CHAPTER 3 ETHICS, INDEPENDENCE AND CORPORATE GOVERNANCE · • Virtue ethics — focus on personal ... professional competence and due care, and ... •communication link between

1 1 Copyright 2003 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett

Slides prepared by Roger Simnett

ETHICS, INDEPENDENCE

AND CORPORATE

GOVERNANCE

CHAPTER 3




Ethics is concerned with the requirements for the general well-being, prosperity, health and happiness of people. It requires knowledge of moral principles, and skills in applying them to problems and decisions.

THE NATURE AND

IMPORTANCE OF

PROFESSIONAL ETHICS




• Teleological ethics — deal with consequences or outcomes of actions generally, if benefits of proposed action

outweigh costs, decision is morally correct.

• Deontological ethics — based on duties and rights duties and rights set down in rules which must

be followed.

• Virtue ethics — focus on personal qualities, such as integrity of the decision-maker.

ETHICAL THEORY




PURPOSE OF CODE OF ETHICS

• Makes explicit the values implicitly required.

• Indicates how members should act toward one another.

• Provides basis for sanctions.

Code of Ethics — formal, systematic statement of rules and principles developed by community to promote its well-being and punish undermining behaviour. Therefore:




JOINT CODE OF PROFESSIONAL

CONDUCT (CPC) - I

• The ICAA and CPA Australia have jointly issued a code of professional conduct (CPC).

• Failure to observe expected standards can result in disciplinary procedures and sanctions.

• Members are expected to comply with the spirit as well as the letter of the code.




JOINT CODE OF PROFESSIONAL

CONDUCT (CPC) - II

• Mandatory for all members

• Six sections

Most important sections for auditors are:

B: Fundamental Principles

F: Professional Statements




CPC: SECTION B: FUNDAMENTAL

PRINCIPLES

1. public interest

2. integrity

3. objectivity

4. independence

5. confidentiality

6. compliance with technical and professional standards

7. professional competence and due care, and

8. ethical behaviour

Eight fundamental principles contained in the codes of ethics:




APPLYING ETHICS

Sound ethical decision-making is dependent on:

• Knowledge of the basic principles on which moral values and rules are based;

• Competence in decision-making; and

• The ability to choose appropriate policies and decision procedures in different situations.




ETHICAL DECISION

MODELS

Three main models:

• American Accounting Association Model

• Laura Nash Model

• Mary Guy Model

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0 Copyright 2003 McGraw-Hill Australia Pty Ltd



CORPORATE GOVERNANCE

• corporate strategy;

• succession planning;

• integrity of internal control structure; and

• remuneration policy.

System by which companies are directed and controlled. Concerned primarily with management and stewardship issues:

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PARTIES IN CORPORATE

GOVERNANCE

• Board of directors

• Management

• Auditors

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GROUPS ADVOCATING

IMPROVED CORPORATE

GOVERNANCE

• Business community

• Investors

• Australian Stock Exchange (ASX)

• Australian Securities and Investments Commission (ASIC)

• CPA Australia and ICAA

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AUDIT COMMITTEES

• Sub-committee of board of directors which should consist mainly of non-executive directors.

• Auditor’s major dealings with the board of directors are normally through this sub-committee.

• Important component of corporate governance, with over 80% of listed companies in Australia having an audit committee.

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FUNCTIONS OF AUDIT

COMMITTEES

• assist the board of directors;

• add to credibility and objectivity of financial reports;

• enhance auditor independence and effectiveness;

• consider appropriateness of accounting policies;

• consider policies for unethical or illegal activities;

• consider internal and management controls; and

• communication link between management, board and auditors.

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WHISTLEBLOWING IN

AUSTRALIA

• s. 311 of the Corporations Act may impose a responsibility on auditors to inform the ASIC of any contraventions of the Act discovered in the normal course of their duties which cannot be remedied by comment in the audit report or by bringing the matter to the attention of directors. Arguably, this places an obligation on the auditor to whistleblow.

