2024 Professional Ethics Update
What are professional ethics?
Professional ethics refer to the moral principles and rules that guide individuals in their professional lives, particularly within regulated professions like accountancy. These ethics encompass both principles, which provide a general framework for making ethical decisions, and rules, which offer specific guidance on appropriate conduct in various situations. Together, they ensure compliance with ethical standards and codes, and foster a broader understanding of what constitutes ethical behavior in the professional context.
A key aspect of professional ethics is the duty to act in the public interest, which sets professions apart from regular business sectors. This responsibility means that professionals, such as accountants, must prioritize the interests of the public and other stakeholders over personal or narrow business interests. Professional ethics enhance the credibility and trustworthiness of the services provided by accountants, distinguishing them from individuals who are not bound by such standards. When ethical breaches occur, especially in cases of corporate failures, the accountability and integrity of the professionals involved are called into question.
Ethical behavior in professions often involves the exercise of professional judgment and skepticism, especially in fields like audit and assurance. Accountants must carefully balance judgment, law, and standards, while being vigilant against biases. Prudence and professional skepticism are critical, requiring substantial evidence before forming conclusions, rather than defaulting to distrust.
A strong ethical culture within firms is essential for fostering ethical behavior. Such a culture should support ethical decision-making and whistleblowing, where staff can report ethical breaches without fear of retaliation. Conversely, an environment that rewards risk-taking and prioritizes self-interest can undermine ethical standards. A robust commitment to ethics, even when it conflicts with the firm’s immediate self-interest, is crucial for maintaining professional integrity and public trust.
Sources of Ethical Principles and Rules for Accountants
Accountants' ethical principles and rules are derived from three main sources: the IESBA Handbook of the Code of Ethics for Professional Accountants, the codes or rules of relevant professional bodies such as ICAEW and ACCA, and the Financial Reporting Council (FRC) in relation to audit work. Additionally, ethical guidance can also be found in a firm’s internal policies and procedures, which may incorporate legal requirements like the Bribery Act and the Money Laundering Regulations. While these legal requirements are not specifically about ethics, they often align with ethical practices.
The IESBA Code is a fundamental source of ethical guidance for accountants globally. It is structured into three parts: general application, guidance for professional accountants in public practice, and guidance for those in business. While it does not specifically address auditors, additional audit-specific requirements are covered by the FRC Ethical Standard in the UK.
Professional body codes, such as those from the ICAEW and ACCA, are based on the IESBA Code and are binding on all members, affiliates, and relevant employees of member firms. These codes require adherence to ethical principles in all professional and business activities, ensuring a broad scope of compliance. Although the ICAEW and ACCA codes are largely aligned, members should review the specific requirements of their respective professional bodies.
For auditors, the FRC Ethical Standard provides additional, specific guidance, particularly focusing on auditor independence and preventing conflicts of interest. The latest update, effective from December 2024, introduces stricter rules, including a whitelist of permissible non-audit services for UK Public Interest Entities (PIEs), bans on certain services like internal audits and contingent fee arrangements, and a reinforced focus on auditor independence from the perspective of public interest stakeholders.
The Fundamental Ethical Principles for Accountants
Professional accountants are guided by five fundamental ethical principles: Integrity, Objectivity, Professional Competence and Due Care, Confidentiality, and Professional Behaviour. These principles ensure that accountants uphold the highest standards in their professional and business relationships, fostering trust and integrity in their actions.
Integrity requires accountants to be honest, straightforward, and fair in all professional interactions. It emphasizes compliance with ethical standards and regulations, maintaining public trust, and safeguarding confidentiality unless disclosure is required by law or in the public interest. Threats to integrity often stem from self-interest, as seen in scandals where individuals exploited positions for personal gain, highlighting the need for constant self-scrutiny and ethical vigilance.
Objectivity compels accountants to exercise impartiality and avoid bias, conflicts of interest, or undue influence. This principle underscores the importance of maintaining professional judgment, even under pressure, ensuring decisions are made fairly and based on merit.
Professional Competence and Due Care obliges accountants to maintain the necessary skills and knowledge to provide competent services. Accountants must stay current through continuous professional development (CPD) and should only accept work they are qualified to perform. This principle emphasizes diligence and adherence to technical standards in all professional activities.
Confidentiality mandates that accountants protect information acquired during professional engagements, refraining from unauthorized disclosure or using it for personal gain. Accountants must respect confidentiality unless legally required to disclose information, ensuring client and employer trust remains intact.
