CHAPTER 2

PROFESSIONAL CONDUCT
CONTENTS

Page

The SAICA and IRBA Codes of Professional Conduct 2/3

General guidance: Ethics and Professional Conduct 2/3

The Public Interest 2/4

THE SAICA CODE OF PROFESSIONAL CONDUCT 2/5

Structure of the Code 2/5

PART A – GENERAL APPLICATION OF THE CODE 2/5

Section 100 Introduction and fundamental principles 2/5

Section 111 Integrity 2/6
Section 112 Objectivity 2/6
Section 113 Professional competence and due care 2/6
Section 114 Confidentiality 2/7
Section 115 Professional behaviour 2/8

Threats 2/9

Evaluating threats 2/10

PART B – PROFESSIONAL ACCOUNTANTS IN BUSINESS 2/11

Section 200 Introduction 2/11

Section 210 Conflicts of interest 2/14
Section 220 Preparation and reporting of information 2/15
Section 230 Acting with sufficient expertise 2/17
Section 240 Financial interests , compensation and incentives linked to financial
reporting and decision making 2/17
Section 250 Inducements including gifts and hospitality 2/18
Section 260 Responding to non-compliance with laws and regulations 2/20
Section 270 Pressure to breach the fundamental principles 2/23

PART C – PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE 2/24

Section 300 Introduction 2/24

Section 310 Conflicts of interest 2/30
Section 320 Professional appointment 2/31
Section 321 Second opinions 2/33
Section 330 Fees and other types of remuneration 2/34
Section 340 Inducements, gifts and hospitality 2/35
Section 350 Custody of client assets 2/36
Section 360 Responding to non-compliance with laws and regulations 2/37

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PART 4 – INDEPENDENCE 2/40
Introduction 2/40
The conceptual approach applied to independence 2/41
Illustrative examples: 2/42

1. Financial interests in an audit client 2/44

2. Loans and guarantees 2/46
3. Business relationships 2/46
4. Family and personal relationships 2/47
5. Employment with an audit client 2/48
6. Temporary personnel assignments 2/49
7. Recent service with an audit client 2/50
8. Serving as an officer or a director of an audit client 2/50
9. Long association of senior personnel with an audit client 2/51
10. Provision of non-assurance services to an audit client 2/51
11. Preparing accounting records and financial statements for an audit client 2/52
12. Valuation services 2/52
13. Provision of taxation services to an audit client 2/53
14. Provision of internal audit services to an audit client 2/56
15. Provision of information technology services to an audit client 2/57
16. Provision of litigation support services to an audit client 2/57
17. Provision of legal services to an audit client 2/57
18. Recruiting senior management on behalf of an audit client 2/58
19. Corporate finance services 2/59
20. Fees 2/59
21. Compensation and evaluation policies 2/61
22. Gifts and hospitality 2/61
23. Actual or threatened litigation between the firm and an audit client 2/62

RULES REGARDING IMPROPER CONDUCT (IRBA) 2/63

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THE SAICA AND IRBA CODES OF PROFESSIONAL CONDUCT
(Effective 15 June 2019)
There are two Codes of Professional Conduct which provide ethical guidance to professional accountants and
auditors in South Africa. They are:
1. The SAICA Code of Professional Conduct for professional accountants.
2. The IRBA Code of Professional Conduct for registered auditors.
Both of these Codes are based on, and consistent in all material aspects with the Code of Ethics for Accountants
released by the International Ethics Standards Board for Accountants (IESBA) published by the International
Federation of Accountants (IFAC) in April 2018. As you would expect the two “South African” codes are consistent
with each other.
Why is it necessary to have two codes? The simple answer is that the majority of professional accountants (i.e.
members of SAICA) are not members of the IRBA (i.e. registered auditors) because they do not conduct audits.
Typically these professional accountants are in government, commerce or industry, engaged as internal auditors,
financial directors or company accountants. They become members of SAICA so as to benefit from being part of a
professional body, and thus must comply with the SAICA code.
Whilst the majority of the members of the IRBA (i.e. registered auditors) are also members of SAICA (i.e.
professional accountants), it is not a requirement that to be a member of the IRBA, the individual must join SAICA.
Therefore the IRBA must have its own code and must define its own rules regarding improper conduct.
As mentioned above, the two codes are very similar and are based on the same international code. One important
difference is that the SAICA code, in addition to having a section which relates to professional accountants in
public practice, has a separate section which deals with professional accountants in business, i.e. professional
accountants in commerce and industry etc. Professional accountant is a generic term used in the Code to refer to a
chartered accountant (CA (SA)), an associate general accountant (AGA (SA)), associate accounting technician
(FMAAT (SA), MAAT (SA), or PSMAAT (SA)). The IRBA obviously does not have such a section because, by
definition, registered auditors are not in commerce and industry, etc., they are all registered auditors in public
practice.
If an individual who is a member of both the IRBA and SAICA acts improperly or unethically, he can be charged in
terms of both codes. Again this is perfectly logical; the IRBA disciplinary committee has the power to “punish” one
of its own members but has no power to “punish” the individual in terms of the SAICA Code. That would be up to
the SAICA disciplinary process.
In summary:
* the SAICA Code applies to a person who is registered with SAICA regardless of whether he is a
professional accountant in public practice or a professional accountant in business;
* the IRBA Code applies to a much narrower field, i.e. those persons registered with the IRBA as registered
auditors;
* provided an individual complies with the registration requirements of both SAICA and the IRBA, he can
be a member of both bodies.

GENERAL GUIDANCE: ETHICS AND PROFESSIONAL CONDUCT

Perhaps the most crucial prerequisite for the accounting and auditing profession is the attainment of the highest level
of professional ethics by its members, both singularly and collectively. Of course members of the profession must
have the necessary intellectual and practical competency, but these will be worth little if respect for, and trust in the
profession is eroded by members displaying a lack of professional ethics. Indeed SAICA has identified skills and
integrity as the pre-eminent attributes of Chartered Accountants (SA).
The Concise Oxford Dictionary defines ethics as: “... a set of principles or morals...rules of conduct...” and “moral”
is defined as: “concerned with the distinction between right and wrong... virtuous in general conduct”. Professional
conduct could be described as the set of principles which governs the professional and wider behaviour of
accountants and auditors.
Ethics apply when a person finds it necessary to make a decision which involves moral principles, namely a choice
between “good” and “bad” or “right” and “wrong”. There are various sources for ethical guidance:
* in our private lives these may include our parents, religion and role models,

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* in our working lives these may include codes of conduct developed by corporations, institutions and
professions, in addition to senior work colleagues or individuals trained to advise in what can be very
difficult ethical situations.
Different religions, races, cultures and backgrounds may see ethical issues from totally different perspectives, so it is
impossible to establish one set of hard and fast rules which can be applied to all situations which raise ethical issues.
So in the absence of hard and fast rules, how does a person decide whether the ethical decision they have made, is
the right one? There is no simple solution, but if the answer to the following questions is yes, then the decision is
probably the right one
* is the decision honest and truthful?
* in making the decision, will I be acting in a way that I would like others to act towards me?
* will this decision build goodwill and result in the greatest good for the greatest number?
* would I be comfortable explaining my decision to people who I respect for their moral values?
In effect, asking the above four questions acknowledges that a conceptual framework approach to ethics is desirable.
There cannot be a rule for every situation so some other process must be available for the professional accountant to
deal with ethical issues.
Whilst individual members of the profession will no doubt be concerned with ethical issues which affect society as a
whole, (the death penalty, abortion or providing jobs at the expense of environmental destruction), it will be their
daily occupations which will give rise to specific ethical situations of a professional nature, for example
* have I acted in a truly independent manner?
* should I make use of confidential information obtained from a client, for my own advantage?
* should I report a client who may been evading tax to the authorities?
Specific guidance and a way of thinking about ethical issues is provided in the various pronouncements indicated
below.

THE PUBLIC INTEREST

As we discussed in Chapter 1, the public at large relies, directly or indirectly, on members of the accounting and
auditing profession in a number of ways, one such example being the reliance which third parties, such as banks and
shareholders, place on audited financial statements in deciding whether to advance finance to companies. This
reliance requires that the profession accept a responsibility to the public, as reliance will only continue to be placed
on the profession for as long as the profession retains public confidence in its abilities. Professional accountants and
registered auditors must therefore ensure that their services are delivered in accordance with the highest ethical and
professional standards. Public reliance is not only placed on members who are in public practice. Many professional
accountants fill very influential roles in the financial world and are relied upon by the public at large to perform with
integrity and competence. Even though it may be indirect reliance, the public at large rely, on:
* financial executives to contribute to the efficient and effective use of their organisations resources, and to
strive for the highest levels of corporate governance,
* internal auditors in both the private and government sectors, to be part of sound internal control systems
that address the risks faced by business and which enhance the reliability of financial information,
* tax experts to help establish confidence and efficiency in the tax system,
* management consultants to promote sound management decision making,
* internal auditors to promote sound corporate governance and assist in fulfilling its wider mandate.
What about trainee accountants, are they bound by the SAICA Code? The answer to this question is that if you enter
into a formal training contract which is registered with SAICA, such as a training contract with a firm of accountants
and auditors or the Auditor General, you will be bound by the Code. The training contract which you sign will
contain a clause which requires that you adhere to the Code of Professional Conduct, and should you breach the
Code, you can be disciplined. For example, if you have contravened the Code by making use of confidential
information obtained whilst carrying out an audit at a client, your training contract could be cancelled.
This text concentrates on the Code of Professional Conduct of the South African Institute of Chartered Accountants
(SAICA). The reasons are that your current studies are probably being conducted under the auspices of SAICA
through a SAICA accredited university, and that the SAICA Code is cast a little wider as it deals with professional
accountants in business as well as in public practice. No doubt many of you will end up in business and not as
auditors.

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CODE OF PROFESSIONAL CONDUCT (SAICA)
(Effective 15 June 2019)

STRUCTURE OF THE CODE

1. The Code is broken down into 3 parts, and each part into sections
Part 1 (Sections 100 to 120) – Complying with the Code, Fundamental Principles and
Conceptual Framework – deals with the general applica-
tion of the Code and is applicable to all professional
accountants.
Part 2 (Sections 200 to 299) – Professional Accountants in Business – applicable to
professional accountants in business when performing
professional activities. Part 2 is also applicable to pro-
fessional accountants in public practice when performing
professional activities related to their relationship with
the firm, whether as a contractor, employee or owner.
Part 3 (Sections 300 to 399) – Professional Accountants in Public Practice – applicable
to professional accountants in public practice when
providing professional services
International Independence Standards – Sets out additional material regarding independence
that applies to professional accountants when providing
assurance services. The section is divided into Part 4A
and Part 4B as follows:
Part 4A (Sections 400 to 899) – Independence for Audit and Review Engagements
Part 4B (Sections 900 to 999) – Independence for Assurance Engagements other than
Audit or Review Engagement
2. A list of definitions is also provided. Where required, definitions will be included in the narrative covering
the various sections.

PART A – GENERAL APPLICATION OF THE CODE

INTRODUCTION AND FUNDAMENTAL PRINCIPLES (SECTION 100)
1. Introduction
It is a distinguishing mark of the auditing and accounting profession that registered auditors and pro-
fessional accountants have a responsibility to act in the public interest (discussed on page 2/4). The
professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client
(professional accountant in public practice) or his employer (professional accountant in business). The
Code establishes the fundamental principles of ethical behaviour and provides a conceptual framework
which the professional accountant can apply in ethical situations.
2. Fundamental principles
The Code establishes five fundamental principles, with which professional accountants must comply
2.1 integrity;
2.2 objectivity;
2.3 professional competence and due care;
2.4 confidentiality;
2.5 professional behaviour.
3. Basis of the Code – the conceptual framework approach (section 120)
3.1 The Code provides an approach which professional accountants should adopt to ensure that they
comply with the fundamental principles. Remember that this conceptual framework approach is
based on the premise that, due to the diversity of ethical issues, it is not possible or desirable to

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 have a comprehensive set of rules to identify and resolve ethical issues. It is not possible to say
“Yes you can do that” or “No you can’t do this” in all situations.
3.2 Therefore professional accountants using their professional judgement, are required to
* identify threats to compliance with the fundamental principles;
* evaluate the threats identified; and
* address the threats by eliminating them or reducing them to an acceptable level.
3.3 When applying the conceptual framework, the professional accountant shall:
 exercise professional judgement;
 remain alert to new information and to changes in facts and circumstances; and
 consider whether the same conclusion would likely be reached by another party (the third-
party test).
3.4 To be able to apply the conceptual approach, the professional accountant must understand the
* fundamental principles;
* types of threats which may arise;
* safeguards which may be applied.

THE FUNDAMENTAL PRINCIPLES

A professional accountant shall comply with the fundamental principles of integrity, objectivity, professional
competence and due care, confidentiality and professional behaviour. Subsections 111 to 115 of the Code discuss
the five fundamental principles of professional ethics.
1. Integrity (section 111)
1.1 A professional accountant shall comply with the principle of integrity which requires straight-
forwardness, honesty, fair dealing and truthfulness in professional and business relationships.
1.2 Professional accountants should not be associated with information they believe
* contains a materially false or misleading statement;
* contains statements or information provided recklessly; or
* omits or obscures information where such omission or obscurity would be misleading.
1.3 If a professional accountant becomes aware that he has been associated with such information, he
must take steps to disassociate him/herself therefrom. Note: this may present a threat to the
fundamental principle of confidentiality.
2. Objectivity (section 112)
2.1 Professional accountants should not allow bias, conflict of interest, or undue influence of others
to override or compromise professional or business judgements.
3. Professional competence and due care (section 113)
3.1 Professional accountants are required to
* attain and maintain professional knowledge and skill at a level which ensures that clients or
employers (in the case of professional accountants in business) receive competent pro-
fessional service. This emphasises the importance of continuing professional development.
* act diligently in accordance with applicable technical and professional standards when
providing professional services.

3.2 Rendering “competent professional service” assumes the exercising of sound judgement in
applying professional knowledge and skill. To maintain professional competence a professional
accountant must remain abreast of relevant technical, professional and business developments.
3.3 Acting diligently (with due care) requires that the professional accountant act timeously,
carefully, thoroughly and in accordance with the requirements of the assignment.

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 3.4 A professional accountant must ensure that those working under his/her authority in a profess-
sional capacity, have appropriate training and supervision.
3.5 Clients, employers and other users shall be made aware of the inherent limitations of services
provided.
3.6 A professional accountant shall not undertake or continue with any engagement which he/she is
not competent to perform, unless advice and assistance are obtained in order to carry out the
engagement satisfactory.

4. Confidentiality (SECTION 114)

4.1 Professional accountants shall comply with the principle of confidentiality which requires a
professional accountant to respect the confidentiality of information acquired as a result of
professional and business relationships. A professional accountant shall:
* Be alert to the possibility of inadvertent disclosure, including in a social environment, and
particularly to a close business associate or an immediate or a close family member;
* Maintain confidentiality of information within the firm or employing organisation;
* Maintain confidentiality of information disclosed by a prospective client or employing
organisation;
* Not disclose confidential information acquired as a result of professional and business
relationships outside the firm or employing organisation without proper and specific
authority, unless there is a legal or professional duty or right to disclose;
* Not use confidential information acquired as a result of professional and business
relationships for the personal advantage of the professional accountant or for the
advantage of a third party;
* Not use or disclose any confidential information, either acquired or received as a result of
a professional or business relationship, after that relationship has ended; and
* Take reasonable steps to ensure that personnel under the professional accountant’s control,
and individuals from whom advice and assistance are obtained, respect the professional
accountant’s duty of confidentiality.
4.2 Disclosure of confidential information is permitted when
* disclosure is permitted by law and is p by the client or employer;
* disclosure is required by law, for example
 providing documents and other provision of evidence in the course of legal proceedings;
 disclosure to appropriate public authorities, including disclosures of reportable irregular-
ities reported to the Regulatory Board as required by section 45 of the Auditing Profes-
sion Act.
* there is a professional duty or right to disclose confidential information about a client, for
example:
 to comply with the quality review of the Regulatory Board or the professional body
(where the professional accountant’s practice is being reviewed);
 to respond to an enquiry or investigation by the Regulatory Board or a regulatory body;
 to protect the professional interests of a professional accountant in legal proceedings; or
 to comply with technical standards and the requirements of this Code.
4.3 In deciding whether to disclose confidential information, a professional accountant should
consider
* whether the interests of all parties, including third parties could be unnecessarily or unjustly
harmed by the disclosures if the client consents to the disclosure of information
* whether all relevant information is known and substantiated (disclosing unsubstantiated facts
or incomplete information could be unfairly damaging to other parties and is unprofessional)
* whether the method or type of communication is appropriate and the recipient of the
information is appropriate, for example going on a popular TV talk show and disclosing

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 confidential information about say, alleged fraud at a client company would not be
appropriate.

