CODE OF ETHICS

· Guidance that accountants perform

· Ethical action an accountant is supposed to do

· Standard of conduct

Fundamental Principles

1. Professional Competence and Due Care

How do you know that you care for someone?

· Understand

· Before we do such actions, we always think of them

· If we know it by heart

· the principle of professional competence and due care imposes the following
obligations on all professional accountants:

(a) to maintain professional knowledge and skill at the level required to ensure that a
client or employer receives competent professional services.

(b) to act diligently in accordance with applicable technical and professional standards
when providing professional services.

· Competent professional service requires the exercise of sound judgment in

applying professional knowledge and skill in the performance of such service.
Professional competence may be divided into two separate phases:

(a) attainment of professional competence

(b) maintenance of professional competence

 2. Confidentiality

- to respect the confidentiality of information acquired as a result of professional and

business relationships and therefore, not disclose any such information to third
parties without proper and specific authority, unless there is a legal or professional
right or duty to disclose.

The accounting profession is rooted on trust and confidence

· The principle of confidentiality imposes an obligation on all professional

accountants to refrain from:

(a) disclosing outside the firm or employing organization confidential acquired as a

result of professional and business relationships without proper and specific
authority or unless there is a legal or professional right or duty to disclose.

(b) Using confidential information acquired as a result of professional and business

relationships to their personal advantage or the advantage of third parties.

3. Integrity

- to be straightforward and honest in all professional and business relationships.

- Professional accountant shall not knowingly be associated with reports, returns,

communications or other information where the professional accountant believes
that the information:

(a)contains a materially false or misleading statement.

(b) contains statements or information furnished recklessly.

(c) omits or obscures information required to be included where such omission or

obscurity would be misleading.
 - When a professional accountant becomes aware that the accountant has been
associated with such information, the accountant shall take steps to be
disassociated from that information.

4. Objectivity

- to not allow bias, conflict of interest or undue influence of others to override

professional or business judgements.

5. Professional Behavior

- to comply with relevant laws and regulations and avoid any action that discredits
the profession.

- In marketing and promoting themselves and their work. Professional accountants

shall not bring the profession into disrepute. Professional accountants shall be
honest and truthful and not:

(a) Make exaggerated claims for the services they are able to offer, the qualifications
they possess, or experience they have gained

(b) Make disparaging references or unsubstantiated comparisons to the work of

others.

“I can reduce your income taxes by 15%” – NOT PROFESSIONAL

1. INDEPENDENCE

- independent in making decisions/assessment

- independent mind; no bias in decision-making

(a) Independence of Mind

- The state of mind that permits the expression of a conclusion without being affected by
influences that compromise professional judgment, thereby allowing an individual to act
with integrity and exercise objectivity and professional skepticism.

(b) Independence in Appearance

- The avoidance of facts and circumstances that are so significant that a reasonable and
informed third party would be likely to conclude, weighing all the specific facts and
colostomies, that a firms’, or a member of the audit team’s, integrity, objectivity, or
professional skepticism has been compromised.

Threats to Independence

1. Self-Interest Threat
2. Self-Review Threat
3. Advocacy Threat
4. Familiarity Threat
5. Intimidation Threat

· Safeguards to threats to independence

· NOCLAR framework

· PSQC

SELF-INTEREST THREAT
- Exists if the auditor holds a direct or indirect financial interest in the company or depends
on the client for a significant outstanding fee.
- It arises when an audit firm or a member of the audit team has stakes in the clients
business. This interest may be financial or stem from other sources

Examples:
● A member of the assurance team having a direct financial interest in the assurance client
● A firm having undue dependence on total fee from a client
● A member of the assurance team having significant close business relationships with an
assurance client

SELF-REVIEW THREAT
- Is the method of self- evaluation, bias
 - Is it a procedure to observe, analyze and calculate the worth of efforts contributed by an
individual by the self

Remedies to prevent self-review threat:

1. Identify the threat
2. Evaluate
3. Address the threat
- Eliminate the threat
- Provide safeguards
- Withdraw from the engagement

Examples:
● A member of the assurance team being, or having recently been, a director or officer of
the client
● A member of the assurance team being, or having recently been, employed by the client
in a position to exert significant influence over the subject matter of the engagement.
● The firm performs a service for an assurance client that directly affects the subject
matter information of the assurance engagement.

