1. 1 1 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett ETHICS, INDEPENDENCE AND CORPORATE GOVERNANCE CHAPTER 3

2. 2 2 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett Ethics is concerned with the requirements for the general well-being, prosperity, health and happiness of people. It requires knowledge of moral principles, and skills in applying them to problems and decisions. THE NATURE AND IMPORTANCE OF PROFESSIONAL ETHICS

3. 3 3 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett Teleological ethics — deal with consequences or outcomes of actions  generally, if benefits of proposed action outweigh costs, decision is morally correct. Deontological ethics — based on duties and rights  duties and rights set down in rules which must be followed. Virtue ethics — focus on personal qualities, such as integrity of the decision- maker. ETHICAL THEORY

4. 4 4 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett PURPOSE OF CODE OF ETHICS Makes explicit the values implicitly required. Indicates how members should act toward one another. Provides basis for sanctions. Code of Ethics — formal, systematic statement of rules and principles developed by community to promote its well-being and punish undermining behaviour. Therefore:

5. 5 5 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett JOINT CODE OF PROFESSIONAL CONDUCT (CPC) - I The ICAA and CPA Australia have jointly issued a code of professional conduct (CPC). Failure to observe expected standards can result in disciplinary procedures and sanctions. Members are expected to comply with the spirit as well as the letter of the code.

6. 6 6 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett JOINT CODE OF PROFESSIONAL CONDUCT (CPC) - II Mandatory for all members Six sections Most important sections for auditors are: B:Fundamental Principles F:Professional Statements

7. 7 7 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett CPC: SECTION B: FUNDAMENTAL PRINCIPLES 1.public interest 2.integrity 3.objectivity 4.independence 5.confidentiality 6.compliance with technical and professional standards 7.professional competence and due care, and 8.ethical behaviour Eight fundamental principles contained in the codes of ethics:

8. 8 8 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett APPLYING ETHICS Sound ethical decision-making is dependent on: Knowledge of the basic principles on which moral values and rules are based; Competence in decision-making; and The ability to choose appropriate policies and decision procedures in different situations.

9. 9 9 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett ETHICAL DECISION MODELS Three main models: American Accounting Association Model Laura Nash Model Mary Guy Model

10. 1010 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett CORPORATE GOVERNANCE corporate strategy; succession planning; integrity of internal control structure; and remuneration policy. System by which companies are directed and controlled. Concerned primarily with management and stewardship issues:

11. 1111 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett PARTIES IN CORPORATE GOVERNANCE Board of directors Management Auditors

12. 1212 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett GROUPS ADVOCATING IMPROVED CORPORATE GOVERNANCE Business community Investors Australian Stock Exchange (ASX) Australian Securities and Investments Commission (ASIC) CPA Australia and ICAA

13. 1313 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett AUDIT COMMITTEES Sub-committee of board of directors which should consist mainly of non-executive directors. Auditor’s major dealings with the board of directors are normally through this sub- committee. Important component of corporate governance, with over 80% of listed companies in Australia having an audit committee.

14. 1414 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett FUNCTIONS OF AUDIT COMMITTEES assist the board of directors; add to credibility and objectivity of financial reports; enhance auditor independence and effectiveness; consider appropriateness of accounting policies; consider policies for unethical or illegal activities; consider internal and management controls; and communication link between management, board and auditors.

15. 1515 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett WHISTLEBLOWING IN AUSTRALIA s. 311 of the Corporations Act may impose a responsibility on auditors to inform the ASIC of any contraventions of the Act discovered in the normal course of their duties which cannot be remedied by comment in the audit report or by bringing the matter to the attention of directors. Arguably, this places an obligation on the auditor to whistleblow.

16. 1616 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett WHISTLEBLOWING DEFINED A person ‘who discloses information he (or she) reasonably believes evidences a violation of any law, rule, or regulation, or mismanagement, a gross waste of public funds, an abuse of authority, or a substantial or specific danger to public health or safety’ is a whistleblower. (United States Civil Service Reform Act of 1978).

17. 1717 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett AUDITOR’S RESPONSIBILITIES REGARDING WHISTLEBLOWING auditor does not have to actively look for contraventions of the Corporations Act. decision to blow the whistle not easy for auditor. AUS 210 also provides guidance.

18. 1818 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett INDEPENDENCE a very key characteristic of an audit or assurance service provider. for auditor to add credibility to financial report or other subject matter, needs to remain independent. one of the eight fundamental ethical requirements of CPC. test for independence is reasonable person test – would a reasonable person having access to all facts consider that the auditor was independent?

19. 1919 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett INDEPENDENCE — CORPORATIONS ACT 2001 s. 324 (1) shall not consent to appointment as auditor if:  level of indebtedness > $5,000  officer, partner, employer or employee. s. 329, appointment until death, removal or resignation. Removal — requires resolution of the company at a general meeting of which special notice is given. Resignation — must have consent of the ASIC.

20. 2020 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett INDEPENDENCE — ETHICAL REQUIREMENTS Emphasises both: perceived independence — how others will view the auditor; and actual independence — state of mind of the auditor. Can the auditor actually eliminate bias and personal interest from their decisions, and not succumb to any pressures or influences.

21. 2121 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett RECENT DEVELOPMENTS IN AUDITOR INDEPENDENCE Ramsay Report (Aust) — issued October 2001. IFAC independence rules, adopted in Australia in CPC F1. Sarbanes-Oxley Act (USA) 2002. Joint Committee of Public Accounts and Auditors (Australia) 2002. Corporate Law Economic Reform Program (CLERP 9) (Australia) 2002.

22. 2222 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett CPC F1: THREATS TO INDEPENDENCE Self-interest threats: auditor could benefit from a financial interest in the client. Self-review threats: auditor could have to re-evaluate their own work. Advocacy threats: auditor could promote the audit client’s point of view and compromise objectivity. Familiarity threats: auditor may become too sympathetic to the client’s interests. Intimidation threats: auditor may be deterred from acting objectively by actual or perceived threats from client.

23. 2323 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett CPC F1 SAFEGUARDS Safeguards fall into three broad categories. For an auditor these are: Safeguards created by the profession, legislation or regulation: education, professional standards, monitoring and disciplinary processes, and inspections and reviews. Safeguards within the audit client: competent employees, corporate governance structures. Safeguards within the audit firm: quality control, policies and procedures. The safeguards are aimed at reducing or resolving circumstances that pose threats.

24. 2424 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett MAJOR IMPEDIMENTS TO AUDITOR INDEPENDENCE Auditor employment relationships Financial and business relationships Provision of non-audit services, including:  preparing financial reports  taxation  internal audit  design of systems  legal services  corporate finance

25. 2525 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett SUGGESTIONS FOR IMPROVING AUDITOR INDEPENDENCE Establishment of a Public Oversight Board, to reduce the perception of auditors setting standards for their own profession Strengthening the role of audit committee Rotation of auditors Audit firm independence boards Client policies, such as restricting other services provided by audit firm

26. 2626 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett FEE DETERMINATION Audit fees should be commensurate with service provided. Thus, should reflect time taken to audit, and knowledge, skills and expertise required. Auditor should not enter into fee arrangements that may compromise independence. Fees for a period should not be dependent on fees from provision of future audits or other services.

27. 2727 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett OBTAINING CLIENTS Advertising, publicity and solicitation are permitted provided they are not false, misleading, deceptive or otherwise reflect adversely on the profession. Competing for prospective clients through tenders is now quite common. Auditors should be careful of firms that are opinion shopping.