Change in 2020 Code of Ethics – Enhanced Conceptual Framework
Ann Buttery reports on one of the main changes to the ICAS Code of Ethics, which takes effect from 1 January 2020.
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 are in the following areas:
- The structure of the Code.
- An enhanced conceptual framework.
- Safeguards – a revised definition.
- Inducements (including gifts and hospitality) – inclusion of a 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 enhanced conceptual framework within the 2020 Code. Other separate articles discuss the other main changes to the Code noted above.
Emphasis of overarching requirement to adhere to fundamental principles and conceptual framework
The Code requires professional accountants to comply with the fundamental ethics principles and to apply the conceptual framework to help in meeting this requirement.
Whilst the Code is split into sections addressing specific circumstances, the International Ethics Standards Board for Accountants (IESBA) makes clear that there is the overarching requirement to adhere to the fundamental principles and to apply the conceptual framework by highlighting this in the Introduction to every section of the Code. This is to emphasise that the individual sections within the Code should not be read in isolation but should instead always be read in conjunction with the fundamental principles and the conceptual framework.
Clarified conceptual framework
The restructured Code sets out the conceptual framework in a more logical and helpful format. The conceptual framework states that the professional accountant should:
(a) Identify threats to compliance with the fundamental principles;
(b) Evaluate the threats identified; and
(c) Address the threats by eliminating or reducing them to an acceptable level.
It also requires the professional accountant to:
(a) exercise professional judgement;
(b) remain alert for new information or changes to the facts or circumstances and re-evaluate if necessary; and
(c) apply the “reasonable and informed third party test” when applying the conceptual framework.
Clarification of “acceptable level”
The restructured Code provides a new definition of “acceptable level”:
“120.7 A1 An acceptable level is a level at which a professional accountant using the reasonable and informed third party test would likely conclude that the accountant complies with the fundamental principles.”
The previous Code described “acceptable level” as follows:
“A level at which a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances available to the professional accountant at that time, that compliance with the fundamental principles is not compromised.”
The new definition therefore provides a clearer, affirmative, approach – i.e. “conclude that the accountant complies with the fundamental principles” rather than “conclude… that compliance with the fundamental principles is not compromised.”
Reasonable and informed third party
The previous Code did not provide any guidance on who is a “reasonable and informed third party.”
The restructured Code elaborates upon the “reasonable and informed third party” test:
“120.5A4 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 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 an accountant but would possess the relevant knowledge and experience to understand and evaluate the appropriateness of the accountant’s conclusions in an impartial manner.”
The new Code therefore clarifies that the “reasonable and informed third party” doesn’t have to be an accountant, but does have to be an objective, knowledgeable, experienced and informed third party – i.e. not an uninformed member of the public – who can impartially consider the appropriateness of the accountant’s conclusions.
Addressing threats - new requirement to “step back” before taking action
The Code requires that identified threats which are not acceptable must be addressed by either:
- Eliminating the circumstances, including interests or relationships, that created the threat; or
- 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
There is a new requirement for the professional accountant to “step back” before taking action to address threats; to review the judgements made and consider the third-party test; and form an overall conclusion as to whether the intended action will eliminate the threats or reduce them to an acceptable level.
Greater emphasis on the importance of understanding facts and circumstances when exercising professional judgement.
The conceptual framework has always required professional accountants to “exercise professional judgement”, and consideration of the facts and circumstances was also discussed in this context, however the Code did not provide guidance as to how exactly this would be achieved in practice by the professional accountant.
The restructured Code now contains new application material within the conceptual framework (paragraphs 120.5 A1, A2 and A3) which emphasises the importance of understanding facts and circumstances when exercising professional judgement and provides some practical guidance as to the steps the professional accountant might consider.
Greater emphasis on professional scepticism in audit and other assurance engagements
The previous Code mentioned the term professional scepticism in the context of describing independence, however it did not elaborate any further on the concept.
The restructured Code now contains new application material within its discussion on the conceptual framework and independence (paragraphs 120.13 A1 and A2) to expand upon how compliance with the fundamental principles supports the exercise of professional scepticism in an audit, review or other assurance engagement.
This new guidance provides specific examples as to how the fundamental ethics principles of integrity, objectivity and professional competence and due care support the exercise of professional scepticism.