Corporate Governance and Code of Ethics for Accountants. Kassim Hussein, PhD

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1 International Federation of Accountants Corporate Governance and Code of Ethics for Accountants NBAA Seminar 27 September 2016, Zanizibar Kassim Hussein, PhD Contact

2 Sources CG practices, International Kings 1 -Federation 1V of Accountants Cadbury Reports, OECD NBAA/IFAC Code of Ethics Organization: Concepts and meaning Relationships IFC structure Part A Framework applies to all professional accountants Part B Professional accountants in public practice Part C Professional accountants in business Threats

3 Ethics of Professional Accountants

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5 Concepts: Corporate Governance and Code of Ethics CG includes all structures, processes, policies, systems and procedures whereby the organization are governed.

6 Concepts: Corporate Governance and Code of Ethics 6 Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals The aim is to align as nearly as possible the interests of individuals, corporations and society. Sir Adrian Cadbury Corporate Governance Overview, 1999 Corporate Governance is a mechanism through which boards and directors are able to direct, monitor and supervise the conduct and operation of the corporation and its management in a manner that ensures appropriate levels of authority, accountability, stewardship, leadership, direction and control. IFC

7 Concepts: Corporate Governance and Code of Ethics The OECD - "Corporate governance involves a set of relationships between a company s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined."

8 Two types of relationships The long term relationship deal with checks and balances, incentives for manager and; communications between management and investors. The transactional relationship involves dealing with disclosure and authority.

9 International Standard on Auditing (ISA) International Standard on Auditing (ISA) 260: that: Governance is the term used to describe the role of persons entrusted with the supervision, control, and direction of an entity.

10 Ethics Ethics involves judgments as to good and bad, right and wrong and what ought to be (what is good, bad or who decides) The golden rule therefore is: do unto others as you would have them do unto you.

11 Morals Ethics deals with things to be sought and things to be avoided Morals: rules or duties that govern our behavior, e.g. do not tell a lie

12 values Values: these are beliefs that a given behavior or outcome is desirable or good. Values serve as standards of conduct that guide our behavior Example: how we value the environment, selfrespect keeping our family safe, good health, (e) politics.

13 Concepts: Corporate Governance and Code of Ethics IFC Part A Framework applies to all professional accountants Part B Professional accountants in public practice Part C Professional accountants in business

14 Fundamental Principles Integrity To be straight forward and honest in all professional and business relationships Objectivity To not allow bias, conflict of interest or undue influence of others to override professional or business judgments

15 Fundamental Principles Professional Competence and Due Care To maintain professional knowledge and skill at the level required to ensure competent professional services based on current developments in practice, legislation and techniques To act diligently in accordance with applicable technical and professional standards

16 Fundamental Principles Confidentiality To refrain from disclosing confidential information acquired as a result of professional and business relationships without proper and specific authority to disclose unless there is a legal or professional right or duty to disclose To refrain from using confidential information acquired as a result of professional and business relationships for personal advantage or the advantage of third parties

17 Fundamental Principles in CG also focus on Professional behavior Obligation to comply with relevant laws and regulations and avoid any action that discredits the profession/ role as a director

18 Concepts: Corporate Governance and Code of Ethics Ethics is a code of behavior that a society considers moral and appropriate for guiding relationship with one another. How does the society set this? It includes: honesty, integrity, fair, open and straight-forward dealing.

19 Objectives of Professional Accountants work to the highest standards of professionalism attain the highest levels of performance, and meet the public s interest

20 IFC - Conceptual Framework Approach Requires active consideration of issues Establishes basic principles Can be applied to differing circumstances Responsive to rapid change Requires judgment rather than literal interpretations encouraged by a pure rules approach

21 Threats/ Risks Self-interest Self-review Advocacy Familiarity Intimidation

22 Safeguards/Risks Two categories: Created by the profession, legislation or regulation In the work environment

23 IFAC Code of Ethics fundamental Principles for all Accountants: Integrity (Sec 110) Objectivity (Sec 120) Professional Competence and Due Care (Sec 130) Confidentiality (Sec 140) Professional Behavior (Sec 150) Continuation

24 Integrity The principle of integrity imposes an obligation on all professional accountants to be straightforward and honest in performing professional services. It also implies fair dealing and truthfulness. In CG the maxim: Fit for purpose entails competency and the board has to have a competency mix Objectivity: The principle of objectivity imposes on all professional accountant not to compromise their professional or business judgment because of bias, conflict of interest or undue influence of others. This is same in CG principle of independence

25 Professional Competence and Due Care: A professional accountant has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques.

