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CP04 - V1 Page 1 of 41
Decoding the IESBA CODE
By: Ragiema Thokan-Mahomed
Acknowledgements
These notes have been produced for the purpose of giving an overview to the
required ethical considerations of the Professional Accountant (SA) in relation to the
IFAC Code of Ethics for Professional Accountants and the SAIPA Code of Conduct.
We acknowledge that the internet has provided useful information, videos and
articles that have been included in these notes for further reading/viewing by the
participants of the course.
I would like to thank the Legal, Ethics and Compliance department at SAIPA- Aysha,
Kabelo, Mulalo and Lindani, for their assistance in researching areas of these notes.
It is comforting to know that I can always rely on your dedication in producing quality
work.
A special thanks to Rashied Small, Faith Ngwenya and my co-presenter Saleem
Kharwa for imparting your knowledge and providing valuable input that I hope will
make this CPD beneficial for our members.
The total Continual Professional Development (CPD) of the attended course is
4.30 Ethics structured hours.
CP04 - V1 Page 2 of 41
Contents
Decoding the IESBA CODE ........................................................................................................... 1
By: Ragiema Thokan-Mahomed ................................................................................................ 1
1. Objectives ................................................................................................................................ 3
2. Decoding the IESBA – Code of Ethics .................................................................................. 3
2.1 Background ...................................................................................................................... 3
2.1.1 Integrity ....................................................................................................................... 8
2.1.2 Objectivity ................................................................................................................. 13
2.1.3 Professional Competence and Due Care (Section 130) ................................... 16
2.1.4 Confidentiality (Section 140) ................................................................................. 18
2.1.5 Professional Behaviour (Section 150) ................................................................. 20
3. Significant amendment to the code ..................................................................................... 22
Section 360................................................................................................................................ 22
4. Identifying reportable irregularities in terms of South African Law ................................... 25
One such example is that of section 29 of the Companies Act which states: ..................... 25
5. Touch, pause, engage ...................................................................................................... 27
6. Case study ......................................................................................................................... 30
THE CASE STUDY THAT FOLLOWS HAS BEEN EXTRACTED FROM THE GUIDE TO QUALITY CONTROL FOR SMALL-AND
MEDIUM-SIZED PRACTICES, THIRD EDITION, PRODUCED BY IFAC. CANDIDATES ARE REQUIRED TO SIT IN GROUPS TO
DISCUSS THE EFFECT OF THE ACTIONS ON THE FUNDAMENTAL PRINCIPLES AND ELABORATE ON SAFEGUARDS TO
THREATS AND POSSIBLE MITIGATION. .................................................................................................... 30
5. Awareness of my duties.................................................................................................... 36
6. Legislative requirements ................................................................................................... 37
7. Holding my ground – tips to achieving success in your practice................................... 40
CP04 - V1 Page 3 of 41
1. Objectives
As an internationally recognised professional, you are required to abide by the
IFAC code of ethics, to ensure that you deliver world class accounting
services in an ethically responsible manner. The following areas have been
identified as the minimum requirements necessary to achieve compliance:
5 Key elements of the code
Significant amendments to the code
Identifying reportable irregularities
Legislative requirements
Awareness of my duties as a professional accountant
2. Decoding the IESBA – Code of Ethics
2.1 Background
The International Ethics Standards Board for Accountants (IESBA) is an independent
standard-setting board that develops, in the public interest, high-quality ethical
standards and other pronouncements for professional accountants worldwide.
Through its activities, the IESBA develops the Code of Ethics for Professional
Accountants, which establishes ethical requirements for professional accountants.
The board also provides adoption and implementation support, promotes good
ethical practices globally, and fosters international debate on ethical issues faced by
accountants. 1
The Code consists of Part A – establishes the fundamental principles of professional
ethics for professional accountants, Part B – applies to professional accountants in
public practice and Part C – applies to professional accountants in business.
Significant changes between the 2015 and the current version (2016) are as follows:
Section 225 and 360 addresses’ the responsibilities of the professional
accountants when they become aware of non-compliance or suspected non-
compliance to laws and regulations committed by a client or employer.
Consequential and conforming changes have been made to Sections 100,
140, 150, 210 and 270 of the Code.
1 www.ethicsboard.org, accessed on 13 January 2017.
CP04 - V1 Page 4 of 41
These changes will be effective from 15 July 2017.2
The IESBA requires that a member body of IFAC shall apply the IESBA Code of
Ethics.
SAIPA prides itself as being one of two accountancy bodies based in South Africa
with accreditation from the International Federation of Accountants (IFAC). We
subscribe to the requirements of the Statements of Members Obligations (SMOs)
and our member policies and professional qualification are founded on the
International Education Standards (IESs).
SAIPA serves on the following IFAC structures:
IFAC Council
Edinburgh Group (EG)
Where our input is required, we are invited to the MOSAIC and PAODC
(Professional Accountancy Organisations Development Committee)
A distinguishing mark of the profession is it acceptance of the responsibility to act in
the public interest (section 100.1). This means that a professional accountant’s
responsibility is not exclusively to satisfy the needs of an individual client or
employer. Serving two masters is likely to cause a few ethical dilemmas. This CPD
serves to provide the Professional Accountant (SA) with a practical guide that will
alert them to possible conflicts of interest and make them mindful of their required
duty of care as a professional accountant.
