FOCUS NOTES -CODE OF ETHICS

Code of Ethics of Professional Accountants in the Philippines

Kristine R. Apale AC516 12:00 – 3:00

Focus Notes

Fundamental Principles A. Integrity

  All professional accountants to be straightforward and honest

  A professional accountant should not be associated with reports or other information which: o Contain a materially false or misleading statements

o Contain statements or information furnished recklessly

o Omit or obscure information required where such omission/obscurity would be misleading B. Objectivity

 Not to compromise a professional accountant’s judgment because of bias, conflict of interest or undue influence of others

C. Professional Competence and Due Care

 To maintain professional knowledge and skill at the level required and to act diligently in accordance with applicable technical and professional standards

 Professional Competence is divided into two (2) phases:

1. ATTAINMENT OF PROFESSIONAL COMPETENCE -Requires initially a high standard of general education, followed by specific education, training and examination

2. MAINTENANCE OF PROFESSIONAL COMPETENCE -Requires continuing awareness and understanding of relevant technical professional developments

D. Confidentiality

 Obligation to refrain from:

o Disclosing confidential information acquired without proper and specific authority or unless there is legal or professional right or duty to disclose; and

o Using confidential information acquired to their/third parties’ personal advantage

 Ensure that the staff under the professional accountant’s control respect such duty of confidentiality.

 Compliance to such principle even after the end of the client/employer-professional accountant relationship

 Where disclosure may be appropriate:

o Permitted by law, authorized by client or employer

o Required by law (production of documents in the course of legal proceedings, disclosure to public authorities of law infringements that come to light)

o Professional duty or right to disclose; when not prohibited by law (To comply with quality review or respond to an inquiry/investigation of a member or professional body, to protect professional interests of an accountant in legal proceedings, to comply with technical standards and ethics requirements)

E. Professional Behavior

 to comply with relevant laws and regulations and avoid any action that may bring discredit to the profession

 professional accountants should be honest and truthful in marketing themselves and their work and should not:

o make exaggerated claims on the services offered, qualifications possessed or experience gained

o make unsubstantiated comparisons to the work of others F.

G. Threats and Safeguards

  Unique Threats to compliance with one or more fundamental principles that cannot be categorized H. Thr eat s I. May occur when

J. Part B: In Public Practice K. Including but not limited to:

L. Part C: In Business M. Including but not

limited to: N. Self -inte rest O. Financia l or other interests of a professi onal account ant or of an immedia te or close family member

-financial interest in a client

-undue dependence on total fees from a client

-close business relationship with client -concern about possibility of losing a client -potential employment with a client -contingent fees relating to an assurance

engagement

-financial interests, loans or guarantees

-incentive compensation arrangements

-inappropriate personal use of corporate assets

-concern over employment security

-commercial pressure from outside the employing organization P. Self -revi ew Q. A previous judgmen t needs to be re-evaluate d by the professi onal account ant responsi ble for that judgmen t

-reporting on operation of financial systems after being involved in their design or implementation

-having prepared the original data used to generate records which are the subject matter of the engagement

-a member of the assurance team, having previously employed by the client in a position to exert direct and significant influence over the subject matter

-business decisions or data being subject to review and justification by the same professional accountant in business responsible for making those decisions or preparing such data

R. Adv oca cy S. A professi onal account promote s a position or opinion that subsequ ent activity may be compro mised

-promoting shares in a listed entity who is a financial statement audit client

-acting as an advocate on behalf of an assurance client in litigation or disputes with third parties

-furthering legitimate goals of employing organizations through promoting

organization’s position using false or misleading statements T. Fa mili arit y U. A professi onal account

-member of the assurance team having close or immediate family relationship with the client’s director/officer or employee in the position to exert direct or significant influence on the subject

-a professional accountant in the position to influence

financial or non-financial reporting having an immediate or close family

ant becomes too sympath etic because of a close relations hip matter

-accepting gifts or preferential treatment from client, unless value is clearly insignificant

-long association of senior personnel with client

member who is in a position to benefit from such

influence

-long association with business contacts influencing business decisions -acceptance of a gift or

preferential treatment, unless value is clearly insignificant V. Inti mid atio n W. A professi onal account ant may be deterred from acting objectiv ely by threats, actual or perceive d.

