The long-awaited International Code of Ethics for Professional Accountants, including International Independence Standards is here. The International Ethics Standards Board for Accountants (IESBA), an international standard-setting board that is responsible for issuing global ethics and independence standards, has worked long and hard to reconstruct its ethics code. What has changed in the IESBA Code, and how is the code better? Before addressing that question, it's important to understand the code's impact on professional accountancy bodies. Show
The IESBA standards significantly influence the accounting profession globally, including in the United States. The AICPA and other professional accountancy organizations worldwide, including the Chartered Institute of Management Accountants (CIMA), are "member bodies" of the International Federation of Accountants (IFAC) that agree (among other things) to meet the standards set by IFAC-supported boards, including the IESBA. (For a discussion of CIMA's Code of Ethics, see the sidebar "Ethics for CIMA Members.") The AICPA Professional Ethics Executive Committee (PEEC) monitors the IESBA's standard-setting activities and may propose updates to the AICPA Code of Professional Conduct accordingly. In addition, when performing services under the International Standards on Auditing (ISAs), auditors must apply the IESBA Code plus any national ethical requirements. Lastly, members of the IFAC Forum of Firms, an association of larger global audit firm networks, agree to adopt policies and methodologies that conform to the IESBA Code (see the sidebar "A Forum to Promote Quality"). BUILDING A BETTER CODEMore than a mere redesign, improvements to the code are multifaceted, spanning the code's structure and applicability, conceptual underpinnings, formatting, language, and clarity. The code emphasizes three key messages to the "professional accountant." They are:
Let's look at each of these in turn. FUNDAMENTAL PRINCIPLESThe professional accountant's overarching objective under the code is to comply with the fundamental principles of ethical conduct, which support his or her duty to the public interest. The fundamental principles are:
All roads in the code lead back to one or more of these five principles. BE INDEPENDENTThe code consistently reminds professional accountants to be independent when performing audit, review, or other assurance services. The independence rules always have been part of the code, but now they have been moved to a new section, International Independence Standards, which is divided into two subsections (independence when performing financial statement audits and reviews (Part 4A) and independence when performing all other assurance services (Part 4B)). Professional accountants are required to apply the conceptual framework to identify, evaluate, and address threats to independence. Independence "of mind" and "in appearance" requires adherence to the fundamental principles of integrity and objectivity. New and improved provisions help accountants apply the conceptual framework when dealing with threats to independence in various contexts. THE CONCEPTUAL FRAMEWORKThe code consistently reminds professional accountants to identify, evaluate, and address threats to compliance with the fundamental principles using the conceptual framework, which requires the professional accountant to:
Clearer provisions on key topics such as conflicts of interest, professional appointment, pressure, and preparing and presenting information illustrate how to apply the framework in those contexts. The code introduces enhanced material (factors) to help in applying the conceptual framework. Also, a stronger link is now made between "threats" to compliance with the fundamental principles and actions that might be "safeguards." Threats, which make it difficult for the professional accountant to comply with the fundamental principles, can be created by a broad range of facts and circumstances, including interests and relationships. Safeguards are actions that effectively reduce to an acceptable level threats to compliance with the fundamental principles. The code also contains new material on professional judgment that underscores the importance of gaining an adequate understanding of the facts and circumstances in exercising professional judgment. ENHANCED CLARITYThe revised and restructured code makes the text easier to read and understand. The IESBA believes the enhanced clarity will also facilitate enforcement by professional bodies and regulators. Here's why. The code clearly distinguishes "requirements" ("R" is the first digit in the citation; for example, R510.4) from "application material" (which includes an "A" in the citation; for example, 510.4 A1) in each subject-matter area. Requirements are general and specific obligations imposed on the professional accountant to comply with the fundamental principles in that subject matter; they generally use the term shall. Application material puts requirements in context and provides factors, explanations, suggested actions, illustrations, or other guidance that helps the professional accountant comply with the code. The following summary of two code provisions illustrates the distinction between requirements and application material:
This approach, which originated in the ISAs and was applied in the AICPA Auditing Standards Board's clarity project, is familiar to many professional accountants. The IESBA also clarified "who" is tasked with performing actions in the code, which was not always obvious in the extant code. Finally, the code more clearly links the requirement to use the conceptual framework to comply with the fundamental principles and makes it crystal-clear that a professional accountant should disassociate or terminate from an employer or client engagement, or not initiate professional activities at all, when safeguards do not reduce threats to an acceptable level. STRUCTURAL CHANGESThe new code is structured as shown in the graphic "New Code's Structure." New code's structure
A professional accountant in business should apply:
