Chapter 3

Ethics

Introduction
Learning outcomes
Chapter study guidance

Learning topics
1 The importance of ethics
2 Ethical codes and standards
3 Ethics: financial reporting focus
4 Ethics: audit and assurance focus
5 Making ethical judgements
6 Money laundering regulations
7 Ethical guidance in more detail
8 Further ethical guidance
Summary
Self-test questions
Further question practice
Technical reference
Answers to Interactive questions
Answers to Self-test questions
 Introduction

Learning outcomes
• Identify and explain ethical issues in reporting, assurance and business scenarios
• Explain the relevance, importance and consequences of ethical issues
• Evaluate the impact of ethics on a reporting entity, relating to the actions of stakeholders
• Recommend and justify appropriate actions where ethical and professional conduct issues arise in
a given scenario
• Design and evaluate appropriate safeguards to mitigate threats and provide resolutions to ethical
problems
Specific syllabus references for this chapter are: 19(a)–(e)
3

Chapter study guidance

Use this schedule and your study timetable to plan the dates on which you will complete your study
of this chapter.

Topic Practical Study approach Exam approach Interactive

significance questions

1 The importance of Approach Every question you IQ1: Ethics and the
ethics This should remind attempt will need to individual
This first section you of why you consider the public Use this as an
reminds you of how continue to study interest so always opportunity to
important it is to do ethics – use it to consider how remind yourself of
the right thing in the maintain your focus. actions look through how a professional
workplace and the lens of various accountant should
Stop and think ethical codes.
beyond. behave in the face
WorldCom occurred of such adversity.
at the very start of
the 20th Century –
do you think there is
still a risk of good
companies doing
bad things?

2 Ethical codes and Approach As you found at the N/A

standards Each of these codes Professional Level,
The way that you of ethics is being able to
should act is always contained within navigate around the
under consideration your open book open book
– note how these permitted text. permitted text under
codes have evolved time pressure is very
Stop and think important, so learn
to keep up with
current Make sure you to do this whenever
developments. understand the you attempt
contents of each of questions.
these codes and
standards – are you
up to date with
recent changes?

3 Ethics: financial Approach You should be on N/A

reporting focus The fundamental the lookout for any
principles, threats clues from the

102 Corporate Reporting ICAEW 2021

Topic Practical Study approach Exam approach Interactive
significance questions

This section will and safeguards scenario that

remind you how should all be suggest some
ethics applies to the revision for you. questionable ethical
accountant in Stop and think behaviour is
business. occurring. For
The remaining example,
sections all relate to considering the FIFA
the work of creating worked example, is
financial there any evidence
information, so while of bribery or
you study them, corruption?
consider how they
could occur in real
life.

4 Ethics: audit and Approach Responding IQ2: Ethical risks

assurance focus Having read about appropriately to Use this as a recap
This section will the current versions ethical threats is of all the ethical
remind you how of the IESBA and dependent upon threats that an
ethics applies to the ICAEW Codes and being able to auditor is likely to
accountant in the FRC Ethical identify and face.
practice. Note the Standard, you need diagnose these
threats in the first IQ3: Stewart Brice
recent to make sure that
developments to you can find place, so your Once you have
address ongoing everything you need technique should studied this section,
issues from the in the open book always start by attempt this
profession. permitted text. confirming the question to see how
problem and then well you are able to
Stop and think evaluating suitable apply this
Do you know how to alternatives in knowledge.
respond if response.
presented with a
variety of different
ethical threats?

5 Making ethical Approach As explained in IQ4: Revenue

judgements Work your way ‘Exam context’ you recognition
Not every scenario methodically should be prepared This is a brilliant way
will be through the for more complex of demonstrating
straightforward to resolution process. situations when how financial
diagnose and may attempting reporting and
Stop and think questions in the
require a systematic auditing knowledge
approach to You may find it Corporate Reporting can be blended
determine the right helpful to consider a exam. together to provide
response. real world problem an ethical challenge.
that you are familiar How will you
with when working respond to this?
through the
resolution process.

6 Money laundering Approach The biggest N/A

regulations Much of this is challenge with
The threat of money revision but you money laundering is
laundering is going should make sure being able to
nowhere so you there is nothing new identify it so always
must always keep up here from the last be on the lookout
to date with current time you studied the for tell-tale signs of
developments in this subject. questionable

ICAEW 2021 3: Ethics 103

 Topic Practical Study approach Exam approach Interactive
significance questions

area. Stop and think financial activity.

Can you explain how
the UK government
is currently dealing
with money
laundering?

7 Integrity, objectivity Approach Use this as an N/A

and independence Work through this opportunity to
To supplement your with the open book consider how the
knowledge of the permitted text in various threats could
open book front of you. be examined.
permitted text, here Stop and think
are some examples
of how the FRC Can you find where
Revised Ethical each of the threats is
Standard and the covered?
ICAEW Code of
Ethics can be
applied.

8 Provisions available Approach Use this as an N/A

for small entities Work through this opportunity to
The FRC Revised with the open book consider how these
Ethical Standard permitted text in points could be
covers issues where front of you. examined.
the guidance is Stop and think
relaxed for smaller
entities. Can you find where
each of the key
points is covered?

Once you have worked through this guidance you are ready to attempt the further question practice
included at the end of this chapter.

104 Corporate Reporting ICAEW 2021

 1 The importance of ethics
Section overview

• Ethical behaviour is essential to maintain public confidence.

• Guidance is provided in professional codes of conduct and ethical standards.

1.1 Introduction
In general terms, ethics is a set of moral principles and standards of correct behaviour. Far from
being noble ideals which have little impact on real life, they are essential for any society to operate
and function effectively. Put simply, they help to differentiate between right and wrong, although
their application often involves complex issues, judgement and decisions. While ethical principles
can be incorporated into law, in many cases their application has to depend on the self-discipline of
the individual. This principle can be seen to apply to society as a whole, the business community and
the accounting profession.

1.2 Ethics in business

Business life is a fruitful source of ethical dilemmas because its whole purpose is material gain, the
making of profit. Success in business requires a constant search for potential advantage over others
and businesspeople are under pressure to do whatever yields such an advantage. As a result,
organisations have become increasingly under pressure to act, and to be seen to be acting, ethically.
In recent years, many have demonstrated this by publishing ethical codes, setting out their values
and responsibilities towards stakeholders.
In some instances, businesses may be forced to adopt a more ethical approach. In 2013, many bank
chief executives saw a pay cut for the first time in years. This was partly due to tightened regulations
which now require banks to align executive pay more closely to risks and performance. Arguably
more forceful, however, are the investor revolts arising as a result of shareholders’ anger at rising pay
in a time of falling profits and reduced dividend payouts.

1.3 Ethics and the accounting profession

The IESBA Code of Ethics for Professional Accountants (IESBA Code) states:
“A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in
the public interest.” (IESBA Code para. 100.1 A1)
The public interest is considered to be the collective well-being of the community of people and
institutions the professional accountant serves. These include the following:
• Clients
• Lenders
• Governments
• Employers
• Employees
• Investors
• The business and financial community
• Others who rely on the work of the professional accountant
For the work of the accountant in practice or in business to maintain its value, the accountant must be
respected and trusted. The individual professional accountant therefore has a duty and a
responsibility to maintain the reputation of the profession and the confidence of the public.

1.4 Ethics and the individual

While legislation and professional bodies have their part to play through issuing guidance, the
importance of the integrity of the individual cannot be overestimated. Its ethical consequences are

ICAEW 2021 3: Ethics 105

potentially very significant in deciding, for example, whether to whistleblow on questionable practice
at work, despite pressure from colleagues or superiors or negative consequences of doing so.
The devastating effect of the ethical choices of one individual can be seen in the following summary
of the role played by Betty Vinson, an accountant at WorldCom.

Context example: WorldCom

WorldCom, the US long-distance telephone carrier, is ‘credited’ with being responsible for a fraud
that created the largest bankruptcy in US history. This reportedly resulted in a fine of $500 million,
which at the time was the largest fine ever imposed by the Securities and Exchange Commission
(SEC).
The problems began for WorldCom in mid-2000. Its operating costs were increasing sharply due to
the fees which it had to pay to other companies for use of their telephone networks. Its chief
executive officer and chief financial officer had had to inform Wall Street of lower than expected
profits for the second half of the year and there was increasing pressure to improve results. Betty
Vinson was working for WorldCom at this time as a senior manager in the corporate accounting
division. She was asked by her boss to falsify the accounts in order to increase profits. This was
achieved primarily by capitalising line costs rather than treating them as operating expenses. While
Betty Vinson considered resignation due to the pressure she was put under to falsify the results, she
continued to work for WorldCom until early 2002 and was promoted from senior manager to
director with an increase in salary of $30,000. Over an 18-month period she had helped to falsify
records at the request of her bosses, increasing profits by $3.7 billion.
By March 2002 questions were being asked by internal audit. Vinson decided to disclose the details
of the falsified records to the FBI, the SEC and the US Attorney. She had hoped that her testimony
could be exchanged for immunity from prosecution; however, this was not the case. In October 2002
she pleaded guilty to two counts of conspiracy and securities fraud (carrying a maximum sentence of
15 years) and in October 2003 she was charged with entering false information on company
documents (carrying a maximum sentence of 10 years).

Interactive question 1: Ethics and the individual

1.1 From the Context Example above, list the factors which you think may have affected Betty
Vinson’s decision to make the fraudulent entries.
1.2 What other courses of action could she have taken?

See Answer at the end of this chapter.

Professional skills focus: Applying judgement

Sometimes doing the right thing is not straightforward and you should be prepared to consider
things in a personal capacity.

One of the other courses of action that Betty Vinson could have taken would have been to blow the
whistle – expose the fraud she was asked to participate in either within or outside the organisation.
Admittedly, as the highest levels of management were involved in the WorldCom case, making an
internal disclosure would have fallen on deaf ears at best, or at worst caused Betty Vinson to lose her
job. However, Betty Vinson could have considered making an external disclosure: to the professional
regulatory body of which she was a member, to public regulators, or, perhaps as a last resort, to the
media. A timely disclosure could have brought the fraudulent activities to an end, mitigating their
disastrous consequences.
In the UK, the Public Interest Disclosure Act 1998 (PIDA 1998) aims to protect whistleblowers who
raise genuine concerns about malpractice in organisations, including the following:
• Crimes
• Civil offences (including negligence, breach of contract and breach of administrative law)

106 Corporate Reporting ICAEW 2021

 • Miscarriages of justice
• Dangers to health and safety and/or the environment
• Attempts to cover up any of the above
The Act overrides the confidentiality clauses which may be contained in employment contracts, and
provides recourse to the employment tribunal should the whistleblower be victimised.
The text of PIDA 1998, as well as useful examples of whistleblowing cases, can be found on the
website of the charity Protect: www.pcaw.org.uk

2 Ethical codes and standards

Section overview

• The accounting profession has developed principles-based codes, including the IESBA Code and
the ICAEW Code of Ethics.
• The ICAEW Code centres around five fundamental principles and a professional accountant is
responsible for recognising and assessing potential threats to these fundamental principles.
• Where threats are identified, a professional accountant must then implement safeguards to
eliminate these threats or reduce them to an acceptable level.

2.1 IESBA and ICAEW Codes

As a key aspect of reputation and professionalism is ethical behaviour, the accounting profession has
developed ethical codes of conduct. These include:
• The IESBA Code of Ethics for Professional Accountants (IESBA Code)
• The ICAEW Code of Ethics (ICAEW Code)
The IESBA Code provides ethical guidance internationally for IFAC members. The ICAEW Code has
been derived from the IESBA Code but in places contains additional guidance or requirements.
Therefore compliance with the ICAEW Code will ensure compliance with the IESBA Code.
The ICAEW has adopted the provisions of the 2019 IESBA Code by issuing an updated version of the
ICAEW Code of Ethics which took effect from 1 January 2020.
You should be familiar with the ICAEW Code of Ethics and IESBA Code from your previous studies,
although it is possible the material you covered at the Professional Level may not have been based
on the most up to date versions. This section summarises the key points.
The ICAEW Code is principles-based and members are responsible for:
• identifying threats to compliance with the fundamental principles;
• evaluating the significance of these threats; and
• implementing safeguards to eliminate them or reduce them to an acceptable level.
The guidance in the Code is given in the form of:
• fundamental principles; and
• illustrations as to how they are to be applied in specific situations.
The Code applies to all members, students, affiliates, employees of member firms and, where
applicable, member firms, in all their professional and business activities, whether remunerated or
voluntary.
It is important to note therefore that adhering to the Code is equally important for a member working
in business as it is for a member working in practice, even though the ethical codes are sometimes
perceived to be associated more with the accountant in practice.
ICAEW is committed to enforcing the Code through disciplining members who do not meet
reasonable ethical and professional expectations of the public and other members.
A copy of the ICAEW Code is included in the Member’s Handbook and is available at
www.icaew.com.

ICAEW 2021 3: Ethics 107

2.2 FRC Revised Ethical Standard 2019
It is essential that an auditor’s independence is not compromised while carrying out an audit
engagement. Therefore the FRC has developed Revised Ethical Standard 2019 which was issued in
December 2019. The basic principles have been covered in detail at Professional Level in the Audit
and Assurance paper. This is covered later in this chapter.

3 Ethics: financial reporting focus

Section overview

• This section provides a summary of some key points covered in the ethics learning material in the
Financial Accounting and Reporting paper at Professional Level.
• Here we primarily consider the application of the ICAEW Code to the accountant in business
involved in a financial reporting environment (we look at the accountant in practice in section 4).

