IESBA Meeting New York December 12-15, 2016 Safeguards Phases 1 and 2 Gary Hannaford, Task Force Chair IESBA Meeting New York December 12-15, 2016

Session Objectives “Agree in principle” final for Safeguards Phase 1 Consider with a view for exposure proposed text for: NAS proposals (Sections 600 and 950) Safeguards conforming amendments to Structure Phase 1 Other conforming amendments to material in Structure Phase 2 Structure ED-1 Part C Long Association

Safeguards Phase 1 Agenda Item 4-B Direct IESBA to Agenda Item 4-B marked from Sept 2016 turnaround draft. Also, let them know that they have a marked from ED version at Agenda Item 4-C, and a clean version within the compilation document at Agenda Item 3-F

Dec 2016 Agreement-in-principle? Safeguards Phase 1 Jan 2015 Project Approval Mar 2015 IESBA CAG Apr-Nov 2015 Development of proposals Sept 2015 IESBA CAG Dec 2015 ED Approval IESBA CAG Mar 2016 Jun 2016 Sept 2016 May-Nov 2016 Revise ED Dec 2016 Agreement-in-principle? Note to Gary – Might be useful to also note that Chairs/ IESBA representatives have discussed the project with: SMPC (three times), FOF (twice), NSS (twice) and more recently EAIG and IFIAR Standards Coordination Working Group Indicate SMPC letter received in advance of this meeting only address Phase 2 – points to be summarized in NAS section

Recap Sept 2016 IESBA Meeting Oct 2016 Task Force Meeting Safeguards Phase 1 Recap Sept 2016 IESBA Meeting IEBSA consideration of revisions to June 2016 draft Task Force revision to Sept 26 draft based on IESBA input IESBA consideration of updated draft Oct 2016 Task Force Meeting Task Force consideration of specific IESBA suggestions and editorials Other revisions to drive consistency with the rest of the Code

S120 – Conceptual framework Safeguards Phase 1 Remaining Issues S120 – Conceptual framework Safeguards vs. factors relevant to evaluating threats Reasonable and informed third party (RITP) S300 – Applying the conceptual framework – PAPPs Need for refinements to examples of threats Clarification to AM for evaluating threats Consider having examples of safeguards to address threats to all FPs

Factors (i.e., conditions, policies and procedures) Safeguards Phase 1 Safeguards Vs Factors Safeguards Specific actions taken by PA, individually or in combination to effectively reduce threats to an acceptable level (i.e., address threats) Factors (i.e., conditions, policies and procedures) Established by professional legislation, regulation, the first or employing organization Do not address threats, but when they exist they impact the PA’s identification and evaluation of the level of threats

Safeguards Phase 1 RITP RITP test is a consideration by PA about whether same conclusions would likely be reached by another party:  Consideration from perspective of a RITP, who weighs all the relevant facts and circumstances that the PA knows, or could reasonably be expected to know, at the time the conclusions are made  RITP need not be an accountant, but would possess the relevant knowledge, experience and impartiality to understand and evaluate appropriateness of PA’s conclusions PLEASE LET’S NOT CHANGE THIS, but flag to the Board that the changes shown in Agenda Item 4-B were agreed verbally during the meeting. Also flag that the Board agreed during the Sept meeting to change from “apply the reasonable and informed third party test” to “use the reasonable informed third party test” in para R120.5. Global consistency changes throughout the document

Responsive to IESBA, Task Force’s proposals: Safeguards Phase 1 Other Revisions Responsive to IESBA, Task Force’s proposals: Drop the last bullet in para 120.7 A2 Clarify that the description of safeguards to explain that they are action that reduce the level of the threats, but do not eliminate them (120.10 A1) Include revised examples of each set of facts and circumstances with categories of threats that relate to each FP (300.6 A1) Further clarify the examples of actions that might be safeguards (300.8 A1)

Matters for IESBA Consideration Safeguards Phase 1 Matters for IESBA Consideration IESBA members are asked whether they agree with revisions in Agenda Item 4-B Do IESBA members agree that the revisions made since Safeguards ED-1 address the significant matters raised by respondents?

