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COVID-19: Ethics and Independence Considerations

This case highlights the importance of vigilance in identifying and addressing threats to independence to avoid catastrophic consequences. Fact independence, on the other hand, refers to the actual independence of auditors and their ability to act without any undue influence. Auditors should have the autonomy to make decisions based on their professional judgment, free from any pressures or interference. This includes being able to challenge management’s assertions, ask difficult questions, and access all necessary information to form an unbiased opinion. By upholding fact independence, auditors can ensure that their work is thorough, comprehensive, and objective.

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The conceptual framework is a set of principles-based provisions in Section 120, The Conceptual Framework of the Code that all PAs are required to apply to deal with ethics and independence issues. It applies to all PAs and outlines a three-step approach involving identifying, evaluating and addressing threats to compliance with the fundamental principles and, where applicable, independence. In early April 2018, the IESBA released a completely rewritten and revamped Code of Ethics for professional accountants (PAs). Renamed “International Code of Ethics for Professional Accountants (including International Independence Standards) (“the Code” or “the revised and restructured Code”), the Code will become effective in June 2019. The IESBA believes the enhanced clarity will also facilitate enforcement by professional bodies and regulators. The code clearly distinguishes “requirements” (“R” is the first digit in the citation; for example, R510.4) from “application material” (which includes an “A” in the citation; for example, 510.4 A1) in each subject-matter area.

The Role of the Auditing Standards Board in Upholding Independence

The Enron scandal serves as a striking example of the consequences of compromised independence. In this case, auditors failed to maintain their independence and were influenced by the financial interests of Enron, leading to the manipulation of financial statements and the eventual collapse of the company. The Enron scandal highlighted the need for stricter regulations and enforcement to prevent similar incidents and restore public trust in auditors. The ASB monitors compliance with auditing standards and takes necessary actions to enforce them. This includes conducting inspections and investigations to ensure that auditors adhere to the principles of independence.

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Require firm personnel to review the RE list upon employment and engagements, when certain changes occur (e.g., promotion or changes to the RE list), and before they or a relevant family member purchase(s) stock, obtain(s) a loan, or enter(s) into a business relationship, etc. Such individuals should take required action(s) to comply with the rules on a timely basis when warranted. This approach differs from that taken by the AICPA and IAASB, which instead focus on the firm and its personnel. On November 18, 2022, the Public Company Accounting Oversight Board (PCAOB or the Board) proposed, A Firm’s System of Quality Control and Other Proposed Amendments to PCAOB Standards, Rules, and Forms, a new quality control (QC) standard applicable to all PCAOB registered public accounting firms. Regulatory bodies are introducing stricter rules to strengthen independence and objectivity standards, especially in auditing, to prevent conflicts of interest and increase transparency. Conflict of interest situations can arise when personal or financial relationships with clients or third parties interfere with the accountant’s professional obligations.

• For instance, case studies can shed light on real-life scenarios where auditors faced ethical challenges and how they resolved them, providing valuable insights for auditors facing similar situations.
• This approach, which originated in the ISAs and was applied in the AICPA Auditing Standards Board’s clarity project, is familiar to many professional accountants.
• The conceptual framework assists accountants in complying with the ethical requirements of the CIMA Code and meeting their responsibility to act in the public interest.
• If Member Firms are unable to agree appropriate safeguards, the CEO and the Chair of the Board are requested to consider the potential impairment of independence or conflict of interest.
• It includes complying with relevant laws and regulations, being diligent in the performance of engagements, and maintaining professional skepticism throughout the audit process.

Dowload the Latest Exploring the IESBA Code Publication – “A Focus on Technology”

By steadfastly upholding these ethical pillars, accountants play a vital role in maintaining the integrity of the financial system and fostering trust among all economic participants. Independence and interdependence in accounting ethics are not opposing forces but complementary elements that, when balanced correctly, enhance the integrity and effectiveness of the auditing process. This balance is not static but requires continuous attention and adjustment to align with evolving standards, stakeholder expectations, and the complex nature of financial reporting. Auditors must remain vigilant in upholding their independence while acknowledging the value of interdependence in fostering a collaborative and ethical professional environment. Professional accountants in business have new provisions to look to when they are pressured to breach the fundamental principles (Section 270), as well as revised provisions for preparing and presenting financial information (Section 220). Revised Section 220 provides more comprehensive provisions for avoiding association with misleading information.

