Chapter 13:

The Code of Professional Ethics and the Accountancy Act of 2004

A professional accountant’s responsibility is not exclusively to satisfy the needs on an
individual client or employer (the primary responsibility of an accountant is to prepare is to
prepare a financial statements for a client but not only to that extent because the main purpose of
preparing the financial statements is for intended users to have a basis on whatever decision to
make for the entity) thus, in preparing the financial statements, the interest of the public must
always be of paramount concern.
Every failure by an accountant to comply with professional standards makes it difficult
for he profession to maintain the reputation for integrity, objectivity and competence that it has
acquired over its many years of service to the public (what one does, reflects to the others, so if
an accountant failed in rendering his service, the client may build up doubts about what
accountants can do, and that particular client may have a perspective that all accountants are the
same based on his negative experience).
In order to maintain public trust and confidence in the accounting profession, professional
accountants must adhere to standards of ethical conduct: standards of conduct that embody and
demonstrate integrity, objectivity and concern for the public (rather than self-) interest.
The Philippine Institute of Certified Public Accountants (PICPA) being a member of the
International federation of Accountants (IFAC) is obliged and committed to support the work of
IFAC. The Code of Ethics of Professional Accountants in the Philippines is based on the IFAC
Code of Ethics for Professional Accountants.
Three parts of the Code of Ethics for Professional Accountants in the Philippines:
o Establishes fundamental principles of professional ethics and provides a conceptual
framework that professional accountants shall apply (Part A)
o Describe how the conceptual framework applies in certain situations and provides
examples of appropriate safeguards that address threats to compliance with fundamental
principles (*Part B and **Part C)
*applies to professional accountants in public practice
**applies to professional accountants in business

Part A – General Applications

Number of prerequisites of fundamental principles that a professional account must be
observe:
Integrity
A professional accountant should be straightforward and honest in professional and
business relationships (it is one of the characteristics that an accountant must possess, integrity.
Having integrity can gain the client’s trust and can provide a better and effective financial
statements).
Objectivity
 The principle of objectivity imposes the obligation on all professional accountants to be
fair, intellectually honest and free of conflicts of interest. A professional accountant should be
fair and should not allow prejudice or bias, conflict of interest or influence of others to override
objectivity.
Professional Competence and Due Care
A professional accountant should not undertake any engagement or accept an
employment which he or she cannot reasonably expect to discharge with professional
competence (professional competence is the ability to do something well, so that, if the
accountant is not capable of doing this, he must not undertake any engagement or accept an
employment because if he fails, his act may reflect to the other accountants).
Two separate phases of professional competence:
o Attainment of professional competence through formal education, professional
examination and a period of experience
o Maintenance of professional competence by being aware of all the developments
affecting the profession and adopting a program to ensure quality in the performance of
professional services
The professional accountant should apply knowledge, skills and experience with due
professional care (due care encompasses the responsibility to perform professional services in
accordance with technical and professional standards, carefully, thoroughly and on a timely
basis).
Confidentiality
A professional accountant should respect the confidentiality of information acquired
during the course of performing professional services and should not use or disclose any such
information without proper and specific authority or unless there is a legal or professional right
or duty to disclose.
Confidential information may be disclosed under the following circumstances:
1. Disclosure is permitted by the client or employer
2. Disclosure is required by law such as compliance with subpoena issued by a court in the
course of legal proceedings
3. There is a professional duty or right to disclose confidential information
Professional Behavior
A professional accountant should comply with relevant laws and regulations and refrain
from any conduct which might bring discredit to the profession (a professional accountant who’s
rendering services must possessed with professional behavior as included in the Code of Ethics
for Professional Accountants).

Conceptual Framework Approach

 The code establishes a conceptual framework approach (aimed at assisting the
professional accountant in complying with ethical requirements and meeting their responsibility
to act in the public interest) that requires a professional accountant to
1. Identify threats to compliance with fundamental principles;
2. Evaluate the significance of threats identified; and
3. Apply safeguards, when necessary, to eliminate the threats or reduce them to an
acceptable level.
Threats to compliance with the fundamental principles
Categories where such threats may fall:
1. Self – Interest Threat (threat that a financial or other interest will inappropriately
influence the professional accountant’s judgement of behaviour)
2. Self – Review Threats (threat that a professional accountant will not objectively evaluate
the results of the previous judgement made or service performed in forming a conclusion
about the subject matter of the engagement)
3. Advocacy Threat (threat that a professional accountant will promote a client’s or
employer’s position to the point that the professional accountant’s objectivity is
compromised0
4. Familiarity Threat (this occurs when then the auditor is too sympathetic or trusting of the
client because of a close relationship with them)
5. Intimidation Threat (threat that a professional accountant will be deterred from acting
objectively because of actual or perceived pressures, including attempts to exercise undue
influence over the professional accountant)

