top stories

Share

Comments from ACCA
October 2008

introduction

(i) ACCA (The Association of Chartered Certified Accountants) welcomes the opportunity to comment on the proposed revisions to the Code of Ethics for Professional Accountants (the Code). ACCA is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management.

We support our 122,000 members and 325,000 students throughout their careers, providing services through a network of 80 offices and centres. ACCA works to achieve and promote the highest professional, ethical and governance standards and advance the public interest.

general comments

(ii) ACCA supports the use of a principles-based approach to ethics for professional accountants, the advantages of which have been enumerated by many over recent years. ACCA believes that professional accountants are in a unique position because of their observance of a generally accepted international code of ethics. The influence of the ethical behaviour of accountants is felt in many circumstances, not least in counterbalancing what many regard as the root cause of the current economic turmoil often referred to as 'the credit crunch'.

Unethical behaviour is not constrained by rules, which instead encourage an avoidance culture. ACCA is gravely concerned, therefore, that at a time when the accountancy profession should be championing ethical behaviour, the International Ethics Standards Board for Accountants (IESBA) is proposing changes, from revised drafting conventions, that will reverse the advances in the Code over the last decade and undermine the principles-based approach to professional ethics.

The relationship between the conceptual framework and Parts A and B of the Code

(iii) The draft Code now refers to Parts B and C as containing 'specific requirements' (paragraph 100.11), or 'specific guidance' (paragraphs 280.2, 290.157 and 291.141), or it simply says that they 'describe specific circumstances'. There must be more consistency in this respect in order to provide clarity, and in view of the fact that the Code is principles-based, use of the term 'specific requirement' must be avoided. For the purpose of this consultation response, we shall refer to Parts B and C as containing 'guidance'.

(iv) The extant position is that the conceptual framework is to assist a professional accountant to identify, evaluate and respond to threats to compliance with the fundamental principles (paragraph 100.6). It is our view that there are three fundamental messages that must be clearly conveyed throughout the Code:

• A professional accountant shall not wilfully breach any of the fundamental principles.
• A professional accountant shall apply the conceptual framework when a situation is identified that could lead to an incentive or a compulsion to breach one or more of the fundamental principles.
• A professional accountant may obtain guidance from Parts B and C of the Code, in the form of examples that will be relevant, to some extent, when a specific situation encountered by the professional accountant is similar to a situation set out in the guidance.

By using the word 'shall' in an identical way, whether it is in connection with the fundamental principles, the conceptual framework or the guidance, the proposed Code elevates the guidance to the same level as the principles and the conceptual framework. This is fundamentally wrong.

(v) It is clearly the stated intention of the IESBA that the Code should follow a principles-based approach, and ACCA is wholly in favour of such an approach. The Board's drafting conventions project has the objective of enhancing the clarity and understandability of the provisions in the Code, and therefore, the Code should convey throughout the fact that the conceptual framework is paramount when the professional accountant encounters threats to the fundamental principles. This is clearly stated in the explanatory memorandum to the Exposure Draft, which states on page (v) that 'in all cases, the objective to be achieved, as outlined in the conceptual framework, is for the professional accountant to comply with the fundamental principles'. However, this situation is not reflected in the proposed paragraph 100.12. Instead, Parts B and C would become rules-based.

(vi) We support the work undertaken by the IESBA that attempts to clarify the requirements of the Code by way of using language that is more assertive. However, Parts B and C of the Code provide guidance in specific situations, and it is impossible to reconcile the prescriptive language used in these sections ('shall' instead of 'should') with the fact that Part A contains the overriding requirements of a principles-based approach.

Form of presentation of requirements

(vii) The effect of many of the proposed changes simply do not meet the objective of providing clarity. In some cases, they provide less clarity whilst, at the same time changing the status of guidance to requirements, or general principles to specific requirements. It appears that the full impact of the so called 'clarity' changes has not been appreciated. When a general principle becomes a specific requirement, there must be precision in language, so that there can be certainty regarding the requirement, and that requirement must be achievable. For example, paragraph 100.8 now expresses a specific requirement as follows:

'A professional accountant shall evaluate any threats to compliance with the fundamental principles when the professional accountant knows, or could reasonably be expected to know, of circumstances or relationships that may compromise compliance with the fundamental principles.'

This requirement is unreasonably onerous as it refers to any threats that may compromise compliance. I n our view a comprehensive review of the drafting is necessary to eliminate similar problems.

specific questions

1. The IESBA is of the view that identifying a requirement by the use of the word "shall" clarifies the Code and appropriately brings the language in line with that adopted by the IAASB. Do you agree? If you do not agree please provide an explanation.

