Safeguards Phase 2
Gary Hannaford, Task Force Chair
IESBA Meeting
June 19-21, 2017
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Objectives
• To consider significant issues raised by respondents to Safeguards ED-2
• To seek input on Task Force’s suggested revisions to proposed S600
– Focus of discussion will be on substantive issues in Agenda Item 4-A
– Revisions for proposed S600 in Agenda Item 4-B are provided for reference
– Formal “first read” of revisions to Safeguards ED-2 planned for Sept 2017
– Editorials and drafting suggestions on revisions to proposed S600 are
welcome by email for Task Force’s further consideration
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Introduction
• Phase 1 of project agreed in principle in Dec 2016
• Phase 2 of project approved for exposure in Dec 2016
– Released in Jan 2017
– Comment period for Safeguards ED-2 closed April 25, 2017
– 46 comment letters received across a range of stakeholder categories
• Task Force meeting May 15-17, 2017 to consider responses
• Proposals to be refined in July 2017
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Involvement of Structure Task Force
• Certain proposals in Safeguards ED-2 were developed jointly
with Structure Task Force including:
– Introductory material in paragraphs 600.1 and 600.2
– Approach to refer to provisions in CF
– Matters relating to use of “may versus might”
– Explicit reference to “firms versus network firms”
• Structural matters deferred for July 2017 Task Force
discussions and will be presented to IESBA in Sept 2017
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Recap of Safeguards ED-1 Proposals
• Enhanced conceptual framework (CF) with more robust provisions to:
– Identify, evaluate and address threats
– Emphasize that threats which are not at an acceptable level should be
addressed in accordance to provisions in CF
– Explains that there are some situations in which threats cannot be
addressed by applying safeguards
– Includes streamlined examples of safeguards that are better linked to
threats
– Clarifies the meaning of key terms used in the CF
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Highlights of Comments
• General support for project objectives and for Safeguards ED-2
• Comments raised about:
–
Matters relating to the permissibility of certain NAS to audit clients (mostly from
regulators)
–
Proposal to extend prohibition for certain types of recruiting services to all entities:
Support from some, but also some concerns (mostly from SMPs)
–
Certain IESBA agreed in principle decisions
–
Whether independence provisions relating to other assurance engagements should be
the same as those for audit engagements (in particular for PIEs)
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Permissibility of NAS
• Focus of Safeguards project is on clarifying the safeguards
– NAS sections explain how firms and network firms should apply the enhanced
CF to identify, evaluate and address threats to independence that are created
by providing NAS to audit and assurance clients
• Clarification that safeguards may not always be available or
capable of addressing threats
– For example, prohibition of certain recruiting services
• IESBA agreed to address matters relating to permissibility of NAS
as separate work stream
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Matter for IESBA Consideration
1. Do IESBA members agree with Task Force’s conclusions
about the issues raised relating to permissibility of NAS?
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Prohibition of Certain Recruiting Services
• Safeguards ED-2 extended PIE prohibition to all entities
• Prohibition applies to specific types of recruiting services:
– Searching for or seeking out candidates for such positions
– Undertaking reference checks of prospective candidates for such positions
• Prohibition applies to specific positions:
– Director or officer of the entity
– Senior management in a position to exert significant influence over
preparation of client’s accounting records or f/s on which firm will opine
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Prohibition of Certain Recruiting Services
• Feedback from respondents were split
– Generally supported by regulators, NSS and larger firms
– Strong concerns raised by mid tier firms and SMPs and some member
bodies who also reiterate SMP concerns
• Suggested that additional guidance explain what is meant by
“seeking out candidates”
• Some believe that safeguards can address threat that might be
created by providing those NAS and suggested examples
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Prohibition of Certain Recruiting Services
Suggested Safeguards
• Examples of actions suggested by respondents do not meet new
description of safeguards
– Involving/having other professionals with no connection to audit perform NAS
– Having professionals not involved in providing the NAS review any audit
work performed that was based on discussions with, or documents prepared
by, the individual recommended by the firm
– Depending on the level and role of the individual hired and their interaction
with the audit team, having a partner or senior professional on audit
engagement or someone with appropriate expertise review the work this
individual provided to the audit team
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Prohibition of Certain Recruiting Services
Task Force Proposal
• Refinements to requirement to clarify the specific facts and
circumstances that trigger prohibition
• New AM to explain:
– Meaning of the term “seeking for or seeking out candidates …”
– Types of recruiting services that might still be provided
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Matter for IESBA Consideration
2. Do IESBA members agree with Task Force’s conclusion
and proposed revisions relating to prohibition of certain
recruiting services?
