Professional Ethics - Code of Ethics for Professional Accountants

Auditing Note 2                                                                               

Professional ethics (Code of Ethics for Professional Accountants)

(Lau & Lam, Ch 7; Messier, Ch 19)

The professional accountant’s responsibility is not only to satisfy the needs of an individual client or employer, but he/she has the responsibility to act in the public interest. Ethics is the code of conduct based on moral duties and obligations (i.e. how we should behave).

Professional ethics is:

• to guide accountants’ behavior and actions,
• to protect the reputation of the profession, and
• to enhance the image of professional accountants.

Code of Ethics prescribes the following fundamental principles:

• Integrity (i.e. to be honest)
• Objectivity (i.e. to be fair, truthful, and free of conflict of interest)
• Professional competence and due care (i.e. due care, competence, and diligence)
• Confidentiality (i.e. not to volunteer to disclose client’s information to third parties)
• Professional behavior (i.e. the act of maintaining good reputation of the profession) 

Resolution of ethical conflicts

1. Professional Accountants in Business (PAIBs)                

If the ethical conflict exists, a professional accountant should follow the establish policies of the employing organisation to resolve the conflict.  If those policies do not resolve the ethical conflict, then the professional accountant should:

• review the conflict problem with the immediate supervisor;
• seek counseling and advice on a confidential basis, including HKICPA’s advice if necessary; or
• resign and submit an information memorandum to an appropriate management of that company, if the above steps cannot resolve the conflict.

1. Professional Accountants in Public Practice (Auditors)

Independence is free from the control or influence of management.  Independence is an attitude of mind rather than a set of rules.  Auditors must be independence of mind and independence in appearance.

Independence of mind:  The state of mind that permits the expression of a professional judgment without being affected by others.

Independence in appearance:  The avoidance of circumstances that a reasonable person would be likely to conclude that an auditor’s professional judgement has been compromised.

If professional accountants in public practice encounter ethical problem in independence, they should tackle the problem with the following 3-step approach (i.e. conceptual framework):

• identify threats to compliance with the fundamental principles
• evaluate the significance of the threats identified
• apply safeguards (i.e. ways) to eliminate the threats or reduce them to an acceptable level

Insignificant                No safeguard is needed[pic 1]

[pic 2]

Identifying         Evaluating                Significant                Safeguard is needed[pic 3][pic 4][pic 5]

      Threats                Threats[pic 6]

                                                Very significant        Safeguard cannot [pic 7]

                                                                        reduce threats

Examples of different situations of compromising professional independence are illustrated in the Appendix 1.

Other Professional Ethics

Confidentiality

Professional accountants should not disclose clients’ information acquired in the professional work to others unless the consent has been obtained from the clients or employers beforehand.  

In certain circumstances, a professional accountant may:

1. be authorized to disclose by the client or employer
2. be obliged to disclose (e.g. required by law or compelled by process of law)
3. have a professional duty to disclose (e.g. violation of technical and ethical standards)
4. be free to disclose for his own interest (e.g. litigation against him or professional disciplinary proceedings against him).

Practice Promotion

Advertising and promotional material should not contain references to scale charges or amounts of fees for professional services, nor making any comparison with other CPA practices.  The “Homepage” of a website of a member or member practice is regarded as a newspaper advertisement and it is not allowed to contain any references to scale charges or amounts of fees. However, information on scale charges or amounts of fees contained in a separate file on the website which is linked to the “Homepage” is allowed.

The practice may carry out promotion activities, but it must be objective, legality, and high ethical and technical standards. Direct mailing, cold calling, unsolicited leaflets, and promotional gifts are prohibited.

Changes in a professional appointment

The nominated auditor, with the consent of prospective client, should communicate with the existing auditing to obtain “professional clearance”, i.e. if there are any professional or other reasons not to accept the nomination, and discuss the client’s affairs if appropriate, such as the integrity of management and internal control.