Generally, we agree that the use of the word 'shall' provides greater clarity when conveying the importance of complying with the fundamental principles and, therefore, applying the conceptual framework. However, simply replacing all instances of the word 'should' with 'shall', throughout the Code, would be counterproductive. It would make the Code more prescriptive and in some situations incorrect.

Although care has to be exercised when using the word 'shall' in Part A of the Code (see (vii) above), it would generally serve to improve the clarity in Part A. However, it cannot be acceptable in Parts B and C of the Code, as these Parts only contain guidance in support of Part A. For reasons already explained, the contents of Parts B and C must be referred to as 'specific guidance', rather than, for example, 'specific requirements'. Part A must explain that, where the specific guidance closely resembles a situation being encountered by the accountant, the accountant must have a good reason if the guidance is not to be followed, and it must also explain those circumstances in which departure from the guidance is required . We suggest this is also made clear in the introductions to Parts B and C.

The significance of bringing the language in line with that adopted by the IAASB is questionable, as t he revised structure in the International Standards of Auditing (ISAs) is better suited to ISAs (ie standards largely concerned with procedure), rather than the Code (which is more concerned with behaviour).

2. The IESBA is of the view that separately presenting the objective to be achieved, the requirements designed to achieve that objective, and the application guidance as in the ISAs would not further improve the clarity of the Code. Do you agree? If you do not agree, please provide an explanation and an example of the separate presentation that you recommend.

Although the exact same format as in the ISAs is not appropriate to the Code, the logic behind the IAASB structure should not be dismissed. Such a change was introduced to improve the understanding of users of the different types of material in the ISAs. The Code also contains different types of material and the new drafting conventions in the exposure draft currently fail to properly differentiate between them.

In its clarity project, the IAASB has only identified requirements that were already known as such, and only 'elevated' guidance in extant ISAs that was more in the nature of requirements and that was expected to be applicable in virtually all audit engagements. The majority of guidance retained that status as 'application and other explanatory material'.

In a principles-based code, which the Code is asserted to be, the starting point must be that the objective of the detailed guidance is to demonstrate the application of the conceptual framework. The framework must always prevail, thereby safeguarding the fundamental principles. It must be made clear that compliance with the detail is a secondary matter, as it is only illustrative guidance.

3. Question 3 - The IESBA is of the view that in exceptional and unforeseen circumstances that are outside the control of the professional accountant, the firm or employing organization, and the client, the application of a specific requirement in the Code may result in an outcome that a reasonable and informed third party would not regard as being in the interest of the users of the output of the accountant's professional services. Therefore, the Board is proposing that the Code include a provision that would permit a professional accountant, in such circumstances, to depart temporarily from that specific requirement. This would not be the same as provisions in the Code that address situations in which a professional accountant has inadvertently violated a provision of the Code. The departure would only be acceptable if all of the conditions set out in paragraph 100.11 are met.

a. Do you agree that the Code should contain a provision that permits any exception to compliance with a requirement set out in the Code? If you do not agree, please provide an explanation.

Clear explanation of the relationship between the conceptual framework and the guidance in Parts A and B would make paragraph 100.11 less important, although its inclusion adds value to the Code if it serves to clarify that the professional accountant shall refer to the specific guidance before then considering whether or not the conceptual framework approach has been satisfied. We have made specific comment regarding the wording of paragraph 100.11 later in this response.

There must be a provision to allow a professional accountant to depart from the guidance in Parts B and C in certain situations. This should not only be where the application of a specific requirement may result in an outcome that would not be regarded as being in the interest of the users of the output of the accountant's professional services. Rather, in order to demonstrate the Code's principles-based foundation, departure should be required in circumstances where to follow the guidance would result in failure to adhere to the fundamental principles or failure to reduce the threats to an acceptable level. In these cases, departure may not be temporary. We have suggested amended wording to paragraph 100.11 below.

b. If you believe that the Code should contain a provision that permits an exception to compliance, are the conditions under which the exception would apply appropriate? Should there be additional or fewer conditions and, if so, what are they?

We believe that these should not be referred to as 'conditions', but rather 'safeguards required', reinforced by the use of the word 'shall' in each case.

The opening sentence of the proposed paragraph 100.11 clarifies the circumstances in which a professional accountant may judge it necessary to depart from a specific requirement of the Code. When circumstances are outside the control of each of the professional accountant, the firm or employing organisation , and the client, whether they are foreseen or unforeseen becomes irrelevant. Therefore, we suggest that reference to unforeseen circumstances be deleted. We have incorporated these suggestions into the suggested wording below.

c. If you believe that the Code should not contain a provision that permits an exception, please explain how you would deal with the types of exceptional and unforeseen situations that may be covered by paragraph 100.11.

