More FAQs
Ethics March 2015
The Ethics Standards Board (“ESB”) of the Malaysian Institute of Accountants (“MIA”) releases a list of Frequently Asked Questions (FAQs) publication, in addition to the 2011 and 2013 Question and Answers for members’ reference. This publication does not amend or override the By-Laws, the text of which alone is authoritative. Reading these FAQs are not substitute for reading the By-Laws. These FAQs are not meant to be exhaustive and reference to the By-Laws itself should always be made.
March 2015
The Ethics Standards Board (“ESB”) of the Malaysian Institute of Accountants (“MIA”) releases a list of Frequently Asked Questions (FAQs) publication, in addition to the 2011 and 2013 Question and Answers for members’ reference. This publication does not amend or override the By-Laws, the text of which alone is authoritative. Reading these FAQs are not substitute for reading the By-Laws. These FAQs are not meant to be exhaustive and reference to the By-Laws itself should always be made.
Public interest entities Pursuant to Paragraph 290.151 of the Institute’s By-Laws, an individual shall not be a key audit partner for more than 5 years in respect of an audit of a public interest entity. After such time, the individual shall not be a member of the engagement team or be a key audit partner for the client for 2 years. Please take note that key audit partners include the engagement partner, engagement quality control review partner and other audit partners on the engagement team who make key decisions or judgments on significant matters with respect to the audit of the financial statements on which the firm will express an opinion. Non-public interest entities The Institute’s By-Laws do not state how often an audit partner of a non-public interest entity should be rotated. In the absence of the specific guidance, the conceptual framework shall be applied when evaluating the particular circumstances. In the case of non-public interest entities, the audit partner is required to assess whether familiarity and self-interest threats have been created by using the same senior personnel on an audit engagement over a long period of time. The significance of threats will depend on factors such as how long the individual has been a member of the audit team; the role of the individual on the audit team; the structure of the firm; the nature of the audit engagement; whether the client’s management team has changed; and whether the nature or complexity of the client’s accounting and reporting issues has changed. If threat has been created, the audit partner is required to apply safeguard to eliminate the threats or reduce them to an acceptable level, such as rotating the senior personnel off the audit team; or having a professional accountant who was not a member of the audit team review the work of the senior personnel. (Paragraph 290.150 of the Institute’s By-Laws)
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Public interest entities
Pursuant to Paragraph 290.151 of the Institute’s By-Laws, an individual shall not be a key audit partner for more than 5 years in respect of an audit of a public interest entity. After such time, the individual shall not be a member of the engagement team or be a key audit partner for the client for 2 years. Please take note that key audit partners include the engagement partner, engagement quality control review partner and other audit partners on the engagement team who make key decisions or judgments on significant matters with respect to the audit of the financial statements on which the firm will express an opinion.
Non-public interest entities
The Institute’s By-Laws do not state how often an audit partner of a non-public interest entity should be rotated. In the absence of the specific guidance, the conceptual framework shall be applied when evaluating the particular circumstances.
In the case of non-public interest entities, the audit partner is required to assess whether familiarity and self-interest threats have been created by using the same senior personnel on an audit engagement over a long period of time. The significance of threats will depend on factors such as how long the individual has been a member of the audit team; the role of the individual on the audit team; the structure of the firm; the nature of the audit engagement; whether the client’s management team has changed; and whether the nature or complexity of the client’s accounting and reporting issues has changed. If threat has been created, the audit partner is required to apply safeguard to eliminate the threats or reduce them to an acceptable level, such as rotating the senior personnel off the audit team; or having a professional accountant who was not a member of the audit team review the work of the senior personnel. (Paragraph 290.150 of the Institute’s By-Laws)
Familiarity and self-interest threats are created where the same key audit partner is engaged with the same audit client for over a 5 years period for an audit of a PIE. The change from one audit firm to another audit firm will not reduce the familiarity and self-interest threats. In this circumstance, the safeguard for an audit of a public interest entity is to rotate the key audit partner off the same audit engagement every 5 years. The 5 years period is counted based on the individual key audit partner on a continuous basis, including the situation where the individual was key audit partner resigned from one audit firm and joins another audit firm, the client simultaneously resigned from the former audit firm and appoints the latter audit firm as an approved company auditor. Please also refer to the Institute’s Circular 27/2013 “Partner Rotation” dated 17 April 2013.
There could be challenges requiring foreign component auditors to adhere to requirements contained in the Institute’s By-Laws which are more stringent than the IESBA Code. Hence, the Council of the Institute concurred with the ESB’s recommendation to allow foreign component auditors, whether a network firm or another firm, who are involved in the audit of the financial statements of members of the group to comply, at a minimum, with the IESBA Code. Please also refer to the Institute’s Circular 28/2011 “Group Audit Independence Requirement” dated 1 June 2011.
Appendix II “Procedures for seeking Professional Clearance for Section 210 of the Institute’s ByLaw” provides guidance to the professional accountant in public practice with respect to professional clearance. In the circumstance where the existing professional accountant does not reply after the expiry of 14 working days of such request, the professional accountant in public practice should:
- send a reminder to the existing professional accountant by registered post or despatched by hand or by similar means; and
- if no reply to such reminder is received within 14 working days after sending the reminder, endeavour to communicate with the existing professional accountant by some other means or try to obtain information about any possible threats by other means such as through inquiries of third parties or background investigations on senior management or those charged with governance of the client. Prior to the acceptance of a new client relationship, the incoming professional accountant is required to:
- determine whether acceptance would create any threats to compliance with the fundamental principles;
- identify client issues that if known could threaten compliance such as money laundering, dishonesty; and
- evaluate the significance of any threats and apply safeguard to eliminate or reduce them to an acceptable level.
