Auditing 1 Lecture 12 Professional Ethics 1 1. SOCIAL AND ETHICAL ENVIRONMENT - PowerPoint Presentation

Auditing 1 Lecture 12Professional Ethics 1

1. SOCIAL AND ETHICAL ENVIRONMENT INTRODUCTION:Ethics are very important aspect for every accountant which need to be applied in all aspects of managerial behaviour . An attempt to massage profit figures, or non-disclosure of a close relationship may amount to unethical behaviour. However, it is the nature of ethics to deny easy answers. Furthermore, in the context of business, ethical prescriptions have to be practical to be of any use. 2

ETHICS WHAT IS IT?It is a set of moral principles to guide behaviour.Whereas the political environment in which an organisation operates consists of laws, regulations and government agencies, the social environment consists of the customs, attitudes, beliefs and education of society as a whole, or of different groups in society. Ethics and morality are about right and wrong behaviour. 3

Ethical Environment The ethical environment consists of a set (or sets) of well-established rules of personal and organisational behaviour.The ethical environment refers to justice, respect for the law and a moral code. The conduct of an organisation , its management and employees will be measured against ethical standard by the customers, suppliers and other members of the public with whom they deal. 4

Examples of Social and Ethical Objectives. Employees: A Minimum Wage, Job Security, Good conditions of work, Job Satisfaction.Customers : Produce of good quality at a reasonable price. Suppliers : Offered regular orders and timely payment in return for reliable delivery and good service. 5

Examples of social and ethical objectives. Society: Control of pollution, Provision of financial assistance to charities, sports and community activities. Co-operation with government authorities in identifying and preventing health hazards in the products sold. 6

Ethics in Organizations. Ethics is a code of moral principles that people follow with respect to what is right or wrong. Ethical principles are not necessarily enforced by law, although the law incorporates moral judgements (murder is wrong ethically, and also punishable by law). Ethics in organizations relates to social responsibility and business practice. 7

Ethical systems in organisations (a) Personal ethics deriving from a person’s upbringing, personality, religious beliefs etc.(b) Professional ethics (eg ACCA’s code of ethics, medical ethics) (c) Organizational cultures eg customer first.(d) Organizational systems. Ethics might be contained in a formal code, reinforced by overall statement of values. 8

Managing Ethics Two approaches to managing Ethics:Compliance-based Integrity-based 9

Compliance-based approach. A compliance-based approach is primarily designed to ensure that the company acts within the letter of the law, and that violations are prevented, detected and punished.Some organizations, faced with the legal consequences of unethical behaviour take precautions such as those below. 10

Compliance-based Compliance procedures to detect misconduct.Audits of contracts.Systems for employees to inform superiors about criminal misconduct without fear of retribution. Disciplinary procedures to deal with transgressions. 11

Integrity-based approach. An integrity-based approach combines a concern for the law with an emphasis on managerial responsibility for ethical behaviour. Integrity strategies strive to define companies’ guiding values, aspirations and patterns of thought and conduct. Integrity-based approach to ethics treats ethics as an issue of organization culture. 12

Reasons why accountants should behave ethically. (a) Ethically issues may be a matter of law and regulation and accountants are expected to apply them.(b) The profession requires members to conduct themselves and provide services to the public according to certain standards in order to protect the profession’s reputation and standing. (c) The accountant’s ethical behaviour serves to protect the public interest. 13

Fundamental Principles and Guidance on Professional Ethics. THE PUBLIC INTEREST: (IFAC’S CODE).A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore, a professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employer. 14

Public Interest. The public interest is considered to be the collective well-being of the community of people and institutions the professional accountant serves, including clients, lenders, governments, employers, employees, investors, the business and financial community and others who rely on the work of professional accountants. 15

The Fundamental Principles of the (ACCA) Code of Ethics and Conduct INTEGRITY:Members shall be straightforward and honest in all professional and business relationships. OBJECTIVITY: Members shall not allow bias, conflict of interest or undue influence of others to override professional or business judgements. 16

The Fundamental Principles (ACCA) PROFESSIONAL COMPETENCE AND DUE CARE:Members have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional service based on current developments in practice, legislation and techniques. Members shall act diligently and in accordance with applicable technical and professional standards. 17

