What are the five fundamental principles in APES 110 who must comply with them?
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APES 110 - Code of Ethics for Professional Accountants � is the foundation of professional and ethical standards in Australia. Show This program examines key aspects of the Code, including:
Introductory comments The foundation of APESB�s professional and ethical standards is APES 110 the Code of Ethics for Professional Accountants (the Code) which is binding on members of the three professional accounting bodies in Australia. The Code is based on the international Code issued by the International Ethics Standards Board for Accountants (IESBA Code). Introductory comments on professionalism and its importance to the accounting profession will provide the background and context for the discussion on the Code. An overview of the Code will be presented followed by a brief summary of international and future developments which impact on the Code. Background and Context Professionalism � what does it mean, what is the value and what does it cost? Being part of a profession is an earned privilege that brings rewards as well as obligations. Professional behaviour goes beyond behaving lawfully. To be part of a profession, the values and characteristics must be understood with the key ingredient being the inclusion of professional and ethical conduct. A fundamental part of ethical conduct is integrity and setting aside an individual�s interests where they compete with a client�s interest or the public interest. Should the accounting profession set its own code of ethics? Professional and ethical standards are fundamental to the reputation of the accounting profession. Professional and ethical standards ensure consistency of practice and confidence in Australia�s capital markets. Professional and ethical standards for the accounting profession are set by the Accounting Professional and Ethical Standards Board (APESB). APESB is an independent, national standard setter that sets the code of ethics and professional standards by which members of Australia�s three professional accounting bodies must abide. This ensures that the code of ethics is set in an independent manner by those who have an understanding of the accounting profession and the ethical demands or challenges faced by a professional accountant. The role of the accounting profession in a global financial crisis The global financial crisis and the associated series of high profile corporate collapses caused many to question the role accountants or finance professionals played in this crisis. As the impact of the crisis is felt, it was inevitable that boards applied greater scrutiny to those responsible for managing the company�s financial affairs. As a result those who were under pressure may have been tempted to cover up poor performance or mismanagement by resorting to unethical behaviour. These and other issues demonstrate that sound professional and ethical practices are just as important in good economic times, as in bad, Australia takes lead role in international accounting ethics Australia is set to have significantly more influence in setting international standards due to Australian representation on the IESBA. Australia�s influence has been enhanced by the appointment of APESB chairperson Kate Spargo to the International Ethics Standards Board for Accountants (IESBA), bringing the number of Australians on the 18-member body to 3. Despite a vast geographic separation from many, Australia has some of the most sophisticated professional and ethical standards of any country. Further the APESB approach to standards development has attracted overseas interest, particularly the unique standards developed around specialist areas such as forensic accounting, valuation services, insolvency services and due diligence committee sign off. The Code of Ethics for Professional Accountants Application and structure Application The Code of Ethics for Professional Accountants, APES110 (the Code) is the foundation of all professional and ethical standards and also states that the members of the profession has a responsibility to act in the public interest. Where members conduct audits in accordance with Chapter 7 of the Corporations Act 2001 the Code has the force of law. Structure of the Code Part A - Establishes the five fundamental principles of professional and ethical conduct for members and also provides a conceptual framework for applying those principles in practice. Part B - Illustrates how the fundamental principles and conceptual framework is applied by Members in Public Practice to various practical circumstances. Part C - Illustrates how the fundamental principles and conceptual framework is applied by Members in Business to various practical circumstances. The examples provided in each of parts B and C are intended illustrate how the conceptual framework is applied in practice. They are not an exhaustive list of all circumstances experienced and it is not sufficient to merely comply with the examples in the Code. Part A: General Application of the Code Fundamental Principles All members are required to comply with the following five fundamental principles:
Conceptual Framework The conceptual framework requires members to:
Where threats cannot be eliminated or reduced to an acceptable level, either because the threat is too significant or appropriate safeguards cannot be applied:
Threats Threats may be created by a broad range of relationships and circumstances. Any given circumstance may in fact create more than one threat, and the threats that arise may affect compliance with more than one fundamental principle. Threats to the fundamental principles may fall into one or more of the following categories:
Safeguards Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level. They fall into two broad categories:
Ethical Conflict Resolution When initiating a formal or informal conflict resolution process, the following matters should be considered:
