National institute of Accounting Technicians
CODE OF ETHICS
FOR MEMBERS IN PUBLIC PRACTICE
9.1. Members in public practice when undertaking a reporting assignment, should be and appear to be free of any interest which might be regarded, whatever its actual effect, as being incompatible with integrity, objectivity and independence.
9.2. The following paragraphs indicate some of those situations which, because of the actual or apparent lack of independence, would give a reasonable observer grounds for doubting the independence of a member in public practice. They also apply to all professional employees engaged in the reporting assignment, and all managerial employees located in an office participating in a significant part of the reporting assignment.
By Direct Financial Interest In The Client
9.3. Any beneficial interest on the part of a member in public practice or anyone closely connected with a member in public practice’s audit firm, in a client company will constitute an impairment of independence. A member in public practice therefore should not hold shares in a client company.
9.4. A beneficial interest is a beneficial shareholding or other direct investment in the company. Shares and shareholding include debenture and other loan stock and the equivalent, and rights to acquire shares, debenture or other loan stock. Shareholdings also include options to purchase or sell such securities. A person’s holdings include holdings by a nominee on behalf of that person or by a trust created by that person for his or her personal benefit. Shareholdings in parent, subsidiary or associated companies of a client company should normally be regarded on the same basis as shareholdings in the client company itself. However, if the member in public practice or the relevant firm is auditor only of a company or companies which taken together constitute an insignificant part of a group, independence of the parent, or subsidiary or associated companies is not required.
9.5. Where an employee, or a person closely connected with an employee, has such a beneficial interest, the employee should not take part in the audit of the client company.
9.6. The foregoing paragraph (9.4) is not intended to preclude a member in public practice or person closely connected with the member from holding or continuing to hold, in the normal course of business and on normal commercial terms, an insurance or pension policy with a client insurance company or society, though an engagement partner should not take out a new policy with such a client.
9.7. Paragraph 9.4 does not preclude a member in public practice or a person closely connected with the member from having a beneficial holding in an authorised unit trust or mutual fund or similar managed fund which holds shares in a client company, provided that the firm does not report upon the trust.
9.8. Where a member in public practice inherits shares or marries a shareholder, or a relevant investment occurs as a result of a takeover, the investment should be disposed of at the earliest practicable date, being a date at which the transaction would not amount to insider dealing. Similar action should be taken where a beneficial investment is held in a company becoming an audit client. Where the necessary disposal cannot be achieved within the timescale envisaged the member in public practice or relevant firm should not continue as auditor.
By Indirect Material Financial Interest in a Client
9.9. When a member in public practice holds or advises on investing in shares in an audit client on behalf of a third party, for example a trust, the appearance of independence is at risk as responsibilities to the third party may conflict with responsibilities to the audit client. In the case of trustee shareholdings, if a member in public practice or employee of a firm or person closely connected to the member in public practice or employee is a trustee of a trust with a holding in shares material to the size of the issued share capital of the company or the total assets of the trust, the practice should not accept the audit of that company. This also applies in the case of those who serve as executors and administrators of any estate. A shareholding in excess of ten percent of the issued share capital of a company would normally be considered material.
By Loans to or from the Client or Any Officer, Director or Principal Shareholder of a Client Company
9.10. A member in public practice or relevant audit firm or a closely connected person of a member in public practice should not directly or indirectly make any loan to, or receive a loan from a client or give or accept any guarantee in relation to a debt of the client, firm, member in public practice or closely connected person of a member in public practice.
By Holding a Financial Interest in a Joint Venture with a Client or Employee(s) of a Client
9.11. A mutual business interest or joint venture between a member in public practice with a client company or with an officer or employee of the company would be considered to impair the member’s independence with respect to the client. Where such a mutual business interest exists the engagement should not be accepted or continued.
9.12. Where a member in public practice has an immaterial financial interest in a non client investor and the non-client investor has a financial relationship with the client, this would not impair the member’s independence provided the member could not reasonably be expected to have knowledge of the financial interests or joint venture.
