INVITATION TO COMMENT

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1 INVITATION TO COMMENT INVITATION TO COMMENT AND EXPOSURE DRAFT ON: Code of Ethics (Revised) 8 March 2013

2 ITC: Code of Ethics (Revised) REQUEST FOR COMMENT The Professional Standards Board (PSB) of the New Zealand Institute of Chartered Accountants (NZICA) is in the process of revising the Code of Ethics and has issued an Exposure Draft for comment. The PSB is seeking comments on all matters addressed in the exposure draft. The PSB regards both critical and supporting comments as essential to a balanced review and will consider all submissions, whether they address all specific matters, additional issues or only one issue. All submissions received will be considered in accordance with the PSB s due process. Respondents should bear in mind that NZICA has obligations to the International Federation of Accountants (IFAC) and must consider all comments in this light. Comments should be addressed to: The Director Technical Services New Zealand Institute of Chartered Accountants PO Box Wellington submission.feedback@nzica.com The closing date for submissions is Friday 7 June

3 ITC: Code of Ethics (Revised) SPECIFIC MATTERS FOR COMMENT Respondents are asked particularly to respond to the following questions: 1. Do you agree with the decision to converge with the IFAC Code by including all of the material as is in the IFAC Code in the revised NZICA Code, and adopting the IFAC Code structure and paragraph numbering? If not, please provide reasons or identify specific paragraphs. 2. Do you agree with the decision to refer to sections 290 and 291 of Part B of the New Zealand Auditing and Assurance Standards Board (NZAuASB) Code? If not, please provide reasons or identify specific paragraphs. 3. Do you consider there are any weaknesses or gaps in the proposals that need to be addressed in the New Zealand context? 4. Do you agree with the decision to add additional New Zealand paragraphs to the IFAC Code, clearly labelled and numbered as such, which are considered to remain appropriate for the New Zealand environment? If not, please identify the specific paragraphs and provide reasons. 5. Do you consider the proposed effective date appropriate? If not, please explain why not. 6. Do you consider the transitional provisions appropriate? If not, please specify the additional provisions that may be needed. 7. Are you aware of any regulatory or other issues in the New Zealand environment that may affect the implementation of the NZICA Code as proposed? If so, please provide details. 3

4 ITC: Code of Ethics (Revised) EXPLANATORY MEMORANDUM 1. Introduction NZICA is a member of the International Federation of Accountants (IFAC) and, as part of its membership obligations, is required to apply no less stringent standards than those stated in the IFAC Code of Ethics 1 (IFAC Code). The adoption of an IFAC-based approach to the Code of Ethics by the New Zealand Auditing and Assurance Standards Board (NZAuASB), combined with IFAC member obligations, signals that change to the existing NZICA Code of Ethics and Code of Ethics: Independence in Assurance Engagements (NZICA Code) is required. The consequences of not revisiting the NZICA Code are twofold. First, failure to change may mean a breach of IFAC membership obligations. Second, assurance practitioners would have to abide by two different Codes (NZAuASB and NZICA), and this would create an environment giving rise to uncertainty. For an overview of the interrelationship of the professional and ethical standards between the External Reporting Board (XRB) and NZICA refer to Appendix A of this explanatory memorandum. The existing NZICA Code is substantially different in structure but not in content to the IFAC Code issued by the International Ethics Standards Board for Accountants (IESBA); this forms a major part of the change. The objective of NZICA is to uphold the public interest through setting high quality ethical and professional standards for its members. This objective is aligned with that of the IESBA (i.e. to serve the public interest by setting high-quality ethical standards and by facilitating the convergence of international and national standards, thereby enhancing the quality and consistency of services provided by professional accountants throughout the world and strengthening public confidence in the global accounting profession). 2. Background International The IESBA began a project in March 2007 to consider the applicability of the clarity conventions adopted by the International Auditing and Assurance Standards Board (IAASB) 2 on the IFAC Code. The objective of the project was to improve the clarity of the IFAC Code s provisions. After IFAC s due process, the revised IFAC Code was approved by the IESBA in April 2009 and issued in July 2009 following the approval and consideration of due process by the Public Interest Oversight Board (PIOB). The IFAC Code was effective 1 January The IESBA has also recently issued five exposure drafts to revise the IFAC Code, specifically on conflicts of interest, provisions addressing a breach of a requirement of the Code, the definition of engagement team, responding to suspected illegal acts, and the definition of those charged with governance. Where these have been finalised, the exposure draft has incorporated these revisions. External Reporting Board On 1 July 2011 the New Zealand Government established the XRB as an independent standard setting body for audit and assurance standards and accounting standards. Prior to this, the primary standard setting functions were performed by NZICA. 1 Statements of Membership Obligations, IFAC Board, November 2006, SMO4, paragraph 4. 2 The IAASB is the Standards Setting Board of IFAC that is responsible for developing auditing and assurance standards, other pronouncements, and guidance. 4