5. Professional behaviour (SECTION 115)

Section 115 deals with a number of matters under the heading of professional behaviour. Much of what
has been included in the section was added by SAICA to tailor the section to satisfy the needs of the South
African profession. This section deals with:
* a general explanation of the principle (5.1);
* publicity, advertising and solicitation (5.2);
* being a member of more than one firm (5.3);
* signing reports (5.4).
5.1 General explanation
This fundamental principle requires that professional accountants
* comply with relevant laws and regulations;
* avoid any action which the professional accountant knows or should know that may bring
discredit to the profession (act in a way which negatively affects the good reputation of the
profession as judged by a reasonable and informed third party taking into account the
specific facts and circumstances available to the professional accountant at the time of his
actions).
5.2 Publicity, advertising and solicitation
Professional Accountants are entitled to market and promote themselves and their firm, but in
doing so must
* not bring the profession into disrepute
* be honest and truthful and
* not make exaggerated claims for the services they offer, the qualifications they possess, or
experience they have gained
* not make disparaging references or unsubstantiated comparisons to the work of others.
Publicity – the communication to the public of information about a professional accountant
or his firm or bringing his name or the firm’s name to the notice of the public.
Advertising – the communication to the public of information as to the services or skills pro-
vided by a professional accountant with a view to procuring professional
business.
Perhaps the key word is good taste. However, it is impossible to define “good taste” as it is very
subjective. The Code does not give guidance as to what would be regarded as contrary to good
taste and ultimately the responsibility for the application of the requirements of this section lies
with the professional accountant.
However, previous versions of the Code have suggested that advertising, publicity or solicitation
characterised by any of the following will not be in good taste
* racist;
* tends to shock, or sensationalise;
* offends religious beliefs;
* trivializes important issues;
* relies excessively on a particular personality;
* derides (make fun of) a public figure, for example the Minister of Finance;
* disparages (mocks) educational attainment;
* odious (hateful, obnoxious);
* strident (loud) or extravagant;
* belittles others or claims superiority.

5.3 Membership of multiple firms and assisted holding out

A professional accountant is permitted to be a member of more than one firm of registered
auditors and/or a member of any other firm which offers professional accounting services. Such

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 association shall not be misleading or cause confusion, and the professional accountant shall
ensure that there is clear distinction between the different firms. A professional accountant who is
a member of an auditing firm and a professional services firm which is not registered with the
IRBA, must ensure that the professional services firm does not perform any audit work, pretend to
be registered with the IRBA or use any designation or description likely to create the impression
of being a registered audit firm in public practice, for example the professional services firm
cannot describe itself as being “a firm of public accountants”, or “accountants and auditors in
public practice”. (Refer to section 41 of the Auditing Profession Act 2005.)
5.4 Signing conventions for reports or certificates
A professional accountant must not delegate to any person who is not a partner or fellow director,
the power to sign audit, review, or other assurance reports or certificates which are required in
terms of the law or regulation, to be signed by the professional accountant responsible for the
engagement
* this restriction may be waived in emergencies (partner may be incapacitated). If this is the
case, the need for delegation must be reported to the client and to the IRBA; and
* written consent for such delegation is obtained from the Regulatory Board or the Institute
In terms of the SAICA Code, when signing off a report or certificate, for example an audit or
review report, the professional accountant responsible for the engagement (the designated auditor
in the case of an audit) should include in his signing off
i the individual professional accountant’s full name;
ii the capacity in which he is signing, for example partner or director;
iii their designation underneath their name; and
iv the name of the professional accountant’s firm (if not set out on the letterhead).

THREATS
Now that the fundamental principles have been described, it is necessary to consider the circumstances which can
threaten compliance with the fundamental principles. The code categorises threats as follows:
1. Self-interest threats
Threats that a financial or other interest will inappropriately influence the professional accountant’s
judgement or behaviour and lead him to act in his own self-interest. For example:
1.1 A professional accountant has shares in an audit client (objectivity).
1.2 A firm is dependent for its survival on the fees from one client (objectivity).
1.3 A member of the audit team will join the client as an employee shortly after the completion of the
audit (objectivity).
1.4 The client is placing pressure on the audit firm to reduce fees (objectivity, professional com-
petence and due care, for example audit team “cuts corners” to save costs).
1.5 The engagement partner obtains confidential information about the client from a meeting with the
directors, which he could use to his own financial advantage (objectivity, integrity, confidentiality
and professional behaviour).
2. Self-review threats
Threats that a professional accountant will not appropriately evaluate the results of a previous service
performed by the professional accountant or by another individual in his firm, on which the professional
accountant will rely as part of a current service
2.1 The former financial accountant of an audit client, a professional accountant, recently resigned
and joined the firm which conducts the audit of his former employer. He was placed on the audit
team for the current audit (objectivity and professional competence and due care).
2.2 A firm issuing an audit opinion on the financial statements of a company for which the firm has
designed or implemented the internal control system (objectivity and professional competence
and due care). In terms of ISA 315, the audit team must obtain an understanding of the client’s
internal control. There is a threat that the audit team will assume that the internal control system is
sound, without evaluating it, because their firm designed it.

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3. Advocacy threats
Threats may arise when a professional accountant promotes a client’s or employing organisation’s position
to a point that his subsequent objectivity may be compromised, for example
3.1 A professional accountant values a client’s shares and then leads the negotiations on the sale of
the client’s company.

4. Familiarity threats
Threats which may arise when, because of a close relationship, a professional accountant becomes too
sympathetic to the interests of others, for example:
4.1 The professional accountant accepts gifts or preferential treatment from a client (objectivity).
This type of occurrence can threaten the basis of a professional relationship.
4.2 A member of the engagement team’s father is responsible for the financial data which is the
subject of the audit engagement.
4.3 The audit engagement partner and audit manager have a long association with the audit client
(objectivity and (potentially) professional competence and due care i.e. the audit becomes too
casual and friendly.)
5. Intimidation threats
Threats which occur when a professional accountant may be deterred from acting objectively by actual or
perceived pressures including attempts to exercise undue influence, for example
5.1 A professional accountant in business fails to report a fraud perpetrated by his section head
because he fears he himself will be dismissed by the section head (objectivity, integrity,
professional behaviour).
5.2 An audit firm is being threatened with dismissal from the engagement (objectivity).
5.3 Pressure to accept an inappropriate decision on an accounting matter, is exerted by the client’s
financial director on a young, inexperienced audit manager (objectivity and integrity.)
Not all threats fall neatly into the above categories! This does not mean they are not threats. They are, and
must still be addressed.

EVALUATING THREATS
When the professional accountant identifies a threat to compliance with the fundamental principles, the accountant
shall evaluate whether the threat is at an acceptable level.
1. Acceptable level
An acceptable level would be when the accountant complies with the fundamental principles.
2. Factors relevant in evaluating the level of threats
The consideration of qualitative as well as quantitative factors is relevant in the professional accountant’s
evaluation of threats, as is the combined effect of multiple threats, if applicable.
The existence of conditions, policies and procedures might also be factors that are relevant in evaluating
the level of threats to compliance with fundamental principles. Examples of such conditions, policies and
procedures include:
* corporate governance requirements;
* educational, training and experience requirements for the profession;
* effective complaint systems which enable the professional accountant and the
* general public to draw attention to unethical behaviour;
* an explicitly stated duty to report breaches of ethics requirements;
* professional or regulatory monitoring and disciplinary procedure.
3. Addressing threats
If the professional accountant determines that the threat is not at an acceptable level, he/she shall reduce
the threat to an acceptable level by:
* Eliminating the circumstances, including interests or relationships, that are causing the threats;

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 * Applying safeguards to reduce the threat to an acceptable level; or
* Declining or ending the specific professional activity.

Considerations for audits, reviews and other assurance engagements

1. Independence
Professional accountants in public practice are required by International Independence Standards to be
independent when performing audits, reviews, or other assurance engagements. Independence is linked
to the fundamental principles of objectivity and integrity and includes independence in mind and in
appearance.
2. Professional scepticism
Under auditing, review and other assurance standards, including those issued by the IAASB, profes-
sional accountants in public practice are required to exercise professional scepticism when planning and
performing audits, reviews and other assurance engagements. Professional scepticism is inter-related
with the fundamental principles:

Integrity
* Being straightforward and honest when raising concerns about a position taken by a client; and
* Pursuing inquiries about inconsistent information and seeking further audit evidence about false or
misleading statements.

Objectivity
* Recognising relationships such as familiarity with the client, that might compromise the profes-
sional accountant’s professional or business judgement; and
* Considering the impact of such circumstances and relationships on the professional accountant’s
judgement when evaluating the sufficiency and appropriateness of audit evidence related to a
matter material to the client's financial statements.

Professional competence and due care

* Applying knowledge to the client’s industry;
* Designing and performing appropriate audit procedures; and
* Applying relevant knowledge when critically assessing whether audit evidence is sufficient and
appropriate.

PART B – PROFESSIONAL ACCOUNTANTS IN BUSINESS

SECTION 200 – INTRODUCTION
1. General
1.1 The majority of professional accountants work in business. They may be, inter alia, salaried
employees, a company director, or an owner manager. Numerous groupings of individuals, such
as investors, creditors, employers as well as the government (e.g. SARS) and the public at large
(e.g. ordinary investors in unit trusts), rely on professional accountants directly or indirectly. This
is particularly so where the professional accountant is involved in the preparation and reporting of
financial and other information, but is not restricted to this; professional accountants are fre-
quently involved in providing financial management and other advice on business matters.
1.2 Professional accountants in business are expected to encourage an ethics based culture within
their organisations. At the same time they themselves have an obligation to comply with the fun-
damental principles of integrity, objectivity, confidentiality, professional competence and due care
and professional behaviour. A simple example to illustrate: A professional accountant working for
a listed company who gets involved in a financial fraud betrays the trust of his employers,
investors and fellow employees and discredits the accounting profession.

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2. The conceptual framework
2.1 The conceptual framework to be applied by professional accountants in business is the same as
has been discussed for professional accountants in public practice, that is:
* identify threats to compliance with the fundamental principles;
* evaluate whether these threats are clearly insignificant; and
* address the threats.
3. Threats
3.1 The categorisation of threats for professional accountants in business remains the same as for
professional accountants in public practice, i.e. self-interest, self-review, advocacy, familiarity
and intimidation:
* self-interest threats are created when a financial or other interest will inappropriately
affect the professional accountant’s judgement or behaviour:
 financial interests, loans or guarantees;
 incentive compensation arrangements;
 inappropriate personal use of corporate assets;
 concern over employment security; and
 a gift or special treatment from a supplier.
Example 1: Lucas Borak, the financial director of Company A has shares in Company A. The
financial decisions he makes may be influenced by the effect the decisions will
have on his share value and not the facts relating to the decision.
Example 2: Carl Marks, the financial controller at Company B participates in a performance
bonus scheme for managers. Financial decisions which Carl Marks makes can
materially affect the bonus he receives.
* self-review threats are created when a professional accountant in business evaluates a
previous judgement or service which he himself has performed. The threat is that the
evaluation may be inappropriate, for example not diligently carried out.
Example 3: Jackie Jones, the financial director of Company X determines the appropriate
accounting treatment for a complex financing transaction which he constructed
and approved.
* an advocacy threat is created when a professional accountant in business promotes
his employer’s position to the extent that his objectivity is compromised.
Example 4: In attempting to sell a financial product marketed by the company for which he
works Dickie Dell, a professional accountant, makes use of questionable tactics
and debatable statistics in “proving” the superiority of his company’s products.
(This is an advocacy threat to his integrity, objectivity and professional behav-
iour.)
* a familiarity threat is created when a professional accountant in business will be or
become too sympathetic to the interests of some other party because he has a long or
close relationship with that party.
 A professional accountant in business in a position to influence reporting or business
decisions which may benefit an immediate or close family member;
 Long association with business contracts influencing business decisions.
Example 5: Billy Alviro, the managing director of Company Z regularly accepts expensive
gifts and travel opportunities from two of his company’s major suppliers. The
threat is that preferential treatment will be given to these two suppliers because
they are friends and not because they are the best suppliers for the company. This
is a threat to Billy Alviro’s objectivity and possibly, his professional competence
and due care.
* intimidation threats are created when a professional accountant will be deterred from
acting objectively because of actual or perceived pressures:

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  threat of dismissal or replacement of the professional accountant in business or a
close or immediate family member over a disagreement about the application of an
accounting principle or the way in which financial information is to be reported;
 a dominant personality attempting to influence the decision-making process.
As a professional accountant in business very often depends upon his/her employing organisa-
tion for his/her livelihood, he/she can often be placed in a very difficult position where ethical
situations arise. He/she may be put under pressure to act or behave in ways which could
threaten his compliance with all of the fundamental principles. A professional accountant in
business may be put under pressure (intimidated by fear of losing his job) to
Example 6: Act contrary to law or regulation, for example claim VAT deductions to which the
company is not entitled (integrity, professional behaviour, objectivity).
Example 7: Facilitate unethical or illegal earnings strategies, for example provide false
documentation to conceal the purchase and sale of illegal products (integrity,
professional behaviour, objectivity).
Example 8: Lie to, or intentionally mislead (including by remaining silent) others in particular,
 the auditors, for example produce false evidence to support fictitious sales;
 regulators, for example lie to custom officials about the nature of imported
goods to reduce import charges (integrity, professional behaviour, objectivity).
4. Evaluating threats
4.1 Although the professional accountant in business will have safeguards created by the profes-
sion, legislation or regulation available to him, it is likely that safeguards in the professional
accountant’s workplace will be more accessible and relevant to him. For example, a profes-
sional accountant whose compliance with the fundamental principle of professional behaviour
is being threatened by intimidation from a superior should have a means of exposing the
intimidation (and preventing his non-compliance) without fear of retribution, for example this
may be an individual at the employer appointed to deal with such matters and to whom the
professional accountant can notify of the intimidation. The following will impact the
professional accountant’s evaluation on whether a threat to compliance with a fundamental
principle is at an acceptable level:
* the employer’s system of corporate oversight which, inter alia, monitors the ethical
behaviour at all levels of management including executive directors;
* strong internal controls, for example clear division of duties and reporting lines which
hold employees accountable for their actions;
* recruitment procedures in the employing organisation emphasising the importance of
employing high-calibre, competent staff;
* policies and procedures to implement and monitor the quality of employee performance;
* policies and procedures to empower employees to communicate to senior levels any
ethical issues without fear of retribution;
* leadership that stresses the importance of ethical behaviour and the expectation that
employees will act in an ethical manner;
* policies and procedures, including any changes, to be communicated to all employees on
a timely basis, and appropriate training and education on such policies and procedures to
be provided;
* ethics and code of conduct policies.
5. Addressing threats
5.1 Sections 210 to 270 describe certain threats that may arise and include actions that might
address such threats.

5.2 A professional accountant in business should consider seeking legal advice if it is believed that
unethical behaviour has occurred and will continue within the organisation. He/she should also
consider resigning from the employing organisation if the circumstances that created the threat

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 cannot be eliminated, or should safeguards not be available or be incapable of reducing the
threat to an acceptable level.
CONFLICTS OF INTEREST – SECTION 210
1. Responsibility
1.1 A professional accountant in business shall not allow a conflict of interest to compromise his
professional or business judgement. A conflict of interest may arise when
* the professional accountant undertakes a professional activity (an activity requiring
accountancy or related skills) related to a particular matter for two or more parties whose
interests with respect to that matter, are in conflict; or
* the interests of the professional accountant with respect to a particular matter and the
interests of a party (e.g. an employing organisation, a vendor, a customer, a lender, a
shareholder, or another party) for whom the professional accountant undertakes a profes-
sional activity related to that matter, are in conflict.
1.2 When identifying and evaluating the interests and relationships that might create a conflict of
interest, and implementing safeguards, a professional accountant in business shall exercise
professional judgement and be alert to all interests and relationships that a reasonable and
informed third party, weighing all the specific facts and circumstances available to the
professional accountant at the time, would be likely to conclude might compromise compliance
with the fundamental principles.
2. Threats
2.1 Primarily a conflict of interest creates a threat to objectivity but may also create a threat to
other fundamental principles.
2.2 Situations in which conflicts may arise
Example 1: Shoab Aktar is a professional accountant in business. He sits on the board of two
unrelated companies (A and B) who operate in the same business sector. At a
board meeting of company A, Shoab Aktar obtains confidential information that
he could use to the advantage of company B, but which would be to the dis-
advantage of company A. This situation (conflict) creates a threat to his object-
ivity, confidentiality and professional behaviour and integrity.
Example 2: Tom Collins a professional accountant in business, has been engaged to provide
financial advice to each of two parties to assist them in dissolving their medical
partnership. There are a number of contentious issues in the dissolution. This
situation could create threats to Tom Collins objectivity, (he may favour one
partner over the other), professional behaviour, (he may act in a manner that
discredits the profession by favouring one partner because there is some kind of
reward for doing so) as well as his integrity.
Example 3: Paul Premium is a professional accountant employed by company Z. He is
responsible for contracting a company to supply a full range of IT support for
company Z. Awarding the contract to one of the strong contenders for the
contract could result in a financial benefit for an immediate family member (his
wife or a dependent). This creates a significant threat to his objectivity and pos-
sibly, confidentiality and professional behaviour (if for example he gave the
immediate family member confidential information about how they should
charge for their services to win the contract).
Example 4: Fred Bennett a professional accountant in business, sits on the investment com-
mittee of company Q. The investment committee approves all major investments
the company makes. If the investment committee approves a specific investment,
it will increase the value of Fred Bennett’s personal investment portfolio. This
creates a threat to his objectivity, i.e. Fred Bennett votes to approve the invest-
ment, not because it is a good investment for the company, but because it is a
good investment for him.

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3. Addressing the threats
To counter the threats arising from a conflict of interest situation, the following safeguards may be
implemented by the professional accountant:
* withdrawing from the decision making or authorising processes relating to the matter giving rise to
the conflict (example 1, 3 and 4);
* restructuring and segregating certain responsibilities and duties;
* disclosing the potential conflict of interest to all parties involved, including the possible con-
sequences of the professional accountant being conflicted (example 1, 2, 3 and 4);
* obtaining appropriate oversight for the service he has provided, for example acting under the
supervision of an independent director (example 2 and 3);
* consulting with third parties such as SAICA, legal counsel or other professional accountants on
how to resolve the conflict.
It may also be necessary to disclose the nature of conflicts of interest to interested parties and to obtain
consent regarding the safeguards implemented. If such disclosure or consent is not in writing, the
professional accountant is encouraged to document:
* the nature of the circumstances giving rise to the conflict of interest;
* the safeguards applied to address the threats when applicable; and
* the consent obtained.