3.1 Fundamental principles

Professional accountants are expected to follow the guidance contained in the fundamental
principles in the ICAEW Code in all their professional and business activities. The professional
accountant should also follow the requirements in the illustrations. However, they should be guided
not just by the terms but also by the spirit of the Code.
The Code sets out five fundamental principles, the spirit of which must always be complied with.
(a) Integrity
A professional accountant should be straightforward and honest in all professional and business
relationships.
A professional accountant should not be associated with reports, returns, communications or other
information where they believe that the information:
• contains a materially false or misleading statement;
• contains statements or information provided recklessly; or
• omits or obscures required information where such omission or obscurity would be misleading.
(b) Objectivity
A professional accountant should not allow bias, conflict of interest or undue influence of others to
override professional or business judgements.
(c) Professional competence and due care
A professional accountant has an obligation to:
• attain and maintain professional knowledge and skill at the level required to ensure that a client or
employing organisation receives competent professional services based on current technical and
professional standards and relevant legislation; and
• act diligently and in accordance with applicable technical and professional standards.
Professional competence may be divided into two separate phases:
• Attainment of professional competence – initial professional development
• Maintenance of professional competence – continuing professional development (CPD)
Diligence encompasses the responsibility to act in accordance with the requirements of an
assignment, carefully, thoroughly and on a timely basis.
(d) Confidentiality
A professional accountant should:
• respect the confidentiality of information acquired as a result of professional and business
relationships;
• be alert to the risk that confidential information may be inadvertently disclosed;

108 Corporate Reporting ICAEW 2021

 • not disclose any such information to third parties without proper and specific authority (unless
there is a legal or professional duty to disclose); and
• not use such information for the personal advantage of themselves or third parties.
The professional accountant must maintain confidentiality even in a social environment and even
after employment with the client/employer has ended.
A professional accountant may be required to disclose confidential information:
• where there is a professional duty or right to disclose, when not prohibited by law, for example:
– complying with the quality review of a professional body
– responding to a professional or regulatory body inquiry or investigation
– protecting a professional accountant’s professional interests in legal proceedings
– complying with technical and professional standards, including ethical requirements
• where disclosure is permitted by law and is authorised by the client or employer;
• where disclosure is required by law, for example:
– production of documents or other provision of evidence in the course of legal proceedings
– disclosure to the appropriate public authorities of infringements of the law that come to light;
and
– in cases where disclosure may be in the public interest (recent developments on non-
compliance with laws and regulations (NOCLAR) in a later section are relevant here).
(e) Professional behaviour
A professional accountant should comply with relevant laws and regulations and should avoid any
action that discredits the profession.
In marketing and promoting themselves professional accountants should not bring the profession
into disrepute. That is, they should not make:
• Exaggerated claims for the services they are able to offer, the qualifications they possess or
experience they have gained; or
• disparaging references or unsubstantiated comparisons to the work of others.

3.2 Threats
Compliance with these fundamental principles may potentially be threatened by a broad range of
circumstances. Many of these threats can be categorised as follows:
(a) Self-interest threat
The threat that a financial or other interest of a professional accountant or of an immediate or close
family member will inappropriately influence the professional accountant’s judgement or behaviour.
Examples of circumstances that may create such threats include the following:
• Financial interests, loans or guarantees
• Incentive compensation arrangements
• Inappropriate personal use of corporate assets
• Concern over employment security
• Commercial pressure from outside the employing organisation
(b) Self-review threat
The threat that a professional accountant will not appropriately evaluate the results of a previous
judgement made by the professional accountant.
(c) Advocacy threat
The threat that a professional accountant will promote a client’s or employer’s position to the point
that the professional accountant’s objectivity is compromised.
(d) Familiarity threat
The threat that due to a long or close relationship with a client or employer, a professional
accountant will be too sympathetic to their interests or too accepting of their work.

ICAEW 2021 3: Ethics 109

 Examples of circumstances that may create such threats include:
• a professional accountant in business, who is in a position to influence financial or non-financial
reporting or business decisions, where an immediate or close family member would benefit from
that influence;
• long association with business contacts influencing business decisions; and
• Acceptance of a gift or preferential treatment, unless the value is clearly insignificant.
(e) Intimidation threat
The threat that a professional accountant will be deterred from acting objectively by threats, either
actual or perceived.
Examples of circumstances that may create such threats include the following:
• Threat of dismissal or replacement in business, of yourself, or of a close or immediate family
member, over a disagreement about the application of an accounting principle or the way in
which financial information is to be reported
• A dominant personality attempting to influence the decision-making process, for example with
regard to the awarding of contracts or the application of an accounting principle

3.3 Safeguards
There are two broad categories of safeguards which may eliminate or reduce such threats to an
acceptable level:
Safeguards created by the profession, legislation or regulation
Examples are:
• Educational, training and experience requirements for entry into the profession
• CPD requirements
• Corporate governance regulations
• Professional standards
• Professional or regulatory monitoring and disciplinary procedures
• External review by a legally empowered third party of reports, returns, communication or
information produced by a professional accountant
• Effective, well-publicised complaints systems operated by the employing organisation, the
profession or a regulator, which enable colleagues, employers and members of the public to
draw attention to unprofessional or unethical behaviour
• An explicitly stated duty to report breaches of ethical requirements
Safeguards in the work environment
Examples are:
• The employing organisation’s systems of corporate oversight or other oversight structures
• The employing organisation’s ethics and conduct programmes
• Recruitment procedures in the employing organisation emphasising the importance of employing
high calibre, competent staff
• Strong internal controls
• Appropriate disciplinary processes
• Leadership that stresses the importance of ethical behaviour and the expectation that employees
will act in an ethical manner
• Policies and procedures to implement and monitor the quality of employee performance
• Timely communication to all employees of the employing organisation’s policies and procedures,
including any changes made to them, and appropriate training and education given on such
policies and procedures
• Policies and procedures to empower and encourage employees to communicate to senior levels
within the employing organisation any ethical issues that concern them without fear of retribution
• Consultation with another appropriate professional accountant

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3.4 Ethical conflict resolution
When evaluating compliance with the fundamental principles, a professional accountant may be
required to resolve a conflict in complying with the fundamental principles.
A professional accountant may face pressure to:
• act contrary to law or regulation;
• act contrary to technical or professional standards;
• facilitate unethical or illegal earnings management strategies;
• lie to, or otherwise mislead, others; in particular:
– the auditor of the employing organisation, and
– regulators; or
• issue, or otherwise be associated with, a financial or non-financial report that materially
misrepresents the facts, for example:
– financial statements,
– tax compliance,
– legal compliance, and
– reports required by securities regulators.

3.5 Preparation and reporting of information

Accountants will often be involved in the preparation and reporting of information that may be:
• made public; or
• used by others inside or outside the employing organisation.
The accountant should:
• prepare or present such information fairly, honestly and in accordance with relevant professional
standards;
• present financial statements in accordance with applicable financial reporting standards; or
• Maintain information for which they are responsible in a manner which:
– describes clearly the true nature of the business transactions, assets or liabilities;
– classifies and records information in a timely and proper manner; and
– represents the facts accurately and completely in all material respects.

3.6 Acting with sufficient expertise

An accountant should only undertake significant tasks for which they have, or can obtain, sufficient
specific training or expertise.
Circumstances that threaten the ability of the accountant to perform duties with the appropriate
degree of professional competence and due care include:
• insufficient time for properly performing or completing the relevant duties;
• incomplete, restricted or otherwise inadequate information for performing the duties properly;
• insufficient experience, training and/or education; and
• inadequate resources for the proper performance of the duties.
Safeguards that may be considered include:
• obtaining additional advice or training;
• ensuring that there is adequate time available for performing the relevant duties;
• obtaining assistance from someone with the necessary expertise; and
• consulting where appropriate with:
– superiors within the employing organisation,
– independent experts; or
– ICAEW.

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3.7 Financial interests
An accountant may have financial interests, or may know of financial interests of immediate or close
family members, that could in certain circumstances threaten compliance with the fundamental
principles.
Examples of circumstances that may create self-interest threats are if the accountant or family
member:
• Holds a direct or indirect financial interest in the employing organisation and the value of that
interest could be directly affected by decisions made by the accountant.
• Is eligible for a profit-related bonus and the value of that bonus could be directly affected by a
decision made by the accountant
• Holds, directly or indirectly, share options in the employing organisation, the value of which could
be directly affected by decisions made by the accountant
• Holds, directly or indirectly, share options in the employing organisation which are, or will soon
be, eligible for conversion
• May qualify for share options in the employing organisation or performance-related bonuses if
certain targets are achieved
Safeguards against such threats may include the following:
• Policies and procedures for a committee independent of management to determine the level or
form of remuneration of senior management
• Disclosure of all relevant interests and of any plans to trade in relevant shares to those charged
with the governance of the employing organisation, in accordance with any internal policies
• Consultation, where appropriate, with superiors within the employing organisation
• Consultation, where appropriate, with those charged with the governance of the employing
organisation or relevant professional bodies
• Internal and external audit procedures
• Up to date education on ethical issues and the legal restrictions and other regulations around
potential insider trading

3.8 Inducements
An accountant, or their immediate or close family, may be offered an inducement such as:
• gifts;
• hospitality;
• preferential treatment; or
• inappropriate appeals to friendship or loyalty.
An accountant should assess the risk associated with all such offers and consider whether the
following actions should be taken:
• Immediately inform higher levels of management or those charged with governance of the
employing organisation.
• Inform third parties of the offer, for example a professional body or the employer of the individual
who made the offer, or seek legal advice.
• Advise immediate or close family members of relevant threats and safeguards where they are
potentially in positions that might result in offers of inducements (for example as a result of their
employment situation).
• Inform higher levels of management or those charged with governance of the employing
organisation where immediate or close family members are employed by competitors or
potential suppliers of that organisation.
In addition to the ICAEW Code, accountants operating in businesses linked to the UK should be
aware of the Bribery Act 2010. Under the Bribery Act, there are four categories of criminal bribery
offences:
(a) Offering, promising or giving a bribe to another person
(b) Requesting, agreeing to receive or accepting a bribe to another person
(c) Bribing a foreign official

112 Corporate Reporting ICAEW 2021

 (d) Failing to prevent bribery (corporate offence)
One particular point to note is that the Bribery Act has a very wide judicial reach: it applies to any
persons with a ‘close connection’ to the UK. This is defined to include the following:
• British citizens
• Individuals ordinarily resident in the UK
• Businesses incorporated in the UK
• Any business which conducts part of its business in the UK, even though it is not incorporated in
the UK

Context example: FIFA

The 2018 football World Cup in Russia was widely regarded as a success both on and off the field,
due to the engagement of fans with their Russian hosts and the quality of the football viewed by
audiences across the world. Yet only three years earlier, the organising body of the World Cup, FIFA,
was being investigated for widespread corruption among many of its most senior officials.
Like any high-profile sporting administrator, FIFA has always attracted criticism, but the decision-
making processes for awarding both the 2018 and 2022 tournaments came under intense scrutiny
following accusations of bribery and corruption among those responsible for deciding on host
countries. After an internal investigation, FIFA concluded that the bidding process was fair, although
it did not release its report to the public in full, leading to the resignation of the investigation’s
independent author in protest.
The accusations continued until 2015, when criminal investigations were launched by the US and
Swiss authorities which eventually led the leadership structure to remove a number of long-standing
‘big’ personalities including overall FIFA president Sepp Blatter and his European counterpart Michel
Platini: both men were banned from football for eight years by FIFA’s ethics committee.
Although the US investigation in 2015 centred on bribes to senior officials of around US$2 million,
sums thought to be in excess of US$150 million have also been mentioned in association with illegal
payments to secure media and marketing rights to future tournaments. FIFA made more than US$2
billion from the 2014 World Cup tournament held in Brazil.
The new leadership of FIFA faces a massive task in restoring faith in the transparency of its own
governance arrangements and the public perception of football and its engagement on the global
stage.
(Source: BBC News (21 December 2015) FIFA corruption crisis: Key questions answered. [Online].
Available from: www.bbc.co.uk/news/world-europe-32897066 [Accessed 1 October 2019])

3.9 Conflicts of interest

An accountant should take reasonable steps to identify circumstances that could pose a conflict of
interest.
Examples might be:
• an accountant in public practice, competing directly with a client, or having a joint venture or
similar arrangement with a major competitor of a client;
• an accountant performing services for clients whose interests are in conflict; or
• clients are in dispute with each other in relation to the matter or transaction in question.
Safeguards should include:
• notifying the client of the firm’s business interest or activities that may represent a conflict of
interest, and obtaining their consent to act in such circumstances;
• notifying all known relevant parties that the professional accountant is acting for two or more
parties in respect of a matter where their respective interests are in conflict and obtaining their
consent to so act; and
• Notifying the client that the accountant does not act exclusively for any one client in the provision
of proposed services and obtaining their consent to so act.

ICAEW 2021 3: Ethics 113

3.10 General duty to report
Under ICAEW’s Bye-laws it is the duty of every member, where it is in the public interest to do so, to
report to the Institute any facts or matters indicating that a member and/or firm or provisional
member may have become liable to disciplinary action. In determining whether it is in the public
interest to report such facts or matters, regard shall be had to such guidance as the Council shall give
from time to time.
This general duty to report to the Institute under the Bye-laws is separate from the duty to report
money laundering to the National Crime Agency; this latter duty arises from legislation.

3.11 Practical significance

Accountants working within a financial reporting environment can come under pressure to improve
the financial performance or financial position of their employer. Finance managers who are part of
the team putting together the results for publication must be careful to withstand pressures from
their non-finance colleagues to indulge in reporting practices which dress up short-term
performance and position. Financial managers must be conscious of their professional obligations
and seek appropriate assistance from colleagues, peers or independent sources.
Visit icaew.com (https://www.icaew.com/-/media/corporate/files/technical/ethics/ethical-case-
studies/ccabeg-case-studies-accountants-public-practice.ashx?la=en) to access ‘Ethical Dilemmas
Case Studies’ covering ethical dilemmas that are relevant to accountants – including a set of case
studies specific to accountants in practice.

4 Ethics: audit and assurance focus

Section overview

• This section focuses on ethical guidance most relevant to accountants in practice providing
assurance services and builds on the material covered in the Assurance paper at Certificate Level
and the Audit and Assurance paper at Professional Level.
• It also provides detail of recent changes to the relevant ethical codes and standards:
– IESBA Code
– ICAEW Code
– Revised Ethical Standard

Interactive question 2: Ethical risks

From your knowledge brought forward from your previous studies, and any practical experience of
auditing you may have, write down as many potential ethical risk areas concerning audit as you can
in the areas below. (Some issues may be relevant in more than one column.)