One of the key challenges auditors face is the potential for conflicts of interest that can compromise their independence. For example, auditors may have financial or personal relationships with the management or shareholders of the audited entity, creating a conflict that could impair their objectivity. To address this issue, auditing standards require auditors to identify and evaluate potential threats to independence and take appropriate measures to mitigate them.

• The familiarity threat arises when auditors develop close relationships with their clients that could impair their objectivity.
• To address this issue, auditing standards require auditors to identify and evaluate potential threats to independence and take appropriate measures to mitigate them.
• Auditors who remain vigilant about compliance, thoroughly document their processes, and foster a cultural commitment to objectivity perform a vital service that upholds the cornerstone of public confidence in the development and presentation of financial information.
• IESBA Safeguards Task Force Chair Gary Hannaford explains key revisions to the conceptual framework and enhancements in relation to safeguards throughout the Code of Ethics.

After careful consideration of comments received, it is appropriate to move forward and amend rule 3523 to exclude the portion of the audit period that precedes the professional engagement period from the scope of the rule. Under the rule, as amended, audit firms would continue to be prevented from providing tax services to persons covered by Rule 3523 once the professional engagement period has commenced. In addition, even if a particular tax engagement is not prohibited by Rule 3523, an auditor would still need to consider the relevant facts and circumstances to determine whether it impairs independence under the SEC’s general standard. By taking a more targeted approach in this area, I believe that audit committees’ choice of auditor will not be restricted unnecessarily. This webpage provides guidance to assist professional accountants navigate some of ethics and independence challenges ahead and comply with Code.

From the perspective of an independent accountant, the utilization of technology must be navigated with a keen awareness of ethical boundaries. For instance, the deployment of artificial intelligence (AI) in auditing can streamline the analysis of financial records, yet it also necessitates a vigilant assessment of the AI’s algorithms to ensure unbiased and accurate outcomes. Similarly, blockchain technology offers a robust framework for transparent and secure transactions, but it also demands a rigorous understanding of its mechanisms Ethics And Independence to uphold the accountant’s duty of care.

Exploring the IESBA Code: A Focus on Technology

In addition, when performing services under the International Standards on Auditing (ISAs), auditors must apply the IESBA Code plus any national ethical requirements. Lastly, members of the IFAC Forum of Firms, an association of larger global audit firm networks, agree to adopt policies and methodologies that conform to the IESBA Code (see the sidebar “A Forum to Promote Quality”). Before accepting any professional engagement, the practitioner considers whether there are any ethical factors which should lead the practitioner to decline the appointment. Chartered accountants are subject to ethical and other guidance laid down by the ICAEW, including the Fundamental Principles of the Code of Ethics, as set out in Part A Section 100 Introduction and Fundamental Principles in performing any professional services. ICAEW’s Code of Ethics is consistent with the Code of Ethics for Professional Accountants issued by the IESBA.

For instance, the Enron scandal in the early 2000s highlighted the devastating impact of compromised independence. The auditors involved were found to have close relationships with Enron executives, which led to the failure to detect and report the company’s fraudulent activities. This case underscores the importance of objectivity in auditing and the need for auditors to remain independent in their role. IESBA Chairman Dr. Stavros Thomadakis explains the practical significance of the revised and restructured Code, an enhanced platform for developing relevant ethics and independence standards that are globally operable in a world of changing technologies, business methods and public expectations. Publicly traded companies present a heightened need for rigorous independence standards, driven by the potential market impact of their audited financial statements. The PCAOB and SEC collaborate to define independence for audits of issuer (publicly traded) entities.