26 Confidentiality: A professional accountant should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority. Professional Behavior: A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession.

27 CG fiduciary responsibilities.. epitomized Fiduciary duty means that, as shareholders guardians, directors must be trustworthy, acting in the best interest of shareholders, and investors in turn have confidence in the directors actions. The corporate governance literature presents the following fiduciary duties of boards of directors: Duty of due care Duty of loyalty Duty of Good Faith Duty to Promote Success Duty to Exercise Diligence, Independent Judgment, and Skill Duty to Avoid Conflict of Interests Fiduciary Duties and Business Judgment Rules.

28 Conceptual Framework Approach A conceptual framework requires a professional accountant to identify, evaluate and address threats to compliance with the fundamental principles, rather than merely comply with a set of specific rules which may be arbitrary. If threats to ethics are not clearly insignificant, a professional accountant should apply safeguards to eliminate the threats or reduce them to an acceptable level.

29 Prohibitions When safeguards are never adequate

30 Identification of threats to Auditors independence Self Review Threat Advocacy Threat Familiarity Threat Intimidation Threat Threat to Independence Self Interest

31 Threats and Safeguards Compliance with the fundamental principles may potentially be threatened by a broad range of circumstances. Many threats fall into the following categories: Self-interest threats Self-review threats Advocacy threats Familiarity threats Intimidation threats

32 Self-Interest Threat A Self-interest threat occurs as a result of the financial or other interests of a professional accountant or of an immediate or close family member; In CG this situation is referred as Conflict of Interest More over, in CG there is conduct risk assessment

33 Self Interest Threats Circumstances A financial interest in a client or jointly holding a financial interest with a client. Undue dependence on total fees from a client. Having a close business relationship with a client. Concern about the possibility of losing a client. Potential employment with a client. Contingent fees relating to an engagement. A loan to or from a client or any of its directors or officers.

34 Self-Review Threats Circumstances The discovery of a significant error during a re-evaluation of the work of the auditor. Reporting on the operation of financial systems after being involved in their design or implementation. Having prepared the original data used to generate records that are the subject matter of the engagement. A member of the team being, or having recently been, a director or officer of that client. A member of the team being, or having recently been, employed by the client in a position to exert direct and significant influence over the subject matter of the engagement. Performing a service for a client that directly affects the subject matter of the engagement.

35 Advocacy Threat An Advocacy Threat occurs when a professional accountant promotes a position or opinion to the point that subsequent objectivity may be compromised. Examples of circumstances that create advocacy threats : Selling, underwriting or otherwise dealing in financial securities or shares of a client; Acting as an advocate on behalf of a client in litigation or disputes with third parties.

36 Part B Professional Accountants in Public Practice Professional Appointment Conflicts of Interest Second Opinions Fees and Other Types of Remuneration Marketing Professional Services Gifts and Hospitality Custody of Client Assets Objectivity All Services Independence Audit and Review Engagements Independence Other Assurance Engagements

37 Independence for Audit and Review Engagements Firm includes network firm, except where otherwise stated Independence of mind and independence in appearance Public interest entities: additional provisions in Section 290 that reflect the extent of public interest in certain entities

38 Independence for Audit and Review Engagements cont d Documentation: conclusions regarding compliance with independence requirements, and substance of any relevant discussions that support those conclusions

39 Independence for Audit and Review Engagements cont d Financial interests Loans and guarantees Business relationships Family and personal relationships Employment with an audit client Temporary staff assignments

40 Independence for Audit and Review Engagements cont d Recent service with an audit client Serving as a director or officer of an audit client Long association of senior personnel (including partner rotation) with an audit client

41 Independence for Audit and Review Engagements cont d Provision of non-assurance services to audit clients Management responsibilities Preparing accounting records and financial statements Valuation services Taxation services Internal audit services

42 Independence for Audit and Review Engagements cont d Provision of non-assurance services to audit clients IT systems services Litigation support services Legal services Recruiting services Corporate finance services

43 Independence for Audit and Review Engagements cont d Fees Compensation and evaluation policies Actual or threatened litigation Reports that include a restriction on use or distribution