ADVOCACY THREAT
- Threat occurs when members promote a position or opinion on behalf of a client to the
point that subsequent objectivity may be compromised.
- Promoting the interest of the client to the point that they are not skeptical

Examples:
● Acting as an advocate for an assurance client in litigation or dispute with third parties
● Representing an assurance client in a lawsuit or a disagreement with a third party
● Selling stock in a publicly traded company when the company is a financial statement
audit customer
● Serving as an advocate for a n assurance client in court or in dispute with a third party

Safeguards:
a. Safeguards created by the professions, legislation or regulation; and
b. Safeguards in the work environment
● Consider the appropriateness or necessity of modifying the assurance plan for the
assurance engagement
● Assigning an assurance team with sufficient experience in relation to the individual who
has joined the assurance client
● Involving an additional chartered accountant who was not a member of the assurance
team to review the work or advise as needed
● Quality control review of the assurance engagement

FAMILIARITY THREAT
 - Threat due to a long or close relationship with a client or employer, a professional
accountant will be too sympathetic to their interest or too accepting of their work
- Exists of the auditor is too personally close to or familiar with employees, officers, or
directors of the client company

Examples:
- A members immediate family with the client
- A members close friend is employed by the client
- A former partner or professional employee joined the client in a key position and has
knowledge of the firm's policies and practices for the professional services engagement
- Senior personal have a long association with the client
- Director or officer of the client or an employee in a position to exert significant influence
over the subject matter of the engagement having recently served as the engagement
partner
- A professional accountant accepting gifts or preferential treatment from a client, unless
the value is trivial or inconsequential

Safeguards:
● Rotation of key audit partner
● Rotation of audit firm
● Quality control review of the assurance engagement

INTIMIDATION THREAT
- Threat that a professional accountant will be deterred from acting objectively because
actual or perceived pressures, including attempts to exercise undue influence over the
professional accountant

Examples:
- The auditors have a fee dependency on a client
- Being threatened with dismissal or replacement in relation to a client engagement
- Being threatened with litigation
- Being pressured to reduce inappropriately the extent of work performed in order to
reduce fees.
- Contingent fee arrangement = ultimatum

Safeguards:
● Recruitment procedures emphasizing the importance of employment of high caliber
competent personnel
● Assigning an assurance team that is of sufficient experience in relation to the individual
who has joined the assurance client
● Involve an additional chartered accountant who was not a member of the assurance
team to review the work or advise as necessary
 ● Ensuring that the individual does not continue to participate or appear to participate in
the firm's business or professional activities
In case where no safeguard is available:
a. Eliminate the circumstances or relationship creating the threat
b. Decline the engagement or terminate it

SAFEGUARDING TO THREATS TO INDEPENDENCE

What are safeguards?
- These procedures, or other measures that are designed to
a. Eliminate the threat
b. Reduce the threat to an acceptable level
- “Acceptable level” at which a reasonable and informed third party would
be likely to conclude, weighing all the specific facts and circumstances
available to the professional accountant at that time, that compliance with
the fundamental principles is not compromised

Why are safeguards important?

- To reduce risks and threats inside the operations of a company. It helps in improving the
efficiency and effectiveness of the operations
- It is the auditor independence - foundation of auditing as a profession
- “threats would impair” meaning the company can be involved in fraudulent activities,
higher risks for creditors, wrong decision making for interested users

How do we apply them?

1. We need to identify the threats
2. Evaluate the significance of the threat
3. Identify and apply safeguards
4. Evaluate the effectiveness of safeguards
5. Document threats and safeguards

Examples:
1. Identified threat: Familiarity
- A manager on the audit engagement within a members firm has a close personal
friend or relative who is in a key position at an audit client
Possible safeguard:
- The member may consider removing the manager from the audit engagement
team for this particular client

2. Identified threat: Self-interest

- A member is considering submitting a proposal for a new audit client. However, if
retained, the fees from the potential client would be significant to the member’s
firm.
Possible safeguard:
- Implement internal firm- monitoring procedures for the audit client
 - Subject the assignment of engagement personnel to approval by another partner
or manager

3. Identified threat: Self-interest & Self-review

- A member performs tax services for a long-standing client and the client has
recently requested that the member perform an audit engagement.
Possible safeguard:
- Use another partner at the firm or another firm to review the audit services
performed by the member

More examples of safeguards to threats to independence:

Firm-wide safeguards in the work environment include:
● Leadership of the firm that establishes the expectation that members of an assurance
team will act in the public interests
● A disciplinary mechanism to promote compliance with policies and procedures
● Published policies and procedures to encourage and empower staff to communicate to
senior levels within the firm any issue relating to compliance with the fundamental
principles that concerns them

Engagement-specific safeguards in the work environment include:

● Having a professional accountant who was not a member of the assurance team review
the assurance work performed or otherwise advise as necessary
● Involving another firm to perform or re-form part of the engagement
● Rotating senior assurance team personnel

3 LEVELS OF SAFEGUARDS
1. Professional Regulatory Body - e.g. Code of ethics, BOA
2. Firm-Wide Safeguard - applied throughout the firm
3. Engagement-specific - applied to a specific engagement

NOCLAR FRAMEWORK
- Any act of omission or commission, intentional or unintentional, committed by a client or
employer, including by management or by others working for under the direction of the
client or employer, which is contrary to prevailing laws or regulations

NOCLAR covers:
● Bribery
● Corruption
● Fraud
● Money laundering
● Tax evasion
● Environmental protection
● Public health and safety
 ● Management override of controls or intentional misrepresentations being made to the
auditor

OBJECTIVES:
● To comply with the principles of integrity and professional behavior
● To alert management when appropriate so that they can deal with the consequences of
the non-compliance; or deter the non-compliance if it hasn't yet happened; and
● To take such further action as appropriate to in the public interest

Who has to comply with NOCLAR?

