This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members to comply with ethical codes and standards in the context of gifts and hospitality.

Members may also wish to refer to the following related guidance:

• FRC Ethical Standard
• ICAEW Code of Ethics

Members should also ensure that they are familiar with their organisation’s gifts and hospitality policy which may contain additional requirements.

Subject to the transitional provisions set out in paragraphs 1.69 to 1.72, the FRC Ethical Standard 2019 becomes effective on 15 March 2020. This helpsheet addresses the requirements of both the FRC Ethical Standard 2016 and the FRC Ethical Standard 2019. Paragraph references are labelled 2016 or 2019 accordingly.

Section 4 of the FRC Ethical Standard provides guidance on gifts and hospitality in paragraphs 4.61D to 4.65 (2016) or 4.40 to 4.45 (2019).

Specifically, paragraph 4.63 (2016) or 4.42 (2019) requires the firm to establish policies on the nature and value of gifts, favours and hospitality that may be accepted or offered to an audited entity, any entity related to that entity, their directors, officers and employees and to issue guidance to assist partners and staff to comply with such policies. The 2019 version of the FRC Ethical Standard (paragraph 4.43) extends this to other entities which are likely to become audited entities (although a similar approach should be adopted even if under the 2016 version).

Paragraph 4.61D (2016) or 4.40 (2019) states:

A firm, its partners and any covered person, and persons closely associated with them, shall not offer or accept pecuniary and non-pecuniary gifts or favours, including hospitality, from an entity relevant to the engagement, or any other entity related to that entity, unless an objective, reasonable and informed third party would consider the value thereof as trivial or inconsequential.

The test you should therefore apply is whether it is likely that an objective, reasonable and informed third party would conclude that independence could be impaired as a result of the offer or acceptance of the favour, gift or hospitality.

There are a number of factors which should be taken into account; they are not necessarily conclusive in isolation as all factors must be considered.

1. The actual value of the gift or hospitality

It is likely that, due to the requirement for independence, the actual value of what is deemed acceptable for an audited entity will be lower than for a non-audit client.

Firms may elect to establish a monetary limit(s) over which gifts/hospitality should not be offered/accepted. Whilst this is entirely appropriate and can facilitate the administration of a gifts and hospitality register, it is important that such limits do not discourage active consideration of factors other than cost/value.

2. The perceived value of the gift or hospitality

For example, tickets to the football may have a lower perceived value to a rugby fan than to a long-term supporter of a team that is playing. The potential range of subjective values should therefore be considered.

3. The frequency of gifts or hospitality

The more often the same person or people are entertained the more likely an actual or perceived threat to independence will arise. Furthermore a familiarity threat may be created from frequent interactions.

4. The timing of gifts or hospitality

As an example, a team dinner with audit client staff will create a greater threat to independence if it takes place shortly before the signing of the audit report, rather than shortly afterwards.

5. Whether the gift or hospitality is targeted towards a single individual or spread amongst a larger team

If a gift or hospitality is directed at a specific individual then an actual or perceived impact on independence is more likely than if the offer is made across the whole team, or office.

6. The intent of the person providing the gift or hospitality

An actual or suspected intent to influence on the part of the offeror is difficult to ascertain but may be identified by analysing the other factors, in particular perceived value, frequency and targeting. Intent to influence will be a more significant ethical threat where the auditor is on the receiving end of gifts or hospitality, rather than the offeror.

7. The circumstances surrounding the gift or hospitality

If the audited entity is celebrating a specific event or milestone this may generate the giving of gifts or hospitality. Depending on other factors this is likely to be acceptable particularly if it is spread across a number of recipients. If there is no apparent reason for the gift or hospitality then the associated risks may be higher.

8. Whether there is a clear business purpose to which the hospitality is ancillary

A dinner or drinks reception that accompanies a technical seminar or other business related purpose is likely to be more acceptable than a standalone social event.

9. The seniority of those involved

The more junior a staff member the more likely they may be influenced; that said the impact of a senior staff member being influenced may be much greater, particularly if they are connected with the audit.

The firm's Ethics Partner/Function, should be consulted if there is any doubt as to the acceptability of gifts, favours or hospitality.

Paragraph 340.2 of the ICAEW Code of Ethics sconfirms that offering or accepting inducements (which include gifts and hospitality) may create threats to compliance with the fundamental principles. For example, a self-interest or familiarity threat to objectivity may be created if a gift from a client is accepted; an intimidation threat to objectivity may result from the possibility of such offers being made public.

You must not offer or accept any gifts or hospitality which a reasonable and informed third party would likely conclude are made with the intent to improperly influence the behaviour of the recipient (paragraphs R340.7 and R340.8 of the ICAEW Code of Ethics).

In other cases, you must still evaluate the significance of any threats to objectivity and apply safeguards when necessary to eliminate the threats or reduce them to an acceptable level. If the threats cannot be eliminated or reduced to an acceptable level by using safeguards, you should not offer or accept the gift or hospitality. The list of factors discussed above in the context of the FRC Ethical Standard are therefore also relevant to non-audit situations.

Where trivial and inconsequential gifts or hospitality are offered in the normal course of business without the specific intent to improperly influence behaviour, you may normally conclude that any threat to compliance with the fundamental principles is at an acceptable level (paragraph 340.11 A2 of the ICAEW Code of Ethics).

1. What is an acceptable monetary limit over which gifts and hospitality should not be offered or accepted?

There is no definitive example of an appropriate threshold, and any limits the firm chooses to set may vary based on the type of client (e.g. audit or non-audit), the sector in which they operate or whether hospitality is being offered or accepted. Remembering that absolute cost is not the only factor to consider, you should be able to justify a monetary limit based on peer group benchmarking or looking at examples in other contexts e.g. HMRC put a £50 per annum limit on business gifts to clients (excluding food, drink and tobacco).

2. My client has invited my spouse and I to one of their drinks receptions. Do I consider the cost per head as that is the benefit extended to me or do I include the cost for my spouse too?

You would have to take into account the cost for both you and your spouse as that is the total benefit extended to you. Furthermore it is worth considering that the inclusion of spouses and “plus ones” make it more likely that this would be perceived as a social event rather than being connected to a specific business purpose.

3. I am currently writing a gifts and hospitality policy and it appears as though having a zero tolerance policy on giving and receiving is more straightforward. Is it therefore appropriate?

Some firms may have such a policy. A strict zero tolerance policy would however prohibit small everyday items such as buying the client a cup of coffee, accepting bottled water at client premises, or tea and cake at a client meeting from being offered or accepted, which may be unduly burdensome.

4. What is an appropriate policy regarding frequency of entertaining?

This will depend on the value and purpose of the hospitality offered. If expenditure on a single event is high (such as tickets to a sporting event), then a greater amount of time would have to pass before the next one. Smaller items (such as a cup of tea or coffee) could be more frequent without necessarily being perceived as a threat to objectivity.

5. The entity I audit has offered me the staff discount that they normally extend to employees, as well as use of the subsidised canteen. Are these considered to be gifts and hospitality?

Being offered the staff discount would be considered a gift. The extent to which it would be a threat to independence will depend on the amount of the discount and what it is applied to. For example, a 10% discount on a new car is likely to be a much greater threat than a similar discount on reasonably priced stationery.

Furthermore if it is extended only to you or the audit team then the perception of a threat will be greater. This threat diminishes if offered to the whole office or whole firm as that might indicate that there is no intention to specifically influence the audit team.

Use of a subsidised canteen is also hospitality however this is unlikely to be a significant threat if on the same terms as the client’s employees generally.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Ethics Advisory Service on +44 (0)1908 248 250 or via webchat.