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Section 200: Applying the conceptual framework – professional accountants in business

(including CGMA designation holders)

Introduction

200.1                  This Part of the Code applies to “Members” as defined and referred to as:

(a)   Members in business (AICPA) who hold the CGMA credential;

(b)   All professional accountants in business (CIMA) including those who hold the CGMA credential (or are entitled to do so); and

(c)   An individual who is a professional accountant in public practice (CIMA) when performing professional activities pursuant to the accountant’s relationship with the accountant’s firm, whether as a contractor, employee or owner. More information on when Part 2 is applicable to professional accountants in public practice (CIMA) is set out in paragraphs R120.4, R300.5, and 300.5 A1.

200.2           Investors, creditors, employing organisations and other sectors of the business community, as well as governments and the general public, might rely on the work of members.

200.3           Members might be solely or jointly responsible for the preparation and reporting of financial and other information, on which both their employing organisations and third parties might rely. Members may also carry out a range of other activities, including:

  • Providing effective financial management and competent advice on a variety of business-related matters. These may include forecasts, estimates, and projections and the assumptions upon which they are based being transparent and credible;
  • Providing robust business case information, supporting decisions and capital allocation; and
  • Providing assessment of effective and sufficient IT controls and procedures as part of implementing or improving financial and non-financial reporting systems.

200.4           A member might be an employee, contractor, partner, director (executive or non-executive), owner-manager, or volunteer of an employing organisation, engaged in commerce, industry or service, the public sector, education, the not-for-profit, or regulatory or professional bodies. The legal form of the relationship of the member with the employing organisation has no bearing on the ethical responsibilities placed on the member.

Conceptual framework for members in business

200.5           Members may encounter various relationships or circumstances that create threats to the member’s compliance with the rules and fundamental principles. The rules, fundamental principles and interpretations seek to address many situations; however, they cannot address all relationships or circumstances that may arise. Thus, in the absence of an interpretation that addresses a particular relationship or circumstance, a member should evaluate whether that relationship or circumstance would lead a reasonable and informed third party who is aware of the relevant information to conclude that there is a threat to the member’s compliance with the rules and fundamental principles that is not at an acceptable level. When making that evaluation, the member should apply the conceptual framework approach as outlined in this interpretation. The conceptual framework requires members to be alert for such facts and circumstances.

200.6           The CGMA Code specifies that in some circumstances, no safeguards can reduce a threat to an acceptable level. For example, the Code specifies that a member may not subordinate the member’s professional judgment to others without violating the Integrity and Objectivity Rule and Principles. A member may not use the conceptual framework to overcome this or any other prohibition or requirement in the Code.

Requirements and application material

General

R200.7         Under the conceptual framework approach, members shall identify, evaluate and address threats to compliance with the rules and fundamental principles. Members should evaluate identified threats both individually and in the aggregate because threats can have a cumulative effect on a member’s compliance with the rules and fundamental principles.

200.7 A1      Members have a responsibility to further the legitimate objectives of the member’s employing organisation. The Code does not seek to hinder members from fulfilling that responsibility, but addresses circumstances in which compliance with the rules and fundamental principles might be compromised.

200.7 A2      Members may promote the position of the employing organisation when furthering legitimate goals and objectives of their employing organisation, provided that any statements made are neither false nor misleading. Such actions usually would not create an advocacy threat.

200.7 A3      The more senior the position of a member, the greater will be the ability and opportunity to access information, and to influence policies, decisions made and actions taken by others involved with the employing organisation. To the extent that they are able to do so, taking into account their position and seniority in the organisation, members are expected to encourage and promote an ethics-based culture in the organisation. Examples of actions that might be taken include the introduction, implementation and oversight of:

  • Ethics education and training programs;
  • Ethics and whistle-blowing policies;
  • Policies and procedures designed to prevent non-compliance with laws and regulations.

Identifying threats

R200.8         The relationships or circumstances that a member encounters in various engagements and work assignments or positions will often create different threats to complying with the rules. When a member encounters a relationship or circumstance that is not specifically addressed by a rule, fundamental principle or an interpretation, under this approach, the member shall determine whether the relationship or circumstance creates one or more threats, such as those identified in paragraphs .07–.12 that follow. The existence of a threat does not mean that the member is not in compliance with the rules and fundamental principles; however, the member should evaluate the significance of the threat.

200.8 A1      Threats to compliance with the rules and fundamental principles might be created by a broad range of facts and circumstances. Many threats fall into one or more of the following six broad categories: adverse interest, advocacy, familiarity, self-interest, self-review, and undue influence (also referred to as “intimidation threat”).

200.8 A2      Examples of threats associated with a specific relationship or circumstance are identified in the interpretations of the Code. Paragraphs 200.7 A3 – 200.7 A12 of this section define and provide examples, which are not all inclusive, of each of these threat categories.

200.8 A3      Adverse interest threat. The threat that a member will not act with objectivity, because the member’s interests are opposed to the interests of the employing organisation. Examples of adverse interest threats include the following:

(a)   A member has charged, or expressed an intention to charge, the employing organisation with violations of law.

(b)   A member or the member’s immediate family or close family has a financial or another relationship with a vendor, customer, competitor, or potential acquisition of the employing organisation.

(c)   A member has sued or expressed an intention to sue the employing organisation or its officers, directors, or employees.

200.8 A4      Advocacy threat. The threat that a member will promote an organisation’s interests or position to the point that their objectivity is compromised. Examples of advocacy threats include the following:

(a)   Obtaining favourable financing or additional capital is dependent upon the information that the member includes in, or excludes from, a prospectus, an offering, a business plan, a financing application, or a regulatory filing.