● Auditors
● Other professional accountants in practice
● Professional accountants in business, or other non-accountancy organizations
● Professional accountants in business who are in senior roles

Impact of non-compliance:
● Penalties
● Reputational damage
● Company shutdown

PHILIPPINE STANDARD ON QUALITY CONTROL (PSQC)

Scope of PSQC
1. Deals with a firm's responsibilities for its system of quality control for audits and reviews
of financial statements, and other assurance and related services engagements. This
PSQC is to be read in conjunction with relevant ethical requirements.
2. Other pronouncements of the Auditing and Assurance Standards Council (ASSC) set out
additional standards and guidance on the responsibilities for specific types of
engagements. PSA 220, 1 for example, deals with quality control procedures for audits
of financial statements.
3. A system of quality control consists of policies designed to achieve the objective set out
in paragraph 11 and the procedures necessary to implement and monitor compliance
with those policies

Authority
1. PSQC applies to all firms of professional accountants in respect of audits and reviews of
financial statements, and other assurance and related services engagements. The
nature and extent of the policies and procedures developed by an individual firm to
comply with this PSQC will depend on various factors such as the size and operating
characteristics of the firm, and whether it is part of a network
2. PSQC contains the objectives of the firm in following the PSQC, and requirements
designed to enable the firm to meet that stated objective. In addition, it contains related
guidance in the form of application and other explanatory material, as discussed further
in paragraph 8, and introductory material that provides context relevant to a proper
understanding of the PSQC, and definition
 3. The objective provides the context in which the requirements of this PSQC are set, and
is intended to assist the firm in:
● Understanding what needs to be accomplished
● Deciding whether more needs to be done to achieve the objectives
4. The requirements of this PSQC are expressed using “shall”
5. Where necessary, the application and other explanatory material provides further
explanation of the requirements and guidance for carrying them out. In particular, it may:
● Explain more precisely what a requirement means or is intended to cover; and
● Include examples of policies and procedures that may be appropriate in the
circumstances
6. PSQC includes, under the heading “Definitions” a description of the meanings attributed
to certain terms for purposes of this PSQC. These are provided to assist in the
consistent application and interpretation of this PSQC, and are not intended to override
definitions that may be established for other purposes, whether in lawn regulation or
otherwise. It also includes descriptions of other terms found in this PSQC to assist in
common and consistent interpretation and translation.

OBJECTIVES OF PSQC:
For the firm to establish and maintain a system of quality control to provide it with reasonable
assurance that:
a. The firm and its personnel comply with professional standards and regulatory and legal
requirements; and
b. Report issued by the firm or engagement partners are appropriate in the circumstances

DEFINITIONS:
1. Date of report
- date selected by the practitioner to date the report
2. Engagement documentation
- Record of work performed, results obtained, and conclusions the practitioner
reached (terms such as “working papers” or “workpapers” are sometimes used).
3. Engagement partner
- Partner or other person in the firm responsible for the audit engagement and its
performance, and for the report that is issued on behalf of the firm, has the
appropriate authority from a professional, legal or regulatory body.
4. Engagement quality control review
- A process designed to provide an objective evaluation, on or before the date of
the auditors report, of the significant judgments the engagement team made and
the conclusions reached in formulating the auditors report; only for audits of
financial statements of listed entities and those other audit engagements, if any,
for which the firm has determined an engagement quality control review is
required
5. Engagement team
 - All partners and staff performing the engagement, and any individuals engaged
by the firm or a network firm who perform audit procedures on the engagement;
excludes external experts engaged by the firm or a network firm
6. Firm
- A sole practitioner, partnership, or other entity of professional accountant
7. Inspection
- Procedures designed to provide evidence of compliance by engagement teams
with the firm's quality control policies and procedures, in relation to completed
audit engagements
8. Listed entity
- An entity whose shares, stock or debt are quoted or listed on a recognized stock
exchange, or are marketed under the regulations of a recognized stock exchange
or other equivalent body; in the Philippines, this includes issuers of registered
securities such as issuers of debt securities and pre-need entities.
9. Monitoring
- A process comprising an ongoing consideration and evaluation of the firms
system of quality control, including a periodic inspection of a selection of
completed engagements, designated to provide the firm with reasonable
assurance that its system of quality control is operating effectively.
10. Network firm
- Firm or entity that belongs to a network
11. Personnel
- Partners and staffs
12. Professional standards
- AASC Engagement Standards, as defined in the AASC’s Preface to the
Philippine Standards on Quality Control, Auditing, Review, Other Assurance and
Related Services and relevant ethical requirements
13. Relevant ethical requirements
- Ethical requirements to which the engagement team and engagement quality
control reviewer are subject, which ordinarily compromise parts A and B of the
Code of Ethics for Professional Accountants in the Philippines (Philippine Ethics
Code) related to an audit of financial statements together with national
requirements that are more restrictive.
14. Staff
- Professionals, other than partners, including any experts the firm employs
15. Suitably qualified external person
- An individual outside the firm with the competence and capabilities to act as an
engagement partner, for example a partner of another firm, or an employee (with
appropriate experience) of either a professional accountancy body whose
members may perform audits of historical financial information or of an
organization that provides relevant quality control services