Safeguards
Once a significant threat has been identified and evaluated, appropriate safeguards should
be considered and applied as necessary.
Safeguards are actions or other measures that may eliminate threats or reduce them to an
acceptable level. Consideration should always be given to what a reasonable and informed third
party having knowledge of all relevant information including safeguards applies, would
reasonably conclude to be unacceptable. The consideration will be affected by matters such as
the significance of the threat, the nature of the engagement and the structure of the firm.
Safeguards fall into two broad categories:
1. Safeguards created by the profession, legislation or regulation; and
2. Safeguards in the work environment (consist of firm-wide safeguards and engagement
specific safeguards)
Engagement specific safeguards may include:
o involving an additional professional accountant to review the work done or otherwise
advise as necessary
o consulting an independent third party, such as a committee of independent directors, a
professional regulatory body or another professional accountant
 o discussing ethical issues with those charged with governance of the client
o disclosing to those charged with governance of the client the nature of services provided
and extent of fees charged
o involving another firm to perform or re-perform part of the engagement
o rotating senior assurance team personnel
In addition to the above safeguards, professional accountant in public practice may also
be able to rely on safeguards that the client has implemented. Safeguards within the client's
systems and procedures may include:
o when a client appoints a firm in public practice to perform an engagement, persons other
than management ratify or approve the appointment
o the client has competent employees with experience and seniority to make managerial
decisions
o the client has implemented internal procedures that ensure objective choices in
commissioning non-assurance engagements
o the client has a corporate governance structure that provides appropriate oversight and
communication regarding the firm's services
Although these safeguards could also reduce the threat to compliance with fundamental
principles, it is not possible for professional accountant to rely solely on these safeguards to
reduce threats to an acceptable level.
In certain situations, no safeguards are available to eliminate or reduce the threat to an
acceptable level. The only possible actions would be to eliminate the activities or interest
creating the threat, or to refuse to accept or continue the engagement.
The firm and the members of the assurance team should select appropriate safeguards to
eliminate or reduce threats, other than those that are clearly insignificant, to an acceptable level.

Part B - Professional Accountants in Public Practice

Professional Appointment
Client Acceptance
A professional accountant in public practice should consider whether acceptance would
create any threats to compliance with the fundamental principles (there are threats that may arise
if the client is involved in illegal activities or if the client's owners or management lack
integrity).
Appropriate safeguards may include obtaining knowledge and understanding of the
client, its owners, managers and those responsible for its governance and business activities or
securing the client's commitment to improve corporate governance practices or internal controls.
Engagements Acceptance
 A professional accountant in public practice should agree to provide only those services
that he is competent to perform.
Changes in a Professional Appointment
A professional accountant in public practice who is asked to replace another professional
accountant in public practice, or who is considering tendering for an engagement currently held
by another professional accountant in public practice, should determine whether there are any
reasons, professional or other for not accepting the engagement, such as circumstances that
threaten compliance with the fundamental principles.
If the proposed accountant is unable to communicate with the existing accountant, the
proposed accountant should try to obtain information about any possible threats by other means
such as through inquiries of third parties or background investigations on senior management or
those charged with governance of the client (the proposed accountant must first ask the client's
permission if he can communicate with the existing accountant, preferably in writing).

Conflicts of Interest
A threat to objectivity or confidentiality may be created when a professional
accountant in public practice performs services for clients whose interests are in conflict or the
clients are in dispute with each other in relation to the matter or transaction in question.

Second Opinions
A professional accountant in public practice who is asked to provide a second opinion on
the application of accounting, auditing, reporting or other standards or principles to specific
circumstances or transactions by or on behalf of a company or an entity that is not an existing
client may give rise to threats to compliance with the fundamental principles.

