Chapter 17 reporting

PART 2: PROFESSIONAL ACCOUNTANTS IN BUSINESS (PAIB)

Circumstance Main Threat/s created Main Fundamental

Principle/s affected

Conflict of interest Self-interest Objectivity

Preparation and presentation Self-interest; intimidation All

of information

Acting without sufficient Self-interest Professional competence and

expertise due care

Financial interests, Self-interest Objectivity; Confidentiality

compensation and incentives

Inducements, including gifts Self-interest; familiarity; Integrity; Objectivity;

and hospitality intimidation Professional behavior

Responding to Self-interest; intimidation Integrity; Professional

Non-compliance with laws behavior
and regulations (NOCLAR)

Pressure to breach the Intimidation All

fundamental principles

Conflict of interest
A conflict of interest arises when there is a clash between personal, professional, or
financial interests that could influence or appear to influence an individual's or entity's
objectivity, decision-making, or actions.

Preparation and presentation of information

When preparing or presenting information, a PAIB shall:
a. Prepare or present the information in acCordance with a relevant reporting
framework (GAAP/PFRS), where applicable,
b. Observe fair presentation of the information,
c. Exercise professional judgment,
d. Not omit anything to mislead or influence outcome inappropriately,
e. Avoid undue influence of, or undue reliance on, individuals,
organizations or technology, and
f. Be aware of the risk of bias.
Acting without sufficient expertise
PAIBs shall act with sufficient expertise. And shall not intentionally mislead an
employer as to the level of expertise or experience possessed.

Financial interest, compensation and incentives

A PAIB shall not manipulate information or use confidential information for personal
gain or for the financial gain of others.

● Financial interest
- Is an interest in an equity or other security, debenture, loan or other debt
instrument of an entity.
● Direct financial interest
- Owned directly by and under the control of an individual or entity. Has
control or the ability to influence investment decisions.
● Indirect financial interest
- The individual or entity has no control or ability to influence investment
decisions.
Inducements, including gifts and hospitality
An inducement is an object, situation, or action that is used as a means to influence
another individual’s behavior, but not necessarily with the intent to improperly influence
that individual’s behavior.

Responding to non-compliance with laws and regulations (NOCLAR)

● Non-compliance with laws and regulations
- Acts of omission or commission, intentional or unintentional, which are
contrary to the prevailing laws or regulations committed.
When encountering non-compliance in the course of their work, accountants are
required to obtain an understanding of legal provisions related to the matter and comply
with them, including
A. Requirement to Report to an Appropriate Authority
B. Prohibition on Alerting the Relevant Party

Pressure to breach fundamental principles

refers to situations where individuals, especially professional accountants, face
external or internal pressures that could lead to a compromise of the fundamental
ethical principles (COBID) guiding their profession.
A professional accountant shall not:
1. Allow pressure from others to result in a breach of compliance with the fundamental
principles, or
2. Place pressure on others that the accountant knows, or has reason to
believe, would result in the other individuals breaching the fundamental principles.

PART 3: PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE (PAPP)

In line with this purpose, Part 3 of the code details how professional accountants in
public practice should apply the conceptual framework approach presented in Part 1.

Circumstance Main Threat/s created Main fundamentals

principle/s affected

Conflict of interest self-interest objectivity

Professional appointments all all

Second opinions self-interest Professional competence

and due care

Fees and other types of self-interest Professional competence

remuneration and due care; objectivity

Inducements, including Self-interest; familiarity; Integrity; objectivity; and

gifts and hospitality intimidation professional behavior

Custody of clients assets self-interest objectivity; and

professional behavior

Responding to Self-interest; intimidation Integrity; professional

non-compliance with laws behavior
and regulations (NOCLAR)

Conflicts of interest
Similar to part 2, part 3 also requires a PAPP not to allow conflicts of interest to
compromise professional or business judgment.
Such threats might be created when:
1. A PAPP provides a professional service related to a particular matter
two or more clients whose interests with respect with respect to that matter are in
conflict; or
2. The interests of a PAPP with respect to a particular matter and the
interests of the client for whom the accountant provides a professional
services related to that matter are in conflict.
Safeguards that should normally included in public practice:
1. Notification of the client about its business interest or activities that may create
conflict of interest and having specific disclosure and explicit consent are necessary.
2. Use a separate engagement team.
3. Clearly defined security and confidentiality agreements signed by the related parties.
4. Seeking guidance from third parties. It can be a senior professional who is not
involved with relevant client engagement reviews.