REQUIREMENTS
Applying and complying with relevant requirements
 - Personnel within the firm responsible for establishing and maintaining the firm's system
of quality control shall have an understanding of the entire text of this PSQC, including
its application and other explanatory material, to understand its objective and to apply its
requirements properly

Elements of a System of Quality Control

- The firm shall establish and maintain a system of quality control that includes policies
and procedures that address each of the following elements:
a. Leadership responsible for quality within the firm
b. Relevant ethical requirements
c. Acceptance and continuance of client relationships and specific engagements
d. Human resources
e. Engagement performance
f. Monitoring
- The firm shall document its policies and procedures and communicate them to the firm's
personnel

Leadership Responsibilities for Quality within the firm

- The firm shall establish policies and procedures designed to promote an internal culture
recognizing that quality is essential in performing engagements. Such policies and
procedures shall require the firm's chief executive officer (or equivalent) or, if
appropriate, the firm's managing board of partners (or equivalent) to assume ultimate
responsibility for the firm's system of quality control.
- The firm shall establish policies and procedures such as that any person or persons
assigned operational responsibility for the firm's system or quality control by the firm's
chief executive officer or managing board of partners has sufficient and appropriate
experience and ability, and the necessary authority, to assume that responsibility

Relevant ethical requirements

- The firm shall establish policies and procedures designed to provide it with reasonable
assurance that the firm and its personnel comply with relevant ethical requirements
a. Communicate its independence requirements to its personnel and, where
applicable, others subject to them; and
b. Identify and evaluate circumstances and relationships that create threats to
independence, and to take appropriate action to eliminate those threats or reduce
them to an acceptable level by applying safeguards, or, if considered appropriate,
to withdraw from the engagement, where withdrawal is possible under applicable
law or regulation
- The firm shall establish policies and procedures designed to provide it with reasonable
assurance that it is notified of breaches of independence requirements, and to enable it
to take appropriate actions to resolve such situations. The policies and procedures shall
include requirements for:
a. Personnel to promptly notify the firm of independence breaches of which they
become aware;
 ● Such policies and procedures shall require:
a. Engagement partners to provide the firm with relevant information about client
engagements, including the scope of services, to enable the firm to evaluate the
overall impact, if any, on independence requirements
b. Personnel to promptly notify the firm of circumstances and relationships that
create a threat to independence so that appropriate action can be taken; and
c. The accumulation and communication of relevant information to appropriate
personnel so that:
● The firm and its personnel can readily determine whether they satisfy
independence requirements;
● The firm can maintain and update its records relating to independence;
and
● The firm can take appropriate action regarding identified threats to
independence that are not at an acceptable level

Acceptance and Continuance of Client Relationships and Specific Engagement

- The firm shall establish policies and procedures for the acceptance and continuance of
client relationship and specific engagements, designed to provide the firm with
reasonable assurance that it will only undertake or continue relationships and
engagements where the firm:
a. Is competent to perform the engagement and has the capabilities, including time
and resources, to do so;
b. Can comply with relevant ethical requirements; and
c. Has considered the integrity of the client, and does not have information that
would lead it to conclude that the client lacks integrity
- The firm shall establish policies and procedures on continuing an engagement and the
client relationship, addressing the circumstances where the firm obtains information that
would have caused it to decline the engagement had that information been available
earlier. Such policies and procedures shall include consideration of:
a. The professional and legal responsibilities that apply to the circumstances,
including whether there is a requirement for the firm to report to the person or
persons who made the appointment or, in some cases, to regulatory authorities;
and
b. The possibility of withdrawing from the engagement or from both the engagement
and client relationship

