IFAC’s recently released Revised Code of Ethics applies to all professional accountants - whether you work in practice, in industry, in academe, or in government. It is effective from June 30, 2006. Accountancy Ireland asked ICAI member, Richard George, Chairman of the IFAC Ethics Committee to explain the background to the development of the revised code and to give our readers a brief overview of what it covers.

Many Irish Chartered Accountants are probably only vaguely aware of the existence of IFAC - the International Federation of Accountants - as a global body that sets professional standards for the accountancy profession and of which their Institute is a member. A much smaller number would have any detailed knowledge of what these professional standards cover or of how they impact on local requirements as promulgated by their own Institute. This article is about ethical matters and the activities of the IFAC Ethics Committee. Besides ethics, IFAC Boards and Committees develop international standards on auditing and assurance (ISAs), on education and on public sector accounting. Each of the member bodies of IFAC - there are 163 currently from all parts of the globe - undertakes to use their best endeavours, subject to national laws and regulations, to implement the standards issued by IFAC in each of these fields. So, ICAI - and indeed, the other UK and Irish based accounting bodies that have members in Ireland - have obligations to promulgate IFAC standards and to monitor their members' performance against them.

In the case of ethics, 2005 has been an important year for IFAC activities. After three years of drafting, consultation, exposure and revision the IFAC Ethics Committee finally released a new Code of Ethics at the end of June 2005.

The new Code applies to all professional accountants - those in practice, in industry, academe, government etc. - and it is effective from June 30, 2006, thus giving IFAC’s member bodies time to make any adaptations necessary for local laws and regulations, to translate where necessary and to obtain local approvals for release and promulgation.

FUNDAMENTAL PRINCIPLES
The fundamental principles are:

- Integrity - An accountant should be straightforward and honest in all professional and business relationships. For example, an accountant should not be associated with information which they believe contains a false or misleading statement.

- Objectivity An accountant should not allow bias, conflict of interest or undue influence of others to override professional or business judgements.

- Professional Competence and Due Care An accountant has to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service. This requires accountants to act diligently and in accordance with current technical, professional and legislative requirements when engaged in professional activities.

- Confidentiality An accountant should respect the confidentiality of information acquired as a result of professional and business relationship and should not disclose any such information without proper and specific authority unless there is a legal or professional right or duty to disclose.

- Professional Behaviour An accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession.

Where accountants consider that any proposed professional activity might compromise compliance with these fundamental principles they are required to put safeguards in place to mitigate the threat or, where they cannot do so, to desist from the proposed activity.

THREATS
The threats identified in the Code are:

- Self Interest Threat May occur as a result of a financial or other interest held by the accountant or a family member.

- Self Review Threat When a previous judgement needs to be re-evaluated - you cannot audit your own work.

- Advocacy Threat May occur when an accountant promotes a position or opinion to the point where subsequent objectivity may be compromised.

- Familiarity Threat May occur when, because of a close relationship, the accountant becomes too sympathetic to the interests of others.

- Intimidation Threat May occur when an accountant may be deterred from acting objectively by threats - actual or perceived.

The Code contains many examples of situations that may be faced by accountants and of possible safeguards that could mitigate the threats. In some cases, the code makes clear that no safeguard could adequately address the perceived or actual threat to the fundamental principles - for example, the threat to objectivity (or independence) if an auditor held shares in his audit client - and, in such cases, the only option is to walk away, to resign or to refuse the assignment. However, the Code clearly states that the examples are not all inclusive and that the obligation is on the accountant to identify and assess any threats that might arise in the particular circumstances faced - and then to address them appropriately in accordance with the framework approach set out in the Code.

CONCEPTUAL FRAMEWORK ADVANTAGES
The advantages of this conceptual framework approach are that:

- the principles based standards set out in the Code are robust and can be applied to the diverse and varying circumstances faced by professional accountants - it avoids technical evasion of detailed rules - it is appropriate for global application and - it continues to be applicable in a rapidly changing environment

In terms of format the Code is divided into three sections:
Part A applies to all professional accountants and it deals with the fundamental principles and explains the conceptual framework approach for applying those principles.

Part B is specific to professional accountants in public practice; and Part C applies to professional accountants in business. This modular format allows those member bodies of IFAC that represent only accountants in practice (e.g. some Nordic institutes) or only accountants in business (e.g. CIMA) to adopt those sections of the code that are specifically relevant to their sphere of activity. In terms of scale, the code runs to some 90 pages and the largest individual section is on independence for assurance engagements, a current hot topic for regulators and national standard setters worldwide. In fact, it was that section on independence, which was first written on a conceptual framework basis and published in November 2001, which encouraged the IFAC Ethics Committee to rewrite the whole Code in the same way, given the support it received from the international community.

IMPLEMENTING THE REVISED CODE
Now that the new Code has been released, the next step is for member bodies of IFAC to implement it. And, so far, support for the Code has been strong and the press coverage has been favourable. In our part of the world, the CCAB/CCAB-I bodies - ICAI, ICPAI, ICAEW, ICAS, ACCA, CIMA and CIPFA - have decided either to adopt the Code into their own or to rewrite their existing ethical guidance in IFAC Ethics Code format with additional local material added to cover Irish/UK legislative or regulatory requirements or to cover specifically local professional activities.

