Proposed Revised Code of Ethics
An Exposure Draft issued by the International Federation of Accountants
Comments from ACCA
November 2003
Executive Summary
The confidence of investors and the public is of key importance for capital
markets to operate effectively and efficiently. The interests of stakeholders, who rely on information in the public domain, must be protected. ACCA believes that any system of regulation of the accounting and auditing profession must be transparent and proportionate, and must reflect global best practice. It must also rise above vested interests which have undermined confidence in the past. ACCA welcomes, therefore, this opportunity to respond to the exposure draft issued by the International Federation of Accountants (IFAC) Proposed Revised Code of Ethics for Professional Accountants (the Code).
ACCA believes that:
• Ethical standards should be principles-based as this approach is best suited to a rapidly changing business environment; legalistic, rules-based standards encourage creative, loophole-based avoidance ;
• The fundamental ethical principles of � being an accountant ' " being an accountant " should be common to all accountants irrespective of the nature of their work
• Global problems need global solutions. ACCA welcomes, therefore, the elevation of the Code to a �standard' " standard " to promote the necessary harmonisation of global markets ;
and
• For the Code to meet the expectations of being a �standard' " standard " , it must be sufficiently robust. The Code needs to meet this challenge and demonstrate to the outside world that a principles-based code is best suited to protect the interests of stakeholders . To that end, it is vital that the Code works properly.
General Comments
ACCA fully supports the principles-based approach and welcomes the move to place the whole of the Code on a threats and safeguards footing. This will provide a framework for analysing the threats and safeguards which accountants can use to determine appropriate courses of action. It is best suited to the rapidly changing business environment as it allows for a the multitude of circumstances which may arise in practice. As such, it best serves the requirements and interests of both the general user and the financial markets.
ACCA also welcomes the elevation of the Code to a "standard". It is important, therefore that the whole of the Code works properly. Its status as a standard means that the Code will be much more important around the world. Major jurisdictions are acting to review existing practices so that they can maintain and enhance market confidence. ACCA is concerned that Nevertheless, uncoordinated action by national bodies, however well motivated, will not promote the necessary harmonisation of global markets. ACCA welcomes , therefore, the elevation of the Code to a �standard' . As a standard, the Code will be much more influential around the world. ACCA also welcome s the increased guidance for professional accountants in business.
ACCA has major concern s ed , however, about the usefulness and usability of the revised Code as currently drafted. ACCA believes that In particular, whil e st the Code is has an appropriate ly scope d , very much more work is needed on the its structure. Section 8 of the Code Independence for Assurance Engagements is in has a useable format which can be (and has been) recommended to regulators , such as the International Organisation for Securities Organisations (IOSCO) and European Commission as a useable standard. The remainder of the Code in it current form is clearly not of the same quality. It could not be adopted as it stands.
The Code needs to address the question of its usefulness. There needs to be expectation management over the current draft of the Code to avoid disappointment.
ACCA also welcomes the increased guidance for professional accountants in business.
Comments on Specific Questions
Our comments on the specific questions posed in the Explanatory Memorandum to the exposure draft are set out on the following pages.
Q (a) Is the structure of the proposed revised Code understandable and useable?
ACCA believes that for the Code to be useful, it needs to be user-friendly and easy to apply in practice. The structure of the proposed revised Code is, however, both difficult to understand and not useable as currently drafted. The three-part structure fails to serve the needs of the user.
There is a risk that these parts will be used as stand-alone documents, which they are not meant to be. ACCA believes that Code's structure should be such that much of the material currently in Parts B and C be incorporated into Part A leaving only those items of particular significance to professional accounts in business or public practice as �bolt-ons' "bolt-ons" . Certainly much of what is in Part C could apply to all professional accountants.
It may therefore be helpful to construct the Code differently in that Part A sets out the high level principles and explains the threats and safeguards framework leaving the other parts to address only specific circumstances. This would mean that the other parts address the specific circumstances for professional accountants in public practice and professional accountants in business in terms of how the framework can be applied to eliminate or reduce the threats to compliance with the fundamental principles. This would also avoid a perception that Part A is too much public practice oriented, as is currently the case in the proposed Code.
By restructuring the Code in this way, it will also provide a platform to assimilate Section 8 in to the Code as a whole, thus removing much of the material which is repeated in Section 8.
ACCA also believes that the current structure only fuels the scope for inconsistency in approach. By way of an example Part B paragraph 1.3 does not discuss the responsibilities of professional accountants in public practice whereas Part C paragraph 1.3 does so for professional accountants in business. Similarly, paragraphs 1.6, 1.14 and 4.4 of Part B and 1.9, 1.17 and 6.9 of Part C refer to Part A whereas in all other areas of Parts B and C relevant aspects of Part A are repeated in full.
The Code should be sufficiently clear so that professional accountants know what to do in practice. It should also allow a reasonable and informed third party to assess the proper application of the principles. To this end the text needs to be kept short and simple.
In its current form, the proposed revised Code is not very helpful as it lacks clarity. ACCA believes the Code would benefit from the use � black ' "black" and � grey ' "grey" lettering as this will aid clarity by clearly identifying the principles which need to be observed.
Q (b) Is the explanation of the framework approach sufficiently clear?
There is only a limited explanation of the framework approach in the revised Code. Part A would benefit if much of the explanation of the framework approach in Section 8 is were incorporated into it.
Part A should explain in greater detail how the principles need to be applied, what questions need to be asked and what principles are at risk.
The Code should clearly explain the difference between eliminating a threat and reducing it to an acceptable level. In situations where there are no safeguards to reduce or eliminate a threat the only option is a prohibition. As such the prohibition is not a safeguard. The resignation or declining the appointment is a means of changing the circumstances that gave rise to the threat rather than a safeguard itself.