44 Independence for Other Assurance Engagements Assurance engagements that are not audit or review engagements Include related entities when reason to believe relevant to independence Include network firms when reason to believe relevant to independence

45 Independence for Other Assurance Engagements Assertion-based assurance engagements Independence required from assurance client (party responsible for the subject matter information, and which may be responsible for the subject matter) When client not responsible for subject matter evaluate the threats firm has reason to believe created by interests and relationships with party responsible for subject matter Direct reporting engagements Independence required from assurance client (party responsible for the subject matter)

46 Independence for Other Assurance Engagements Multiple responsible parties Firm may take into account whether interest or relationship with a particular responsible party creates a threat. Consider: Materiality of subject matter information (or subject matter) for which the particular responsible party is responsible Degree of public interest associated with engagement

47 Part C Professional Accountants in Business Potential conflicts Preparation and reporting of information Acting with sufficient expertise Financial interests Inducements

48 Intimidation Threat Intimidation Threat occur when a professional accountant may be deterred from acting objectively by threats, either actual or perceived. Examples of circumstances: Being threatened with dismissal or replacement in relation to a client engagement. Being threatened with litigation. Being pressured to reduce inappropriately the extent of work performed in order to reduce fees.

49 Safeguards Safeguards that may eliminate or reduce such threats to an acceptable level fall into three broad categories: Safeguards created by the profession, legislation or regulation; Safeguards within the client; and Safeguards within the firm s own systems and procedures.

50 Safeguards created by the profession, legislation or regulation Educational, training and experience requirements for entry into the profession. Continuing professional development requirements. Corporate governance regulations. Professional standards. Professional or regulatory monitoring and disciplinary procedures External review by a third party of the reports, returns, communications or information produced by a professional accountant.

51 Safeguards within the Client When the client s management appoints the firm, persons other than management ratify or approve the appointment; The client has competent employees to make managerial decisions; Policies and procedures that emphasize the client s commitment to fair financial reporting; A corporate governance structure, such as an audit committee, that provides appropriate oversight and communications regarding a firm s services.

52 Safeguards in the work environment leadership that stresses the importance of independence and the expectation that members of the teams will act in the public interest. Policies and procedures to implement and monitor quality control of the engagements; Documented independence policies regarding the identification of threats to independence, the evaluation of the significance of these threats and the identification and application of safeguards to eliminate or reduce the threats, other than those that are clearly insignificant, to an acceptable level;

53 Resolution of Ethical Conflicts If the matter remains unresolved, the professional accountant should consult with other appropriate persons within the firm Where a matter involves a conflict with, or within, an organization, consult with those charged with governance of the organization, such as the board of directors or the audit committee. If a significant conflict cannot be resolved, obtain professional advice from the relevant professional body or legal advisors. If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a professional accountant should, where possible, refuse to remain associated with the matter creating the conflict.

54 Professional Appointment Client Acceptance - consider whether acceptance would create any threats to compliance with the fundamental principles Engagement Acceptance - agree to provide only those services that the accountant is competent to perform.

55 Changes in a Professional Appointment Before accepting an appointment involving services that were carried out by another, the proposed auditor should: Request permission from the client to contact former auditor directly; Contact existing auditor before beginning audit.

56 Information from Existing Auditor Once the client permission is obtained, the existing auditor should provide information honestly and unambiguously. If the proposed auditor is unable to communicate with the existing auditor, the proposed auditor should try to obtain information about any possible threats by other means such as through inquiries of third parties or background investigations on senior management. The existing auditor is no longer required to provide information in writing or regarding reasons not to take an audit.

57 Conflicts of Interest A professional accountant in practice should take reasonable steps to identify circumstances that could pose a conflict of interest. Such circumstances may give rise to threats to compliance with the fundamental principles

58 Second Opinions Providing a second opinion on the application of accounting, auditing, reporting or other standards or principles by or on behalf of a company that is not an existing client may cause threats to compliance with the fundamental principles. Safeguards such as seeking client permission to contact the existing auditor, describing the limitations surrounding any opinion and providing the existing auditor with a copy of the opinion may be required.

59 Fees and Other Types of Remuneration An auditor may quote whatever fee deemed to be appropriate. However, a self-interest threat to professional competence and due care is created if the fee quoted is so low that it may be difficult to perform the engagement.