SECTION 220 – PREPARATION AND REPORTING OF INFORMATION

1. Responsibility
1.1 Professional accountants at all levels in an employing organisation are involved in the
preparation or presentation of information both within and outside the organisation. Preparing
or presenting information includes recording, maintaining and approving information. Informa-
tion can include financial and non-financial information that might be made public or used for
internal purposes, including operating and performance reports, decision support analyses,
budgets and forecasts, information provided to internal and external auditors, risk analysis,
general and specific purpose financial statements, tax returns and reports filed with regulatory
bodies for legal and compliance purposes.
When preparing and presenting information, the professional accountant shall prepare or
present information:
* in accordance with a relevant reporting framework (e.g. IFRS); and
* in a manner that is intended neither to mislead nor to influence contractual or regulatory
outcomes inappropriately; and
* exercise professional judgement to
 ensure that all facts are represented accurately and completely in all material respects;
 describe clearly the true nature of business transactions or activities; and
 classify and record information in a timely and proper manner; and
* the professional accountant shall also not omit anything with the intention of rendering
information misleading or of influencing contractual or regulatory outcomes.
1.2 Use of discretion in preparing or presenting information
Preparing or presenting information might require the exercise of discretion in making
professional judgements. The professional accountant shall not exercise such discretion with
the intention of misleading others or influencing contractual or regulatory outcomes inappro-
priately. Examples of ways in which discretion might be misused to achieve inappropriate
outcomes include:
Example 1: Determining estimates, for example determining fair value estimates in order to
misrepresent profit or loss.
Example 2: Selecting or changing an accounting policy or method among two or more
alternatives permitted under the applicable financial reporting framework, for

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 example selecting a policy for accounting for long-term contracts in order to
misrepresent profit or loss.
Example 3: Determining the timing of transactions, for example timing the sale of an asset
near the end of the fiscal year in order to mislead.

1.3 Relying on the work of others

A professional accountant who intends to rely on the work of others, either internal or external
to the employing organisation, shall exercise professional judgement to determine what steps to
take, if any, in order to fulfil the responsibilities when preparing and presenting information set
out in 1.1 above.
Factors to consider in determining whether reliance on others is reasonable include:
* the reputation, expertise and resources available to the other individual or organisation;
* whether the other individual is subject to applicable professional and ethics standards.
2. Threats
Intimidation or self-interest threats to objectively, integrity or professional competence are created
where a professional accountant is pressured by internal or external parties, or by the prospect of
personal gain, to prepare or report information in a misleading way or to become associated with
misleading information through the actions of others, for example manipulating reported profits or
knowingly benefiting from reported profits manipulated by others, to earn additional bonuses.

3. Addressing the threats

3.1 Self-interest threats can really only be addressed by professional accountants in business putting
preventative measures in place to ensure that they cannot be accused of looking after their own
interests. Of course addressing a self-interest threat requires a willingness on the part of the profess-
sional accountant to comply with the fundamental principles. The professional accountant shall be
particularly alert to threats to the principle of integrity, which requires that the professional
accountant be straightforward and honest.
3.2 When the professional accountant knows or has reason to believe that the information with which
the accountant is associated is misleading, the professional accountant shall take appropriate actions
to seek to resolve the matter such as:
* Appropriate action might include consulting with superiors within the organisation, for example
the audit committee or a professional body in order to reduce or eliminate the threat such as:
 having the information corrected;
 informing users and correcting information if already disclosed to users; and
 consulting the policies and procedures of the employing organisation (for example, an
ethics or whistle-blowing policy) regarding how to address such matters internally.
3.3 Where it is not possible to reduce the threat to an acceptable level, a professional accountant in
business shall refuse to be or remain associated with information he deems to be misleading and
shall take steps to dissociate himself from such information, but without non-compliance with the
fundamental principle of confidentiality (section 114). The professional accountant might consider
consulting with:
* a relevant professional body;
* the internal or external auditor of the employing organisation;
* legal counsel;
* determining whether any requirements exist to communicate to:
 third parties, including users of the information;
 regulatory and oversight authorities;
* if after exhausting all feasible options, the professional accountant shall refuse to be or to
remain associated with the information in which case it might be appropriate to resign.

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SECTION 230 – ACTING WITH SUFFICIENT EXPERTISE
1. Responsibility
The professional accountant has a responsibility to undertake only those tasks for which he has the
necessary training or expertise. If the professional accountant does not have the necessary expertise, he
has a responsibility to obtain it.
2. Threats
2.1 The primary threat in this situation is that the professional accountant may fail to comply with
the fundamental principle of professional competence and due care.
2.2 A self-interest threat to compliance with the principles of professional competence and due
care might be created if a professional accountant has:
* insufficient experience, education or training;
* inadequate resources;
* inadequate time available for performing the duties; and
* incomplete, restricted or inadequate information
2.3 Factors that are relevant in evaluating the level of the threat include:
* the extent to which the professional accountant is working with others,
* the seniority of the individual in the business; and
* the level of supervision and review applied to the work
3. Safeguards
The relevant safeguards may be to
3.1 Obtain assistance or training from someone with the necessary expertise.
3.2 Ensure that there is sufficient time and the necessary resources to perform the task to the
required professional standard.
3.3 The professional accountant shall refuse to perform an assignment, should he/she not possess
the experience or expertise, and should the above safeguards fail to reduce or eliminate the
resultant threat to the fundamental principle of professional competence and due care.

SECTION 240 – FINANCIAL INTERESTS, COMPENSATION AND INCENTIVES

LINKED TO FINANCIAL REPORTING AND DECISION MAKING
1. Responsibility
Where a professional accountant in business (or his immediate or close family members) has a financial
interest in the employing organisation, including those arising from compensation or incentive arrange-
ments, he must ensure that he complies with the fundamental principles. A professional accountant in
business shall neither manipulate information nor use confidential information for personal gain, as this
will amount to self-interest threats to his compliance with the fundamental principles of objectivity or
confidentiality.
2. Threats
Self-interest threats to objectivity or confidentiality and, at times, professional behaviour may be
created. Such threats may arise where the professional accountant or an immediate or close family
member
2.1 holds a direct or indirect financial interest in the employing organisation and the value of the
interest can be directly influenced by decisions made by the professional accountant;
2.2 is eligible for a profit-related bonus and the value of the bonus could be directly affected by
decisions made by the professional accountant;

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 2.3 holds, directly or indirectly, deferred bonus share rights or share options in the employing
organisation, the value of which might be affected by decisions made by the professional
accountant;
2.4 has a motive and opportunity to manipulate price-sensitive information in order to gain
financially;
2.5 the professional accountant participates in compensation arrangements which provide incen-
tives to achieve performance targets, the amount of which can be influenced by the decisions
made by the professional accountant.
Note that self-interest threats arising from compensation or incentive arrangements may be
further compounded by pressure from superiors or peers whose “bonuses” may be influenced
by decisions made by the professional accountant in business. Example: All management
above a certain level at company P participate in a bonus scheme based on the net profit before
tax. Peter Pinarello, the chief financial officer and a professional accountant, makes a number
of decisions that can affect the reported net profit before tax. As Peter Pinarello is on a man-
agement level which will benefit from the “bonus” scheme, a self-interest threat is created.
Pressure from other management on Peter Pinarello to make financial reporting decisions
which will maximise net profit before tax (and hence their bonuses) will intensify the self-
interest threat and may amount to an intimidation threat.
3. Evaluating the level of the threat
Whether safeguards need to be applied will depend upon the significance of the threat and may include:
3.1 factors that are relevant in evaluating the level of such a threat, which include:
* the significance of the financial interest. What constitutes a significant financial interest
will depend on personal circumstances and the materiality of the financial interest to the
individual;
* policies and procedures for a committee independent of management to determine the
level or form of senior management remuneration;
* in accordance with any internal policies, disclosure to those charged with governance of:
• all relevant interests.
• any plans to exercise entitlements or trade in relevant shares.
* Internal and external audit procedures that are specific to address issues that give rise to
the financial interest.

SECTION 250 – INDUCEMENTS INCLUDING GIFTS AND HOSPITALITY

Receiving and making offers

1. Responsibility
The professional accountant in business (or an immediate or close family member) may be offered a
gift, hospitality, preferential treatment, etc., in an attempt to unduly influence his actions or decisions or
encourage him to act in an illegal or dishonest manner or to reveal confidential information. The profes-
sional accountant has a responsibility to be alert to threats to his compliance with the fundamental
principles and not be influenced by the inducement.
A professional accountant in business should not offer an inducement to improperly influence the
judgement or behaviour of a third party. Pressure to do so may be placed on the professional accountant
by internal sources, for example a superior, or from external sources, for example a business associate
who promises a business deal in return for the professional accountant’s company paying for an over-
seas holiday for the business associate.
The professional accountant shall obtain an understanding of relevant laws and regulations and comply
with them when the professional accountant encounters such circumstances.
A professional accountant shall not accept, or encourage others to accept, any inducement that the pro-
fessional accountant concludes is made, or considers a reasonable and informed third party would be

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 likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of
another individual.
Inducement – * an object, situation or action;
* used as means to influence another individual’s behaviour;
* includes minor acts of hospitality;
* acts that result in NOCLAR;
* gifts;
* hospitality;
* entertainment;
* political or charitable donations;
* appeals to friendship and loyalty;
* employment or other commercial opportunities;
* preferential treatment, rights or privileges.
2. Threats
Accepting or making inducements may create self-interest, familiarity or intimidation threats to object-
ivity integrity and professional behaviour.
3. Factors to consider when determining whether there is an actual or perpetual intent to influence
behaviour
The determination of whether there is actual or perceived intent to improperly influence behaviour
requires the exercise of professional judgement. Relevant factors to consider might include:
* the nature, frequency, value and cumulative effect of the inducement;
* timing of when the inducement is offered relative to any action or decision that it might
influence;
* whether the inducement is a customary or cultural practice in the circumstances, for example
offering a gift on the occasion of a religious holiday or wedding;
* whether the inducement is an ancillary part of a professional service, for example offering or
accepting lunch in connection with a business meeting;
* whether the offer of the inducement is limited to an individual recipient or available to a
broader group. The broader group might be internal or external to the employing organisation,
such as other customers or vendors;
* the roles and positions of the individuals offering or being offered the inducement;
* whether the professional accountant knows, or has reason to believe, that accepting the induce-
ment would breach the policies and procedures of the counterparty’s employing organisation;
* the degree of transparency with which the inducement is offered;
* whether the inducement was required or requested by the recipient;
* the known previous behaviour or reputation of the offeror.
4. Safeguards
To protect against these threats, the professional accountant in business should

4.1 immediately inform higher levels of management or those charged with governance if such an
offer is made;
4.2 amend or terminate the business relationship with the offeror;
4.3 decline or not offer the inducement;
4.4 transfer responsibility for any business-related decision involving the counterparty to a
counterparty who would not be improperly influenced in making the decision;
4.5 be transparent with senior management or those charged with governance of the employing
organisation;
4.6 register the inducement in a log maintained by the employing organisation;
4.7 have an appropriate reviewer, who is not otherwise involved in undertaking the professional
activity, review any work performed or decisions made by the professional accountant;

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 4.8 donate the inducement to charity after receipt and appropriately disclose the donation, for
example to those charged with governance or the individual who offered the inducement;
4.9 reimburse the cost of the inducement, such as hospitality, received;
4.10 as soon as possible, return the inducement, such as a gift, after it was initially accepted.
5. Inducements with no intent to improperly influence behaviour
Inducements with no intent to improperly influence behaviour can still create threats to the fundamental
principles. Self-interest threats may be created where a professional accountant is offered part-time
employment by a vendor. Familiarity threats may be created if a professional accountant regularly takes
a customer or supplier to sporting events. Intimidation threats may be created if the professional
accountant accepts hospitality, the nature of which could be perceived to be inappropriate were it to be
publicly disclosed.
If such an inducement is trivial and inconsequential, any threats created will be at an acceptable level

SECTION 260 – RESPONDING TO NON-COMPLIANCE WITH LAWS AND

REGULATIONS (NOCLAR)
1. General
A professional accountant might encounter or be made aware of non-compliance or suspected non-
compliance in the course of carrying out professional activities. This section guides the professional
accountant in assessing the implications of the matter and the possible courses of action when
responding to non-compliance or suspected non-compliance with:
* laws and regulations generally recognised to have a direct effect on the determination of material
amounts and disclosures in the employing organisation’s financial statements; and
* other laws and regulations that may be fundamental to the operating aspects of the employer’s
business or its ability to continue in business or to avoid material penalties.
NOCLAR – * any act or omission;
* intentional or unintentional;
* committed by a client or an employer or those charged with governance, by man-
agement or other individuals working for, or under the direction of a client or
employer;
* that is contrary to the prevailing laws or regulations, being;
• all laws and regulations which affect material amounts and disclosure in
financial statements; and
• other laws and regulations that are fundamental to entity’s business.
Examples of laws and regulations that could be transgressed for NOCLAR:
* fraud, corruption and bribery;
* money laundering, terrorist financing and proceeds of crime;
* securities markets and trading;
* banking and other financial products and services;
* data protection;
* tax and pension liabilities and payments;
* environmental protection;
* public health and safety.
Non-compliance might result in fines, litigation or other consequences for the employing organisation,
potentially materially affecting its financial statements. Importantly, such non-compliance might have
wider public interest implications in terms of potentially substantial harm to investors, creditors,
employees or the general public (e.g. perpetration of a fraud resulting in significant financial losses to
investors, and breaches of environmental laws and regulations endangering the health or safety of
employees or the public).

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2. Requirements
Professional accountants shall obtain an understanding of legal or regulatory provisions and how non-
compliance with laws and regulations should be addressed, should it exist in a jurisdiction. The require-
ments may include a requirement to report the matter to an appropriate authority, or a prohibition on
alerting the relevant party.
Professional accountants must always act in the public interest and the objectives when responding to
non-compliance with laws and regulations are therefore to:
* comply with the fundamental principles of integrity and professional behaviour;
* by alerting management or those charged with governance, to seek to:
• enable them to rectify, remediate or mitigate the consequences of the non-compliance; or
• prevent the non-compliance where it has not yet occurred; and
* to take further action as appropriate in the public interest.
Many employing organisations have policies and procedures that deal with the reporting of, inter alia,
non-compliance with laws and regulations. This shall be considered by the professional accountant in
deciding on how to respond to non-compliance (e.g. an ethics policy or internal whistle-blowing
mechanism.)
Professional accountants in business shall comply with this section on a timely basis, having regard to
the nature of the matter and the potential harm to the interests of the employing organisation, investors,
creditors, employees or the general public
3. Threats
A self-interest or intimidation threat to compliance with the principles of integrity and professional
behaviour is created when a professional accountant becomes aware of non-compliance or suspected
non-compliance with laws and regulations.
4. Actions required by NOCLAR
The code distinguishes between responsibilities if senior professional accountants and other profes-
sional accountants.
Senior professional accountants in business: Senior professional accountants in business follow steps
1-5 below.
Other accountants in business follow step 1 below and then inform an immediate superior or higher
level of authority if the immediate superior is involved. In exceptional circumstances, the professional
accountant may determine that disclosure of the matter to an appropriate authority is an appropriate
course of action. If the professional accountant does so pursuant to step 4 below (paragraphs 260.20 A2
and A3), that disclosure is permitted pursuant to the fundamental principle of confidentiality. The other
professional accountant should also document the process as set out in step 5 below.
Senior professional accountants – Senior professional accountants in business are directors,
officers or senior employees able to exert significant influence
over, and make decisions regarding, the acquisition, deploy-
ment and control of the employing organisation’s human,
financial, technological, physical and intangible resources.

Step 1: Obtaining an understanding of the matter

1.1 The understanding shall include:
* the nature of the NOCLAR or suspected NOCLAR and the circumstances in which it occur-
red or might occur;
* laws and regulations relevant to the situation; and
* potential consequences of the non-compliance or suspected non-compliance.
1.2 The senior professional accountant is required to apply knowledge, professional judgement and
expertise, but is not expected to have a level of knowledge beyond that which is required for the
professional accountant’s role in the employing organisation.

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1.3 Consultation on a confidential basis with others in the employing organisation, or professional
body, is permitted, depending on the nature and significance of the matter.

Step 2: Addressing the matter

2.1 The senior professional accountant shall discuss the matter with his/her immediate superior, except
if the immediate superior appears to be involved, in which case the matter shall be discussed with
the next higher level of authority within the employing organisation.
2.2 The senior professional accountant should also take appropriate steps to:
* have the matter communicated to those charged with governance;
* comply with applicable laws and regulations governing the reporting of NOCLAR;
* rectify, remediate or mitigate the consequences of NOCLAR;
* reduce the risk of re-occurrence; and
* seek to prevent the NOCLAR if it has not yet occurred.
2.3 The senior professional accountant shall also determine whether disclosure to the employing
organisation’s auditor is necessary to enable the auditor to perform the audit.

Step 3: Determining whether further action is needed

3.1 The senior professional accountant shall, in determining whether further action is needed, assess
the appropriateness of the response of his/her superiors or where appropriate, those charged with
governance.

3.2 Relevant factors to consider in assessing the appropriateness:

* the response is timely;
* they have taken or authorised appropriate action to seek to rectify, remediate or mitigate the
consequences of the non-compliance, or to avert the noncompliance if it has not yet occurred;
* the matter has been disclosed to an appropriate authority where appropriate and, if so, whether
the disclosure appears adequate.
3.3 In light of the response of the senior professional accountant’s superiors, if any, and those charged
with governance, the professional accountant shall determine if further action is needed in the
public interest. Consider:
* the legal and regulatory framework;
* the urgency of the situation;
* the pervasiveness of the matter throughout the employing organisation;
* whether the senior professional accountant continues to have confidence in the integrity of the
professional accountant’s superiors and those charged with governance;
* likelihood of recurrence; and
* evidence of substantial harm.
3.4 The senior professional accountant shall exercise professional judgement in determining the need
for, and nature and extent of, further action. In making this determination, the professional
accountant shall take into account whether a reasonable and informed third party would be
likely to conclude that the professional accountant has acted appropriately in the public interest by
* informing the management of the parent company of the matter if the employing organisation
is a member of a group;
* disclosing the matter to an appropriate legal body; and
* resigning from the employing organisation.

