Professional Ethics and Quality Management
The fundamental principles
The IFAC Code of Ethics sets out five principles: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. Candidates must apply the conceptual framework: identify threats, evaluate their significance, and address them through safeguards or by declining/withdrawing from the engagement. The five threat categories are self-interest, self-review, advocacy, familiarity and intimidation.
Independence
Independence has two dimensions: independence of mind (state of mind) and independence in appearance (public perception). Know the prohibitions: financial interests in the client, loans to/from the client, close family in a key position, long association (partner rotation), and provision of services that create a self-review threat (e.g. preparing the financial statements and then auditing them). Contingent fees for audit work are prohibited. Fee dependence on one client can create a self-interest threat requiring safeguards or withdrawal.
Quality management
At firm level, ISQM 1 requires a system of quality management covering governance, ethical requirements, acceptance and continuance, engagement performance, resources (human, technological, intellectual) and monitoring/remediation. At engagement level, ISQM 2 governs the engagement quality review for listed entities and other high-risk engagements. ISA 220 (Revised) places responsibility on the engagement partner for direction, supervision, review and consultation.
Traps
- Thinking safeguards can reduce any threat to an acceptable level - some threats (e.g. a direct financial interest) cannot be safeguarded and must be eliminated.
- Confusing independence of mind with appearance.
- Assuming a small fee is always acceptable - consider the proportion of total fees.
- Believing quality review replaces the engagement partner's responsibility.
Worked example
An audit partner holds shares in an audit client. This creates a self-interest threat. No safeguard can reduce it to an acceptable level, so the shares must be disposed of or the engagement declined. If a relative of a junior team member holds a non-key clerical role, a familiarity threat may be reduced by removing that member from the team.