Professional appointments
Acceptance of a new client relationship or changes in an existing engagement might
create a threat to compliance with one or more of the fundamental principles.
★ Client and engagement acceptance
- Before accepting a new client relationship, a professional accountant
in public practice should examine whether doing so will jeopardize the
fundamental principles. If the client is involved in illegal activities or the
client's Owners or management lack integrity. Also, if the engagement
does not possess the competencies to perform professional services,
there may be potential threats to integrity, professional behavior and
professional competence and due care.
★ Changes in a professional appointment
A PAPP shall determine whether there are any reasons for not accepting an
engagement when the PAPP:
➢ Is asked by a potential client to replace another PAPP,
➢ Considers tendering for an engagement held by another PAPP, or
➢ Considers undertaking work that is complementary or additional to that of
another PAPP.
★ Changes in audit or review appointments
➢ If the client consents, the existing or predecessor accountants shall
provide the information honestly and unambiguously, and
➢ If the client fails or refuses, the existing or predecessor accountant shall
disclose this fact to the proposed accountant, who shall carefully consider
such failure or refusal.
★ Client and engagement continuance
For a recurring client engagement, a PAPP shall periodically review whether
to continue with the engagement.
★ Using the work of an expert
When a PAPP intends to use the work of an expert, the PAPP shall determine
whether the use is warranted.
Second opinions
A PAPP might be asked to provide a second opinion on the application of
accounting, auditing or the other standards or principles to specific transactions. This
may create a threat if the second opinion is not based on the same facts that the
existing or predecessor accountant had, or is based on inadequate evidence.
Examples of safeguards to address the threat:
➢ Obtaining information from the existing or predecessor accountant with client
permission. If the corporation or entity seeking the opinion refuses to communicate
with its current accountant, a professional accountant in public practice should
examine whether it is suitable to provide the requested opinion, given all of the facts.
➢ Describing the limitations surrounding any opinion.
➢ Providing the existing or predecessor accountant with a copy of the opinion.

Fees and other types of remuneration

Professionals fees should reflect the value of the professional services provided to
the client fairly.
★ Level of fees
➢ A PAPP might quote whatever fee is considered appropriate. But if the fee
quoted is so low that it might be difficult to perform the engagement, a
threat may arise.
➢ Possible safeguards:
a. Adjusting the level of fees or the scope of the engagement.
b. Having an appropriate reviewer.
★ Contingent fees
➢ The range of possible fee amount
➢ The basis for determining the fees
➢ The outcome of the transaction or the result of the services performed by
the firm.
➢ A fee established by a court or other public authority is not a contingent
fee.
➢ Possible safeguards:
a. Obtaining an advance written agreement.
b. Having an appropriate reviewer.
★ Referral fees or commissions
Referral fees and commissions refer to compensation received by individuals
or entities for referring clients or customers to another business or professional
service.
➢ Possible safeguards:
a. Disclosing to the clients any arrangements.
 b. Revealing any plans to pay referral fees to another professional for
the work referred.
c. Obtaining the client’s consent.

Inducements, including gifts and hospitality

An inducement is an object, situation, or action that is used as a means to influence
another individual’s behavior, but not necessarily with the intent to improperly influence
that individual’s behavior. (The discussion of inducements under part 2: PAIB also
applies to part 3: PAPP.)

Custody of client assets

A professional accountant in public practice should not take custody of a client's
money or other assets unless the law permits it and, if so, only in accordance with any
additional legal obligations imposed on professional accountants in public practice who
hold such assets.
★ Before taking custody
➢ Make inquiries about the source of the assets, and
➢ Consider related legal and regulatory obligations.