● Such policies and procedures shall require:

a. The firm to obtain such information as it considers necessary in the
circumstances before accepting an engagement with a new client, when deciding
whether to continue an existing engagement, and when considering acceptance
of a new engagement with an existing client
HUMAN RESOURCES
- The firm shall establish policies and procedures designed to provide it with reasonable
assurance that it has sufficient personnel with the competence, capabilities, and
commitment to ethical principles necessary to:
a. Perform engagements in accordance with professional standards and applicable
legal and regulatory requirements;
b. Enable the firm or engagement partners to issue reports that are appropriate in
the circumstances

Assignment of engagement teams

- The firm shall also establish policies and procedures to assign appropriate personnel
with necessary competence, and capabilities to:
a. Perform engagements in accordance with professional standards and applicable
legal and regulatory requirements; and
b. Enable the firm or engagement partners to issue reports that are appropriate in
the circumstances
- The firm shall assign responsibility for each engagement to an engagement partner and
shall establish policies and procedures requiring that:
a. The identity and role of the engagement partner are communicated to key
members of client management and those charged with governance;
b. The engagement partner has the appropriate competence, capabilities, and
authority to perform the role; and
c. The responsibilities of the engagement partner are clearly defined and
communicated to that partner

ENGAGEMENT PERFORMANCE
- The firm shall establish policies and procedures designed to provide it with reasonable
assurance that engagements are performed in accordance with professional standards
and applicable legal and regulatory requirements, and that the firm or the engagement
partner issue reports that are appropriate in the circumstances. Such as policies and
procedures shall include:
a. Matters relevant to promoting consistency in the quality of engagement
performance
b. Supervision responsibilities; and
c. Review responsibilities

Requirements
- The firm review responsibility policies and procedures shall be determined on the basis
that work of less experienced team members is reviewed by more experienced
engagement team members.

Consultation:
 - The firm shall establish policies and procedures designed to provide it with reasonable
assurance that:
a. Appropriate consultation takes place on difficult or contentious matters;
b. Sufficient resources are available to enable appropriate consultation to take
place;
c. The nature and scope of, and conclusions resulting from, such consultations are
documented and are agreed by both the individual seeking consultation and the
individual consulted; and
d. Consultations resulting from consultation are implemented

ENGAGEMENT QUALITY CONTROL REVIEW

- The firm shall establish policies and procedures setting out the nature timing and extent
of an engagement quality control review
- The firm shall establish policies and procedures to require the engagement quality
control review to include:
a. Discussion of significant matter with the engagement partner;
b. Review of the financial statements or other subject matter information and the
proposed report;
c. Review of selected engagement documentation relating to significant judgments
the engagement team made and the conclusions it reached; and ]
d. Evaluation of the conclusions reached in formulating the report and consideration
of whether the proposed report is appropriate
- The firm shall establish policies and procedures requiring, for appropriate engagements,
an engagement quality control review. Policies and procedures requires:
a. An engagement quality control review for all audits of financial statements of
listed entities;
b. Set out criteria for against which all other audits and reviews of historical financial
information and other assurance and related services engagements shall be
evaluated to determine whether an engagement quality control review should be
performed; and
c. Require an engagement quality control review for all engagements, if any,
meeting the criteria established in compliance with subparagraph 35

For audits of financial statements of listed entities, the firm shall establish policies and
procedures to require the engagement quality control review to also include consideration of the
following:
a. The engagement teams evaluation of the firm's independence in relation to the specific
engagement;
b. Whether appropriate consultation has taken place on matters involving differences of
opinion or other difficult or contentious matters, and the conclusions arising from those
consultations; an
c. Whether documentation selected for review reflects the work performed in relation to the
significant judgments and supports the conclusions reached
Criteria for the eligibility of Engagement Quality Control Reviewers
- The firm shall establish policies and procedures designated to maintain the objectivity of
the engagement quality control reviewer
- The firm's policies and procedures shall provide for the replacement of the engagement
quality control reviewer where the reviewers ability to perform an objective review may
be impaired
- The firm shall establish policies and procedures to address the appointment of
engagement quality control reviewers and establish their eligibility through:
a. The technical qualifications required to perform the role, including the necessary
experience and authority; and
b. The degree to which engagement quality control reviewer can be consulted on
the engagement without compromising the reviewers objectivity

Documentation of the Engagement Quality Control Review

- The firm shall establish policies and procedures on documentation of the engagement
quality control review which require documentation that:
a. The procedures required by the firm's policies on engagement quality control
review have been performed;
b. The engagement quality control review has been completed on or before the date
of the report; and
c. The reviewer is not aware of any unresolved matters that would cause the
reviewer to believe that the significant judgments the engagement team made
and the conclusions it reached were not appropriate

