The global body for professional accountants COMMON ETHICAL ISSUES

The global body for professional accountants

COMMON ETHICAL ISSUES


AGENDA

• Access to clients (beneficial owners) and control of audits

• Serious issues on audit independence; Serving as director or officer of audit clients Undue financial dependence on audit clients

• Network firms and audit independence

• Other common independence issues


Common with international business company audit clients referred by lawyers or corporate service providers

No contact with beneficial owners or manager of the business of audited entity to:

• Obtain an understanding of business and associated risks for audit planning and to communicate under ISA 260

• Understand the rationale behind existence of business and transactions

• Deal with evidential matters including on analytical reviews and subsequent events and going concern reviews

• Communicate internal control deficiencies under ISA 265

• Obtain management representation letter and approval of financial statements

Access to clients (beneficial owners) and control of audits


RESULTS IN FIRM NOT IN A POSITION TO PROPERLY CONTROL THE AUDITS IN SERIOUS BREACH OF ISA 220

Access to clients (beneficial owners) and control of audits (Continued)


Serving as director or officer of audit client

Breach of s43(3) of Law 42(I)/2009 - None of the following individuals can be appointed as statutory auditor:

• Officer, shareholder or an employee of the audit client• Parent, Spouse, brother, sister or child of an officer• Partner or employee of an officer of the audited entity

Breach of IFAC Code of Ethics (S290.146, s290.148 and s290.127 to s290.132)• Partners and employees• Immediate family relations of partners• Close family relations of partners• Other close personal relatives

Common with international business company audit clients

Serious issues on audit independence


Undue financial dependence

• Significant proportion of firm’s income for one client or group of connected clients

• Significant proportion of firm’s income from clients referred from a single source

Common where all or significant proportion of the firm’s income from international business company audit clients referred to the firm by one lawyer or company services provider

No safeguards workable if dependence high

Breach of s220 of IFAC Code of Ethics

Serious issues on audit independence


Network firms and audit independence

• Common with international business audit clients where fiduciary services provided by another entity

• Paragraph 28 (2) of Law 42(I)/2009 states that a statutory auditor or a statutory audit firm shall not carry out a statutory audit if there is any direct or indirect financial or business or employment or other relationship between the statutory auditor, the statutory audit firm or network and the audited entity

• Paragraph 290.3 of the IFAC Code of Ethics states the term “Firm” in section 290 includes network firm, except where otherwise stated


Network firms and audit independence (Continued)

• s290.13 to s290.24 of IFAC Code of Ethics cover networks

• Although two entities are legally separate entities, there may be facts and circumstances that would suggest that they are associated in such a way that a network exists (s290.14 of IFAC Code of Ethics)

• The judgment as to whether the larger structure is a network shall be made in light of whether a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that the entities are associated in such a way that a network exists (s290.15 of IFAC Code of Ethics)

• Larger structure between audited entity and fiduciary services provider aimed at co-operation


Network firms and audit independenceCommon characteristics identified of networks:

Common ownership (or immediate and close family relationships)

Ownership of fiduciary services provider hidden behind firm’s employees or relations or friends of practitioner / partners

Virtually all clients of fiduciary services provider are audit clients of the firm – Fiduciary services provider appears as extension of the audit firm or as a separate department of the audit firm.

The firm’s website promotes the services of the fiduciary services provider as its own or as offered through associates or collaborators or vice versa.

Promotional activity (presentations and material) carried out jointly offering respective services - one stop shop.

…


Network firms and audit independenceCommon characteristics identified of networks:

Invoices for services are issued by either the audit firm or fiduciary services provider.

Invoices show the same contact details for both entities.

Joint statement of account to clients showing the transactions and balances relating to both entities.

A current account between the two entities and financial transfers made between them for mutual financial support.

The practitioner acts a signatory or has viewing rights on the bank accounts of the fiduciary services provider

Both entities share resources (e.g. staff, server etc.)


Other common independence issues:

Acting as signatory on bank accounts of audit clients

Book-keeping and accounts preparation services provided to audit clients

Long association of senior personnel with audit clients

Key partner rotation on audits of public interest clients


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The global body for professional accountants COMMON ETHICAL ISSUES