Personal interests Review of your own Disputes Intimidation

work

114 Corporate Reporting ICAEW 2021

 Personal interests Review of your own Disputes Intimidation
work

See Answer at the end of this chapter.

4.1 Development of the 2018 IESBA Code

4.1.1 Content changes
One of the driving forces behind the update to the IESBA Code was the conclusion of the NOCLAR
(non-compliance with laws and regulations) project.
This project addressed professional accountants’ responsibilities when they become aware of non-
compliance or suspected non-compliance with laws and regulations committed by a client or
employer. The IESBA Code states that the objectives of the professional accountant are as follows:
• To comply with the principles of integrity and professional behaviour
• By alerting management or, where appropriate, those charged with governance of the employing
organisation, to seek to:
– enable them to rectify, remediate or mitigate the consequences of the identified or suspected
non-compliance; and
– deter the commission of the non-compliance where it has not yet occurred.
• To take such further action as appropriate in the public interest (IESBA Code: para. 260.4)
Where the professional accountant becomes aware of information concerning instances of non-
compliance or suspected non-compliance the following procedures are required. The professional
accountant must:
• obtain an understanding of the matter;
• address the matter;
• determine whether further action is needed;
• consider any imminent breaches; and
• consider any additional documentation requirements.
(IESBA Code: para 260.12-23)
In January 2017, the IESBA issued a close off document: Addressing the Long Association of
Personnel with an Audit or Assurance Client. This states that for audits of Public Interest Entities an
individual cannot act as the engagement partner, the individual appointed as responsible for the
engagement quality control review or any other key audit partner role (or a combination of these
roles) for a period of more than seven cumulative years (para. R540.5). It also includes the following
‘cooling off’ periods where the individual has acted in the role for seven cumulative years (para.
R540.11–13):
• Engagement partner: five consecutive years
• Individual responsible for the engagement quality control review: three consecutive years
• Individual who has acted in any other capacity as key audit partner: two consecutive years
A previous close off document from 2016 provided guidance on two further areas which are now
included in the 2018 IESBA Code: Preparation and presentation of information (section 220) and
Pressure to breach the fundamental principles (section 270). While these are presented in the
context of the professional accountant in business, the auditor should consider these expectations
which have now been explicitly raised as part of their audit approach.

ICAEW 2021 3: Ethics 115

 When preparing or presenting information, a professional accountant shall:
(a) Prepare or present information in accordance with a relevant reporting framework, where
applicable;
(b) Prepare or present the information in a manner that is intended neither to mislead nor to
influence contractual or regulatory outcomes inappropriately;
(c) Exercise professional judgement to:
(1) Represent the facts accurately and completely in all material respects
(2) Describe clearly the true nature of business transactions or activities; and
(3) Classify and record information in a timely and proper manner
(d) Not omit anything with the intention of rendering the information misleading or of influencing
contractual or regulatory outcomes inappropriately.
(IESBA Code: para R220.4)
A professional accountant shall not allow pressure from others to result in a breach of compliance
with the fundamental principles or place pressure on others that the accountant knows, or has
reason to believe, would result in the other individuals breaching the fundamental principles. (IESBA
Code: para R270.3)

4.1.2 Structural changes

In addition to the content changes mentioned above, the IESBA has changed the format and
structure of the 2018 Code as follows:
• Guide to the code
• International Code of Ethics for Professional Accountants (including International Independence
Standards)
• Preface
• Part 1 – Complying with the Code, fundamental principles and conceptual framework
• Part 2 – Professional accountants in business
• Part 3 – Professional accountants in public practice
• International independence standards: Part 4A Independence for audit and review engagements
and 4B Independence for assurance engagements other than audit and review engagements
• Glossary, including list of abbreviations
• Effective dates (mostly 15 June 2019)
This restructured Code is now referred to as the International Code of Ethics for Professional
Accountants (including International Independence Standards).

4.2 FRC Revised Ethical Standard 2019

In December 2019, the FRC issued Revised Ethical Standard 2019 (Ethical Standard). This one
standard covers the independence requirements for auditors, reporting accountants and for
engagements to report to the Financial Conduct Authority. The previous Ethical Standard from 2016
has been updated to address auditor independence and consequently to improve audit quality.
It is arranged in two parts. Part A sets out overarching principles and supporting ethical provisions
while Part B considers the practical application of these in a series of sections as follows:
Section 1: General requirements and guidance
Section 2: Financial, Business, Employment and Personal Relationships
Section 3: Long Association with Engagements and with Entities Relevant to Engagements
Section 4: Fees, Remuneration and Evaluation Policies, Gifts and Hospitality, Litigation
Section 5: Non-audit/Additional services
Section 6: Provisions Available for Audits of Small Entities
An article called ‘The new FRC Ethical Standard’ was published online by ICAEW in March 2020 and
summarised the key changes made to the FRC Revised Ethical Standard 2016 as follows:
• Third party test – The definition of objective, reasonable and informed third party now focusses on
the perspective of an informed investor, shareholder or other stakeholder

116 Corporate Reporting ICAEW 2021

 • Loan staff assignments – Loan staff assignments will generally be prohibited
• Removal of contingent fees – Contingent fees will no longer be permitted for non-audit /
additional services
• Internal audit services – Firms will no longer be able to provide internal audit services to audited
entities or their significant affiliates
• Non audit services for public interest entities (PIEs) – Rather than providing a blacklist of non-
audit services which must not be provided to PIEs (their parents or worldwide controlled
undertakings), the Revised Ethical Standard 2019 now provides a whitelist of services which may
be provided. If the service is not on the list, it must not be provided
• Gifts and hospitality – The requirement to establish policies on the nature and value of gifts,
favours and hospitality that may be accepted from and offered to other entities has been
extended to apply to those entities which are likely to subsequently become audited entities
• Other entity of public interest (OEPI) – A new term, other entity of public interest (OEPI) is
introduced: it is defined as an entity which does not meet the definition of a PIE, but nevertheless
is of significant public interest to stakeholders (specific examples of these are difficult to provide
and at the time of writing, definitive guidance is being produced by ICAEW, but the FRC Glossary
(FRC, 2019b) suggests this could include larger AIM listed entities, Lloyd’s of London insurance
syndicates and large private sector pension schemes)
• SME listed entities – SME listed entities were not previously subject to many of the prohibitions
applied to listed entities more generally – this is no longer the case
Further details are provided later in this chapter.

4.3 ICAEW Code of Ethics (ICAEW Code)

The current ICAEW Code was introduced in January 2020 and was substantially revised from the
previous version to follow the IESBA Code more closely. ICAEW published a factsheet in December
2019 which explained the key areas of change in the new ICAEW Code of Ethics as follows:
• Non-compliance with laws and regulations (NOCLAR) disclosure guidance was written into the
IESBA Code in 2018 - guidance to the same effect already existed in the ICAEW Code regarding
breaching confidentiality in the public interest, so the ICAEW and IESBA Codes are now more
formally aligned.
• Conflicts of interest - the ICAEW Code is now more detailed in how it illustrates different types of
conflict, explicitly referencing the reasonable and informed third party test and providing more
detail on how to identify and respond to various types of conflict.
• There is new guidance for Professional Accountants In Business (PAIBs) designed to stop any
breaches in the fundamental ethical principles from arising, either as a result of the PAIB being
placed under pressure by others to commit a breach or the PAIB placing others under pressure to
commit such a breach.
• There is new guidance on how a professional accountant should act if a breach of the Code is
identified - this includes evaluating the significance of the breach, the impact of any resultant
inability to comply with the fundamental principles, suitable remedial action and whether or not
the breach requires any form of reporting to relevant parties.
• The Code contains a number of independence requirements that apply to professional
accountants who complete audit and assurance engagements. However, in the majority of cases,
the FRC Revised Ethical Standard 2019 should be followed.

4.4 Threats and safeguards

The IESBA Code, the ICAEW Code and the FRC Revised Ethical Standard are all based on the
principle that integrity, objectivity and independence are subject to various threats and that
safeguards must be in place to counter these.
The majority of threats fall into the following categories:

Threat Example

Self-interest threat Undue dependence on total fees from a client

ICAEW 2021 3: Ethics 117

 Threat Example

Self-review threat Reporting on the operation of financial systems after being involved in
their design or implementation

Management threat Where the audit firm has been involved in the design, selection and
implementation of financial information technology systems
(This threat is included in the FRC Ethical Standard only)

Advocacy threat Acting as an advocate on behalf of an assurance client in litigation or

disputes with third parties

Familiarity or trust threat A member of the engagement team having a close or immediate
family relationship with a director of the client

Intimidation threat Being threatened with dismissal or replacement in relation to a client

engagement

(a) The ICAEW Code defines a safeguard to be ‘…actions, individually or in combination, that the
professional accountant takes that effectively reduce threats to compliance with the fundamental
principles to an acceptable level.’ (ICAEW Code, para 120.10 A2)
(b) Safeguards in the work environment may differ according to whether a professional accountant
works in public practice, in business or in insolvency.
(c) When evaluating safeguards, the auditor should consider what a reasonable and informed third
party, having knowledge of all relevant information, including the significance of the threat and
the safeguards applied, would conclude to be unacceptable.

4.5 Professional appointment

Section 320 of the ICAEW Code sets out the following procedures for acceptance and continuance.
The prospective auditor should consider the various threats that an engagement could present - for
example:
• integrity and professional behaviour issues may arise from clients with questionable integrity
(these can be evaluated by considering the client’s integrity and the existence of any suitable
governance practices in place)
• self-interest threats could arise from undertaking work that the auditor is not competent to
complete (a thorough understanding of the nature of the work being considered is therefore
essential)
When considering a prospective engagement, the prospective auditor needs to determine if there
are any reasons for not accepting the engagement (in other words, would it lead to a threat that
could not be satisfactorily dealt with by safeguards).
A suitable response would be to undertake research of the prospective client (usually by some form
of enquiry) or to ask for information about the prospective client from the existing auditor. Both
existing and prospective auditors need formal consent from the client to be able to communicate:
the prospective auditor should keep an open mind when evaluating the threat attached to the
prospective client, even if the existing auditor does not respond (although in such cases it would be
reasonable to obtain information by other means).
In any event, both parties must be careful to avoid any risk of tipping off if there is any suspicion of
money laundering.

4.6 Access to information by successor auditors

As a result of the implementation of the Companies Act 2006 when the predecessor auditor ceases
to hold office, if requested by the successor auditor, the predecessor auditor must allow the
successor access to all relevant information in respect of its audit work. This includes access to
relevant working papers.
The ICAEW Code states that predecessor auditors should pass their working papers on to the
successor auditor but that if there are any outstanding fees from the engagement, they can exercise
their right of lien. Any transfer of information should be based on a reasonable request and should
be undertaken promptly. Any information that assists the successor auditor with gaining an

118 Corporate Reporting ICAEW 2021

 understanding of their client can also be requested from the predecessor auditor and should be
provided free of charge unless it would require significant work to create.

Professional skills focus: Assimilating and using information

Although there is a lot of content in each of the FRC Ethical Standard and the ICAEW and IESBA
Codes, you can use something as mundane as the contents pages of each document to help you
find the right path through any ethics problem.

Interactive question 3: Stewart Brice

You are the Ethics Partner at Stewart Brice, a firm of chartered accountants. The following situations
exist.
Teresa is the audit manager assigned to the audit of Recreate, a large quoted company. The audit
has been ongoing for one week. Yesterday, Teresa’s husband inherited 1,000 shares in Recreate.
Teresa’s husband wants to hold on to the shares as an investment.
The Stewart Brice pension scheme, which is administered by Friends Benevolent, an unconnected
company, owns shares in Tadpole Group, a listed company with a number of subsidiaries. Stewart
Brice has recently been invited to tender for the audit of one of the subsidiary companies, Kermit Co.
Stewart Brice has been the auditor of Kripps Bros, a limited liability company, for a number of years.
It is a requirement of Kripps Bros’ constitution that the auditor owns a token £1 share in the company.
Requirements
3.1 Comment on the ethical and other professional issues raised by the above matters.
3.2 Identify the ethical and professional issues Stewart Brice would need to consider.

See Answer at the end of this chapter.

5 Making ethical judgements

Section overview

• The application of ethical guidance requires skill and judgement and relies on the integrity of the
individual.
• The ICAEW provides a framework for the resolution of ethical conflicts.
• In the exam, you will be expected to identify ethical issues and evaluate alternative courses of
action.

5.1 Resolving ethical conflicts

Although there are a number of sources of ethical guidance, resolving ethical issues can be complex.
As you have seen in your earlier studies, there are some specific rules which can be applied, but
current UK ethical guidance is primarily principles-based.
The application of these principles requires a degree of skill and the onus is placed on the integrity
and judgement of the individual in weighing up the facts of the situation. In addition, it may mean
that in certain circumstances there is more than one acceptable outcome.
The ICAEW Code recognises that conflicts in the application of fundamental principles may need to
be resolved. When providing a service the professional accountant must take into account:
• the client‘s requirements; and
• the public interest.
Where these are in conflict, the public interest should take priority.

ICAEW 2021 3: Ethics 119

The ICAEW has produced a help sheet (ICAEW, 2014) which sets out a framework that accountants
can follow when faced with these issues, which you may find useful when considering ethical
problems in the exam.
The help sheet suggests that the resolution process should consider the following:

Relevant facts This may involve:

Do I have all the relevant facts? • referring to the organisation’s policy,
Am I making assumptions? procedures, code of conduct and previous
history; or
Is it my problem or can anyone else help?
• discussing the matter with trusted managers
and employees.

Relevant parties These may include those directly affected eg,

Who are the individuals, organisations and shareholders, employees and employers but may
key stakeholders affected? also include the community at large.

How are they affected?

Are there conflicts between different
stakeholders?
Who are your allies?

Ethical issues involved These include:

Would these ethical issues affect the • professional ethical issues;
reputation of the accountancy profession? • organisational ethical issues; and
Would they affect the public interest? • personal ethical issues.
You could refer to the ICAEW Code of Ethics for
help.