Where it is not possible to reduce the threats to an acceptable level, the professional accountant in public practice shall decline to enter into the client relationship.
Threats to independence are created when an immediate family member of the audit team is a director or officer of the audit client, or an employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion, or was in such a position during any period covered by the engagement or the financial statements. In such circumstance, the closeness of the relationship is such that no other safeguards could reduce the threat to an acceptable level other than by removing the individual from the audit team. (Paragraph 290.128 of the Institute’s By-Laws)
Threats to independence are also created when an immediate family member of the audit team is an employee in a position to exert significant influence over the client’s financial position, financial performance and cash flows. The significance of the threats will depend on factors such as the position held by the immediate family member and the role of the professional on the audit team. Safeguards shall be applied to eliminate the threat or reduce it to an acceptable level, such as removing the individual from the audit team or structuring the responsibilities of the audit team so that the professional does not deal with matters that are within the responsibility of the immediate family member. (Paragraph 290.129 of the Institute’s By-Laws).
If a former member of the audit team or partner of the firm has joined the audit client in such a position and a significant connection remains between the firm and the individual, the threat would be so significant that no safeguards could reduce the threat to an acceptable level. Therefore, independence would be deemed to be compromised if a former member of the audit team or partner joins the audit client as a director or officer, or as an employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion, unless:
- The individual is not entitled to any benefits or payments from the firm, unless made in accordance with fixed pre-determined arrangements, and any amount owed to the individual is not material to the firm; and
- The individual does not continue to participate or appear to participate in the firm’s business or professional activities. (Paragraph 290.135 of the Institute’s By-Laws).
If a former member of the audit team or partner of the firm has joined the audit client in such a position, and no significant connection remains between the firm and the individual, the existence and significance of any familiarity or intimidation threats will depend on factors such as:
- The position the individual has taken at the client;
- Any involvement the individual will have with the audit team;
- The length of time since the individual was a member of the audit team or partner of the firm; and
- The former position of the individual within the audit team or firm, for example, whether the individual was responsible for maintaining regular contact with the client’s management or those charged with governance.
The significance of any threats created shall be evaluated and safeguards applied when necessary to eliminate the threats or reduce them to an acceptable level. Examples of such safeguards include:
- Modifying the audit plan;
- Assigning individuals to the audit team who have sufficient experience in relation to the individual who has joined the client; or
- Having a professional accountant review the work of the former member of the audit team. (Paragraph 290.136 of the Institute’s By-Laws)
An intimidation threat is created when the individual who was the firm’s Senior or Managing Partner (Chief Executive or equivalent) joins an audit client that is a public interest entity as (a) an employee in a position to exert significant influence over the preparation of the entity’s accounting records or its financial statements or (b) a director or officer of the entity. Independence would be deemed to be compromised unless two years have passed since the individual was the Senior or Managing Partner (Chief Executive or equivalent) of the firm. (Paragraph 290.140 of the Institute’s By-Laws)
Public interest entities
The provision of accounting and bookkeeping services, including payroll services and the preparation of financial statements or financial information which forms the basis on which the audit report is provided, on behalf of a financial statement audit client that is a public interest entity, impairs the independence of the firm, or at least give the appearance of impairing independence. Accordingly, no safeguard other than the prohibition of such services, could reduce the threat created to an acceptable level. Therefore, a firm shall not, provide such services to a public interest entity that is an audit client. (Paragraph 290.172 of the Institute’s By-Laws)
Non-public interest entities
The firm may provide services related to the preparation of accounting records and financial statements to an audit client that is not a public interest entity where the services are of a routine or 5 mechanical nature, so long as any self-review threat created is reduced to an acceptable level. Examples of such services include:
- Providing payroll services based on client-originated data;
- Recording payroll transactions for which the client has determined or approved the appropriate account classification;
- Posting transactions coded by the client to the general ledger;
- Posting client-approved entries to the trial balance; and
- Preparing financial statements based on information in the trial balance.
In the course of the provision of the above-mentioned services, a professional accountant is required to ensure that the work carried out does not assume a management responsibility for the client. If such services involve assuming a management responsibility for the client, threats to independence will be created. In this circumstance, safeguard shall be applied to eliminate the threat or reduce it to an acceptable level. Examples of such safeguard include:
- Arranging for such services to be performed by an individual who is not a member of the audit team; or
- If such services are performed by a member of the audit team, using a partner or senior staff member with appropriate expertise who is not a member of the audit team to review the work performed. (Paragraph 290.171 of the Institute’s By-Laws).
Pursuant to Paragraph 290.146 of the Institute’s By-Laws, when a partner or employee of the firm serves as a director or officer on the board of an audit client or as a liquidator, provisional liquidator, receiver, receiver and manager, special administrator or persons of like description, the self-review and self-interest threats created would be so significant that no safeguard could reduce the threats to an acceptable level. Accordingly, no partner or employee shall serve as a director or officer of an audit client.
According to Definitions section of the Institute’s By-Laws:
- Audit client is defined as “An entity in respect of which a firm conducts an audit engagement. When the client is a listed entity, audit client will always include its related entities. When the audit client is not a listed entity, audit client includes those related entities over which the client has direct or indirect control.”
- Related entity is defined as “An entity that has any of the following relationships with the client:
- An entity that has direct or indirect control over the client provided the client is material to such entity;
- An entity with a direct financial interest in the client if that entity has significant influence over the client and the interest in the client is material to such entity;
- An entity over which the client has direct or indirect control;
- An entity in which the client, or an entity related to the client under (c) above, has a direct financial interest that gives it significant influence over such entity and the interest is material to the client and its related entity in (c); and
- An entity which is under common control with the client (a “sister entity”) if the sister entity and the client are both material to the entity that controls both the client and sister entity.”
