This section sets out specific requirements and application material relevant to applying the conceptual framework to conflicts of interest. When a professional accountant provides an audit, review or other assurance service, independence is also required in accordance with International Independence Standards. Requirements and Application Material General R310.4 A professional accountant shall not allow a conflict of interest to compromise professional or business judgment. 310.4 A1 Examples of circumstances that might create a conflict of interest include: • Providing a transaction advisory service to a client seeking to acquire an audit client, where the firm has obtained confidential information during the course of the audit that might be relevant to the transaction. • Providing advice to two clients at the same time where the clients are competing to acquire the same company and the advice might be relevant to the parties’ competitive positions. • Providing services to a seller and a buyer in relation to the same transaction. • Preparing valuations of assets for two parties who are in an adversarial position with respect to the assets. 310 Conflicts of Interest 77 • Representing two clients in the same matter who are in a legal dispute with each other, such as during divorce proceedings, or the dissolution of a partnership. • In relation to a license agreement, providing an assurance report for a licensor on the royalties due while advising the licensee on the amounts payable. • Advising a client to invest in a business in which, for example, the spouse of the professional accountant has a financial interest. • Providing strategic advice to a client on its competitive position while having a joint venture or similar interest with a major competitor of the client. • Advising a client on acquiring a business which the firm is also interested in acquiring. • Advising a client on buying a product or service while having a royalty or commission agreement with a potential seller of that product or service. Conflict Identification General R310.5 Before accepting a new client relationship, engagement, or business relationship, a professional accountant shall take reasonable steps to identify circumstances that might create a conflict of interest, and therefore a threat to compliance with one or more of the fundamental principles. Such steps shall include identifying: (a) The nature of the relevant interests and relationships between the parties involved; and (b) The service and its implication for relevant parties. 310.5 A1 An effective conflict identification process assists a professional accountant when taking reasonable steps to identify interests and relationships that might create an actual or potential conflict of interest, both before determining whether to accept an engagement and throughout the engagement. Such a process includes considering matters identified by external parties, for example clients or potential clients. The earlier an actual or potential conflict of interest is identified, the greater the likelihood of the accountant being able to address threats created by the conflict of interest. 310.5 A2 An effective process to identify actual or potential conflicts of interest will take into account factors such as: • The nature of the professional services provided. • The size of the firm. 310 Conflicts of Interest 80 the circumstances and a comprehensive explanation of any planned safeguards and the risks involved. • Consent might be implied by clients’ conduct in circumstances where the professional accountant has sufficient evidence to conclude that clients know the circumstances at the outset and have accepted the conflict of interest if they do not raise an objection to the existence of the conflict. 310.9 A3 It is generally necessary: (a) To disclose the nature of the conflict of interest and how any threats created were addressed to clients affected by a conflict of interest; and (b) To obtain consent of the affected clients to perform the professional services when safeguards are applied to address the threat. 310.9 A4 If such disclosure or consent is not in writing, the professional accountant is encouraged to document: (a) The nature of the circumstances giving rise to the conflict of interest; (b) The safeguards applied to address the threats when applicable; and (c) The consent obtained. When Explicit Consent is Refused R310.10 If a professional accountant has determined that explicit consent is necessary in accordance with paragraph R310.9 and the client has refused to provide consent, the accountant shall either: (a) End or decline to perform professional services that would result in the conflict of interest; or (b) End relevant relationships or dispose of relevant interests to eliminate the threat or reduce it to an acceptable level. Confidentiality General R310.11 A professional accountant shall remain alert to the principle of confidentiality, including when making disclosures or sharing information within the firm or network and seeking guidance from third parties. 310.11 A1 Subsection 114 sets out requirements and application material relevant to situations that might create a threat to compliance with the principle of confidentiality. 310 Conflicts of Interest 81 When Disclosure to Obtain Consent would Breach Confidentiality R310.12 When making specific disclosure for the purpose of obtaining explicit consent would result in a breach of confidentiality, and such consent cannot therefore be obtained, the firm shall only accept or continue an engagement if: (a) The firm does not act in an advocacy role for one client in an adversarial position against another client in the same matter; (b) Specific measures are in place to prevent disclosure of confidential information between the engagement teams serving the two clients; and (c) The firm is satisfied that a reasonable and informed third party would be likely to conclude that it is appropriate for the firm to accept or continue the engagement because a restriction on the firm’s ability to provide the professional service would produce a disproportionate adverse outcome for the clients or other relevant third parties. 