Professional Ethics and Independence

Professional Ethics and Independence

Syllabus tag: KASNEB CPA | Advanced Level | CA36 Advanced Auditing and Assurance

1. The IESBA Code of Ethics

The International Ethics Standards Board for Accountants (IESBA) Code governs professional accountants worldwide. The five fundamental principles are:

• Integrity — be straightforward and honest in professional relationships
• Objectivity — do not allow bias, conflicts of interest or undue influence to override professional judgements
• Professional competence and due care — maintain knowledge and skill at the level required; act diligently
• Confidentiality — do not disclose information unless authorised or legally/professionally required
• Professional behaviour — comply with relevant laws and regulations; avoid actions that discredit the profession

2. The threats to independence

Independence is the cornerstone of the audit function — without it, the audit opinion has no credibility. Threats include self-interest (financial stake in client), self-review (auditing own prior work), advocacy (promoting client position), familiarity (long relationship leading to uncritical acceptance), and intimidation (client threatening to remove auditor).

3. Safeguards

Firm-level: partner rotation, engagement quality control review, independence monitoring, ethics partner. Client-level: audit committee with independent non-executives, two-tier board structure, competent management separate from owners.

4. Non-audit services

The IESBA prohibits auditors of public interest entities (PIEs) from providing: bookkeeping, financial statement preparation, valuations with material effect on the financial statements, internal audit functions, tax services involving advocacy, and certain management functions — all create self-review threats.

5. Fees and gifts

Fee dependency: if fees from one client exceed 15% of a firm's total income (PIE), a self-interest threat arises requiring disclosure and independent review. Contingency fees for assurance engagements are prohibited. Gifts must be trivial and inconsequential — anything of material value must be refused.

6. Rotation requirements

For PIEs: engagement partner rotation at least every seven years with a two-year cooling-off period. Firm-level rotation (EU): 10 years, extendable to 20 with retendering every 10 years.

7. Money laundering obligations

Under Kenya's Proceeds of Crime and Anti-Money Laundering Act, auditors are designated non-financial businesses. Obligations: customer due diligence (CDD) on clients, suspicious transaction reporting to the Financial Reporting Centre (FRC), five-year record-keeping, and staff training. Tipping off a client that a report has been filed is a criminal offence.