Recently, the Institute’s Standard Setting Department responded to the International Ethics Standards Board for Accountants’ (IESBA) requests for comments to two exposure drafts related to the International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code):
- The Proposed Revisions to the Code Relating to the Definition of Engagement Team and Group Audits establish provisions that comprehensively address independence considerations for firms and individuals involved in an engagement to perform an audit of group financial statements.
- The Proposed Technology-related Revisions to the Code seeks to enhance the Code’s robustness and expand its relevance in an environment being reshaped by rapid technological advancements. The proposed amendments will guide the ethical mindset and behaviour of professional accountants in business and in public practice as they deal with changes brought by technology in their work processes and the content of the services they provide.
The Institute had responded to the exposure drafts after their local comment period. This article provides a high-level summary of our responses, which are available on our website.
Proposed Revisions to the Code Relating to the Definition of Engagement Team and Group Audits
In our response, we stated our support for the IESBA’s proposed revised definition of engagement team and other proposed new terms which would align with the corresponding definitions in International Standard on Quality Management 1 Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements for consistency. We also agreed with the proposed new defined terms which align with the existing defined terms in the Code and those in the newly issued International Standard on Auditing (ISA) 600 (Revised) Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors).
However, we expressed our concerns on the proposed independence requirements for non-network component audit firms, where, when the group audit client is a public interest entity (PIE), the PIE independence requirements would apply to the non-network component audit firm with respect of its audit of the component even if the component audit client is not itself a PIE. The proposal would also prohibit non-network component audit firms from performing non-assurance services for a component audit client (which itself is not a PIE) when the group audit client is a PIE. The consequences altogether could limit corporates’ choice of auditors, intensify the concentration of audit market, etc.
In this connection, we recommended the IESBA to reconsider the applicability of PIE independence requirements to the non-network component audit firm of a non-PIE entity component by providing exemptions in particular circumstances, rather than adopting a one-size-fits-all approach. For example, allowing components that (i) are not material in monetary terms, (ii) do not impose any significant risks to the group audit and (iii) has obtained consent from the group engagement partner to apply non-PIE independence requirements. Requiring the PIE independence provisions to apply to the non-network component audit firm with respect of its audit of the component as such, even if the component audit client is not itself a PIE, seems to be unduly burdensome.
To enhance clarity and align with the requirements of ISA 600 (Revised), we also suggested the Code to require the group engagement partner to take responsibility for confirming whether the component auditor (including non-network component auditor) understands and would comply with the relevant ethical requirements, including those related to independence according to the Code’s provisions.
In our comment letter, we also suggested the IESBA to reassess the application of PIE independence requirements to the provision of non-assurance services to a non-PIE entity component audit client of a PIE group.
Proposed Technology-related Revisions to the Code
In April, we invited all Institute members to participate in a survey to provide comments to IESBA’s Proposed Technology-related Revisions to the Code. Comments received from the survey were reflected in the Institute’s comment letter submitted to the IESBA, as appropriate. We thank those of you who had taken the time to complete the survey.
Overall, we stated our support for the IESBA’s proposed technology-related revisions in order for the Code to remain relevant and fit for purpose in response to the major trends and developments in technology on the work of the global accounting profession. We found the proposed guidance in the exposure draft useful to supporting professional accountants’ performance of professional activities amid the increasing risks and challenges to compliance with the fundamental principles, such as inclusion of factors and examples to “routine or mechanical” services, “close business relationship” etc.
However, we were conscious that the proposed thought process to be undertaken, when considering whether the use of technology by a professional accountant might create a threat to compliance with the fundamental principles, might be especially difficult to apply among inexperienced professional accountants and those without sufficient IT competency. Also, professional accountants might find it difficult to substantiate their thought process in hindsight when subsequently challenged by regulators, who might assess prior incidents or decisions by professional accountants using the latest understanding in technology. Accordingly, in our comment letter, we recommended the IESBA to provide further guidance, such as how to document professional accountants’ judgement on their use of or reliance on the output of technology objectivity, particularly in hindsight. We also suggested the IESBA to enhance or clarify some of the proposed materials, such as description to “complex circumstances,” to avoid inconsistency in interpretation and practice.
IESBA’s next steps
IESBA is considering comments and suggestions received as a result of the exposure drafts. It is anticipated that the IESBA will approve the final pronouncement of Revisions to the Code Relating to the Definition of Engagement Team and Group Audits in December this year and align its effective date with that of ISA 600 (Revised), and to approve the final Technology-related Revisions to the Code and determine its effective date by March 2023.
This article was contributed by the Institute’s Standard Setting Department.