Confidentiality Members shall respect the confidentiality of information acquired as a result of professional and business relationships and, therefore not disclose any such information to third parties without proper and specific authority, or unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships must not be used for the personal advantage of the professional accountant or third parties. 18

Professional Behaviour. Members should comply with relevant laws and regulations and should avoid any action that discredits the profession. 19

Personal qualities expected of an accountant Personal quality Detail Reliability Work must be done well and must meet professional standards Responsibility Accountant should take ‘ownership’ of his work Timeliness Work must be produced within a specified time frame Courtesy Conduct yourself with courtesy and consideration towards clients Respect Respect others by developing constructive relationship and recognizing the values and rights of others. 20

Professional qualities expected of an accountant Professional quality Detail Independence Work be completed without bias or prejudice and you must be seen to be independent. Scepticism Question information so that you form your own opinion regarding its quality and reliability. Accountability Should recognize that you are accountable for your own judgements and decisions Social responsibility Accountant should have public duty as well as duty to their employer or client. Audit work, accountancy work and investment decisions may all affect the public. 21

Integrity, objectivity and independence Members must behave with integrity and should strive for objectivity in all professional and business judgements .Objectivity is a state of mind and should be shown by the maintenance of independence.Independence and objectivity matter because of;1. The expectations of those directly affected, and 2. The public interest 22

Independence Independence of mind:The state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgement, allowing the individual to act with integrity, and exercise objectivity and professional scepticism . 23

Independence in appearance:The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firm’s, or a member of the assurance team’s integrity, objectivity or professional scepticism had been compromised. 24 Independence

Threats to independence and objectivity Compliance with the fundamental principles of professional ethics may potentially be threatened by a wide range of different circumstances.Appropriate safeguards must be put in place to eliminate or reduce such threats to acceptable levels. The threats are; Self-interest Self-reviewAdvocacy Familiarity Intimidation 25

Self-interest threat This is the threat that a financial or other interest will inappropriately influence the professional accountant’s judgement or behaviour . It may arise due to; Financial interest,Close business relationshipEmployment with the clientPartner on client boardFamily and personal relationshipsGifts and hospitalityLoans and guarantees Recruitment Lowballing % or contingent fees High % of fees 26

Safeguards to self-interest threats Financial interest by audit firm, a member of audit team and family member of a member of the audit team.Safeguards;Dispose of the interest Remove the individual from the team Inform the client’s audit committee Use independent partner to review work carried out.Exercise;Discuss the safeguards to the other factors arising. 27

Self-review threat This threat arises when a member reviews his or her own work or advice as part of an assurance engagement. Circumstances that may arise include;Recent service with assurance clientGeneral other services Preparing accounting records and financial statements Valuation services Tax servicesInternal audit servicesCorporate finance 28

Advocacy threat This arises in those situations where the audit firm promotes a position or opinion to the point that subsequent objectivity is compromised.Examples include;1. Promoting shares in a listed audit client. 2. Commenting publicly on future events 3. Acting as an advocate in litigations ACCA code does not permit a firm as a counsel for legal affairs.Safeguards include using different department for the work, informing audit committee and making disclosures . 29

Familiarity threat This is where a firm is on the client for a long period of time. Factors include;How long an individual has been on the audit team.How senior the person is Whether the client management has changed Whether the client’s accounting issues have changed in nature. Safeguards include;Rotate the senior personnel off the team, have a senior member to review work done and quality reviews. 30

Intimidation threat Intimidation threat arises when members of the audit may be deterred from acting objectively by threats, actual or perceived.These could arise from family and personal relationships, litigation or close business relationships.Client threatens to sue, or does sue, the audit firm for work that has been done previously. Threat of losing the client compels the firm to produce unmodified audit opinion. 31

Factors to consider by the firm if such situations arise include; The materiality of the litigationThe nature of the audit engagementWhether the litigation relates to a prior audit engagement.Safeguards include;Disclose to audit committee Remove specific affected individuals from the engagement team Involve a senior partner on the team to review work. 32 Intimidation threat (contd.)