Where matters involve conflict with or within an organisation, the member must determine whether to consult with those charged with governance of the organisation If unable to resolve a conflict, the member may consider obtaining professional advice from the relevant professional body or from legal advisors (under the protection of legal privilege). This can be done without breaching the principle of confidentiality by discussing matters on an anonymous basis with the professional body. Where the conflict cannot be resolved, where possible the member is required to refuse to remain associated with the matter creating the conflict. This may be done by resigning from the engagement or employing organisation. Part B: Members in Public Practice Part B describes how the conceptual framework applies in certain situations to members in public practice. Whilst a broad range of circumstances and relationships that may create threats to compliance with the fundamental principles is described, the list is not exhaustive and members should be alert for other situations that may threaten compliance. The key areas addressed are:
Professional appointment Client acceptance: acceptance of a new client relationship may threaten compliance with the fundamental principles. For example:
Engagement acceptance: the fundamental principles of professional competence and due care impose an obligation on the member to only perform services the member is competent to perform Changes in a professional appointment: the member is required to determine if , prior to replacing another member or tendering for an engagement, there are any professional or other reasons for not accepting the engagement Conflicts of interest Conflicts may arise in numerous ways. An example is where the member competes directly with a client or has a joint venture or similar arrangement with a major competitor of the client. Second opinions The provision of a second opinion may threaten professional competence and due care. For example, a member may be asked to provide a second opinion on proposed accounting presentations or interpretations of accounting standards. However, the same set of facts available to the existing accountant may not have been made available to the member. Fees and other types of remuneration Quoting fees too low may threaten professional competence and due care if it makes it difficult to perform the engagement in accordance with applicable professional and technical standards. Contingent fees, whilst used for certain types of engagements, may threaten compliance with the fundamental principles. Acceptance of referral fees and commissions creates self-interest threats to objectivity and professional competence and due care. Marketing professional services Members are required not to bring the profession into disrepute when marketing their services. Honesty and truthfulness are required whilst the following behaviour is prohibited:
Gifts and hospitality Where a client offers gifts or hospitality to the member or an immediate or close family member, threats to compliance may be created. Where the offer is made in the normal course of business without specific intent to influence the member, the threat may be considered at an acceptable level. Custody of client assets Where the member is entrusted with money or other assets, the member shall:
Objectivity � All services A Member in Public Practice shall determine when providing any professional service whether there are threats to compliance with the fundamental principle of objectivity resulting from having interests in, or relationships with, a client or its directors, officers or employees. Independence The concept of Independence is fundamental to compliance with the principles of integrity and objectivity. The conceptual framework requires the identification and evaluation of threats to Independence and the application of safeguards to reduce any threats created to an acceptable level. Members and other readers of the Code should recognise that adherence to the Code is not a substitute for compliance with legislation and reference to such legislation must be made to determine any additional obligations that members must comply with. Independence comprises:
The Auditor Independence requirements in the Code extend to network firms. A network firm is a firm or entity that belongs to a network. A network is a larger structure:
Threats to independence may arise from any of the following circumstances and relationships:
Part C: Members in Business Part C describes how the conceptual framework applies to members in business. Whilst a broad range of circumstances and relationships that may create threats to compliance with the fundamental principles is described, the list is not exhaustive and members should be alert for other situations that may threaten compliance. A Member in Business may be a salaried employee, a partner, a director, an owner manager, a volunteer or otherwise working for one or more employing organisations. The legal form of the relationship with the employing organisation has no bearing on the ethical responsibilities incumbent on the member in business. The key areas addressed by the Code in relation to members in business are:
Potential conflicts Supporting the legitimate and ethical objectives established by an employer, and the rules and procedures in support of those objectives may put the member under pressure to act in ways that could threaten compliance with the fundamental principles of the Code. For example, the member may experience pressure from senior managers to lie or hide information from the auditors. Preparation and reporting of information Members in business are often involved in the preparation and reporting of information that may either be made public or used by others inside or outside the employing organisation. Threats to the ability to prepare or present such information fairly, honestly and in accordance with professional standards may arise for example, where there is a possibility of personal gain Acting with sufficient expertise Members in business should only undertake tasks for which they have, or can