Differences of Opinion
- The firm shall establish policies and procedures for dealing with and resolving
differences of opinion within the engagement team, with those consulted and, where
applicable, between the engagement partner and the engagement quality control
reviewer.
Such policies and procedures shall require that:
a. Conclusions reached be documented and implemented; and
b. The report not be dated until matter is resolved

MONITORING
- The firm shall establish a monitoring process designed to provide it with reasonable
assurance that the policies and procedures relating to the system of quality control are
relevant, adequate, and operating effectively. This process shall:
a. Include an ongoing consideration and evaluation of the firm's system of quality
control including, on a cyclical basis, inspection of at least one completed
engagement for each engagement partner
b. Require responsibility for the monitoring process to be assigned to a partner to a
partner or partners or other persons with sufficient and appropriate experience
and authority in the firm to assume that responsibility; and
 c. Require that those performing the engagement or the engagement quality control
review are not involved in inspecting the engagement.

Evaluating, communicating and remedying identified deficiencies:

- The firm shall communicate to relevant engagement partners and other appropriate
personnel deficiencies noted as a result of the monitoring process and recommendations
for appropriate remedial action.
Recommendations for appropriate remedial actions for deficiencies noted shall include
one or more of the following:
a. Taking appropriate remedial action in relation to an individual engagement or
member of personnel;
b. The communication of the findings to those responsible for training and
professional development;
c. Changes to the quality control policies and procedures; and
d. Disciplinary action against those who fail to comply with the policies and
procedures of the firm, especially those who do so repeatedly
- The firm shall evaluate the effect of the deficiencies noted as a result of the monitoring
process and determine whether they are either:
a. Instances that do not necessarily indicate that the firm's system of quality control
is insufficient to provide it with reasonable assurance that it complies with
professional standards and applicable legal and regulatory requirements, and
that the reports issued by the firm or engagement partners are appropriate in the
circumstances; or
b. Systemic, repetitive or other significant deficiencies that require prompt corrective
action.
- The firm shall establish policies and procedures to address cases where the results of
the monitoring procedures indicate that a report may be inappropriate or that procedures
were omitted during the performance of the engagement. Such policies and procedures
shall require the firm to determine what further action is appropriate to comply with
relevant professional standards and applicable legal and regulatory requirements and to
consider whether to obtain legal advice.
- The firm shall communicate at least annually the results of the monitoring of its system of
quality control to engagement partners and other appropriate individuals within the firm,
including the firm's chief executive officer or, if appropriate, its managing board of
partners. This communication shall be sufficient to enable the firm and these individuals
to take prompt and appropriate action where necessary in accordance with their defined
roles and responsibilities. Information communicated shall include the following:
a. A description of the monitoring procedures performed
b. The conclusions drawn from the monitoring procedures
c. Where relevant, a description of systemic, repetitive or other significant
deficiencies and of the actions taken to resolve or amend those deficiencies

Complaints and allegations

 - The firm shall establish policies and procedures designed to provide it with reasonable
assurance that it deals appropriately with:
a. Complaints and allegations that the work performed by the firm fails to comply
with professional standards and applicable legal and regulatory requirements;
and
b. Allegations of non-compliance with the firm's system of quality control

Documentation of system of quality control

- The firm shall establish policies and procedures requiring appropriate documentation to
provide evidence of the operation of each element of its system quality control
- The firm shall establish policies and procedures that require retention of documentation
for a period of time sufficient to permit those performing monitoring procedures to
evaluate the firm's compliance with its system of quality control, or for longer period if
required by law or regulation
- The firm shall establish policies and procedures requiring documentation of complaints
and allegations and the responses to them

Note: Majority of the BOD must be non-executives

Why?
- To assure proper checks and balances
- Eradicate the possibility of self-review threat (bias)

Executive Director
- In charge with the operations of the company
- Involve in the day-to-day

Non-executive Director
- Not involve in day-to-day

1. ESTABLISHING A COMPETENT BOARD

- The board should be composed of a majority of non-executive directors who
possess the necessary qualifications to effectively participate and help secure
objective, independent judgment on corporate affairs and to substantiate proper
checks and balances.

The Compliance Officer is a member of the company's management team in charge of the
compliance function. Similar to the Corporate Secretary, he/she is primarily liable to the
corporation and its shareholders, and not to the Chairman or President of the company. He/she
has, among others, the following duties and responsibilities:

2. ESTABLISHING CLEAR ROLES AND RESPONSIBILITIES OF THE BOARD

 - The board members should act on a fully informed basis, in good faith, with due
diligence and care, and in the best interests of the company and all shareholders.
- The duty of loyalty is There are two key elements of the fiduciary duty of board
of members: duty of care and duty of loyalty
➔ Duty of care - requires board members to act on a fully informed basis, in
good faith, with due diligence and care.
➔ Duty of loyalty - also of central importance; the board member should
act in the interests of the company and all its shareholders, and not those
of the controlling company of the group or any other stakeholder.