310.12 A1 A breach of confidentiality might arise, for example, when seeking consent to perform: • A transaction-related service for a client in a hostile takeover of another client of the firm. • A forensic investigation for a client regarding a suspected fraud, where the firm has confidential information from its work for another client who might be involved in the fraud. Documentation R310.13 In the circumstances set out in paragraph R310.12, the professional accountant shall document: (a) The nature of the circumstances, including the role that the accountant is to undertake; (b) The specific measures in place to prevent disclosure of information between the engagement teams serving the two clients; and (c) Why it is appropriate to accept or continue the engagement. Conflicts between professional accountants’ and clients’ interests 310.14 A professional accountant in public practice shall not accept or continue an engagement in which there is, or is likely to be, a significant conflict of interest between the professional accountant and the client. 310 Conflicts of Interest 82 310.15 Any form of financial gain which accrues or is likely to accrue to a professional accountant in public practice as a result of an engagement, or as a result of using information known to him/her about a client, will always amount to a significant conflict of interest between the professional accountant and the client unless the financial gain is declared under the provisions of paragraph 310.17 below. 310.16 Whether any other form of interest is such as to amount to significant conflict will depend on all the circumstances of the case. Commission and other financial gains 310.17 Where any commission, fee, reward or other financial gain is received by a firm or anyone in the firm, in return for the introduction of clients, as a result of advice or other services given to clients, or as a result of using information known about clients, the professional accountant in public practice shall, when necessary, establish safeguards to eliminate the threats or reduce them to an acceptable level. Such safeguards shall generally include: (a) disclosing to the client in writing any arrangement to receive a referral fee, both of the fact that such commission, fee, reward or other financial gain will be or has been received and, as soon as practicable, of its amount and terms; and (b) obtaining advance agreement from the client for any referral arrangement in connection with the sale by a third party of goods or services to the client. 310.18 The provisions in paragraph 310.17 apply to any commission, fee, reward or other financial gain received, whether it relates to a single transaction concerning a client or more than one client, or a series or group of transactions concerning a client or more than one client. For the avoidance of doubt, this includes “override” commission, whereby in some jurisdictions commission may be earned if the number of financial products of a particular type sold by a professional accountant in public practice reaches a certain level. 310.19 Where the commission, fee, reward or other financial gain results from advice given to a client, special care shall be taken that the advice is in fact in the best interests of the client. Agency work 310.20 The acceptance by a professional accountant in public practice of an agency for the supply of services or products may present a conflict of interest which threatens compliance with the fundamental principles. 310.21 Before accepting or continuing an agency, a professional accountant shall satisfy himself/herself that: 320 Professional Appointments 85 SECTION 320: PROFESSIONAL APPOINTMENTS Introduction 320.1 Professional accountants are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats. 320.2 Acceptance of a new client relationship or changes in an existing engagement might create a threat to compliance with one or more of the fundamental principles. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances. Requirements and Application Material Client and Engagement Acceptance General 320.3 A1 Threats to compliance with the principles of integrity or professional behavior might be created, for example, from questionable issues associated with the client (its owners, management or activities). Issues that, if known, might create such a threat include client involvement in illegal activities, dishonesty, questionable financial reporting practices or other unethical behavior. 320.3 A2 Factors that are relevant in evaluating the level of such a threat include: • Knowledge and understanding of the client, its owners, management and those charged with governance and business activities. • The client’s commitment to address the questionable issues, for example, through improving corporate governance practices or internal controls. 320.3 A3 A self-interest threat to compliance with the principle of professional competence and due care is created if the engagement team does not possess, or cannot acquire, the competencies to perform the professional services. 320.3 A4 Factors that are relevant in evaluating the level of such a threat include: • An appropriate understanding of: o The nature of the client’s business; o The complexity of its operations; o The requirements of the engagement; and o The purpose, nature and scope of the work to be performed. 320 Professional Appointments 86 • Knowledge of relevant industries or subject matter. • Experience with relevant regulatory or reporting requirements. • The existence of quality control policies and procedures designed to provide reasonable assurance that engagements are accepted only when they can be performed competently. 320.3 A5 Examples of actions that might be safeguards to address a self-interest threat include: • Assigning sufficient engagement personnel with the necessary competencies. • Agreeing on a realistic time frame for the performance of the engagement. • Using experts where necessary. Changes in a Professional Appointment General R320.4 A professional accountant shall determine whether there are any reasons for not accepting an engagement when the accountant: (a) Is asked by a potential client to replace another accountant; (b) Considers tendering for an engagement held by another accountant; or (c) Considers undertaking work that is complementary or additional to that of another accountant. 320.4 A1 There might be reasons for not accepting an engagement. One such reason might be if a threat created by the facts and circumstances cannot be addressed by applying safeguards. For example, there might be a self- interest threat to compliance with the principle of professional competence and due care if a professional accountant accepts the engagement before knowing all the relevant facts. 