Change in 2020 Code of Ethics – Inducements (including gifts and hospitality)
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 new requirements and guidance on Inducements within the 2020 Code. Separate articles discuss the other main changes to the Code.
Inducements (including gifts and hospitality)
For both Professional Accountants in Business (PAIBs) (Section 250) and Professional Accountants in Public Practice (PAPPs) (Section 340) there are new provisions pertaining to the offering or accepting of inducements, which includes gifts and hospitality.
The sections clarify the meaning of an “inducement” in the context of the Code and introduce a new “intent test” with the provisions now prohibiting any inducements where there is “intent” to improperly influence behaviour.
Definition of inducement
The term “inducement” is considered by IESBA to be neutral and therefore does not necessarily refer to circumstances where there is intent to improperly influence another individual’s behaviour.
“250.4 A1 An inducement is an object, situation, or action that is used as a means to influence another individual’s behaviour, but not necessarily with the intent to improperly influence that individual’s behaviour. Inducements can range from minor acts of hospitality between business colleagues to acts that result in non-compliance with laws and regulations. An inducement can take many different forms, for example:
- Gifts.
- Hospitality.
- Entertainment.
- Political or charitable donations.
- Appeals to friendship and loyalty.
- Employment or other commercial opportunities.
- Preferential treatment, rights or privileges.”
Requirement to comply with laws and regulations
There is a requirement for all professional accountants to comply with any laws and regulations that prohibit the offering or accepting of inducements in certain circumstances, such as in relation to bribery and corruption. For example, in the UK there is the Bribery Act 2010. Additionally, regard would also need to be had to other external legislation that may be applicable e.g. the US Foreign Corrupt Practices Act.
Where a PAIB or PAPP becomes aware of inducements which may result in non-compliance with laws and regulations they should refer to the “Responding to non-compliance with laws and regulations” sections of the Code (Sections 260 and 360 respectively).
New intent test
There is also a new “intent test” to determine if inducements are made with the intent to improperly influence behaviour.
Inducements with intent to improperly influence behaviour
Some inducements may not be prohibited by laws and regulations but may still create a threat to compliance with the fundamental principles. The new provisions in the Code prohibit any inducements, given or received, where there is, or perceived to be, “intent” to improperly influence behaviour:
- R250.7 A PA shall not offer, or encourage others to offer, any inducement that is made, or which the accountant considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another individual.
- R250.8 A PA shall not accept, or encourage others to accept, any inducement that the accountant concludes is made, or considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another individual.
The key is whether it is considered that the inducement improperly influences behaviour. The IESBA notes academic research that indicates that even a gift having little intrinsic value might still affect the recipient’s behaviour, therefore even inducements which are “trivial and inconsequential” are not permitted if there is improper intent. In summary, if any inducement could improperly influence behaviour then it is not permitted by the Code.
The application material in the Code discusses consideration of the nature, frequency, value, cumulative effect and timing of the inducement. For example, if a gift arrives just before a contract is completed that could be influential, and therefore inappropriate. Similarly, an inducement being offered in advance – but not being given until after the decision has been taken - can also be influential. The outcome of the influence or hospitality is an important consideration.
There is also the need to consider “creeping” influence. For example, if one member of a team receives a gift, that might be considered “trivial and inconsequential” and having no intent to improperly influence behaviour; however, if every member of the team receives a gift, that could potentially be influential, and therefore inappropriate. There is therefore a need to have a broader perspective, and not just to look at events in isolation.
Safeguards include informing more senior management or those charged with governance of the offer; or amending or terminating the relationship with the offeror.
Inducements with no intent to improperly influence behaviour
The Code also provides guidance where an inducement is offered or received where it is concluded that there is no intent, or no perceived intent, to improperly influence behaviour. In such circumstances the requirements and application material set out in the conceptual framework apply.
Safeguards regarding other inducements where there is no intent to improperly influence behaviour include declining or not accepting the inducement; informing senior management or those charged with governance regarding the inducement; registering the inducement in a log maintained by the employing organisation; having someone else, who is not otherwise involved in the engagement, review the work performed or decisions reached.
If such an inducement is trivial and inconsequential, any threats created will be at an acceptable level
Immediate or close family members
The Code also provides guidance when a professional accountant becomes aware of an immediate or close family member offering to, or receiving inducements from, a party with whom the professional accountant has a business relationship. Where the professional accountant believes that there is intent to improperly influence behaviour they need to advise the family member not to offer or accept the inducement.
The professional accountant only needs to act upon potential threats that have come to his or her attention and does not need to specifically enquire of immediate or close family members as to their personal business (which may in and of itself breach confidentiality).