Fundamental principles affected and any This will involve reference to the relevant ethical
associated ethical threats guidance from the ICAEW Code:
Which fundamental principles are affected? • Section 110 for the fundamental principles
Which threats to compliance exist? • Section 120.6 A3 for threats to these
Are there safeguards in place which can fundamental principles
reduce or eliminate the threats? Are any of these threats clearly insignificant?

Established internal procedures The professional accountant may find it useful to

Does your organisation have policies and discuss ethical conflict issues with:
procedures to deal with this situation? • immediate superior;
How can you escalate concerns within your • the next level of management;
organisation? • a corporate governance body; or
Is there a whistleblowing procedure? • other departments eg, legal, audit, human
resources.
Consideration should also be given to the point at
which help is sought from external sources eg,
ICAEW. Generally it would be preferable for the
conflict to be resolved without external
consultation.

Alternative courses of action The following should be considered:

Have all the consequences been discussed • The organisation’s policies, procedures and
and evaluated? guidelines
Will the proposed course of action stand the • Applicable laws and regulations
test of time? • Universal values and principles adopted by
Would a similar course of action be society
undertaken in a similar situation? • Consequences

120 Corporate Reporting ICAEW 2021

 Would the course of action stand scrutiny Whenever considering an ethical issue, thought
from peers, family and friends? processes, discussions and decisions should all
be recorded and can be referred to if you need
to justify your actions in future.

Where the conflict is significant and cannot be resolved, the accountant would need to seek legal
advice. After exhausting all other possibilities and depending on the nature of the conflict, the
individual may conclude that withdrawal from the engagement team or resignation from the
firm/employing organisation is appropriate.
Note: Withdrawal/resignation would be seen very much as a last resort.

Professional skills focus: Structuring problems and solutions

Scenarios in the exam may be discrete and straightforward, but what if they are not? Use this
systematic resolution process to help you work the problem logically.

5.2 Exam context

Ethical issues will have been examined in earlier papers. However, at the Advanced Level you will be
faced with more complex situations. More emphasis will be placed on your ability to use your
judgement in the light of the facts provided, rather than testing your knowledge of the ethical codes
and standards in detail. In some instances, the correct action may be uncertain and it will be your
ability to identify the range of possible outcomes which will be important rather than concluding on
a single course of action.
You should also be aware that the term ‘ethics’ will be used in a much broader sense than it has been
in the earlier Assurance and Audit and Assurance papers. It is likely to be combined with financial
reporting and business issues where you may be required to assess the ethical judgements made by
others, including management. You may also be asked to consider the issue from the point of view of
the accountant in practice and the accountant in business.
The following Interactive question demonstrates these points.

Interactive question 4: Revenue recognition

You are the auditor of Bellevue Ltd for the year ended 31 December 20X8. The company provides
information to the financial services sector and is run by the Managing Director, Toby Stobbart. It has
a venture capital investment of which part is in the form of a loan. The investment agreement details
a covenant designed to protect the loan. This states an interest cover of two is required as a
minimum ie, the company must be able to cover interest and loan principal repayments with profits
at least twice.
70% of the revenue of the business is subscription based and contracts are typically three years in
duration. 30% of the revenue is for consultancy work which is billed on completion of the work.
Consultancy projects are for a maximum of two months.
During the previous year the management performed a review of the subscription revenue and
concluded that 40% of this represented consultancy work and should therefore be recognised in the
first year of the contract rather than being recognised over the duration of the contract as had
previously been the case. The audit file for 20X7 indicates that this treatment had been questioned
vigorously by the audit manager but had been agreed with the audit partner, James Cowell. James
Cowell subsequently left the firm abruptly.
You have received a copy of the 20X8 draft accounts which show an interest cover of 2.02 for 20X7
and 2.01 for 20X8. You have also been told that a similar review of subscription income has been
made for 20X8, with 40% being reclassified as consultancy work as in the previous year.
Requirement
What are the issues that you as auditor would need to consider in this situation?

See Answer at the end of this chapter.

ICAEW 2021 3: Ethics 121

 6 Money laundering regulations
Section overview

• This section provides a summary of some key points covered in the Audit and Assurance paper at
Professional Level.
• Changes to money-laundering regulations were made on 26 June 2017 and the Money
Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017
are now in force. These changes were made in order to improve the 2007 regulations.
• Here, we consider an overview of the money laundering regulations in the UK, and how they
affect the work of accountants in practice.

6.1 New money laundering regulations – key changes from 2007

The EU issued its fourth anti-money laundering directive on 26 June 2015 aimed at enhancing
consistency across member states. The provisions were incorporated in national law on 26 June
2017.The main changes between the 2007 and 2017 regulations relate to amending the approach to
customer due diligence, seeking to prevent new means of terrorist financing (including through e-
money and prepaid cards), improving the transparency of beneficial ownership of companies and
trusts and effectively enforcing sanctions.
Relevant persons (ie, those covered by the money laundering regulations 2017) now include all
gambling providers, not just those who hold a casino operating licence. However the new
regulations do not apply to those engaging in financial activity on a very occasional basis, with a
turnover less than £100,000 (this is an increase of £64,000 compared to the 2007 regulations).
The new requirements are summarised below.
General risk assessment
The new regulations are more prescriptive in terms of risk assessment and due diligence procedures
and require specific procedures to be undertaken to assess the business’s potential exposure to
money laundering and terrorist financing. This includes a report by the relevant person on
customers, countries of operation, products and services, transactions, delivery channels and the size
and nature of the business. This report must also be translated into written policies and procedures.
Officer responsible for compliance
Firms must now appoint a money laundering compliance principal (MLCP)who must be on the
board of directors or a member of senior management (sole practitioners with no employees are
exempt from this requirement). Firms must also have a nominated officer (who receives internal
suspicious activity reports and assesses whether a suspicious activity report should be made to the
National Crime Agency, NCA). Under the old regulations, firms had to appoint a money laundering
reporting officer (MLRO) and this person can act as MLCP and nominated officer if sufficiently senior.
The new regulations also require firms to assess the skills, knowledge, conduct and integrity of
employees involved in identifying, mitigating and preventing or detecting money laundering and
terrorist financing.
Internal controls
The new regulations state that firms must establish an independent audit function to assess the
adequacy and effectiveness of a firm’s anti-money laundering policies, controls and procedures.
Policies, controls and procedures
Firms must have policies, controls and procedures in place to prevent money laundering and
terrorist financing and conform with data protection requirements. Firms must maintain written
records of training. Firms with overseas branches and subsidiaries must establish group-wide
policies and controls that comply with UK regulations. Specifically, if the branch or subsidiary
operates in an EEA state, it must comply with the regulations of that state; if it operates outside of the
EEA then it must comply with the UK regulations.

122 Corporate Reporting ICAEW 2021

Due diligence and reliance on third parties
Client due diligence must still be performed under the new regulations, both before establishing a
new business relationship and when factors have been identified that result in a change to the risk
assessment. Owners and beneficial owners must still be identified but under the new regulations,
sole reliance on Companies House cannot be placed.
Simplified due diligence is more restricted under the 2017 regulations, where automatic simplified
due diligence ceases. Instead relevant persons need to consider both customer and geographical
risk factors in deciding whether simplified due diligence is applicable. The new regulations also have
a black list of high risk jurisdictions which, if involved in a transaction, make enhanced due diligence
and additional risk assessment necessary.
The regulations define a list of situations where enhanced due diligence applies:
• where there is a high risk of money laundering or terrorist financing;
• in any business relationship with a client established in a high-risk country;
• if the client is a politically exposed person (PEP) or a family member or known close associate of a
PEP;
• in any case where the client has provided false or stolen identification documentation; and
• in cases where there are complex and unusually large transactions or an unusual pattern of
transactions and the transactions do not seem to have any apparent economic or legal purpose.
The regulations set out factors that could indicate that enhanced due diligence is necessary such as
customer risk factors, product, service, transaction or delivery channel risk factors, and geographical
risk factors.
Third parties can still be relied upon for carrying out due diligence as long as the third party is
subject to the Money Laundering 2017 regulations or a similar regime. However, the conditions for
reliance on a third party for due diligence are prescriptive in that the third party must provide the
customer due diligence information and enter into a written agreement in which is agrees to provide
copies of all customer due diligence information within two working days.
Politically exposed persons (PEPs)
The regulations require that firms have procedures in place to identify whether a client, or the
beneficial owner of a client, is a PEP or a family member (spouse, civil partner, children and parents)
or known close associate of a PEP.
PEPs are defined by the legislation as individuals entrusted with prominent public functions, other
than as a middle ranking or more junior official. PEPs include heads of state, members of parliament,
members of supreme courts and ambassadors amongst others.
Known close associates are defined as individuals known to have joint beneficial ownership of a legal
entity or a legal arrangement or any other close business relations with a PEP, or individuals who
have sole beneficial ownership of a legal entity or a legal arrangement which is known to have been
set up for the benefit of a PEP.
Where a PEP is identified, the regulations require the following as a minimum:
• Senior management approval for the relationship
• Adequate measures to establish the source of funds and wealth
• Enhanced ongoing monitoring of the relationship
Enhanced due diligence procedures must continue for 12 months after a PEP ceases to be a client,
but this does not apply to family members or known associates of a PEP.
The new regulations now encompass both foreign PEPs and domestic PEPs. This means enhanced
due diligence requirements for a wider range of individuals who have been trusted with prominent
public functions both within the UK and overseas.
New criminal offence
Under the new regulations, any individual who recklessly makes a statement in the context of money
laundering which is false or misleading commits an offence which is punishable by a fine and/or up
to two years in prison.

ICAEW 2021 3: Ethics 123

 6.2 The wide scope of money laundering
The definition of money laundering is covered by the Proceeds of Crime Act 2002,which defines
money laundering deliberately in very general terms. Money laundering means exchanging money
or assets that were obtained from criminal activity for money or other assets that are ‘clean’. The
‘clean’ money or assets do not then have an obvious link with any criminal activity. Money laundering
also includes money that is used to fund terrorism, however it is obtained.
In the UK, a person is deemed to commit a money laundering offence when they:
(a) conceal criminal property (for example, converting the proceeds of criminal conduct into
another currency);
(b) enter into an arrangement regarding criminal property (for example, an accountant in practice
who advises a client involved in money laundering on the acquisition of a business); or
(c) acquire, use or possess criminal property (this includes acquiring criminal property for
‘inadequate consideration’ – for example, an adviser receiving a payment of professional fees
from a client involved in money laundering offences that is significantly above the value of the
professional services performed).
Criminal property is also rather widely defined as the benefits of criminal conduct. It includes those
benefits gained indirectly, or partly, from criminal conduct. Criminal conduct includes:
• tax evasion;
• illegally saved costs (failure to comply with environmental regulations or health and safety
requirements); and
• offences committed overseas that are criminal offences under UK law (including bribery).
In addition, those working within the regulated sector – this includes auditors, insolvency advisers,
external accountants and tax advisers – need to be aware of an additional offence: failure to disclose.
We will look at this in the section below.

6.3 The professional accountant‘s responsibilities

6.3.1 The duty to report
If an accountant has knowledge or suspicion, or reasonable grounds for suspicion, that money
laundering is taking place at a client, that accountant must report it. It is important to note the words
‘grounds for suspicion’– if an accountant waits for incontrovertible evidence, it might be too late.
The money laundering regulations override the accountant’s duty of confidentiality towards the
client. Therefore, accountants have always had to tread a fine line of discretion between their duty to
their client and the public interest.
If a client is doing well and you do not understand where the money has come from, after exhausting
all reasonable lines of inquiry then you have grounds for suspicion and a duty to report without
tipping off either:
• the client; or
• anyone who could prejudice an inquiry into the matter.
ISA (UK) 250A was revised in December 2017 to include the following guidance:
“In the UK, legislation relating to money laundering, terrorist financing and proceeds of crime
imposes additional responsibilities on the auditor. The Appendix contains further guidance on these
responsibilities.” (ISA (UK) 250A: para A6-1)
The Appendix to ISA (UK) 250A discusses the 2017 money laundering regulations in more detail – in
essence, there is now a legal obligation for UK auditors to fulfil beyond the professional
requirements of the auditing standards.

6.3.2 Report to whom?

Accountants must report to the nominated official (MLCP) in their assurance firm, which fulfils their
responsibility.
The MLCP then has to decide on whether to report the matter to the National Crime Agency and, if
appropriate, to make the report.
The legislation protects professionals from any claims for breach of confidentiality even where
suspicions are later proved to be ill-founded.

124 Corporate Reporting ICAEW 2021

 6.4 Offences and penalties
Failing to report and comply with the regulations – including the provision of suitable training – are
offences under the legislation.
Remember, ‘tipping off‘ is also an offence.
The penalties for non-compliance by accountants can be severe – for some offences a jail term of 14
years is a possibility.

6.5 Economic Crime Plan 2019 to 2022

The economic crime plan (UK Government, 2019) sets out 7 priority areas that were agreed in
January 2019 by the Economic Crime Strategic Board, the ministerial level public-private board
charged with setting the UK’s strategic priorities for combatting economic crime:
(a) develop a better understanding of the threat posed by economic crime and our performance in
combatting economic crime
(b) pursue better sharing and usage of information to combat economic crime within and between
the public and private sectors across all participants
(c) ensure the powers, procedures and tools of law enforcement, the justice system and the private
sector are as effective as possible
(d) strengthen the capabilities of law enforcement, the justice system and private sector to detect,
deter and disrupt economic crime
(e) build greater resilience to economic crime by enhancing the management of economic crime
risk in the private sector and the risk-based approach to supervision
(f) improve our systems for transparency of ownership of legal entities and legal arrangements
(g) deliver an ambitious international strategy to enhance security, prosperity and the UK’s global
influence
The plan demonstrates the UK’s commitment to making the fight against economic crime as effective
as possible by means of greater scope, transparency and action.

