20.3 Code of Ethics: Fundamental Principles, Conceptual Framework, and Threats
Key Takeaways
The Philippine Code of Ethics establishes five fundamental principles: Integrity, Objectivity, Professional Competence and Due Care, Confidentiality, and Professional Behavior.
The conceptual framework requires professional accountants to identify, evaluate, and address threats to compliance with the fundamental principles; if threats cannot be eliminated or reduced to an acceptable level, the service must be declined or terminated.
The five categories of ethical threats are Self-interest, Self-review, Advocacy, Familiarity, and Intimidation threats.
Code of Ethics for Professional Accountants in the Philippines
A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. A professional accountant's responsibility is not exclusively to satisfy the needs of an individual client or employer. In the Philippines, all Certified Public Accountants are legally and ethically bound by the Philippine Code of Ethics for Professional Accountants, promulgated by the Professional Regulatory Board of Accountancy (BOA) and the Professional Regulation Commission (PRC) based on the international standards issued by the International Ethics Standards Board for Accountants (IESBA).
1. Architecture of the Code of Ethics
The Philippine Code of Ethics employs an integrated, principles-based structure divided into four distinct operational parts:
Architecture of the Philippine Code of Ethics
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Part 1 Part 2 Part 3 Part 4
Complying with the Professional Professional International
Code, Fundamental Accountants in Accountants in Independence
Principles & Business (PAIBs) Public Practice Standards
Conceptual (Commerce, Industry, (PAPPs) • Part 4A: Audits & Reviews
Framework Academe, Government) (Audit, Tax, Advisory) • Part 4B: Other Assurance
- Part 1: Establishes the fundamental principles of professional ethics and provides the conceptual framework applicable to all professional accountants regardless of sector.
- Part 2: Sets out additional requirements and guidance for Professional Accountants in Business (PAIBs), covering commerce, industry, education, and government.
- Part 3: Sets out additional requirements and application material for Professional Accountants in Public Practice (PAPPs) offering audit, review, tax, or advisory services.
- Part 4 (International Independence Standards): Delineates independence requirements for assurance engagements, divided into Part 4A (Independence for Audit and Review Engagements) and Part 4B (Independence for Assurance Engagements Other than Audit and Review Engagements).
2. The Five Fundamental Ethical Principles
Every professional accountant in the Philippines must comply with five foundational ethical principles:
| Fundamental Principle | Technical Definition & Standard Requirement | Prohibited Behavior / Practical Manifestation |
|---|---|---|
| 1. Integrity | To be straightforward and honest in all professional and business relationships. Implies fair dealing, truthfulness, and moral uprightness. | An accountant shall not knowingly be associated with reports, returns, communications, or other information where the accountant believes the information contains a materially false or misleading statement, statements furnished recklessly, or omits or obscures required information. |
| 2. Objectivity | Not to compromise professional or business judgment because of bias, conflict of interest, or undue influence of others. | Performing professional work while beholden to personal economic interests, political relationships, or undue pressure from corporate superiors or dominant clients. |
| 3. Professional Competence and Due Care | To attain and maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current technical and professional standards and relevant legislation; and to act diligently in accordance with applicable standards. | Performing services without adequate training, failing to supervise audit staff, issuing reports without verifying supporting records, or failing to maintain Continuing Professional Development (CPD). |
| 4. Confidentiality | To respect the confidentiality of information acquired as a result of professional and business relationships. An accountant shall not disclose confidential information outside the firm or employing organization without proper and specific authority, nor use it for personal advantage or third-party advantage. | Using insider operational data to trade securities, sharing proprietary client formulas with competitors, or gossiping about a client's pending acquisition. |
| 5. Professional Behavior | To comply with relevant laws and regulations and avoid any conduct that the professional accountant knows or should know might discredit the profession. | Engaging in exaggerated claims regarding services offered, qualifications possessed, or experience gained; or making disparaging references or unsubstantiated comparisons to the work of other practitioners. |
The Duty of Confidentiality and Permitted Disclosures
The obligation to maintain confidentiality continues even after the end of the relationship between the professional accountant and the client or employer. Information acquired during professional service cannot be used or disclosed unless an authorized exception applies.
Confidential client information may be disclosed only under three recognized legal circumstances:
- Disclosure is Authorized: Disclosure has been explicitly authorized by the client or employing organization, provided the interests of all relevant parties are safeguarded.
- Disclosure is Required by Law: Examples include production of documents or provision of evidence in the course of legal proceedings (e.g., valid court subpoena), or disclosure to appropriate public authorities of identified or suspected non-compliance with laws and regulations (e.g., statutory reporting under the Anti-Money Laundering Act).
- There is a Professional Duty or Right to Disclose (When Not Prohibited by Law):
- To respond to an official inquiry or investigation by the PRC, BOA, or a regulatory body;
- To protect the professional interests of an accountant in legal proceedings (e.g., defending oneself against professional malpractice litigation);
- To comply with technical standards and ethical requirements (e.g., quality assurance reviews conducted by the BOA or AIPO/PICPA).