The board should be headed by a competent and qualified Chairperson

The roles and responsibilities of the chairman include, among others, the following:
a. Makes certain that the meeting agenda focuses on strategic matters, including the
overall risk appetite of the corporation, considering the developments in the business
and regulatory environments, key governance concerns, and contentious issue that will
significantly affect operations;
b. Guarantees that the Board receives accurate, timely, relevant, insightful, concise, and
clear information to enable it to make sound decisions;
c. Facilities discussions on key issues by fostering an environment conducive for
constructive debate and leveraging on the skills and expertise of individual directors;
d. Ensures that the Board sufficiently challenges and inquiries on reports submitted and
representations made by Management;
e. Assures the availability of proper orientation for first-time directors and continuing
training opportunities for all directors; and
f. Make sure that performance of the Board is evaluated at least once a year and
discussed/followed up on.

The following may be considered as grounds for the permanent disqualification of a

director:
a. Any person convicted by final judgment or order by a competent judicial or administrative
body of any crime that:
- Involves the purchase or sale of securities, as defined in the Securities
Regulation Code;
b. Any person who, by reason of misconduct, after hearing, is permanently enjoined by a
final judgment or order of the SEC, Bangko Sentral ng Pilipinas (BSP) or any court or
administrative body of competent jurisdiction from:
● Acting as underwriter,broker, dealer, investment adviser, principal distributor,
mutual fund dealer, futures commission merchant, commodity trading advisor; or
floor broker;
● Acting as director or officer of a bank, quai-bank, trust company, investment
house, or investment company;
c. Any person convicted by final judgment or order by a court, or competent administrative
body of an offense involving moral turpitude, fraud, embezzlement, theft, estafa,
 counterfeiting, misappropriation, forgery, bribery, false affirmation, perjury or other
fraudulent acts;
d. Any person who has been adjudged by final judgment or order of the SEC, BSP, court,
or competent administrative body to have willfully violated, or willfully aided. Abetted,
counseled, induced or procured the violation of any provision of the Corporation Code,
Securities Regulation Code or any other law, rule, regulation or order administered by
the SEC or BSP;
e. Any person judicially declared as insolvent
f. Any person found guilty by final judgment or order of a foreign court or equivalent
financial regulatory authority of acts, violations or misconduct enumerated previously;
g. Conviction by final judgment of an offense punishable by imprisonment for more than six
years, or a violation of the Corporation Code committed within five years prior to the date
of his election or appointment; and
h. Other grounds as the SEC may provide. In addition, the following may be grounds for
temporary disqualification of a director.

The following may be grounds for temporary disqualification of a director:

a. Absence in more than fifty percent (50%) of all regular and special meetings of the Board
during his incumbency, or any 12-month period during the said incumbency, unless the
absence is due to illness, death in the immediate family or serious accident.The
disqualification should apply for purposes of the succeeding election;
b. Dismissal or termination for cause as director of any publicly-listed company, public
company, registered issuer of securities and holder of a secondary license from the
Commission. The disqualification should be in effect until he has cleared himself from
any involvement in the cause that gave rise to his dismissal or termination;
c. If the beneficial equity ownership of an independent director in the corporation or its
subsidiaries and affiliates exceeds two percent (2%) of its subscribed capital stock. The
disqualification from being elected as an independent director is lifted if the limit is later
complied with; and
d. If any of the judgments or orders cited in the grounds for permanent disqualification has
not yet become final.

5. REINFORCING BOARD INDEPENDENCE

- The board should have at least three independent directors, or such number as to
constitute at least one-third of the members of the Board, whichever is higher

An Independent Director refers to a person who ideally:

