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Chapter 6: Professional Ethics and Independence

Certificate Level

Chapter 6: Professional Ethics and Independence

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Chapter Contents

Purpose and Learning Goals6.1 Why Ethics Matter6.2 The ICAEW Code of Ethics6.3 Independence6.4 Threats to Independence and Ethics6.5 Safeguards6.6 Confidentiality and Data Protection6.7 Regulation and Oversight

Purpose and Learning Goals

Assurance engagements rely on public trust. That trust depends on the practitioner behaving ethically and remaining independent. This chapter introduces the ICAEW Code of Ethics, explains why independence matters, and explores the common threats and safeguards practitioners must be aware of.

By the end of this chapter, you will be able to:

  • • Explain why ethics are central to assurance and the accountancy profession.
  • • Describe the five fundamental principles of the ICAEW Code of Ethics.
  • • Understand the concept of independence in fact and appearance.
  • • Identify threats to independence and ethical conduct.
  • • Suggest safeguards to reduce threats to an acceptable level.
  • • Recognise how regulation supports ethics and professionalism.

6.1 Why Ethics Matter

Assurance is more than technical checking — it is about credibility. If practitioners are not trusted to act ethically, their conclusions lose value.

Ethics in context:

  • • Auditors give opinions relied on by investors, lenders, and the public.
  • • Unethical behaviour (e.g. covering up fraud) can cause major financial scandals.
  • • High-profile failures (e.g. Enron, Carillion, Wirecard) often involved breakdowns in ethics and independence.

6.2 The ICAEW Code of Ethics

The ICAEW Code (based on the IESBA Code) applies to all ICAEW members, students, and firms. It sets out five fundamental principles:

  1. 1. Integrity – be honest and straightforward in all dealings.
  2. 2. Objectivity – avoid bias, conflicts of interest, or undue influence.
  3. 3. Professional Competence and Due Care – maintain knowledge and skill, act diligently.
  4. 4. Confidentiality – respect information acquired and do not misuse it.
  5. 5. Professional Behaviour – comply with laws and regulations, avoid discrediting the profession.

Failure to follow these principles can lead to disciplinary action and loss of trust.

6.3 Independence

Independence means being free from relationships or influences that compromise — or appear to compromise — objectivity.

  • • Independence in fact – the auditor truly remains objective.
  • • Independence in appearance – others perceive the auditor as objective.

Example:

If an auditor owns shares in the company being audited, independence is compromised in fact. If the auditor's close relative works as finance director, independence in appearance is compromised.

6.4 Threats to Independence and Ethics

Common threats include:

  • • Self-interest – financial or other interests in the client (e.g. shareholding, loan).
  • • Self-review – reviewing work you or your firm previously prepared.
  • • Advocacy – promoting a client's position (e.g. representing them in disputes).
  • • Familiarity – becoming too close with management.
  • • Intimidation – being pressured or threatened by the client.

6.5 Safeguards

When threats exist, practitioners must apply safeguards to reduce them to an acceptable level.

Examples:

  • • Independent partner review.
  • • Rotating engagement partners.
  • • Declining non-assurance services to audit clients.
  • • Removing individuals with conflicts from the engagement.
  • • Disclosing threats transparently.

If no adequate safeguard exists → decline or resign from the engagement.

6.6 Confidentiality and Data Protection

Confidentiality extends to all client information. Practitioners must not disclose information without proper authority unless legally required (e.g. money laundering reporting).

With the rise of GDPR and data protection laws, auditors must also ensure that client data is handled securely, including electronic records and personal information.

6.7 Regulation and Oversight

Ethics are supported by regulatory frameworks:

  • • ICAEW monitors compliance through quality reviews and disciplinary processes.
  • • FRC (Financial Reporting Council) oversees auditors in the UK.
  • • Audit Regulation ensures that independence rules are enforced, particularly for public interest entities (PIEs).

Test Your Understanding – Quick Check

1. What are the five fundamental principles of the ICAEW Code of Ethics?

2. What is the difference between independence in fact and independence in appearance?

3. Give one example each of a self-interest threat and a familiarity threat.

4. What should an auditor do if no safeguard can reduce a threat to independence?