The code presents subjects in self-contained portions with the consistent flow of an introduction (to provide context) followed by requirements and application material. Relevant factors help professionals evaluate the level of threat to compliance. For example, Section 240, Financial Interests, Compensation and Incentives Linked to Financial Reporting and Decision Making (240.3 A3), provides that when a professional is eligible for a profit-based bonus, which could be impacted by his or her decisions, the following factor (among others), quoted directly from the code, is relevant to evaluating the threat: "Policies and procedures for a committee independent of management to determine the level or form of senior management remuneration." STRENGTHENING INDEPENDENCETo address a key concern to regulatory bodies, the IESBA made several improvements to strengthen the code's independence provisions. For example, the code has clearer requirements and safeguards and fortified provisions for long association of personnel (including partner rotation) with an audit client. Restrictions on performing certain types of recruitment services have been greatly expanded to apply to audits of all entities, not only those considered to be "public interest entities" such as public companies or registered broker-dealers. MORE NEW GUIDANCEProfessional skepticism The code provides new material on exercising professional skepticism, which applies only in the context of performing audits of financial statements and illustrates how a professional accountant's compliance with fundamental principles supports the exercise of professional skepticism. Professional accountants in business Professional accountants in business have new provisions to look to when they are pressured to breach the fundamental principles (Section 270), as well as revised provisions for preparing and presenting financial information (Section 220). Revised Section 220 provides more comprehensive provisions for avoiding association with misleading information. Expanded and enhanced provisions on offering or accepting inducements strengthen the requirements for all professional accountants, and Part 2 of the code includes redrafted provisions relating to responding to noncompliance with laws and regulations (NOCLAR). EFFECTIVE DATESEffective dates for the new code are:
These effective dates have no bearing on the effective dates for the NOCLAR and long association provisions, which were issued prior to the new code's release and redrafted solely to conform the language. Early adoption is permitted. An IESBA working group is developing an e-code, an improved version of the current web-based code based on the revised and restructured code. The e-code will be more user friendly and provide greater ease of navigation and functionality. A BETTER CODE?The IESBA's top-to-bottom evaluation of the code led to an enhanced structure, tighter language, and more precise guidance that is now clearer. Professional accountants and those who oversee and regulate their work are better positioned to protect investors and other users of financial information, the public interest, and the accounting profession. Widespread and timely adoption and implementation by firms, national standard setters, policymakers, IFAC member bodies, and others will significantly advance the global accounting profession and support their commitment to the public interest. A forum to promote quality The objective of the IFAC Forum of Firms is to promote consistent and high-quality standards of financial reporting and auditing practices worldwide — bringing together firms that perform transnational audits and involving them more closely with IFAC’s activities in audit and other assurance-related areas. Members of the Forum of Firms must demonstrate their commitment to adhere to and promote the consistent application of high-quality audit practices worldwide, as detailed in the Forum of Firms Constitution. Currently, the Forum of Firms comprises 27 firms. Ethics for CIMA members While AICPA members follow the AICPA Code of Professional Conduct, Chartered Institute of Management Accountants (CIMA) members and students are required to abide by CIMA’s Code of Ethics. Like the AICPA Code, CIMA’s Code of Ethics is based on the IESBA Code. CIMA’s code establishes a conceptual framework that requires a professional accountant to identify, evaluate, and address threats to compliance with the fundamental principles. The conceptual framework assists accountants in complying with the ethical requirements of the CIMA Code and meeting their responsibility to act in the public interest. CIMA’s code is overseen by its Professional Standards Committee (PSC). The PSC will review the CIMA Code during the course of the next year to align it with the IESBA Code. About the author Catherine R. Allen, CPA, provides ethics and independence consultation and training through her consulting firm, Audit Conduct LLC, in Rocky Point, N.Y. Why code of ethics for professional accountants is important?Ethics require accounting professionals to comply with the laws and regulations that govern their jurisdictions and their bodies of work. Avoiding actions that could negatively affect the reputation of the profession is a reasonable commitment that business partners and others should expect.
What is the importance of code of ethics for professional accountants in the Philippines?It contains the fundamental principles with which accountants are expected to comply—integrity, objectivity, professional competence and due care, confidentiality and professional behavior.
What are the most important ethical standards for accountants?The fundamental principles within the Code – integrity, objectivity, professional competence and due care, confidentiality and professional behavior – establish the standard of behavior expected of a professional accountant (PA) and it reflects the profession's recognition of its public interest responsibility.
What are the benefits of accounting ethics to the profession?Accounting ethics help companies to maintain professional competence and reputation. They prevent companies and individuals handling accounting information from disclosing financial information, which is considered a breach of trust to the owners of the information and a breach of ethics.
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