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The Fundamental principles and conceptual framework

Their importance in the SAICA code

Part 1 of the SAICA Code of Professional Conduct (Revised 2018) is effective from 15 June 2019. Part 1 deals with complying with the code, fundamental principles and conceptual framework, and is applicable to all professional accountants

Adherence to the five fundamental principles has been elevated to a requirement in the SAICA Code of Professional Conduct. The conceptual framework has been enhanced and is more prominently featured under the code.

The sections within the code are structured, where appropriate, in the following manner:

  • An introduction to the subject matter Requirements which establish general and specific obligations with respect to that subject matter, which is denoted by the letter R
  • Application material Providing context, explanations and matters to consider in complying with the requirements, which are denoted by the letter A

Section 100 deals with complying with the code

The very first requirement under this section states that a professional accountant shall comply with the code. The next requirement addresses a breach of International Independence Standards. Where a professional accountant identifies a breach of any other provision of the code, he/she shall evaluate the significance thereof and his/her ability to comply with the fundamental principles. The professional accountant shall also take whatever actions may be available and at the earliest possible opportunity to address those consequences of the breach satisfactorily and determine whether there is a need to report the breach to any relevant parties, including those who may be affected by the breach, such as a professional or regulatory body, or an oversight authority.

Section 110 deals with fundamental principles

The five fundamental principles of integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour are now requirements which the professional accountant shall comply with.

These fundamental principles of ethics establish the standard of behaviour expected of a professional accountant.

Integrity

‘Integrity’ is to be straightforward and honest in all professional and business relationships.

A professional accountant shall not knowingly be associated with reports, returns, communications or other information where he/she believes that the information contains a materially false or misleading statement, contains statements or information provided recklessly, or omits or obscures required information to mislead.

When a professional accountant becomes aware of having been associated with this type of information, he/she shall take steps to be disassociated from that information.

Objectivity

‘Objectivity’ is not to compromise professional or business judgements because of bias, conflict of interest, or undue influence of others. A professional accountant shall not undertake a professional activity if a circumstance or relationship unduly influences his/her professional judgement regarding that activity.

Professional competence and due care

‘Professional competence and due care’ is to attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organisation receives competent professional service based on current technical and professional standards and relevant legislation and to act diligently and in accordance with applicable technical and professional standards.

A professional accountant shall take reasonable steps to ensure that those working in a professional capacity under his/her authority have appropriate training and supervision.

A professional accountant shall make clients, where appropriate, the employing organisation, or other users of his/her professional services or activities, aware of the limitations inherent in the services or activities.

Confidentiality

‘Confidentiality’ is to respect the confidentiality of information acquired as a result of professional and business relationships.

An accountant shall:

  • Be vigilant to the possibility of inadvertent disclosure, including in a social environment, and particularly to a close business associate or an immediate or a close family member
  • Maintain confidentiality of information within the firm or employing organisation
  • Maintain confidentiality of information disclosed by a prospective client or employing organisation
  • Not disclose confidential information acquired as a result of professional and business relationships outside the firm or employing organisation without proper and specific authority, unless there is a legal or professional duty or right to disclose
  • Not use confidential information acquired as a result of professional and business relationships for his/her personal advantage or for the advantage of a third party
  • Not use or disclose any confidential information, either acquired or received as a result of a professional or business relationship after that relationship has ended
  • Take reasonable steps to ensure that personnel under his/her control, and individuals from whom advice and assistance are obtained, respect his/her duty of confidentiality

A professional accountant shall continue to comply with the principle of confidentiality even after the end of the relationship between himself/herself and a client or employing organisation. The professional accountant’s prior experience may be used when changing employment or acquiring a new client, but he/she shall not use or disclose any confidential information acquired or received as a result of a professional or business relationship.

Professional behaviour

‘Professional behaviour’ is to comply with relevant laws and regulations and avoid any conduct that the professional accountant knows or should know might discredit the profession.

A professional accountant shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession.

When undertaking marketing or promotional activities, a professional accountant shall not bring the profession into disrepute. A professional accountant shall be honest and truthful and shall not make exaggerated claims for his/her services offered or his/her qualifications or experience, or make disparaging references or unsubstantiated comparisons to the work of others.

Section 120 deals with the conceptual framework

The conceptual framework establishes the approach which a professional accountant is required to apply to assist in complying with the fundamental principles.