We do believe that there is a need for a provision permitting exemption, albeit not in the form currently set out in the Exposure Draft. The inclusion of paragraph 100.11 itself demonstrates that the Code has become rules-based. A truly principles-based Code would emphasise a general requirement to comply with the conceptual framework in any situation.

d. Are there any other circumstances where you believe a departure from a requirement in the Code would be acceptable? For example, should an event that is within the control of one of the relevant parties qualify for an exception? If so, please provide an explanation and specific examples of the circumstances where you believe a departure would be acceptable.

The mere inclusion of paragraph 100.11 in its current form suggests that the Code is principally rules-based. However, this paragraph could be amended in order to emphasise the fact that the Code is not rules-based.

Currently, paragraph 100.11 deals with the situation where an outcome would not be perceived to be in the interests of the users of the output of the accountant's professional services. In addition, the Code must be perceived as being fundamentally principles-based by emphasising that departure from the specific guidance is required where strict adherence to the guidance would result in either a failure to comply with the fundamental principles, or a failure to adequately reduce the threat to compliance.

We suggest the following wording for paragraph 100.11:

'Specific guidance in the Code shall be departed from in those rare circumstances where to follow the guidance would result in failure to comply with the fundamental principles or failure to reduce the threats to an acceptable level.

In exceptional circumstances that are outside the control of the professional accountant, the firm or employing organization, and the client, the application of specific guidance in the Code may result in an outcome that a reasonable and informed third party would not regard as being in the interest of the users of the output of the professional services. In such circumstances, the professional accountant may judge it necessary to depart from that specific guidance. Such a departure would be acceptable only if alternative safeguards are applied and appropriate disclosure made, including the following:

• The professional accountant shall discuss the matter with those for whom the activity is being undertaken, or appropriate representatives such as those charged with governance*; the discussion shall include the nature of the exceptional circumstance, the fact that the circumstance is outside the control of the relevant parties, why in the professional accountant's judgment it is necessary to depart from specific guidance in the Code, and any safeguards that will be applied; and
• The nature of the departure and the reasons for the departure shall be appropriately disclosed to the users of the output of the professional services.

The professional accountant shall comply with the specific guidance of the Code at the earliest date that compliance can be achieved.

If providing an assurance service, the professional accountant shall document the substance of the departure and details of any discussions held or decisions made concerning that issue. In other circumstances, when non-assurance services are provided such as accounting, taxation, business advice, being an accountant in business, etc, it may be in the best interests of the professional accountant to document this.

The professional accountant may wish to discuss the matter with the relevant regulatory authority. If the accountant has such a discussion, the substance of that discussion shall be documented.'

The term 'users of the output of the professional services' should be defined, as it could be interpreted as 'some of the users', rather than 'all of the known and suspected users'.

Currently, paragraph 100.12 says that the conceptual framework is applied when the specific guidance does not cover a situation, and 100.11 (as redrafted above) deals with the position when a situation is covered by the specific guidance, but the guidance would result in (i) a failure to adhere to the fundamental principles, (ii) failure to reduce the threats to an acceptable level or (iii) an outcome that is not regarded as being in the interest of the users of the output of the professional services. This is a more unusual situation, and so the message would be more clearly conveyed if the order of paragraphs 100.11 and 100.12 was swapped.

4. The IESBA is of the view that the proposed modification to focus the application of the conceptual framework throughout the Code, and the related documentation requirements in Sections 290 and 291, on threats that are not at an acceptable level will result in a more efficient and effective application of the framework approach. Do you agree? If you do not agree, please provide an explanation.

Generally, we agree that the assessment of threats with reference to the perception of a reasonable and informed third party and whether or not the threats are at an 'acceptable level' is a useful device, and there is clearly an opportunity for enhanced clarity in this respect. However, an 'acceptable level' is a higher level of risk than 'clearly insignificant', and great care should be taken by the IESBA to be seen to be maintaining ethical standards in the light of the comments made under (ii) above.

In particular, there are occasions when it is considered necessary to set the standard higher and assess any threats that are not 'trivial and inconsequential' (as demonstrated by paragraph 291.28). Another example of this is when considering the need to document conclusions and related discussions regarding threats to independence (paragraphs 290.29 and 291.29). There is a large degree of subjectivity required when assessing whether or not the threats are at an 'acceptable level', and so we believe that it is still necessary to document independence conclusions and related discussions in any situation where the threat is not trivial and inconsequential.