(b)   The member gives or fails to give information that the member knows will unduly influence the conclusions reached by an external service provider or other third party

200.8 A5      Familiarity threat. The threat that, due to a long or close relationship with a person or an employing organisation, a member will become too sympathetic to their interests or too accepting of the person’s work or organisation’s product or service. Examples of familiarity threats include the following:

(a)   A member uses an immediate family’s or close family’s company as a supplier to the employing organisation.

(b)   A member accepts an individual’s work product with little or no review because the individual has been producing an acceptable work product for an extended period of time.

(c)   A member’s immediate family or close family is employed as a member’s subordinate.

200.8 A6      Self-interest threat. The threat that a member could benefit, financially or otherwise, from an interest in, or relationship with, the employing organisation or persons associated with the employing organisation. Examples of self-interest threats include the following:

(a)   A member’s immediate family or close family has a financial interest in the employing organisation.

(b)   A member holds a financial interest (for example, shares or share options) in, or receives a loan or guarantee from, the employing organisation, and the value of that financial interest is directly affected by the Member’s decisions.

(c)   A member is eligible for a profit or other performance-related bonus, and the value of that bonus is directly affected by the Member’s decisions.

(d)   A member being offered a gift or special treatment from a supplier of the employing organisation.

200.8 A7      Self-review threat. The threat that a member will not appropriately evaluate the results of a previous judgment made or service performed or supervised by the member, or an individual in the employing organisation, and that the member will rely on that service in forming a judgment as part of another service. Examples of self-review threats include the following:

(a)   When performing an internal audit procedure, an internal auditor accepts work that they previously performed in a different position.

(b)   The member accepts the work previously performed by the member, alone or with others that will be the basis for providing another professional service.

200.8 A8      Undue influence threat (also referred to as “intimidation threat”). The threat that a member will subordinate their judgment to that of an individual associated with the employing organisation or any relevant third party due to that individual’s position, reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the member. Examples of undue influence threats include the following:

(a)   A member is pressured to become associated with misleading information.

(b)   A member is pressured to deviate from a company policy.

(c)   A member is pressured to change a conclusion regarding an accounting or a tax position.

(d)   A member is pressured to hire an unqualified individual.

Evaluating threats

R200.9        In evaluating the significance of an identified threat, a member shall determine whether a threat is at an acceptable level.

200.9 A1      Members are encouraged to evaluate identified threats both individually and in the aggregate because threats can have a cumulative effect on a member’s compliance with the rules and fundamental principles.

200.9 A2      A threat is at an acceptable level when a reasonable and informed third party who is aware of the relevant information would be expected to conclude that the threat would not compromise the member’s compliance with the rules and fundamental principles.

200.9 A3      If the member evaluates the threat and concludes that a reasonable and informed third party who is aware of the relevant information would be expected to conclude that the threat does not compromise a member’s compliance with the rules and fundamental principles, the threat is at an acceptable level and the member is not required to evaluate the threat any further under this conceptual framework approach.

200.9 A4      Members may consider both qualitative and quantitative factors when evaluating the significance of a threat, including the extent to which existing safeguards already reduce the threat to an acceptable level.

200.9 A5      A member’s evaluation of the level of a threat might be impacted by the work environment within the employing organisation and its operating environment. For example:

  • Leadership that stresses the importance of ethical behaviour and the expectation that employees will act in an ethical manner.
  • Policies and procedures to empower and encourage employees to communicate ethics issues that concern them to senior levels of management without fear of retribution.
  • Policies and procedures to implement and monitor the quality of employee performance.
  • Systems of corporate oversight or other oversight structures and strong internal controls.
  • Recruitment procedures emphasising the importance of employing high calibre competent personnel.
  • Timely communication of policies and procedures, including any changes to them, to all employees, and appropriate training and education on such policies and procedures.
  • Ethics and Code of conduct policies.

Addressing threats

R200.10       If, in evaluating the significance of an identified threat, a member concludes that a threat is not at an acceptable level, the member shall address the threats by eliminating them or reducing them to an acceptable level. The member shall do so by:

(a)   Eliminating the circumstances, including interests or relationships, that are creating the threats;

(b)  Applying safeguards, where available and capable of being applied, to reduce the threats to an acceptable level; or

(c)   Declining or ending the specific professional activity.

200.10 A1    Sections 210 to 270 describe certain threats that might arise during the course of performing professional activities and include examples of actions that might address such threats.

200.10 A2    Members might consider obtaining legal advice where they believe that unethical behaviour or actions by others have occurred, or will continue to occur, within the employing organisation.

200.10 A3    In extreme situations, if the circumstances that created the threats cannot be eliminated and safeguards are not available or capable of being applied to reduce the threat to an acceptable level, it might be appropriate for a member to resign from the employing organisation.

Communicating with those charged with governance

R200.11       When communicating with those charged with governance in accordance with the Code, a member shall determine the appropriate individual(s) within the employing organisation’s governance structure with whom to communicate. If the member communicates with a subgroup of those charged with governance, the member shall determine whether communication with all of those charged with governance is also necessary so that they are adequately informed.

200.11 A1    In determining with whom to communicate, a member might consider:

(a)   The nature and importance of the circumstances; and

(b)   The matter to be communicated.

200.11 A2    Examples of a subgroup of those charged with governance include an audit committee or an individual of those charged with governance.

R200.12       If a member communicates with individuals who have management responsibilities as well as governance responsibilities, the member shall be satisfied that communication with those individuals adequately informs all of those in a governance role with whom the member would otherwise communicate.

200.12 A1    In some circumstances, all of those charged with governance are involved in managing the employing organisation, for example, a small business where a single owner manages the organisation and no one else has a governance role. In these cases, if matters are communicated with individual(s) with management responsibilities, and those individual(s) also have governance responsibilities, the member has satisfied the requirement to communicate with those charged with governance.