Public practice and independence

Accepting an engagement is a professional decision

A prospective engagement brings questions about the client's conduct, the work required and the practice's capacity. An attractive fee does not establish that the firm should accept. Understand the business, purpose of the service, reporting requirements, complexity, available information and time needed.

Client integrity is also relevant. A request to omit an important limitation is not just a difficult sales negotiation. It may indicate a threat that affects acceptance or continuation. Evaluate the facts rather than assuming either that a new client is untrustworthy or that a longstanding client is safe.

Concept sources: APES 110, December 2022, Part 3 and Parts 4A–4B — professional appointments, remuneration and independence requirements in the edition used by the guide.

Predecessors, referrals and second opinions

Communication with an existing or predecessor accountant can reveal facts important to acceptance. Confidentiality still applies. Establish the relevant permission and professional requirements rather than expecting unrestricted access to the former accountant's files. A client's refusal to permit communication is itself information to evaluate; it is not automatically proof of wrongdoing.

A referral can obtain expertise beyond the original accountant's competence. Define the specialist's task, responsibilities and communication arrangements. The referral is not a licence to disregard the existing professional relationship or to recommend a less suitable specialist because of a private reward.

A second opinion should be based on sufficient facts. If the client supplies only favourable information or refuses appropriate contact with the existing accountant, consider whether a reliable opinion can be provided. State limitations clearly. A second opinion becomes problematic when it is used to obtain a desired answer without resolving the underlying evidence or technical issue.

Fees affect judgement and the quality of work

A low fee is not automatically unethical. The issue is whether the practice can deliver competent work and address threats arising from the fee arrangement. A quote that depends on skipping necessary work threatens care even if the client agrees to pay less.

Contingent fees, referral payments and commissions require attention to the applicable service-specific restrictions and ethical threats. Some arrangements are prohibited. Where an arrangement is permitted, disclosure and agreement may be relevant but do not automatically resolve the conflict. The explanation should identify why the proposed response would protect judgement in that engagement.

Fee dependence can create self-interest and intimidation: a firm may hesitate to challenge a major client because losing it would damage the practice. Growing the client base may reduce dependence over time, but it does not necessarily resolve an immediate threat on an engagement already under pressure. Apply the applicable requirements and determine whether effective action is available now.

Financial-planning remuneration in the guide's historical setting

The guide refers to APES 230 issued in December 2019. That standard addresses client interests, the basis of advice, remuneration and benefits. Its treatment distinguishes fee-for-service arrangements from permitted third-party remuneration with specific conditions. The detailed requirements must be read with the applicable legal restrictions; a disclosure form does not override a prohibition.

For the guide's discussion of soft-dollar benefits, the historical standard contains a limited category of trivial and insignificant benefits and associated register and disclosure conditions. Its $300 reference is not a general permission to accept any gift below that amount. The Code's improper-influence prohibition still matters, as do the benefit's nature and the applicable law. Volume-based benefits are treated separately.

An adviser should evaluate what suits the client's circumstances before considering how the adviser is paid. Reversing that sequence can turn apparently plausible product comparisons into a justification for a preferred commission. In an assessment, identify the incentive and the provision that applies rather than importing present-day remuneration rules into a historical guide question.

Concept sources: APES 230 Financial Planning Services, December 2019 — see sections 8–10 for the historical remuneration and benefit provisions.

Reviewers and client assets require structural protection

An engagement quality reviewer needs enough objectivity to challenge the work. Reciprocal favours between partners, review of one's own earlier engagement, close relationships or a reporting line to the person being reviewed can undermine that role. Changing the reviewer or reporting arrangements may be necessary. A review signature by itself does not demonstrate independence of judgement.

Taking custody of client money or other assets is subject to legal permission and relevant conditions. Where custody is permitted, separation, authorised use and the ability to account for the assets are central. Inquiry into the source of assets can also reveal issues requiring a response under the NOCLAR provisions.

Ridgeway cannot treat client funds as a convenient bridge for its own expenses merely because it expects to replace them. Keeping records of that use would not make it authorised. Separate the client's entitlement from the firm's cash needs and follow the applicable client-money requirements.

