Threats to compliance with fundamental principles with respect to CA Act, 1949

Threats to compliance with fundamental principles with respect to CA Act, 1949 (Chartered. Accountants Act, 1949)

Threats to compliance with the fundamental principles fall into one or more of the following  categories:

(1) Self-interest  threat – the threat that a financial or other interest will inappropriately  influence a professional accountant’s judgment or behaviour;

Example:-

• Having a direct financial interest in a client
• Undue dependence on total fees from a client.
• Having a close business relationship with a client.
• Concern about the possibility of losing a client.

(2) Self-review  threat – the threat that a professional accountant will not appropriately evaluate the  results of a previous judgment made; or an activity performed by the  accountant, or by another individual within the accountant’s firm or employing  organization, on which the accountant will rely when forming a judgment as  part of performing a current activity;

Example:-

• A loan to or from an assurance client or any of its directors or officers
• A professional accountant holding a financial interest in, or receiving a loan or guarantee from, the employing organization.
• A professional accountant being offered a gift or special treatment from a supplier of the employing organization.
• A professional accountant having access to corporate assets for personal use.
• A professional accountant participating in incentive compensation arrangements offered by the employing organization.

(3) Advocacy  threat – the threat that a professional accountant will promote a client’s or  employing organization’s position to the point that the accountant’s  objectivity is compromised;

Example:-

• Acting as an advocate on behalf of an assurance client in litigation or dispute with third party
• Promoting shares in a entity when that entity is on a financial statement audit client.
• lobbying in favor of legislation behalf of a client.

(4) Familiarity  threat – the threat that due to a long or close relationship with a client, or  employing organization, a professional accountant will be too  sympathetic to their interests or too accepting of their work; and

Example:-

• Long association of an audit team member with the audit client.
  • A former partner of the firm being a director or officer of the client or an employee in a position to exert direct and significant influence over the subject matter of the engagement.
  • A member of the engagement team having a close or immediate family relationship with an employee of the client who is in a position to exert direct and significant influence over the subject matter of the engagement.
  • A member of the engagement team having a close or immediate family relationship with a director or officer of the client.

5) Intimidation  threat – the threat that a professional accountant will be deterred from acting  objectively because of actual or perceived pressures, including attempts to  exercise undue influence over the accountant.

Example:-

• Being threatened with dismissal or replacement in relation to a client engagement because of a disagreement about a professional matter.
• Being feeling pressured to agree with the judgment of a client because the client has more expertise on the matter in question.
• Being informed that a planned promotion will not occur unless the accountant agrees with an inappropriate accounting treatment.

Evaluation of Threats:

The conditions, policies and procedures described above might impact the evaluation of whether a threat to compliance with the fundamental principles is at an acceptable level.

(i) Acceptable level: An acceptable level is a level at which a professional accountant using the reasonable and informed third party test would likely conclude that the accountant complies with the fundamental principles.

(ii) Reasonable and Informed Third Party : The reasonable and informed third party test is a consideration by the professional accountant about whether the same conclusions would likely be reached by another party. Such consideration is made from the perspective of a reasonable and informed third party, who weighs all the relevant facts and circumstances that the accountant knows, or could reasonably be expected to know, at the time the conclusions are made. The reasonable and informed third party does not need to be an accountant but would possess the relevant knowledge and experience to understand and evaluate the appropriateness of the accountant’s conclusions in an impartial manner.

Addressing Threats

If the professional accountant determines that the identified threats to compliance with the fundamental principles are not at an acceptable level, the accountant shall address the threats by eliminating them or reducing them to an acceptable level. The accountant shall do so by:

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

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

(iii) Declining or ending the specific professional activity.

Actions to Eliminate Threats : Depending on the facts and circumstances, a threat might be addressed by eliminating the circumstance creating the threat. However, there are some situations in which threats can only be addressed by declining or ending the specific professional activity. This is because the circumstances that created the threats cannot be eliminated and safeguards are not capable of being applied to reduce the threat to an acceptable level.