The approach specified is for the professional accountant to identify threats to compliance with the fundamental principles, evaluate the threats identified, and address the threats by eliminating or reducing them to an acceptable level.

The professional accountant shall exercise professional judgement, remain vigilant for new information and to changes in facts and circumstances, and use the reasonable and informed third party test.

Professional judgement involves the application of relevant training, professional knowledge, skill and experience corresponding with the facts and circumstances, including the nature and scope of the particular professional activities, and the interests and relationships involved.

The reasonable and informed third party test is a consideration by the professional accountant about whether the same conclusions would likely be reached by another party. Such a consideration is made from the perspective of a reasonable and informed third party, who weighs all the relevant facts and circumstances that the accountant knows, or could reasonably be expected to know, at the time the conclusions are made. The reasonable and informed third party does not need to be a professional accountant but should possess the relevant knowledge and experience to understand and evaluate the appropriateness of the professional accountant’s conclusions in an impartial manner.

Identifying threats to compliance with the fundamental principles is a requirement for the professional accountant under the code.

Threats fall into one or more of the following categories, and a circumstance might create more than one threat and may affect compliance with more than one fundamental principle:

  • Self-interest threat The threat that a financial or other interest will inappropriately influence a professional accountant’s judgement or behaviour
  • Self-review threat The threat that a professional accountant will not appropriately evaluate the results of a previous judgement made; or an activity performed by himself/herself, or by another individual within his/her firm or employing organisation on which he/she will rely when forming a judgement as part of performing a current activity
  • Advocacy threat The threat that a professional accountant will promote a client’s or employing organisation’s position to the point that his/her objectivity is compromised
  • Familiarity threat The threat that due to a long or close relationship with a client, or employing organisation, a professional accountant will be too sympathetic to their interests or too accepting of their work, and
  • Intimidation threat The threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over himself/herself

Once a threat has been identified, it must be evaluated to see whether it is at an acceptable level. An acceptable level is a level at which a professional accountant, with the use of the reasonable and informed third party test, would likely conclude that he/she complies with the fundamental principles.

Both qualitative and quantitative factors are relevant in the evaluation of the threats identified. If the professional accountant becomes aware of new information or changes in facts and circumstances that might impact whether a threat has been eliminated or reduced to an acceptable level, he/she shall re-evaluate and address that threat accordingly.

If the threats are determined not to be at an acceptable level, the professional accountant shall address these threats by eliminating or reducing them to an acceptable level.

The professional accountant shall eliminate or reduce the threats by eliminating the circumstances, including interests or relationships, that are creating the threats; applying safeguards, where available and capable of being applied, to reduce the threats to an acceptable level; or declining or ending the specific professional activity.

The professional accountant shall form an overall conclusion about whether the actions that he/she takes, or intends to take, to address the threats created, will eliminate those threats or reduce them to an acceptable level. In forming the overall conclusion, he/she shall review any significant judgements made or conclusions reached and use the reasonable and informed third party test.

International Independence Standards require professional accountants in public practice to be independent when performing audits, reviews and other assurance engagements. Independence is linked to the fundamental principles of integrity and objectivity. These standards also set out requirements and application material on how to maintain independence when performing audits, reviews and other assurance engagements.

Independence comprises both independence of mind (the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement, thereby allowing an individual to act with integrity, and exercise objectivity and professional scepticism) and independence in appearance (the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firm’s or an audit or assurance team member’s integrity, objectivity or professional scepticism has been compromised).

Professional accountants in public practice are required to exercise professional scepticism when planning and performing audits, reviews and other assurance engagements.

Professional scepticism and the fundamental principles are inter-related concepts, and in an audit of financial statements, compliance with the fundamental principles (individually and collectively) supports the exercise of professional scepticism. For example, the accountant complies with the principle of integrity by being straightforward and honest when raising concerns about a position taken by a client, and pursuing inquiries about inconsistent information, and seeking further audit evidence to address concerns about statements that might be materially false or misleading in order to make informed decisions about the appropriate course of action in the circumstances. In so doing, the professional accountant demonstrates the critical assessment of audit evidence that contributes to the exercise of professional scepticism.

In conclusion

A professional accountant:

  • Shall at all times comply with the code
  • Is required to comply with the five fundamental principles (integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour), and
  • Is required to apply the conceptual framework to assist in complying with the fundamental principles

Daniella Coetzee is a member of the SAICA Ethics Committee.

This article was originally published in ASA.