For the three Institutes of Chartered Accountants in these islands, for example, it will be necessary to add to the IFAC Code the current ethical requirements applying to insolvency practitioners, not specifically covered by IFAC because accountants do not carry out such work in many countries and, in any case, because the ethical / regulatory requirements are country specific.

Also, and importantly, the APB has authority in Ireland and the UK to issue Ethical Standards for auditors relating to independence, objectivity and integrity. It will, therefore, be necessary to incorporate the five Ethical Standards and Provisions Available to Small Entities (PASE) that the APB has recently issued (and that have already been promulgated here) into the new IFAC compliant Code currently being drafted by a task force from the three Institutes. This rewrite will be completed in good time to achieve the effective implementation date for the IFAC Code of June 2006. A principal objective of the three chartered institutes in carrying out this rewrite through a joint task force is to achieve a similar product that, as far as possible, will apply to all Chartered Accountants be they in any part of the UK or in Ireland. There are, of course, some legislation differences that may affect some details of the Code in the Republic of Ireland as compared with the various jurisdictions of the UK but, as far as possible, the Institutes are committed to having a Code that looks, and is, similar for all of us. And that is also an aspiration of the CCAB/CCAB-I bodies generally and, indeed, of the wider international accountancy community too.

THE PUBLIC INTEREST AND GLOBALISATION The public interest increasingly demands, as globalisation of business accelerates, that accountants worldwide should adhere to the same high ethical standards and be judged, when issues arise, against the same ethical principles. In such an environment, it is extremely hard to justify to an increasingly informed public a myriad of different ethical codes applying to accountants who are carrying out similar functions.

But there is the rub for an international standard setter like IFAC. Whereas, up to now, standards were written largely by and for member bodies - with the public interest in mind, certainly, and with an eye to achieving international convergence over time - there is now the reality that control of ethical and other standards for accountants has moved away from the profession in many countries and into the realm of independent regulatory bodies. This has been the price paid for a perception, in some quarters, of the failure by the accounting profession to prevent, detect or adequately deal with the business scandals of the past ten years. This move, across many countries, to independent regulation of the profession by non accountants may be seen as unfair by some but it is a reality - and the pendulum is unlikely to swing back towards self regulation in the near future.

Regulation of the accounting profession by Government appointed bodies has resulted in a plethora of widely differing national requirements for those accountants who operate in regulated activities - principally auditors. As these requirements have arisen because of local political pressures and as the legislators have a mandate to introduce laws and regulations, there is little that IFAC can do to prevent differing requirements except preach the benefits of international convergence in a global economy.

Increasingly, however, the focus of the IFAC Ethics Committee is on the major national standard setters and, happily, their focus is also on us - as they see the problems of extra territoriality in attempting to impose their own national requirements on businesses that are global in their operations.

The IFAC Ethics Committee, together with its activities and its due process, has recently been restructured to reflect the new world we now live in and the perceived requirements for an international standard setter. While we have always had a broad spectrum of members, each supported by a technical advisor, from across the globe, we now have two public (i.e. non accountant) members - a German judge and a French banker - whose job it is to ensure that we truly reflect the public interest in our deliberations. We now hold all our meetings in public. Our agenda for each meeting and all of the papers emanating from the task forces to be presented to each meeting are published on the IFAC web site, together with minutes of meetings and summaries of decisions reached. Our due process for selecting projects, releasing exposure drafts and dealing with comments received is lengthy and is public.

At the end of 2004 the IFAC Ethics Committee established a Consultative Advisory Group, consisting of national standard setters, representatives of investors and of other users of the output of accountants' work etc. The main role of this Group is to review the work program of the Ethics Committee and to assess the technical adequacy of its pronouncements. The work of the IFAC Ethics Committee - and, particularly, its due process - is overseen by the Public Interest Oversight Board, a body that provides oversight to each of IFAC's three standard setting Committees/Boards and which is charged with ensuring that all standard setting activities reflect the public interest and are fully transparent to those affected by the standards.

All of this is being done to build credibility and confidence in the standards that are issued. In a disparate world where, in some places and for some activities, the accounting profession sets its own ethical standards whereas, in others, regulators have been given this task, the role of the IFAC Ethics Committee has to be to write high quality standards, not just for member bodies of IFAC but 'into the ether' - in the hope that national standard setters in the major trading blocs will adopt them as their benchmark - thus facilitating the widely agreed objective of attaining a level playing field across the world.

For Irish Chartered Accountants this change of emphasis by IFAC should not pose a threat. We already have a body of high quality ethical pronouncements that comply with European Commission and IFAC requirements and most of the changes that emerge from the current redrafting (referred to earlier in this article) are likely to be stylistic rather than substantive. In the longer term, we are likely to end up with IFAC Plus - with the IFAC Code of Ethics as the centrepiece or foundation of our ethical standards but with a number of supplementary standards/guidance documents flowing from it, including extensive material developed for our members in business as well as country specific material arising from national regulatory requirements.