ACCA is also concerned about the � should and should not ' "should and should not" style which is used in Code. ACCA believes that such a style is not suited to a Code which is meant to be principles based. ACCA is concerned that the tendency towards more and more detailed underlying rules undermines the robustness of the principles-based approach. For example paragraph 2.2 of Part A is phrased as a rule rather than as a principle. Care should be taken that principles do not become rules; professional accountants need to be able to use their own judgement.
Q (c) Are the fundamental principles sufficiently articulated?
ACCA believes the fundamental principles are sufficiently articulated and defined.
We would however point out that the definition of objectivity in the definitions section is not in line with the definition in paragraph 1.14 of Part A. Additionally, we cannot see why only the definition of objectivity is included in the definitions section but none of the other fundamental principles. We see little point including a definition of the fundamental principles in the definitions section when these are sufficiently defined in Part A.
Q (d) Does the guidance on specific circumstances contained in Parts B and C cover the appropriate activities and relationships in sufficient depth?
The guidance on specific circumstances contained in Parts B and C covers adequately the common activities and relationships that give rise to threats which may compromise compliance with the fundamental principles adequately . However, ACCA is concerned that where the same circumstance is covered (for example inducements), there is inconsistency in approach.
Q (e) In certain circumstances, the "ultimate" safeguard has been identified as a prohibition. Where such prohibitions have been identified, is the analysis appropriate?
ACCA believes that where the � ultimate ' "ultimate" safeguard has been identified as a prohibition, the analysis is appropriate.
Nevertheless, ACCA considers that where the threats cannot be eliminated or reduced to an acceptable level through the application of safeguards, it should be clearly stated that professional accountants should decline the engagement. To that end words such as � may ' �may� , �try' �try� , �consider' �consider� should be avoided where a �prohibition' �prohibition� is identified, for example in paragraph 4.8 of Part B.
Q (f) The IFAC Ethics Committee is considering an implementation date of January 1, 2006 for the proposed revised Code. Is this appropriate?
ACCA considers the implementation date of 1 January 2006 as appropriate. However, given that International Standards on Auditing must be applied in Europe by 2005 coupled with the fact that Section 8 applies to reports for the period ending 31 December 2004 , the Code should encourage early adoption .
Other Comments
In addition to our responses to the specific questions raised in the Explanatory Memorandum to the revised Code, ACCA also has the following comments.
The definition of � assurance engagement ' "assurance engagement" should as far as is possible tie in with final standard on Assurance Engagements. The definition may nevertheless, need to include some explanation regarding its scope insofar as it relates to the Code. ACCA appreciates that the Code does not take instruction from IAASB and the Ethics Committee will consider any changes to definitions, but a common definition would aid clarity.
Similarly, it would also be helpful if there is a common definition of �assurance team' "assurance team" . Currently, the Code considers �those who provide quality control for the assurance engagement' "those who provide quality control for the assurance engagement" to be part of the assurance team. This is not the case insofar as ISA 220 is concerned. Again, a common definition would aid clarity.
Throughout the Code reference is made to the potential threats posed where close or immediate family members are concerned. It should be made clear that any assessment of the threats needs to be based on information which the professional accountant can reasonably be expected to be aware of.
At paragraph 1.12 of Part A there is a discussion on inadvertent violations of the Code. ACCA believes a fuller analysis of the situations where this can occur is required. For example a breach of confidentiality is a breach whether inadvertent (which would imply a lack of due care) or on purpose (which would imply a lack of integrity). Merely attempting to adapt a Section 8 situation does not work.
Section 3 of Part A, Objectivity, similarly needs further analysis to make it applicable to all professional accountants. Again simply adapting a public practice situation fails to take into account the needs of the professional accountant in business. For example, a professional accountant in business cannot always be independent of his/her employer but would nevertheless need to be objective and act with integrity.
It is suggested at paragraph 1.16 of Part A that there are only two broad categories that safeguards fall into. The Code ignores the specific safeguards which can be implemented by the individual. Similarly, the Code fails to make a distinction between strategic safeguards that professional accountants must have regard to and the specific ones which can be implemented. The Code would therefore benefit from a fuller analysis of what safeguards exist and which ones can actually be applied.
At paragraph 1.18 of Part B the fact that the client has competent employees to make managerial decisions is considered a safeguard. ACCA questions whether this necessarily constitutes a reliable or adequate safeguard. It is possible that even competent employees may be unwilling to make important strategic decisions.
Similarly, at paragraph 2.2 of Part B, � complying with relevant laws, regulations and best practice ' "complying with relevant laws, regulations and best practice" is considered to be a safeguard. Professional accountants are expected to comply with relevant laws and regulations and follow best practice. ACCA therefore questions its use as a specific safeguard in this context; it is a general safeguard.
At paragraph 2.10 of Part B, ACCA questions the adequacy of the safeguards suggested by the last two bullets as there is no action implied. The bullets needs to explain why these would be effective safeguards.
Contingent fees referred to in paragraph 6.3 of Part B should be defined. This could be by way of a footnote using the definition in Section 8. Alternatively, the definition of �contingent fees' �contingent fees� could be included in the definition section. At the very least paragraph 6.3 should refer to the appropriate paragraph reference in Section 8.
In response to question (d), ACCA suggested that where a prohibition is identified, it should be clearly stated. Similarly where a threat is identified, it should similarly be clearly stated. Again words such as � may ' �may� , �try' �try� , �consider' �consider� should be avoided. For example at paragraph 6.5 of Part B the use of the word �may' �may� is not appropriate because accepting referral fees or commissions does give rise to a self-interest threat.