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What if an employee is a director of an audit client

Welcome to Query Of The Week

Welcome to this week’s Query Of The Week. Each week our technical team respond to a huge number of client queries and in this segment, we share with you the most common questions that keep coming up time and time again.

In this week’s Query Of The Week, John Murphy discusses how to handle the situation of an employee being the director of an audit client.

We hope you enjoy this week’s, Query Of The Week.

Ethics for Accountants

If this Query Of The Week was of interest to you, you will also be interested in our Ethics for Accountants online CPD course.

Full details for this online CPD course can be found below:

Webinar Duration 1 Hour
Fee €25
Presenter Colm Owens – OmniPro
Category Regulation

Query Of The Week – Video Transcript

(Please note that this is a direct unedited transcript of the spoken word as recorded on the video) 

Hello and welcome to this weeks’ query of the week. Similar to every other week where we deal with queries in the context of AML, financial reporting, company law and tax, this weeks’ query of the week is in relation to ethics. Every accountant in public practice is required to comply with their governing institutes’ code of ethics. That code of ethics is derived from the IESBA’s code of ethics. That’s the international body. And guess what, for the current year as effective from July of 2019 this is a new IESBA code of ethics. Subsequently, CPA, ACCA and currently chartered are overlaying this revised code of ethics into their new institute code of ethics.

So this weeks’ query of the week we’ll take account of what is the new governing code of ethics and how it’s going to be applied in practice. The query is in relation to audits. I accept, not every accountant in public practice will be an auditor. However, a vast majority of you are, and leaving aside that, our upcoming webinar we’ll be dealing with ethics for all practitioners as well as those specifically required from auditors.

Now this weeks’ query of the week is in the context of an employee who is a director of an audit client. The question arose through a file review that I was performing whereby it was identified that here was an employee of the audit firm, was acting as a director, as effectively a Irish nominee director for a company, which was beneficially owned by a foreign parent, which in turn invested in another foreign associate undertaking a foreign subsidiary. So it was an intermediary vehicle purely from an investment point of view here in Ireland. The director was effectively the Irish resident director but was an employee of the audit firm.

Now, if we look here at our new code of ethics, it specifically states that serving as a director of an audit client creates a self-review and self-interest threat. In addition, what is requirements, which are mandatory indicated by ‘R’ here, stipulates service as a director or officer. I would like to point out a director is an officer, and an appointed secretary is an officer and effectively auditors are deemed to be an officer in accordance with Irish company law. A partner or an employee of the firm or network firm shall not serve as a director or officer of an audit client of the firm.

So you’re going to say to me, “But I’m an auditor. We do basic secretarial work for our clients. We do CRO filings, we do meeting minutes, et cetera. Appointments with directors, resignations of directors, et cetera.” The reality is these are basic forms of secretarial services and the court of ethics does facilitate you as an auditor facilitating this type of work. However, more complex secretary of the work, let’s say share restructurings, advisory that way would effectively create a threat, which might be deemed to be a self-interest threat and self-review through the work that you do as a secretary in the basis of the work that you’re going to be performing on the audit engagement.

What the standard says here, again, a regulation, a requirement of the code of ethics, “A partner or an employee of the firm, or a network firm shall not serve as a company secretary for an audit client of the firm unless it is specifically permitted under local law and professional rules of practice.” This is the overarching code of ethics. You do need to consider does the ethical standard for auditors apply or is there anything prohibiting it? There isn’t. Management makes all relevant decisions. This is key. So effectively we’re only doing basic CRO filings, meeting minutes, all decision-making. Decision-making is ultimately done by the board of directors, and we’re basically saying the duties and activities performed are limited those of a routine at an administrative nature, so it’s just preparing minutes and maintaining statutory returns.

So me as an auditor, I can do basic secretarial work for my audit client. However, as stipulated and indicated above, my employee, if they’re a director of a company, and I’d like to point out if it’s for a period from the 1st of January ’18 to 31 December ’18 and we’re only signing the audit engagement now, basically for the last 21 months, if they were a director at any point, we cannot do that audit engagement. And I as the audit RI or partner’s signing that auditors report cannot sign off on it. It is a breach of the code of ethics and there is the potential it would instigate disciplinary situations.

I’d like to thank you for joining me here in Query of the Week. I’m Neill Doran of OmniPro Practice Support. And I would encourage you if this was helpful to you, come learn more about what are your ethical obligations both as an accountant in public practice and also maybe as an auditor or a general accountant working in industry as well, in our upcoming ethics for our accountants webinar. Thank you.