Accountant is required to comply with five fundamental principles specified by IFAC code of ethics. However, compliance with fundamental principles may potentially be threatened by broad range of Circumstances.
The following are categories of threats that may potentially affect compliance with fundamental principles.
Self interest threats.
This may occur as result of the financial or other interests of the accountant or of an immediate or close family members.
Example of self interest threat includes:
- Undue dependence on total fee from client.
- Having close business relationship with client.
- Accepting gifts or preferential treatment from client, unless the value is clearly insignificant
- Concern about the possibility of losing the client.
- potential employment with the client.
- Contingent fee relating to an assurance engagement
- A loan to or from an assurance client or any of its directors or officers.
Self review threats
This may occur when a previous judgement need to be re evaluated by the accountant responsible for the judgement.
Example of self review threats include:
- Having prepared the original data used to generate records that are the subject matter of the engagement
- Reporting on the operation of financial system after being involved in their design or implementation.
- A member of assurance them being, or having recently been, the director or officer of that client.
- Performing a service for the client that directly affects the subject matter of the assurance engagement.
- A member of assurance team being, or being recently been, employed by the client in the position to exert direct and significance influence over the subject matter of the engagement.
This may occur when accountant promotes the position or opinion to the point that subsequent objectivity may be compromised. Example of situation leading to advocacy threat include:
- promoting Shares in a listed entity when that entity is financial statement audit client.
- Acting as advocate on behalf of an assurance client in litigation or dispute with third party.
This may occur when, because of close relationship, accountant becomes too sympathetic to the interest of others. Situations which may lead to familiarity threats include
- Long association of Senior personnel with the assurance client
- A former partner of the firm being a director or officer of the client or an employee in the position to exert direct and Significant influence over the Subject matter of the engagement.
- A member of engagement team having close or immediate family relationship with a director or officer of the client.
- A member of the engagement team having close or immediate family relationship with an employee of the client who is in the position to exert direct and significant influence over the subject matter of the engagement.
This may occur when accountant maybe deterred from acting objectively by threats, actual or perceived. Example of situation which may lead to intimidation threats include.
- Being threatened by dismissal or replacement into the client engagement.
- Being threatened with litigation.
- Being pressured to reduce inappropriately the extent of the work performed in order to reduce fee.