3
Videos to check out
https://www.youtube.com/watch?v=i9l4vm-ziJo -
inspirational
Articles to read:
http://www.saipa.co.za/page/416470/accounting-ethics-
%E2%80%93-threats-and-safeguards
2 IESBA Handbook of the Code of Ethics for Professional Accountants, 2016 Edition, page 4 3 https://za.pinterest.com/janroberg/tax-stuff/, accessed on 3 February 2017
CP04 - V1 Page 6 of 41
Five Key elements of the code
Relevant sections of the code:
Part A – 100.1, 100.8, 100.9
Part C - 300.6, 300.7, 300.13, 300.14, 300.15, 360.1, 360.2, 360.3, 360.4, 360.5, 360.6, 360.7, 360.8,
360.9
These elements can be found in Part A of the code and re-inforce guidelines for
professional accountants to act in the best interest of your client and the public.
Professional accountants are required to adhere to the five fundamental principles. A
professional accountant is therefore required to evaluate the significance of the
threats to compliance with the fundamental principles (section 100.8) by considering
both quantitative and qualitative factors. Where a threat cannot be eliminated,
professional accountants are expected to resign from an engagement or employing
organization (100.9).
IFAC sees the role of the professional accountant as being a beacon of ethics in
every organization. Professional accountants shall not knowingly engage in any
business, occupation, or activity that impairs or might impair integrity, objectivity or
the good reputation of the profession and as a result compromise the fundamental
principles (300.6).
Threats to the fundamental principles are set out in section 300.7.
List the threats:
_______________________
_______________________
_______________________
_______________________
_______________________
The safeguards to these threats can be found in 300.13 and 300.14 which include
those created by the profession, legislation/regulation and the work environment.
Where a professional accountant believes that unethical behaviour will continue he
may seek legal advice and if the situation cannot be remedied, he may conclude that
it is appropriate to resign from the contract (300.15).
NOTES:
CP04 - V1 Page 8 of 41
2.1.1 Integrity
“be straightforward and honest in all professional and business relationships”
Relevant sections of the code:
Part A – 110.1, 110.2, 110.3
Part C - 320.3
Professional Accountants are relied upon for the preparation and reporting of
financial information, providing effective financial management and competent
advice. When you provide these services, you do so in the capacity of a reasonable
professional accountant. There will be times when you need to be brave and give
the bad news. You may not always be liked by your clients, but they have instructed
you to provide a service and as such, they need to know that you have applied your
mind and have taken due care in their best
interests.
4To avoid miscommunication ensure that
your mandate has been reduced to writing.
Clients immediately revert to the defensive
when asked to sign a contract and start
calculating what an attorney will cost them
to peruse the lengthy document you have
just presented to them. They often refuse
to sign the agreement arguing that you are
costing them.
A contract or letter of engagement may
scare clients. . The purpose of the written document is to protect your clients as
much as it protects you. If everyone is on the same page, it reduces negligence
claims.
The confirmation of your mandate in writing, indicates that you are a person of your
word and that you have no problem being held to account and that you will carry out
your functions ethically as directed by the engagement letter.
There are general rules that must be followed in order to ensure that you are
covered for a legally binding contract. These include:
Consensus between the parties
Performance must be possible
There must be a clear exchange (of goods or services for a confirmed fee)
The agreement must be enforceable by law
Offer and acceptance
4 http://www.truthliesdeceptioncoverups.info/2013/06/quotes-integrity-and-honor.html, accessed on 2 February 2017
CP04 - V1 Page 9 of 41
There are however clauses that must be included when a professional accountant
takes on specific functions. These are not listed in the IESBA but in the accounting
standards, namely ISRS 4400, ISRS 4410 and ISRE 2400.
1. Compilation engagement (ISRS 4410)
Ask yourself, “Am I being relied upon, for professional services, to provide a
report that may be relied upon in accordance with the accounting standards?”
If the answer is yes, then ensure that your contract has the following inclusions:
It must state the clear purpose and objective of the engagement
Your client’s or employer’s responsibilities must be stated
It must confirm any exclusions to the work agreed upon
There must be a clear reporting line
It must state who may rely on the statements
2. Agreed Upon Procedures Engagement (ISRS 4400)
Agreed upon procedures engagements is a factual findings report for specified
users where no assurance is provided or opinion is expressed.
Separate letter for each engagement
Nature and purpose of the task
It must state who may rely on the reports
Format of the report
Procedure to be followed
The financial information required
3. Review Engagement (ISRS 2400)
Review by an independent professional to express an opinion that the financial
statements, in all material aspects in compliance with the accounting framework
(and to provide negative assurance if required).
The reviewer must assess financial statement risk through the application of
professional judgement/scepticism, analytical procedures and inquiry in order to
obtain evidence for items which were identified to have material risks.
Ensure that your contract has the following inclusions:
It must state the clear purpose and objective of the engagement
Both parties responsibilities must be clearly noted
It must confirm any restrictions on the mandate
There must be a clear reporting line
It must state who may rely on the statements
CP04 - V1 Page 10 of 41
Honesty vs Integrity
There is a difference between integrity and honesty. You
need honesty to have integrity but honestly alone does not
mean that you have integrity.
To be honest requires that you do not to tell lie. A
professional accountant will not advertise for work that he
has no competency to perform. This won’t only have you
facing the disciplinary committee, but you could face
litigation and in the case of SARS, a fine or possible jail
time.
Integrity is a quality that, if tested, proves that you can be
trusted. By following through with an instruction, you have
not just satisfied your client’s need, you have proved that
you are a professional. Clients want to know that they are
paying for professional services. Letters of engagement
provide assurance and assists you in maintaining
reasonable expectations.
