ETHICS

The PRC/BOA has recently approved a new revised Code of Ethics for Professional Accountants in the Philippines. The revised Philippine Code follows the IFAC Code with the exception of few provisions which are not consistent with our Philippine Laws and these exceptions are all explained in the Preface to guide our members. PICPA as a member body of IFAC is covered by Statements of Membership Obligations or SMOs. In particular, PICPA ethics are covered by SMOs 3, 4, and 6.

The Code is divided into three sections; the first includes principles that are applicable to all professional accountants, the second and third parts distinguish between those principles that affect professional accountants in public practice and those that are applicable to other accountants employed in business and industry. The bulk of the document is devoted to Independence for Assurance Engagements, which is to be found in Section 8 in Part B of the Code. These new rules of independence set out a conceptual framework that focuses on the factors that pose a threat to independence for all assurance engagements and the safeguards those auditors should put in place to preserve their independence. In addition, the updated Code provides examples of situations on how the conceptual approach to independence is to be applied to specific circumstances and relationships. Thus we find situations of conflict being addressed such as employment with assurance clients, provision of non-assurance services to assurance clients including temporary staff assignments, recruiting of senior management, provision of tax and legal services and preparation of accounting records and financial statements.

The Code does not prohibit such relationships thereby taking into account the reality of the modern business world which accepts that the company’s auditors may be best placed to provide another service. However the Code in general stipulates that if there is a threat to independence then the work should not be undertaken. A threat to independence occurs when a firm or a member of the assurance team could benefit from a financial interest in, or other self-interest conflict with, an assurance client.

Self-interest is just one of four perceived threats to independence. The others are self-review, advocacy, familiarity and intimidation threats. Each has its own dangers. IFAC has identified three sets of safeguards:

• Safeguards created by the profession, legislation or regulation;
  
• Safeguards within the assurance client; and
  
• Safeguards within the firm’s own systems and procedures.

The latter systems include ensuring that the firm does not rely heavily on any single client for its revenue. Rotation of senior personnel is also viewed as a safeguard as is using different partners and teams with separate reporting lines for the provision of non-assurance services to an assurance client.
This Code has adopted a principles based approach to laying down a Code of Ethics for accountants and auditors worldwide. This approach has been lauded in the international accounting press in that it reflects the age-old adage that detailed rules encourage avoidance but principles encourage compliance. The fact that it is principles–based makes it more adaptable to meet any new potential conflicts and threats to independence. It also is a well-timed move by the profession away from the US rule-book method approach to independence. It is expected that as part of the fallout from Enron the SEC will be looking at the US rules on independence and a possible move towards the principles bas

The new approach does not mean lighter regulation. Far from it! Firms are being encouraged to analyze threats to independence rather than to adopt a tick-box based approach. This translates into a tougher mindset when dealing with threats to independence, with more responsibility being placed fairly and squarely on the shoulders of the firms. To sum up therefore the new Code of Ethics is another example of how the profession has the ability to regulate itself and does not shy away from adopting a tougher stance on its members.

The revised Code establishes a conceptual framework for all professional accountants to ensure compliance with the five fundamental principles of professional ethics. These principles are integrity, objectivity, professional competence and due care, confidentiality, and professional behavior. Under the framework, all professional accountants will be required to identify threats to these fundamental principles and, if there are threats, apply safeguards to ensure that the principles are not compromised. The framework applies to all professional accountants, those in public practice and those in business, industry and government.

"The revised Code protects the public interest by requiring all professional accountants to be alert to situations that could potentially compromise their compliance with the Code's fundamental principles and to take action to ensure that the principles are not compromised," explains Ethics Committee Chair Richard George.

The revised Code also conforms to the International Framework for Assurance Engagements, issued by the International Auditing and Assurance Standards Board, and definitions contained in the International Standard on Quality Control (ISQC) 1, Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance Related Services Engagements. To assist with the implementation of these conforming changes, there is in place interpretation providing guidance on the application of the independence requirements to assurance engagements that are not financial statement audit engagements.

FUNCTIONS

1. Organize the Committee; invite members who are familiar in identifying and resolving ethical issues, as well as the administrative processes involved in resolving ethical cases.
   
   
2. Develop course materials that will cover significant provisions of the Code of Ethics, the PRC Law and the Accountancy Law.; including illustrative cases that will facilitate the understanding of the various applicable provisions.
   
   
3. Coordinate with the Committee of Professional Development and Research and with the CPE on the Road Committee and the CPE Council in order that understanding more about ethics is always part of the CPE approved materials.
   
   
4. Implement the promotion and roll out the trainings on ethics.
   
   
5. Develop the Committee’s Plans and Budget for approval of the Liaison Director and for submission during the Annual Planning Conference.