5 ITC: Code of Ethics (Revised) On 1 July 2011 the XRB adopted the auditing and assurance standards, including the professional and ethical standards, previously issued by NZICA. Minor changes were made to NZICA s standards but the two suites of standards were substantively the same. The XRB then delegated authority to the NZAuASB to issue auditing and assurance standards, including the professional and ethical standards, to govern the professional conduct of assurance practitioners. In doing so the XRB required the NZAuASB to adopt international auditing and assurance standards, including ethical standards, unless there are compelling reasons not to do so. The NZAuASB Professional and Ethical Standards have direct relevance for NZICA members who are assurance practitioners. The NZAuASB issued PES 1 (Revised) Code of Ethics for Assurance Practitioners to adopt Part A and Part B of the IFAC Code as it applies to assurance practitioners. It has withdrawn PES 2 Independence in Assurance Engagements. This resulted in both structural changes and changes to the ethical requirements. In PES 1 (Revised) the independence requirements have been split and incorporated within two sections, in line with the IFAC Code: Section 290, dealing with audit and review engagements; and Section 291, dealing with other assurance engagements. The NZAuASB mandate is limited to assurance engagements and therefore the scope of PES 1 (Revised) differs from the IFAC Code. PES 1 (Revised) is intended to apply to all assurance practitioners, appointed or engaged, to provide assurance services. PES 1 (Revised) does not include Part C of the IFAC Code, Professional Accountants in Business, as this is outside of the NZAuASB legal mandate. Assurance practitioners who carry out statutory audits are required by law to conduct the engagement in accordance with the auditing and assurance standards issued by the XRB, which includes their Professional and Ethical Standards. In September 2011, a pronouncement was approved by NZICA Council that made it a requirement for all NZICA members providing assurance services to adhere to the auditing and assurance standards issued by the NZAuASB, and hence indirectly with their Professional and Ethical Standards. NZICA The New Zealand Institute of Chartered Accountants Act 1996 requires that we always have a Code of Ethics that governs the professional conduct of its members. The Code of Ethics sets out fundamental principles and provides guidance on professional conduct. These principles sustain public confidence in the accounting profession and are positive points of difference between our members and other accountants. All NZICA members must comply with the requirements of the Professional and Ethical Standards which the Council declare to be mandatory. The last significant revision of the Institute s Code of Ethics was in One of the principles agreed at an early stage in the 2003 project was that the format, structure and authority of the Institute s Code of Ethics and Ethical Guidelines be considered to ensure that it is clear, logical and appropriate. In this light, the existing NZICA Code was developed after much consultation and analysis, with the aim of encouraging member buy in and acceptance of the Code. The PSB is now seeking to revise the NZICA Code to converge more closely with the IFAC Code, and to be consistent with the NZAuASB Code. That way compliance with NZICA s Code will inherently also mean compliance with the NZAuASB Code. The objectives of the PSB s exposure of the NZICA Code are: 5

6 ITC: Code of Ethics (Revised) To ensure reasonable steps are taken to obtain submissions from members who will be affected by the changes to the NZICA Code; To alert members to changes in the NZICA Code as a result of adopting the revised IFAC Code; and To bridge the gap for members who carry out non-assurance engagements and for members in business. 3. Overview of the proposed changes The following summarises key differences between the exposure draft and the existing NZICA Code. Readers should not rely on this summary of significant differences to determine what changes, if any, they may have to make to their current practices, policies or methodologies. Rather, readers should read the full exposure draft to determine the significance of its proposals. a) New structure The PSB proposes to adopt the IFAC Code structure. The proposed NZICA Code contains three parts: Part A: General Application of the Code. This part introduces the fundamental principles and conceptual framework, and applies to all members. Part B: Describes how the conceptual framework applies in certain situations facing members in public practice 3. Part C: Describes how the conceptual framework applies in certain situations facing members in business 4. b) Revised fundamental principles In the existing NZICA Code all the rules and requirements are directly linked to a fundamental principle, whereas in the exposure draft the fundamental principles stand alone in Part A. Members are required to comply with the fundamental principles. There are minimal additional requirements in this Part. The fundamental principles are similar, but not identical: Proposed NZICA Code (aligned with the IFAC Code) Integrity Objectivity Professional Competence and Due Care Confidentiality Professional Behaviour Existing NZICA Code Integrity Objectivity and Independence Competence Quality Performance Professional Behaviour Some of the fundamental principles in the existing NZICA Code have been subsumed under different headings in the proposed NZICA Code. Independence is no longer a fundamental principle as this requirement is only applicable to members performing certain types of engagements, such as assurance engagements, some insolvency engagements, independent business valuations and expert witness engagements. 3 A member in public practice is defined to be a member, irrespective of functional classification (e.g., audit, tax or consulting) in a firm that provides professional services. This term is also used to refer to a firm of members in public practice. 4 A member in business is defined as a member employed or engaged in an executive or non-executive capacity in such areas as commerce, industry, service, the public sector, education, the not for profit sector, regulatory bodies or professional bodies, or a member contracted by such entities. 6