5. The IESBA is of the view that the selected point-in-time effective date with the proposed transitional provisions will provide the appropriate balance between firms and member bodies having sufficient time to implement the new standards and effecting change as soon as possible. Do you agree? If you do not agree, please provide an explanation of how you would revise the effective date or transitional provisions to achieve that balance.

We agree with these proposals.

other comments

Paragraph 100.9

It is unrealistic for this paragraph to state that a professional accountant 'shall take qualitative as well as quantitative factors into account when evaluating the significance of a threat' (emphasis added). This is an example of a requirement that must be amended, as there may be no qualitative factors or quantitative factors in a particular circumstance. Therefore, the drafting of this paragraph requires further thought. We have not suggested alternative wording, as this is simply an example of a general shortcoming in the Exposure Draft.

Paragraph 100.12

Further to our comment above regarding this paragraph, we should like to emphasise our concern regarding a perceived move from a principles-based Code to a rules-based Code. Paragraph 100.12 currently states that Parts B and C 'include examples that are intended to illustrate' the application of the framework, and states that 'the framework should be applied to the particular circumstances encountered by the professional accountant'. Although we understand the concern that the status of 'examples' may be misunderstood, it appears to us that the proposed wording is more likely to lead to a misunderstanding of the whole framework approach, and that the proposed changes to the wording are too extreme. We would suggest the following:

'Parts B and C of this Code contain guidance, intended to illustrate how the conceptual framework is to be applied in specific circumstances . Parts B and C do not describe all the circumstances that could be experienced by a professional accountant that create or may create threats to compliance with the fundamental principles. Therefore, in any situation not explicitly addressed by Part s B or C, the professional accountant shall apply the framework when evaluating the specific facts and circumstances. In any situation that is addressed by Part B or C, it is not sufficient for a professional accountant merely to comply with the guidance provided; rather, the need to apply the framework to the specific circumstances encountered shall be determined. '

This proposed wording should be considered in conjunction with that suggested above for paragraph 100.11, as to incorporate both paragraphs into the Code as amended would result in a degree of repetition. (Any amendment to the proposed paragraph 100.12 should result in similar changes to paragraphs 200.1, 300.1 and 300.6.)

Paragraph 100.13

100.13 (b), as redrafted, is too long, and clarity is impaired. The definition is also narrower than it was previously, as the proposed definition would not include the situation where a professional accountant becomes aware of an error previously made by the professional accountant or the firm.

Under 100.13 (c), the removal of the word 'subsequent' changes the meaning to such an extent that the definition is no longer logical.

Paragraph 100.21

For clarity and accuracy, this paragraph should refer to the documentation of 'discussions held and decisions made', rather than 'discussions held or decisions made'.

Paragraph 100.22

This paragraph starts with the words 'If a significant conflict cannot be resolved…'. We consider this to be inappropriate, as a significant conflict must be resolved if the professional accountant is to retain the engagement or employment or remain associated with the engagement. We also believe that it is not sufficiently robust to state that the professional accountant 'may consider' obtaining professional advice. We suggest that this paragraph starts with the sentence:

'If the professional accountant believes that a significant conflict cannot be resolved, the professional accountant shall consider obtaining professional advice from the relevant professional body or from legal advisors, before taking appropriate action in accordance with paragraph 100.23'.

Paragraph 100.23

This paragraph appears to recognise that it is not always possible to withdraw from an engagement. However, it would be useful to elaborate on what the options are for the professional accountant in the situation where he is not permitted, by law or regulation, to withdraw from the engagement.

Paragraph 110.3

We suggest that the words 'a modified report' be replaced with the words 'an appropriately modified report'.

Paragraph 120.2

This paragraph, as amended, states that the professional accountant cannot act if circumstances bias the accountant's professional judgement. This implies that the professional account cannot, for example, act as the client's or the employer's advocate. The paragraph would be more accurately worded if the word 'unduly' was moved to precede the word 'biases'. (The test of undue bias should be based on the perception of a reasonable and informed third party.)

Paragraph 130.6

There appears to be a word missing at the end of this paragraph. We suggest it should refer to 'services offered'.

Paragraphs 200.4 to 200.8

It is incorrect to state that all the examples given in these paragraphs always create threats. Therefore, we disagree with the deletion of the word 'may' in the first line of each paragraph.

Paragraph 200.4

Two of the bullet points use the word 'significant'. This is inappropriate, because the significance of the threat is not relevant to these examples. In addition, the word 'significant' is not defined.