-Being threatened with

dismissal/replacement/litigation -Being pressured to reduce inappropriately

extent of work to reduce fees

-Threats of

dismissal/replacement of a close or immediate family member

-A dominant personality attempting to influence the decision-making process

X. Y. Z.

AA. Safeguards AB. In Public Practice (Part B)

AC.Including but not limited to:

AD. In Business (Part C) AE. Incl uding but not limited to: AF. Safeguards created by the

profession, legislation or regulation

-Educational, training and experience requirements for entry in the profession

-Continuing professional development requirements -Corporate governance regulations

-Professional standards

-Regulatory monitoring and disciplinary procedures

-External review of legally empowered third party of reports, communications and information produced

AG. S afeguar ds in the work environ ment AH. Firm-wide safeg uards

-Leadership that stresses the importance of compliance with fundamental principles -Policies and procedures:

-- that implement and monitor quality control of engagements, compliance with fundamental principles

-- enables the identification of interests or relationships between members of assurance team and clients

-- monitor the reliance on revenue received from a single client

-Using different partners and engagement teams for the provision of non-assurance services to an assurance client

-Overseeing the adequate functioning of the firm’s quality control system

-Employing organization’s systems of corporate oversight, ethics and conduct programs -Strong internal controls -Appropriate disciplinary practices -Policies and procedures to implement and

monitor quality of employee performance -Timely communication of such policies AI. AK. Engagem ent-specif ic safeg uards

-Involving an additional professional accountant to review the work done

-Consulting an independent third party, such as committee of independent directors, etc. -Discussing ethical issues with those charged with

governance of the client and disclosing to them the nature of service provided and extent of fees charged

-Rotating senior assurance team personnel AM. Safeguards

implemented by client

-Client has competent employees to make managerial decisions

-Client has implemented internal procedures to ensure objective choices in commissioning non-assurance engagements

-Client has corporate governance structure that provides appropriate oversight and

communications

AN.

AO.

AP. Other Matters Concerning Professional Accountants in Public Practice (Part B of the Code)

AQ.

AR.

AS.

AU. P rofessio nal Appoint ment AV. Client Accep tance AW. should consider whether acceptance would create any threats to compliance with fundamental

principles; decline to enter if threats could not be reduced to an acceptable level

-Obtaining knowledge and understanding of the client and its activities

AY.Engag ement Accep tance

AZ. should only agree to provide those services which the professional

accountant is

competent to perform

-Acquiring knowledge of relevant industries

-Assigning sufficient staff with necessary competencies

-Agreeing on realistic time frame for the performance BB.Chang es in Profes sional Appoi ntmen t BC. determine reasons for not

accepting the engagement, such as circumstances that may threaten compliance to fundamental

principles; still bound by confidentiality

-Discussing client’s affairs fully and freely with existing accountant

-If unable to communicate with the latter, try to obtain information about any possible threats

BD. C

onflicts of Interest

BE. BF. -Notifying client of firm’s activities which

may present conflict of interest -Use of separate engagement teams -Use of confidentiality agreements

BG. S

econd Opinion s

BH. There may be threat if second opinion is based on inadequate evidence

-Seeking client permission to contact existing accountant

-Providing the latter with copy of opinion BI. Fees

and Other Types of

BJ. Fees charged should be a fair reflection of the value of work involved:

BK. -skill and knowledge required BL. -level of training and experience

-Making the client aware of the basis on which fees are charged

-Quality control procedures

Remune rations

BM. -time occupied by each person

BN. M

arketing Professi onal

BO. Should not bring the profession into disrepute:

- make exaggerated claims on the services offered, qualifications possessed or experience gained

- make unsubstantiated comparisons to the work of others BP. BQ. G ifts and Hospita lity

BR.Significance of such threat will depend on nature, value or intent behind offer

BS. Safeguards should be considered otherwise, offer should not be accepted

BT. Custody of Client Assets

BU. Should not assume custody of client monies or other assets unless permitted to do so by law

-keep assets separate from personal or firm assets

-use assets only for purpose intended -be ready to account for those assets BV. Objectiv

ity – All Services

BW. A professional accountant in public practice who provides an assurance service is required to be independent of the assurance client.