Providing assurance
Due care must be exercised when preparing and reporting
on information. You may not be an auditor, but the
information you provide as a professional accountant will
be relied upon and the assumption taken by those who
read your reports is one of an implied assurance (ISRS
4410). Reasonable steps must be taken to maintain the
information that you are responsible for.
Professional accountants are required to clearly describe
the true nature of the business transactions, assets, or
liabilities; classify and record information in a timely and
proper manner; and represent the facts accurately and
completely in all material aspects (Section 320.3). It is imperative that you hold your
independence and are not swayed by intimidation. Your integrity will be questioned
if you are associated with misleading information. Be straight-forward and honest in
all professional relationships. It is important for you to take steps to disassociate
yourself from misleading information.5
5 For further information refer to Section 320, “Preparation and Reporting of Information”, IESBA Code of Ethics 2016.
To protect yourself against
possible negligence claims
it would serve you well to
email your client
confirmation the mandate
they have given you. That
way you have a record of
the interaction between
yourself and your client.
Remember to enable a read
receipt)
If you find yourself trapped
as an employee and
pressured to report
information in a misleading
way, notify HR, your
manager or the audit
committee responsible for
governance. Insist on a
whistle blowing hotline
facilitated by an external
vendor.
CP04 - V1 Page 11 of 41
In summary, Section 110.2 confirms that a professional accountant should not,
knowingly, be associated with information that is materially false; contains
information furnished recklessly; or information that is obscured and contains
omissions.
Videos to check out
https://www.youtube.com/watch?v=Ps6-3zyXWus - motivational
https://www.youtube.com/watch?v=lacwpfPk_HE - inspirational
https://www.youtube.com/watch?v=P4z-2wGkQdo
NOTES:
Preparation and compilation of
financial statements (ISRS 4410)
Review
(ISRS 2400)
Audits
Non-assurance Services
Reasonable Assurance
Moderate Assurance
Level of
cre
dib
ility
Assura
nce t
hro
ugh the
expre
ssio
n o
f an o
pin
ion
CP04 - V1 Page 13 of 41
2.1.2 Objectivity
“to not allow bias, conflict of interest or undue influence of others to
override professional and business judgments.”
Relevant sections of the code:
Part A - 120
Part C - 300.2, 300.4, 310.1, 310.2, 310.8, 310.9, 310.10, 320.3, 340
This principle requires that a professional accountant never waivers on their
professional judgment. Bias, conflict of interest and undue influence are factors to
take heed of when assessing if your objectivity has been compromised.
Any conflict of interest is a threat to the principle of objectivity and a professional
accountant shall not allow a conflict of interest to compromise professional or
business judgment 310.1. Examples of situations that may arise can be found in
Section 310.2.
Before accepting a new client relationship reasonable steps must be taken to identify
possible conflicts of interests with existing clients in respect of the nature of the
interests and the relationship between the parties and the nature of the service and
its implication for the relevant parties (310.6) must be considered.
List the safeguard to consider to eliminate threats (_____):
Where required, consent must be obtained from your client or employer to reduce
the threat of a conflict of interest. Consent may be implied, but a professional
accountant must have sufficient evidence to deduce and confirm that no objection
will be taken later (310.9). You are encouraged to reduce everything to writing even
if the disclosure is made verbally (310.10).
CP04 - V1 Page 14 of 41
Section 340 refers to situations which could compromise your objectivity as a
professional accountant and include, having shares in a company that you are an
employee of; receiving a profit-related bonus; or where a close family relative has
interests in a business where you are the accounting officer.
You are required to be conscious of any pressure from peers or employers and self-
interest threats that can diminish your ability to remain objective. To avoid losing
your designation, you must remain resolute in your principles and the code of ethics
by ensuring that you do not use confidential information for personal gain.
When faced with inducements by family or close friends, the professional accountant
must evaluate the situation. These may come in the form of preferential treatment,
hospitality, gifts or inappropriate appeals. The nature and intent must be considered
and if the conduct is determined not to be unethical and only business as usual, then
there is no significant threat. If the evaluation confirms that the threat is significant,
safeguards must be established.
What actions can be taken to mitigate against possible threats:
If a professional accountant is expected to offer inducements to influence the
decision-making process, whether the pressure is internal or external, he must follow
the ethical conflict resolution as contained in sections 100.19 to 100.25 of Part A of
the code.
A professional accountant shall not offer an inducement to improperly influence
professional judgment of a third party. Where a matter involves a conflict with your
client or employer, the professional accountant must consult with those responsible
for governance such as the board or audit committee.6
6 100.21
CP04 - V1 Page 15 of 41
Self assessment
Susan is a professional accountant for a SMME, George’s Construction. Susan
requests records to support the payables and receivables but George, the owner,
never has time to provide the information to Susan. George suggests that Susan
refer to the numbers available on pastel. What should Susan do?
Videos to check out
https://www.youtube.com/watch?v=Ps6-3zyXWus - motivational
Notes:
CP04 - V1 Page 16 of 41
2.1.3 Professional Competence and Due Care (Section 130)
to maintain professional knowledge and skill at a level required to ensure that
a client or employer receives competent professional service based on current
developments in practice, legislation and techniques and act diligently and in
accordance with the applicable technical and professional standards.
Relevant sections of the code:
Part A – 130.1, 130.2, 130.3, 130.4, 130.4, 130.5, 130.6
Part C – 330.1, 330.2, 330.3, 330.4
There is a requirement that a professional accountant attain the necessary
competence and act diligently in discharging his assignment. He must maintain his
professional and technical knowledge through Continuous Professional Development
(CPD) and ensure that his professional staff have the appropriate training and
supervision.