7 ITC: Code of Ethics (Revised) c) Conceptual framework The proposed NZICA Code provides a much fuller description of the conceptual framework for complying with the fundamental principles, and requires a member to identify, evaluate, and address threats to compliance with the fundamental principles. A member is required to take qualitative and quantitative factors into this evaluation. A member must evaluate threats when the member knows, or could reasonably be expected to know, of circumstances or relationships that compromise the fundamental principles. Where threats are not at a level at which a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances available at that time, that compliance with the fundamental principles is compromised, it is necessary to determine whether appropriate safeguards are available and can be applied to eliminate the threats or reduce them to an acceptable level. The proposed NZICA Code includes an identification and description of the categories of threats and categories of safeguards. A member must decline to offer a service, stop providing a service or resign where threats cannot be eliminated or reduced to an acceptable level. d) Mandatory requirements The proposed NZICA Code identifies a mandatory requirement by the use of the word shall which is in line with the IFAC Code, with the wording adopted by the IAASB in the ISAs and with that used in the more recent professional standards. Mandatory requirements in the existing NZICA Code are indicated by the use of must. e) Definitions A number of the definitions have been revised and some new definitions have been included. The terms review engagements and financial statements are defined. Introduces new terms: key audit partner and key assurance partner. This includes the engagement partner, the partner responsible for the engagement quality control review and any other partner on the engagement team who makes key decisions or judgements on significant matters. Certain requirements now apply to these key partners. The IFAC Code has introduced the concept of a public interest entity and defined it to be all listed entities and any entity (a) defined by regulation or legislation as a public interest entity, or (b) for which the audit is required by regulation or legislation to be conducted in compliance with the same independence requirements that apply to the audit of listed entities. Substitutes the term member for the term professional accountant used in the IFAC code. f) New requirements and guidance The requirements and guidance in the proposed NZICA Code are expressed differently from the requirements in the existing NZICA Code. Most of the new requirements, identified from shall statements, are implied in the existing NZICA Code rather than explicitly stated. The following summarises key differences between the exposure draft and the existing NZICA Code. Conflicts of Interest A description of and requirements to deal with conflicts of interest (paragraphs , section 220 and section 310), along with requirements to resolve ethical conflict (paragraphs ). 7

8 ITC: Code of Ethics (Revised) Inherent Limitations Where appropriate, requiring members to make others aware of limitations inherent in their services (paragraph 130.6). Superseding an Existing Accountant A softening of the requirements for a member, when superseding an existing accountant, as follows: It is proposed that a member will only be required to determine whether there are any reasons for not accepting an engagement, which may, depending on the engagement, require direct communication with the existing accountant (paragraphs ); and The following requirements, when superseding another accountant have been replaced by examples of safeguards to be applied: - To ascertain if the prospective client has advised the existing accountant of the change and whether permission to discuss the client s affairs has been given; - To communicate with the existing accountant; - To request, in writing, information of any professional matters of which the proposed accountant should be aware; and - The requirement for the existing accountant to reply to such a request within seven days has been removed and replaced by more general requirements, including the need to be bound by confidentiality but that when providing information, to do so honestly and unambiguously (paragraphs and ). Review Engagements Reviews of financial statements are subject to the same independence requirements as audits of financial statements. Public Interest Entities Introduces new or revised independence requirements for assurance practitioners of public interest entities. In overview, these relate to: The requirement for a minimum 12-month cooling-off period when a key audit partner or the firm s managing partner joins an audit or review client that is a public interest entity as a director or officer of the entity, or an employee in a position to exert significant influence over the preparation of the accounting records or the financial statements. Partner rotation requirements are extended to all key assurance partners (7 years), previously only the lead engagement partner, with a 2 year stand-down period. During this stand-down period, the individual shall not be involved with the client in any way that could directly influence the outcome of the engagement. Relative size of fees. There are new requirements for a pre-issuance and post-issuance review where the total fees from the assurance client exceed 15% of the total fees of the firm for two consecutive years. Provision of the following non-assurance services are prohibited for a public interest entity: - Internal audit services that relate to: a significant part of the internal controls over financial reporting; financial accounting systems that generate information that is significant to the client s accounting records or the financial statements on which the firm will express an opinion; or amounts or disclosures that are material to the financial statements. 8