7 Ethical guidance in more detail

7.1 Integrity, objectivity and independence
7.1.1 Exam focus
You will have covered the ethical guidance on integrity, objectivity and independence in your earlier
studies. At the Advanced Level, however, a greater emphasis will be placed on your ability to apply
this knowledge. Ethical dilemmas which you may be required to deal with will be less clear-cut and
the requirements of the question will not always specifically indicate that ethical issues need to be
considered. Instead information will typically be embedded within the question and you will need to
demonstrate your skill in identifying the ethical issue and its implications.
This section is based on the FRC Revised Ethical Standard 2019 and the 2020 ICAEW Code.
It provides a summary of the key points. It has been structured around the ethical issues, as this is the
way that it will be examined at the Advanced Level.
Note: Definitions have been sourced from the FRC Glossary of Terms (Auditing and Ethics)
(December 2019) unless otherwise stated.

Definitions
Integrity: Being trustworthy, straightforward, honest, fair and candid; complying with the spirit as well
as the letter of the applicable ethical principles, laws and regulations; behaving so as to maintain the
public’s trust in the auditing profession; and respecting confidentiality except where disclosure is in
the public interest or is required to adhere to legal and professional responsibilities.
Objectivity: Acting and making decisions and judgments impartially, fairly and on merit (having
regard to all considerations relevant to the task in hand but no other), without discrimination, bias, or
compromise because of commercial or personal self-interest, conflicts of interest or the undue
influence of others, and having given due consideration to the best available evidence.

ICAEW 2021 3: Ethics 125

 Independence: Freedom from conditions and relationships which, in the context of an engagement,
would compromise the integrity or objectivity of the firm or covered persons.
Reasonable and informed third party: Consideration of whether the ethical outcomes required by
the overarching principles and supporting ethical provisions have been met should be evaluated by
reference to the perspective of an objective, reasonable and informed third party (sometimes
referred to as the ‘Third Party Test’) (FRC Ethical Standard, Introduction section I14).
Covered person: A person in a position to influence the conduct or outcome of the engagement.
Close family: A non-dependent parent, child or sibling.
Person closely associated: This is:
(a) a spouse, or partner considered to be equivalent to a spouse in accordance with national law;
(b) a dependent child;
(c) a relative who has lived in the same household as the person with whom they are associated for
at least one year;
(d) a firm whose managerial responsibilities are discharged by, or which is directly or indirectly
controlled by, the firm/person with whom they are associated, or by any person mentioned in (a),
(b) or (c) or in which the firm or any such person has a beneficial or other substantially equivalent
economic interest; or
(e) a trust whose managerial responsibilities are discharged by, or which is directly or indirectly
controlled by, or which is set up for the benefit of, or whose economic interests are substantially
equivalent to, the firm/person with whom they are associated or any person mentioned in (a), (b)
or (c).
Other entity of public interest (OEPI): An entity which does not meet the definition of a Public
Interest Entity, but nevertheless is of significant public interest to stakeholders (these are not
straightforward to define but include insurance syndicates, pension schemes and smaller AIM listed
entities)
Entity relevant to the engagement: An entity with respect to which the firm and covered persons are
required to be independent. In the case of an audit engagement, the entity relevant to the
engagement is the audited entity.

7.1.2 Non-involvement in Management Decision-taking

This is a key principle in the Ethical Standard. It identifies the following as judgements and decisions
which should not be taken by the firm or a covered person:
• Setting policies and strategic decisions
• Directing and taking responsibility for the actions of the entity’s employees
• Authorising transactions
• Deciding which recommendations of the firm or other third parties should be implemented
• Taking responsibility for the preparation and fair presentation of the financial statements in
accordance with the applicable financial reporting framework
• Taking responsibility for the preparation and presentation of subject matter information in the
case of another public interest assurance engagement
• Taking responsibility for designing, implementing and maintaining internal control

7.1.3 Self-interest threat

Financial interests The parties listed below are not allowed to own a direct financial interest
or an indirect material financial interest in an audited entity:
• The audit firm
• Any partner in the audit firm
• Any person in a position to influence the conduct and outcome of the
engagement ie, a covered person (eg, a member of the engagement
team)

126 Corporate Reporting ICAEW 2021

 • Any person closely associated with any such partner or covered person
(Ethical Standard s.2.3)
The following safeguards will therefore be relevant:
• Disposing of the interest
• Removing the individual from the team if required
• Keeping the audited entity’s audit committee informed of the situation
• Using an independent partner to review work carried out if necessary

Business Firms, covered persons and persons closely associated with them must not
relationships (eg, enter into business relationships with any entity relevant to the
operating a joint engagement, or its management or its affiliates except where those
venture between the relationships involve the purchase of goods on normal commercial terms
firm and the client) and which are not material to either party or would be inconsequential in
the view of an objective, reasonable and informed third party. (Ethical
Standard s.2.26)
Where a business relationship exists that is not permitted and has been
entered into by the following parties:
(a) The firm: either the relationship is terminated or the firm does not
accept/withdraws from the engagement
(b) A covered person: either the relationship is terminated or that person
is excluded from any role in which they would be a covered person
(c) A person closely associated with a covered person: either the
relationship is terminated or the covered person is excluded from any
role in which they would be a covered person. (Ethical Standard
s.2.28)

Employment with When a partner leaves the firm they may not be appointed as a director or
assurance client to a key management position/ member of the audit committee with an
audited entity, having acted as statutory auditor or key audit partner in
relation to that audit before the end of:
(a) in the case of a public interest entity, two years; and
(b) in any other case, one year. (Ethical Standard s.2.43)
Where a partner approved as statutory auditor is appointed as a director, a
member of the audit committee or to a key management position having
previously been a covered person:
(a) in the case of a partner, at any time during the two years before the
appointment; or
(b) in the case of another person, at any time during the year before the
appointment
the firm must resign from the engagement where possible under
applicable law or regulation. (Ethical Standard s.2.45)
The firm cannot accept another engagement for the entity until:
(a) in the case of a partner, a two-year period; or
(b) in the case of another person, a one year period.

Governance role The audit firm, a partner or employee of an audit firm shall not perform a
role as an officer or member of the board of an entity relevant to the
engagement. (Ethical Standard s.2.53)

Family and personal Where a covered person or any partner in the firm becomes aware that a
relationships person closely associated with them is employed by an entity and that
person is in a position to exercise influence on the accounting records and
financial statements relevant to the engagement they should be excluded
from any role in which they would be a covered person eg, they should be
removed from the audit team.

ICAEW 2021 3: Ethics 127

 Where a covered person or any partner in the firm becomes aware that a
close family member who is not a person closely associated with them is
employed by an entity and that person is in a position to exercise influence
on the accounting records and financial statements relevant to the
engagement they should report the matter to the engagement partner to
take appropriate action. (Ethical Standard s.2.62)
If it is a close family member of the engagement partner, the matter should
be resolved in consultation with the Ethics Partner/Function. (Ethical
Standard s.2.63)

Gifts and hospitality Gifts, favours or hospitality should not be accepted unless an objective,
reasonable and informed third party would consider the value to be trivial
and inconsequential. (Ethical Standard s.4.40)

Loans and Firms, covered persons and persons closely associated with them must not
guarantees enter into any loan or guarantee arrangement with an audited entity that
is not a bank or similar institution, and the transaction is made in the
ordinary course of business on normal business terms and is not material
to the entity. (Ethical Standard s.2.21 – 2.22)

Overdue fees Firms should guard against fees building up, as the audit firm runs the risk
of effectively making a loan. Where the amount cannot be regarded as
trivial the engagement partner and ethics partner must consider whether it
is necessary to resign. (Ethical Standard s.4.11) The ICAEW Code (s.410.7
A1) states that, generally, the payment of overdue fees should be required
before the assurance report for the following year can be issued.

Percentage or Fees for the provision of engagements, non-audit and audit-related

contingent fees services to an entity relevant to an engagement, its UK parent undertaking
and any worldwide controlled undertaking shall not be contingent fees.
The firm and any of its network firms shall not provide any non-audit
/additional services, to or in respect of an entity relevant to an
engagement, wholly or partly on a contingent fee basis (Ethical Standard
s.4.5 and 4.10)

High percentage of The Ethical Standard includes a 70% cap in respect of non-audit services
fees provided to an audit client as follows:
(a) Total fees for non-audit services provided to a public interest entity
audit client must be limited to no more than 70% of the average fees
paid in the last three consecutive financial years for the audit.
(b) Total fees for such services provided by the audit firm must be limited
to no more than 70% of the average of the fees paid to the audit firm
in the last three consecutive financial years for the audits of the entity.
(Ethical Standard s4.15)
Where total fees (audit and non-audit services) from an audited entity are
expected to regularly exceed 15% of the annual fee income of the audit
firm (10% in the case of a public interest entity or other listed entity), the
firm should resign or not stand for reappointment. Where total fees from
an audited entity are expected to regularly exceed 10% of the annual fee
income, but will not regularly exceed 15% (5% and 10% in the case of a
public interest entity or other listed entity) the audit engagement partner
should disclose that fact to the ethics partner and those charged with
governance of the audited entity and consider whether appropriate
safeguards should be applied to reduce the threat to independence. Non-
public-interest entities will also require an external independent quality
control review to be undertaken if the 10-15% category applies. (Ethical
Standard s4.23, 4.24, 4.27 and 4.31)

Lowballing Where the fee quoted is significantly lower than would have been charged
by the predecessor firm, the engagement partner must be satisfied that:

128 Corporate Reporting ICAEW 2021

 • the appropriate staff are used and time is spent on the engagement;
and
• all applicable assurance standards, guidelines and quality control
procedures have been complied with. (ICAEW Code sR330.6)
The engagement partner must be able to demonstrate that the
engagement has assigned to it sufficient partners and staff with
appropriate time and skills, irrespective of the fee charged.
Fees must not be influenced or determined by the provision of non-
audit/additional services to an entity. (Ethical Standard s4.3)

7.1.4 Self-review threat

Service with an Individuals who have been a director or officer of the client, or an
assurance client employee in a position to exert direct and significant influence over the
financial statements on which the firm will express an opinion should not
be assigned to the audit team. (ICAEW Code s.R522.3)
The Ethical Standard states that in this situation the individual should be
excluded from any role in which they would be a covered person for a
period of two years following the date of leaving the entity. (Ethical
Standard s2.57)

Preparing The Ethical Standard (s.5.120) prohibits the provision of accounting

accounting records services where:
and financial (a) the entity is a listed entity; or
statements
(b) for any other entity if those accounting services would involve the firm
undertaking the role of management or the services are anything
other than routine and mechanical, requiring little or no professional
judgement.
Where accounting services are provided, safeguards include:
• using staff members other than engagement team members to carry
out work;
• a review of the accounting services provided by a partner or other
senior staff member with relevant expertise who is not a member of the
engagement team; and
• a review of the engagement by a partner or other senior staff member
with relevant expertise who is not a member of the engagement team.
The ICAEW Code only allows routine and mechanical bookkeeping
(s.R601.6 and R601.7) and no longer allows firms to prepare financial
statements for public interest entity audit clients, apart from those of
immaterial divisions or related entities when separate teams would be
required.

Provision of other The FRC has effectively prohibited the provision of non-audit services to
services audit clients who are public interest entities unless the services fall into
certain categories (usually these are services required by law or regulation)
and these are not subject to the 70% cap mentioned earlier. (Ethical
Standard s5.40)
For other entities, while in principle the provision of other services is
allowed, the threat of self-review must be considered particularly where
the matter in question will be material to the financial statements.
Safeguards may mitigate the threats in some circumstances although the
Ethical Standard does include a number of instances where the provision
of the service would be inappropriate irrespective of any safeguards. In
particular, the service should not be provided where the audit firm would
undertake part of the role of management.

ICAEW 2021 3: Ethics 129

 • Valuation services
Valuation services to public interest entities are prohibited.
For other listed entities that are not SMEs valuation services cannot be
provided where the valuation would have a material effect on the entity’s
financial statements.
For all other companies the restriction applies where the valuation involves
a significant degree of subjective judgment and has a material effect on
the financial statements. (Ethical Standard s5.52)
• Taxation services
The firm must not provide the following tax services to a public interest
entity audit client:
– Preparation of tax form
– Tax services relating to payroll and customs duties
– Calculation of direct tax, indirect tax and deferred tax
– Provision of tax advice
For other audit clients the basic principle is that a tax service can be
provided where the service would not involve the firm in undertaking a
management role. (Ethical Standard s.5.69)
For listed companies that are not SMEs a firm cannot provide a service to
prepare current or deferred tax calculations that are material to the
financial statements. (Ethical Standard s.5.71)
• Internal audit services
The provision of internal audit services to any audit clients is now
prohibited. (Ethical Standard s.5.44)
• Corporate finance services
Due to the broad range of services that this work could include, the
Ethical Standard requires firms to consider the precise nature of the
service provided when evaluating the threats to integrity, objectivity
and independence (Ethical Standard s.5.89) although certain activities
are prohibited (such as dealing in, underwriting or promoting shares in
Ethical Standard s.5.93).
• Information technology services
Provision of services which involve designing and implementing internal
control or risk management procedures related to the preparation and/or
control of financial information or designing and implementing financial
information technology systems is prohibited for public interest entities.
Information technology services can be provided for other audit clients
provided the system concerned is not important to a significant part of the
accounting system or to the production of the financial statements and
significant reliance would not be placed upon these systems during the
audit. (Ethical Standard s.5.50)
• Litigation support services
Valuation services including valuations performed in connection with
litigation support services are prohibited in respect of public interest
entities.
For other entities, litigation support should not be provided where it
involves the estimation by the firm of the outcome of a pending legal
matter related to amounts or disclosures that could be material to the
financial statements. (Ethical Standard s.5.81)
For other entities the restriction applies where the matter is potentially
material and there is a significant degree of subjectivity.

130 Corporate Reporting ICAEW 2021

7.1.5 Advocacy threat

Arises where the The Ethical Standard prohibits the provision of legal services for public
assurance firm is in a interest entities with respect to:
position of taking the • the provision of legal counsel;
client’s part in a
dispute or somehow • negotiating on behalf of the audit client; and
acting as their • acting in an advocacy role in the resolution of litigation.
advocate.
For other entities legal services should not be provided where it would
Examples: involve acting as the solicitor formally nominated to represent the client in
• If the firm carried resolution of a dispute or litigation which is material to the financial
out corporate statements. (Ethical Standard s.5.83)
finance work for
the client; eg, if
the audit firm
were involved in
advice on debt
restructuring and
negotiated with
the bank on the
client’s behalf.
• If the firm offered
legal services to a
client and, say,
defended them in
a legal case.