A professional accountant may not mislead his employer or client as to his level of
expertise or experience.7 Where appropriate, clients/employers must be notified of
any inherent limitations that the professional accountant may have.8
There are identified threats are listed in section 330.2 as:
Insufficient time to complete the relevant duties
Incomplete, restricted or inadequate information for performing the duties
properly
Insufficient experience, training and education
Inadequate resources for proper performance
List the safeguards (_____):
7 330.1 8 130.1 – 130.6
Where a professional
accountant cannot
eliminate a threat or
reduce it to an acceptable
level, he must determine
if refusing is appropriate
and clear reasons must
be communicated to the
client or employer
(Section 330.4)
CP04 - V1 Page 18 of 41
2.1.4 Confidentiality (Section 140)
to respect the confidentiality of information acquired as a result of
professional and business relationships and, therefore not disclose any such
information to third parties without proper and specific authority, unless there
is a legal or professional right or duty to disclose, nor use the information for
the personal advantage of the professional accountant or third parties.
Relevant sections of the code:
Part A – 140.1, 140.2 140.3, 140.4
Part C -
Confidentiality is important for many reasons. The inability to properly secure and
protect confidential information can lead to the loss of clients and diminish the
integrity of the professional accountant.
Confidential information that lands in the wrong hands, can be used to confer
unlawful movement (e.g. extortion or segregation), which can in turn may result in
expensive litigation.
Section 140 notes that a professional accountant has an obligation to refrain from
disclosing confidential information without proper and specific authority unless there
is a legal or professional right or duty to disclose. Furthermore, the professional
accountant my not use the confidential information to their personal advantage or the
advantage of third parties9. Professional accountants are in a unique position to
know about fraud and misconduct and have the technical competence to recognise
and report it. Even if in a social context, the confidentially principle must remain in-
tact.
It is required that reasonable steps be taken to ensure that the staff of the
professional accountant respect the duty his obligation to uphold confidentiality.
A professional accountant is expected to comply with this principle beyond the
relationship with his client or employer.10
9 140.1 10 140.6
The Protection of Personal Information Act (POPI), places a burden on any
person who is in possession of the personal information of another:
To have the requisite authority to be in possession of the information.
To protect the information from further distribution
To notify relevant persons of a breach of their personal information
Harsh penalties of up to 10 million or imprisonment up to 10 years await those
who breach the provisions of the act.
CP04 - V1 Page 19 of 41
11
When is the disclosure of confidential information required?
a.
b.
c.
Videos to check out
https://www.youtube.com/watch?v=_ITU377uuJY – secure your
information
https://www.youtube.com/watch?v=Gz2JNm7ubUU
Notes:
11 Act 4 of 2013
CP04 - V1 Page 20 of 41
2.1.5 Professional Behaviour (Section 150)
to comply with relevant laws and regulations and avoid any action
that discredits the profession.
Relevant sections of the code:
Part A – 150.1 and 150.2
Part C - 300.5
The principle of professional behaviour imposes an obligation on professional
accountants to comply with relevant laws and regulations and to avoid any action
that may bring discredit to the profession. This includes actions which a reasonable
and informed third party, having knowledge of all relevant information, would
conclude negatively affects the good reputation of the profession (150.1).
In terms of the SAIPA code of conduct, professional behaviour means that members
should act in a manner consistent with the good reputation of the Institute and the
accounting profession, refraining from any conduct that might bring the Institute
and/or the accounting profession into disrepute (150.2). Members should conduct
themselves professionally with due consideration towards clients, third parties, other
members of the accountancy profession, staff, employers and the general public.
Professional Accountants should be honest and not:
(a)
(b)
What does it mean to be a professional Accountant (SA)12
I am capable of managing my own work;
I am responsible for the quality of the work I perform;
I am able to exercises professional judgement; and
I am capable of leading a team and managing functions adapted to my skill
set.
The more senior your position, the greater your ability and opportunity to influence
events, practices and attitudes. You are therefore expected to encourage an ethics-
based culture (300.5).
12 Issue 28, Professional Accountant (SA) Official Journal
CP04 - V1 Page 21 of 41
Self assessment
Robert is a Professional Accountant (SA) and a registered tax practitioner on the
SAIPA RCB list. His letter of engagement notes that he will perform various
functions for his client Peter, including his tax returns. During tax season, Robert’s
business starts thriving and he takes on more work than he can handle. Robert
neglects his responsibility to Peter who incurs a penalty from SARS. Peter is furious
and immediately demands his e-profile. Robert refuses to transfer the e-profile as
Peter still has an outstanding amount for the management accounts that were done.
a. Discuss the fundamental principles that were breached.
b. What should Robert have done?
Videos to check out
https://www.youtube.com/watch?v=14bCsM16bYo&t=8s
https://www.youtube.com/watch?v=pmVF23QXY10 – dealing with
difficult people
Notes:
CP04 - V1 Page 22 of 41
3. Significant amendment to the code
Relevant sections of the code:
Part C - 360.1 – 360.37
The additional sections discuss the manner in which a professional accountant
should respond to non-compliance with laws and regulations.