a. Is not, or has not been a senior officer or employee of the covered company unless there
has been a change in the controlling ownership of the company; (F/SI)
b. Is not, and has not been in the three years immediately preceding the election, a director
of the covered company; a director, officer, employee of the covered company’s
subsidiaries, associates, affiliates or related companies; or a director, officer, employee
of the covered companies substantial shareholders and its related companies; (SI/F)
 c. Has not been appointed in the covered company, its subsidiaries, associates, affiliates or
related companies as Chairman “Emeritus”, “Ex-Officio” Directors/Officers or Members of
any Advisory Board, or otherwise appointed in a capacity to assist the Board in the
performance of its duties and responsibilities within three years immediately preceding
his election; (SR/F)
d. Is not an owner of more than two percent (2%) of the outstanding shares of the covered
company, its subsidiaries, associates, affiliates or related companies; (SI)
All independent directors are non-executives but non-executives are not all independent
directors
e. Is not a relative of a director, officer, or substantial shareholder of the covered company
or any of its related companies or any of its substantial shareholders. For this purpose,
relatives include spouse, parent, child, brother, sister and the spouse of such child,
brother or sister; (F)
f. If not acting as a nominee or representative of any director of the covered company or
any of its related companies; (A)
g. Is not a securities broker-dealer of listed companies and registered issuers of securities.
“Securities broker-dealer” refers to any person holding any office of trust and
responsibility in a broker-dealer firm, which includes, among others, a director, officer,
principal stockholder, nominee of the firm to the Exchange, an associated person or
salesman, and an authorized clerk of the broker or dealer; (SI)
h. Is not retained, either in his personal capacity or through a firm, as a professional
adviser, auditor, consultant, agent or counsel of the covered company, any of its related
companies or substantial shareholder, or is otherwise independent of Management and
free from any business or other relationship within the three years immediately preceding
the date of his election; (A/SR)
i. Does not engage or has not engaged, whether by himself or with other persons or
through a firm of which he is a partner; director or substantial shareholder, in any
transaction with the covered company or any of its related companies or substantial
shareholders, other than such transactions are conducted at arm's length and could not
materially interfere with or influence the exercise of his independent judgment. (SI/F)
j. Is not affiliated with any non-profit organization that receives significant funding from the
covered company or any of its related companies or substantial shareholders; and (I)
k. Is not employed as an executive officer of another company where any of the covered
companies executives serve as directors. (F)

The Boards independent directors should serve for a maximum cumulative term of nine years.
After which, the independent director should be perpetually barred from re-election as such in
the same company, but may continue to qualify for nomination and election as a
non-independent director.

KINDS OF

Insider Trading
 - Refers to the practice of purchasing or selling a publicly traded company's securities
while in possession of material information that is not yet public information.
Example:
● A government employee acts upon his knowledge about new regulations to be passed
which will benefit a sugar-exporting firm and buys its shares before the regulation
becomes public knowledge.

Pump and dump is a form of securities fraud that involves artificially inflating the price of an
wned stock through false and misleading positive statements, in order to sell the cheaply
purchased stock at a higher price

Wash Sale (marking the tape)

- The trader sells and repurchases the same security or a substantial amount of the same
security to generate more activity and increase the price as well
- Creating false appearance of trading activity
- There must be a collision between traders
Example:
Nicole sold the share for P5, Raye bough to nicole and sold for P7, Marvin bough it for 9, and
Nicole repurchase for P11

Boiler Room Operations

- In the context of investing, the term “boiler room operation” refers to an outfit using high
pressure sales tactics to sell stocks

Squeeze the float

- Done by “taking advantage of a shortage of securities in the market by controlling the
demand side and exploiting market congestion during such shortage in a way as to
create artificial prices
Example:
Venture capitalists- manage hedge funds

Rug Pull
- A type of scam where developers abandon a project and take their investors money

REDFLAGS -
https://www.acfe.com/report-to-the-nations/2020/docs/infographic-pdfs/Behavioral%20Red%20F
lags%20of%20Fraud.pdf

● Living beyond means

● Financial difficulties

HOW TO AVOID FRAUD

● External audit of financial statements
● Code of conduct
 ● Internal audit department
● Management certification of FS
● Hotline
● External audit of internal controls over financial reporting
● Management review
● Independent audit committee
● Anti Fraud policy
● Fraud training for employees
● Fraud training for managers/executives
● Employee support programs
● Dedicated fraud department, function, or team
● Formal fraud risk assessment
● Surprise audit
● Proactive data monitoring/analysis
● Job rotation/mandatory vacation
● Rewards for whistleblowers

Risk Mitigation
- What this means in ERM speak is to take steps to reduce the likelihood or impact of a
loss. If the risk is just slightly above your appetite and tolerance level, then reduction is a
reasonable strategy for bringing it down to within acceptable limits.
- On a personal level, we all employ risk reduction in one way or another in our daily lives.
When we get in our car to go somewhere, we put on a seatbelt to reduce the potential
impact

Risk Transfer
- Unlike options 1 and 2, this option does not eliminate or reduce the chances of it
occurring, but instead delegates or transfers responsibility of the risk to a third party.
Purchasing insurance for your home does not reduce or eliminate damage from a storm,
but it does provide a financial safety net in the event damages do occur

Risk Acceptance
- Requires no action, it is what it is

Take Risks
- Decision makers could decide to take on the risks - note that this is not the same as the
“accept” strategy above because risk acceptance is passive in nature
- Having game plan does not reduce the severity or likelihood of this event occurring, it
simply makes the organizations actions post-risk smoother and more integrated
Think of a company/organization
1. Identify the risk (minimum of 5 risk)
2. Assess the probability and severity
3. Response

Due: march 6
Risk map - optional

Example: PAL
Risk - airplane crash
Probability - not probable, high impact (specific gaano ka probable and impact)
Response - mitigate by training airline personnel
- travel insurance