Fees and Other Types of Remunerations

Professional Fees
Professional fees should be a fair reflection of the value of the professional services
performed for the client, taking into account:
a. The skill and knowledge required for type of professional services involved;
b. The level of training and experience of the persons necessarily engaged in performing the
professional services;
c. The time necessarily occupied by each person engaged in performing the professional
services; and
d. The degree of responsibility that performing those services entails.
Contingent Fees
 Contingent fees may give rise to a self-interest threat to objectivity. The significance of
such threats will depend on factors including:
o the nature of the engagement
o the range of possible fee amounts
o the basis for determining the fee
o whether the outcome or result of the transaction is to be reviewed by an independent third
party
Referral Fee or Commission
A professional accountant in public practice may receive referral fee or commission
relating to a client.
A professional accountant in public practice may receive a commission from a third party
(e.g., a software vendor)in connection with the sale of goods or services to a client. Accepting
such referral fee or commission may give rise to self-interest threats to objectivity and
professional competence and due care.
A professional accountant in public practice may also pay a referral fee to obtain a client,
for example, where the client continues as a client of another professional accountant in public
practice but requires specialist services not offered by the existing accountant. The payment of
such referral fee may create a self-interest threat to objectivity and professional competence
and due care.
A professional accountant in public practice should not pay or receive a referral fee or
commission, unless the professional accountant in public practice has established safeguards to
eliminate the threats or reduce them to an acceptable level.
A professional accountant in public practice may purchase all or part of another firm
on the basis that payments will be made to individual formerly owning the firm or their heirs or
estates. Such payments are not regarded as commission or referral fees for the purpose of this
rule.

Marketing Professional Services

When a professional accountant in public practice solicits new work through advertising
or other forms of marketing, a self-interest threat to professional behavior is created if
services achievements or products are marketed in a way that is inconsistent with that principle.
A professional accountant in public practice should not bring the reputation in disrepute
when marketing professional services. The professional accountant in public practice should be
honest and trustful and should not:
o make exaggerated claims for services offers, qualifications possessed or experience
gained; or
o make disparaging references to unsubstantiated comparisons to the work on another
Generally, any form of advertisement is allowed.
Gifts and Hospitality
A professional accountant in public practice, or an immediate or close family member,
may be offered gifts and undue hospitality from a client. Such an offer ordinarily gives rise to
threats to compliance with the fundamental principles.
Appropriate safeguards should be considered and applied as necessary to eliminate them
or reduce them to an acceptable level. When the threats cannot be eliminated or reduced to an
acceptable level through the application of safeguards, a professional accountant in public
practice should not accept such an offer.

Custody of Client Assets

A professional accountant in public practice should not assume custody of client monies
or other assets unless permitted to do so by law and, if so, in compliance with any additional
legal duties imposed on a professional accountant in public practice holding such asstes.
The holding of client assets creates self-interest threat to professional behaviour and may
be a self-interest threat to objectivity.

Objectivity – All Services

A professional accountant in public practice who produces an assurance service is
required to be independent of the assurance client. 280.3 The existence of threats to objectivity
when providing any professional service will depend upon the particular circumstances of the
engagement and the nature of the work that the professional accountant in public practice is
performing.
A professional accountant in public practice should evaluate the significance of identified
threats and, if they are other than clearly insignificant, safeguards should be considered and
applied as necessary to eliminate them or reduce them to an acceptable level.

Independence
- taking an unbiased viewpoint in the performance of the examination and in the preparation of
the report
- an essential element of the CPA profession
Section 290 of the Code of Ethics provides a framework for identifying, evaluating and
responding to threats to independence. It outlines the threats to independence including the
appropriate safeguards capable eliminating the threats or reducing them to an acceptable level.
Two phases of independence:
Independence of mind - the auditor's perception of his own independence
- a state of mind that permits the expression of a conclusion without being affected by influences
that compromise professional judgment, allowing an individual to act with integrity, and exercise
objectivity and professional skepticism
Independence in appearance - the public's perception of the professional accountant's
independence
- the avoidance of facts and circumstances that are so significant that a reasonable and informed
third person would reasonably conclude that the firm's integrity, objectivity and professional
skepticism had been compromise
Professional accountants are not only required to have an independence in mental attitude
but also avoid circumstances which would cause the public doubt their independence.
Engagement Period
The period of the engagement starts when the assurance team begins to perform
assurance services and ends when the assurance report is issued, except when the assurance
engagement is of a recurring (if the assurance engagement is expected to recur, the period of the
assurance engagement ends with the notification by either party that the professional relationship
has terminated or the issuance of the final assurance report, whichever comes later) nature.