Section 360
This section sets out a framework to guide professional accountants in what actions
to take in the public interest when they become aware of a potential illegal act,
known as non-compliance with laws and regulations (NOCLAR) by clients and
employers.
a. If you become aware of non-compliance or suspected non-compliance with
the laws and regulations, in the course of carrying out your professional
activities, you are expected to13:
b. The definition of non-compliance includes acts of omission or commission,
intentional or unintentional, committed by your client or employer which are
contrary to the prevailing laws (360.2)
c. The laws must have a direct effect on the determination material amounts and
disclosures in your clients or employers financial statements.
d. Where the laws have no direct effect, but compliance may be fundamental to
the operation of the business, why should a professional accountant still
ensure compliance?14
e. List the objectives of the professional accountant in responding to non-
compliance:
13 360.1 14 350.5, 360.7
CP04 - V1 Page 23 of 41
f. The responsibility of those entrusted with governance is to ensure that
business activities are conducted in accordance with laws and regulations.15
What is the general responsibility of the Professional Accountant?
What are the responsibilities of a Senior Professional Accountant?
There is a greater expectations of responsibility required of a professional
accountant who holds a position that allows him to exert significant influence, make
decisions and control the resources of the business. The steps required are16:
15 390.10 16 360.14 – 360.32 and 330.31
To establish protocols and procedures that allow for anonymous reporting through a designated channel, e.g. whistle-blowing
hotline.
In assessing the the non-compliance, the professional accountant shall determine
how to respond
(Section 360.11)
If it is determined that section 360 is applicable, the porfessional accountant
must act timeously (having regard to the nature of the matters; nature of the act;
the circumstances in which it occured; and potential harm to the public interest and
relevant stakeholders.
(Section 360.12 and 360.33)
The professional accountant is expected to apply knowledge, professional judgment and expertise to the non-compliance and where requires, consult on a confidential basis with other in the organization, his professioanl accountant or with legal
counsel.
(Section 360.34)
If non-compliance is suspected or identified, it is the professional accountant's responsibility to
immeadiately inform a superior who is expected to take action.
(Section 360.35)
If the the professional accountant follows the steps as contained in section 360.29, it will not be considered a breach of the duty of confidentiality under section 140 of this code. When making such disclosure, the professional accountant shall act in good faith and exercise caution when making
statements and asssertions.
(Section 360.36)
CP04 - V1 Page 24 of 41
Section 360.32 and 360.37 notes that where there is an identified or suspected act of
non-compliance, the professional accountant is encouraged to document the
following:
The matter;
The results of discussions with the professional accountant’s superior,
management and, where applicable, those charged with governance and
other parties;
How the professional accountant’s superior has responded to the matter;
The courses of action the professional accountant considered, the judgments
made and the decisions that were taken.
How the professional accountant is satisfied that he has fulfilled the
responsibility of disclosing to those in charge of governance and his
determination of any further action required in the public interest.
To determine is further action is required, the nature and extent of it, will depend on
the following factors17:
17 360.22
Obtaining an understanding of
the matter
•The nature of the act
•The application of the relevant laws and regulations
•Potential consequence to stakeholders and the public interest
•exercising knowledge, professional judgment and expertise required of a professional accountant to investigate any non-compliance and to consult, on a confirdential basis, with others within the organization, professioanl body or with legal counsel
Addressing the matter
•By notifying their immediate superior and if necessary the next level of authority
•Appropriate steps must be taken as noted in 360.17
•Disclosure may be required to the external auditor if there is a legal obligation to enable the suditor to perfom his audit
Determining whether further action is needed
•To assess the appropriateness of the response to those in charge of governance
• In assessing the response, consider if it is timely, if the appropriate action was taken to rectify, remedy or mitigate the consequence of non-compliance.
Documentation
•The senior professional accountant must document the investgation of the matter and the recourse taken.
CP04 - V1 Page 25 of 41
What further action may be taken?18
In determining if the appropriate action was taken one must consider if a reasonably
informed third party, weighing all the specific fact and circumstances available to the
professional accountant at the time, would be likely to conclude that the professional
accountant has acted appropriately in the public interest.19
4. Identifying reportable irregularities in terms of South African Law
In some jurisdictions, such as South Africa, there are specific regulations that govern
how to address the non-compliance. When encountering non-compliance, a
professional accountant has the responsibility to20:
One such example is that of section 29 of the Companies Act which states:
Independent Reviewers need to be aware of the definition of a Reportable
Irregularity in terms of the regulations in order to comply with the reporting
obligations placed on them.
18 360.25 19 360.24 20 360.3
CP04 - V1 Page 26 of 41
Regulation 29(1) (b) of the Companies Act defines a reportable irregularity (RI) as
follows:
"Any act or omission committed by any person responsible for the management of a
company, which
1. unlawfully has caused or is likely to cause material financial loss to the
company or to any member, shareholder, creditor or investor of the company
in respect of his, her or its dealings with that entity; or
2. is fraudulent or amounts to theft; or
3. Causes or has caused the company to trade under insolvent circumstances.”
Who should a member report to?
A member who identifies a reportable irregularity in terms of Regulation 29 of the
Companies Act, must report directly to the Companies and Intellectual Property
Commission (CIPC).
The member must ensure that irregularities identified are recorded immediately and
are in detail enough to allow CIPC to check whether there is any evidence of same.
Members who send first reports need to follow up with the second report as per
section 29(8) (c).
During February 2016 the CIPC raised concerns that the Independent Reviewers
were not following through with the first reports they provided.
