Review of Part C of the Code - PowerPoint Presentation

Review of Part C of the Code Jim Gaa IESBA June 2012 New York, USA

To inform the development of IESBA’s Strategy and Work PlanTo determine whether recent accounting irregularities reveal ethical implications for professional accountants in business (PAIBs) To determine whether Part C of the Code should be amendedBackgroundReview of Part C of the Code

Jim Gaa (Chair) Alice McCleary (Board member) Lisa Snyder (Technical Adviser)Larry Kean (SME -- USA)Ian Rushby (PAIB Committee -- UK)Significant input from PAIB/SME perspectiveWorking Group MembershipReview of Part C of the Code

Consideration of accounting irregularitiesInformal survey of selected member bodiesAnalysis of Part C of CodeTentative conclusionsActivities to DateReview of Part C of the Code

Reports focus mainly on illegal acts rather than “legal but unethical”, and actions of senior managementLittle attention to Legal but unethical acts PAIBs who act on the instructions of superiorsRole of auditors not directly relevant to Part CLimited discussion of questionable payments (section 350)Consideration of Accounting Irregularities Review of Part C of the Code

Survey of selected member bodies that have significant number of PAIBsConducted to identify PAIBs’ ethical issues as reported to member bodies and to identify ways of providing guidanceSurvey of member bodies Review of Part C of the Code

Few ethical queries received from PAIBs than from from PAIPsOnly significant recurring issue: pressure by senior management or supervisors to report misleading informationSome information was provided about forms of additional guidanceSurvey of member bodies Review of Part C of the Code

Focus:Areas in Part C that could be amendedAreas not currently in Part C that could be addressedWhat forms additional guidance might takeDiscussion of results of selected cases of accounting irregularities and survey of member bodiesParagraph by paragraph examination of Part CPreliminary discussion of additional guidanceWorking Group ActivityReview of Part C of the Code

Part C provides limited guidance on: Responsibilities of PAIBs:What PAIBs should do: produce financial information that is a faithful representation of the economics of transactions What PAIBs should not do: be associated with misleading information and reportsDealing with pressure on PAIBs from superiors to violate legal or ethical standardsWorking group’s major findingsReview of Part C of the Code

Financial reportingMore guidance to PAIBs about preparing and reporting faithfully representative (truthful) informationConfirm that 320.1 is intended to go beyond financial reporting principlesProvide guidance on earnings managementPressureSection 340 could be expanded to include pressures of all kinds, not just financial self-interestCode could include guidance for PAIBs who may exert pressurePreliminary recommendationsReview of Part C of the Code

PAIBs have a responsibility to produce financial reports that are faithful (complete, neutral and free of material errors) or truthful representations of the economics of transactionsCode mentions this only briefly in two places: indirectly in paragraph 110.1 (“truthful”) and in 320.1 (“fair and honest”) Faithful representation: Limited contentReview of Part C of the Code

320.1 requires information to be presented “fairly, honestly and in accordance with relevant professional standards.”Issue: 320.1 contains two tests:To present information fairly and honestlyTo present information in accordance with relevant professional standardsShould the Code provide guidance about what accountants should do Provide faithfully representative (truthful) information?Faithful representation: two “tests”Review of Part C of the Code

PAIBs have a responsibility not to be associated with misleading information and reportsA number of references, especially 110.2 and 310.2 (current code), but limited guidanceFinancial statements may be misleading even though they do not violate applicable financial reporting standards. Earnings management is an important issue in relation to truthful versus misleading informationAssociation with misleading informationReview of Part C of the Code

Most businesses undertake earnings management without violating any laws Diversity of views about its ethical statusThere is no problemIt is never acceptable (always misleading)It is acceptable in some circumstances, not in othersCurrent Code makes no reference to it It is included in proposed 300.6, and also 210.5 (Illegal Acts task force)Earnings managementReview of Part C of the Code

Should Part C address earnings management?Should Part C provide guidance on distinguishing acceptable from improper earnings management?Earnings ManagementReview of Part C of the Code

Part C provides limited guidance about how a PAIB should deal with The unethical acts of others (small addition to 300.5 (Illegal acts Task Force)Pressure to engage in illegal or unethical actsSurvey and working group discussion: Pressure to improperly influence earnings are as likely to be the result of corporate culture, cajoling, bullying and threats of job loss as personal financial gain Pressure from SuperiorsReview of Part C of the Code

Section 310 (current version) addresses pressures of many typesDeleted from Part C by conflict of interest exposure draftSection 320 focuses on threats relating specifically to financial reportingSection 340 is limited to self-interest and familiarity threats (incentives) related to financial reportingSections 310,320,340Review of Part C of the Code

Subordinates: Should section 340 be expanded beyond financial interests and incorporate the pressure on subordinates to act inappropriately in Section 320? Guidance similar to the escalation process in proposed Section 360 (Illegal acts) may help the PAIBSuperiors: Should the Code include guidance for PAIBs who may exert pressure on subordinates?PressureReview of Part C of the Code

Receipts and Offers of Items of Value (Section 350)Should section 330 (“Sufficient Expertise”) be incorporated into section 300?Whistleblowing (reporting unethical/illegal acts of others)Responsibility of PAIBs to advance the legitimate objectives of the employing organizationOther matters identifiedReview of Part C of the Code

Are there any other issues the IESBA would like the Working Group to examine?DiscussionReview of Part C of the Code