Step 4: Determining whether to disclose the matter to an appropriate authority

4.1 Disclosure to an appropriate authority would be precluded if doing so would be contrary to law or
regulation.

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 4.2 In deciding whether or not to make a disclosure, the senior professional accountant shall consider
the actual or potential harm that is or may be caused by the matter to investors, creditors, employ-
ees or the general public. The decision will also be influenced by:
* the entity is engaged in bribery (for example, of local or foreign government officials for pur-
poses of securing large contracts);
* the entity is regulated and the matter is of such significance as to threaten its licence to
operate;
* the entity is listed on a securities exchange and the matter might result in adverse conse-
quences to the fair and orderly market in the employing organisation’s securities or pose a
systemic risk to the financial markets;
* the entity sells harmful products; and
* the entity is promoting a scheme to its clients to assist them in evading taxes.
Furthermore, the decision will also be influenced by external factors such as:
* whether there is an appropriate authority able to receive and deal with the information;
* whether robust and credible protection exists from civil, criminal or professional liability or
retaliation; and
* whether there are threats to the physical safety of any person.
4.3 If the senior professional accountant determines that disclosure of the matter to an appropriate
authority is an appropriate course of action in the circumstances, that disclosure is permitted pur-
suant to paragraph R114.1(d) (confidentiality) of the Code.

Step 5: Documentation
5.1 The senior professional accountant is encouraged to have the following matters documented:
* the matter;
* the results of discussions with superiors, those charged with governance and other parties;
* how the above parties have responded to the matter;
* the courses of action considered, the judgements and the decisions made; and
* how the senior professional accountant is satisfied that all his/her responsibilities have been
fulfilled.

SECTION 270 – PRESSURE TO BREACH THE FUNDAMENTAL PRINCIPLES

1. Responsibility
A professional accountant shall not allow pressure from others to result in a breach of compliance with
the fundamental principles or place pressure on others that would result in the other individual breaching
the fundamental principles. Examples of pressure that might result in threats to compliance with the fun-
damental principles include:
* pressure related to conflicts of interest (section 210) – pressure from a family member who is bid-
ding to be a vendor to select the family member over another prospective vendor;
* pressure to influence the preparation or presentation of financial statements (section 220) – pres-
sure to suppress internal audit reports containing adverse findings;
* pressure to act without sufficient expertise or due care (section 230) – pressure from superiors to
inappropriately reduce the extent of work performed;
* pressure related to financial interests (section 240) – pressure from those who might benefit from
participation in an incentive scheme to manipulate performance indicators;
* pressure related to inducements (section 250) – pressure to accept a bribe;
* pressure related to non-compliance with laws and regulations (section 260) – pressure to structure
a transaction to evade tax.

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2. Threats
A professional accountant might face pressure that creates threats to compliance with the fundamental
principles, for example an intimidation threat, when undertaking a professional activity. Pressure might
be explicit or implicit and might come from:
* within the employing organisation, for example from a colleague or superior;
* an external individual or organisation such as a vendor, customer or lender;
* internal or external targets and expectations.

3. Evaluating the level of the threat

Whether safeguards need to be applied will depend upon the significance of the threat and may include:
3.1 Factors that are relevant in evaluating the level of such a threat include:
* the intent of the individual who is exerting the pressure and the nature and extent of the
pressure;
* the application of laws, regulations, and professional standards to the circumstances;
* the culture and leadership of the employing organisation including the extent to which they
reflect or emphasise the importance of ethical behaviour, for example a corporate culture that
tolerates unethical behaviour might increase the likelihood that the pressure would result in a
threat to compliance with the fundamental principles;
* policies and procedures that the employing organisation has established, such as ethics or
human resources policies that address pressure.
4. Safeguards
Discussions with the following parties may enable the professional accountant to evaluate the level of
the threat:
* the individual who is exerting the pressure – an attempt to resolve it;
* the accountant’s superior (not the individual exerting the pressure);
* higher levels of management;
* internal or external auditors;
* those charged with governance;
* disclosing the matter in line policies; and
* consulting with:
• a colleague, human resources personnel, or another professional accountant;
• relevant professional body (e.g. SAICA); and
• legal counsel.
* The professional accountant is encouraged to document the facts, the communications and parties
with whom the matter was discussed, the courses of action considered and how the matter was
addressed.

PART C – PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE

SECTION 300 – INTRODUCTION
1. This part of the Code applies to all professional accountants in public practice, whether they provide
assurance services or not. The term “professional accountant” also refers to the individual accountant in
public practice and their firms. Professional accountants in public practice are obliged, as explained
earlier, to identify and react to any circumstances or situation which may threaten their compliance with
the fundamental principles on which the profession is built.
It is important to note that threats may vary depending on the service the professional accountant is
providing. The services the professional accountant in public practice offers can be categorised as:
assurance engagements – an engagement where the professional accountant expresses an opinion or a
conclusion which is intended to enhance the degree of confidence of a user of the information on which

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 the opinion or conclusion has been expressed – for example an audit or review of financial statements;
or
non-assurance engagements – an engagement where the professional accountant does not express an
opinion or draw a conclusion on information – for example agreed upon procedure engagements or
compilation engagements.
Threats to the fundamental principles may be more significant for assurance engagements than for non-
assurance engagements, particularly in the case of threats to objectivity.
To illustrate, if an opinion on the fair presentation of Atco (Pty) Ltd’s financial statements is given by a
professional accountant who is not truly independent of Atco (Pty) Ltd, for example he owns shares in
Atco (Pty) Ltd, the credibility of the opinion will be questionable. Holding shares in an audit client is an
unacceptable threat to the professional accountant’s objectivity. If, however, Atco (Pty) Ltd was not an
audit client and the professional accountant was asked to compile some financial information for the
company, his shareholding would not present a significant risk to his objectivity.
This does not mean that threats arising on non-assurance engagements can be ignored. Objectivity is
only one of the five fundamental principles and whilst there may be no specific threat to objectivity in a
non-assurance engagement, other principles, for example a threat to the principle of confidentiality may
be considerable in a non-assurance engagement, for example when the professional accountant is
advising a client on a highly sensitive merger transaction.
2. The charts on the following three pages are designed to assist you in understanding the conceptual
framework approach. The examples given are nowhere near exhaustive.
3. Evaluating threats
Professional accountants need to evaluate whether the above threats are at an acceptable level. Condi-
tions, policies and procedures might impact this evaluation and might relate to:
* The client and its operating environment
Nature of client engagement
• an audit client and whether the audit client is a public interest entity;
• an assurance client that is not an audit client; or
• a non-assurance client.
As an example, providing a non-assurance service to an audit client that is a public interest entity
may result in a higher level of threat to compliance with the fundamental principle of objectivity.
Corporate governance structure promoting the compliance with fundamental principles, for
example:
• the client requires appropriate individuals other than management to ratify or approve the
appointment of a firm to perform an engagement;
• the client has competent employees with experience and seniority to make managerial
decisions;
• the client has implemented internal procedures that facilitate objective choices in tendering
non-assurance engagements;
• the client has a corporate governance structure that provides appropriate oversight and com-
munications regarding the firm’s services.
* The firm and its operating environment
• firm leadership that stresses the importance of compliance with the fundamental principles
(e.g. to act with integrity and in a professional manner);
• the expectation that members of an assurance team will act in the public interest;
• policies and procedures to implement and monitor quality control of engagements, including
policies and the monitoring thereof with regard to independence and compliance with the fun-
damental principles;
• compensation, performance appraisal and disciplinary policies and procedures that promote
compliance with the fundamental principles;
• management of the reliance on revenue received from a single client;
• engagement partner having authority within the firm for decisions concerning compliance with
the fundamental principles;

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 • educational, training and experience requirements;
• processes to facilitate and address internal and external concerns or complaints.
* New information or changes in facts and circumstances
New information or changes in facts and circumstances may change the level of the threat or con-
clusions about whether safeguards continue to address the threats. Examples of changes include:
• the expansion of the scope of a professional service;
• the merger or listing of the client;
• when the professional accountant is jointly engaged by two clients and a dispute emerges
between the two clients;
• when there is a change in the professional accountant’s personal or immediate family relation-
ships.
4. Addressing threats
The following are examples of engagement-specific safeguards that might be actions to address the
threats:
* Additional time and qualified personnel to required tasks when an engagement has been accepted
might address a self-interest threat.
* Having an appropriate reviewer who was not a member of the team review the work performed or
advise as necessary might address a self-review threat.
* Using different partners and engagement teams with separate reporting lines for the provision of
non-assurance services to an assurance client might address self-review, advocacy or familiarity
threats.
* Involving another firm to perform or re-perform part of the engagement might address self-
interest, self-review, advocacy, familiarity or intimidation threats.
* Disclosing to clients any referral fees or commission arrangements received for recommending
services or products might address a self-interest threat.
* Separating teams when dealing with matters of a confidential nature might address a self-interest
threat.

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Examples of circumstances which may create threats to professional accountants and some possible safeguards
Neither the threats nor the safeguards are exhaustive. The intention is to illustrate the application of the conceptual framework.

Threat Example Fundamental Principle Threatened Safeguard

Self-interest 1. Walter Wiseman, an audit partner, owns 1. Objectivity, Integrity, Professional 1. * A policy within the audit firm which prohibits
15% of the shares in Buttco (Pty) Ltd, an Behaviour (Walter Wiseman may overlook partners and employees from holding shares in
audit client. issues that arise on audit, to protect his an assurance client. (Walter Wiseman should
investment.) dispose of his investment.)
* A procedure for monitoring this prohibition and
a disciplinary follow up for transgressors.
2. Joe Zulu, an audit manager, has been 2. Integrity, Objectivity, Professional 2. * Removal of Joe Zulu from the audit
offered a highly paid job at one of his audit Behaviour (Joe Zulu may overlook issues engagement team.
clients. that arise on audit so as not to jeopardise * Having the key audit work performed by Joe
the job offer.) Zulu reviewed by a professional accountant
independent of the engagement.
* Notifying the company’s audit committee of the
situation and the safeguards put in place.
3. Fred Fasset could make a great deal of 3. Integrity, Confidentiality, Objectivity and 3. * Ongoing education for employees as to ethical
money by getting his wife to purchase Professional Behaviour. (Fred Fasset would issues, compliance with legislation, etc.,
shares in a listed company of which he is be contravening the Insider Trading Act, specifically relating to listed companies.
in charge of the audit , before the annual acting dishonestly and making use of * Instant dismissal of a firm employee (Fred
financial statements are released. confidential information. If his wife Fasset) for this kind of breach of the
purchases shares, Fred Fasset’s objectivity fundamental principles, and a policy which
would also be compromised.) requires that transgressors of the Insider
Trading Act be reported to the relevant
authorities.

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Threat Example Fundamental Principle Threatened Safeguard
Self-review 1. Harris Ford, a partner in an auditing firm 1. Objectivity (Harris Ford may be tempted to 1. * Notifying the 3rd party of the extent of Harris
has been asked by a 3rd party to provide a omit valid criticisms of the system as he Ford and his engagement team’s involvement in
report on a (non-audit) client’s compu- designed it – he is reporting on his own the system design and implementation prior to
terised sales system, which he and his team work.) accepting the engagement.
had recently designed and implemented.
2. Hopgood & Co writes up the accounting 2. Objectivity (The audit firm is not inde- 2. In effect the Companies Act 2008 provides the
records of Tuis (Pty) Ltd and have been pendent as it will be giving an opinion on safeguard.
approached to perform the annual audit. financial statements it prepared from acc- * In terms of s 90, an individual (or firm) may not
ounting records it compiled.) be appointed auditor if he (or his partner or
employees) regularly performs the duties of
accountant or bookkeeper of that company.
3. Clarence Kleynhans, who was, for some 3. Objectivity, Integrity and Professional 3. * A firm policy which prohibits newly appointed
years, the financial manager of Kambo Competence (As Clarence Kleynhans employees such as Clarence Kleynhans (coming
(Pty) Ltd, recently resigned to go back into would be in charge of the audit of financial from a client) from being part of the audit team
the profession. He was employed by the information some of which he would have until, say, two years have lapsed.
audit firm that holds the appointment of been directly responsible for, he cannot be * Appointing him to the engagement team (so as to
auditor of Kambo (Pty) Ltd and because of regarded as being independent. His make use of his knowledge) but not as the
his knowledge of the company, it has been integrity may also be threatened, as there manager.
suggested that he be placed in charge of could be issues in which he was involved as
the audit. the financial manager, but which he does * Comprehensive reviews of the work he carries
not want to be subject to audit. It is also out if he does work on the audit.
possible that he lacks the professional com- * Notifying those charged with governance of the
petence to manage an engagement of this situation before placing him on the team.
nature.) Note: as the auditor should be independent and
seen to be independent, the best safeguard would
be to keep Clarence Kleynhans off the team.
Advocacy 1. Dandy Ncobo a partner in an audit firm, 1. Objectivity (Dandy Ncobo may over- 1. * A firm policy which requires that a partner
(this category has been requested to negotiate the sale of promote or overstate the worth of his client independent of the client (Hi-Shine (Pty) Ltd),
of threat is far Hi-Shine (Pty) Ltd, an audit client. to get a better price, to the extent that he is handle the sale negotiation.
less common perceived as not being objective in his * A firm policy which limits the non-assurance
that the others) approach to the negotiations.) services offered to assurance clients to only those
which carry a minimal threat of non-compliance
with the fundamental principles.

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Threat Example Fundamental Principle Threatened Safeguard
Familiarity 1. The financial director of Travel Bug Ltd 1. Objectivity and professional competence 1. * A firm policy which forbids the acceptance of
has offered to take the whole audit team on and due care (this type of situation changes gifts and hospitality which are anything other
an all-expenses paid weekend to an the professional relationship between the than clearly insignificant.
exclusive game lodge. He has stated that audit team from professional to “familiar”. * A strict disciplinary action for any transgressions
this will become a yearly event if the audit In return, the financial director may expect by staff, who do not adhere to this policy.
deadline is met. “favours” from the audit team. The promise
of future trips if the deadline is met, may
threaten the objectivity, adherence to
standards and due care of future audit teams
who may be tempted to “overlook” audit
problems to ensure the deadline is met.)
2. Marie Lopes, the audit manager on the 2. Objectivity (Marie Lopes will shortly have 2. * Removal of Marie Lopes from the audit.
audit of Topaz Ltd will shortly marry Bill an immediate family member (spouse) who * Policies and procedures within the firm which
Brown the financial director of Topaz Ltd. is in a position to exert direct and signifi- monitor specifically the independence of the
cant influence over the information which firm’s employees so that situations such as this
she will be auditing. Her independence is are identified and can be addressed.
compromised.)
Intimidation 1. The financial director of Rubdub Ltd has 1. Objectivity, Professional Competence and 1. * A review of the work carried out on the audit
informed Rex Randolf, the engagement due care and Integrity. (To retain the audit, by a partner independent of the client.
partner on the audit of Rubdub Ltd that Rex Randolf may compromise on stand- * Quality control procedures within the firm
unless the audit fee is reduced by 30%, his ards, for example do insufficient audit which review the desirability of continuing pro-
firm will be removed from the appointment work, and fail to follow up problems which fessional relationships with the firm’s clients.
of auditor. he is fully aware should be followed up, so * Raising the matter with the audit committee
as not to go “over budget” on the reduced and/or other governance structures.
fee.)
2. The financial director of ProTech (Pty) Ltd 2. Objectivity, Professional Competence and 2. * Appointing an engagement team which consists
is very aggressive, domineering and dis- due care. (The financial director’s attitude of experienced, strong willed individuals who
missive of the audit function and audit may compromise the audit team’s profes- will behave professionally under pressure.
team. sional judgement. They may “be bullied” * Quality procedures within the firm which
into ignoring problems on the audit out of review, the desirability of continuing profes-
fear of the financial director.) sional relationships with the firm’s clients.
* Discussion of the situation with the client’s
governance structure.
* Discussion of the situation with the audit com-
mittee.

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SECTION 310 – CONFLICTS OF INTEREST
1. Responsibility
A professional accountant in public practice may be faced with a conflict of interest when performing
virtually any type of professional service including audits, reviews, taxation services, advisory services
including corporate finance, forensic and information technology. A professional accountant cannot allow
a conflict of interest to compromise his professional or business judgement.

2. Threats
2.1 Conflicts of interest create a threat to the professional accountant’s objectivity and may also give
rise to threats to the other fundamental principles, particularly confidentiality. Such threats may
arise when
Type 1: the professional accountant provides a professional service related to a particular matter
for two or more clients whose interest in respect to that matter, are in conflict; or
Type 2: the interests of the professional accountant with respect to a particular matter and the
interests of the client for whom the professional accountant provides a professional ser-
vice related to that matter, are in conflict.
Examples:
* Advising client A and client B at the same time where client A and client B are competing to
acquire Company C (Type 1).
* Client X wants to acquire Company Z, and engages professional accountant Y to advise on
the acquisition. Company Z is an audit client of professional accountant Y. A conflict of
interest arises if professional accountant Y has obtained confidential information from the
audit of Company Z, which may be relevant to the acquisition (Type 1).
* P and Q are partners but due to an ethical disagreement, wish to dissolve the partnership.
Both partners have engaged professional accountant R to advise them on the financial
aspects of the dissolution (Type 1).
* Company S pays royalties to Company T. Professional accountant V provides Company T
with an assurance report on the “fair presentation” of the amount of royalties due whilst at
the same time performing the royalties payable calculation on behalf of Company S (Type
1).
* Professional accountant O advises Company Q to invest in Company R, a company in which
professional accountant O’s wife has a financial interest (Type 2).
* Professional accountant F advises a client to purchase and install an expensive suite of
financial reporting software. The local agent for the installation and maintenance of the
software is a company in which professional accountant F’s son is the majority shareholder
and managing director (Type 2).
2.2 Generally when there is a potential conflict of interest, there will be a confidentiality threat as
well. The professional accountant will need to be mindful of exactly what information can be
divulged to each of the parties involved.
3. Conflict identification
3.1 A professional accountant in public practice must identify potential conflicts of interest before
accepting a new client, including potential conflicts because of a network firm. Such steps shall
include identifying:
* the nature of the relevant interests and relationships between the parties involved; and
* the service and its implication for relevant parties.
An effective process to identify actual or potential conflicts of interest will take into account
factors such as:
* the nature of the professional services provided;
* the size of the firm;
* the size and nature of the client base;
* the structure of the firm, for example the number and geographic location of offices.