The Process as per the Regulation 29(8):
1. The independent reviewer must as soon as reasonably possible but not later
than 20 business days from the date on which the report referred to in sub
regulation (6) was sent to the Commission—
(a) take all reasonable measures to discuss the report referred to in sub-
regulation (6) with the members of the board of the company;
(b) afford the members of the board of the company an opportunity to make
representations in respect of the report; and
(c) send another report to the Commission, which report must include—
(i) a statement that the independent reviewer is of the opinion that—
(aa) no reportable irregularity has taken place or is taking place; or
(bb) the suspected reportable irregularity is no longer taking place
and that adequate steps have been taken for the prevention or
recovery of any loss as a result thereof, if relevant; or
(cc) the reportable irregularity is continuing; and
CP04 - V1 Page 27 of 41
(ii) detailed particulars and information supporting the statement referred
to in subparagraph (i)
Was the matter disclosed to the appropriate authority?
Disclosure must wither be required by law or if the professional accountant thought it
necessary for investigation by the appropriate authority in the public interest.21
In determining the nature and extent of the actual or potential harm, due
consideration must be taken of the relevant stakeholders. Examples of situations
that may determine if disclosure is appropriate can be found in section 360.29.
List the external factors to consider before making a disclosure:
5. Touch, pause, engage
Relevant sections of the code:
Part A – 100.9, 100.19, 100.20, 100.24
Part C – 310.3
By IFAC standards, professional accountants are required to identify, evaluate and
address each matter requiring their skills, so as to act in a diligent manner with
professional competence. You are also required to resolve conflict in compliance to
the fundamental principles.22 If your evaluation of the situation does not yield an
acceptable level, it is important that you put into place safeguards in place to
eliminate or mitigate against the threat.
21 360.28 22 100.19
CP04 - V1 Page 28 of 41
Being aware of your responsibilities and the consequence of your advice, makes you
a better professional. Your knowledge and skills have been developed for the
duration of your studies and articles, but to place yourself in the category of a
professional, you must understand how to conduct yourself in a manner that will not
just blemish your name or tarnish the reputation of your entire fraternity.
To determine if there is a compromise of the fundamental principles, use the
following test23:
Qualitative and quantitative measures must be considered when evaluating the
significance of the threat.
When initiating the conflict resolution process, what factors must be considered?24
You must now weigh the consequences for each likely course of action and
determine the appropriate way forward.
Where a threat cannot be eliminated, professional accountants are expected to
decline or discontinue the professional activity and where necessary resign from the
engagement or employing organization (100.9).
After exhausting all relevant possibilities, if the ethical conflict remains resolved, a
professional accountant shall refuse to remain associated with the matter causing
the conflict (100.24).
23 310.3 24 100.20
Would a reasonable and informed professional
accountant perform in the same manner
Weigh all the facts and circumstances
conclude that compliance to the
fundamental principles are compromised
CP04 - V1 Page 29 of 41
25
25 http://tigerhawk.blogspot.co.za/2008/06/old-school-accounting.html accessed on 2 March 2017
Ensure that you
have documented
the substance of the
issue, details of the
discussion held, and
the decisions made
concerning the issue
(Section 100.22)
CP04 - V1 Page 30 of 41
6. Case study
THE CASE STUDY THAT FOLLOWS HAS BEEN EXTRACTED FROM THE GUIDE TO QUALITY CONTROL FOR
SMALL-AND MEDIUM-SIZED PRACTICES, THIRD EDITION, PRODUCED BY IFAC.26 CANDIDATES ARE
REQUIRED TO SIT IN GROUPS TO DISCUSS THE EFFECT OF THE ACTIONS ON THE FUNDAMENTAL
PRINCIPLES AND ELABORATE ON SAFEGUARDS TO THREATS AND POSSIBLE MITIGATION.
M.M. and Associates
General
Marcel Mooney is a sole practitioner, practicing as M.M. and Associates and
employing four staff. The practice performs a large number of review
engagements (some of which are on behalf of family members or close
personal friends), several small audits, and three medium-sized audits. The
more substantial audit clients include a retirement home, a local
government agency, and the largest motorcycle dealership in town. The
local government agency has had a lot of negative publicity lately with
allegations of corruption against senior managers. Marcel has known the
managers for many years and feels these charges are unfounded. The
retirement home is almost a year behind in payment of its fees for last
year’s audit, and the firm needs to begin scheduling the field work soon.
Marcel, 48, started his practice in 1990 with no staff. The firm has grown
gradually over the last 18 years. Marcel is a dynamic individual and keeps
life around the office interesting. If something looks like fun, Marcel is
usually in the middle of it. He is an excellent marketer and promotes the
firm wherever he goes. Marcel earns a good living, and has no plans to
retire. M.M. employs Deborah D’Alessandro, who has three years of
experience with the firm and hopes to qualify as a professional accountant
next year; an accounting technician, Bob Morton; and two students
recently enrolled in a program of professional accounting studies, who are
new to the firm. Bob has one year of experience and started with the firm
four months ago. His enthusiasm makes up for his lack of experience.
Deborah is constantly reminding Bob to ask the client more questions and
to document more completely. In several cases, Bob has missed key
26 This publication may be downloaded free of charge from the Publications and Resources area of the IFAC website: http://web.ifac.org/publications.
CP04 - V1 Page 31 of 41
matters in the file and Deborah has had to go back to the client and obtain
further information.
Marcel, like many other practitioners, is always reluctant to turn down new
clients, sometimes even those with poor reputations. He feels everyone has
a right to professional services. Recently Marcel took on Mark Spitzer as an
audit client. Mark owns the local restaurant, which has ties to community
members with questionable reputations. Mark also has a history of
problems with tax authorities resulting in fines, penalties, and, in one case,
a suspended jail sentence. Deborah is not looking forward to the audit and
the working environment she’ll have to endure to get the work done.