9 ITC: Code of Ethics (Revised) - Design or implementation of IT systems that form a significant part of the internal control over the subject matter of the engagement or generate information that is significant to the information on which the firm will express an opinion are prohibited. - Certain recruiting services with respect to a director or officer of the entity or individual in a position to exert significant influence over the subject matter information are prohibited. Client Mergers and Acquisitions The proposed NZICA Code introduces new requirements and application guidance addressing situations where, as a result of a merger or acquisition, an entity becomes a related entity of an audit or review client (paragraph ). Documentation The proposed NZICA Code introduces additional guidance on what firms are required to document as to their conclusions regarding compliance with independence requirements. Breach of a Requirement of the Code The proposed NZICA Code includes the framework proposed by the IESBA in the exposure draft for addressing a breach of a requirement of the Code (paragraph and NZ NZ291.43). These proposals will replace existing New Zealand requirements that address an inadvertent violation. Management Responsibilities The proposed NZICA Code introduces a new section dealing with Management Responsibilities. This includes a clear prohibition on the firm assuming management responsibilities for an audit or review client (paragraph ). Guidance is provided as to activities that would, and would not, generally be regarded as the responsibility of management (paragraph ). Taxation Services The proposed NZICA Code contains new provisions relating to threats that are created by providing four specific types of tax services to audit clients: Tax return preparation the contention is that such services may create threats to independence unless management takes responsibility for the returns, including any significant judgements made. Tax calculations for the purposes of preparing the accounting entries preparing calculations of current and deferred tax for the purpose of the preparation of the accounting entries may create a self-review threat. This is therefore prohibited for public interest entities. Tax planning and other advisory services a prohibition on providing these services where the effectiveness of tax advice depends on a particular accounting treatment or presentation, and there is reasonable doubt on the appropriateness of the related accounting treatment and the outcome or consequences of that tax advice is material is included. Assistance in the resolution of tax disputes acting as an advocate for an audit or review client before a public tribunal or court in the resolution of a tax matter where the amounts involved are material to the information on which the firm will express an opinion is prohibited. Corporate Finance Services The proposed NZICA Code includes enhanced discussion of the nature of corporate finance services, possible threats to independence, factors to consider and potential safeguards. It introduces a prohibition on a service where the effectiveness of corporate finance advice 9

10 ITC: Code of Ethics (Revised) depends upon a particular accounting treatment or presentation, there is a reasonable doubt as to its appropriateness and the effect on the financial statements is material. Contingent Fees The proposed NZICA Code introduces a prohibition on contingent fees for a non-audit assurance service to an audit or review client if specific conditions are met (paragraph ). Evaluation and Compensation The proposed NZICA Code states that a key audit partner shall not be evaluated on or compensated based on that partner s success in selling non-assurance services to the partner s audit or review clients. Fees Relative Size The proposed NZICA Code introduces a new requirement where, if the total fees from the audit or review client exceed 15% of the total fees of the firm for two consecutive years, the matter must be discussed with the audit committee and one of the following safeguards applied: Pre-issuance review performed by another assurance practitioner who is not a member of the firm prior to the issuance of the audit opinion on the second year s financial statements; or Post-issuance review performed by another assurance practitioner who is not a member of the firm before the issuance of the audit opinion on the third year s financial statements. Restricted Use and Distribution Reports The proposed NZICA Code contains new modified independence requirements relating to certain audit and review reports that include a restriction on use and distribution (paragraphs ). Similar provisions are included in paragraphs Inducements The proposed NZICA Code introduces a prohibition on members in business from offering an inducement to influence a third party improperly (paragraph 350.7). 4. Differences from the IFAC Code The PSB has decided to follow an IFAC-plus approach to the adoption of the IFAC Code. This will mean moving closer to the IFAC Code by including all of the material in the IFAC Code in the revised NZICA Code and aligning the format and numbering of sections and paragraphs. However, there are additional requirements in the existing NZICA Code which are considered to remain appropriate for the New Zealand environment and which will be retained by incorporating them into the appropriate sections. New Zealand additions are clearly labelled and numbered as such. The key differences are summarised below. Public Interest Entities The exposure draft is proposing to define a public interest entity in paragraph NZ and NZ as all Tier 1 entities (as outlined in the External Reporting Board s Accounting Standards Framework). 10