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WHISTLEBLOWING

DEFINED

A person ‘who discloses information he (or she) reasonably believes evidences a violation of any law, rule, or regulation, or mismanagement, a gross waste of public funds, an abuse of authority, or a substantial or specific danger to public health or safety’ is a whistleblower. (United States Civil Service Reform Act of 1978).

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AUDITOR’S RESPONSIBILITIES

REGARDING WHISTLEBLOWING

• auditor does not have to actively look for contraventions of the Corporations Act.

• decision to blow the whistle not easy for auditor.

• AUS 210 also provides guidance.

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INDEPENDENCE

• a very key characteristic of an audit or assurance service provider.

• for auditor to add credibility to financial report or other subject matter, needs to remain independent.

• one of the eight fundamental ethical requirements of CPC.

• test for independence is reasonable person test – would a reasonable person having access to all facts consider that the auditor was independent?

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INDEPENDENCE — CORPORATIONS

ACT 2001

• s. 324 (1) shall not consent to appointment as auditor if:

level of indebtedness > $5,000

officer, partner, employer or employee.

• s. 329, appointment until death, removal or resignation.

• Removal — requires resolution of the company at a general meeting of which special notice is given.

• Resignation — must have consent of the ASIC.

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INDEPENDENCE — ETHICAL

REQUIREMENTS

Emphasises both:

• perceived independence — how others will view the auditor; and

• actual independence — state of mind of the auditor. Can the auditor actually eliminate bias and personal interest from their decisions, and not succumb to any pressures or influences.

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RECENT DEVELOPMENTS IN

AUDITOR INDEPENDENCE

• Ramsay Report (Aust) — issued October 2001.

• IFAC independence rules, adopted in Australia in CPC F1.

• Sarbanes-Oxley Act (USA) 2002.

• Joint Committee of Public Accounts and Auditors (Australia) 2002.

• Corporate Law Economic Reform Program (CLERP 9) (Australia) 2002.

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CPC F1: THREATS TO

INDEPENDENCE

• Self-interest threats: auditor could benefit from a financial interest in the client.

• Self-review threats: auditor could have to re-evaluate their own work.

• Advocacy threats: auditor could promote the audit client’s point of view and compromise objectivity.

• Familiarity threats: auditor may become too sympathetic to the client’s interests.

• Intimidation threats: auditor may be deterred from acting objectively by actual or perceived threats from client.

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CPC F1 SAFEGUARDS

Safeguards fall into three broad categories. For an auditor

these are:

• Safeguards created by the profession, legislation or regulation: education, professional standards, monitoring and disciplinary processes, and inspections and reviews.

• Safeguards within the audit client: competent employees, corporate governance structures.

• Safeguards within the audit firm: quality control, policies and procedures.

The safeguards are aimed at reducing or resolving circumstances that pose threats.

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MAJOR IMPEDIMENTS TO

AUDITOR INDEPENDENCE • Auditor employment relationships

• Financial and business relationships

• Provision of non-audit services, including:

preparing financial reports

taxation

internal audit

design of systems

legal services

corporate finance

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SUGGESTIONS FOR IMPROVING

AUDITOR INDEPENDENCE

• Establishment of a Public Oversight Board, to reduce the perception of auditors setting standards for their own profession

• Strengthening the role of audit committee

• Rotation of auditors

• Audit firm independence boards

• Client policies, such as restricting other services provided by audit firm

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FEE DETERMINATION

• Audit fees should be commensurate with service provided. Thus, should reflect time taken to audit, and knowledge, skills and expertise required.

• Auditor should not enter into fee arrangements that may compromise independence.

• Fees for a period should not be dependent on fees from provision of future audits or other services.

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OBTAINING CLIENTS

• Advertising, publicity and solicitation are permitted provided they are not false, misleading, deceptive or otherwise reflect adversely on the profession.

• Competing for prospective clients through tenders is now quite common.

• Auditors should be careful of firms that are opinion shopping.

Documents

CHAPTER 3 ETHICS, INDEPENDENCE AND CORPORATE GOVERNANCE · • Virtue ethics — focus on personal ... professional competence and due care, and ... •communication link between