BX.Indepen dence – Assuran ce Engage ments BZ.

CA. Possible threats to independence: CB.

CC.

CD.

insignificant, such safeguards are available to

eliminate or reduce threat to acceptable level: CF. When it wouldn’t impair independence of the firm: CG. Financial intere sts CH. When interest is held as a trustee, such interest should only be held when:

-Interest held is not material -Member of assurance team

does not have significant influence over any investment decision involving a financial interest in the assurance client

-Dispose of the direct financial interest prior to becoming a member of the assurance team -Dispose of the indirect financial

interest in total or to a sufficient amount that is no longer

material prior to becoming a member of the assurance team -Remove the member of the

assurance team from the assurance engagement

-Excluding the individual from any substantive decision-making concerning the assurance engagement

-The firm have established policies and procedures that require all

professionals to report promptly any breaches resulting from any acquisition of a financial interest in an assurance client The firm promptly notify

the professional that financial interest should be disposed of

Disposal occurs at the earliest practical date after identification of the issue, or professional is removed from assurance team CI. Loan s and guar antee s

CJ. If the firm or member of the assurance team makes a loan to an assurance client, that is not a bank or similar institutions, or guarantees such client’s borrowings, the threat would be so significant no safeguard could reduce the threat to an acceptable level

-If loan is immaterial and/or held under normal commercial terms or procedures

busin ess relati onshi ps with assur ance client s CL. Fami ly and perso nal relati onshi ps would be so significant no safeguard could reduce the threat to an acceptable

level.

-Reduce the magnitude of the relationship so the financial interest would be immaterial and relationship be insignificant -Refuse to perform the assurance

engagement

insignificant to the firm and audit client

-Interest held is immaterial -Interest does not give the

investor the ability to control the closely held entity

CO. Significan

ce of the threat will depend on factors such as: CP. - position the

immediate family holds with the client

CQ. - role of the professional on the assurance team

-Removing the individual from the assurance team

-Structuring the responsibilities of the assurance team so that the professional does not deal with matters that are within the responsibility of the immediate family member

-Policies to empower staff to communicate to senior levels any issue of independence and objectivity

-To withdraw from the assurance engagement

-Firm has established policies that require all professionals to report promptly any breaches resulting from changes in employment status of immediate or close family members -Responsibilities of the

assurance team have been restructured so the professional does not deal with matters concerning those of immediate family member

-Additional care is given to review the work of the professional

CS. If a member of the assurance team, partner or former partner of the firm has joined the assurance client, threat will depend on the following: CT. -position he has taken at the assurance client CU. -amount of involvement with the assurance team CV.- length of time

passed since he was a member of the assurance team CW. - former

position in the assurance team or firm

-Considering the appropriateness or necessity of modifying the assurance plan for the assurance engagement

-Involving an additional professional accountant who was not a member of the assurance team to review the work done

-Quality control review of the assurance engagement

-Individual concerned is not entitled to any benefits or payments from the firm unless these are made in accordance with fixed pre-determined arrangements -He does not continue to participate

in the firm’s business activities

CX. CZ. Threat is created when a member of the assurance team participates in the engagement having reason to believe that he may join the client some time

-Policies and procedures to require the individual to notify the firm when entering serious

employment negotiations with assurance client

-Removal of the individual from the engagement

in the future DB. Recent servi ce with assur ance client s

DC. If DURING the period covered by the assurance report, a member of the assurance team had served as an officer/director/employee of the assurance client in the position to exert significant influence over the subject matter, such individual should not be assigned to the assurance team

DD.