Independence Requirement
Independence is required only whenever the auditor provides assurance services.
Classifications of assurance engagements for the purpose of applying the principle of
independence:
Financial statement audit engagements - the members of the assurance team, the firm and
network firms are required to be independent of the audit client
Non-audit assurance engagements (the distribution of the report is not restricted) - the
members of the assurance team and the firm must be independent of the assurance client
Non-audit assurance engagements (the distribution of the report is restricted to specified
users) - the members of the assurance team must be independent of the assurance client; the firm
should not have any material financial interest in an assurance client

Independence Interpretation and Rulings

The following independence interpretations and rulings, however, may serve as
guidelines to professional accountants:
Financial Interest
When evaluating the type of financial interest, consideration should be given to the fact
that financial interests range from those where the individual has no control over the investment
vehicle financial interest held to those where individual has control over financial interest or is
able to influence investment decisions. When control exists, the financial interest should be
considered direct (impairs the CPA's independence, whether material or immaterial).
Conversely, when the individual has no control over the financial interest, the financial interest
should be considered indirect (impairs the CPA's independence only if the interest is material).

Loans and Guarantees

A loan from, or a guarantee thereof by, an insurance client that is a financial institution
will not impair the CPA's independence provided the loan is:
o immaterial to both the firm and assurance client; or
o made under normal lending procedures, terms and requirements of financial institution
A loan to or from an assurance client that is not a financial institution or a guarantee of
assurance client's borrowing will normally impair the CPA's independence unless the amount of
the loan or guarantee is immaterial to the firm and assurance client.

Close Business Relationships

A close business relationship between a firm or a member of the assurance team and the
assurance client or its management, or between the firm, a network firm and a financial
statement audit client, will involve a commercial or common financial interest and may creates
self-interest and intimidation threats.
Close business relationships can be considered as an indirect financial interest.
Family and Personal Relationships
In evaluating the significance of threats created by family and personal relationships, the
CPA should consider the closeness of the relationship and the role of the family member within
the assurance client.
Independence is impaired, when a member of an assurance team has an immediate
family member who is a director, an officer or an employee of an assurance client in a position
to influence the subject matter of the assurance engagement.
Past employment with an assurance client
Independence is impaired if, during the period covered by the insurance report, a member
of the assurance team had served as a director, an officer or an employee of the assurance client
in a position to influence the subject matter of the assurance engagement.
Serving as an officer or director on the Board of Assurance Clients
Serving as an honorary member on the board of an assurance client, will not impair the
CPA's independence provided that the CPA does not participate in the management or operations
of the assurance client.
Long association with assurance clients (creates familiarity threat)
When auditing financial statements of listed entities, it is required that lead engagement
partners be rotated at least once every five years.
 Provision of accounting and bookkeeping services to assurance clients
A firm or network firm should not provide accounting and bookkeeping services for an
audit client that is a public interest entity. The provision of such services may impair the CPA's
independence, or at least give the appearance of impairing independence.
Provision of taxation services to assurance clients
Provision of taxation services such as tax compliance, planning, provision of taxation
opinions and assistance in the resolution of tax disputes will not impair the CPA’s independence.
Actual or threatened litigation
Litigation involving the firm or a member of the assurance team and the assurance client may
create self-interest and intimidation threats. The relationship between the CPA and the client
must be characterized by honesty, truthfulness and full disclosure.

1. The essence of the due care principle is that the auditor should not be guilty of?
- Negligence
2. The principle of confidentiality applies to?
- All professional accountants
3. A fundamental principle that is seriously threatened by an engagement that is compensated
based on the net proceeds on loans received by the client from commercial banks.
- Objectivity
4. Independence in auditing means?
- Taking an unbiased viewpoint
5. Ultimately, the decision as to whether the CPA is independent or not, will be made by the.
- Auditor
6. Independence is required whenever a professional accountant performs?
- Assurance services
7. When CPAs are able to maintain their actual independence, it is referred to as independence
in:
- Fact
8. This occurs when, because of a close relationship, a professional accountant becomes too
sympathetic to the interests of others.
- Familiarity threat
9. An engagement partner who is rotated in the audit of financial statements of listed entity can
only participate on the audit engagement for the same client after a period of?
- Two years