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 The professional accountant should also remain alert for changes in circumstances that may create
conflicts of interests. Refer to Section 320, Professional Appointments for more information on
client acceptance.
4. Evaluating threats
4.1 The professional accountant in public practice should evaluate the level of the threat caused by
conflicts of interests. Factor that are relevant in evaluating the level of the threat include:
* the existence of separate practice areas for specialty functions within the firm, which might
act as a barrier to the passing of confidential client information between practice areas;
* policies and procedures to limit access to client files;
* confidentiality agreements signed by personnel and partners of the firm;
* separation of confidential information physically and electronically;
* specific and dedicated training and communication
5. Safeguards
5.1 Having separate engagement teams who are provided with clear policies and procedures on main-
taining confidentiality.
5.2 Having an appropriate reviewer, who is not involved in providing the service or otherwise
affected by the conflict, review the work performed to assess whether the key judgements and
conclusions are appropriate.
5.3 Disclosing to all parties involved in the “conflict” situation that there is a conflict of interest and
explaining the threats which arise therefrom. If any safeguards have been or will be put in place,
for example see 5.2 above, these should also be disclosed and explained. The parties should
acknowledge their understanding and acceptance of the situation. (If the parties do not accept, the
professional accountant will have to decline or resign from the service which gives rise to the
conflict of interest.) All of the above should be documented (it should not be verbal and
acceptance should not simply be implied).
5.4 The professional accountant should discontinue an engagement or not accept the engagement
should explicit consent be sought and not be granted by a client.
5.5 Specific disclosures in order to obtain explicit consent may result in a breach of confidentiality.
The firm shall generally not accept or continue with an engagement under these circumstances,
unless:
* the firm does not act in an advocacy role for one client against another client in the same
matter;
* specific measures are in place to prevent disclosure of confidential information between
engagement teams; and
* the firm applies the reasonable and informed third-party test, and concludes that it is appro-
priate to accept or continue with the engagement.

SECTION 320 – PROFESSIONAL APPOINTMENT

Client and engagement acceptance
1. Responsibility
Before accepting a client, accepting a specific engagement, or replacing another professional accountant in
public practice, a professional accountant in public practice should consider whether there are any
circumstances which may create threats to compliance with the fundamental principles. The level of the
threats should be evaluated and actions taken to address the threats.

2. Threats
2.1 The two fundamental principles most at threat are integrity and professional behaviour. These
would be threatened if, for example, the client’s management condoned unethical (dishonest)
business practices, the client was involved in a business sector which may have a reputation for
questionable business practice such as second hand car parts, or which is socially or morally
questionable. This may include companies which have no regard for environment damage or
which exploit their workforce.

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 2.2 Having accepted the client a self-interest threat to professional competence and due care is
created if the engagement team does not possess, or cannot acquire, the competencies necessary
to perform the engagement
3. Evaluating threats
3.1 The professional accountant in public practice should evaluate the level of the threat caused by
the acceptance of the client. Factors that are relevant in evaluating the level of the threat include:
* pre-engagement activities, including obtaining knowledge and understanding of the client,
its owners, management and those charged with governance and business activities;
* the client’s commitment to address the questionable issues, for example through improving
corporate governance practices or internal controls.
3.2 Factors that are relevant in evaluating the level of the threat caused by engagement acceptance
(therefore after accepting the client) include:
* obtaining an appropriate understanding of the:
• nature of the client’s business;
• complexity of its operations;
• requirements of the engagement; and
• purpose, nature and scope of the work to be performed.
* knowledge of relevant industries or subject matter;
* experience with relevant regulatory or reporting requirements;
* the existence of quality control policies and procedures when accepting the engagement.
4. Safeguards
4.1 Safeguards that may be implemented
* assigning sufficient staff with the necessary competencies;
* using experts where necessary (it should first be determined whether reliance is warranted);
and
* agreeing on a realistic time frame for the performance of the engagement

Changes in professional appointment

1. Responsibility
1.1 A professional accountant who is asked to replace another professional accountant in public
practice (the existing accountant), or who is considering tendering for an engagement currently
held by another professional accountant, or considers providing complementary work must deter-
mine whether there are any reasons, professional or otherwise, for not accepting the engagement.
This will include any threats to compliance with the fundamental principles.
2. Threats
2.1 The threat to the proposed accountant is in essence the same as the threats posed by taking on a
new client/accepting a new engagement. There may be threats to the proposed accountant’s
compliance with the fundamental principles of professional competence and due care, profes-
sional behaviour and integrity. For example, there may be a threat to professional competence if
the professional accountant does not know all the relevant facts about the proposed client.
2.2 The threat to the existing accountant is that he fails to comply with the fundamental principle of
confidentiality (e.g. by divulging confidential information to the proposed accountant without
client permission) and professional behaviour (by bringing discredit to the profession by for
example, criticising the client he is losing or the proposed accountant.) There is also a potential
threat to integrity. The existing accountant must be honest and truthful in his dealings with the
proposed accountant. The threat is particularly real if the existing accountant is angry/upset about
being replaced.
3. Safeguards
3.1 In addition, the proposed accountant should effect the following safeguards:

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  discussions with the current professional accountant to evaluate the significance of any
threats and also identify suitable safeguards;
 obtaining information from other sources such as through inquiries of third parties or back-
ground investigations regarding senior management or those charged with governance of the
client.
As mentioned above, the fundamental principle of confidentiality should still be honoured. The
incoming (proposed) accountant will usually need the client’s permission, preferably in writing, to
initiate discussions with the existing or predecessor accountant.
If unable to communicate with the existing or predecessor accountant, the proposed accountant
shall take other reasonable steps to obtain information about any possible threats. This includes
including enquiries from third parties, and performing background checks on the proposed client.
If the proposed client refuses or fails to give permission for the proposed accountant to commu-
nicate with the existing or predecessor accountant, the proposed accountant shall decline the
appointment, unless there are exceptional circumstances of which the proposed accountant has
full knowledge, and the proposed accountant is satisfied regarding all relevant facts, by some
other means.
3.3 The existing accountant should address the threats facing the firm by implementing the following
safeguards:
 obtaining the client’s permission to discuss the client’s affairs with the proposed accountant,
and defining the boundaries of what may be discussed (in writing);
 complyiing with relevant laws and regulations governing the request; and
 providing the proposed accountant with information honestly and unambiguously.

SECTION 321 – SECOND OPINIONS

1. Responsibility
A professional accountant may be faced with a situation where he is asked to provide a second opinion on
some aspect of work which has been carried out for an entity which is not an existing client. In this
instance the professional accountant has ethical responsibilities to himself and the other party (existing
accountant).
2. Threats
2.1 This situation could give rise to a self-interest threat that the professional accountant will fail to
comply with the fundamental principle of professional competence and due care, if he is not
provided with the same set of facts or evidence provided to the existing accountant. For example,
the matter on which a second opinion is sought, is how a complex transaction which is subject to
various conditions, should be treated in the financial statements. The professional accountant
from whom the second opinion has been sought, gives his opinion without being aware of the full
extent of the various conditions. His opinion is then discredited, and he appears incompetent.
2.2 Another threat that arises is that the second opinion, if it differs from the first opinion, may appear
to be a criticism of the provider of the first opinion. This is a threat to compliance with the prin-
ciple of professional behaviour.
3. Safeguards
3.1 Describing the limitations surrounding any opinion in communications with the client.
3.2 Obtaining the client’s permission to contact the provider of the first opinion to discuss the matter.
(If this permission is not given, the professional accountant should consider very carefully
whether it is appropriate to provide a second opinion.)
3.3 Providing the existing or predecessor accountant with a copy of the opinion

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SECTION 330 – FEES AND OTHER TYPES OF REMUNERATION
Level of fees
1. Responsibility
The professional accountant is entitled to be remunerated fairly but must charge appropriate fees, for
example not overcharge or undercharge.
2. Threats
2.1 In an attempt to secure the engagement, a professional accountant may quote a fee which is so
low that it will be difficult to perform the engagement in accordance with applicable standards.
This is potentially a self-interest threat to compliance with the fundamental principle of profes-
sional competence and due care and to a lesser extent, integrity (this is not an honest practice) and
objectivity (the low fee may adversely influence the nature and extent of tests performed).
3. Evaluating threats
3.1 Factors that are relevant in evaluating the level of the threat include:
 whether the client is aware of the terms of the engagement and, in particular, the basis on
which fees are charged and the services to which fees relate; and
 whether the level of the fee is set by an independent third party such as a regulatory body.
4. Safeguards
4.1 Examples of actions that might be safeguards to evaluate the threat include:
 adjusting the level of the fee or the scope of the engagement; and
 having an appropriate reviewer review the work performed.

Contingent fees
1. Responsibility
Contingent Fees (fees that are calculated on a predetermined basis relating to the outcome of the work
performed or as a result of a transaction which arises from the service) are acceptable for a wide range of
non-assurance engagements. The professional accountant may charge such fees in accordance with
business norms. (Contingent fees for assurance engagements are not permitted).
A professional accountant shall not charge contingent fees for the preparation of an original or amended
tax return, as these services are regarded as creating self-interest threats to objectivity that cannot be
eliminated and safeguards are not capable of being to reduce it to an acceptable level.
2. Threats
2.1 The charging of contingent fees may give rise to a self-interest threat to objectivity. The profes-
sional accountant becomes more interested in the fee that could be earned than the quality of the
service offered.
3. Evaluating threats
3.1 Factors that are relevant in evaluating the level of the threat may depend on:
 the nature of the engagement;
 the range of possible fee amounts;
 the basis for determining the fee;
 disclosure to intended users of the work performed by the professional accountant and the
basis of remuneration;
 quality control policies and procedures;
 whether the outcome of the transaction is to be reviewed by an independent third party; and
 whether the level of the fee is set by an independent third party, such as a regulatory body.
4. Safeguards
4.1 Obtaining in advance, a written agreement with the client as to the basis and detail of fees to be
charged.

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 4.2 A review by an independent third party (committee) of the work performed by the professional
accountant, to counter any claims that the professional accountant was only interested in max-
imising the fee.

Referral fees/commissions
1. Responsibility
A professional accountant may receive or pay a fair referral fee or commission but must ensure that the
payment of such fees or commission do not compromise the fundamental principles.
2. Threats
2.1 The threats that may arise are compliance with the principles of objectivity, professional com-
petence and due care and integrity.
Example 1: The firm of Jones and Jones does not offer information technology services. Any
requests they receive for IT services are referred to other firms for which Jones and
Jones receives a referral fee. These fees vary from firm to firm. The threat is that
Jones and Jones will refer the client to the firm that pays the highest referral fee,
but which may not necessarily be the most suitable for the particular assignment.
Example 2: Jones and Jones receive a 15% commission for any office equipment which Office-
Man (Pty) Ltd sells to clients of Jones and Jones, which have been referred to the
company by Jones and Jones. Again Jones and Jones have an interest in the trans-
action and may be referring clients to OfficeMan (Pty) Ltd because of the com-
mission and not because of the suitability of OfficeMan (Pty) Ltd’s products.
3. Safeguards
3.1 Disclosure to the client of any arrangements to pay or receive a referral fee or commission and the
details thereof. These disclosures should be made in advance of the transaction taking place
and should be in writing.
3.2 Obtaining prior agreement, in writing from the client, for commission arrangements in connection
with the sale by a third party of goods or services to the client

SECTION 340 – INDUCEMENTS, GIFTS AND HOSPITALITY

1. Responsibility
A professional accountant shall not offer or accept, or encourage others to offer, any inducement that is
made, or which the professional accountant considers a reasonable and informed third party would be
likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of
another individual.
Refer to section 250 for the definition of an inducement. The factors in section 250 have to be considered
to determine the actual or perceived intent behind the inducement.
2. Threats
Offering or accepting inducements might create a self-interest, familiarity or intimidation threat to com-
pliance with the fundamental principles, particularly the principles of integrity, objectivity and professional
behaviour.
Examples of circumstances where offering or accepting such an inducement might create threats even if the
professional accountant has concluded there is no actual or perceived intent to improperly influence
behaviour include:
 Self-interest threats
• A professional accountant is offered hospitality from the prospective acquirer of a client while
providing corporate finance services to the client.
* Familiarity threats
• A professional accountant regularly takes an existing or prospective client to sporting events.
* Intimidation threats
• A professional accountant accepts hospitality from a client, the nature of which could be per-
ceived to be inappropriate were it to be publicly disclosed.

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3. Safeguards
Refer to section 250 for examples of actions that might be safeguards to address such threats created by
offering or accepting such an inducement include.

SECTION 350 – CUSTODY OF CLIENT ASSETS

1. Responsibility
1.1 A professional accountant may not take custody of a client’s assets (money or other) unless
permitted to do so by law (e.g. Financial Intelligence Centre Act 38 of 2001 (FICA)). If the
source of the asset is unknown, appropriate enquiries should be made about the source of such
assets. Inquiries about the source of client assets might reveal, for example, that the assets were
derived from illegal activities, such as money laundering. The professional accountant shall not
accept or hold the assets in such circumstances, and the provisions of section 360 would apply .
1.2 Before taking custody
As part of client and engagement acceptance procedures related to assuming custody of client
money or assets, a professional accountant shall:
* make inquiries about the source of the assets; and
* consider related legal and regulatory obligations.
1.3 After taking custody
A professional accountant entrusted with money or other assets shall:
* keep client assets separate from personal or firm assets;
* use such assets only for the purpose for which they were intended;
* at all times, be prepared to account to any person who is entitled to such accounting for
those assets, and any income, dividends or gains generated;
* comply with all relevant laws and regulations relevant to the holding or accounting of those
assets.
1.4 A professional accountant shall not accept custody of an audit or assurance client’s assets unless
the threat to independence can be eliminated or reduced to an acceptable level.
2. Threats
2.1 The custody of a client’s assets may threaten compliance with the fundamental principles of
professional behaviour and objectivity.
Example: Ronnie Rings, a professional accountant, has been given sole authorisation to operate
the bank accounts of Marjory Manoj, a wealthy client who is on an extended visit overseas. She
has requested that Ronnie Rings pay her taxes, rates, electricity accounts, etc., as they fall due.
The threat is that Ronnie Rings may use his client’s funds to enrich himself (self-interest), for
example make speculative deals from which he benefits using Marjory Manoj’s money.
2.2 A further threat is that a client may be trying to launder illegal money through the firm. This
presents a threat to compliance with the law (professional behaviour) and allegations of the
professional accountant being involved in dishonest practice (integrity).
2.3 The professional accountant may be accused of misuse of client assets.
3. Safeguards
3.1 Safeguards for all client monies which the professional accountant controls or is liable to account
for are the following:
* do not refer to such client monies as being “in trust” or in a “trust account” as this could be
misleading;
* maintain one or more bank accounts with an institution or institutions registered in terms of
the Banks Act, 1990 (Act 94 of 1990), that are separate from the professional accountant’s
own bank account;
* the accounts have to be appropriately named to distinguish them from the firm’s normal
business accounts or a specific account named and operated per relevant client. (such as
ABC’s Client Account);
* deposit client monies without delay to the credit of such client account;

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 * maintain such records as may reasonably be expected to ensure that the client monies can be
readily identified as being the property of the client, for example detailed bookkeeping and
being able to supply the client with an analysis of the account/s;
* perform a reconciliation between the designated bank account and the client monies ledger
account/s; and
* do not hold client monies indefinitely unless specifically allowed by laws and regulations.
Professional accountants are encouraged to hold client monies for a limited period,
depending on the professional service provided.
3.2 Professional accountant is entrusted with client assets other than client monies:
* do not refer to such client assets as being held “in trust” or in a “trust account” as this could
be misleading;
* maintain such records as may be reasonably expected to ensure that the client assets can
readily be identified as being the property of the client; and
* for documents of title, the professional accountant should arrange to safeguard the
documents against unauthorised use.
3.3 A professional accountant shall apply appropriate measures to protect the client assets:
* use an umbrella account with subaccounts for each client;
* open a separate bank account and provide the professional accountant with appropriate
power of attorney or signatory rights over the account;
* consider whether the firm’s indemnity and fidelity insurance is sufficient to cover incidents
of fraud or theft; and
* where a formal engagement letter is entered into covering the professional service involving
custody of client assets, the engagement letter shall address the risks and responsibilities
relating to such client assets.

