2020 Code of Ethics – Amended requirements in relation to loans and guarantees with clients
Ann Buttery reports on amended requirements in the new Code of Ethics in relation to loans and guarantees with clients
ICAS is adopting a new Revised and Restructured Code of Ethics with effect from 1 January 2020 which replaces the previous version (applicable from 1 November 2017).
The main changes in the Code include the following:
- The structure of the Code
- An enhanced conceptual framework
- Safeguards – a revised definition
- Inducements (including gifts and hospitality) – new intent test
- New and revised sections for Professional Accountants in Business (PAIBs) on pressure to breach the fundamental principles and preparation and presentation of information
- Documentation, including written confirmation of fee arrangements
- Objectivity – loans and guarantees with clients
This article focuses on the amended requirements for professional accountants in public practice in relation to loans and guarantees with clients. Separate articles discuss the other main changes to the Code.
Objectivity
“Objectivity” is described at subsection 112 of the 2020 Code as follows:
“SUBSECTION 112 – OBJECTIVITY
R112.1 A professional accountant shall comply with the principle of objectivity, which requires an accountant not to compromise professional or business judgment because of bias, conflict of interest or undue influence of others.
R112.2 A professional accountant shall not undertake a professional activity if a circumstance or relationship unduly influences the accountant’s professional judgment regarding that activity.”
The Revised and Restructured ICAS Code of Ethics includes an enhanced conceptual framework to help professional accountants to assess the level of any threat to complying with the fundamental ethics principles and then address any threats by eliminating or reducing them to an acceptable level.
Professional Accountant in Public Practice - Section 370 - Objectivity
Self-interest and familiarity threats to compliance with the fundamental principle of objectivity can result from a member or member firm having a family, or other personal, or business relationship with a client; making loans to or receiving loans from a client; or having beneficial interests in shares, or other investments, in a client.
In the previous version of the ICAS Code of Ethics, Section 280 “Objectivity – All Services” contained additional ICAS requirements in relation to any self-interest and familiarity threats resulting from a member or member firm having financial interests, or close personal or business relationships, with a client or its directors, officers or employees. Section 280 specifically prohibited the professional accountant from making loans to and receiving loans from clients (unless the client is a bank or similar institution and the transaction is under normal commercial conditions) and required the professional accountant to cease to act for a client when an investment in the client became material.
There is no equivalent to Section 280 in the new Revised and Restructured IESBA Code, however ICAS has decided to retain the provisions within previous Section 280 in its 2020 Code as it believes the requirements and application material contained within this section are helpful to members. ICAS has however made an amendment to the requirements in new Section 370 in relation to loans and guarantees with clients to bring the wording more in line with the requirements in relation to loans and guarantees with clients in the International Independence Standards (Parts 4A and 4B) of the 2020 Code.
ICAS does not believe that this change in wording is a significant change in practice. In any scenario involving a loan or guarantee to or from a client the threat to compliance with the fundamental principle of objectivity must be carefully considered prior to the loan or guarantee being made or accepted.
New Section 370 now states:
“b) Loans
Objectivity might be subject to a self-interest threat if a firm, any principal of the firm, or any of that individual’s immediate family, directly or indirectly, makes a loan to or accepts a loan from a client. Likewise, objectivity might be subject to a self-interest threat if a firm, any principal of the firm, or any of that individual’s immediate family, directly or indirectly, guarantees a loan to a client or has a borrowing guaranteed by a client.
In any such scenario the threat shall be carefully considered prior to the loan or guarantee being made or accepted.
Loans and Guarantees with a Client that is a Bank or Similar Institution
A firm, or principal in the firm, or any of that individual’s immediate family, shall not accept a loan, or a guarantee of a loan, from a client that is a bank or a similar institution unless the loan or guarantee is made under normal lending procedures, terms and conditions.
Loans and Guarantees with a client that is not a Bank or Similar Institution
A firm, or principal in the firm, or any of that individual’s immediate family, shall not make or guarantee a loan to a client unless:
(a) the loan or guarantee is immaterial to the firm, or the individual making the loan or guarantee, as applicable, and the client; and
(b) appropriate safeguards have been applied to reduce the threat to objectivity to an acceptable level.
A firm, or principal in the firm, or any of that individual’s immediate family, shall not accept a loan from, or have a borrowing guaranteed by, a client that is not a bank or similar institution, unless:
(a) the loan or guarantee is immaterial to the firm, or the individual receiving the loan or guarantee, as applicable, and the client; and
(b) appropriate safeguards have been applied to reduce the threat to objectivity to an acceptable level.”