Despite the firm’s smaller size, and Marcel’s somewhat casual attitude towards
policy development, the firm has no history of complaints or allegations, and a
majority of the clients would report they are satisfied with the firm’s service.
Firm Planning Process
The firm’s planning process consists of a day spent by Marcel reflecting on
the past year and the preparation of a simple budget. The budget is
usually last year’s numbers adjusted for known client gains and losses. It
also addresses capital requirements, staffing costs, and office expenses.
Since the competitors in town seem to be performing fewer audit and
review engagements, Marcel sees this as an opportunity to increase his
share of the assurance market. He has thought about registering with the
regulatory body in order to be able to conduct listed entity audits. Marcel
normally discusses his firm’s revenue plan with Deborah and together they
plan staffing and other resources such as identifying equipment and
furniture requirements for the next year.
Human Resources
The hiring process is informal. When one of the staff members announces that
he or she is leaving the firm, Marcel may place an advertisement in the local
newspaper or review the resumes recently received from people looking for
positions. When a candidate is found, Marcel interviews this individual and then
makes a decision. Marcel tries to check out the references or qualifications of
candidates, but sometimes he does not complete the process owing to the
pressures of client meetings and engagements. Deborah assists Marcel with
staff scheduling when a time conflict arises and finds work for staff that are not
busy.
Since junior staff never seem to stay with the firm very long, Marcel is reluctant
to spend time and money training them. Besides, he believes “on the job”
CP04 - V1 Page 32 of 41
training is the best training. Furthermore, he does not often conduct
performance appraisals, and retains only brief notes on file for any of the
personnel, with the exception of statutory personal information required to
prepare the necessary annual income reporting slips.
Professional Standards
Marcel is concerned about the new independence rules. He fears they
may prevent him from performing some assurance engagements. For
example, when Deborah questioned the firm’s independence on a new
audit client, Magnificent Dollar Stores (a business owned in part by
Marcel’s sister-in-law), he responded “I hardly know the woman. There’s
no threat.”
Marcel spends his time managing or attracting clients, so he has not kept
up -to- date with the new professional standards as much as he would like.
He feels the new standards are too complicated and time-consuming for
working practitioners and their clients to understand. He barely has time to
keep up with all of the tax changes. Marcel relies heavily on Deborah to
ensure the engagement files meet professional standards.
Marcel resists leading-edge technology, but after some pressure he recently
purchased notebook computers for Deborah and Bob, who wanted to start
using electronic working paper software. The students share a desktop
computer. Marcel has considered becoming a member of a local group of small
firms who provide training on new standards, but hasn’t yet had time to contact
the group and investigate the advantages and costs associated with joining the
affiliation.
As a result of comments received during the last practice inspection two
years ago, M.M. purchased a subscription to certain resource library
materials, including an audit and review manual which includes examples of
standardized templates. Despite the negative comments Marcel’s attitude
towards practice inspection is just to obtain ‘a passing grade’ without having
to engage in additional procedures that he feels will only consume the limited
time available to his personnel that don’t result in fee generation for the firm.
Planning and File Reviews
Since Marcel knows his clients well, he feels that planning meetings are rarely
needed. The approach used most commonly in the firm is simply to do
CP04 - V1 Page 33 of 41
whatever was done last year. Marcel performs his own file reviews.
Engagement personnel are briefed by Marcel before beginning field work.
Engagement letters are obtained, but for existing clients this is usually done
after the engagement is complete. Standard templates are used most of the
time. Staff is expected to do their best to complete the file and then hand it in
for review. Deborah reviews her own work, and Bob’s and the students’ work,
before giving the file to Marcel to sign off. Marcel is not naturally inclined
towards the patient work of reviewing files and gets frustrated when there is
too much paper in the file. He would like to spend time doing careful reviews,
but sometimes the amount of paper the employees put in the file makes this
too time-consuming.
After Marcel heard about the new quality control standards, he asked Deborah
to study them and report back to him with recommendations about what the
firm should do. The one condition he gave her was that the changes should be
kept to the minimum required because compliance rules tend to cut into
billable hours. Deborah feels uncomfortable with this approach. She also
knows that the firm has no formal process for determining if, and when, an
engagement quality control review should be completed on a file, but she is
aware that this forms only one component of the standards requirements.
Group Task
One Discuss the current tone on top, the relevant fundamental principles and possible threats. Provide a solution, if any, to current threats.
Two Discuss the element of independence, including current threats and possible mitigation
Three Discuss the conflict of interest aspect of the case study. Ensure that you provide the threats and available safeguards.
Four Discuss the element of confidentiality as well as the threats and safeguards available.
Five Discuss the acceptance of the mandate and if it fulfils the requirement of competency. Provide possible threats and safeguards
Notes:
CP04 - V1 Page 36 of 41
5. Awareness of my duties
Relevant sections of the code:
Part A – 100.9, 100.19, 100.24
Part C – 310.3
When encountering unusual circumstances which could result in a disproportionate
outcome to the requirements of the code or contrary to the public interest, it is
recommended that the professional accountant consult with their professional body
or the relevant regulator (100.11)
These situations may arise in the case of conflict of interest matters and the
professional accountant is advised to take not of section 310.4 in this regard.
When communicating with those in governance structures27, regard must be given to
the nature and importance of the particular circumstances and the matter to be
communicated. Only appropriate persons may be communicated to (100.25). The
professional accountant can generally obtain guidance on ethical matters without
breaching confidentiality through legal counsel or their professional body (100.23)28.