By Having a Financial Interest Considered Material in a Non-client That Has an Investor or Investee Relationship with the Client.
9.13. When a non-client investee is material to client investor, any direct or material indirect financial interest of the member in public practice in the non-client investee would be considered to impair the member’s independence with respect to the client. Likewise, where a client investee is material to a non-client investor, any direct or material indirect financial interest of the member in public practice in the non client investor would be considered to impair the member’s independence with respect to the client.
Appointments in Companies
9.14. When a member in public practice is or are, within the period under current review or immediately preceding an assignment:
- a member of the board, an officer or employee of a company; or
- a partner of, or in the employment of, a member of the board or an officer or employee of a company;
he or she would be regarded as having an interest which could detract from independence when reporting on that company.
9.15. A member should not personally take part in the conduct of an audit of a company if he or she has, during the period upon which the report is to be made, or at any time in the two years prior to the first day thereof, been a member of the board, an officer (other than auditor) or employee of that company.
9.16. Paragraph 9.14 applies where a member has been a partner of, or in the employment of, a member of the board or an officer or employee of a company in the two years prior to the commencement of the period being audited.
9.17. A firm’s independence may be impaired because of the participation in the conduct of an audit by a member in public practice or senior employee who intends to join the client. The firm’s guidelines should include the requirement for immediate notification to the firm by a member in public practice or senior employee involved in a client’s audit of his or her intention or any discussions concerning the possibility of joining the client.
9.18. Where a member in public practice or senior employee is to join the client or is involved in substantive negotiations with the client he or she should be removed from the audit team and the significant audit decisions made by the member or senior employee should be reviewed.
Provision of Other Services to Audit Clients
9.19. When a member in public practice, in addition to carrying out an audit or other reporting function, provides other services to a client, care should be taken not to perform management functions or make management decisions, responsibility for which remains with the board of directors and management.
9.20. In all cases in which independence is required and in which a member in public practice is concerned in the preparation of accounting records for a client, the following should be observed:
- The member in public practice should not have any relationship or combination of relationships with the client or any conflict of interest which would impair integrity or independence.
- The client should accept responsibility for the statements.
- The member in public practice should not assume the role of employee or of management conducting the operations of an enterprise.
- Staff assigned to the preparation of accounting records ideally should not participate in the examination of such records. The fact that the member in public practice has processed or maintained certain records does not eliminate the need to make sufficient audit tests.
Personal and Family Relationships
9.21. Personal and family relationships can affect independence. There is a particular need to ensure that an independent approach to any assignment is not endangered as a consequence of any personal or family relationships.
9.22. Family relationships which always pose an unacceptable threat to independence are those in which an officer or senior employee of an audit client is closely connected to a member in public practice or an employee engaged on the assignment. Closely connected includes the spouse, dependent child or relative living in a common household but may include an extended family member to whom regular financial assistance is given or who is otherwise indebted financially to the member in public practice.
9.23. When the receipt of recurring fees from a client or group of connected clients, represents a substantial proportion of the total gross fees of a member in public practice or of the practice as a whole, the dependence on that client or group of clients should inevitably come under scrutiny and could raise doubts as to independence.
9.24. A branch office which is auditing the financial statements of a client of the practice as a whole and that client forms a major part of the business of the branch office, in such circumstances, professional services for that client or group should be reviewed by a partner from another office.
Goods and Services
9.25. Acceptance of goods and services from a client may be a threat to independence. Acceptance of undue hospitality poses a similar threat.
9.26. Goods and services should not be accepted by members in public practice or their immediate family or persons closely connected to the member in public practice, except on business terms no more favourable than those generally available to others. Hospitality and gifts on a scale which is not commensurate with the normal courtesies of social life should not be accepted.
Ownership of the Capital
9.27. Ideally, the capital of a practice should be owned entirely by members in public practice. However, ownership of capital by others may be permitted provided that the majority of both the ownership of the capital and the voting rights lies only with the members in public practice.