SECTION 360 – RESPONDING TO NON-COMPLIANCE WITH LAWS AND

REGULATIONS (NOCLAR)
1. General
A professional accountant might encounter or be made aware of non-compliance or suspected non-
compliance in the course of carrying out professional activities. This section guides the professional
accountant in assessing the implications of the matter and the possible courses of action when respond-
ing to non-compliance or suspected non-compliance with:
* laws and regulations generally recognised to have a direct effect on the determination of material
amounts and disclosures in the employing organisation’s financial statements; and
* other laws and regulations that may be fundamental to the operating aspects of the employer’s
business or its ability to continue in business or to avoid material penalties.
NOCLAR – * Any act or omission
* Intentional or unintentional
* Committed by a client or an employer or those charged with governance, by
management or other individuals working for, or under the direction of a client
or employer.
* That is contrary to the prevailing laws or regulations, being;
• all laws and regulations which affect material amounts and disclosure in
financial statements; and
• other laws and regulations that are fundamental to entity’s business.
Examples of laws and regulations that could be transgressed for NOCLAR:
* fraud, corruption and bribery;
* money laundering, terrorist financing and proceeds of crime;
* securities markets and trading;
* banking and other financial products and services;
* data protection;
* tax and pension liabilities and payments;

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 * environmental protection;
* public health and safety.
Non-compliance might result in fines, litigation or other consequences for the employing organisation,
potentially materially affecting its financial statements. Importantly, such non-compliance might have
wider public interest implications in terms of potentially substantial harm to investors, creditors,
employees or the general public. (e.g. perpetration of a fraud resulting in significant financial losses to
investors, and breaches of environmental laws and regulations endangering the health or safety of
employees or the public).
2. Requirements
Professional accountants shall obtain an understanding of legal or regulatory provisions and how non-
compliance with laws and regulations should be addressed, should it exist in a jurisdiction. The require-
ments may include a requirement to report the matter to an appropriate authority, or a prohibition on
alerting the relevant party.
Professional accountants must always act in the public interest and the objectives when responding to
non-compliance with laws and regulations are therefore to:
* comply with the fundamental principles of integrity and professional behaviour;
* by alerting management or those charged with governance, to seek to:
• enable them to rectify, remediate or mitigate the consequences of the non-compliance; or
• prevent the non-compliance where it has not yet occurred; and
* to take further action as appropriate in the public interest.
Many employing organisations have policies and procedures that deal with the reporting of inter alia
non-compliance with laws and regulations. This shall be considered by the professional accountant in
deciding on how to respond to non-compliance (e.g. an ethics policy or internal whistle-blowing
mechanism.)
Professional accountants in business shall comply with this section on a timely basis, having regard to
the nature of the matter and the potential harm to the interests of the employing organisation, investors,
creditors, employees or the general public
3. Threats
A self-interest or intimidation threat to compliance with the principles of integrity and professional
behaviour is created when a professional accountant becomes aware of non-compliance or suspected
non-compliance with laws and regulations.
5. Actions required by NOCLAR
Step 1: Obtaining an understanding of the matter
1.1 The understanding shall include:
* the nature of the NOCLAR or suspected NOCLAR and the circumstances in which it
occurred or might occur;
* laws and regulations relevant to the situation; and
* potential consequences of the non-compliance or suspected non-compliance.
1.2 The professional accountant is required to apply knowledge, professional judgement and
expertise, but is not expected to have a level of knowledge beyond that which is required for the
professional accountant’s role in the employing organisation.

1.3 Consultation on a confidential basis with others in the employing organisation, or professional
body, is permitted, depending on the nature and significance of the matter.

Step 2: Addressing the matter

2.1 The professional accountant shall discuss the matter with his/her immediate superior, except if the
immediate superior appears to be involved, in which case the matter shall be discussed with the
next higher level of authority within the employing organisation.

2.2 The professional accountant should also take appropriate steps to:
* have the matter communicated to those charged with governance;

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 * comply with applicable laws and regulations governing the reporting of NOCALR;
* rectify, remediate or mitigate the consequences of NOCLAR;
* reduce the risk of re-occurrence; and
* seek to prevent the NOCALR if it has not yet occurred.

2.3 Disclose the matter to an appropriate authority where required to do so by law or where consid-
ered to be in the public interest.

2.4 A professional accountant involved in the audit of a group as the component auditor shall consider
communicating an actual or suspected non-compliance to the group engagement partner, unless
prohibited to do so by law or regulation. The same applies to communication as the group engage-
ment partner to the component auditor.

Step 3: Determining whether further action is needed

3.1 The professional accountant shall, in determining whether further action is needed, assess the
appropriateness of the response of his/her superiors or where appropriate, those charged with
governance.

3.2 Relevant factors to consider in assessing the appropriateness:

* the response is timely;
* the non-compliance or suspected non-compliance has been adequately investigated;
* they have taken or authorised appropriate action to seek to rectify, remediate or mitigate the
consequences of the non-compliance, or to avert the noncompliance if it has not yet occurred;
* the matter has been disclosed to an appropriate authority where appropriate and, if so, whether
the disclosure appears adequate.

3.3 In light of the response of the professional accountant’s superiors, if any, and those charged with
governance, the professional accountant shall determine if further action is needed in the public
interest. Consider:
* the legal and regulatory framework;
* the urgency of the situation;
* the pervasiveness of the matter throughout the employing organisation;
* whether the professional accountant continues to have confidence in the integrity of the pro-
fessional accountant’s superiors and those charged with governance;
* likelihood of recurrence; and
* evidence of substantial harm.
3.4 The professional accountant shall exercise professional judgement in determining the need for,
and nature and extent of, further action. In making this determination, the professional account-
ant shall take into account whether a reasonable and informed third party would be likely to
conclude that the professional accountant has acted appropriately in the public interest by:
* disclosing the matter to an appropriate authority even when there is no legal or regulatory
requirement to do so;
* withdrawing from the engagement and the professional relationship where permitted by law or
regulation.
The professional accountant shall, on the request of the successor accountant, provide all informa-
tion regarding the actual or suspected non-compliance (section 320).
If the proposed accountant is unable to communicate with the predecessor accountant, the proposed
accountant shall take reasonable steps to obtain information about the circumstances of the change
of appointment by other means.
Step 4: Determining whether to disclose the matter to an appropriate authority
4.1 Disclosure to an appropriate authority would be precluded if doing so would be contrary to law or
regulation.

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 4.2 In deciding whether or not to make a disclosure, the professional accountant shall consider the
actual or potential harm that is or may be caused by the matter to investors, creditors, employees
or the general public. The decision will also be influenced by the following:
* the entity is engaged in bribery (e.g. of local or foreign government officials for purposes of
securing large contracts);
* the entity is regulated and the matter is of such significance as to threaten its licence to
operate;
* the entity is listed on a securities exchange and the matter might result in adverse conse-
quences to the fair and orderly market in the employing organisation’s securities or pose a
systemic risk to the financial markets;
* the entity sells harmful products; and
* the entity is promoting a scheme to its clients to assist them in evading taxes.
Furthermore, the decision will also be influenced by external factors such as:
* whether there is an appropriate authority able to receive and deal with the information;
* whether robust and credible protection exists from civil, criminal or professional liability or
retaliation; and
* whether there are threats to the physical safety of any person.
4.3 If the professional accountant determines that disclosure of the matter to an appropriate authority
is an appropriate course of action in the circumstances, that disclosure is permitted pursuant to
paragraph R114.1(d) (confidentiality) of the Code.

Step 5: Documentation
5.1 The professional accountant is encouraged to have the following matters documented:
* how management or those charged with governance have responded to the matter;
* the courses of action considered, the judgements and the decisions made; and
* how the professional accountant is satisfied that all his/her responsibilities have been fulfilled.
Professional services other than audits of financial statements
The above will also be applicable to the delivery of services other than audits of financial statements by professional
accountants.

PART 4 – INDEPENDENCE
Introduction
1. As has been pointed out, the SAICA Code places a great deal of importance on independence
particularly in respect of assurance engagements. This is not surprising as, by definition, an assurance
engagement is one where a professional accountant in public practice expresses an opinion/conclusion
on client information to enhance the degree of confidence of third parties in that information. It is easy
to understand that if the professional accountant is not clearly independent of the client or the infor-
mation, the intended increase in credibility/confidence will not be achieved.
2. Studying independence in terms of the SAICA Code with its unfamiliar terminology and long-winded-
ness can be daunting, but the key to coping with it is to recognise firstly the importance of independence
and secondly that the Code presents a conceptual framework for dealing with independence issues,
which, if clearly understood, makes the task a great deal easier.
3. The SAICA Code contains two very long sections which deal with independence:
* Part 4A: Independence – Audit and Review Engagements;
* Part 4B: Independence – Other Assurance Engagements.
This text deals only with Part 4A . The reasons for this are that the conceptual approach to independence
applies in exactly the same way to both sections, the content of both sections is very repetitive and that
your studies concentrate on audit engagements, reviews to a lesser extent, and do not cover other assurance
engagements.

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4. Part 4A of the Code essentially provides narrative passages pertaining to such matters as financial interests,
family and personal relationships, temporary staff assignments and a host of other situations which may
threaten independence. In this text we have chosen to illustrate the application of the conceptual approach
to these potential independence problems by way of example. We have described a situation, circumstance
or relationship, identified the threat posed and then suggested suitable safeguards.

The conceptual approach applied to independence

1. Before considering the conceptual framework approach to independence, we should consider what inde-
pendence comprises. It comprises:
1.1 Independence of mind – the state of mind that permits the expression of a conclusion without
being affected by influences that compromise professional judgement, allowing an individual to
act with integrity, objectivity and professional scepticism.
1.2 Independence in appearance – the avoidance of facts and circumstances that are so significant
that a reasonable and informed third party, having knowledge of all relevant information,
including safeguards applied, would reasonably conclude that a firm’s, or member of the assur-
ance team’s, integrity, objectivity or professional scepticism had been compromised.
As can be seen from the definitions above, independence is about an independent state of mind and the
appearance of independence. Both are very important. Why? Bear in mind that a member who has, for
example, a financial interest in a client may actually perform his duties to that client with the highest level
of independence (state of mind) but will still not be perceived to be independent by any party who is aware
that he has a financial interest in the client (appearance). The member should not only “be independent, he
should be seen to be independent.”
2. Breach of an Independence Provision for Audit and Review Engagements
2.1 Breaches relate to breaches to the code that have already occurred as opposed to implementation
safeguards to prevent the breach occurring. If a firm concludes that a breach of independence has
occurred, the firm shall:
* end, suspend or eliminate the interest or relationship that created the breach and address the
consequences of the breach;
* requirements:
 consider and comply with legal or regulatory requirements; and
 consider reporting the breach to a professional or regulatory body or oversight authority;
* communicate the breach in accordance with its policies and procedures:
 the engagement partner;
 those with responsibility for the policies and procedures relating to independence;
 other relevant personnel; and
 those who need to take appropriate action;
* evaluate the significance of the breach and its impact on the firm’s objectivity and ability to
issue an audit report:
 the nature and duration of the breach;
 the number and nature of any previous breaches with respect to the current audit engage-
ment;
 whether an audit team member had knowledge of the interest or relationship that created
the breach;
 whether the individual who created the breach is an audit team member or another indi-
vidual for whom there are independence requirements;
 if the breach relates to an audit team member, the role of that individual;
 if the breach was created by providing a professional service, the impact of that service,
if any, on the accounting records or the amounts recorded in the financial statements on
which the firm will express an opinion;
 the extent of the self-interest, advocacy, intimidation or other threats created by the
breach;

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 * depending on the significance of the breach, determine:
 whether to end the audit engagement; or
 remove the relevant individual from the audit team;
 use different individuals to conduct an additional review of the affected audit work or to
re-perform that work to the extent necessary;
 recommend that the audit client engage another firm to review or re-perform the affected
audit work to the extent necessary;
 if the breach relates to a non-assurance service that affects the accounting records or an
amount recorded in the financial statements, engage another firm to evaluate the results
of the non-assurance service or have another firm re-perform the non-assurance service
to the extent necessary to enable the other firm to take responsibility for the service.
2.2 If action can be taken to address the consequences, the firm shall discuss with those charged with
governance:
* the significance of the breach, including its nature and duration;
* how the breach occurred and how it was identified;
* the action proposed or taken and why the action will satisfactorily address the consequences
of the breach and enable the firm to issue an audit report;
* objectivity has not been compromised; and
* any steps proposed or taken by the firm to reduce or avoid the risk of further breaches
occurring.
2.3 If the firm determines that action cannot be taken to address the consequences of the breach
satisfactorily, the firm shall inform those charged with governance as soon as possible and take
the steps necessary to end the audit engagement in compliance with any applicable legal or
regulatory requirements.
2.4 Document
If the breach occurred, the frim shall document:
* the breach;
* the actions taken;
* the key decisions made;
* all the matters discussed with those charged with governance; and
* any discussions with professional or regulatory body.

Illustrative examples
The examples laid out in the charts which follow, describe specific situations, circumstances or relationships which
may create threats to independence. The charts classify the threat, and indicate which safeguards might be appro-
priate. Remember the fundamental principle which is primarily under threat is objectivity.
The following definitions are important for this section:
1. financial interest: * an interest in an equity or other security, debenture, loan or other debt instru-
ment of an entity, including rights and obligations to acquire such an interest.
2. direct financial interest: * a financial interest owned directly by, and under the control of, an individual
or entity; or
* a financial interest beneficially owned through an investment vehicle (e.g.
unit trust, mutual fund), trust, estate, etc., which is controlled by the indi-
vidual or entity.
3. indirect financial interest: * a financial interest beneficially owned through a collective investment
vehicle, (e.g. unit trust, mutual fund) estate or trust over which the individual
or entity has no control.
4. immediate family: * spouse (or equivalent) or dependent
5. close family: * parent, child or sibling who is not an immediate family member.

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6. For the purposes of section 4A – Independence – Audit and Review Engagements, “audit” includes: “audit
team”, “audit engagement”, “audit client”, and “audit report” and applies equally to “review team”,
“review engagement”, “review client” and “review re-port”.

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Situation, Circumstance, Relationship Threat Safeguards
1. Financial interests in an audit client (section 510)
1.1 A member of the audit team or his immediate family member (spouse or Self-interest * Disposal of the financial interest if held by the firm or withdrawal from
dependent) or the firm has a direct or material indirect financial interest in an the engagement.
audit client. * Disposal of the financial interest before the individual becomes a
member of the audit team if held by the member of the team or his
immediate family member.
* Disposal of the indirect financial interest in total or to the extent that it
is no longer material before the individual becomes a member of the
audit team.
* Removal of the member of the audit team from the audit engagement.
Note 1: If the financial interest arises out of an inheritance, a gift or as a
result of a merger the same threat will exist and the same safe-
guards can be applied, i.e. disposal at the earliest practical date or
removal of the member from the audit team.
Note 2: None of the following shall have a direct financial interest or a
material indirect financial interest in an audit client
 a member of the audit team;
 an immediate family member of this individual;
 the firm.
1.2 A close family member (parent, child, or sibling) of the member of the audit Self-interest * Disposal of the interest (or portion thereof) at the earliest date. The
team has a direct or material indirect financial interest in an audit client. close family member will have to make this decision.
Note: the significance of the threat will depend upon: * Notifying the audit client’s governance structures (e.g. the audit com-
* the nature of the relationship between the member of the audit team and mittee) of the interest.
the close family member; * Providing an additional independent review of the work done by the
* the materiality of the financial interest to the close family member; member of the audit team with the close family relationship.
* the significance and influence of the member of the audit team in relation * Removal of the affected member from the audit team.
to the audit.

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Situation, Circumstance, Relationship Threat Safeguards
1.3 The firm or a member of the audit team (or a member of his immediate Self-interest * The firm or member of the audit team should resign the position of
family) holds a direct financial interest or a material indirect financial interest trustee. However, resignation will not be necessary if:
in an audit client in the capacity of a trustee.  the firm, or the member, or the member’s immediate family are not
Example. Joe Soap and Co, an audit firm, is a trustee of Laduma Trust. beneficiaries of the trust;
Laduma Trust holds shares in Plexcor (Pty) Ltd. Joe Soap and Co are the  the interest held by the trust in the audit client is not material;
auditors of Plexcor (Pty) Ltd.  the trust is not able to exercise significant influence over the audit
client; and
 the firm or the member of the audit team do not have significant
influence over the investment decisions of the trust.
1.4 A partner in the office of the engagement partner, or his immediate family Self-interest * The holder of the financial interest must dispose of it as no safeguards
holds a direct or material indirect financial interest in an audit client. can reduce the self-interest threat to an acceptable level.
* The audit appointment may have to be given up. (Note that the imme-
diate family member cannot be forced to dispose of the financial
interest.)
1.5 Other partners and managerial employees or their immediate family Self-interest * If the involvement of partners and managerial employees is anything
members, hold a direct or material indirect financial interest in an audit client other than minimal, the holder of the interest must dispose of it.
to which they provide non-assurance services (e.g. IT services).
1.6 An individual who has a close personal relationship with a member of the Self-interest, familiarity * Notifying the audit client’s governance structures (e.g. the audit commit-
audit team, for example best friend, has a direct or material indirect financial tee) of the interest (in effect obtaining their approval).
interest in the audit client. * Providing an additional independent review of the work done by the
member of the audit team who has a close personal relationship with
the person who has the financial interest.
* Removal of the member from the audit team.
* Excluding the member from significant decision making on the audit.
1.7 A member of the audit team or his immediate family member or the firm has Self-interest * The holder of the financial interest must dispose of it or
a direct financial interest (or a material indirect financial interest) in an entity * The audit appointment must be given up. (Note: Denise Chetty cannot
which has a controlling interest in the audit client and the client is material to be forced to dispose of her investment so Das Chetty may have to resign
the entity. the audit appointment.)
Example: Ridabike (Pty) Ltd is 60% owned by Denise Chetty. Ridabike (Pty)
Ltd owns 75% of the shares in Roadie (Pty) Ltd. Roadie (Pty) Ltd is audited
by Das Chetty. He is Denise Chetty’s husband. Roadie (Pty) Ltd is one of
Ridabike (Pty) Ltd’s major investments.