When a matter involves complex analysis and judgments, consideration must be
given to consulting internally, obtaining legal advice to understand the available
options or legal implications of taking any particular course of action.29
Notes:
27 100.21 28 360.30 also notes that if the determined course of action would be disclosure, the senior professional will not be n breach of section 140 of the code. 29 360.27
Seek guidance within the organization
Board/Audit committee
Approach your professional body
Seek legal counsel
Seek counsel from a fellow professional accountant
CP04 - V1 Page 37 of 41
6. Legislative requirements
Cognisance must be taken of relevant legislation. We note the following list of
legislation that are applicable to Accounting Officers or Tax Practitioners:
Accounting officer references
Banks Act section 85 certification of returns and other
documents and Regulation 4 – certification of
returns
Bills of Exchange Act section 72B prevention of fraud
Broad-Based Black Economic
Empowerment Act
Including regulations framework for accreditation
and verification by all verification agencies
appendix 6 item 5.4.9.9. Current validity
questionable; Draft BBBEE Forest Code 0000
item 4.7 Current validity questionable; financial
sector code 000 item 4.5; agriculture code item
2.6)
Close Corporations Act section 12 founding statement, section 15
registration of amended founding statement,
section 58 annual financial statements, section
59 appointment of accounting officers, section 60
qualifications of accounting officers, section 61
right of access and remuneration of accounting
officers, section 62 duties of accounting officers,
section 63 joint liability for debts of corporation,
section 66 application of the Companies Act,
section 73 repayments, payments of damages
and restoration of property by members and
others) and Regulations (regulation 15
registration of founding statement, regulation 16
registration of amended founding statement,
regulation 16A annual return, regulation 21
accounting officer, regulation 21A reporting by
CP04 - V1 Page 38 of 41
accounting officer, schedule 3 periods of
corporation records, CK2A Amended founding
statement in respect of accounting officer and
addresses, accounting officer designations.
Companies Act Including regulation 29 (independent review of
financial statements)
Consumer Protection Act Regulations (regulation 2 franchise agreements,
regulation 3 disclosure document for prospective
franchisee, draft SA automative code item 15, )
Co-operatives Act section 29 AGM, section 49 auditor and
independent reviewer disqualified from acting,
section 50 appointment and termination of
auditor or independent reviewer, section 51
removal of auditor or independent reviewer,
section 52 attendance of meeting by auditor or
independent reviewer, section 53 right to
information, section 54 notice of error) and
Regulations (Schedule 3 Standards of
accounting to be followed.
Electronic Communications
Act
Regulations (General notice on compliance items
7, 8 and 19, universal service access and fund
regulation 4, prescribed annual contributions
regulation 4, general licence fee regulations
schedule 3 payments iro licence fees
Financial Advisory and
Intermediary Services Act
Regulations (qualifying criteria and qualifications
for financial services providers 2008 annexure 1
section 1 item 14, Exemption of certain
authorised financial services providers from
requirements pertaining to audited financial
statements, exemption of FSPs and FSPs limited
by products from audit requirements
Financial Advisory and
Intermediary Services Act
Regulations (qualifying criteria and qualifications
for financial services providers 2008 annexure 1
CP04 - V1 Page 39 of 41
section 1 item 14, Exemption of certain
authorised financial services providers from
requirements pertaining to audited financial
statements, exemption of FSPs and FSPs limited
by products from audit requirements)
Financial Services Board Act Regulations (Levies item 12 levies on
intermediaries).
Independent Communications
Authority of South Africa Act
Regulations (compliance procedure manual
regulation form 2)
Inspection of Financial
Institutions Act
section 9 disclosure to certain affected parties.
Act to be replaced by the Financial Sector
Regulation Bill
Justices of the Peace and
Commissioners of Oaths Act
section 7 Powers of commissioners of oaths and
Regulations (designation and manner of oath
Mutual Banks Act
section 43 annual financial statements and
section 86 certification of returns and other
documents
National Credit Act Section 58A additional requirements for
cancellations and regulations 65 (annual
financial statements, 67 (responsibility for
assurance engagements, and form 40D
Non-profit Organisations Act section 17 accounting records and reports and
section 18 duty to provide reports and information
Pension Funds Act regulation 32 application for registration as
administrator
Preferential Procurement
Policy Framework Act
Regulations (2011 regulations, including
regulation 10 Broad-based black economic
empowerment status level certificates, ending 1
April 2017
CP04 - V1 Page 40 of 41
Sectional Titles Act Regulations (Annexure 8 management rule 32
record of rules and their availability, 42 audit, 50
when to be held, 56 AGM)
South African Schools Act section 43 audit or examination of financial
records and statements
Tax practitioner references
Customs and Excise Act Rule 119A customs modernisation
Tax Administration Act section 69 secrecy of taxpayer information and
general disclosure, section 70 disclosure to other
entities, section 229 understatement penalty
percentage table, section 234 criminal offences
relating to non-compliance, and chapter 18
registration of tax practitioners and reporting of
unprofessional conduct) and Regulations
(definition of registered user, and item 4, in rules
for electronic communication).30
7. Holding my ground – tips to achieving success in your practice
Document the substance of any issue that could potentially result in a breach
of the fundamental principles.
Keep evidence where permission was sought and consequently given in a
conflict of interest situation.
Ensure that your letter of engagement contains the necessary clauses.
Whistle-blow internally using the Protected Disclosure Act.
Never withhold an e-profile in order to leverage for outstanding fees.
If your mandate has been terminated, do not inflate the final bill or reverse
discounts (unless they were a mechanism for preferential payments in terms
of your agreement).
30 Table courtesy of the Contemporary Gazette as at February 2017