obtain, sufficient specific training or experience. This may be threatened by factors such as insufficient time, resources, knowledge or information. Financial interests Financial interests of a Member in Business or their immediate or close family members could give rise to threats to compliance with. For example, self-interest threats to objectivity or confidentiality may be created through the existence of the motive and opportunity to manipulate price sensitive information in order to gain financially. Inducements Receiving of offers and making of offers may threaten compliance with the fundamental principles. For example, a member may experience pressure from the receipt of an inducement to subordinate the judgment of another or to influence a decision-making process. Revision of the IESBA Code of Ethics for Professional Accountants With the objective of enhancing the clarity and comprehension of the international Code, the IESBA undertook a project to update the Code as well as improve the drafting conventions used in the Code. The revised Code was issued in July 2009. APESB is currently undertaking a project to update the Code in line with the revised IESBA. As a first step in the process the APES Board issued a Consultation Paper on its proposed revision in late 2009 to seek stakeholder views on key issues that impact the drafting approach to be adopted. Comments received from stakeholders were considered and where appropriate, incorporated into the document for exposure. Some of the key changes introduced are:
Case Studies for use in the video presentation When initiating an ethical dilemma resolution process, members should consider applying the following ethical resolution process which also links in well with the conceptual framework in the Code.  CASE STUDIES 1. INCORRECT REPORTING OF FINANCIAL INFORMATION Harry is a management accountant in a manufacturing company. Harry�s immediate manager, Tom, is a very forceful, domineering individual and Harry has accepted his views over the last two years on the level of work in progress inventory. Tom has given Harry specific assurances that work in progress inventory has increased by 200% during the current reporting period, and instructed Harry to report this level in the monthly management accounts. The draft financial statements show that the organisation has only just met its business plan financial targets. Evidence then becomes available (which Harry was not aware of when the draft financial statements were produced) to indicate that something is clearly wrong and the work in progress has not increased as advised by Tom. 2. CHARITY�S LATE LODGEMENT Sally is the audit partner of a charitable group that is structured to include a wholly-owned trading company. The company�s profits are covenanted to be paid over annually to the charity, which provides widely-valued public services. Sally�s firm also acts as the group�s tax adviser. The audit team has discovered, just a week too late, that, for a prior period, no cheque was raised for the transfer of the covenanted funds, nor was the appropriate documentation prepared within the regulatory deadlines. Tax will therefore be payable and it is likely to be irrecoverable. There is some uncertainty as to whether the charity�s staff, or Sally�s own firm�s tax advisory staff, were responsible for the oversight. It is not stipulated in the letter of engagement but in every previous year since the covenant was set up, Sally�s firm has written to the charity reminding its accountant of the deadline. On this occasion, no such prompting was given, probably due to a change in staff at Sally�s firm. Sally informs the charity�s Chief Executive Officer, James, who is very concerned about what has happened. He talks gloomily of having to cut services and lay off staff- unless the tax office allows a late claim, or the charity can successfully sue Sally�s firm. Suddenly, he brightens up and suggests a simple solution. The documentation should be back-dated and submitted now, and the tax return should be prepared consistent with the earlier dating. As he says:
3. TRANSFER OF FUNDS TO AN OFFSHORE ACCOUNT Michelle works as an interim finance director. Michelle is not a director of the Company and does not attend board meetings. A newly appointed director, Bob, has paid a substantial sum of money into the company to save it from financial collapse. The new director Bob has asked Michelle to transfer $50,000 into an offshore account. When Michelle sought an explanation, Bob told her that the sum was to pay for expenses incurred. However, no invoice or supporting documents were offered. Michelle then received a memorandum instructing her to make the payment and confirming that the transaction was to pay for legitimate expenses. Michelle concluded that, as she is an employee, she cannot refuse in the absence of evidence that she is being asked to commit a crime or other irregularity. Therefore, Michelle makes the payment but expresses concern to the chief executive and chairman. Shortly afterwards, Michelle is informed that her interim role will not continue due to financial difficulties. Subsequently, an insolvency practitioner, who has been appointed as an administrator, has contacted Michelle. One of the key concerns of the insolvency practitioner is the transfer of $50,000 to the offshore account. CASE STUDY SOLUTIONS 1. INCORRECT REPORTING OF FINANCIAL INFORMATION Key fundamental principles and duties Integrity Will Harry be able to demonstrate that the accounts are true and fair without re-drafting? Objectivity How can Harry maintain his objectivity given that Tom, his immediate manager, is a forceful, perhaps intimidating individual? Professional competence and due care Are the draft accounts prepared in accordance with technical and professional standards? Professional behaviour How should Harry proceed so as not to discredit himself? Discussion Identify relevant facts Consider the company�s business�s policies, procedures and guidelines, accounting standards, best practices, applicable laws and regulations. Is