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Situation, Circumstance, Relationship Threat Safeguards
2. Loans and guarantees (section 511)
2.1 A loan or guarantee made by an audit client that is a bank or similar insti- No threat (the threat arises Comment. Some threats, (self-interest) could arise if the loan is material to
tution, to the firm under normal lending procedures, terms and requirements. if the loan was not made the audit firm. This would be especially significant if the firm is in any way
under normal lending financially dependent on the audit client to the extent that audit decisions
conditions) could be affected. The only suitable safeguard may be for the audit firm to
seek financing from a non-client financial institution.
2.2 A loan by an audit client that is a bank or similar institution made to a mem- No threat (as above) Comment. If the loan was not made according to normal lending proced-
ber of the audit team (or his immediate family) under normal lending ures, terms and requirements, it should be thoroughly investigated by the
procedures, terms and requirements. bank, the audit firm and the member of the audit team should be removed
Examples: mortgages, overdrafts, vehicle finance. from the audit engagement and be required to pay back the loan
2.3 The firm or a member of the audit team (or immediate family) makes or Self-interest * The loan should be cancelled and repaid unless it is immaterial to both
accepts a loan to or from an audit client other than a bank or similar parties. There is no other suitable safeguard.
institution or a director or officer of the client. Note: this amounts to direct
financial involvement.
3. Business relationships (section 520)
3.1 The firm or a member of the audit team (or immediate family) has a close Self-interest and intimida- * Termination of the business relationship.
business relationship with an audit client or its management, for example tion, for example client * Reducing the magnitude of the relationship so that the financial interest
* a joint venture threatens to terminate the is immaterial and the relationship is clearly insignificant.
* an agreement whereby the firm acts as a distributor or marketer of the business relationship if * Resigning the audit engagement.
audit client’s products/services or vice versa (e.g. accounting package certain audit problems are
not overlooked. * Removing the member from the audit team (i.e. where the close business
software). relationship is between the member of the team and the audit client).
* Independent review of member of the audit team’s work.
3.2 A firm or a member of the audit team purchases goods from an audit client in No threat Comment. Some threat (self-interest, intimidation) may arise if the trans-
the normal course of business on an arms-length basis. actions are:
* not in the normal course of business;
* not arms-length (potential intimidation); or
* of significant nature or magnitude.
If this is the case, safeguards should be
* cancelling or reducing the transactions (including any future trans-
actions);
* notifying the clients governance structures (e.g. audit committee);
* removing the member from the audit team;
* firm policy that prohibits audit team members from transacting with an
audit client

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Situation, Circumstance, Relationship Threat Safeguards
4. Family and personal relationships (section 521)
4.1 An immediate family member (spouse or dependent) of a member of the Self-interest, familiarity * The member must be removed from the audit engagement team.
audit team is and intimidation * Possibly restructuring the responsibilities of the audit team so that the
* a director, an officer or an employee (e.g. financial controller) who is in a member of the audit team does not deal with the immediate/close
position to exert direct and significant influence over the subject matter family member.
of the audit engagement, at the client. Note: In terms of section 90 of the Companies Act 2008 an individual who
is related to any director or employee or consultant who is involved in the
maintenance of the company’s financial records or preparation of its finan-
cial statements may not be appointed auditor (designated auditor).
4.2 A close family member (parent, child or sibling) of a member of the audit Self-interest, familiarity * The member of the audit team must be removed from the audit engage-
team is a director, an officer or an employee who is in a position to exert and intimidation ment.
direct and significant influence over the subject matter of the audit engage-
ment, at the client.
Comment. The likelihood of the threat will have to be assessed in terms of
the position the close family member holds with the client, and the role filled
by the member of the audit team on the audit.
Example 1. Zeb Ngidi is a junior trainee on the audit team. His father is the fac- Insignificant threat No safeguard required
tory manager of the audit client.
Example 2. Raj Naidu is the senior-in-charge of the audit of Megamen (Pty) Ltd. Self-interest, familiarity Safeguards against the threat posed by example 2 would be:
His brother is the financial controller of Megamen (Pty) Ltd, a senior financial and intimidation * removing Raj Naidu from the audit team;
position.
* structuring Raj Naidu’s responsibilities in such a way that he does not
Note 1: The same principles as discussed under 4.2 will apply to a person other have to deal with matters which are the responsibility of his brother, for
than a close family member who has a close relationship with a member example he is no longer the senior-in-charge of the audit;
of the audit team, for example a lifelong friend and who is a director,
* having any work carried out by Raj Naidu, independently reviewed.
officer or employee in a position to exert direct or significant influence
over the subject matter of the audit engagement at the client.

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Note 2: Consideration must be given as to whether a self-interest, familiarity or
intimidation threat arises where a personal or family relationship between
a partner or employee of the firm who is not a member of the audit team
and a director, officer or employee of the audit client, who is in a position
to exert direct influence on the subject matter of the audit engagement
exists. Example. Jacqui Chan, a tax partner of Corbett and Co, an audit
firm, has a close personal relationship with Chuck Morris, an employee at
Kwando (Pty) Ltd, an audit client. Jacqui Chan is not part of the audit
team. Whether or not the threats arise will depend on:
* the nature and “closeness” of Jacqui Chan and Chuck Morris’
relationship;
* the extent of influence (if any) Chuck Morris has in the subject
matter of Kwando (Pty) Ltd’s financial statements;
* his seniority in the company.
5. Employment with an audit client (section 524)
5.1 A member of the audit team, or partner of the audit firm, leaves the firm to Self-interest, familiarity
take up a position as a director, an officer or an employee of the audit client. and intimidation
Comment. The significance of the threat to independence will have to be assessed
in terms of the following:
* the position the former member has taken at the audit client;
* the amount of involvement the former member of the audit team will have with
the audit team;
* the position the former member held within the audit team;
* the length of time which has elapsed since the former member was part of the
audit team.
Example 1: Art Simon, the former manager in charge of the audit of Crossbow If a threat to independence does exist, the following safeguards should be
(Pty) Ltd, took up a position as financial controller at Crossbow (Pty) Ltd considered and applied as necessary:
during the year currently under audit – potentially a high threat to inde- * introducing changes to the audit strategy and audit plan;
pendence. * assigning a strong and experienced audit team to the engagement (to
Example 2: Three years ago, Geoff Martin joined Crossbow (Pty) Ltd as a credit counter any intimidation threat);
controller. He had previously worked as a 2nd year trainee on the audit of Cross- * introducing an additional review (of the audit work) by a partner/man-
bow (Pty) Ltd – no threat to independence. ager who was not a member of the audit team.

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Situation, Circumstance, Relationship Threat Safeguards
5.2 A member of the audit team participates in the audit engagement while Self-interest (and * Policies and procedures at the firm which require employees to notify
knowing he will be joining the audit client at some stage in the future. (Note: familiarity) the firm when entering serious employment negotiations with an audit
the member of the audit team may deliberately overlook certain audit client.
“problems” so as not to jeopardise his future employment with the audit * Removal of the member from the audit team.
client.) * Performing an independent review of any significant judgements made
by the member of the audit team while on the engagement.
Note: If the designated (key) audit partner of a public interest entity audit (e.g.
listed company) joins the company as:
* a director or prescribed officer; or
* an employee in a position to exert significant influence over the prep-
aration of the client’s accounting records or the financial statements on
which (his former) firm will express an opinion, a familiarity or intimi-
dation threat will be created and independence would be deemed to be
compromised unless
* subsequent to the partner ceasing to be the key audit partner, the public
interest entity has issued audited financial statements covering a period
of at least 12 months and
* the former partner did not work on the audit.
6. Temporary personnel assignments (section 525)
A firm lends a trainee (or other staff member) to an audit client to assist in the Self-review The following safeguards must be applied:
accounting department. * The trainee/employee may not:
Note: A firm employee who has been loaned to an audit client may not take on  make any management decisions;
any management responsibilities at the client. There are no safeguards that  exercise discretionary authority to commit the client, for example
could make such a situation acceptable. sign a purchase order, write off a bad debt.
* The trainee on “loan” should not be given audit responsibility for any
function he performed whilst on loan.
* The audit client must acknowledge its responsibility for directing and
supervising the “on-loan trainee”.
* The loan of the staff member should be for short period only.
* The trainee on “loan” does not form part of the audit team.

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7. Recent service with an audit client (section 522)
7.1 An individual who during the period covered by the audit report, has been a Self-interest, familiarity * This individual should not be assigned to the audit team for that client’s
director, officer, or employee in a position to exert direct and significant and self-review (may be audit, as no safeguards can reduce the threat to an acceptable level.
influence over the subject matter of the audit engagement, joins the audit auditing his own work) Note: In terms of Sec 90 of the Companies Act 2008, a person who was a
firm which conducts the audit of his former company. director at any time during the five financial years preceding the
current year, may not be appointed as auditor. This does not legally
Example. Max Mosely CA(SA), resigned from Crafters Ltd where he had been prevent the person from working as part of the audit team, but in
employed as the financial controller for 5 years, half way through the current terms of the Code, he should not.
financial year. He was offered, and accepted the position of audit manager at Note: If the individual as described in 7.1, joined the audit firm prior to the
Uyse and Co, the auditors of Crafters Ltd. period covered by the audit report, the significance of the threat
which this situation poses will take into account:
* the position the individual held with the audit client;
* the length of time that has passed since the individual left the
audit client; and
* the role the individual fills on the audit team.
If the threat is perceived to be significant, the following safeguards may be
applied:
* not assigning the individual to the audit team for that client;
* introducing an additional review of the individual’s work on the audit;
* notifying the client’s governance structures of the situation.
8. Serving as an officer or a director of an audit client (section 523)
8.1 A partner or employee of the firm accepts an appointment to serve as an Self-review and self- * The firm must withdraw (resign) from the audit engagement or the
officer or director of the audit client (without resigning from the audit firm). interest, advocacy (pro- partner/employee must resign from the firm. There are no other safe-
moting the position of the guards which will reduce the threats to an acceptable level.
client) Note: In terms of section 90 a director, officer or employee of the company
may not be the auditor of the company.
Note: In terms of section 90, an individual appointed as company secretary
may not be appointed auditor.

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9. Long association of senior personnel with an audit client (section 540)
Senior personnel, for example partner/manager, have been involved with the client Familiarity and self- * Changing the senior personnel on the audit team on a planned basis.
over a long period of time. interest * Introducing additional independent reviews by a professional accountant
Example. John Jonas, the audit manager of Contion Ltd, has been associated with of the work done by the partner/manager.
the client for 10 years, starting as a first year trainee and working his way up to * Regular internal or external quality control reviews.
manager on the audit. As he spends many hours at Contion Ltd, he has his own Note: Section 92 of the Companies Act 2008 states that the same individual
office and is listed in the internal telephone directory. may not serve as the designated auditor for more than five consecutive
years. As John Jonas is not the designated auditor, Code safeguards would
be applied as indicated above.
10. Provision of non-assurance services to an audit client (section 600)
Management responsibility. As a basic principle management is responsible for
mmanaging the entity and the auditor should not in any way take over this
responsibility whether the company is a public or private company as it presents a
significant threat to independence.
10.1 A firm is requested by an audit client to provide the following non-assurance Self-interest and self- * The firm should not permit the rendering of such non-assurance services
services: review and advocacy to audit clients. This policy must be conveyed to all audit teams and
* authorisation, execution and consummation of certain transactions; those at the firm involved in formulating the terms of engagement with
* making certain business decisions for the client; audit clients.
* management reporting; Note 1. All of the services listed under 10.1 are management client
* setting policy and strategic direction; responsibilities.
* supervision of the client’s staff in the performance of their normal Note2. In terms of Sec 94 of the Companies Act 2008, the audit committee
activities; of a public company must determine the nature and extent of non-audit
* taking responsibility for designing, implementing and maintaining inter- work carried out by the auditor and must be satisfied that the auditor is
nal control. and remains independent.
10.2 A firm advises an audit client on accounting principles and disclosure or No threat These activities are considered to be “part of the dialogue of the audit
the appropriateness of financial and accounting controls or the methods process” and an appropriate means to promote the fair presentation of the
used in determining stated amounts of assets and liabilities or proposed financial statements. The auditor advises and assists, but does not make
adjusting journal entries. decisions.

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11. Accounting and Bookkeeping services
The Code draws a distinction between “public/listed companies” and “private
companies”. It states that a firm should not provide accounting and bookkeeping
services (as listed below) to a public/listed company which is its audit client.
However it suggests that the firm may provide the services listed below to a
private company which is its audit client provided the appropriate safeguards are
put in place to reduce any self-review threat to an acceptable level.
11.1 A firm provides the following accounting and bookkeeping services to an Self-review In the case of public companies, the best safeguard would be compliance
audit client: with the audit committee’s interpretation of accounting and bookkeeping
* recording transactions which the client has approved and classified; services. The audit committee:
* posting such transactions to the client’s general ledger;  must approve all non-audit work; and
* posting client approved entries to the trial balance;  must be satisfied that the auditor is independent.
* preparing the client’s payroll and related services, for example In the case of a private company, if the audit firm perceives that a signifi-
submitting PAYE returns; cant threat may arise, safeguards might include:
* drawing up the annual financial statements from the trial balance. * arranging for such services to be performed by someone not on the
Comment. There appear to be two issues here. Firstly, are the services described audit team;
above part of the preparation of the financial statements (which is a management * notifying the audit team that they may not make any management
responsibility) and secondly, are the services considered to be part of “habitually decisions;
or regularly performing the duties of accountant or bookkeeper…” because in * clarifying for management:
terms of section 90 of the Companies Act 2008, a person who performs the duties  that management is responsible for source data, transaction approv-
of accountant or bookkeeper may not be appointed as auditor (because of the al, journal entry origination and approval, etc.;
obvious lack of independence).  what the audit team is permitted to do.
Traditionally the services listed above have not been regarded as “habitually or Note: In the situation where a company avoids an audit and qualifies to
regularly performing the duties of accountant or bookkeeper” so section 90 of the have its AFS independently reviewed because the AFS are externally
Companies Act would not apply. However, a self-review threat still arises and compiled, the reviewer (who will frequently be a professional accountant)
safeguards should be put in place may not also be the compiler of the AFS (lack of independence).
12. Valuation services
A firm performs a valuation (of an asset, liability, investment) for an audit client Self-review Where the valuation has a material effect on the financial statements and
which is to be incorporated into, or used in conjunction with, the client’s financial involves a significant degree of subjectivity the valuation service should not
statements. be undertaken.
Example: Company A holds 20% of the shares in (private) company B. The Where a valuation service is undertaken, the self-review threat could be
directors of A request the auditors to value the investment at reporting date, so that reduced to an acceptable level by the introduction of the following safe-
the fair value can be incorporated into the year-end financial statements. guards:

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Note again that in the case of a public company the audit committee must deter- * Ensuring that the personnel who perform the valuation, are not part of
mine the nature and extent of any non-audit work to be conducted by the auditor. the audit team.
This is an effective safeguard. * Involving an individual who was not a member of the audit team to
review the valuation.
* Confirming with the client, its understanding of the underlying assump-
tions and methodologies used in the valuation and obtaining its approv-
al thereof.
13. Provision of taxation services to an audit client
Taxation services can be broken down into four broad categories, each of which
may present different kinds of threat or no threat at all. The four categories are
* preparation of tax returns
* carrying out tax calculations for the purpose of preparing accounting entries
* tax planning and advisory services
* tax services involving valuations
* assistance with resolution of tax disputes.
13.1 The audit firm assists with the preparation of tax returns and advises the audit No threat Taxation services are generally not perceived to impair independence but
client on any queries arising from the SARS relating to the tax return. the audit firm must be careful not to make management decisions or assume
responsibility for the tax affairs of the audit client. The role should be
advisory
13.2 The firm prepares calculations of current and deferred tax liabilities for the Self-review Safeguards could include:
purposes of preparing journal entries for a private company which will be * using individuals who are not members of the audit team to perform the
subsequently audited. service;
* using a partner who is not a member of the audit team to review the
calculations;
* not performing the service if the calculations have a very material effect
on the financial statements;
* obtaining advice from an external tax professional;
* complying with the audit committees ruling on non-audit work.
13.3 As in 13.2 above but for public/listed companies. * The Code states that the auditor should not prepare tax calculations for
a public company that are material to the financial statements other
than in an “emergency”

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Situation, Circumstance, Relationship Threat Safeguards
13.4 The firm provides tax planning and advisory services which will affect Self-review Safeguards as above.
matters to be reflected in the financial statements. Note: If the advice given is clearly supported by the tax authority,
precedent or established practice, then generally speaking no threat to
independence arises.
13.5 The firm represents an audit client in the resolution of a tax dispute, which Self-review or advocacy. * Safeguards as above. However, if the amounts involved are material to
has arisen from SARS rejecting the client’s arguments on a particular issue the financial statements on which the auditor will express an opinion,
and the matter has been referred to a hearing/court by either the SARS or the there are no safeguards which would reduce the threat posed (by acting
audit client. for the client) to an acceptable level.
Comment. Professional accountants who render professional tax services in any Objectivity, integrity and The following safeguards should protect the professional accountant:
form may often find themselves faced with difficult situations. Generally clients professional behaviour * A professional accountant should put forward the best position in
do not like paying tax and may go to great lengths to evade tax. Clients may favour of a client, provided he does so:
request a professional accountant to submit false returns on their behalf, or may  with professional competence, integrity and objectivity,
themselves deliberately withhold information from the professional accountant  within the bounds of the law.
who is acting on their behalf so as to evade tax. Some clients may even become * A professional accountant should ensure that the client understands
abusive with a professional accountant or make claims that “Everyone evades that:
tax, so why shouldn’t I?”  tax services and advice offered may be challenged by the South
Paying tax can be an emotive issue but the overriding requirement is that a pro- African Revenue Services where they are based on opinion rather
fessional accountant should not be associated with any taxation return or com- than fact, as is often the case,
munication in which there is reason to believe that it:  responsibility for the content of a tax return rests with the client
* contains a false or misleading statement; even where the return has been prepared by the professional
* contains statements or information furnished recklessly or without any real accountant.
knowledge of whether they are true or false; * Material matters relating to tax advice/opinions given to a client, should
* omits or obscures information required to be submitted and such omission or be recorded in writing. This is essential to prevent a client accused of
obscurity would mislead the revenue authorities. tax evasion, from falsely claiming that he was “following the advice
given to him by the professional accountant”.
To assist a client to evade tax will amount to a failure to comply with the funda- * In preparing a tax return, a professional accountant may rely on
mental principles. information furnished by the client, provided :
 the information appears reasonable;
 the professional accountant makes use of the client’s returns for
prior years where feasible;
 the professional accountant makes reasonable enquiries when
information appears incorrect or incomplete

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but the professional accountant is encouraged to:
 request supporting data as required;
 make reference to relevant documents and records of the client’s
business operations.
* Where a professional accountant discovers that there have been mater-
ial errors or omissions relating to tax returns submitted in respect of
prior years, he should:
 notify the client of the error or omission
 advise the client to make full disclosure of the error or omission to
the revenue authorities
 advise the client of the powers of the revenue authorities to obtain
information which they may require, for example seize the client’s
books and records and to impose penalties, for example double
the amount of tax payable.
. Comment. It is quite possible that the client was well aware of the omis-
sion and is not prepared to make any disclosures. This creates a difficult
situation for the professional accountant if he is associated with the incor-
rect return which was submitted. In terms of the fundamental principle of
confidentiality, the professional accountant may not inform, at this stage,
the revenue authorities without permission, as this may be a breach of con-
fidentiality; on the other hand section 110 of the Code, states that a mem-
ber should not be associated with any false return. Advice given by the
technical department of SAICA on this anomaly in the Code is that a
professional accountant who is associated with a false return which has
been submitted, and which the client will not rectify, should notify the rev-
enue authorities that his association with the return can no longer be relied
upon but without giving any details. Legal advice should be taken before
doing this! Of course this action will alert the authorities to the problem
and they will follow it up.
* As a general rule a professional accountant should not continue an
association with a dishonest client, and should be aware that in terms of
section 105 of the Income Tax Act, the Commissioner is empowered to
report a professional accountant to SAICA for unprofessional conduct.

