Ethics: CPAs should take note of new professional standards and an exposure draft on business valuation, says Channa Wijesinghe.
In December 2007, the Accounting Professional and Ethical Standards Board (APESB) issued three standards as part of its mandate to revise and reissue professional and ethical standards for members of the professional accounting bodies in Australia:
APES 110 Amendment to network firms in section 290 independence
APES 205 Conformity with accounting standards
APES 305 Terms of engagement
The APESB also issued an exposure draft (ED) on a proposed business valuation standard that was developed by the APESB's Business valuation taskforce. A brief summary of the key requirements of each standard and the ED is given below.
APES 110 Amendment to network firm definition
The APESB has amended the definition of network firms in Section 290: Independence - Assurance engagements of APES 110 Code of ethics for professional accountants in line with international amendments incorporated in the IFAC code by the International Ethics Standard Board for Accountants (IESBA) in 2006.
The code requires firms that operate in a network structure to be independent of the financial statement audit clients of other firms within the network. For other assurance engagement clients, the code requires firms to consider any threats to independence that the firm has reason to believe are created by network firm interests and relationships.
In the revised definition a firm is considered to be part of a network when there is a larger structure aimed at co-operation and one or more of the following facts and circumstances apply:
profit or cost sharing among the entities
share common ownership, control or management
common quality-control policies and procedures
common business strategy
use of common brand name
sharing of a significant part of professional resources
APES 205 Conformity with accounting standards
APESB has issued the standard APES 205 Conformity with accounting standards to replace the former professional standard APS 1 that dealt with the same topic.
APES 205, which takes effect from 1 July 2008, sets out mandatory requirements and guidance for members of the professional accounting bodies about the need to comply with accounting standards when members prepare, present, audit, review or compile general-purpose or special-purpose financial statements.
The standard stipulates members' responsibilities in terms of the reporting entity concept. It refers members to Statement of accounting concepts 1, which provides further guidance on circumstances in which an entity will be considered to be a reporting entity.
Recently the Australian Accounting Standards Board reissued AASB 101 Presentation of financial statements, which will be applicable to financial periods commencing on or after 1 January 2009. The new AASB 101 refers to 'financial statements' whereas the existing AASB 101 refers to 'financial reports'.
But the APESB was mindful that auditing and assurance standards and the Corporations Act refer to financial reports. APESB decided to adopt the terminology in the new AASB 101. But, in order to address any interpretation issues the definition of financial statements includes a statement that for the purposes of APES 205 the terms 'financial statements' and 'financial reports' are equivalent terms.
APES 205 mandates that members have a professional obligation to take reasonable steps to comply with Australian accounting standards when they prepare, present, audit, review or compile general-purpose financial statements which purport to comply with the Australian financial reporting framework. When members are unable to ensure that general-purpose financial statements are prepared in accordance with Australian accounting standards, they have an obligation to take reasonable steps to ensure that appropriate disclosures are made in the financial statements.
APES 205 also deals with special-purpose financial statements. It mandates that members have a professional obligation to ensure that the following matters are disclosed:
that the financial statements are special purpose
the purpose for which they are prepared
the significant accounting policies adopted
Where members in public practice have been engaged to provide audit, review or compilation services and are unable to ensure that clients comply with the applicable financial reporting framework, the members have a professional obligation to consider relevant Australian auditing standards applicable to audit or review engagements, or professional standards applicable to compilation engagements.
In the case of other members who are unable to ensure proper disclosure of departures from Australian accounting standards, APES 205 recommends they discuss the matter with an appropriate level of management and document the results of these discussions.
APES 305 Terms of engagement
APES 305 Terms of engagement will replace APS 2 Terms of engagement, effective from 1 July 2008. The key change in APES 305 that will significantly impact on members in public practice is that they will have to document and communicate the terms of engagement with the client. (Under the existing APS 2 the requirement was to only have a clear understanding of the terms of engagement.)
The standard will mandate that the terms of engagement must be documented in an engagement document. However, APES 305 recognises that various forms of engagement documents (such as a standard format handout, brochure, leaflet or electronic communication) are acceptable and that it is not necessary for the terms to be in the form of a letter or agreement.
APES 305 discusses the general contents of an engagement document and provides guidance of the elements that members may consider for inclusion in an engagement document. Compared to APS 2, the new additions to the elements of an engagement document are the involvement of other members in public practice and ownership of documents. Where other members in public practice are involved in an engagement, it is important that the client is aware of this at the outset of the engagement. Therefore, APES 305 recommends that the potential involvement of other members should be disclosed in the engagement document.
The paragraph relating to ownership of documents addresses the situation where disputes arise due to members in public practice withholding working papers or client information due to unpaid fees. APES 305 suggests that if a member has policies relating to ownership restrictions of documents when there is a dispute then these policies should be disclosed at the outset of an engagement.
The existing APS 2 (issued in 2000) refers to the Professional Standards Act 1994 (NSW). As other states in Australia have now enacted similar legislation, specific references to the NSW legislation no longer appear in APES 305.
Proposed APES 225 Business valuation ED
APESB has issued an exposure draft on business valuation and is seeking comments from members who are providing valuation services to clients or employers. The ED was developed by the APESB Business valuation taskforce, which includes business valuation practitioners and representatives of the professional accounting bodies. The taskforce considered similar professional pronouncements issued in other jurisdictions when developing this pronouncement.
The proposed APES 225 envisages that a member may undertake a valuation engagement, a limited scope valuation engagement or a calculation engagement for a client or employer. The ED proposes that when members in public practice are engaged to perform independent valuation services, they will need to consider Section 220: Conflicts of interest of the code as well as Section 290: Application of framework to specific situations, which deal with independence issues.
As per the ED, members will also need to maintain professional competence and take due care in the performance of their work. A member who does not have the necessary professional expertise has a professional obligation to engage the services of a suitably qualified third party or refuse to undertake the valuation service.
The ED proposes mandatory reporting requirements in respect of a valuation service undertaken by a member in public practice. The reporting requirements include the purpose and scope of the engagement, basis of the valuation, valuation methodologies adopted, description of material assumptions, specific information obtained by the member, conclusion of value or a calculated value and any qualifications that materially affect the valuation.
The APESB has raised a specific question about the reporting obligations and is seeking comments regarding respondents' support of proposed mandatory reporting obligations for members in public practice.
The ED proposes that a member should clearly define the valuation terms used in the valuation report, and refers members to the International glossary of business valuation terms, which is included in the business valuation standards of the American Institute of Certified Public Accountants and the Canadian Institute of Chartered Business Valuators. Members also have an obligation to appropriately document the work performed in respect of the valuation service.
Members of CPA Australia who are involved in valuation services are encouraged to provide comments on the business valuation exposure draft before 4 April 2008.
Channa Wijesinghe CPA is the senior project manager of APESB and chair of the APESB Business valuation taskforce.
For further information visit the APESB's website to access the issued standards section and the 'Basis for conclusions' document.