7.1.6 Familiarity threat

Long association The Ethical Standard requires compliance with Article 17 of the EU Audit
Regulation on audit firm rotation. As previously referred to, there is a
requirement that for public interest entities an audit tender must be
carried out at least every 10 years, with mandatory rotation of an audit firm
at least every 20 years.
The Ethical Standard also requires all firms to monitor the relationship
between staff and established clients.
The general provision in the Ethical Standard is that when engagement
partners, key partners involved in the audit and partners and staff in senior
positions have a long association with the audit, the firm must assess the
threats to integrity, objectivity and independence and apply safeguards to
reduce the threats to an acceptable level. Once an audit engagement
partner has held this role for a continuous period of 10 years, careful
consideration must be given (using the ‘third party test’) as to whether the
audit firm’s integrity, objectivity and independence is impaired (Ethical
Standard s.3.6).
The standard states the following for listed companies:
• No one should act as audit engagement partner for a continuous
period longer than five years and should not subsequently participate
in the audit until a further period of five years has elapsed. (Ethical
Standard s.3.10)
• The engagement partner may continue in this position for an additional
two years where the audit committee decide that this is necessary to
safeguard the quality of the audit. Safeguards must be applied and
disclosure made to the shareholders. (Ethical Standard s.3.15 and 3.16)
• No one should act as engagement quality reviewer or key partner
involved in the audit for a continuous period of more than seven years
(and when an engagement quality control reviewer or a key partner

ICAEW 2021 3: Ethics 131

 involved in the audit becomes the audit engagement partner the
combined service should not be more than seven years). (Ethical
Standard s.3.20)
• Anyone who has acted as engagement quality reviewer for seven years
should not return to that position for at least five years. (Ethical
Standard s.3.20)
• Anyone who has acted as key partner involved in the audit for seven
years should not return to that position for at least two years. (Ethical
Standard s.3.20)
The ICAEW Code (s. R540.11-13)) states that for the audit of listed entities,
the engagement partner, individuals responsible for engagement quality
control review and any key audit partners should be rotated after seven
years, and should not return to the engagement until a period of five,
three and two years respectively has elapsed.

Recruitment and The firm shall not provide recruitment services to an entity relevant to an
remuneration engagement, that would involve the firm taking responsibility for, or
services advising on the appointment of any director or employee of the entity, or a
significant affiliate of such an entity, where the firm is undertaking an
engagement. (Ethical Standard s.5.85)
The firm shall not provide advice on the remuneration package or the
measurement criteria on which the remuneration is calculated, for any
director or employee of the entity, or a significant affiliate of an entity
relevant to an engagement. (Ethical Standard s.5.86)

7.1.7 Intimidation threat

Litigation Generally, where litigation threatens integrity, objectivity and

independence, the normal course of action would be for the firm to resign.
However, the firm is not required to resign immediately in circumstances
where a reasonable and informed third party would not regard it in the
interests of the shareholders for it to do so. This might be the case where:
• the litigation was started as the engagement was about to be
completed and shareholders would be adversely affected by the delay;
or
• on legal advice, the firm deems that the litigation is designed solely to
bring pressure to bear on the auditor’s opinion. (Ethical Standard s.4.47
and 4.48)

7.1.8 Management threat

Arises when the firm • If there is informed management (ie, management capable of making
undertakes non-audit independent judgements and decisions on the basis of the information
services for audit provided) safeguards may be able to mitigate the threat
clients which • If there is no informed management, it is unlikely that the threat can be
involves making avoided if the work is undertaken.
judgements and
taking decisions that
are the responsibility
of management (and
due to the alignment
of such
responsibilities could
diminish the firm’s
professional
scepticism)

Note: A given situation may give rise to more than one threat.

132 Corporate Reporting ICAEW 2021

 Professional skills focus: Concluding, recommending and communicating

Questions are unlikely to simply ask you what the problem is - they will also expect some form of
recommended action for the firm or accountant to take. Each part of the various Codes and
Standards are designed to suggest responses but it is up to you to explain what you believe to be
the right one and why.

8 Further ethical guidance

8.1 Provisions available for small entities
8.1.1 Exam focus
Section 6 of the Revised Ethical Standard (FRC, 2019) covers this issue. It relaxes the ethical rules for
smaller entities by making use of exemptions and some additional disclosures. It applies where the
client satisfies certain criteria that indicate it to be a ‘Small Entity’ (including those that qualify as a
small company under the Companies Act 2006 - see Ethical Standard s.6.4 for the full list) and covers
three issues dealt with by the Ethical Standards, as well as their disclosure. In your exam you may
need to consider ethical issues, as they affect smaller companies specifically.

8.1.2 Key points

Economic Where total fees for audit and non-audit services from a non-listed
dependence audited entity will regularly exceed 10% of the annual fee income of the
firm but will not regularly exceed 15%, no external independent quality
control review is required. Instead this must be disclosed to the ethics
partner and those charged with governance. (Ethical Standard s.6.5)

Non-audit services The restrictions on the provision of non-audit services related to self-
review threats can be waived, but:
• there needs to be ‘informed management‘; and
• the audit firm needs to extend its cycle of cold reviews
In addition, the firm is exempt from taking the specified actions in
response to management and some advocacy threats associated with
non-audit services for small entities provided there is adequate disclosure
that the firm has applied the FRC Ethical Standard’s Provisions Available
for Audits of Small Entities. (Ethical Standard s.6.11 and 6.12)

Partners joining audit The provisions concerning partners joining audit clients are waived
clients provided there is no threat to the audit team’s integrity, objectivity and
independence. (Ethical Standard s.6.13 and 6.14)

Disclosure Disclosure should be made in the auditor’s report. (Ethical Standard

s.6.15)

ICAEW 2021 3: Ethics 133

Summary

134 Corporate Reporting ICAEW 2021

 Further question practice
1 Knowledge diagnostic
Before you move on to question practice, complete the following knowledge diagnostic and check
you are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from the topic indicated.

Confirm your learning

1. Can you identify behaviour in a given scenario that may be considered unethical?

2. Do you know the various ethical codes and standards that you are expected to use and
can you find them in your open book permitted text?

3. Can you differentiate between the ethical issues faced by accountants in business and by
auditors working in practice?

4. Can you identify the various threats raised by certain situations and explain the most
suitable response?

5. Are you aware of current developments in response to money laundering?

2 Question practice
Aim to complete all self-test questions at the end of this chapter. The following self-test questions are
particularly helpful to further topic understanding and guide skills application before you proceed to
the next chapter.

Question Learning benefit from attempting this question

Easter Use this as good practice of how to interrogate the open book permitted
text for responses to a series of discrete ethical scenarios.

Marden plc Having looked at some individual issues, now attempt something more
exam-standard where you have to unpick the ethical issues from a larger
and more complex scenario.

Once you have completed these self-test questions, it is beneficial to attempt the following questions
from the Question Bank for this module. These questions have been selected to introduce exam style
scenarios that will help you improve your knowledge application and professional skills development
before you start the next chapter.

Question Learning benefit from attempting this question

Poe, Whitman and Here, you have been asked about practical and ethical issues related to your
Co late appointment as group auditor. This requires a more methodical
approach to consider the issues when reading the whole scenario.

UHN This is a self-contained requirement to consider a one-off assignment but in

the field of cyber-security – this presents a number of threats so your answer
should adopt as broad a scope as possible.

Refer back to the learning in this chapter for any questions which you did not answer correctly or
where the suggested solution has not provided sufficient explanation to answer all your queries.
Once you have attempted these questions, you can continue your studies by moving on to the next
chapter.

ICAEW 2021 3: Ethics 135

Technical reference

FRC (2019) Revised Ethical Standard 2019. [Online] Available at:

https://www.frc.org.uk/getattachment/601c8b09-2c0a-4a6c-8080-30f63e50b4a2/Revised-Ethical-
Standards-2019-Updated-With-Covers.pdf [Accessed 6 July 2020]
FRC (2019b) Glossary of terms (Auditing and Ethics). [Online] Available at:
https://www.frc.org.uk/getattachment/d4968a74-15d1-47ce-8fc4-220ae3536b06/Glossary-of-Terms-
(Auditing-and-Ethics)-(Updated-Jan-2020).pdf [Accessed 6 July 2020]
ICAEW (2014) Ethical problems - framework for resolution. [Online] Available at:
https://www.icaew.com/technical/ethics/ethics-helpsheets/ethical-problems-framework-for-
resolution [Accessed 6 July 2020]
ICAEW (2019) Key areas of change in ICAEW Code of Ethics 2020. [Online] Available at:
https://www.icaew.com/-/media/corporate/files/members/regulations-standards-and-
guidance/ethics/key-areas-of-change-new-icaew-code-of-ethics-2020.ashx?la=en [Accessed 6 July
2020]
ICAEW (2020) ICAEW Code of Ethics. [Online] Available at: https://www.icaew.com/-
/media/corporate/files/members/regulations-standards-and-guidance/ethics/icaew-code-of-ethics-2
020.ashx?la=en [Accessed 6 July 2020]
ICAEW (2020) The new FRC Ethical Standard. [Online] Available at:
https://www.icaew.com/insights/viewpoints-on-the-news/2020/mar-2020/the-new-frc-ethical-
standard [Accessed 6 July 2020]
IESBA (2018) International code of ethics for professional accountants. [Online] Available at:
https://www.ethicsboard.org/international-code-ethics-professional-accountants [Accessed 7 July
2020]
UK Government (2019) Policy paper: Economic crime plan 2019 to 2022. [Online] Available at:
https://www.gov.uk/government/publications/economic-crime-plan-2019-to-2022 [Accessed 6 July
2020]

136 Corporate Reporting ICAEW 2021

 Self-test questions

Answer the following questions.

1 Easter
You are a partner in a firm of chartered accountants. The following issues have emerged in relation to
three of your clients:
(1) Easter is a major client. It is listed on a major exchange. The audit team consists of eight
members, of whom Paul is the most junior. Paul has just invested in a personal pension plan that
invests in all the listed companies on the exchange.
(2) While listed, Easter has subsidiaries in five different European countries. Tax regimes in those
countries vary on the absolute rate of tax charged as well as expenses allowable against taxable
income. The Finance Director of Easter has indicated that the Easter group will be applying
management charges between different subsidiaries to take advantage of favourable tax
regimes with the five countries. The FD reminds you that another firm offering assurances
services, Bunny & Co, has already approved the management charges as part of a special review
carried out on the group and the FD therefore considers the charges to be legal and
appropriate to Easter.
(3) You are at the head of a team carrying out due diligence work at Electra, a limited company
which your client, Powerful, is considering taking over. Your second in command on the team,
Peter, who is a manager, has confided in you that in the course of his work he has met the
daughter of the Managing Director of Electra, and he is keen to invite her on a date.
(4) Your longest standing audit client is Teddies, which you have been involved in for 10 years, with
four years as engagement partner. You recently went on an extended cruise with the Managing
Director on his yacht. The company is not a public interest entity or listed entity.
(5) You are also aware that the executive directors of Teddies were recently voted a significant
increase in bonus by their audit committee. The financial statements of Teddies do show a small
improvement in net profit, but this does not appear to justify the extent of bonus paid. You are
also aware that the Finance Director of Teddies is a non-executive director of Grisly, while the
Senior Independent Director of Teddies is the Finance Director of Grisly.
Requirement
Comment on the ethical and other professional issues raised by the above matters.
Note: Your answer should outline the threat arising, the significance of the threat, any factors you
have taken into account and, if relevant, any safeguards you could apply to eliminate or mitigate
against the threat.

2 Saunders plc
Bourne & Berkeley is an assurance firm with a diverse range of audit clients. One client, Saunders plc,
is listed on the stock exchange. You are the engagement partner on the audit; you have been
engagement partner for four years and have an experienced team of eight staff to carry out the
audit. The audit is made slightly more complicated because Bourne & Berkeley rent office space from
Saunders plc. The total rental cost of that space is about 10% of the total income from Saunders plc.
Office space is made available to other companies, including Walker Ltd, another of your audit
clients. You are aware from the audit of Walker Ltd that the company is close to receivership and that
the rent arrears is unlikely to be paid by Walker to Saunders.
In an interesting development at the client, the Finance Director resigned just before the audit
commencing and the board asked Bourne & Berkeley for assistance in preparing the financial
statements. Draft accounts were available, although the final statutory accounts had not been
produced.
As part of your review of the draft accounts you notice that the revenue recognition policy includes
an estimate of future revenues from the sale of deferred assets. One of the activities of Saunders plc
is the purchase of oil on the futures market for delivery and resale between 6 and 12 months into the

ICAEW 2021 3: Ethics 137

 future. As the price of oil rises, the increase has been taken to the statement of profit or loss and
other comprehensive income. When queried, the directors of Saunders state that while the
accounting policy is new for the company, it is comparable with other firms in the industry and they
are adamant that no amendment will be necessary to the financial statements. They are certain that
other assurance firms will accept the policy if asked.
Requirement
Discuss the ethical and professional issues involved with the planning of the audit of Saunders plc.

3 Marden plc
At 6pm on Sunday evening a text message arrives for you from your audit manager, John Hanks,
stating:
“Please check your email urgently”
On checking your email, you find the following message.
“I hope you had a good weekend. Instead of coming into the office tomorrow morning I would like
you to go to a client called Marden plc. I know you have not worked on this client before so I am
emailing you some background information (Exhibit 1). One of our audit juniors, Henry Ying, was at
Marden’s head office last week working on the interim audit and he has come up with a schedule of
issues that are worrying me (Exhibit 2). Henry does not have the experience to deal with these, so I
would like you, as a senior, to go out there and prepare a memorandum for me which sets out the
financial reporting implications of each of these issues. I would also like you to explain in the
memorandum the ethical issues that arise from these issues and the audit procedures required for
each of the matters on Henry’s schedule. I will visit Marden on Tuesday to speak to the directors.
John”
Requirement
Prepare the memorandum requested by your audit manager.