Safeguards Phase 2 (NAS) Agenda Items 4-D and 4-E

SMPC Feedback on Task Force’s Proposals Safeguards Phase 2 SMPC Feedback on Task Force’s Proposals SMPC expressed support for enhancements to general provisions including, more prominent placement of provisions to avoid the assumption of management responsibilities SMPC generally agreeable with the Task Force’s proposed revision of the various NAS subsections for the ease of readability and application

Enhancements to General Provisions Safeguards Phase 2 Enhancements to General Provisions More prominent location for req’ts and AM for avoiding the assumption of management responsibilities New AM to: Assist PAs identify, evaluate and address threats created by NAS Explain materiality in relation to an audit client’s financial statements State in an explicit manner that, in certain situations, the Code prohibits providing certain NAS because there can be no safeguards to address threats to independence Note for last bullet: Refocuses PAs to that there are other actions that might, depending on the facts and circumstances, be more appropriate to address threats: Eliminating the circumstance, including interests or relationships, that is creating the threat(s); or Declining or ending the specific professional activity.

Revisions to Structure of NAS Subsections (1) Safeguards Phase 2 Revisions to Structure of NAS Subsections (1) Introduction Describe the type of NAS (if applicable) Indicate the type of threat created Refer to general provisions and emphasize need to comply with FPs and be independent when providing the specific NAS Signal when the subsection includes prohibitions Revisions in the introduction section (i.e., paragraphs 600.1–600.3) in close coordination with the Structure TF. These revisions are to achieve consistency with the other Sections of the restructured Code and are not intended to change the meaning of the September 2016 draft.

Revisions to Structure of NAS Subsections (2) Safeguards Phase 2 Revisions to Structure of NAS Subsections (2) Req’ts and AM General Relevant factors in evaluating level of threats Examples of actions that might be safeguards Prohibitions Entities that are not PIEs PIEs Note to Gary – I suggest you walkthrough the subsections with this slide on the screen leveraging the material in para 16-20 of issues paper as desired for speaking notes.

Highlights of Revisions in Subsections (1) Safeguards Phase 2 Highlights of Revisions in Subsections (1) Consistent presentation of material in subsections Refinements in introduction to: CF is applicable to identify, evaluate and address threats to independence created by providing NAS to audit clients Emphasize applicability of req’ts and AM in general section Indicate that certain NAS are prohibited (when applicable) Indicate that NAS is prohibited in certain circumstances because threats cannot be eliminated, or there can be no safeguards to reduce them Indicate that revisions were developed in close coordination with Structure TF The subsections with statement about prohibitions are: 601, 603, 604, 605, 606, 608, 609 and 610

Highlights of Revisions in Subsections (2) Safeguards Phase 2 Highlights of Revisions in Subsections (2) Tax Corporate Finance Valuation IT Recruiting Legal Administrative Acctg & Bookkeeping Internal Audit Litigation Support Color Legend Blue – No substantive revisions made to subsection since Sept draft Yellow – substantive revision- see below Red outline – subsection include requirement that prohibit NAS in certain circumstances Summary of Revisions in Subsections (para 20 of issues paper) Subsection 601, Accounting and Bookkeeping Services –new application material in 601.3 A1 to describe the nature of accounting and bookkeeping services. Doing so supports the TF’s decision to streamline the title of the subsection in accordance to the Structure Drafting Guidelines. Subsection 602, Administrative Services –reaffirmed IESBA 2015 positon to have a standalone subsection Subsection 603, Valuation Services – No other substantive revisions. Subsection 604, Taxation Services – Covers: 1. tax return preparation, 2. tax calculation for the purpose of preparing the accounting entries, 3. tax planning and other tax advisory services, and 4. assistance in the resolution of tax disputes. Refinements to explain the link and interaction between provisions for taxation services vs each specific type of tax service. For example, paragraph 604.4 A2 includes a list of factors that are relevant in evaluating the level of threats created by providing any taxation services. Additional factors for specific types of tax services are included in paragraphs 604.7 A2, 604.10 A1, 604.12 A3 and 606.16 A1. Revised proposals clarify that those specific factors are relevant in addition to those in general tax services in paragraph 604.4 A2. Subsection 605, Internal Audit Services – To enhance readability, a new subheading titled “Using the Work of an Internal Audit Function in an Audit Engagement” precedes paragraph 605.7 A1. The TF believes that this subheading is helpful to distinguish the application material from other material in the subsection that is relevant when providing internal audit services as a NAS to an audit client. Subsection 606, Information Technology (IT) Systems Services – Drawing from the extant Code, new AM in paragraph 606.5 A1 with factors that are relevant in evaluating the level of threats created by providing IT systems services to an audit client. Subsection 607, Litigation Support Services – Revisions made to AM with factors that are relevant in evaluating the level of threat created by providing litigation support services to an audit client (see paragraph 607.4 A1). Subsection 608, Legal Services – Several revisions made to the TF’s initial proposals to better explain the specific types of legal services (i.e., legal advisory services, acting as general counsel, and legal services involving acting in an advocacy role) and provide examples of each of those types of services. Refinements to specific factors that are relevant in evaluating the level of threats associated with providing legal advisory services and legal services involving acting in an advocacy role, as well as the actions that might be safeguards to address those threats. Subsection 609, Recruiting Services – No other substantive revisions. Subsection 610, Corporate Finance Services – No other substantive revisions