DF.If PRIOR the period covered by the assurance report, a member of the assurance team had served as an officer/director/em ployee of the assurance client in the position to exert significant influence over the subject matter, the threat will depend on the following factors:

DG. -position of the individual with the assurance client

DH. -length of time that passed since he left the assurance client DI. -role of the

individual in the assurance team

-Involving an additional accountant to review the work done

-Discussing the issue with those charged with governance, such as the audit committee

DJ. DK. Serving as an office r or direct or on the boar d of assur ance client s

DL. In case of financial statement audit

engagement, the only course of action is to refuse to perform or withdraw from the assurance engagement

DM.

DO. When practice is specifically permitted under local law, the duties and functions undertaken should be limited to those of routine and formal administrative nature such as the preparation of minutes and maintenance of statutory returns

DP. DQ. Long assoc iatio n of senio r perso nnel DR. Significan ce of the threat shall depend on: DS. -length of time that

the individual has been a member of the assurance team DT.-role in the

assurance team

-Rotating the senior personnel off the assurance team

-Involving an additional professional accountant who was not a member of the assurance team to review the work done

-Independent internal quality reviews

with assur ance client s DU. - structure of the firm DV.-nature of the assurance engagement DY.For financial statement audit clients that are listed entities:

-Rotation should be for a pre-defined period, normally no more than 5 years

-Such individual rotating should not participate in the audit

engagement until a further period of time, normally 2 years, has elapsed

-Some degree of timing in the rotation may be necessary in some circumstances DZ. EA.Provi sion of non-assur ance servi ces to assur ance client s

EB.The following list of activities would create threats so significant that the only safeguard to reduce it to an acceptable level would be refusal to perform the assurance engagement:

EC. -authorizing, consummating a transaction or otherwise exercising authority on behalf of the assurance client ED.-determining which recommendation of the firm should

be implemented

EE. -reporting, in a management role, to those charged with governance

EF.

EH.The following activities may also create threats: EI. -having custody of

client’s assets EJ. -supervising assurance client employees in the performance of their normal recurring activities EK.-preparing source documents or originating data evidencing occurrence of transaction

-Making arrangements so that personnel providing such services does not participate in the engagement

-Involving additional professional accountant to review the work done

-Other relevant safeguards set out in national regulations

-Policies and procedures that prohibit professional staff from making management decisions for assurance clients

-Discussing independence issues regarding provision of non-assurance with those charged with governance

-EL.

-Firm should not assume any managerial role

-Audit client should accept

responsibility of the work results -Personnel providing the services

should not participate in the audit

-Services do not involve the exercise of judgment -Divisions or subsidiaries

for which the services provided are

collectively immaterial to the audit client -Fees are clearly

insignificant EN.

Valuation servi ces

EO. Provision of valuation services material to FS and involves significant degree of subjectivity, such

valuation services should not be provided / withdraw from the FS audit engagement

-Provision of tax services to FS audit clients

-Provision of internal audit services provided that personnel do not act in capacity equal to a member of client mgmt. -Provision of legal services EQ.Provision of

valuation services immaterial to FS

-Involving an additional professional accountant to review work done -Confirming with client

and do not involve a significant degree of subjectivity

assumptions of valuation -Making arrangements so personnel

providing such services do not participate in audit engagement

provided that members of assurance team are not involved in providing the service; audit client makes ultimate decision ES. Fees and prici ng ET.Significance of the threat depends on: EU.-firm structure EV. -whether firm is

well-established or newly created

-Discussing extent and nature of fees charged with those charged with governance

-Taking steps to reduce client dependency

-External quality control reviews -Consulting third party, professional

regulatory body or other accountant

EW.