3. The Conceptual Framework Approach
Circumstances in which professional accountants operate may create specific threats to compliance with the fundamental principles. Because it is impossible to define every situation that creates threats, the Code establishes a dynamic Conceptual Framework requiring the accountant to:
The Conceptual Framework Three-Step Cycle
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1. Identify Threats 2. Evaluate Threats
Identify threats to compliance Evaluate whether identified threats
with fundamental principles are at an ACCEPTABLE LEVEL using the
(Self-interest, Self-review, Reasonable and Informed Third Party
Advocacy, Familiarity, Test.
Intimidation). │
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Are threats acceptable?
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YES NO
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Proceed with 3. Address Threats
Engagement • Eliminate circumstance
• Apply safeguards
• Decline / Terminate!
The Reasonable and Informed Third Party Test
To evaluate whether a threat is at an acceptable level, the accountant applies the reasonable and informed third party test. This test evaluates whether a hypothetical third party—who possesses relevant knowledge of all facts and circumstances available to the accountant at the time—would likely conclude that the accountant complies with the fundamental principles.
Addressing Threats: Elimination, Safeguards, or Termination
If an identified threat is not at an acceptable level, the professional accountant must address the threat by:
- Eliminating the circumstances creating the threat: For example, divesting a financial interest in an audit client, or removing an individual whose spouse is the client's chief accountant from the audit engagement team.
- Applying safeguards: Designing actions that effectively reduce the threat to an acceptable level. Examples include having an independent professional review work performed, consulting an independent third party, or rotating senior engagement personnel.
- Declining or Terminating the Engagement: If the threat cannot be eliminated and adequate safeguards cannot be applied to reduce it to an acceptable level, the accountant must decline or terminate the specific professional activity or engagement.
4. The Five Categories of Ethical Threats
The Code groups circumstances that compromise compliance with the fundamental principles into five broad categories:
Five Categories of Ethical Threats
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Self-Interest Self-Review Advocacy Familiarity Intimidation
Financial or Evaluating one's Promoting a client's Close or long Deterred from
personal stakes own past judgments position to the point relationship acting with
improperly or previous non-audit that objectivity is breeds excess objectivity by
swaying CPA services compromised sympathy threats/pressure
Detailed Threat Analysis & Practical Scenarios
| Threat Category | Nature and Triggering Circumstance | Practical Real-World Scenario | Mandatory Safeguard or Required Action |
|---|---|---|---|
| Self-Interest Threat | The threat that a financial or other interest will inappropriately influence the accountant's judgment or behavior. | An audit partner holds shares in an audit client, or the audit firm derives 40% of its gross annual fee income from a single client. | Holding direct financial interest is strictly prohibited—must divest shares immediately or decline engagement. For fee dependency, apply independent pre-issuance quality review. |
| Self-Review Threat | The threat that an accountant will not appropriately evaluate the results of a previous judgment made or service performed by the accountant or firm upon which they will rely in the current service. | An accounting firm prepares the trial balance, posts adjusting journal entries, designs internal control software, and subsequently performs the independent statutory audit. | Strict prohibition for Public Interest Entities (PIEs). For non-PIEs, routine services permitted only if client retains all management responsibility and separate teams perform the work. |
| Advocacy Threat | The threat that an accountant will promote a client's or employing organization's position to the point that the accountant's objectivity is compromised. | An audit firm acts as the legal advocate or litigation representative for an audit client in a disputed tax case before the Court of Tax Appeals, or promotes the client's commercial shares. | The firm must not act as an advocate for an audit client in legal or tax litigation disputes involving material amounts. The client must retain independent legal counsel. |
| Familiarity Threat | The threat that due to a long or close relationship with a client or employing organization, an accountant will be too sympathetic to their interests or too accepting of their work. | An audit engagement partner has led the statutory audit of a major commercial client continuously for 8 years, or the audit senior's spouse is the client's finance director. | Rotate the audit partner (mandatory rotation after 5 years under SEC SRC Rule 68). For family relationships, remove the individual from the audit team immediately. |
| Intimidation Threat | The threat that an accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence. | Management threatens to dismiss the audit firm or withhold outstanding audit fees unless the auditor issues an unmodified opinion on questionable asset valuations. | Elevate matter to the Audit Committee or Board of Directors. Involve an independent quality reviewer. If intimidation persists, withdraw from the engagement. |
A CPA in public practice advertises that the firm guarantees clients will receive tax refunds and describes a competing firm's audits as sloppy without evidence. Which fundamental principle is most directly violated?
Professional behavior
Confidentiality
Objectivity
Professional competence and due care
A firm designs and implements the financial information system of an audit client and then audits the financial statements produced by that system. Which threat is created?
Advocacy threat
Intimidation threat
Self-review threat
Familiarity threat
Sections you finish are checked off in the contents.