1. Professional Ethics The Duties of an Accountant. The Accounting Profession has the following features: An established body of knowledge Organized bodies to exercises its authority Community sanction concerning its control over memberships and accreditation A high image in society through professional culture. Professional Culture Every profession operates through a network of groups such as professional firms, universities and professional bodies that act a focus of common interests and aims. It has values, norms and symbols of practice. It includes the maintenance of: Competence in the field of expertise and knowledge Integrity in client dealings Objectivity in offering of services Confidentiality in client matters Discipline over member who do not discharge the duties according to public expectations 1

2. Professional Ethics The Nature of Ethics Ethics provides a framework of beliefs and a reasoned and systematic analysis of decisions, in order to help individuals acquire the skills and insights necessary for ethical decision making. Such individuals are able to: Make competent decisions by learning, practice, trial-and-error and life experiences Determine whose interests are at stake and identify one’s obligations Identify problems clearly Identify and prioritize the ethical principles relevant to a specific problem Take account of experience and consider a variety of possible options for decision and action Act with resolve an d in pursuit of clear, achievable objectives and carry our the action objectively through to its conclusion Professional Ethics and Ethical Codes for Accountants Professional ethics extend beyond moral principles. They include standards of behavior. The following fundamental principles apply: Integrity (the professional accountant should be straightforward and honest) Objectivity (should not allow bias, conflict of interest or undue influence to override professional or business judgments) Professional competence and due care (must have knowledge and skill. Should act diligently and according to professional standards) Confidentiality (should respect information acquired during business conduct) Professional Behavior (should comply with relevant laws and regulation and avoid acts discrediting the profession) 2

3. Professional Ethics Professional Independence Independence is the cornerstone of the auditing profession. Without it, there is lack of impact and credibility. Some key areas of risk and examples of guidance: Fees: There are limits to recurring fees. For UK (10% for plc’s and 15% for private companies for audit and other services) Fees: Should be collected promptly and in accordance with engagement letter. Otherwise, they can be considered a loan. Actual/threatened litigation: Causes a breakdown of the client/auditor relationship; the auditor should resign. Family and other personal relationships: Should be avoided. Financial interests in audit clients: Should not be held; the auditor should dispose shares of his client at earliest opportunity. Loans and guarantees: Should be neither given nor received. Gifts and hospitality: Should be accepted only if on normal terms and the benefit is clearly insignificant Long association of senior personnel: This should be rotated. In the UK this is limited to 5 years. Recruitment services: Where assistance is required (e.g. appointment of financial director) the client should decide. Employment with the customer: A two year gap is required. Provision of nonaudit services to audit clients: May be undertaken, depending on the nature of service provided. Care is needed and professional guidance is necessary. 3

4. Professional Ethics Fraud, Illegal Acts and Money Laundering Detection of fraud and error was the original primary objective of audit. Although currently this has been replaced by the “true and fair” view of the financial statements, several users still consider fraud detection among the primary goals of the audit. Fraud: An intentional act by management, governors, employees or third parties, involving use of deception to obtain an unjust or illegal advantage. Fraudulent financial reporting: Falsification or alteration of records or other documents Willful misrepresentation or omission of transactions or the entity’s state of affairs Intentional misapplication of accounting policies. Fraudulent misappropriation of assets: False or misleading. documents or records in order to conceal missing or devalued assets. Fraud detection The auditor must be alert to the possibility of fraud and assess the risk it might occur. The auditor should consider: Incentives Opportunities Rationalizations 4

5. Professional Ethics Incentives: Threats to profits or financial stabilityIncreased competition Changes in technology Declining demand Negative cash flows Changes in regulations Pressure to meet third party expectationsExpectations of investment analysts Need to raise additional funds Threat to persona finances of managementPerformance related pay Significant financial interests Opportunities Nature of industry or its operationsRelated party transactions Accounting estimates significant in financial recording Management dominated by an individual or small group Ineffective monitoringUltimate ownership unclear Complex organizational structureUnduly complex structure High turnover of senior management Poor interim reporting structure Deficient controlIneffective accounting. IT or internal audit staff 5

6. Professional Ethics Rationalization: Those involved in a fraud are able to rationalize fraudulent act as being consistent with their personal code of ethics. Some people possess an attitude, character or set of ethical values that allows them to knowingly and intentionally commit a dishonest act. Poor communication of entity’s ethical values Known history of violation of laws and regulations Excessive interests in maintaining share price or meeting analysts’ expectations Failure to correct know control weaknesses Strained relationship between management and auditor When there is an assessed risk of materially misstated financial statements due to fraud, auditors should pay particular attention to: Revenue recognition Management estimates Unusual transactions 6

7. Professional Ethics Noncompliance with Law and Regulations Auditors may not always possess the knowledge to detect illegal acts. There are three principal categories of illegal act: Form content and preparation of financial statements Having a fundamental effect on operations, a branch of which would jeopardize the viability of the entity Equal employment opportunity, occupational health and safety and environmental protection In presence of a material irregularity, the auditors must consider matters such as: The effect on financial statements or audit report Evaluate the internal control, the possibility of recurrence of the same of similar irregularities and the need for further audit procedures Management’s proposed actions to prevent recurrence Public interest implications Money Laundering This includes all forms of handling or possessing criminal property (criminal activities, terrorism, tax evasion, bribery or corruptions etc). This could be quite complex and involve operations in several countries and jurisdictions. The auditor should report any suspicious action. The auditor must report any suspicious actions. 7