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14. Provision of internal audit services to an audit client
Internal audit functions vary and can include:
* monitoring of internal controls;
* reviewing the economy, efficiency and effectiveness of operating activities,
both financial and non-financial;
* assessing risks faced by the company and the company’s responses thereto;
* reviewing compliance with laws and regulations, management policies, etc.
All of the above are responsibilities of management so if the external auditor gets
too involved with these activities there is a significant threat that the auditor will
be assuming management responsibilities, which is not acceptable as it will com-
promise the auditor’s independence.
Furthermore, if the firm uses the work of internal audit in the course of the external
audit, there is a potential self-review threat to independence.
14.1 Providing internal audit services such as the following would equate to Self-review * Although not specifically prohibited by the Companies Act 2008, the
assuming management responsibilities: provision of both internal and external audit services by the same firm
* setting internal policy and strategic direction for internal audit; is unlikely to be acceptable to the audit committee for independence
* directing and taking responsibility for internal audit’s employees; reasons. It would also be contrary to the King IV Report on Corporate
* deciding which recommendations from internal audit should be imple- Governance, particularly for public (listed) companies.
mented; * The best safeguard would therefore be not to offer both internal and
* performing procedures such as business risk assessment on behalf of external audit services to the same client. However, the Code does state
internal audit. that a firm can offer (some) internal audit services and at the same time
avoid assuming management responsibility if management:
 designates an appropriate and competent resource to be responsible
at all times for internal audit activities and to acknowledge responsi-
bility for designing, implementing and maintaining internal control;
 reviews, assesses and approves internal audit work (scope, risk and
frequency);
 evaluates the adequacy of the internal audit services and findings
Note: In some situations there may be internal audit work the audit firm can do and determines which recommendations to implement;
which presents no threat, for example where the audit firm provides internal audit  reports to those charged with governance on the significant findings
services of an operational (not financial) nature, for example an evaluation of an and recommendations arising from the internal audit service.
audit client’s product distribution system. * In the case of a public company, the audit committee would have to
approve the appointment to do this work.

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15. Provision of Information Technology services to an audit client
15.1 The audit firm provides design and implementation services for financial Self-review If the audit client is a public/listed company the audit firm should not
systems which form a significant part of the internal control over financial provide IT services as described under 15.1 as no safeguards can reduce
reporting or which are used to generate information which forms part of a the threat to independence to an acceptable level (because of the level of
client’s financial statements, for example revenue and receipts cycle “public interest” in the audit client).
software. If the audit client is a private company the safeguards to address the threat
Note: The following IT systems services are deemed not to create a threat to inde- should include the following:
pendence (as long as the firm’s personnel do not assume a management responsi- * the audit client acknowledges its responsibility for establishing and
bility) for either a private or public/listed company: monitoring a system of internal controls;
* design and implementation of IT systems unrelated to internal control over * the audit client designates a competent, senior employee with the
financial reporting or which do not generate information forming a significant responsibility of making all management decisions with respect to the
part of the accounting records, for example a sales forecasting system; design and implementation of the hardware or software required;
* implementing “off the shelf” accounting or financial reporting software (not * the audit client evaluates the adequacy and results of the design and
developed by the firm); implementation of the system;
* evaluating and making recommendations with respect to a system designed, * the audit client is responsible for the operation of the system (hardware
implemented or operated by another service provider. and software) and the data used or generated by the system; and
* the IT service is carried out by personnel not involved in the audit
engagement.
16. Provision of litigation support services to an audit client
Litigation support services include acting as an expert witness, calculating esti- Self-review Safeguards might include:
mated legal damages payable or receivable, or assisting in gathering documenta- * using professionals (from the firm) who are not members of the audit
tion in relation to a dispute/litigation. team to perform the service;
A self-review threat will usually arise only where the result of providing the litiga- * using independent experts;
tion service affects the financial statements, for example where the service involves * ensuring that the firm does not make management decisions on behalf of
assisting with determining an estimate of legal damages which must be disclosed in the client.
the financial statements.
17. Provision of legal services to an audit client
Legal services differ from litigation support services. Legal services are defined as
services which can only be offered by a qualified lawyer. (Many of the larger firms
employ lawyers.) Litigation support services (see 16 above) can be provided by
anyone with the necessary expertise.

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17.1 The legal service provided supports an audit client in the execution of a Self-review If the following safeguards are put in place, the threat would normally be
transaction, for example drafting a contract, providing legal advice, or insignificant:
providing legal due diligence for say, a merger. * the lawyer who provides the legal service is not a member of the audit
team;
* having a lawyer who was not involved in providing the legal service:
 advise the audit team on the details of the service; and
 performing a review of any treatment of matters arising from the
legal service in the financial statements.
17.2 The legal service provided is to act for an audit client in a dispute or liti- Self-review and advocacy This legal service should not be undertaken by an audit firm on behalf of an
gation when the amounts involved are material in relation to the financial audit client.
statements on which the firm will express an opinion.
17.3 The legal service provided is to act for an audit client in a dispute or liti- Normally no threat If the audit firm is concerned that there may be an advocacy or self-review
gation when the amounts involved are not material in relation to the finan- threat the safeguards described under 17.1 could be applied to reduce the
cial statements on which the firm will express an opinion. threat to an acceptable level.
17.4 The audit client wishes to appoint a partner or employee of the firm which Self-review and advocacy A partner or employee of the audit firm should not accept this appointment.
holds the audit appointment as legal advisor, i.e. the person to whom legal (A legal advisor is generally a senior management position, and indepen-
affairs are referred. (The person appointed remains an employee of the audit dence would be significantly threatened.)
firm.) Note: a partner in an audit practice may, besides being a registered
auditor, also be a qualified lawyer.
18. Recruiting senior management on behalf of an audit client
18.1 The firm is engaged to recruit suitable accounting staff for an audit client. Self-interest, familiarity Safeguards should include the following:
* limiting the service to reviewing the suitability of applicants against a
list of criteria drawn up by the client;
* leaving the final decision to the client;
* ensuring that the service is rendered by a professional at the firm who is
not a member of the audit team.
18.2 The firm is engaged by a public/listed company which is an audit client to Self-interest, familiarity In addition to the above, where the audit client is a public/listed company,
recruit a senior employee who will be in a position to exert significant the following additional safeguards should be implemented:
influence over the preparation of the client’s accounting records or the The audit firm should not:
financial statements on which the firm will express an opinion, for example * search for candidates to fill such positions as described in 18.2;
the financial director.
* undertake reference checks of prospective candidates for such positions
as described in 18.2.

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19. Corporate finance services
Whether providing corporate finance services will threaten independence, will
depend upon the nature of the service.
Examples
19.1 The firm promotes, deals in, or underwrites an audit client’s shares Self-interest and advocacy These activities should not be undertaken by the audit firm as there are no
safeguards which would reduce the threat to an acceptable level.
19.2 The firm assists an audit client in developing corporate finance strategies Self-interest, self-review Safeguards which could be applied:
and/or introduces clients to sources of finance and/or identifies potential and advocacy threats. * ensuring that management decisions are not made on behalf of the client
targets for the audit client to acquire. by implementing a client approval procedure as the assignment
progresses;
Note: Providing some types of corporate finance services may materially affect the * using individuals from the firm who are not members of the audit team
amounts reported in the financial statements on which the firm will express an on corporate finance assignments;
opinion. Self-review threats may arise.
* having an individual who was not involved in the corporate finance
service:
 advise the audit team on the details of the service; and
 review any accounting treatment for transactions arising from the
corporate finance service;
* ensuring that the firm does not commit the client to anything or consum-
mate a transaction on behalf of the client;
* discussing the engagement with the governance structures of the client;
* disclosing to the client any financial interest which the audit firm may
have in the advice it renders, for example the firm receives a commis-
sion from the source of finance it introduces to the audit client.
20. Fees (section 410)
20.1 Fees – relative size
The fees generated by one audit client represent a large portion of a firm’s Self-interest, intimidation Safeguards should include the following:
total fee income. * discussing the matter with the clients governance structures;
Note: The audit firm may compromise its independence because they do * taking steps to reduce dependency, for example actively seeking new
not want to lose the client (self-interest). clients
There is also a possibility that the client, realising that the audit firm * introducing external quality control reviews;
derives a large proportion of its income from it, will put pressure on the * consulting a third party on key audit judgements, for example the
audit firm by threatening to end the relationship (intimidation). appropriateness of the audit opinion to be given.

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Note: “Pre” and “Post” issuance quality control reviews
1. In a situation where an audit client is a public/listed entity and, for two con-
secutive years, the total fees from the client and its related entities (e.g. an
entity over which the client has direct or indirect control such as a subsidiary)
represent more than 15% of the total fees received by the audit firm, the firm
must:
* notify those charged with governance (including the audit committee), of
the 15% situation; and
* must discuss which of the safeguards, described below, the firm will imple-
ment to reduce any threats to an acceptable level.
Safeguard 1. Pre-issuance quality control review
Prior to issuing the audit opinion on the second year’s financial statements,
a professional accountant (in public practice) who is not a member of the
firm performs a quality control audit engagement; or
Safeguard 2. Post-issuance quality control review
After the audit opinion on the second year’s financial statements has been
issued, and before the audit opinion on the third year’s financial statements
have been issued, a professional accountant (in public practice) who is not
a member of the firm, performs a quality control review on the second
year’s audit.
2. The disclosure to, and discussion with, those charged with governance, shall
occur each year for as long as the 15% situation continues and one of the two
safeguards described above must be applied.
3. If the total fees significantly exceed 15% of the audit, the firm must determine
whether a post issuance review will reduce the threat to an acceptable level
and if not, a pre-issuance review must be conducted.
20.2 Fees – overdue
An audit client has not paid its fees for professional services for a long Self-interest Safeguards should include the following
time. Section 511 with respect to loans and guarantees might also apply to * Obtaining partial payment of overdue fees
situations where such unpaid fees exist. * Introducing an additional independent review of the work performed
(for quality). However, this will increase the fee!
Note: This may result in the audit firm not putting the necessary resources
and time into the current engagement, because the partner/manager does
not expect the fee to be paid. This threatens independence.

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Situation, Circumstance, Relationship Threat Safeguards
The firm shall determine:
(a) Whether the overdue fees might be equivalent to a loan to the client;
and
(b) Whether it is appropriate for the firm to be re-appointed or continue the
audit engagement.
20.3 Fees – contingent
Contingent fees are fees calculated on a predetermined basis relating to the Self-interest A firm may not enter into a contingent fee arrangement for an audit
outcome of the work performed or as a result of a transaction which arises engagement as no safeguards would reduce the threat to an acceptable
from the service. Note: fees are not regarded as contingent if they are estab- level.
lished by a court or public authority, for example liquidator’s fee.
* A contingent fee is proposed for an audit engagement. The audit firm is Self-interest Safeguards which could be implemented include:
required to express an opinion on a set of financial statements which are * disclosing the nature and extent of the fee to the audit client’s gover-
to be used by the client to support a loan application. The audit client nance structures prior to the engagement;
offers to pay a fee equal to 5% of the loan applied for if the application
* having the “fairness” of the fee reviewed or decided upon by an inde-
is successful.
pendent third party;
* A contingent fee is proposed for a non-assurance engagement to be
* (see also 18 above relating to recruiting).
rendered to an audit client, for example the client engages the audit firm
to recruit senior personnel. The fee will be an amount equal to 10% of
the annual remuneration package payable to the person appointed.
21. Compensation and evaluation policies (section 411)
21.1 Members of the audit team are given a financial bonus for selling non-audit Self-interest Safeguards could include:
services to the audit client. (The audit team member could be more * changing or eliminating compensation methods of this nature.
interested in, or focused on, trying to earn bonuses than on audit work.) * removing the audit team member who sold the non-audit services from
the audit team.
* having the work of audit team member independently reviewed.
Note: An audit partner should not be remunerated based on his success at
selling non-assurance services.
22. Gifts and hospitality (section 420)
22.1 An audit client wishes to “reward” the firm’s audit manager by giving him Self-interest, familiarity A firm or member of the audit team should not accept gifts or hospitality
a holiday trip to America. and intimidation which are anything other than clearly insignificant.

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Situation, Circumstance, Relationship Threat Safeguards
22.2 An audit client gives each member of the engagement team an inexpensive No threat In determining whether the gift or hospitality is insignificant, the monetary
pen bearing the company’s logo, at the completion of the annual audit. value should be considered as well as whether the degree of independence
in the relationship between the client and audit team will be altered, for
example has a “professional” relationship become one of “familiarity”.
23. Actual or threatened litigation between the firm and an audit client
(section 430)
Where a client and firm are involved in actual or threatened litigation Self-interest or intimida- As this situation will very often make it impossible for the auditor to per-
instigated by either party, the relationship between them is likely to be tion form to the required standards, withdrawal from the audit engagement
altered significantly. Both parties are likely to be on the defensive and unco- would normally be the only option. Discussion with the audit committee
operative as they have been placed in adversarial positions. may resolve the issue.

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RULES REGARDING IMPROPER CONDUCT (IRBA)
As you are primarily studying auditing, you should be aware that the IRBA has a set of “rules regarding improper
conduct”. The opposite of “professional conduct” is “improper conduct” and registered auditors (the majority of
whom are also professional accountants in public practice), if found guilty of improper conduct, may be sentenced
to:
* a caution or reprimand;
* a fine;
* a suspension of the right to practice for a specified period;
* cancellation of registration and removal of the member’s name from the register of registered auditors.

The table below provides a summary of the acts or omissions by a registered auditor which will amount to improper
conduct.

Rule Reference The following will be regarded as improper conduct:

Contravention of or failure to comply with:
2.1 * the Auditing Profession Act;
2.2 * any other Act which should be complied with by a Registered Auditor, for example
2.5 Companies Act;
* auditing pronouncements prescribed by the IRBA;
2.6
* the IRBA Code of Professional Conduct.
Dishonesty:
2.3 * dishonesty in the form of any offence, especially:
theft, fraud, perjury, bribery and corruption.
2.4 * dishonesty in carrying out work and duties.
* dishonesty in relation to any office of trust held by the registered auditor.
2.7 Failure to perform any professional service with reasonable care and skill or failure to
perform the professional service at all.
2.8 Evasion of any tax, duty, levy or rate or assisting others in such evasion by knowingly or reck-
lessly making, signing or preparing false statements or records.
2.9 Vouching for the accuracy of estimates in future earnings
The registered auditor’s name may not be used in such a manner that it suggests the registered
auditor vouches for the accuracy of the forecast. (This lends unwarranted credibility to the
forecast.)
Contraventions in respect of trainee accountants
2.10 * imposing (or attempting to impose) restraints of any kind which will apply after the
traineeship.
However, this rule will not apply to restraining a trainee who becomes a registered auditor
from soliciting the practitioner’s existing clients for a period of one year after the trainee
ceases to be employed by the practitioner.
2.11 * requiring compensation for agreeing to the cancellation of a training contract (does not
apply to actual expenses paid to IRBA in respect of the training contract).
2.12 * failing in complying with his responsibilities to the IRBA/other persons
2.13 * failing to respond promptly to communications, orders requirements or requests.
2.15 * failing, after demand, to pay fees or other charges due to the IRBA.
Contraventions in respect of relinquishing engagements
2.14 * failing without reasonable cause to resign from a professional appointment when the client
requests the member to do so
2.16 * abandoning his or her practice without giving notice to clients and making necessary
arrangements for them to obtain the services they require.
2.17 Acting in a manner which brings the profession into disrepute.

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