📚Ethics in Accounting Unit 8 – Professional Competence and Due Care

What's This All About?

• Professional competence and due care are fundamental ethical principles for accountants and auditors
• Requires maintaining and continuously updating professional knowledge and skills to provide high-quality services
• Involves acting diligently and in accordance with applicable technical and professional standards when providing professional services
  • Includes staying current with developments in accounting standards (GAAP, IFRS)
  • Adhering to auditing standards (GAAS, ISAs)
• Accountants must exercise professional skepticism and judgment throughout engagements
• Entails critically assessing audit evidence and considering the reliability of information used
• Maintaining objectivity and independence is crucial to upholding professional competence and due care
• Accountants should only accept engagements they are competent to perform and allocate sufficient resources to complete them

Key Concepts to Know

• Professional competence: Having the necessary knowledge, skills, and abilities to perform professional duties effectively
• Due care: Exercising diligence, thoroughness, and timeliness in providing professional services
• Professional skepticism: Maintaining a questioning mind and critically assessing audit evidence
  • Involves being alert to conditions that may indicate possible misstatement due to error or fraud
• Professional judgment: Applying relevant training, knowledge, and experience in making informed decisions
• Continuing professional development (CPD): Ongoing learning activities to maintain and enhance professional competence
• Engagement acceptance: Evaluating whether the firm has the necessary competence, capabilities, and resources to undertake an engagement
• Quality control: Policies and procedures designed to ensure that engagements are performed in accordance with professional standards

Real-World Examples

• Arthur Andersen's involvement in the Enron scandal highlighted the importance of professional competence and due care
  • Auditors failed to exercise professional skepticism and overlooked red flags in Enron's financial statements
• The collapse of Carillion, a British construction company, raised questions about the role of auditors in detecting financial irregularities
  • Auditors were criticized for not challenging management's aggressive accounting practices
• PwC's audit of Colonial Bank revealed a lack of professional skepticism and due care
  • Auditors failed to detect a $2.3 billion fraud scheme involving fake mortgage loans
• KPMG's audit quality issues led to regulatory sanctions and reputational damage
  • The firm admitted to using stolen information to improve audit results and altering past audit work

Common Pitfalls and How to Avoid Them

• Overreliance on client representations without obtaining sufficient appropriate audit evidence
  • Maintain professional skepticism and corroborate management's assertions with independent evidence
• Failing to keep up with changes in accounting and auditing standards
  • Regularly attend training sessions and read professional literature to stay current
• Inadequate supervision and review of engagement team members' work
  • Establish clear roles and responsibilities and conduct thorough reviews of work performed
• Succumbing to client pressure to meet unrealistic deadlines or overlook issues
  • Prioritize audit quality over client relationships and escalate concerns to appropriate parties
• Lack of documentation to support audit conclusions and judgments
  • Maintain comprehensive workpapers that demonstrate the basis for conclusions reached

Ethical Dilemmas and Decision-Making

• Balancing client confidentiality with the need to disclose information in the public interest
  • Consider the potential harm to stakeholders and consult with professional bodies or legal counsel
• Dealing with client pressure to modify audit opinions or financial statements
  • Remain objective and independent, and communicate concerns to those charged with governance
• Addressing conflicts of interest between providing audit and non-audit services to the same client
  • Implement safeguards such as separate engagement teams and review processes
• Deciding whether to report suspected fraud or illegal acts discovered during an engagement
  • Evaluate the gravity of the matter and the auditor's legal and ethical responsibilities
• Navigating situations where management's integrity is questionable
  • Increase professional skepticism, expand audit procedures, and consider the impact on the auditor's report

Legal and Regulatory Framework

• Compliance with relevant laws and regulations is a key aspect of professional competence and due care
• Auditors must have a thorough understanding of the legal and regulatory requirements applicable to their clients
  • Includes industry-specific regulations (banking, healthcare, energy)
  • Securities laws and regulations (Sarbanes-Oxley Act, SEC rules)
• Failure to comply with legal and regulatory requirements can result in disciplinary actions, fines, and legal liability
• Auditors should stay informed about changes in the legal and regulatory landscape and adapt their audit approaches accordingly
• In cases of suspected non-compliance, auditors must follow established protocols for reporting to appropriate authorities

Practical Applications in Accounting

• Conducting thorough risk assessments to identify areas requiring heightened professional skepticism
  • Considering factors such as industry trends, company performance, and management incentives
• Designing and performing audit procedures that are responsive to assessed risks
  • Tailoring procedures to address specific assertions and obtain sufficient appropriate evidence
• Documenting significant judgments and conclusions reached during the audit
  • Providing a clear trail of the thought process and rationale behind key decisions
• Communicating effectively with those charged with governance and management
  • Discussing audit findings, significant risks, and internal control deficiencies
• Continuously monitoring and improving the firm's system of quality control
  • Conducting internal inspections, peer reviews, and implementing corrective actions

Wrapping It Up

• Professional competence and due care are essential for maintaining the integrity of the accounting profession
• Accountants and auditors must commit to lifelong learning and upholding the highest ethical standards
• Exercising professional skepticism and judgment is crucial in detecting and preventing financial misstatements and fraud
• Adhering to legal and regulatory requirements is non-negotiable and requires constant vigilance
• Ethical decision-making involves carefully weighing competing interests and prioritizing the public trust
• Practical application of these principles requires a systematic approach to risk assessment, audit planning, and execution
• By embracing professional competence and due care, accountants can serve as trusted advisors and guardians of financial reporting integrity