Page 1 | Proprietary and Copyrighted Information Safeguards Gary Hannaford, Task Force Chair IESBA Meeting New York, USA June 29 – July 1, 2015

Page 2 | Proprietary and Copyrighted Information To review the clarity, appropriateness and effectiveness of safeguards in Sections 100 and 200 and those safeguards that pertain to NAS in Section 290 of the Code Re-cap – Key Project Objective

Page 3 | Proprietary and Copyrighted Information January 2015-Project proposal approved April 2015-Preliminary issues and initial TF proposals presented to IESBA May 2015-Presented preliminary issues and initial TF proposals to NSS -TF met to develop issues and proposals Project Background

Page 4 | Proprietary and Copyrighted Information Reasonable and informed third party first appears in S.100 Paragraph suggests objective of conceptual framework is to apply safeguards Re-focus on compliance with fundamental principles and the elimination/reduction of threats –Clarification of “step-back” Clarifying the Conceptual Framework Section A

Page 5 | Proprietary and Copyrighted Information ISAs require auditors to –Identify and assess risk –Design audit response –Evaluate audit response The ISA approach Section A

Page 6 | Proprietary and Copyrighted Information TF proposes to apply an ISA approach to the CF –Identify threats to compliance with fundamental principles –Evaluate the significance of threats identified –Eliminate threats or reduce to an acceptable level –Respond to threats (apply safeguards or decline/discontinue the activity or service) –Evaluate response to threats (evaluate effectiveness of action taken and re- assess the threat) Applying an ISA approach to the CF Section A

Page 7 | Proprietary and Copyrighted Information Fundamental to assessing “acceptable level” Intended as an objective test Another professional accountant? –Consider the views –May be other parties Conceptual “person” Most similar to an arbitrator Reasonable & Informed Third Party Section B

Page 8 | Proprietary and Copyrighted Information Add guidance to: –Set out the purpose of the test –Describe attributes; including conceptual party –Describe the parameters of facts and circumstances Reasonable & Informed Third Party - Proposals Section B

Page 9 | Proprietary and Copyrighted Information TF presented descriptions for discussion Different views expressed by IESBA members –A safeguard is an action or measure that is effective at eliminating a threat or reducing it to an acceptable level. –A safeguard is an action or measure that is intended to be effective at eliminating a threat or reducing it to an acceptable level. The effectiveness of the actions is subsequently evaluated. Description of a Safeguard – Re-cap Section C

Page 10 | Proprietary and Copyrighted Information “Safeguards” is used interchangeably Narrower description combined with re-focus of CF –Improve perception –Demonstrate robust approach Proposed description establishes link between a threat and the response Effectiveness re-assessed in response to new information Description of a Safeguard Section C

Page 11 | Proprietary and Copyrighted Information Safeguards created by the profession, legislation or regulation Not designed and implemented in response to a threat Create an environment supporting compliance with the fundamental principles May increase significance of threat if not present TF proposal to include as factors when evaluating threats Types of Safeguard – Section 100 Section D

Page 12 | Proprietary and Copyrighted Information Ensure that engagement-specific safeguards can be effective “Laundry-list” of examples diminishes importance Crossover with ISQC 1 TF proposal –Increase prominence of firm-wide safeguards –Follow framework in ISQC 1 Firm-wide Safeguards – Section 200 Section D

Page 13 | Proprietary and Copyrighted Information Summary of engagement-specific safeguards found throughout Code Safeguards listed without reference to threats TF proposal –Add discussion on how to eliminate threats or reduce them to an acceptable level –Present safeguards in the context of threats and fundamental principles Engagement-specific Safeguards – Section 200 Section D

Page 14 | Proprietary and Copyrighted Information Objective of S.200 –Demonstrate to PAPP how to apply the conceptual framework TF proposals –S.200 becomes a robust overview of how the conceptual framework can be applied Overview of Section 200 Section D

Page 15 | Proprietary and Copyrighted Information 2013 survey showed variation –Some jurisdictions require specific communication Code encourages regular communication with TCWG –Some specific requirements to communicate Not a safeguard Those Charged With Governance - Background Section E

Page 16 | Proprietary and Copyrighted Information Increases transparency around evaluation of threats and safeguards applied Indicates possible reasonable and informed third party view Promotes stakeholder confidence in the profession Clarifies independence as a joint responsibility Communication with TCWG - Benefits Section E

Page 17 | Proprietary and Copyrighted Information Recommend matters to include when communicating with TCWG on NAS Options for communication –Informing TCWG of NAS provided –Obtaining concurrence of TCWG for NAS –Obtaining Pre-approval by TCWG for NAS –A combination of the above determined by professional judgment Communication with TCWG - Response Section E

Page 18 | Proprietary and Copyrighted Information Existing requirement to document conclusion on independence and the substance of any relevant discussions –the nature of the threat and the safeguards in place or applied –The nature of threats and rationale for conclusion where treats required significant analysis but safeguards were not necessary TF proposal to align with ISA 220 Documentation of Safeguards Section F

Page 19 | Proprietary and Copyrighted Information Threats –Categories in the Code remain appropriate –Threats exist for each fundamental principle –Align with ISA 220 PIEs –Safeguards available may not be effective for PIEs –Add guidance to explain effect of PIE on evaluating threats and the acceptable level Other Matters Section G

Page 20 | Proprietary and Copyrighted Information Material and Significant –Used throughout the Code –For NAS, material in same context as ISAs is acceptable –Significant to be used in context with description of factor that increase significance Other Matters Section G

Page 21 | Proprietary and Copyrighted Information General direction and approach received support Concern re PIE proposal –Issue of SMP being forced to resign from engagement with small PIE although not in the PIE’s best interest nor the wider public interest remains Support for reasonable and informed third party guidance –Clearer language in relation to “the outcome of a safeguard” SMP Committee Comments on Agenda Papers

Page 22 | Proprietary and Copyrighted Information Changes in safeguards terminology may be problematic –LA proposal to recognize alternative measures (e.g. laws) as safeguards TCWG –Support for Option 4: Combination of 1, 2, and 3 determined by professional judgement SMP Committee Comments on Agenda Papers

Page 23 | Proprietary and Copyrighted Information Themes identified –Circumstances causing multiple threats; example safeguards given are not clearly linked to threats –Circumstances where no safeguards are identified and no prohibition exists –Example safeguard given is unclear Significant changes to Code may be suggested Impact on timing Safeguards Specific to NAS Section I

Page 24 | Proprietary and Copyrighted Information Next Steps TimingAction SeptCAG – Reactions to draft proposed changes IESBA – First read ED DecApprove ED

The Ethics Board