Matter for IESBA Consideration Safeguards Phase 2 Matter for IESBA Consideration Do IESBA members agree with the proposed text for Section 600?

Section 950 – NAS for Other Assurance Clients Safeguards Phase 2 Section 950 – NAS for Other Assurance Clients Revisions to Section 291.138-291.148 of extant Code Consistent with extant Code provisions do not apply to network firms Aligned to structure and provisions in S600 More prominent placement of material for avoiding the assumption of management responsibilities New AM for identifying, evaluating and addressing threats New AM for materiality in relation to an assurance client’s information New AM to consider combined effect of threats created from providing multiple NAS to the same assurance client This is the first read – proposed text in Agenda Item 4-E, Mapping table at Agenda Item 4F

Matter for IESBA Consideration Safeguards Phase 2 Matter for IESBA Consideration Do IESBA members agree with the proposed text for Section 950?

Safeguards Phase 2 (CAs) Gray text in Agenda Items 3-B, 5-B, 8-B, 3-D

Overview of Conforming Amendments Safeguards conforming amendments needed in: Structure Phase 1 text Restructured Part C Phase 1 text Restructured LA text Structure Phase 2 text No safeguards conforming amendments to NOCLAR

Nature of Conforming Amendments (1) Safeguards Phase 2 Nature of Conforming Amendments (1) Drop duplicate provisions that are already included in S120 Replace “…significance of the threat…,” with “…level of the threat…”. Avoid higher level of threat” Re-characterize examples of safeguards established by professional, legislation, regulation, the firm, or the employing organization to factors that are relevant in evaluating threats Direct them to (e.g., 320.3 A5 in Agenda Item 3-B)

Nature of Conforming Amendments (2) Safeguards Phase 2 Nature of Conforming Amendments (2) Clarify the actions to address threats Examples of actions that might be safeguards to address a specific threats (actions that can reduce the level of, but not eliminate threats) Other actions that might address the threat, i.e., actions that PA takes to either: Eliminate the circumstances, including the interests or relationships that are creating the threat); or Decline or end the specific professional activity Direct them to (e.g., 320.3 A5 in Agenda Item 3-B)

Breaches vs Threats to Compliance with FPs Safeguards Phase 2 Breaches vs Threats to Compliance with FPs the TF has agreed to use the word breaches in the restructured Code only to refer to a circumstance when the PA has not complied with the fundamental principles. By way of an example, the implication of this conclusion is seen in the TF’s revisions to paragraphs 270.4 A2 and 270.4 A3–R270.5 in Agenda Item 5-B

Conforming Amendments in Part 2, PAIB Safeguards Phase 2 Conforming Amendments in Part 2, PAIB Section 270 Factors that are relevant to evaluating the level of threats created by pressure (270.4 A3) Clarify that certain matters might assist PAIBs understand factors (270.4 A4 and 270.4 A5) Consultations and advice Enhancement to req’t to address threats created by pressure (R270.5) More closely aligned with R120.10

Addressing Threats Created by Pressure Safeguards Phase 2 Addressing Threats Created by Pressure …the accountant shall address that threat by: Eliminating the circumstances, interests or relationships, that are creating the threats; including resigning from the employing organization Applying safeguards, where available or capable of being applied Declining or ending the specific professional activity Consistent with Part C Phase 1 close-off document, S270 does not include examples of safeguards Includes example of an action that might address threats by eliminating the circumstance creating the pressure (270.4 A6)

Matters for IESBA Consideration Safeguards Phase 2 Matters for IESBA Consideration Do IESBA members agree with the proposed conforming amendments arising from the Safeguards project (i.e., the text shaded in gray in Agenda Items 3-B, 3-D, 5-B, and 8-B). IESBA members are asked to comment on any other matters that are relevant to Phase 2 of the Safeguards project more broadly.