11 ITC: Code of Ethics (Revised) Conflicts of Interest The proposed NZICA Code includes more stringent requirements for dealing with conflicts of interest than the IESBA proposals. Paragraph has been amended and paragraphs NZ and NZ have been added. Paragraph has been deleted and replaced by NZ The exposure draft always requires the disclosure in writing to a client or a potential client where a potential conflict has been identified. In addition, paragraph NZ requires that a member disengage from the relevant professional service if adequate disclosure to the client is restricted as a result of confidentiality requirements. The IFAC Code allows this in limited situations. Audits and Reviews of Financial Statements vs. Other Assurance Engagements The IFAC Code has separated independence requirements for audits and reviews of historical financial statements which are more restrictive in some instances from other assurance engagements (Section 290, dealing with audit and review engagements and Section 291, dealing with other assurance engagements). The proposed NZICA Code includes proposals to extend the scope of Section 290 to cover all assurance engagements in relation to an offer document of an issuer in respect of historical financial information, prospective or pro-forma financial information or a combination of these. Multiple Threats to Independence The proposed NZICA Code explicitly requires in paragraphs NZ and NZ that an assurance practitioner should evaluate multiple threats to independence, identified in aggregate, which individually may not be significant. This is not explicitly required by the IFAC Code. Liquidator or Receiver The proposed NZICA Code specifically prohibit a firm from providing assurance services to an entity if the partner or an employee of the firm serves as a director or officer of the assurance client, or as a liquidator or receiver of the property of the entity, or in a similar role. The IFAC Code has a similar prohibition, but only in respect of a partner or employee serving as a director or officer of an assurance client. Fees Relative Size The proposed NZICA Code emphasises that an assurance practitioner is required to decline or withdraw from an engagement where the total fees from a client represent a large proportion of the total fees of the firm and safeguards have not reduced the threats to an acceptable level. The PSB consider that the relative size of fees is a significant threat to independence and therefore has emphasised that it is not always possible to mitigate the threats using safeguards and that the engagement may need to be declined. Breach of a Requirement of the Code The PSB is of the view that there is no reason why the provisions for addressing a breach of the independence requirements when performing an assurance engagement under section 291 compared to an audit engagement under section 290, would not apply. Therefore the PSB propose to include the same detailed requirements in section 291 as included in section 290 of the IFAC Code. 11

12 ITC: Code of Ethics (Revised) Temporary Staff Assignments The proposed NZICA Code adds the additional guidance on temporary staff assignments as it relates to assurance engagements that are not audit or reviews from section 290 in section 291. The PSB is of the view that this guidance, which is expanded guidance on the threats and safeguards approach, is as relevant to other assurance engagements as it is to audits and reviews. The PSB believes that the threats to independence do not differ when the subject matter of the engagements are financial statements or another subject matter. Lending staff may create a self-review threat if that staff member is later involved in providing assurance over that subject matter or that subject matter information. Assurance Clients, who are not Audit or Review Clients, but are Public Interest Entities In the IFAC Code, section 290 includes more stringent requirements for audit or review clients that are public interest entities. Section 291 does not make any distinction between clients that are public interest entities and those that are not. The PSB is of the view that the threats to independence do not differ when the subject matter of the engagement are financial statements or another subject matter. The PSB is of the view that these prohibitions are appropriate for other assurance clients, if they are public interest entities and that prohibiting such services in these circumstances is appropriate to maintaining independence, given the high level of interest in a public interest entity. The proposed NZICA Code includes the definition of a public interest entity in section 291 and proposes to include the following more stringent requirements for assurance clients, who are not audit or review clients, but are public interest entities: Impose a 7 year rotation period and a 2 year stand-down period on key assurance partners; Prohibit valuation services to assurance clients if the valuation is material to the subject matter on which the firm will express and opinion; Prohibit the provision of IT system services involving the design or implementation of the IT systems that form a significant part of the internal control over the subject matter or generate information that is significant to the subject matter information; Prohibit the provision of recruiting services for key positions that are able to exert significant influence over the subject matter or subject matter information of the engagement; and Require a pre- or post-issuance review where total fees from an assurance client represent more than 15% of the total fees received by the firm. Reports that Include a Restriction on Use and Distribution The proposed NZICA Code adds exceptions to the independence requirements for public interest entities in paragraph NZ in limited circumstances where the report includes a restriction on use and distribution. This is similar to the approach adopted in section Effective Date It is proposed that the NZICA Code of Ethics (Revised) be effective on 1 January 2014, early adoption is permitted. 12