the evidence that work in progress inventory is incorrectly stated supported by other documentation, for example analytical review of cost of sales, margins and cashflows? Identify affected parties Key affected parties are Harry and his immediate manager, Tom. Other possible affected parties are the next level of management, recipients of the management accounts and the financial statements, finance, purchasing, accounts payable, human resources, internal audit, audit committee, board, external auditors, and shareholders. Who should be involved in resolution Harry should consider not just who should be involved, but also for what reason and the timing of their involvement. Harry may consider contacting his professional body for advice. He could also discuss the matter with his immediate line manager in light of all the available evidence and possible consequences. Harry can consider discussing the matter with recipients of the management accounts. Depending on the outcome of the other steps in the resolution process, Harry may consider involving other affected parties. Possible course of action Harry can check the relevant facts by corroborating with other available documentation. For example, the cost of sales calculations, margins, previous stock counts and other financial information. He can then discuss the matter with his immediate line manager as to the appropriate course of action, for example undertaking a stock count. If Harry feels that his manager�s response is not appropriate, he may choose to discuss the matter further with recipients of the management accounts and the next level of management. Potential next steps include discussion with the senior management, internal audit, audit committee, the board and external auditors. During this process, Harry may also find it useful to consult with his professional body. Harry should document his involvement and the substance of all discussions held, who else was involved, what conclusions were reached and why. Summary Threats to compliance with fundamental principles: Fundamental principles affected:
Possible safeguards:
Decide on a preferred course of action and implementation After Harry has gone through the above process he should be able to select a preferred course of action. This should include amending the management accounts and notifying the users who previously received these accounts. If after exploring all the options Harry is not able to amend the management accounts then he must disassociate himself from the management accounts. He may also consider resigning from the company. 2. CHARITY�S LATE LODGEMENT Key fundamental principles and duties Integrity Can Sally accept the �common sense� argument for backdating the relevant documents? Objectivity How does Sally ignore the possibility that her firm may be responsible even if it cannot be successfully sued? Significant amounts of time, energy and goodwill could be expended in defending this? Professional behaviour The practice of �back-dating� can cause long term damage to the reputation of Sally�s firm. Discussion Identify relevant facts Consider the firm�s policies, procedures and guidelines, in particular consider the ethical issues as opposed to the commercial appropriateness of the practice. Given the charity�s contribution to the community, is back-dating legal documentation to reverse an error an appropriate precedent? Identify affected parties Key affected parties are Sally, a decision maker at the tax office, the charity and its beneficiaries, James and (potentially) Sally�s firm. Who should be involved in the resolution She should discuss the matter with the taxation partner working on the charity or other affected parties such as the tax office. Sally may even consider further discussion with James and the Board of the Charity. Sally may also consider contacting her professional body for advice. Possible course of action Sally should discuss the matter further with James to encourage a more ethical approach to the problem. Sally should discuss the matter with the taxation partner working on the charity to obtain an understanding of potential remedies to the situation. She may also consider contacting the tax office to discuss options available and the possible appeals process. Following this, Sally may discuss the matter with another partner in the firm that is not involved directly with the client. She should also consult with the firm�s legal representatives. Sally should document the substance of all discussions held, the parties involved, what conclusions were reached and why. Decide on a preferred course of action and implementation After exploring all the options Sally should be able to choose the preferred course of action and this should not involve falsifying documentation. If the client insists in falsifying the documentation then Sally and the firm should consider resigning from the engagement. Summary Threats to compliance with fundamental principles:
Fundamental principles affected:
Possible safeguards:
3. TRANSFER OF FUNDS TO AN OFFSHORE ACCOUNT Key fundamental principles and duties Integrity Were the actions Michelle took appropriate in the circumstances? Objectivity Where is the boundary between Michelle�s duty to the former employer and her responsibility to the insolvency practitioner? Confidentiality Are there proper grounds for disclosing the information? Discussion Identify relevant facts Consider the business�s policies, procedures and guidelines, accounting standards, applicable laws and regulations. Of particular relevance will be the provisions relating to confidentiality and money laundering. Has Michelle made records of how she attempted to deal with the offshore payment, and the responses of the CEO and directors? Identify affected parties Key affected parties are Michelle, the director, the insolvency practitioner, creditors, chief executive and chairman. Who should be involved in the resolution Michelle should consider not just who she should involve, but also when and why. She should take advice early and if necessary from a lawyer or