9.28. A partner in a practice may leave the practice by resignation, termination, retirement, or sale of the practice. Such a partner may accept an appointment with a client of the practice, of which he or she is a former partner, when an audit or other reporting function is being performed by the practice of which he or she is a former partner. In such circumstances the independence of the practice would not be impaired, if –
- Payments of the amounts due to a former partner for his or her interest in the practice and for unfunded, vested retirement benefits are made in accordance with a schedule that is fixed as to both payment dates and amounts. In addition, the amounts owed should be such that they do not cause a substantial doubt about the practices’ ability to continue as a going concern.
- The former partner does not participate or appear to participate in the practice’s business or professional activities whether or not compensated. Indications of participation include the provision of office space and related amenities to the former partner by the practice.
Actual or Threatened Litigation
9.29. Litigation involving a member in public practice and a client may cause concern that the normal relationship with the client is affected to the extent that the member’s independence and objectivity may be impaired.
9.30. The existence of legal action (or threat of action) may affect the willingness of the management of the company to disclose relevant information to the member in public practice. It is not possible to specify precisely the point at which it would become improper for the member in public practice to continue to report. However, he or she should have regard to circumstances when litigation might be perceived by the public as likely to affect the member’s independence.
Long Association of Senior Personnel with Audit Clients
9.31. The use of the same senior personnel on an audit engagement over a prolonged period of time may pose a threat to independence. The member in public practice should take steps, outlined in paragraphs 9.32 to 9.36, to ensure that objectivity and independence are maintained on an engagement.
9.32. Professional firms should provide for an orderly rotation of the audit engagement partner and of senior personnel serving on an engagement. The timing and nature of rotation of engagement personnel, especially the engagement partner, depends on many practical considerations. Such a rotation should, however provide for an orderly blend of experienced and replacement personnel as well as an orderly transition.
9.33. Firms should ensure that no audit engagement partner remains in charge of an audit for a period exceeding seven consecutive years for publicly listed companies and ten consecutive years for private companies. An audit engagement partner who has ceased under this provision to act as such, should not return to that role in relation to that audit until a minimum of two years has passed but is not precluded from other involvement with the client.
9.34. A limited degree of flexibility over timing may be acceptable in circumstances where audit engagement partner continuity is especially important. Examples could include major changes to a company’s structure or management, or its involvement in a takeover, which would otherwise coincide with the partner change.
9.35. Senior audit staff should not be assigned to an audit for a period exceeding seven consecutive years and should not be reassigned to that audit until a minimum of two years has passed.
9.36. Rotation may be impracticable in small offices or when there are specialisations relating to assignments. In such cases, alternative safeguards should be applied, such as the setting up of standing arrangements to consult externally with another suitably experienced member.
Professional Competence and Responsibilities Regarding the Use of Non Accountants
10.1. A member in public practice should refrain from agreeing to perform professional services which they are not competent to carry out unless competent advice and assistance is obtained so as to enable them to satisfactorily perform such services. If a member does not have the competence to perform a specific part of the professional service, technical advice may be sought from experts such as other members of the Institute, lawyers, actuaries, engineers, geologists, valuers.
10.2. In such situations, although the member is relying on the technical competence of the expert, the knowledge of the ethical requirements cannot be automatically assumed. Since the ultimate responsibility for the professional service rests with the member, he or she should see that the requirements of ethical behaviour are followed.
10.3. When using the services of experts who are not professional accountants, the member must take steps to see that such experts are aware of ethical requirements. Primary attention should be paid to the fundamental principles. These principles would extend to any assignment in which such experts would participate.
10.4. The degree of supervision and the amount of guidance that will be needed will depend upon the individuals involved and the nature of the engagement.
Examples of such guidance and supervision might include:
- asking individuals to read the appropriate ethical codes
- requiring written confirmation of understanding of the ethical requirements, and
- providing consultation when potential conflicts arise.
10.5. The member should also be alert to specific independence requirements or other risks unique to the engagement. Such situations will require special attention and guidance to see that ethical requirements are met.
10.6. If at any time the member is not satisfied that proper ethical behaviour can be respected or assured, the engagement should not be accepted; or, if the engagement has commenced, it should be terminated.