320.4 A2 If a professional accountant is asked to undertake work that is complementary or additional to the work of an existing or predecessor accountant, a self-interest threat to compliance with the principle of professional competence and due care might be created, for example, as a result of incomplete information. Before accepting such work, a professional accountant in public practice shall determine whether to communicate with the existing accountant to inform them of the general nature of the complementary or additional work. 320 Professional Appointments 87 It is in the client’s interest that the existing accountant is aware of the additional work being undertaken. This will facilitate the transfer of information between the advisers and aid them in carrying out their respective appointments. 320.4 A3 A factor that is relevant in evaluating the level of such a threat is whether tenders state that, before accepting the engagement, contact with the existing or predecessor accountant will be requested. This contact gives the proposed accountant the opportunity to inquire whether there are any reasons why the engagement should not be accepted. 320.4 A4 Examples of actions that might be safeguards to address such a self-interest threat include: • Asking the existing or predecessor accountant to provide any known information of which, in the existing or predecessor accountant’s opinion, the proposed accountant needs to be aware before deciding whether to accept the engagement. For example, inquiry might reveal previously undisclosed pertinent facts and might indicate disagreements with the existing or predecessor accountant that might influence the decision to accept the appointment. • Obtaining information from other sources such as through inquiries of third parties or background investigations regarding senior management or those charged with governance of the client. Communication with the existing accountant is not just a matter of professional courtesy. Its main purpose is to enable a professional accountant to ensure that there has been no action by the client which would on ethical grounds preclude the professional accountant from accepting the appointment and that, after considering all the facts, the client is someone for whom the professional accountant would wish to act. Thus, a professional accountant shall communicate with the existing accountant on being asked to accept appointment for any recurring work, except where the client has not previously had an accountant acting for them. Communicating with the Existing or Predecessor Accountant 320.5 A1 The proposed accountant should write to the existing or predecessor accountant requesting all the information which ought to be made available to enable the proposed accountant to decide whether or not to accept the appointment. A proposed accountant will usually need the client’s permission, preferably in writing, to initiate discussions with the existing or predecessor accountant. R320.6 If unable to communicate with the existing or predecessor accountant, the proposed accountant shall take other reasonable steps to obtain information about any possible threats. If the existing accountant fails to reply, or fails to supply satisfactory replies, the proposed accountant shall generally send a 320 Professional Appointments 90 Using the Work of an Expert R320.10 When a professional accountant intends to use the work of an expert, the accountant shall determine whether the use is warranted. 320.10 A1 Factors to consider when a professional accountant intends to use the work of an expert include the reputation and expertise of the expert, the resources available to the expert, and the professional and ethics standards applicable to the expert. This information might be gained from prior association with the expert or from consulting others. Unpaid fees of previous accountant 320.11 The proposed accountant is not expected to refuse to act where there are unpaid fees owed to the existing accountant. 320.12 It is a matter for the proposed accountant’s own judgement to decide how far he/she may properly go in assisting the existing accountant to recover fees. Transfer of books and papers 320.13 Once a new accountant has been appointed, or on otherwise ceasing to hold office, the former accountant shall ensure that all books and papers belonging to his/her former client which are in the former accountant’s possession are promptly transferred, whether the new accountant or the client has requested them or not, except where the former accountant claims to exercise a lien or other security over them in respect of unpaid fees. Transfer of information 320.14 In order to ensure continuity of treatment of a client’s affairs, the former accountant shall promptly provide the new accountant with all reasonable transfer information that the new accountant requests, free of charge. 320.15 All reasonable transfer information shall be provided even where there are unpaid fees. 320.16 “Reasonable transfer information” is defined as: (a) a copy of the last set of accounts formally approved by the client; and (b) a detailed trial balance that is in agreement with the accounts referred to in (a) above. 320.17 Any information in addition to the reasonable transfer information, as defined above, is provided purely at the discretion of the former accountant, who may render a charge to the person requesting the information. 321 Second Opinions 91 SECTION 321: SECOND OPINIONS Introduction 321.1 Professional accountants are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats. 321.2 Providing a second opinion to an entity that is not an existing client might create a self-interest or other threat to compliance with one or more of the fundamental principles. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances. Requirements and Application Material General 321.3 A1 A professional accountant might be asked to provide a second opinion on the application of accounting, auditing, reporting or other standards or principles to (a) specific circumstances, or (b) transactions by or on behalf of a company or an entity that is not an existing client. A threat, for example, a self-interest threat to compliance with the principle of professional competence and due care, might be created if the second opinion is not based on the same facts that the existing or predecessor accountant had, or is based on inadequate evidence. 321.3 A2 A factor that is relevant in evaluating the level of such a self-interest threat is the circumstances of the request and all the other available facts and assumptions relevant to the expression of a professional judgment. 321.3 A3 Examples of actions that might be safeguards to address such a self-interest threat include: • With the client’s permission, obtaining information from the existing or predecessor accountant. • Describing the limitations surrounding any opinion in communications with the client. • Providing the existing or predecessor accountant with a copy of the opinion. 