her professional body. Possible course of action Normally Michelle would be able to co-operate openly with an insolvency practitioner, but she should ask for an explicit statement from the insolvency practitioner of the authority under which he is requesting the information. On receipt, Michelle should consider seeking legal advice, unless she is very familiar with the law and her duties in respect to it. Michelle can then open a dialogue with the insolvency practitioner, and try to establish the scope of the enquiry. If there is any suggestion of potential action against her for wrong-doing, she should seek further legal advice and continue her discussions under legal guidance. Michelle needs to ensure that she keeps a record of all interactions with the insolvency practitioner. During the resolution process, it may be helpful for Michelle to document the substance of the discussions held, who was involved, what conclusions were reached and why, and her involvement. Summary Threats to compliance with fundamental principles:
Fundamental principles affected:
Possible safeguards:
Activity 1 � Power Up PowerUp was an energy trader operating in the energy markets in the US. PowerUp commonly estimated revenue from long term energy contracts under mark to market accounting practices. Some of the contracts were valued based on management estimates rather than verifiable market prices. In some instances, PowerUp was booking revenue for forward energy contracts that would not be performed for decades, and in some cases the sales were in regulated regions that did not allow such contracts. Meeting revenue expectations became more and more challenging as PowerUp�s share price climbed from $ 5 to over $ 50 just two years later. The organisational culture was driven to achieve revenue targets that were promised to the stock market by senior management. Performance evaluations of staff were dominated by the CFO, Alex, who ensured that employees who brought in the �required numbers� were given the greatest rewards. After a while it was apparent that these targets would not be met by flexibility in the mark to market accounting process alone. Alex then created over 3000 Special Purpose Entities (SPE�s) to spin PowerUp�s debt off the books into these entities. In accordance with the accounting standards at the time, consolidation was not required if PowerUp owned less than 50% of a Special Purpose Entity and if it could be argued that powerUp did not control that Special Purpose Entity. Accordingly, Alex and his colleagues transferred the debt to these entities, where they held shares as well as earned commissions from PowerUp for transfer of the debt. Brendan, the ABC Auditco audit partner was concerned with PowerUp�s use of SPE�s when it was initially proposed by the CFO. Auditco highlighted this issue as a high risk matter to PowerUp�s audit committee. So in effect the Board as well as the external auditor knew about these SPE�s and knew that these entities whilst not illegal were pushing the boundaries of generally accepted accounting principles. However, the Board took no action to either stop or curtail the continued creation of these entities and Auditco also remained silent. Brendan was reluctant to take further action as PowerUp was a key client of Auditco with annual fees over $ 40 million per annum which translated to an annual compensation of over $ 1 million for himself. Also Brendan�s close personal friend, the Chief Accounting Officer at PowerUp was the person who was approving the Special Purpose Entities created by Alex at the senior management level. PowerUp had an extensive code of ethics which dealt with conflicts of interest. However, the Board approved that the code of ethics be suspended for the SPE transactions allowing Alex to represent PowerUp as the CFO and himself personally as one of the equity owners of the SPE�s. In the next year, Alex informed the Board that he had transferred some of his interest in the SPE�s to another PowerUp employee. This was due to concern that as the CFO his interest required a higher level of disclosure. Alex also disclosed that he had personally made $ 43 million from these SPE transactions. Part A
Part B Assume that you are Alex (CFO) of PowerUp and that you attended a recent professional development seminar in which APES 110 and the professional obligations it imposes were explained to you.
Solution to Activity 1 � Power Up Part A
Part B
Activity 2 � Auditco Auditco is the auditor of some significant corporate clients that contribute significantly to the firm�s consulting division revenues. In some cases, the consulting fees earned from the respective client is so significant, and in most instances greater than the audit fees, which in effect compromises the integrity and objectivity of Auditco�s external audit process. Recently there has been a significant departure of partners at Auditco. This has changed the character of the firm to one that nurtures a revenue-driven internal culture. This is starting to put pressure on audit partners to �push the envelope� in terms of certifying financial statements of clients who adopt aggressive accounting practices. Generating sales by consulting has become the key measure of success for the partners who remained within the firm. The consulting relationship with 5 of the firm�s major audit clients is material to Auditco as in most instances it exceeds the audit fees. Thus retaining the consulting fees from audit clients has become the driving force for what Auditco will and will not do in the audit. Part A Apply the conceptual framework on independence in Section 290 of APES 110 identify potential threats that could occur when Auditco as the external auditor earns significant consulting revenue? Part B What are the safeguards available in Section 290 that Auditco should apply to reduce the threats to auditor independence? Solution to Activity 2 � Auditco Part A The conceptual framework on independence in section 290 of APES 110 states the following:
STUDY POINTS
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