★ After making custody

➢ Comply with the relevant laws and regulations,
➢ Keep assets separately from personal or firm assets,
➢ Use the assets only for the purpose for which they are intended, and
➢ Be ready at all times to account for the assets and any income.

Responding to non-compliance with laws and regulations (NOCLAR)

Acts of omission or commission, intentional or unintentional, which are contrary to
the prevailing laws or regulations committed.
Response framework for NOCLAR in audits of financial statements
Response framework for PAPPs who are engaged to perform audit of financial
statements.

Response framework for NOCLAR in non-audit services services

Response framework for PAPP who are engaged to provide professional services
other than audits of financial statements.

.
Part 4A: INDEPENDENCE FOR AUDIT AND REVIEW ENGAGEMENTS
When it comes to auditing, independence means taking an unbiased approach to the
examination and report writing. The ability to work independently is a requirement of the
CPA profession. It is critical that users of the information regard the professional
accountant as an objective impartial if the engagement is to improve the assurance if
the financial statement readers are aware that the professional CPAs is not independent
with respect to client, then the professional accountant's report on the financial
statements will be of little or no use to them.
★ 2 phases of independence
1. Independence in mind
2. Independence in appearance

Required period of independence

Network firms
"Network firms" typically refer to a group of professional service firms that have
established a formal network or alliance to collaborate and share resources, expertise,
and capabilities while maintaining their individual legal structures and identities. These
networks are common in industries such as accounting, law, consulting, and other
professional services.
Independence requirement for network firms

Holding financial interest - audit and review engagement

● Financial interest
- Is an interest in an equity or other security, debenture, loan or other debt
instrument of an entity.
● Direct financial interest
- Owned directly by and under the control of an individual or entity. Has
control or the ability to influence investment decisions.
● Indirect financial interest
- The individual or entity has no control or ability to influence investment
decisions.
Prohibited Financial interests

Long association provisions for audit and review engagements

Definition
● Public interest entity (PIE) is:
a. A listed entity, or
b. An entity defined by regulation or legislation as a public interest entity, or
c. An entity which the audit is required by the regulation.
● Listed entity
 Whose shares, stock or debt are quoted or listed on a recognized stock
exchange.
Example: https://edge.pse.com.ph/companyDirectory/form.do

● Key audit partner

The individual responsible for the engagement quality control review, on the
engagement team who makes key decisions or judgements on significant
matters.
Rules on rotation
7-year "time-on period" - Key Audit Partner (KAP) roles are not allowed for a period >7
cumulative years.
After the 7-year time-on period, the individual shall serve a "cooling-off" period as
follows:
➢ 5-year cooling off - Engagement Partner
➢ 3-year cooling off- Engagement Quality Control Reviewer (EQCR)
➢ 2-year cooling off- Other KAP Role

Note: If the individual acted in a combination of KAP roles and served as the
engagement partner for 4 or more cumulative years, the cooling-off period shall be
5 consecutive years.
PART 4B: INDEPENDENCE FOR OTHER ASSURANCE ENGAGEMENTS

Breach of an independence provision for other assurance engagements

If a firm concludes that a breach of a requirement in this Part has occurred, the firm
shall:
1. End, suspend or eliminate the interest or relationship that created the breach;
2. Evaluate the significance of the breach and its impact on the firm's objectivity and
ability to issue an assurance report; and
3. Determine whether action can be taken that satisfactorily addresses the
consequences of the breach.

Circumstances Threat/s created to independence

Nature and level of fees or other types of Self-interest or intimidation

remuneration

Accepting gifts and hospitality from an client Self-interest, familiarity or intimidation

Actual or threatened litigation with a client Self-interest and intimidation

Holding a financial interest in a client Self-interest

Loan or guarantee of loan with a client Self-interest

Close business relationship with a client or Self-interest or intimidation

its management

Family or personal relationships with client Self-interest, familiarity or intimidation

personnel

Recent service of an engagement team Self-interest, self-review or familiarity

member as a director, or employee of the
client

Serving as a director or officer of a client Self-review and self-interest

Employment relationships with a client Self-interest, familiarity or intimidation

Long association of an engagement team Familiarity and self-interest

member to an assurance engagement