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Section 240: Preparation and presentation of information

Introduction

240.1           Members at all levels are required to comply with the rules and fundamental principles and apply the conceptual framework set out in Section 200 to identify, evaluate and address threats.

240.2           Preparing or presenting information might create self-interest, familiarity, undue influence or other threats to compliance with one of more the rules and fundamental principles, such as the “Integrity and Objectivity Rule” and the Integrity and Objectivity fundamental principles.

Requirements and application material

Knowing misrepresentations in the preparation of financial statements or records

240.3 A1      Members in business are often involved in the preparation and reporting of information that may either be made public or used by others inside or outside the employing organisation.

240.3 A2      Stakeholders to whom, or for whom, such information is prepared or presented, include:

  • Management and those charged with governance.
  • Investors and lenders or other creditors.
  • Regulatory bodies.

240.3 A3      Information might assist stakeholders in understanding and evaluating aspects of the employing organisation’s state of affairs and in making decisions concerning the organisation. Information may include financial or non-financial or management information that might be made public or used for internal purposes. Examples include:

  • Operating and performance reports.
  • Decision support analyses.
  • Budgets and forecasts.
  • Information provided to the internal and external auditors.
  • Risk analyses.
  • General and special purpose financial statements.
  • Tax returns.
  • Reports filed with regulatory bodies for legal and compliance purposes.

240.3 A4      For the purposes of this section, preparing or presenting information includes recording, maintaining, approving, and reporting information.

R240.4         When preparing or presenting information, a member shall do so in accordance with the “Integrity and Objectivity Rule” and the Integrity and Objectivity fundamental principle, and shall:

(a)   Prepare or present the information in accordance with a relevant reporting framework where applicable;

(b)  Prepare or present the information in a manner that is intended neither to mislead nor to influence contractual or regulatory outcomes inappropriately;

(c)   Exercising professional judgment to:

(i)    Represent the facts accurately and completely in all material respects;

(ii)   Describe clearly the true nature of business transactions or activities; and

(iii)  Classify and record information in a timely and proper manner; and

(d)  Not omit anything with the intention of rendering the information misleading or of influencing contractual or regulatory outcomes inappropriately.

240.4 A1      An example of influencing a contractual or regulatory outcome inappropriately is using an unrealistic estimate with the intention of avoiding violation of a contractual requirement such as a debt covenant or of a regulatory requirement such as a capital requirement for a financial institution.

240.4 A2      Threats to compliance with the “Integrity and Objectivity Rule” and the Integrity and Objectivity fundamental principles would not be at an acceptable level and could not be reduced to an acceptable level by the application of safeguards, and the member would be considered to have knowingly misrepresented facts in violation of the “Integrity and Objectivity Rule” and the Integrity and Objectivity fundamental principles, if the member:

(a)   Makes, or permits or directs another to make, materially false and misleading entries in an entity’s financial statements or records;

(b)   Fails to correct an entity’s financial statements or records that are materially false and misleading when the member has the authority to record the entries; or

(c)   Signs, or permits or directs another to sign, a document containing materially false and misleading information.

Use of discretion in preparing or presenting information

R240.5         Preparing or presenting information might require the exercise of discretion in making professional judgments. A member shall not exercise such discretion with the intention of misleading others or influencing contractual or regulatory outcomes inappropriately.

240.5 A1      Examples of ways in which discretion might be misused to achieve inappropriate outcomes include:

  • Determining estimates, for example, determining fair value estimates in order to misrepresent profit or loss.
  • Selecting or changing an accounting policy or method among two or more alternatives permitted under the applicable financial reporting framework, for example, selecting a policy for accounting for long-term contracts in order to misrepresent profit or loss.
  • Determining the timing of transactions, for example, timing the sale of an asset near the end of the fiscal year in order to mislead.
  • Determining the structuring of transactions, for example, structuring financing transactions in order to misrepresent assets and liabilities or classification of cash flows.
  • Selecting disclosures, for example omitting or obscuring information relating to financial or operating risk in order to mislead.

R240.6         When performing professional activities, especially those that do not require compliance with a relevant reporting framework, a member shall exercise professional judgment to identify and consider:

(a)   The purpose for which the information is to be used;

(b)   The context within which it is given; and

(c)   The audience to whom it is addressed.

240.6 A1      For example, when preparing or presenting pro forma reports, budgets or forecasts, the inclusion of relevant estimates, approximations and assumptions, where appropriate, would enable those who might rely on such information to form their own judgments.

240.6 A2      A member might also consider clarifying the intended audience, context and purpose of the information to be presented.

Relying on the work of others

R240.7         A member who intends to rely on the work of others, either internal or external to the employing organisation, shall exercise professional judgment to determine what steps to take, if any, in order to fulfil the responsibilities set out in paragraph R240.4.

240.7 A1      Factors to consider in determining whether reliance on others is reasonable include:

  • The reputation and expertise of, and resources available to, the other individual or organisation.
  • Whether the other individual is subject to applicable professional and ethics standards.

Such information might be gained from prior association with, or from consulting others about, the other individual or organisation.

Addressing information that is or might be misleading

R240.8         When a member knows or has reason to believe that the information with which the member is associated is misleading, the member shall take appropriate actions to seek to resolve the matter.