While the revised examples in this paragraph are not unreasonable, they are very biased towards assurance services. Section 200 is intended to address all services provided by the professional accountant in public practice.

The second bullet point should refer to 'a firm, individual office or partner' having undue dependence on total fees from a client.

The final bullet point of this paragraph is, in fact, an example of a self-review threat, and should appear instead under paragraph 200.5.

Paragraph 200.7

The use of the word 'assurance' under the final bullet point is irrelevant for the purpose of the examples in this section of the Code.

Paragraph 200.8

Under this paragraph, the second bullet point describes fee dependency. Under paragraph 290.221, fee dependency is said to be a self-interest threat, rather than an intimidation threat.

Paragraph 210.8

We suggest that once the revision and redrafting of ISA 620 has been finalised by the IAASB, the requirements of this paragraph be brought into line with ISA 620.

Paragraph 210.11

We recommend that the words 'unless there is satisfaction as to necessary facts by other means' be deleted. Safeguards are either adequate or they are not.

Paragraph 210.14

Removal of the word 'ordinarily' results in an apparently illogical paragraph. The proposed sentence appears to be an absolute requirement, and yet it is followed by a sentence referring to when the requirement is not absolute. Whilst we agree with the removal of the word 'ordinarily', clarity may be achieved by ending the first sentence with the words 'to the proposed accountant'.

Paragraph 270.3

We believe that it is not sufficiently robust to state that the professional accountant 'may also consider seeking legal advice'. We suggest that this wording be changed to 'shall consider obtaining legal advice'.

Independence - Audit and review engagements contents

The paragraph references are incorrect from IT 'Systems Services' (290.201) onwards.

Paragraph 290.1

This paragraph should also refer to review engagements to report on elements of financial statements, in line with ISA 805.

Paragraph 290.106

This paragraph clearly states that a member of the audit team, for example, shall not have a financial interest in an entity that has a direct financial interest in a client where 'the client is material to the entity'. The paragraph is significantly weakened by the absence of an explanation of materiality in this context.

Paragraph 290.116

290.116 (c) concludes by saying that 'pending disposal of the financial interest, a determination shall be made as to whether any safeguards are necessary'. Why is this not considered relevant to (a) and (b) also?

Paragraph 290.123

This paragraph does not explain why a deposit with a bank, held under normal commercial terms, does not create a threat to independence. This is unlikely to be the perception of a reasonable and informed third party.

Paragraph 291.120

One sentence in this paragraph commences 'the significance of any shall be evaluated'. This should say 'the significance of any threat shall be evaluated'.

Interpretation 2005-01

In two places, the interpretation says 'Company 8 accounts for 0.16% of the reserves'. In fact, the figure is closer to 0.17%. In each case, there should be a full stop and a new sentence after 'reserves'.

Paragraph 300.9

The first line of this paragraph is inconsistent with paragraphs 200.4 to 200.8 in that the word 'may' has not been deleted. This is also true of paragraphs 300.12 and 300.13.

Paragraph 300.12

The third bullet point of this paragraph would be more effective if it explained from whom the gift or preferential treatment might be received.

Paragraph 320.6

Throughout the draft Code, it is usually a requirement to 'consider' something (as it is usually used in conjunction with the word 'shall'). However, this is often not the case where the draft Code refers to obtaining legal advice. In this paragraph, we suggest the wording be changed to state that the accountant 'shall consider obtaining legal advice' (as it does in paragraph 300.16).

Paragraph 330.1

The first sentence does not read well since the word 'should' has been deleted. The word 'undertake' may be changed to 'undertakes'. However, we believe it is preferable, and more robust, to insert the word 'shall' where 'should' has been deleted.

Section 330

We believe this section should be entitled 'Acting Without Sufficient Expertise' rather than 'Acting with Sufficient Expertise'.

Paragraph 330.2

This paragraph should start with the words 'Circumstances that create a threat s ...'.

Paragraph 350.4

In order to add clarity, prior to points (a) to (d), this paragraph should state that the professional accountant shall 'determine whether to take one or more of the following actions'.

Paragraph 350.8

We believe that this paragraph is now misleading, as the professional accountant is always required to follow the principles and guidance set out in Part A. There is no value in including specific situations within Parts B and C if the guidance does not state a specific impact of the conceptual framework.

Definitions: Independence

It is unclear why the explanation on 'independence in appearance' is with reference to a firm or 'a member of the audit team' rather than a firm or 'a member of the assurance team'.

Back to top