What safeguards might be established to ensure the threats have been eliminated or reduced to acceptable levels?

The first article of our series on fundamental principles, threats and safeguards.

Study tips: fundamental principles, threats and safeguards series

• Part 1 – fundamental principles, threats and safeguards
• Part 2 – fundamental principles, threats and safeguards

AAT’s Ethical Code of Practice is based on a conceptual framework, which is an integrity based approach rather than a compliance based one. 

This means that it expects its members to want to do the right thing rather than just follow rules. As such, it holds members responsible for:

• Understanding its fundamental principles
• Identifying and evaluating threats to them
• Putting suitable safeguards in place to address the threats, thereby upholding the principles

In this two part series we’re going to look at these three areas, break down the definitions and identify some of the key terms to help us work out which principle or threat is in question. We’ll also analyse examples to identify what’s happening and what an accountant should do about it.

Firstly, we have to know what the fundamental principles are. The acronym below might help:

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1. Professional behaviour
2. Professional competence and due care
3. Confidentiality
4. Integrity
5. Objectivity

Next, we need to understand what each one means, and it is vital to accept that this is not common sense or even an everyday definition necessarily. The only definitions that count, in this context, are those described in the ethical code:

Integrity – you must be straightforward and honest in all professional and business relationships.

Objectivity – you must not compromise professional or business judgement because of bias, conflict of interest or the undue influence of others.

Professional competence and due care – you must maintain professional knowledge and skill (in practice, legislation and techniques) and act diligently, in other words with care, to ensure that a client or employer receives competent professional service.

Confidentiality – you must not disclose confidential professional or business information or use it to your personal advantage or that of third parties, unless you have explicit permission to disclose it, or a legal or professional right or duty to disclose it.

Professional behaviour – you must comply with relevant laws and regulations, and avoid any action that may bring disrepute to the profession.

Which principle is it?

Identifying which principle is in question often comes down to paying close attention to the wording. It is easy to assume that any incorrect behaviour or action means that the accountant in question is not behaving professionally. However, the principle of professional behaviour does not always best describe a situation. Anything that relates to honesty, being truthful or fair is describing integrity, even though being associated with misleading information would also mean the accountant involved was acting unprofessionally. Equally, disclosing information about a past, present, or prospective client’s or employer’s affairs is unprofessional. However, the principle being most accurately described is confidentiality, as this type of information is unlikely to be public knowledge and therefore would be confidential. The key wording that identifies that professional behaviour is the principle in question, so ‘bring the profession into disrepute’.

Consider the following situation

Thomas has recently started work for a firm of accountants and is helping prepare a client’s final accounts. He was unsure about how to make some year-end adjustments so revised his college notes on capital expenditure, depreciation and disposals, and asked for help when he had questions. Thomas’s manager assigned a more experienced member of staff to support Thomas whilst he made the actual year-end adjustments, which included correctly applying IAS 2.

Which principle is being described? The clues are in each sentence. Firstly Thomas revised his knowledge. Secondly he was supervised whilst providing professional services and then he applied the right accounting standard. All together these actions evidence diligence and will ensure the client receives a competent, professional service, which is what the principle of professional competence and due care is all about.

This description not only alludes to the principle but also outlines some safeguards. Thomas’s competence is safeguarded on an on-going basis by his education and training, and specifically in this case, by an experienced colleague’s supervision.

In a conceptual framework, members have to use their professional judgement to determine and apply appropriate safeguards when they identify threats to the fundamental principles. The safeguards must eliminate the threats or reduce them to acceptable levels. Before we can look too closely at safeguards though, we need to know what the threats are. Just like the principles, knowing them in everyday terms is not enough, as the definitions given in the ethical code are the only ones that are relevant.

1. Self-interest threats, which may occur where a financial or other interest will inappropriately influence the member’s judgement or behaviour
2. Self-review threats, which may occur when a previous judgement needs to be re-evaluated by the member responsible for that judgement
3. Advocacy threats, which may occur when a member promotes a position or opinion to the point that subsequent objectivity may be compromised
4. Familiarity threats, which may occur when, because of a close or personal relationship a member becomes too sympathetic to the interests of others
5. Intimidation threats, which may occur when a member may be deterred from acting objectively by threats, whether actual or perceived

Which threat is it?

Let’s return to Thomas’s situation and think about the implications if we discover that the client, whose final accounts he is preparing, is his uncle. This now raises a familiarity threat due to the personal relationship and the possibility that Thomas’s actions might be affected if he were to discover an error. His manager may have determined that the threat is reduced to an acceptable level by appointing a more experienced member of staff to support him. However, it might be that assigning Thomas the accounts of a different client would be a better safeguard as it would eliminate the threat entirely.

In part two, we’ll look at more examples and focus on confidentiality, intimidation and advocacy.

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Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.