13 Appendix A: Overview of the interrelationship of standards between NZICA and the XRB Standards of NZICA Standards of XRB Code of Ethics PES 1: Ethical Standards for Assurance Practitioners Non-Assurance Engagements Non-Statutory Assurance Engagements Statutory Audits and Reviews of Historical Financial Information Other Assurance Engagements Engagements Agreed Upon Procedures Opinions on Accounting & Reporting Matters Business Valuations Insolvency Compilation of Financial Information Financial Advisory Engagements ISAs (NZ) International Standards on Auditing (New Zealand) RS-1 Statement of Review Engagement Standards SAEs Standards on Assurance Engagements ISAEs (NZ) International Standards on Assurance Engagements (New Zealand)

14 New Zealand Institute of Chartered Accountants CODE OF ETHICS Notice of Legal Status of the Code of Ethics The Code of Ethics of the New Zealand Institute of Chartered Accountants is made pursuant to section 7 of the New Zealand Institute of Chartered Accountants Act The Act states, in section 8, that the Regulations (Disallowance) Act 1989 applies to the Code of Ethics as if they were regulations within the meaning of the Regulations (Disallowance) Act The Council of the New Zealand Institute of Chartered Accountants has prescribed the following Code of Ethics to be binding on all members of the Institute. This Code of Ethics replaces all previous Codes of Ethics issued by the Council of the Institute. This Code of Ethics is effective from 1 January 2014.

15 CODE OF ETHICS CONTENTS Page NEW ZEALAND PREFACE 2 NEW ZEALAND SCOPE AND APPLICATION 3 PART A: FUNDAMENTAL PRINCIPLES 4 Section 100 Introduction and Fundamental Principles 5 Section 110 Integrity 9 Section 120 Objectivity 10 Section 130 Professional Competence and Due Care 11 Section 140 Confidentiality 12 Section 150 Professional Behaviour 14 PART B: MEMBERS IN PUBLIC PRACTICE 15 Section 200 Introduction 16 Section 210 Professional Appointment 20 Section 220 Conflicts of Interest 23 Section 230 Second Opinions 27 Section 240 Fees and Other Types of Remuneration 28 Section 250 Marketing Professional Services 30 Section 260 Gifts and Hospitality 31 Section 270 Custody of Client Assets 32 Section 280 Objectivity 33 Section 290 Independence Audit and Review Engagements 34 Section 291 Independence Other Assurance Engagements 35 Interpretation PART C: MEMBERS IN BUSINESS 37 Section 300 Introduction 38 Section 310 Conflicts of Interest 41 Section 320 Preparation and Reporting of Information 43 Section 330 Acting with Sufficient Expertise 44 Section 340 Financial Interests, Compensation and Incentives Linked to Financial Reporting and Decision Making Section 350 Inducements 47 DEFINITIONS 49 EFFECTIVE DATE AND TRANSITIONAL PROVISIONS 55 WITHDRAWAL OF CODE OF ETHICS AND CODE OF ETHICS: INDEPENDENCE 57 45

16 NEW ZEALAND PREFACE The Code of Ethics (Revised), (the Code), issued by NZICA is based on the Code of Ethics for Professional Accountants issued by the International Ethics Standards Board for Accountants (IESBA), published by the International Federation of Accountants (IFAC) and used with permission of IFAC. New Zealand additions and definitions are prefixed with NZ in this Code. The Code is based on a number of fundamental principles that express the basic tenets of professional and ethical behaviour and conduct. Members must abide by these fundamental principles when providing professional services. The requirements set out in this Code apply to all members. If the fundamental principles are threatened and no safeguards can be effectively implemented, the member or firm shall terminate or decline the engagement. 2

17 NEW ZEALAND SCOPE AND APPLICATION NZ1.1 This Code is effective from 1 January 2014 and supersedes the Code of Ethics (issued by the Board of NZICA in November 2002) and the Code of Ethics: Independence in Assurance Engagements (issued by the Board of NZICA in August 2003). Earlier adoption of this Code is permitted. Transitional provisions relating to public interest entities, partner rotation, non-assurance services, fees relative size, compensation and evaluation policies apply from the date specified in the respective transitional provisions. NZ1.2 Compliance with the Code is mandatory for all members; the requirements are equally applicable to all members, whether they are in public practice, industry, commerce, the public sector or education. This Code is designed to provide members with authoritative guidance on minimum acceptable standards of professional conduct. Non-compliance with the Code may expose a member to disciplinary action. The Code focuses on essential matters of principle and is not to be taken as a definitive statement on all matters. Members must be able to demonstrate at all times that their actions, behaviour, and conduct comply with the Code. NZ1.3 This Code is not intended to detract from responsibilities which may be imposed by law or regulation. NZ1.4 In applying the requirements outlined in the Code, members shall be guided, not merely by the words, but also by the spirit of the Code. The fact that particular behaviour or conduct does not receive a mention within the Code, does not prevent it from amounting to a breach of the Code. 3