Independence of mind and in appearance

Independence of mind concerns whether professional judgement is actually free from compromising influences. Independence in appearance concerns whether the relevant circumstances would lead a reasonable and informed third party to conclude that integrity, objectivity or professional scepticism had been compromised.

Both matter. An auditor's personal confidence that a relationship will not affect them is not enough. Equally, independence in appearance is assessed with relevant facts, rather than by treating any uninformed suspicion as decisive. The purpose is to support confidence in an independent conclusion.

The five fundamental principles apply broadly. The detailed independence standards in Parts 4A and 4B apply to the specified audit, review and assurance engagements. Do not describe independence as a sixth fundamental principle, or assume that every employed accountant must be independent of their employer in the same way as an external auditor.

Match the response to the independence issue

Independence issues include financial interests, loans, business and family relationships, recent service, employment negotiations, long association, litigation, fees and gifts. The exact requirement depends on the relationship, person's role, client and engagement. The guide expects understanding of these issues rather than treating a short study table as a complete substitute for Parts 4A and 4B.

Do not convert “consider materiality” into “all small interests are allowed”. Some provisions prohibit a relationship or activity rather than offering a menu of safeguards.

Non-assurance services and restricted reports

A practice that provides additional services to an audit client may create self-review, advocacy or self-interest threats. Preparing information and then auditing it creates an obvious risk of evaluating one's own work. Taking responsibility for management decisions is a separate concern.

Separate teams may be relevant in some permitted circumstances, but are not a universal solution. The historical Code contains specific restrictions, including restrictions for public interest entity audit clients. Read the relevant provision for the proposed service and client before recommending a safeguard. Multiple services also need to be assessed together.

Certain eligible reports with restricted use and distribution can involve specified modifications to independence requirements. This is not permission to waive independence whenever a report is called “special purpose”. The intended users must receive the relevant explanation, understand the purpose and limitations, and explicitly agree to the permitted modifications. Only the modifications allowed by the relevant Code section are available.

Practice: separating a service does not always solve it

Ridgeway audits a client and is asked to select the assumptions for a valuation that will enter the client's financial statements. A partner proposes using a separate advisory team and says that the client will sign a consent letter.

Reasoned response: Determine the nature of the valuation, the client's status, the management responsibilities involved and the applicable independence provisions. The work can create self-review and possibly other threats. Client consent and a separate team cannot override a prohibition. Management must retain its responsibilities, and the firm must establish whether the service is permitted before considering safeguards.

Self-check: Why is the firm's technical expertise not enough? Competence addresses ability to perform the work; independence addresses whether the combination of relationships and services is acceptable. A firm can be technically excellent and still unable to accept a particular combination of roles.

Ethical failures have several forms of accountability

The guide's examples of misconduct illustrate different failures: deliberate dishonesty, compromised judgement and work performed without sufficient care. Do not assume that every failure is fraud, or that the absence of a dishonest intention proves that professional standards were met. Identify the conduct and evidence before identifying the principle breached.

Consequences can include professional discipline, regulatory action and, where the relevant law is breached, civil or criminal proceedings. These are distinct processes with their own authority and findings. Reputational and practical harm may also affect users and the wider profession.

As a brief historical illustration, ASIC records that it accepted an enforceable undertaking in June 2014 preventing former Banksia auditor Warren John Sinnott from practising as a registered auditor until June 2019. This is a historical regulatory outcome, not a statement about his current status. The learning point is that accountability for professional work extends beyond the client engagement.

Concept sources: ASIC, 17-205MR (2017), background on the Banksia matter — verifies the auditor undertaking and its dates. The report's separate allegations about another person are not treated here as findings against the auditor.

Sources and further reading

Study-guide reading: CPA Australia, Ethics and Governance, fourth edition, November 2023, Module 2, printed pages 81–87 and 93–105. The focus is public-practice applications and the purpose of independence requirements.

• APES 110, December 2022: sections 310–350, Parts 4A and 4B, and sections 800 and 990 for eligible restricted reports.
• APES 230, December 2019: financial-planning services in the edition referenced by the guide.