240.8 A1      Actions that might be appropriate include:

  • Discussing concerns that the information is misleading with the member’s superior and/or the appropriate level(s) of management within the member’s employing organisation or those charged with governance, and requesting such individuals to take appropriate action to resolve the matter. Such action might include:
    • Having the information corrected.
    • If the information has already been disclosed to the intended users, informing them of the correct information.
  • Consulting the policies and procedures of the employing organisation (for example, an ethics or whistle-blowing policy) regarding how to address such matters internally.

240.8 A2      The member might determine that the employing organisation has not taken appropriate action. If the member continues to have reason to believe that the information is misleading, threats to compliance with the “Integrity and Objectivity Rule” and the fundamental principles would not be at an acceptable level. In such circumstances, the following further actions might be appropriate provided that the member remains alert to the “Acts Discreditable Rule” and fundamental principle of confidentiality:

  • Consulting with:
    • A relevant professional body.
    • The internal or external auditor of the employing organisation.
    • Legal Counsel.
    • Determining whether any requirements exist to communicate to:
      • Third parties, including users of the information.
      • Regulatory and oversight authorities.

R240.9         If after exhausting all feasible options, the member determines that appropriate action has not been taken and there is reason to believe that the information is still misleading, the member shall refuse to be or to remain associated with the information.

240.9 A1      In such circumstances, it might be appropriate for a member to resign from the employing organisation.    

Documentation

240.10 A1    The member is encouraged to document:

  • The facts.
  • The accounting principles or other relevant professional standards involved.
  • The communications and parties with whom matters were discussed.
  • The courses of action considered.
  • How the accountant attempted to address the matter(s).

Subordination of judgment

240.11 A1    The “Integrity and Objectivity Rule” and the fundamental principles prohibit a member from knowingly misrepresenting facts or subordinating their judgment when performing professional services for an employer or on a volunteer basis. This interpretation addresses differences of opinion between a member and their supervisor or any other person within the member’s organisation.

240.11 A2    Self-interest, familiarity, and undue influence threats to the member’s compliance with the “Integrity and Objectivity Rule” and the Integrity and Objectivity fundamental principles may exist when a member and their supervisor or any other person within the member’s organisation have a difference of opinion relating to the application of accounting principles; auditing standards; or other relevant professional standards, including standards applicable to tax and consulting services or applicable laws or regulations.

240.11 A3    A member should evaluate the significance of any threats to determine if they are at an acceptable level. Threats are at an acceptable level if the member concludes that the position taken does not result in a material misrepresentation of fact or a violation of applicable laws or regulations.

240.11 A4    In evaluating threats, a member should determine, after appropriate research or consultation, whether the result of the position taken by the supervisor or other person

(a)   Fails to comply with professional standards, when applicable;

(b)   Creates a material misrepresentation of fact; or

(c)   May violate applicable laws or regulations.

240.11 A5    If the member concludes that threats are at an acceptable level, the member should discuss their conclusions with the person taking the position. No further action would be needed under this interpretation.

240.11 A6    If the member concludes that the position results in a material misrepresentation of fact of a violation of applicable laws or regulations, then threats would not be at an acceptable level. In such circumstances, the member should discuss their concerns with the supervisor.

240.11 A7    If the difference of opinion is not resolved after discussing the concerns with the supervisor, the member should discuss their concerns with the appropriate higher level(s) of management with the member’s organisation (for example, the supervisor’s immediate superior, senior management, and those charged with governance).

240.11 A8    If after discussing the concerns with the supervisor and appropriate higher level(s) of management within the member’s organisation, the member concludes that appropriate action was not taken, then the member might consider, in no specific order, the following safeguards to reduce threats to the member’s compliance with the “Integrity and Objectivity Rule” and the Integrity and Objectivity fundamental principles to an acceptable level:

  • Determine whether the organisation’s internal policies and procedures have any additional requirements for reporting differences of opinion.
  • Determine whether the member is responsible for communicating to third parties, such as regulatory authorities or the organisation’s (former organisation’s) external accountant. In considering such communications, the member should be cognizant of their obligations under Section 270.
  • Consult with legal counsel regarding the member’s responsibilities.
  • Document the member’s understanding of the facts, the accounting principles, auditing standards, or other relevant professional standards involved or applicable laws or regulations and the conversations and parties with whom these matters were discussed.

240.11 A9    If the member concludes that no safeguards can reduce the threats to an acceptable level or if the member concludes that appropriate action was not taken, then they should consider the continuing relationship with the member’s organisation and take appropriate steps to eliminate their exposure to subordination of judgment.

240.11 A10  Nothing in this interpretation precludes a member from resigning from the organisation at any time. However, resignation may not relieve the member of responsibilities in the situation, including any responsibility to disclose concerns to third parties, such as regulatory authorities or the employer’s (former employer’s) external accountant.

240.11 A11  A member should use professional judgment and apply similar safeguards, as appropriate, to other situations involving a difference of opinion as described in this interpretation so that the member does not subordinate their judgment.

Obligation of a member to their employer’s external accountant

240.12 A1    The “Integrity and Objectivity Rule” and the Integrity and Objectivity principles require a member to maintain objectivity and integrity in the performance of a professional service. When dealing with an employer’s external accountant, a member must be candid and not knowingly misrepresent facts of knowingly fail to disclose material facts. This would include, for example, responding to specific inquiries for which the employer’s external accountant requests written representation.