18 PART A: FUNDAMENTAL PRINCIPLES CONTENTS Page Section 100 Introduction and Fundamental Principles 5 Section 110 Integrity 9 Section 120 Objectivity 10 Section 130 Professional Competence and Due Care 11 Section 140 Confidentiality 12 Section 150 Professional Behaviour 14 4

19 SECTION 100 Introduction and Fundamental Principles A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore, a member s responsibility is not exclusively to satisfy the needs of an individual client. In acting in the public interest, a member shall observe and comply with this Code. If a member is prohibited from complying with certain parts of this Code by law or regulation, the member shall comply with all other parts of this Code This Code contains three parts. Part A establishes the fundamental principles of ethics for members and provides a conceptual framework that member s shall apply to: a) Identify threats to compliance with the fundamental principles; b) Evaluate the significance of the threats identified; and c) Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level. Safeguards are necessary when the member determines that the threats are not at a level at which a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances available to the member at that time, that compliance with the fundamental principles is not compromised. A member shall use professional judgement in applying this conceptual framework Parts B and C describe how the conceptual framework applies in certain situations. It provides examples of safeguards that may be appropriate to address threats to compliance with the fundamental principles. It also describes situations where safeguards are not available to address the threats, and consequently, the circumstance or relationship creating the threats shall be avoided The use of the word shall in this Code imposes a requirement on the member or firm to comply with the specific provision in which shall has been used. Compliance is required unless an exception is permitted by this Code. Fundamental Principles A member shall comply with the following fundamental principles: a) Integrity to be straightforward and honest in all professional and business relationships. b) Objectivity to not allow bias, conflict of interest or undue influence of others to override professional or business judgements. c) Professional Competence and Due Care to maintain professional knowledge and skill at the level required to ensure that a client receives competent professional services based on current developments in practice, legislation and techniques and act diligently and in accordance with the standards issued by NZICA, the External Reporting Board, the New Zealand Auditing and Assurance Standards Board, and the New Zealand Accounting Standards Board. d) Confidentiality to respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the member or third parties. e) Professional Behaviour to comply with relevant laws and regulations and avoid any action that discredits the member s profession. Each of these fundamental principles is discussed in more detail in Sections

20 Conceptual Framework Approach The circumstances in which members operate may create specific threats to compliance with the fundamental principles. It is impossible to define every situation that creates threats to compliance with the fundamental principles and specify the appropriate action. In addition, the nature of engagements may differ and, consequently, different threats may be created, requiring the application of different safeguards. Therefore, this Code establishes a conceptual framework that requires a member to identify, evaluate, and address threats to compliance with the fundamental principles. The conceptual framework approach assists members in complying with the ethical requirements of this Code and meeting their responsibility to act in the public interest. It accommodates many variations in circumstances that create threats to compliance with the fundamental principles and can deter a member from concluding that a situation is permitted if it is not specifically prohibited When a member identifies threats to compliance with the fundamental principles and, based on an evaluation of those threats, determines that they are not at an acceptable level, the member shall determine whether appropriate safeguards are available and can be applied to eliminate the threats or reduce them to an acceptable level. In making that determination, the member shall exercise professional judgement and take into account whether a reasonable and informed third party, weighing all the specific facts and circumstances available to the member at the time, would be likely to conclude that the threats would be eliminated or reduced to an acceptable level by the application of the safeguards, such that compliance with the fundamental principles is not compromised A member shall evaluate any threats to compliance with the fundamental principles when the member knows, or could reasonably be expected to know, of circumstances or relationships that may compromise compliance with the fundamental principles A member shall take qualitative as well as quantitative factors into account when evaluating the significance of a threat. When applying the conceptual framework, an member may encounter situations in which threats cannot be eliminated or reduced to an acceptable level, either because the threat is too significant or because appropriate safeguards are not available or cannot be applied. In such situations, the member shall decline or discontinue the specific professional service involved or, when necessary, resign from the engagement Sections 290 and 291 contain provisions with which a member shall comply if the member identifies a breach of an independence provision of the Code. If a member identifies a breach of any other provision of this Code, the member shall evaluate the significance of the breach and its impact on the member s ability to comply with the fundamental principles. The member shall take whatever actions that may be available, as soon as possible, to satisfactorily address the consequences of the breach. The member shall determine whether to report the breach, for example, to those who may have been affected by the breach, a professional body, relevant regulator or oversight authority When a member encounters unusual circumstances in which the application of a specific requirement of the Code would result in a disproportionate outcome or an outcome that may not be in the public interest, it is recommended that the member consult with a professional body or the relevant regulator. Threats and Safeguards Threats may be created by a broad range of relationships and circumstances. When a relationship or circumstance creates a threat, such a threat could compromise, or could be perceived to compromise, a member s compliance with the fundamental principles. A 6