60 Commissions, Referral Fees, and Contingent Fees A professional accountant in public practice should not pay or receive a referral fee or commission, unless he/she has established safeguards to eliminate the threats or reduce them to an acceptable level. Contingent fees are widely used for certain types of non-assurance engagements. They may, however, give rise to self-interest threats to compliance with the fundamental principles.

61 Advertising and Marketing When a professional accountant in public practice solicits new work through advertising or other forms of marketing, there may be potential threats to compliance with the fundamental principles.

62 What Advertising Cannot Do A professional accountant should not bring the profession into disrepute when marketing professional services. He/she should be honest and truthful and should not: Make exaggerated claims for services offered, qualifications possessed or experience gained; or Make disparaging references to unsubstantiated comparisons to the work of another.

63 Gifts and Hospitality Self-interest threats to objectivity may be created if a gift from a client is accepted; intimidation threats to objectivity may result from the possibility of such offers being made public. Gifts or hospitality which are acceptable are those which a reasonable and informed third party, having knowledge of all relevant information, would consider clearly insignificant.

64 Custody of Client Assets Safeguard against a self-interest threat to objectivity, a professional accountant in public practice entrusted with money (or other assets) belonging to others should: Keep such assets separately from personal or firm assets; and Use such assets only for the purpose for which they are intended. At all times, be ready to account for those assets, and any income, dividends or gains generated. Comply with all relevant laws and regulations relevant to the holding of and accounting for such assets.

65 Application of Framework to Specific Situations The Code of Ethics, discusses a principles-based framework for identifying, evaluating and responding to threats. The framework establishes principles to identify threats to ethics principles, evaluate the significance of those threats, and, if the threats are other than clearly insignificant, identify and apply safeguards to eliminate the threats or reduce them to an acceptable level.

66 Cross-Border Activities An accountant may perform services in a country other than his home country. If differences exist between ethical requirements of the two countries, the strictest provisions should be applied.

67 The IFAC Code prohibits the following non-audit services for audit clients: Bookkeeping Services Valuation services Management decision making functions Broker-dealer or investment advisor services Litigation support

68 Financial involvement with a client direct financial interest in a client; indirect material financial interest loans to or from the client or any director or major stockholder in the client company; financial interest in a joint venture with a client or employee(s) of a client. financial interest in non-client with investor or investee relationship with the client.

69 Professional Competence and Responsibilities Regarding the Use of Non-Accountants If a professional accountant does not have the competence to perform a specific part of the professional service, technical advice may be sought from experts (such as other professional accountants, lawyers, actuaries, engineers, geologists, and evaluators). However, since the auditors have ultimate responsibility for the service, it is his responsibility to see that the requirements of ethical behavior are followed.

70 Activities Incompatible with the Practice of Public Accountancy A CPA in public practice should not concurrently engage in any business, occupation or activity that impairs or might impair integrity, objectivity or independence, or the good reputation of the profession. The simultaneous engagement in another activity unrelated to assurance or accounting services, which reduces the accountant s ability to conduct his accounting practice according to ethical principles, is inconsistent with public practice.

71 Conflict of Loyalties Employed professional accountants owe a duty of loyalty to their employer as well as to their profession and there may be times when the two are in conflict. An employee cannot legitimately be required to break the law, breach the ethics, rules, and standards of the accounting profession, lie to their employer s auditors, or be associated with a statement that materially misrepresents the facts. If employed accountants cannot resolve any material issue involving a conflict between their employers and their professional requirements they may have no other recourse but to resign.

72 Support for Professional Colleagues and Professional Competence Support for Professional Colleagues A professional accountant, particularly one having authority over others, should allow them to develop their own judgment in accounting matters. Professional Competence An accountant employed in industry, commerce, the public sector or education may be asked to undertake significant tasks for which she has not had sufficient specific training or experience. Where appropriate expert advice and assistance should be sought.

73 Presentation of Information A professional accountant is expected to present financial information fully, honestly and professionally and so that it will be understood in its context. Under CG, the Directors are equally responsible and have to make attestation on the financial information

74 Disciplinary action and common sanctions Disciplinary action ordinarily arises from such issues as: failure to observe the required standard of professional care, skills or competence; non-compliance with rules of ethics and discreditable; or dishonorable conduct. Sanctions commonly imposed by disciplinary bodies include: reprimand, fine, payment of costs, withdrawal of practicing rights, suspension, and expulsion from membership. LEGAL OR imposed at the AGM

75 Discussions, Q & A

76 Thank you