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Types of General NAS Safeguards – Recap
• Using professionals who are not audit team members to perform the
NAS
• If NAS is performed by an audit team member, using professionals
who are not audit team members, with appropriate expertise to
review NAS
• Having a professional review audit work or result of NAS
• In some cases, having a professional who was not involved in
providing NAS review the accounting treatment or presentation in f/s
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Appropriateness of Safeguards
• Enhanced description of safeguard established in Phase 1
– “Actions, individually or in combination, that PA takes that effectively reduce
threats to compliance with FPs to an acceptable level”
– Conditions, policies and procedures established by profession, legislation,
regulation, the firm, or the employing organization used are no longer
characterized as safeguards
• SMP concerns about overall reduction in number of safeguards
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Appropriateness of Safeguards
Other Concerns Raised
• More frequently used examples of safeguards are not appropriate
to address threats to independence at firm and network firm level
• Concern that individual PA doing a review may be inclined to
make judgments that protects economics and other interests of
firm rather than public interest and needs of investors
• Suggestion for Code to explicitly address “… use of independent
external consultants…”
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Appropriateness of Safeguards
Suggestion to Improve NAS Safeguards
• Several refinements aimed at driving further consistency in
language used to describe similar safeguards
• New examples of safeguards suggested include:
– Involving another audit firm to perform or re-perform part of the audit
– Joint audits
– Obtaining an advice from a third party in certain circumstances, (e.g., a
supervising or a controlling authority)
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Appropriateness of Safeguards
Task Force Preliminary Proposals
• Safeguards in the Code should be neutral and should not distinguish b/w
actions that might be performed by professionals who are employed by
the firm versus those external to the firm
– Agreement that in some cases, e.g., for SMPs, it might be appropriate for
professionals external to firm or network firm to be used
– Exercise of professional judgment needed to make determination
• Further consideration of respondents’ responses about appropriateness
of safeguards planned for July 2017
• IESBA views welcome now, final proposals to be presented in Sept 2017
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Matter for IESBA Consideration
3. IESBA members are asked to consider respondents’
feedback about appropriateness of examples of safeguards
and indicate whether they agree with Task Force’s
preliminary proposal
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Other Matters Relevant to Revising S600
• Substantive suggestions made by respondents and
considered by Task Force
– Revised where deemed appropriate general provisions for evaluating level
of threats
– Revisit how S600 deals with identifying, evaluating and addressing
advocacy threats and made revisions as deemed appropriate
• Matters that are not substantive but are beyond editorial
• Task Force plans to consider need for further revisions
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Proposed Section 950 and Conforming Amendments
• Questions about whether independence provisions relating
to other assurance engagements should be the same as
those for audit engagements (in particular for PIEs)
– Task Force believes that issues goes beyond Safeguards project
scope
• Further consideration of respondents’ comments on S950
and conforming amendments planned; final proposals to
be presented to IESBA in Sept 2017
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Matter for IESBA Consideration
4. IESBA members are asked for views about the TF’s
approach to finalize its:
a) Revisions to proposed Section 600
b) Planned approach for revising proposed Section 950,
and the conforming amendments
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Feedback on Phase 1 Decisions
• Some respondents expressed concerns about certain
Phase 1 matters
– Conditions, policies and procedures or “factors to evaluate level of
threats” versus safeguards
– New descriptions of key terms (RITP, acceptable level, and
safeguards)
– Use of the term “significance” and calls for guidance to explain its
meaning, in particular as it relates to identifying, evaluating, and
addressing threats
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Feedback on Phase 1 Decisions
“Factors Relevant to Evaluate Threats” Vs Safeguards
• No change to proposal to re-characterize certain
safeguards in extant Code
• Basis for Conclusions (BfC) to explain interaction b/w
factors that are relevant to evaluate threats and safeguards
• Code requires PAs, firms and network firms to address
threats that are not at an acceptable level
– If results of evaluating threats indicate that the level of those threats are at
an acceptable level, then no further action would be required
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Feedback on Phase 1 Decisions
RITP
• Phase 1 of the project emphasizes requirement for PAs to
use RITP test when applying CF and establishes a
description of the term
• General support, but some believe that RITP test should
incorporate anticipated views of the public in whose
interests the PA has a responsibility to act
• Suggestion that IESBA consider introducing a new concept
of “investor perception test”
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Feedback on Phase 1 Decisions
Acceptable Level
• Phase 1 established revised description for “acceptable
level” as “a level at which a professional accountant using
the RITP test would likely conclude that the PA complies
with the FPs”
• Some respondents reiterated concerns raised on
Safeguards ED-1
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Feedback on Phase 1 Decisions
Task Force Proposals
• No changes to Phase 1 text
• BfC to further clarify rationale for IESBA decisions with
respect to Phase 1
– Clarify relevance of “acceptable level” in the applying the enhanced CF
– Emphasize that RITP test is intended to be objective and from
perspective of a RITP
• Consideration of a description for significance is out of scope
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Matter for IESBA Consideration
5. IESBA members are asked for views about Task Force’s
proposals in response to feedback received on Phase 1
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Matters for IESBA Noting and Further Consideration
• Terminology in the Code and the IAASB’s standards should be
more closely aligned
• Some concerns about pace of changes to Code in recent years
– More time needed to adopt and incorporate the changes
– Some jurisdictions (e.g., France and Japan) will be challenged to translate
• Some suggested extending planned effective dates
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Matter for IESBA Consideration
6. IESBA members are asked to express any other views
about the feedback on Safeguards ED-2 and the TF’s
proposals
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The Ethics Board
www.ethicsboard.org