As a newly-qualified Chartered Certified Accountant, you have been asked to write an „ethics column‟ for a trainee accountant on ICAN News Letter. In particular, you have been asked to draft guidance on the following questions addressed to the News Letter‟s helpline:
a) What gifts or hospitality are acceptable and when do they become an inducement?
b) If a partner, who is an actuary, provides valuation services to an audit client, can we continue with the audit?
c) Can internal audit services be undertaken for an audit client?
a) Gifts and hospitality – Gifts and hospitality may be offered as an inducement i.e. to unduly influence actions or decisions, encourage illegal or dishonest behavior or to obtain confidential information. An offer of gifts and/or hospitality from a client ordinarily gives rise to threats to compliance with the fundamental principles, for example:
Self-interest threats to objectivity and/or confidentiality may be created if a gift from a client is accepted provided such gift is of significant value.
intimidation threats to objectivity and/or confidentiality may arise through the possibility of such offers being made public and damaging the reputation of the professional
accountant (or close family member). The significance of such threats will depend on the nature, value and intent behind the offer. There may be no significant threat to compliance with the fundamental principles if a reasonable and informed third party would consider gifts and hospitality to be clearly insignificant. For example, if the offer of gifts or hospitality is made in the normal course of business without the specific intent to influence decision making or to obtain information.
If evaluated threats are other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate them or reduce them to an acceptable level. Offers of gifts and hospitality should not be accepted if the threats cannot be eliminated or reduced to an acceptable level through the application of safeguards. As the real or apparent threats to compliance with the fundamental principles do not merely arise from acceptance of an inducement but, sometimes, merely from the fact of the offer having been made, additional safeguards should be adopted. For example:
immediately informing higher levels of management or those charged with governance that an inducement has been offered;
informing third parties (e.g. a professional body) of the offer (after seeking legal advice);
advising immediate or close family members of relevant threats and safeguards where they are potentially in positions that might result in offers of inducements (e.g. as a result of their employment situation); and
informing higher levels of management or those charged with governance where immediate or close family members are employed competitors or potential suppliers of that organization.
b) Actuarial services to an audit client- IFAC‟s „Code of Ethics for Professional Accountants‟ does not deal specifically with actuarial valuation services but with valuation services in general. A valuation comprises:
making assumptions about the future;
applying certain methodologies and techniques;
computing a value (or range of values) for an asset, a liability or for a business as a whole.
A self-review threat may be created when a firm or network firm performs a valuation for a financial statement audit client that is to be incorporated into the client‟s financial statements. As an actuarial valuation service is likely to involve the valuation of matters material to the financial statements (e.g. the present value of obligations) and the valuation involves a significant degree of subjectivity (e.g. length of service), the self-review threat created cannot be reduced to an acceptable level of the application of any safeguard. Accordingly:
such valuation services should not be provided; or
the firm should withdraw from the financial statement audit engagement. If the net liability was not material to the financial statements the self-review threat may be reduced to an acceptable level the application of safeguards such as:
involving an additional professional accountant who was not a member of the audit team to review the work done the actuary;
confirming with the audit client their understanding of the underlying assumptions of the valuation and the methodology to be used and obtaining approval for their use;
obtaining the audit client „s acknowledgement of responsibility for the results of the work performed the firm; and
making arrangement so that the partner providing the actuarial services does not participate in the audit engagement.
c) Internal audit services – A self-review threat may be created when a firm, or network firm, provides internal audit services to a financial statement audit client. Internal audit services may comprise:
an extension of the firm‟s audit service beyond requirements of Nepal Standards on Auditing (NSAs);
assistance in the performance of a client‟s internal audit activities; or
outsourcing of the activities.
The nature of the service must be considered in evaluating any threats to independence. (For this purpose, internal audit services do not include operational internal audit services unrelated to the internal accounting controls, financial systems or financial statements.) Services involving an extension of the procedures required to conduct a financial statement audit in accordance with NSAs would not be considered to impair independence with respect to the audit client provided that the firm‟s or network firm‟s personnel do not act or appear to act in a capacity equivalent to a member of audit client management. When the firm, or a network firm, provides an audit client with assistance in the performance of internal audit activities or undertakes the outsourcing, any self-review threat created may be reduced to an acceptable level a clear separation of:
the management and control of the internal audit client management;
the internal audit activities. Performing a significant portion of an audit client‟s internal audit activities may create a self-review threat. Appropriate safeguards should include the audit client‟s acknowledgement of its responsibilities for establishing, maintaining and monitoring the system of internal controls. Other safeguards include:
the audit client designating a competent employee, preferably within senior management, to be responsible for internal audit activities;
the audit client, audit committee or supervisory body approving the scope, risk and frequency of internal audit work;
the audit client being responsible for evaluating and determining which recommendations of the firm should be implemented;
the audit client evaluating the adequacy of the internal audit procedures performed and the resultant findings obtaining and acting on reports from the firm; and
appropriate reporting of findings and recommendations resulting from the internal audit activities to the audit committee or supervisory body. Consideration should also be given to whether such non-assurance services should be provided only personnel not involved in the financial statement audit engagement and with different reporting lines within the firm.