Professional Ethics in Practice

Holding a financial interest in an audit client (directly or indirectly) creates a self-interest threat.

Direct financial interest: The individual (or their immediate family) owns shares or other securities in the audit client directly. This is always prohibited for members of the audit team and the engagement partner. No safeguard can reduce this threat to an acceptable level — the interest must be disposed of, or the individual must be removed from the engagement.

Indirect financial interest: The individual has an interest through an intermediary (e.g., a managed fund, pension fund, or family trust). An indirect financial interest is only a threat if it is material to the individual. If material, the same safeguards apply (dispose or remove from team).

Close family: If a close family member (spouse, dependent child) of a member of the audit team holds a financial interest in the client, the same rules apply as if the team member held it directly.

Firm-wide interests: If the audit firm or a partner who is not on the engagement team holds a financial interest in the client, this must also be evaluated. For PIEs, even very small interests are prohibited for the firm's partners.

A close business relationship between the audit firm (or a member of the audit team) and the client can create self-interest or familiarity threats.

Examples:

• A joint venture or similar arrangement between the firm and the client
• A commercial interest in a joint product or service
• Distribution or marketing arrangements

Treatment: Close business relationships with the audit client are generally prohibited unless the relationship is clearly insignificant to both the firm and the client. If significant, the relationship must be terminated or the firm must decline/resign from the audit.

Buying goods or services from the client in the ordinary course of business (e.g., buying products the client sells to the public) is generally acceptable if the transaction is at arm's length and on normal commercial terms and not material.

Employment relationships between the audit firm and the client can create multiple threats:

Former employee of the client joining the audit firm:

• If a former employee of the client (who held a position of significant influence) joins the audit team, there is a self-review threat (they may be auditing their own previous work) and a familiarity threat (close relationships with former colleagues).
• Safeguard: The individual should not be assigned to the audit team for at least two years after leaving the client. All work performed during the period the individual was at the client should be reviewed by another team member.

Former member of the audit team joining the client ("revolving door"):

• If a former engagement partner or senior member of the audit team becomes a director or senior employee of the audit client, this creates self-interest, self-review, and familiarity threats.
• Safeguard: The FRC Ethical Standard requires a two-year cooling-off period for key audit partners before they can join a PIE audit client in a senior position. The firm must also consider whether any significant connections remain between the individual and the current audit team and take appropriate action (e.g., change the team, perform an independent review).

Audit team member negotiating employment with the client:

• If a member of the audit team is in discussions about joining the client, the self-interest threat is immediate — they may be influenced to please their potential future employer.
• Safeguard: The individual must notify the firm immediately and be removed from the engagement team. Their work should be reviewed by another member of the team.

Long association between the same senior audit personnel and the same audit client creates a familiarity threat and potentially a self-interest threat.

FRC Ethical Standard requirements for PIEs:

• The engagement partner must rotate off the audit after a maximum of five years, with a five-year cooling-off period before they can return to the engagement
• The engagement quality control reviewer (EQCR) has the same rotation requirements
• Other key audit partners must rotate after seven years with a two-year cooling-off period

For non-PIEs: Rotation is not mandated by the FRC Ethical Standard, but the firm should consider safeguards such as an independent partner review if the same partner serves for an extended period.

Firm rotation (for PIEs under EU/UK regulation): The audit firm itself must be rotated periodically. Under UK rules (as amended post-Brexit by the FRC), PIEs must retender the audit at least every 10 years and rotate the audit firm at least every 20 years. There are transitional provisions.

POCA 2002 creates three principal money laundering offences that can apply to any person (including accountants):

Criminal property is property that constitutes or represents a person's benefit from criminal conduct — or property the person knows or suspects constitutes or represents such a benefit. The crime generating the property can be any crime (not just drug trafficking or terrorism).

Defence: A person has a defence if they made an authorised disclosure (a Suspicious Activity Report, or SAR) to the National Crime Agency (NCA) before the act, or as soon as practicable after if they had a reasonable excuse for not reporting earlier, and the NCA gave consent to proceed (or the moratorium period expired without objection).

Failure to report (s.330 POCA — applies to the "regulated sector" including accountants):

A person in the regulated sector commits an offence if they know or suspect (or have reasonable grounds for knowing or suspecting) that another person is engaged in money laundering, and they fail to make a disclosure (SAR) to the firm's nominated officer (MLRO — Money Laundering Reporting Officer) or directly to the NCA as soon as practicable.

The information must have come to the person in the course of business in the regulated sector. There is a defence of reasonable excuse for not reporting, or where the person had appropriate training and did not actually know or suspect.

Tipping off (s.333A POCA):

It is a criminal offence for a person in the regulated sector to disclose to any person that a SAR has been made (or that an investigation is being contemplated or carried out) if the disclosure is likely to prejudice any investigation. This means the accountant must not inform the client (or anyone else) that a SAR has been filed or that the accountant suspects money laundering.

Penalties: The money laundering offences carry a maximum penalty of 14 years' imprisonment and/or an unlimited fine. Failure to report and tipping off carry a maximum of 5 years' imprisonment and/or a fine.

The Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLR 2017) require firms in the regulated sector (including accountancy firms) to implement systems and controls to prevent money laundering.

Key requirements:

• Customer Due Diligence (CDD): The firm must verify the identity of the client before establishing a business relationship or carrying out occasional transactions. CDD involves:
  • Identifying the client and verifying their identity from reliable, independent sources (e.g., passport, driving licence, utility bills, Companies House records)
  • Identifying any beneficial owner (a person who ultimately owns or controls the client — typically >25% shareholding) and taking reasonable measures to verify their identity
  • Obtaining information on the purpose and intended nature of the business relationship
• Enhanced Due Diligence (EDD): Required for higher-risk situations — e.g., politically exposed persons (PEPs), non-face-to-face business relationships, clients from high-risk third countries
• Simplified Due Diligence (SDD): May be applied in lower-risk situations — e.g., UK-listed companies, public authorities
• Ongoing monitoring: Firms must conduct ongoing monitoring of the business relationship, including scrutinising transactions and keeping CDD information up to date
• Record keeping: CDD records must be retained for five years after the business relationship ends
• Nominated officer (MLRO): The firm must appoint a nominated officer to receive internal suspicious activity reports and decide whether to report externally to the NCA
• Staff training: All relevant employees must receive appropriate training on AML procedures and how to recognise suspicious activity

When an accountant suspects money laundering, the process is:

1. The individual reports their suspicion to the firm's nominated officer (MLRO) — this is an internal report
2. The MLRO evaluates the report and, if they agree there are grounds for suspicion, submits a Suspicious Activity Report (SAR) to the National Crime Agency (NCA)
3. The MLRO requests consent from the NCA to continue acting for the client (if the ongoing work could constitute one of the principal offences)
4. The NCA has 7 working days to respond. If consent is refused, there is a further moratorium period of 31 calendar days during which the firm must not proceed with the transaction
5. If the NCA does not respond within 7 working days, consent is deemed given
6. Throughout, the accountant must not tip off the client or any other person that a SAR has been made