EY.If amount of fee for non-assurance engagement was agreed and contingent upon the result of an assurance engagement, the threats could not be reduced to an acceptable level; only acceptable action is not to accept such arrangements EZ. FA. Gifts and hospi tality

FB. A firm or member of assurance team should not accept gifts or hospitality

-When value is clearly insignificant FC.Actu al or threa tened litiga tion FD. Significance of threat will depend on: FE. -materiality of litigation FF. -nature of assurance engagement FG. -whether it relates to prior assurance engagament

-Disclosing to those charged with governance the nature and extent of litigation

-Removing anyone involved in the litigation from the assurance team

-Involving an additional professional accountant to review work done -Withdraw from or refuse to accept

the engagement

-FH. FI. Professional Accountants in Business (Part C)

 Professional accountants in business may be responsible:

o solely or jointly for the preparation and reporting of financial and other information, which both their employing organizations and third parties may rely on

o for providing effective financial management and competent advice on a variety of business-related matters

 A professional accountant in business may be a/an: o salaried employee

o partner

o director (whether executive or non-executive) o owner manager

o volunteer or another working for one or more employing organization FJ. Potential Conflicts

 A professional accountant in business may face pressure to: o Act contrary to law or regulation

o Act contrary to technical or professional standards

o Facilitate unethical or illegal earnings management strategies

o Lie to, or otherwise intentionally mislead (including misleading by remaining silent) others, in particular:

 The auditors of the employing organization  Regulators

o Issue, or otherwise be associated with, a financial or non-financial report that materially misrepresents the facts, including statements in connection with, for example:

 Tax compliance  Legal compliance

 Reports required by securities regulators

 Safeguards that may eliminate or reduce threats arising from pressures:

o Obtaining advice where appropriate from within the employing organization, an independent professional advisor or a relevant professional body

o The existence of a formal dispute resolution process within the employing organization o Seeking legal advice

FK. Preparation and Reporting of Information

 A professional accountant in business should maintain information for which the professional accountant in business is responsible in a manner that:

o Describes clearly the true nature of business transactions, assets or liabilities o Classifies and records information in a timely and proper manner

o Represents the facts accurately and completely in all material respects

 Where it is not possible to reduce the threat to an acceptable level, a professional accountant in business should refuse to remain associated with information they consider is or may be misleading

FL.

FM. Acting with Sufficient Expertise

 Examples of circumstances that threaten the ability of a professional accountant in business to perform duties with the appropriate degree of professional competence and due care:

o Insufficient time for properly performing or completing the relevant duties

o Incomplete, restricted or otherwise inadequate information for performing the duties properly o Insufficient experience, training and/or education

o Inadequate resources for the proper performance of the duties  Safeguards that may eliminate or reduce threats:

o Obtaining additional advice or training

o Ensuring that there is adequate time available for performing the relevant duties o Obtaining assistance from someone with the necessary expertise

o Consulting, where appropriate, with:

 Superiors within the employing organization  Independent experts

 A relevant professional body FN.Financial Interests

 Examples of circumstances that may create self-interest threats:

o Holds a direct or indirect financial interest in the employing organization

o Is eligible for a profit related bonus and the value of that bonus could be directly affected by decisions made by the professional accountant in business

o Holds, directly or indirectly, share options in the employing organization

o Holds, directly or indirectly, share options in the employing organization which are, or will soon be, eligible for conversion

o May qualify for share options in the employing organization or performance related bonuses if certain targets are achieved

 Safeguards that may eliminate or reduce threats:

o Policies and procedures for a committee independent of management to determine the level of form of remuneration of senior management

o Disclosure of all relevant interests, and of any plans to trade in relevant shares to those charged with the governance of the employing organization, in accordance with any internal policies o Consultation, where appropriate, with superiors within the employing organization

o Consultation, where appropriate, with those charged with the governance of the employing organization or relevant professional bodies

o Internal and external audit procedures

o Up-to-date education on ethical issues and the legal restrictions and other regulations around potential insider trading

FO. Inducements

 Receiving Offers

o A professional accountant in business should assess the risk associated with all such offers and consider whether the following actions should be taken:

 Where such offers have been made, immediately inform higher levels of management or those charged with governance of the employing organization

 Advise immediate or close family members of relevant threats and safeguards where they are potentially in positions that might result in offers of inducements

 Inform higher levels of management or those charged with governance of the employing organization where immediate or close family members are employed by competitors or potential suppliers of that organization

 Making Offers

o Sources of pressures to make offers:  within the employing organization  external individual or organization