Professional Behaviour requires accountants to comply with relevant laws and regulations and to avoid actions that could discredit the profession. This principle extends to honest marketing practices, responsible use of social media, and overall conduct that aligns with the profession’s reputation. Missteps, such as offensive comments or unprofessional behavior, can result in disciplinary actions and damage to one’s standing in the profession.
Threats and Safeguards in Ethical Accounting
Accountants must uphold ethical principles by identifying potential threats and implementing safeguards to mitigate or eliminate them. Threats to ethical compliance are categorized as self-interest, self-review, advocacy, familiarity, and intimidation. Understanding these threats and applying appropriate safeguards is crucial in maintaining ethical standards in professional accounting.
Categories of Threats:
Self-interest threats arise when personal or financial interests conflict with professional duties, such as having a financial stake in a client or being overly dependent on fees from one client.
Self-review threats occur when an accountant evaluates their own work, which could compromise objectivity, such as auditing accounts they prepared.
Advocacy threats involve situations where the accountant promotes a client's position, potentially compromising impartiality, such as acting as an advocate in litigation.
Familiarity threats stem from close relationships with clients, which can lead to a loss of objectivity. Examples include accepting significant gifts or working with the same client for many years.
Intimidation threats involve pressure from clients or employers, which can impair an accountant's judgment, such as threats of dismissal or legal action.
Safeguards Against Threats:
Safeguards are measures that can help mitigate threats to ethical principles. These safeguards can be at the profession level, firm level, or specific to individual engagements.
Profession-wide safeguards include education and training requirements, professional standards, regulations, and external reviews that provide a foundation for ethical behavior.
Firm-wide safeguards involve internal policies and procedures, leadership commitments, disciplinary mechanisms, and whistleblowing channels to ensure ethical compliance within the firm.
Engagement-specific safeguards include reviewing work by uninvolved parties, consulting independent experts, rotating staff to avoid familiarity, and discussing ethical concerns with governance bodies.
In some cases, threats cannot be mitigated adequately by safeguards alone. In such scenarios, more drastic measures may be necessary, such as altering the engagement terms, declining certain services, or even resigning from the client relationship to maintain ethical integrity.
ICAEW Code: Professional Accountants in Public Practice
The ICAEW Code, aligned with the IESBA Code, includes a section specifically for professional accountants in public practice (Sections 300-399). This section provides guidance on applying the threats and safeguards model to their work, while also requiring compliance with Part 4A (independence for audit and review engagements) and Part 4B (other assurance engagements).
Key Threats in Public Practice:
Self-interest Threats:
Financial interests in clients, low fee quotes that affect service quality, close business relationships, misuse of confidential information, and discovering errors in past services.
Self-review Threats:
Evaluating systems implemented by the accountant, using own-prepared data in assurance engagements.
Advocacy Threats:
Promoting client interests or acting as an advocate in litigation, lobbying for client-related legislation.
Familiarity Threats:
Close relationships with client personnel, long association with audit clients.
Intimidation Threats:
Threats of dismissal or non-promotion based on disagreement over professional matters, accepting significant gifts, or feeling pressured to agree with clients' judgments.
Application to Specific Scenarios:
Conflicts of Interest (Section 310):
Situations include advising competing clients, representing opposing parties, or advising on transactions where personal interests exist. Professional judgment is needed to determine if disclosure or consent is required.
Professional Appointments (Section 320):
Addresses threats from client involvement in illegal activities and the process of handling changes in appointments, including communication with predecessor accountants.
Second Opinions (Section 321):
Guidance on providing second opinions, including the importance of confirming opinions in writing and communicating with the original accountant where possible.
Fees and Remuneration (Section 330):
Risks from low fees, contingent fees, referral fees, or commissions that can create self-interest threats.
Inducements (Section 340):
Includes guidance on gifts and hospitality, emphasizing the importance of adherence to the Bribery Act and avoiding improper inducements.
Custody of Client Assets (Section 350):
Highlights fiduciary responsibilities and references to ICAEW Client Money Regulations and anti-money laundering guidance.
Responding to NOCLARs (Section 360):
Covers responsibilities concerning fraud and non-compliance with laws and regulations, aligning with auditing standards ISAs (UK) 240 and 250.
CPD Requirements (Effective November 1, 2023):
Professional accountants must determine their applicable CPD category based on their work type, with specific minimum CPD hours required, including verifiable activities.
CPD includes a broad range of learning activities relevant to the role, such as courses, podcasts, problem-solving, and developing soft skills.
Verifiable CPD requires objective evidence of completion, such as records of attendance, peer discussions, expert consultations, and research.
This comprehensive guidance ensures that professional accountants in public practice maintain ethical standards and fulfill their responsibilities effectively.