Case Studies On Compliance with the IESBA Code of Ethics
Manoj Fadnis, Johnny Yong | September 16, 2019
On June 15, 2019, the accounting world heralded the coming into effect of the International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code) which has been revised and restructured. The project started in 2014 to look at the structure of how the Code was presented to enhance clarity and usability, thereby facilitating the Code’s adoption, effective implementation and consistent application on a global basis.
Following the updates and restructuring, the fundamental principles that have been the hallmark of the Code remain unchanged (see Section 110 onward together with the Application Material). They are:
- Integrity – to be straightforward and honest in all professional and business relationships. (R111.1)
- Objectivity – not to compromise professional or business judgments because of bias, conflict of interest or undue influence of others. The professional accountant (PA) should not undertake a professional activity if a circumstance or relationship unduly influences the PA’s professional judgment regarding that activity. (R112.1 and R112.2)
- Professional competence and due care – to attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organization receives competent professional service, based on current technical and professional standards and relevant legislation. The PA is to act diligently and in accordance with applicable technical and professional standards. (R113.1)
- Confidentiality – to respect the confidentiality of information acquired as a result of professional and business relationships. (R114.1)
- Professional behavior – to comply with relevant laws and regulations and avoid any conduct that the PA knows or should know might discredit the profession. The PA shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession and, as a result would be incompatible with the fundamental principles. (R115.1)
Independence on its own is not a fundamental principle but it is linked to the principles of objectivity and integrity. It comprises independence of mind and independence in appearance. When performing audit, review and other assurance engagements, the Code requires the PA and firm to comply with the fundamental principles and be independent.
The IFAC SMP Committee (SMPC) has provided input to the International Ethics Standards Board for Accountants (IESBA) in the course of their work in revising the Code. Significant resources had been invested in preparing the various comment letters to the Board for its quarterly meetings as well as the official input to the Exposure Draft. As part of the SMPC work plan, it considered a number of publications that can be shared with the global audience, particularly those that deal with compliance with the fundamental principles and not other aspects of the Code due to possible differences in regulations and laws from one jurisdiction to another. The Consultative Committee of Accountancy Bodies (CCAB) of UK and Ireland previously published guidance for PAs in public practice, business, working as non-executive directors, in the voluntary sector and in the public sector. These can be downloaded under the title “Ethical Dilemmas Case Studies” at: http://www.ccab.org.uk/reports.php
In addition, to facilitate education and training among PAs, the Institute of Chartered Accountants India (ICAI) shared with the SMPC two cases covering confidentiality and professional behavior that demonstrated a breach of the fundamental principles:
The ICAI’s Code of Ethics, which was developed in 2009, incorporates elements of the 2005 IESBA Code of Ethics with modifications. With the revised and restructured Code coming into effect in June 2019, the Council of ICAI has taken the practical step to re-focus on the convergence with the latest version of the IESBA Code.
Under the ICAI’s code of conduct, a PA shall safeguard the client’s confidentiality in all circumstances except under the following circumstances:
- Consent has been given by the client;
- Where there is an order by a court of competent jurisdiction; and
- Where there is a mandatory reporting requirement in the statute (such as Anti Money Laundering Law) or when there is a legal right to disclose.
These provisions are equivalent to those readily available under the IESBA’s Code that deals with confidentiality.
Confidentiality is an important principle that serves the public interest because it facilitates the free flow of information from the PA’s clients or employing organization to the accountant with the knowledge that the information will not be disclosed to a third party.
In this case, the PA had written to the Registrar of Companies (Regulator of Companies in India) making disclosures of their audit work on the client’s records following a dispute. The client had then lodged a complaint to the Disciplinary Committee of the ICAI alleging a breach of the provisions pertaining to confidentiality for disclosing information acquired without the client’s explicit consent.
The Disciplinary Committee of ICAI (the Committee) investigated the complaint and the PA was found guilty of the charge of violation of the provisions of confidentiality. The Committee further noted that it has not come across any provision in any Act (in India) whereby a member is required to report directly to the Registrar of Companies with respect to a financial statement that they have audited. Therefore, the Committee was satisfied (i) that the PA had acquired the information in the course of the professional engagement, (ii) that they had disclosed them to the Registrar of Companies, (iii) that the disclosure was without the consent of the client, and (iv) that there was no requirement in any law for such a disclosure.
A PA has access to a great deal of client information which can be highly confidential. It is important for the work of a member and for maintaining the dignity and status of the profession that they should treat such information as having been provided only to facilitate the performance of their professional duties for which they have been engaged.
Under the ICAI’s code of conduct, the principle of professional behavior imposes an obligation on all PAs to comply with relevant laws and regulations and avoid any action that the PA knows or should know that may discredit the profession. Thus, at the heart of this second case is the question of conduct befitting the profession. In this case, the issue was how a PA deals with the client’s money. In many jurisdictions (including India), a PA is expected to bank any money received from clients in a separate client account. A PA should:
- Use such assets only for the purpose for which they are intended;
- At all times, be ready to account for these assets and any income or gains generated to any persons entitled to such accounting (in certain jurisdictions, some threshold may have been prescribed to minimize the workload of the PA in accounting for these gains or dividends); and
- Comply with all relevant laws and regulations relevant to the holding of and accounting for such assets.
In this case a PA had recommended their client to make an investment in some local companies. They also assured that they would look after the client’s matters relating to income tax and would invest in the names of the client and his wife. For these purposes, the client had given the PA a bank draft, cash and a cheque amounting to Rs. 665,000 (or equivalent to about US$ 9,400) in total over a period of time.
On verification, the client subsequently found that the PA did not invest the money in any company or pay the income tax to the revenue authority in India. Despite the client’s repeated requests, the PA had not provided the certificates of investment and receipt of payment of income tax to the relevant authority. Hence, a complaint was lodged with the Disciplinary Committee of the ICAI.
The Disciplinary Committee of ICAI which conducted the investigation subsequently found the PA to be guilty of professional misconduct for not keeping the money received from the client in a separate bank account as required under the Clause (10) of Part-I of the Second Schedule to the Chartered Accountant Act, 1949 applicable in India.
Readers should take note that the revised and restructured Code of the IESBA deals with the professional behavior of accountants and custody of clients’ assets under paragraph R115.1 (under subsection 115) and section 350 respectively.
Ethics and integrity lie at the heart of the qualities expected of PAs. The case studies as published by CCAB and the two cases presided by the ICAI’s Disciplinary Committee serve as a reminder of how real dilemmas can either emerge or present themselves to a PA, sometimes very quickly. These cases can provide helpful resources for PAs in many ways:
- To form the basis of an internal discussion with colleagues to assess what each might do in these circumstances. This is especially true for some of the case studies as mentioned in the CCAB publications dealing with improper accounting for sales and conflicting clients’ interests (see the ethical dilemmas case studies for PA in public practice); and
- To be used as a training aid in a formal or other educational setting. This will ensure that future ethical challenges are continuously debated and properly understood as the business environment becomes even more complex over time.