Exhibit 1: Background information

Marden plc operates a fleet of 10 executive jets available for private hire. The jets are based in
Europe, the US and the Far East, but they operate throughout the world. The company is resident in
the UK.
The jets can be hired for specific flights, for short periods or for longer periods. For insurance
purposes, all planes must use a pilot employed by Marden. All the jets are owned by Marden.
Marden has an Alternative Investment Market listing. Ordinary share capital consists of five million £1
shares. The ownership of share capital at 1 January 20X6 was:

Directors 25%
Financial institutions 66%
Jack Airlines plc 9%

The company uses an interest rate of 10% to discount the cash flows of all projects.
The accounting year end is 31 December.

Exhibit 2: Interim audit issues

Prepared by Audit Junior: Henry Ying
In respect of the interim audit of the financial statements for the year to 31 December 20X6 the
following issues have arisen.
(1) Marden appears to have inadvertently filed an incorrect tax return for last year showing a
material understatement of its corporation tax liability for that year and has therefore paid
significantly less corporation tax than it should have. Our firm is not engaged as tax advisers. The
directors are now refusing to inform HM Revenue & Customs of the underpayment, as they say
that ‘it is in the past now’. I am not sure of our firm’s obligations in this matter.

138 Corporate Reporting ICAEW 2021

(2) One of the directors, Dick Tracey, owns a separate travel consultancy business. He buys unused
flying time from Marden to sell to his own clients. In the year to 31 December 20X6 to date he
has paid Marden £30,000 for 100 hours of flying time made available.
(3) On 16 September 20X6 a major customer, Stateside Leisure Inc, gave notification to Marden that
the service it had been receiving was poor and it was therefore considering terminating its long-
term contract with the company. The contract amounted to 15% of Marden’s revenue and 25% of
its profit in 20X5. The directors did not make an immediate announcement of this and so the
share price did not initially change. Four directors sold a total of 200,000 shares in Marden plc
on 2 October 20X6. Stateside Leisure Inc terminated the contract on 1 November 20X6 and the
directors disclosed this to the London Stock Exchange the same day. The price per share then
fell immediately from £7.50 to £6.
(4) Our audit fee for the year to 31 December 20X5 is still outstanding and is now overdue by five
months.
(5) I have selected a sample jet to be physically inspected. I selected this jet because it does not
appear to have flown since December 20X5. The jet in question cost £6 million on 1 January
20W8 and has a useful life of 10 years with a residual value of £1 million. Each jet is expected to
generate £2 million income per year net of expenses.
The directors say that this jet is located in the US, but they have offered to fly a member of our
audit team out there in one of their executive jets. They insist that a jet needs to go there anyway
so there would be no cost to Marden by making transport available to us.
(6) On 28 August 20X6 Jack Airlines plc – a large, listed company which operates a discount airline –
acquired 1 million shares in Marden from financial institutions. On 20 October 20X6 Jack Airlines
plc announced to the London Stock Exchange that it intends to make a bid for the entire share
capital of Marden and at the same time requested that our firm, as Marden’s auditors, should
carry out the due diligence work in respect of the bid.

Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for
this chapter.

ICAEW 2021 3: Ethics 139

Answers to Interactive questions

Answer to Interactive question 1

1.1 Factors
The request was made by her superiors.
• Financially she may have felt pressure to keep her job.
• Potential prospect of being rewarded through promotion and pay rises.
• Inability to decide how to deal with the situation.
1.2 Other courses of action
She could have:
• refused to make the adjustments;
• brought the matter to the attention of other senior members of staff eg, internal audit;
• resigned;
• sought advice from her relevant professional body;
• sought legal advice; or
• reported the matter to the relevant authorities eg, SEC at an earlier stage.

Answer to Interactive question 2

Potential ethical risk areas

Personal interests Review of your own Disputes Intimidation

work

Undue dependence Auditor prepares the Actual litigation with a Any threat of litigation
on an audit client due accounts client by the client
to fee levels

Overdue fees Auditor participates in Threatened litigation Personal relationships

becoming similar to a management with a client with the client
loan decisions

An actual loan being Provision of any other Client refuses to pay Threat of any services
made to a client services to the client fees and they become being put out to
long overdue tender

Contingency fees
being offered

Accepting
commissions from
clients

Provision of lucrative
other services to
clients

Relationships with
persons in associated
practices

Relationships with the

client

140 Corporate Reporting ICAEW 2021

 Personal interests Review of your own Disputes Intimidation
work

Long association with

clients

Beneficial interest in
shares or other
investments

Hospitality

Answer to Interactive question 3

3.1 Issues
(1) Teresa is at present a member of the engagement team and a member of her immediate
family now owns a direct financial interest in the audit client. This is unacceptable.
If someone closely associated with a covered person holds a financial interest in the audit client,
Stewart Brice needs to apply the following safeguards:
• Ensure that this person disposes of the shares immediately
• Remove Teresa from the engagement team (FRC Ethical Standard, para 2.9)
The financial interest has arisen from an inheritance by Teresa’s husband, who has indicated that
he would like to keep hold of the investment. The FRC ES paras. 2.11-12 requires that these
shares should be disposed of as soon as possible and while this is being arranged, Teresa
should be removed from the engagement team.
The firm should appraise the audit committee of Recreate of what has happened and the
actions it has taken. The partners should consider whether it is necessary to bring in an
independent partner to review audit work. However, given that Teresa’s involvement is subject
to the review of the existing engagement partner and she was not connected with the shares
while she was carrying out the work, a second partner review is likely to be unnecessary in this
case.
(2) The audit firm has an indirect financial interest in the parent company of a company it has
been invited to tender for by virtue of its pension scheme having invested in Tadpole Group.
The FRC ES would classify this indirect financial interest as a diversified collective investment
scheme.
This is no barrier to the audit firm tendering for the audit of Kermit Co.
Should the audit firm win the tender and become the auditors of Kermit Co it should consider
whether it is necessary to apply safeguards to mitigate against the risk to independence on the
audit as a result of the indirect financial interest.
The factors that the partners will need to consider are the materiality of the interest to either
party and the degree of control that the firm actually has over the financial interest. (FRC Ethical
Standard, para. 2.13, 2.19)
In this case, the audit firm has no control over the financial interest. An independent pension
scheme administrator is in control of the financial interest. In addition, the interest is unlikely to
be substantial and is therefore immaterial to both parties. It is likely that this risk is already
sufficiently minimal as to not require safeguards. However, if the audit firm felt that it was
necessary to apply safeguards, it could consider the following:
• Notifying the audit committee of the interest
• Requiring Friends Benevolent to dispose of the shares in Tadpole Group
3.2 In this case, Stewart Brice has a direct financial interest in the audit client, which is technically
prohibited by ethical guidance. However, it is a requirement of any firm auditing the company
that the share be owned by the auditors.
The interest is not material. The audit firm should safeguard against the risk by not voting on its
own re-election as auditor. The firm should also strongly recommend to the company that it

ICAEW 2021 3: Ethics 141

 removes this requirement from its constitution, as it is at odds with ethical requirements for
auditors.

Answer to Interactive question 4

The issues to consider would include the following:
• Whether the management have made the decision to make the change in accounting treatment
of a proportion of the subscription income on a valid and ethical basis.
• Management are under pressure not to breach the loan covenants. With the change in timing of
the recognition the interest cover is only just achieved in both 20X7 and 20X8. This suggests that
without this change the covenant would be breached indicating that profit levels are sensitive.
• The auditor’s responsibility to all stakeholders, including shareholders.
• In this case the auditor would have a legal and moral responsibility to the venture capitalists who
have invested in Bellevue Ltd, to ensure that profits are fairly stated.
• The implications of the disagreement with the treatment by the audit manager in 20X7 which was
overruled by the partner. This is now of particular concern, as the audit partner has left the firm
abruptly. This potentially raises questions about the integrity of the partner.
• Whether there is sufficient evidence to support the conclusion that some of the subscription fees
are consultancy in nature and should therefore be recognised as the work is completed ie, when
the performance obligation is satisfied (IFRS 15) rather than being recognised over the duration
of the contract.
• Whether fees treated as subscription fees in previous years should have been recognised as
consultancy fees resulting in the need for a prior-period adjustment.
• The basis on which the figure of 40% was established and whether there is evidence to support
this estimation, particularly as this is exactly the same percentage as applied in 20X7.
• The overall increase in audit risk due to the need to comply with the loan agreement.

142 Corporate Reporting ICAEW 2021

 Answers to Self-test questions

1 Easter
Issues
(1) In relation to Easter, there is a threat of self-interest arising, as a member of the audit team has
an indirect financial interest in the client.
The relevant factors are as follows:
• The interest is unlikely to be material to the client or Paul, as the investment is recent and Paul’s
interest is in a pool of general investments made in the exchange on his behalf.
• Paul is the audit junior and does not have a significant role on the audit in terms of drawing audit
conclusions or audit risk areas.
The risk that arises to the independence of the audit here is therefore not significant. It would be
inappropriate to require Paul to divest his interest in the audit client. If I wanted to eliminate all
elements of risk in this situation, I could simply change the junior assigned to my team, but such a
step is not vital in this situation.
(2) Regarding the management charges, there is a threat that the management charges are
accepted as correct, simply because another assurance firm has recommended those charges to
Easter.
To query the charges could imply a lack of trust in Bunny, with the possible effect of bringing the
profession into disrepute. There is a risk that you as the assurance professional may not have the
necessary knowledge to determine whether or not Easter has been acting correctly. There is also an
intimidation threat in that the client is implying the charges are valid as another assurance firm has
recommended the changes.
The relevant factors to take into account include the following:
• The legality or otherwise of the transactions. Information concerning the management charges
must be obtained and compared to the law, not only of the individual countries but also of the EU
as a whole. It remains a possibility that Easter has acted in accordance with laws of individual
jurisdictions, but not the EU overall.
• Your level of knowledge. Where necessary, specialist advice must be obtained from the taxation
department to determine the legality or otherwise of the transactions.
• The materiality of the management charges involved and the reduction in the taxation expense.
Given that Easter is attempting to minimise its taxation charge, then the amounts are likely to be
material and therefore as the audit firm, the transactions will have to be audited.
• Your knowledge of Bunny & Co. The assurance firm may well be skilled in advising on this type of
issue, in which case there is likely to be less of an issue with the legality of the charges. However, if
the reputation of Bunny is suspect, then additional work on the management charges may be
required.
The intimidation threat is significant; it is unlikely that Easter would expect your firm to query the
charges as another professional firm has confirmed them. A discussion with the FD may be required
to confirm the purposes of the audit and the extent of evidence required to reach an audit opinion.
Material transactions affecting the financial statements and taxation charges must be subject to
standard audit procedures.
Your potential lack of knowledge is relatively easy to overcome. Specialist advice can be obtained
from the taxation department, with a tax manager/partner being present in any discussion with the
client to determine legality of the management charges.
(3) In relation to Powerful, two issues arise.
The first is that the firm appears to be providing multiple services for Powerful, which could raise a
self-interest threat. The second is that the manager assigned to the due diligence assignment wants
to engage in a personal relationship with a person connected to the subject of the assignment, which
could create a familiarity or intimidation threat.

ICAEW 2021 3: Ethics 143

With regard to the issue of multiple services, insufficient information is given to draw a conclusion as
to the significance of the threat. Relevant factors would be such matters as the nature of the services,
the fee income and the team members assigned to each. Safeguards could include using different
staff for the two assignments and review by a partner not connected to the Powerful engagement.
The risk is likely to be significant only if one of the services provided is audit, which is not indicated in
the question.
In relation to the second issue, the relevant factors are these:
• The assurance team member has a significant role on the team as second in command.
• The other party represents a close family member at the company being reviewed.
• Timing.
In this situation, the firm is carrying out a one-off review of the company, and timing is a key issue.
Presently Peter does not have a personal relationship which would significantly threaten the
independence of the assignment. In this situation, the safeguard is to request that Peter does not
take any action in that direction until the assignment is completed. If he refuses, then I may have to
consider rotating my staff on this assignment, and removing him from the team.
(4) In relation to Teddies, there is a risk that my long association and personal relationship with the
client will result in a familiarity threat.
This is compounded by my acceptance of significant hospitality on a personal level.
The relevant factors are as follows:
• I have been involved with the client for 10 years and have a personal relationship with client staff.
• The company is not a listed or public interest company.
• It is an audit assignment.
The risk arising here is significant but, as the client is not listed, it is not insurmountable. However, it
would be a good idea to implement some safeguards to mitigate against the risk. I could invite a
second partner to provide a hot review of the audit of Teddies, or even consider requesting that I am
rotated off the audit of Teddies for a period, so that the engagement partner is another partner in my
firm. In addition, I must cease accepting hospitality from the directors of Teddies unless it is clearly
trivial and inconsequential.
If the independence issue cannot be resolved then the audit firm may also consider resigning from
the audit of Teddies.
(5) It appears that there are cross-directorships between Teddies and Grisly.
In other words, at least one executive in Teddies assists in setting the bonuses of directors in Grisly,
and at least one executive in Grisly is involved in setting the bonuses of directors in Teddies. This
issue provides an independence threat for those directors, especially so if the FDs are members of a
professional body such as ICAEW.
There is a further point, that you as engagement partner are aware of the issue, but your
independence may be compromised by the cruise with the managing director. There is also the issue
of the lack of clear reporting obligations in this situation. Most codes of corporate governance
require the directors of the company to make statements of compliance with that code, and in many
situations cross-directorships are not explicitly banned.
Factors to consider include:
• Whether the directors are members of a professional body. If so, the engagement partner could
tactfully ask whether there are independence conflicts and how these will be resolved.
• The level of bonuses awarded in Grisly. If these appear to be nominal then the issue of lack of
independence regarding the bonuses in Teddies is reduced.
• Whether Teddies has audit and remuneration committees and whether these are effective in
determining director remuneration and communicating concerns of the auditor to the board. As
auditor, you have access to the audit committee but not the remuneration committee, so there is
no precise way of raising concerns with the remuneration committee.
• To a certain extent, the association threat of being linked to a client where the code of corporate
governance may not be being followed.
As the engagement partner, it would be appropriate to mention the perceived lack of independence
with the Finance Director. This may be directly rather than via the audit committee due to the lack of

144 Corporate Reporting ICAEW 2021

 communication you have with the remuneration committee. The result of any communications must
be documented in the audit file, even where communication is simply verbal.
The association risk is probably minimal, although will increase where your firm also provides
assurance services to Grisly. Where there are significant and continued breaches of the code of
governance, then your firm may consider not acting for Teddies in the future. Provision of additional
disclosure is compromised by lack of reporting obligations and your independence issue with the
managing director of Teddies.