321.3 A4 Not at issue are opinions provided pursuant to litigation, expert testimony and assistance provided to other firms and their clients jointly. 321 Second Opinions 92 321.3 A5 A professional accountant in public practice giving an opinion on the application of accounting standards or other standards or principles, relating to a hypothetical situation and not based on the specific facts or circumstances of a particular organisation, shall ensure that the nature of the opinion is made clear. When Permission to Communicate is Not Provided R321.4 If an entity seeking a second opinion from a professional accountant will not permit the accountant to communicate with the existing or predecessor accountant, the accountant shall determine whether the accountant may provide the second opinion sought. 330 Fees and Other Types of Remuneration 95 330.4 A3 Examples of actions that might be safeguards to address such a self-interest threat include: • Having an appropriate reviewer who was not involved in performing the non-assurance service review the work performed by the professional accountant. • Obtaining an advance written agreement with the client on the basis of remuneration. 330.4 A4 Requirements and application material related to contingent fees for services provided to audit or review clients and other assurance clients are set out in International Independence Standards. 330.4 A5 In order to preserve professional accountants’ objectivity, fees shall not be charged on a percentage, contingency or similar basis, save where that course of action is generally accepted practice for certain specialised work. Particularly, professional accountants in public practice are reminded that fees charged in respect of expert or insolvency work may be subject to the requirements of local law. Management buy-out and raising venture capital 330.4 A6 There are circumstances, such as advising on a management buy-out or the raising of venture capital, where in some instances fees cannot realistically be charged save on a contingency basis, for example, where the ability of clients to pay is dependent upon the success or failure of the venture. 330.4 A7 Where work is subject to a contingency or percentage fee, the capacity in which the professional accountant has worked and the basis of his/her remuneration shall be made clear in any document upon which a third party may rely. Referral Fees or Commissions 330.5 A1 A self-interest threat to compliance with the principles of objectivity and professional competence and due care is created if a professional accountant pays or receives a referral fee or receives a commission relating to a client. Such referral fees or commissions include, for example: • A fee paid to another professional accountant for the purposes of obtaining new client work when the client continues as a client of the existing accountant but requires specialist services not offered by that accountant. • A fee received for referring a continuing client to another professional accountant or other expert where the existing accountant does not provide the specific professional service required by the client. • A commission received from a third party (for example, a software vendor) in connection with the sale of goods or services to a client. 330 Fees and Other Types of Remuneration 96 330.5 A2 Examples of actions that might be safeguards to address such a self-interest threat include: • Obtaining an advance agreement from the client for commission arrangements in connection with the sale by another party of goods or services to the client might address a self-interest threat. • Disclosing to clients any referral fees or commission arrangements paid to, or received from, another professional accountant or third party for recommending services or products might address a self- interest threat. 330.5 A3 A professional accountant in public practice may receive commission in respect of transactions effected for clients on the basis that this must be repaid in certain circumstances. In these circumstances, the professional accountant in public practice may agree with clients any one of the following options: (a) to delay refunding the clients’ commission until the expiry of the term; or (b) to place the commission into a designated deposit account until the expiry of the term and then to refund the commission to clients with interest; or (c) to rebate the clients’ commission annually over the term; or (d) to request persons paying commission to pay only the commission due each year, retaining the balance; or (e) to forgo all commission; or (f) to instruct the persons offering commission to retain the commission for the benefit of clients’ pension or other policies. 330.5 A4 Nothing in this Code prohibits a professional accountant in public practice from refunding the commission to clients either with or without clients’ confirmation that they would reimburse the professional accountant in the event that the commission became repayable. Purchase or Sale of a Firm 330.6 A1 A professional accountant may purchase all or part of another firm on the basis that payments will be made to individuals formerly owning the firm or to their heirs or estates. Such payments are not referral fees or commissions for the purposes of this section. 330 Fees and Other Types of Remuneration 97 Fee disputes 330.7 When a professional accountant in public practice becomes aware that he will render a fee note which is substantially different from fees rendered to the same client on earlier occasions for which the work would appear to be comparable, he shall explain to the client the reason for the variation. 330.8 To the extent that the increased fee reflects a charge for extra work, the reason for the extra work shall be explained in writing to the client. To the extent that the increased fee reflects an increase in disbursements or costs, this shall also be explained in writing to the client. 330.9 It is possible that the client has genuine doubts as to the propriety of the fee, and is not actuated by malice or lack of means. In such circumstances, the professional accountant in public practice is reminded that, on written application by both the parties to the dispute, ACCA can arrange for an arbitrator to be appointed to determine any dispute over fees charged. 330.10 A professional accountant in public practice shall be prepared to provide the client with reasonable explanation of the fees charged. The explanation shall be provided without charge and shall be sufficient to enable the client to understand the nature of the work carried out. A professional accountant in public practice shall also take all reasonable steps to resolve speedily any dispute which arises.