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Review of Part C of the Code

Review of Part C of the Code. Jim Gaa IESBA June 2012 New York, USA . Review of Part C of the Code. Background. To inform the development of IESBA’s Strategy and Work Plan

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Review of Part C of the Code

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  1. Review of Part C of the Code Jim Gaa IESBA June 2012 New York, USA

  2. Review of Part C of the Code Background • To inform the development of IESBA’s Strategy and Work Plan • To determine whether recent accounting irregularities reveal ethical implications for professional accountants in business (PAIBs) • To determine whether Part C of the Code should be amended

  3. Review of Part C of the Code Working Group Membership • Jim Gaa (Chair) • Alice McCleary (Board member) • Lisa Snyder (Technical Adviser) • Larry Kean (SME -- USA) • Ian Rushby (PAIB Committee -- UK) • Significant input from PAIB/SME perspective

  4. Review of Part C of the Code Activities to Date • Consideration of accounting irregularities • Informal survey of selected member bodies • Analysis of Part C of Code • Tentative conclusions

  5. Review of Part C of the Code Consideration of Accounting Irregularities • Reports focus mainly on illegal acts rather than “legal but unethical”, and actions of senior management • Little attention to • Legal but unethical acts • PAIBs who act on the instructions of superiors • Role of auditors not directly relevant to Part C • Limited discussion of questionable payments (section 350)

  6. Review of Part C of the Code Survey of member bodies • Survey of selected member bodies that have significant number of PAIBs • Conducted to identify PAIBs’ ethical issues as reported to member bodies and to identify ways of providing guidance

  7. Review of Part C of the Code Survey of member bodies • Few ethical queries received from PAIBs than from from PAIPs • Only significant recurring issue: pressure by senior management or supervisors to report misleading information • Some information was provided about forms of additional guidance

  8. Review of Part C of the Code Working Group Activity • Focus: • Areas in Part C that could be amended • Areas not currently in Part C that could be addressed • What forms additional guidance might take • Discussion of results of selected cases of accounting irregularities and survey of member bodies • Paragraph by paragraph examination of Part C • Preliminary discussion of additional guidance

  9. Review of Part C of the Code Working group’s major findings Part C provides limited guidance on: • Responsibilities of PAIBs: • What PAIBs should do: produce financial information that is a faithful representation of the economics of transactions • What PAIBs should not do: be associated with misleading information and reports • Dealing with pressure on PAIBs from superiors to violate legal or ethical standards

  10. Review of Part C of the Code Preliminary recommendations • Financial reporting • More guidance to PAIBs about preparing and reporting faithfully representative (truthful) information • Confirm that 320.1 is intended to go beyond financial reporting principles • Provide guidance on earnings management • Pressure • Section 340 could be expanded to include pressures of all kinds, not just financial self-interest • Code could include guidance for PAIBs who may exert pressure

  11. Review of Part C of the Code Faithful representation: Limited content • PAIBs have a responsibility to produce financial reports that are faithful (complete, neutral and free of material errors) or truthful representations of the economics of transactions • Code mentions this only briefly in two places: indirectly in paragraph 110.1 (“truthful”) and in 320.1 (“fair and honest”)

  12. Review of Part C of the Code Faithful representation: two “tests” • 320.1 requires information to be presented “fairly, honestly and in accordance with relevant professional standards.” • Issue: 320.1 contains two tests: • To present information fairly and honestly • To present information in accordance with relevant professional standards • Should the Code provide guidance about what accountants should do • Provide faithfully representative (truthful) information?

  13. Review of Part C of the Code Association with misleading information • PAIBs have a responsibility not to be associated with misleading information and reports • A number of references, especially 110.2 and 310.2 (current code), but limited guidance • Financial statements may be misleading even though they do not violate applicable financial reporting standards. • Earnings management is an important issue in relation to truthful versus misleading information

  14. Review of Part C of the Code Earnings management • Most businesses undertake earnings management without violating any laws • Diversity of views about its ethical status • There is no problem • It is never acceptable (always misleading) • It is acceptable in some circumstances, not in others • Current Code makes no reference to it • It is included in proposed 300.6, and also 210.5 (Illegal Acts task force)

  15. Review of Part C of the Code Earnings Management • Should Part C address earnings management? • Should Part C provide guidance on distinguishing acceptable from improper earnings management?

  16. Review of Part C of the Code Pressure from Superiors • Part C provides limited guidance about how a PAIB should deal with • The unethical acts of others (small addition to 300.5 (Illegal acts Task Force) • Pressure to engage in illegal or unethical acts • Survey and working group discussion: Pressure to improperly influence earnings are as likely to be the result of corporate culture, cajoling, bullying and threats of job loss as personal financial gain

  17. Review of Part C of the Code Sections 310,320,340 • Section 310 (current version) addresses pressures of many types • Deleted from Part C by conflict of interest exposure draft • Section 320 focuses on threats relating specifically to financial reporting • Section 340 is limited to self-interest and familiarity threats (incentives) related to financial reporting

  18. Review of Part C of the Code Pressure • Subordinates: Should section 340 be expanded beyond financial interests and incorporate the pressure on subordinates to act inappropriately in Section 320? • Guidance similar to the escalation process in proposed Section 360 (Illegal acts) may help the PAIB • Superiors: Should the Code include guidance for PAIBs who may exert pressure on subordinates?

  19. Review of Part C of the Code Other matters identified • Receipts and Offers of Items of Value (Section 350) • Should section 330 (“Sufficient Expertise”) be incorporated into section 300? • Whistleblowing (reporting unethical/illegal acts of others) • Responsibility of PAIBs to advance the legitimate objectives of the employing organization

  20. Review of Part C of the Code Discussion • Are there any other issues the IESBA would like the Working Group to examine?

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