2 Saunders plc
Issues
(1) The rental of the premises from an audit client represents a business relationship which poses a
potential threat to objectivity.
• Bourne & Berkeley would be able to continue to act if the arrangement is:
– in the ordinary course of business;
– on an arm’s length basis; and
– not material to either party.
• In this case the rental income is likely to be material to the audit client, as it represents 10% of
total income.
• The audit firm would need to take immediate steps to terminate either the client or the business
relationship.
(2) The FRC Revised Ethical Standard prohibits accounts preparation work for listed company audit
clients.
• In this case it is likely that the preparation of the financial information will involve the auditor in
making subjective judgements, as the internal reporting format will need to be converted into the
statutory format. Decisions will need to be made about, for example, the level and nature of
disclosures. This would constitute an accountancy service and would not be allowed.
(3) There is a conflict of interest here.
While it may be in the interest of Saunders plc for the auditor to disclose the information regarding
the recoverability of the debt, this information is confidential, as it was obtained in the course of audit
work performed for Walker Ltd. Disclosure of this information to Saunders plc would breach the duty
of confidentiality.
• Section 310 of the ICAEW Code requires that the auditor should disclose a conflict of interest to
the parties involved. In this case, however, the situation is complicated by the fact that the conflict
of interest has had a practical consequence rather than simply being a potential problem. In
addition, it may be difficult to make the communication without revealing confidential
information.
• The firm should consider whether there were sufficient procedures in place to prevent the conflict
of interest occurring in the first place.
• The ICAEW Code states that the auditor should take steps to identify circumstances that could
pose a conflict of interest and to put in place any necessary safeguards eg, use of separate audit
teams.
• If procedures were inadequate this may have implications for other clients.
• If the balance is not material further action is unlikely to be necessary. If the balance is material the
situation will need to be addressed.
• Saunders plc may be aware of the potential irrecoverability of the debt and an allowance for an
irrecoverable receivable may have been made in the financial statements.
• If an adjustment has been made and the auditor is in agreement with it no further action would be
required.
• Independent evidence may be available which would indicate that the debt was irrecoverable.
For example, there may have been correspondence between Saunders plc and Walker Ltd
concerning the payment of the balance. There may also be evidence in the public domain, for
example newspaper reports and the results of credit checks. However, the auditor would need to

ICAEW 2021 3: Ethics 145

 consider how this evidence was used, particularly if it was sought as a result of having the
confidential information.
• The audit manager could consider requesting Walker Ltd to communicate with Saunders plc.
• This may not be acceptable to Walker Ltd, who may feel that any communication would not be in
their interest. It may also make any future relationship between the auditor and Walker Ltd
difficult.
• If the issue cannot be resolved and the balance is material the auditor will not be able to form an
audit opinion. Bourne & Berkeley will need to consider resigning as the auditor of Saunders plc.
(4) Revenue recognition policy
It appears that Saunders plc is attempting to implement a change in accounting policy which
increases revenue, while at the same time intimidating the auditors to accept this policy. There is an
implied threat that Bourne & Berkeley will be removed from office if the accounting policy is not
accepted.
Factors to consider include the following:
• The materiality of the amounts involved. Given that the accounting policy is an attempt to increase
revenue, the amount is likely to be material – again it would be unlikely that the directors would
want to spend the time and effort if this was not the case.
• The accounting policies adopted by similar firms in the industry. The directors of Saunders have
noted that the income recognition policy is the same as other firms in the industry. Accounts of
similar firms need to be obtained and the accounting policies checked. If the policies are the
same as Saunders, and the technical department of Bourne & Berkeley confirm that the policy
follows GAAP, then no modification of the auditor’s report will be required, although audit
evidence will be obtained to confirm the correct application of the policy. If the revenue
recognition policy is inappropriate, then additional discussion will be required with the directors
to determine whether they will continue with the policy, and risk a modified report, or amend the
policy.
• Whether the directors would actually seek to remove Bourne & Berkeley if the revenue
recognition policy does not follow GAAP and the auditor’s report will be modified. The audit firm
needs to document the situation and be prepared to provide a statement on why it is being
removed in accordance with Companies Act requirements.
Bourne & Berkeley will find it difficult to remove the intimidation threat. Advice can be obtained from
the ethics partner, although it is unlikely that the firm’s position can be defended by agreeing to an
accounting policy if this does not follow GAAP. Bourne & Berkeley will need to maintain its integrity
by insisting that appropriate accounting policies are followed, even where this risks losing an audit
client.

3 Marden plc
MEMO
To Audit manager
From Audit senior
Date XX-XX-XX
Re Accounting issues of Marden plc
(1) Understatement of tax liability
Audit and ethics
The understatement of the tax liability is an illegal act by the client. Tuesday’s meeting offers the
opportunity to attempt to persuade the client even at this late stage.
Consider whether a partner needs to be at the meeting given the ethical importance of the issue.
The key issue is the conflict between our duty to report and our duty of confidentiality.
According to ICAEW ethical requirements in terms of reporting, this may be:
• where there is a duty to disclose
• where there is a right to disclose

146 Corporate Reporting ICAEW 2021

Suggested actions if the client continues to refuse to disclose to HMRC:
• Our views should be put in writing to the client
• Report to the audit committee if there is one
• Refer the matter to senior personnel in our firm – eg, the ethics partner
• The firm must consider whether to cease to act for the client
• Consider whether this is a ‘whistleblowing’ incident in the public interest
Financial reporting
If there is a material unrecognised liability in the financial statements then we need to consider
whether the financial statements give a true and fair view. Any material understatement of the tax
provision would need to be reflected in the auditor’s report. The level of detail as to the cause of the
misstatement raises confidentiality considerations.
(2) Related party transaction
Audit and ethics
The audit issue in this case is that there is a potential conflict of interest between a director and the
body of shareholders.
Directors also have a fiduciary duty to act in the interests of all shareholders. Directors must not place
themselves in a position where there is a conflict of interest between their personal interests and
their duty to the company (Regal (Hastings) Ltd v Gulliver). In certain circumstances the company may
void such contracts.
More specifically, the audit risk in this case is that the price of £30,000 for the use of the jet might not
be an arm’s length price in terms of an hourly rate for this type of hire. At £300 per hour including the
pilot’s time there is a risk that the director, Dick Tracey, may be exploiting his position.
The Companies Act imposes restrictions on the dealings of directors with companies in order to
prevent directors taking advantage of their position. This applies even where the directors are
shareholders, but particularly where the interests of non-controlling, or outside, shareholders may be
damaged.
If there has not been knowledge and approval of the transactions by the other directors then there
may be an issue of false accounting by Dick Tracey.
Audit procedures:
• Review provisions in Articles of Association regarding directors’ contracts with the company
• Examine the terms of the contract(s) ascertaining the nature of the hire agreements
• Ascertain whether any similar arm’s length hires took place and at what prices (see evidence of
such agreements where appropriate)
• Ascertain whether the other directors were aware of the nature and extent of the hire contracts
(eg, review correspondence)
• Review board minutes to see if the hire contracts have been considered and formally approved by
the board
Financial reporting
Transactions involving directors are required to be disclosed in the financial statements by both the
Companies Act 2006 and IAS 24, Related Party Disclosures.
A director is part of key management personnel and thus is a related party of the company.
According to IAS 24 the transaction should be disclosed irrespective of its materiality. However, the
name of the director need not be disclosed.
As a result, the hire fees are likely to be deemed to be a related party transaction and thus the
following disclosures should be made:
• Amounts involved
• Amounts due to or from the related party
• Irrecoverable debt write-offs to or from the related party

ICAEW 2021 3: Ethics 147

(3) Directors’ share trading
Audit and ethics
There are two issues in this case:
• The failure to make a timely disclosure for personal gain by the directors
• The consequences of the underlying event of the loss of a major contract
The failure to announce the loss of the contract might leave the directors in breach of their fiduciary
duty to shareholders, as they may have manipulated the market for their own gain.
Consider taking legal advice as to whether an illegal act has been committed, as the initial
communication from Stateside in September was only about poor service. The formal notification of
the contract being terminated by Stateside was immediately communicated to the London Stock
Exchange by the directors. If this is considered illegal, it could represent money laundering under the
Proceeds of Crime Act and as such, care must be taken to avoid tipping off.
Consider also taking advice as to whether stock market rules have been breached by the directors
individually and by the company. This might affect quality of markets and may be contrary to insider
trading laws.
Regarding the underlying event of the loss of a major customer, consideration needs to be given as
to whether going concern is affected by the loss of such a large contract (eg, if the service is poor,
will other major contracts be lost?).
Financial reporting
Consider whether any provision is necessary once advice is received on whether the company has
committed an illegal act (as opposed to the directors themselves) or has been in breach of
regulations. Provisions might include fines or other penalties imposed by the courts or regulators.
If there has been a significant decline in activity, then impairment needs to be considered on the jets
if their value in use has decreased.
Consider recoverability of amounts outstanding from Stateside Leisure Inc.
(4) Audit fee outstanding
Audit and ethics
It may be that the matter of the overdue fees can be resolved amicably at Tuesday’s meeting.
If, however, the fee remains outstanding, it may be a threat to our independence. This may be
because it biases our opinion against the client. Alternatively, it may be that we do not wish to put the
client’s going concern at risk, as this may reduce the likelihood of us receiving payment.
In effect, the overdue fee may be similar to a loan to the client which is not permitted.
Actions may include the following:
• A review by an independent partner (perhaps the ethics partner) who is not involved in the audit
to agree that the objectivity of the engagement staff is not affected. This should really have been
completed before commencement of the audit so it is now a matter of urgency.
• If legal action is necessary to recover the fees it would not be possible for us to continue acting
for the client, as the Revised Ethical Standard 2019 prohibits, in most circumstances, auditors
acting for clients where there is actual or potential litigation between the two parties.
Financial reporting
A provision should be made for the audit fee outstanding.
(5) Physical inspection of jets
Audit and ethics
There are two issues here.
• The fact that one jet appears not to have been used
• The offer of ‘free’ transport on an executive jet may be deemed as a gift
The fact that a jet has not been used for some time may have a number of possible causes.
• Technical problems – the jet may not be serviceable. We need to establish whether this is the case
(eg, hire an independent local aircraft engineer) then consider impairment testing.

148 Corporate Reporting ICAEW 2021

• Lack of markets – there may be insufficient demand to warrant using the plane. This seems less
likely, as the plane has not been used at all. Examine usage of other Marden planes in the US.
• Unrecorded usage – the jet may be being used but the usage is unrecorded and income
understated. Alternatively, it might mean that improper use is being made of the company’s
assets (eg, by management).
Regarding the ‘free’ flight, gifts beyond what is considered trivial and inconsequential are not
permitted. However, if the flight were merely for the purpose of the audit check and there were no
added benefits (additional destinations, trips etc) then it may be permissible if agreed by the ethics
partner.
Alternatively, a local firm of auditors could be used. The check might not just be the physical
verification of the asset but also usage records (eg, flying logs, pilots’ time).
Financial reporting
The jet has not been used for some time and therefore impairment testing needs to be considered.
Technical problems – The jet may not be fully serviceable, in which case it needs to be reviewed for
impairment according to IAS 36 as both fair value and value in use may be affected.
The carrying amount at 31 December 20X6 of the jet is £1.5 million (ie, £6m – [£5m × 9/10])
The value in use, if fully operational (assuming year-end operating cash flows and including the
residual amount) is:
(£2m + £1m)/1.1 = £2.73m
Thus, there is no impairment if the plane is fully operational (the fair value less costs of disposal
calculation is not necessary as the value in use exceeds the carrying amount).
However, if the plane is not operational then both next year’s net operating inflow and the residual
value are likely to be affected. In this case an impairment charge of £1.5 million (less the present
value of any residual value obtainable for a non-operational jet) may be required.
Lack of markets – There may be insufficient demand to warrant using the plane. This will affect value
in use but perhaps not the residual value. Again, impairment testing may be needed as according to
IAS 36 value in use may be affected.
If the jet is not operational next year, but can be sold for a residual value of £1 million next year
(although selling immediately would be a better option in this case) the impairment charge is:
£1.5m – £1m/1.1 = £0.59m
Unrecorded usage – This may mean that any depreciation based on the amount of flying time may be
understated.
Any impairment on this aircraft might have further implications for impairment of other aircraft if the
cause is market based rather than technically based.
(6) Due diligence assignment
Audit and ethics
Acceptance of the due diligence assignment is not permitted, as there would be a conflict of interest
between our role as auditor of Marden and a due diligence role for the bidder for Marden, Jack
Airlines plc.
The acquisition of one million shares would take Jack Airlines to a 29% holding (Note: 30% is the
maximum permitted by the stock exchange before an offer needs to be made to all shareholders).
The offer is therefore for the remaining shares. This is a key audit risk, as directors still hold a
significant amount of the shares and this may influence their financial reporting, as the share price
will be affected by the bid.
It might be noted that the announcement was made during the period that the share price was
artificially inflated due to the Stateside Leisure Inc announcement, and this may ultimately affect the
bid.
Financial reporting
There is no direct effect on the financial statements; however, consider:
• if the bid process is going into next year and the bid is to be defended, then a provision may
need to be made for defence costs; and

ICAEW 2021 3: Ethics 149

• if the bid process is going into next year, then disclosure of the bid as a non-adjusting event after
the reporting date may be necessary.

150 Corporate Reporting ICAEW 2021