21 circumstance or relationship may create more than one threat, and a threat may affect compliance with more than one fundamental principle. Threats fall into one or more of the following categories: a) Self-interest threat the threat that a financial or other interest will inappropriately influence the member s judgement or behaviour; b) Self-review threat the threat that a member will not appropriately evaluate the results of a previous judgement made or service performed by the member, or by another individual within the member s firm, on which the member will rely when forming a judgement as part of providing a current service; c) Advocacy threat the threat that a member will promote a client s position to the point that the member s objectivity is compromised; d) Familiarity threat the threat that due to a long or close relationship with a client, a member will be too sympathetic to their interests or too accepting of their work; and e) Intimidation threat the threat that a member will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the member. Parts B and C of this Code explain how these categories of threats may be created for members in public practice, and members in business, respectively. Members in public practice may also find Part C relevant to their particular circumstances Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level. They fall into two broad categories: a) Safeguards created by the member s profession, legislation or regulation; and b) Safeguards within the firm s own systems and procedures Safeguards created by the member s profession, legislation or regulation include: Educational, training and experience requirements for entry into the member s profession. Continuing professional development requirements. Corporate governance regulations. Professional standards. Professional or regulatory monitoring and disciplinary procedures. External review by a legally empowered third party of the reports, communications or information produced by a member Part B and C of this Code discuss safeguards in the work environment for members in public practice and members in business, respectively Certain safeguards may increase the likelihood of identifying or deterring unethical behaviour. Such safeguards, which may be created by the member s profession, legislation, regulation, or within the firm s own systems and procedures include: Effective, well-publicised complaint systems operated by the firm, the member s profession or a regulator, which enable colleagues and members of the public to draw attention to unprofessional or unethical behaviour. An explicitly stated duty to report breaches of ethical requirements. Conflicts of Interest A member may be faced with a conflict of interest when undertaking a professional activity. A conflict of interest creates a threat to objectivity and may create threats to the other fundamental principles. Such threats may be created when: 7

22 The member provides a professional service related to a particular matter for two or more parties whose interests with respect to that matter are in conflict; or The interests of the member with respect to a particular matter, and the interests of a party for whom the member undertakes professional activity related to that matter are in conflict Parts B and C of this Code discuss conflicts of interest for members in public practice and members in business, respectively. Ethical Conflict Resolution A member may be required to resolve a conflict in complying with the fundamental principles When initiating either a formal or informal conflict resolution process, the following factors, either individually or together with other factors, may be relevant to the resolution process: a) Relevant facts; b) Ethical issues involved; c) Fundamental principles related to the matter in question; d) Established internal procedures; and e) Alternative courses of action. Having considered the relevant factors, a member shall determine the appropriate course of action, weighing the consequences of each possible course of action. If the matter remains unresolved, the member may wish to consult with other appropriate persons within the firm for help in obtaining resolution Where a matter involves a conflict with, or within, an organisation, a member shall determine whether to consult with those charged with governance of the organisation, such as the board of directors or the audit committee It may be in the best interests of the member to document the substance of the issue, the details of any discussions held, and the decisions made concerning that issue If a significant conflict cannot be resolved, a member may consider obtaining professional advice from the relevant professional body or from legal advisors. The member generally can obtain guidance on ethical issues without breaching the fundamental principle of confidentiality if the matter is discussed with the relevant professional body on an anonymous basis or with a legal advisor under the protection of legal privilege. Instances in which the member may consider obtaining legal advice vary. For example, a member may have encountered a fraud, the reporting of which could breach the member s responsibility to respect confidentiality. The member may consider obtaining legal advice in that instance to determine whether there is a requirement to report If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a member shall, unless prohibited by law, refuse to remain associated with the matter creating the conflict. The member shall determine whether, in the circumstances, it is appropriate to withdraw from the engagement team or specific assignment, or to resign altogether from the engagement, or the firm. 8

23 SECTION 110 Integrity The principle of integrity imposes an obligation on all members to be straightforward and honest in all professional and business relationships. Integrity also implies fair dealing and truthfulness A member shall not knowingly be associated with reports, returns, communications or other information where the member believes that the information: a) Contains a materially false or misleading statement; b) Contains statements or information furnished recklessly; or c) Omits or obscures information required to be included where such omission or obscurity would be misleading. When a member becomes aware that the member has been associated with such information, the member shall take steps to be disassociated from that information A member will be deemed not to be in breach of paragraph if the member provides a modified report in respect of a matter contained in paragraph