Structure and Safeguards Don Thomson and Gary Hannaford, Task Force Chairs IESBA Meeting Livingstone, Zambia December 4-8, 2017

Towards a Restructured IESBA Code Structure and Safeguards Towards a Restructured IESBA Code

Combined Objectives for December Meeting Structure and Safeguards Combined Objectives for December Meeting Obtain final Board views on any outstanding issues Discuss and agree to final revisions to proposed texts Consideration will be given to refinements and revisions developed during meeting Approve final texts Don to note that the IESBA will consider effective date after the texts are approved on Friday

Approach to Joint Chairs’ Presentation Structure and Safeguards Approach to Joint Chairs’ Presentation Introductory remarks and general matters “Walk-through” of proposed texts by section with a focus on Significant revisions highlighted in Agenda Items 2-A and 2-B Substantive “advance input” comments re Structure and Safeguards Board members asked to focus on substantive matters Editorials and drafting refinements welcome off-line Thanks for advance input, including editorial refinements Don and Gary to indicate that comments should be provided by end of public session on Monday via email to Shirley, Diane, and Liz to ensure that they are considered by both TFs during their Monday evening meetings.

Key Features of Restructuring Safeguards- Feedback on Safeguards ED-2 and Task Force Proposals Agenda Item E-1 Structure Key Features of Restructuring New title to emphasize key features: International Code of Ethics for Professional Accountants (including International Independence Standards) Clearer language with explicit provisions + new Guide = greater understandability More self-contained, topic based sections Increased prominence of FPs and CF Care taken to avoid inadvertent changes in meaning or weakening of Code Speaking Notes for Don Highlights of Restructuring as per Issues paper Increased clarity of language to improve understandability and usability Requirements distinguished from application material Increased prominence of Code’s principles basis Overarching requirements CF and specific requirements Increased clarity of responsibility for independence - Firms, network firms, individuals within firms New title to emphasize International Independence Standards Avoidance of inadvertent changes in meaning or weakening of Code Out of scope matters referred to the Board for future attention

Key ED Comments – Overarching Requirements Feedback on Structure ED-2 Key ED Comments – Overarching Requirements Emphasize that compliance with specific requirements does not necessarily mean compliance with the overarching requirements Does the Code now appear more rules-based? Create a more explicit link to ethical outcomes? Restructuring distinguishes, doesn’t add requirements Explanation added to the Guide to emphasize the principles establishing ethical behavior and the Code’s ethical foundation

Key ED Comments – Clarity of Responsibility Feedback on Structure ED-2 Key ED Comments – Clarity of Responsibility Further work needed to clarify responsibility? Add explanation of approach to responsibility in S120 (The Conceptual Framework)? No senior management duties re ethical mind-set in Code? IAASB considering clarifying responsibility as part of revision of ISQC 1 Explained in§400.4 – required to know and understand S400 (Applying the Conceptual Framework to Independence); S120 not intended to replace S400 Snr. management of firm providing assurance services subject to ISQC 1; Leadership is an element of ISQC 1

Revisions Made Since Sept 2017 IESBA Meeting General Matters Relating to Structure Revisions Made Since Sept 2017 IESBA Meeting Quality control and consistency review Drafting Guidelines updated for Safeguards wording Requirements to exercise professional judgment Use of “provisions” versus “requirements and guidance” Referring to application material in requirements paragraphs Use of “All Audit Clients” versus “General” in headings Consistently used across all sections Quality Control includes: Consistency reviews Comparison mark-up to show changes between January and December 2017 Review of of this comparison to check that inadvertent meaning changes reviewed

General Matters Relating to Structure Questions? Note to Don and Gary – provide IEBSA members an opportunity to comment on general remarks before walking

Safeguards Project Overview Objective Review clarity, appropriateness and effectiveness of safeguards Phases 1 and 2 Phase 1 – Conceptual Framework Linked to Structure of the Code Project Phase 2 - NAS and Conforming Amendments Restructured Code Phase 1 – agreed in principle Dec 2016 Enhanced conceptual framework will require mind shift Phase 2 – on track for completion Dec 2017 Review of safeguards pertaining to provision of non- assurance services (NAS) to audit clients Permissibility of NAS out of scope Close coordination with Structure and other Task Forces

Key Enhancements re Conceptual Framework Safeguards Key Enhancements re Conceptual Framework Identified threats must be addressed in one of three ways: Eliminate circumstances creating the threats; Apply safeguards; or Decline or end the specific professional service Safeguard and RITP concepts clarified Safeguards now more closely correlated to identified threats New “step back” requirement for an overall conclusion Emphasis that if threats cannot be addressed, must decline or end the engagement

Feedback on Safeguards ED-2 Key ED Comments Comment Accepted? Tailor safeguards to specific threats Examples of safeguards reviewed and linked to specific threat(s) Make clear situations where no safeguards would be effective Explicit statement that there are some situations in which threats can only be addressed by declining or ending the specific engagement Prohibitions in NAS subsections prominently flagged Seeking out, or performing reference checks for, director or officer of entity (or management able to significantly influence financial statement preparation) now prohibited for all entities

Feedback on Safeguards ED-2 Key ED Comments Comment Accepted? Review concepts like “materiality” and “significance” for greater enforceability To be considered for prioritization as part of next strategy and work plan Providing exceptions to NAS provisions impairs clarity and robustness of the Code Outside scope of Safeguards project; for consideration as part of upcoming NAS initiative Clarify NAS provisions that apply to firms and network firms in all instances Extensively reviewed and clarified as appropriate (in coordination with Structure Task Force) Are NAS provisions conveying the message that providing advice and recommendations to management is always acceptable? IESBA does not believe this is the case – firms required to ensure that client management makes all judgments and decisions that are the proper responsibility of management

Revisions Made Since Sept 2017 IESBA Meeting General Matters Relating to Safeguards Revisions Made Since Sept 2017 IESBA Meeting New AM added to CF to explain role of “consultation with others” Refinements relating to advocacy threats Improved examples of actions that might be safeguards in Code “Appropriate professional” changed to “appropriate reviewer” Revised examples of safeguards for contingency fees Several drafting refinements to achieve drafting consistency across Code and minimize duplication of provisions in CF Deleted 120.10 A3 re determining whether an action is a safeguard Better explained in Basis for Conclusions and other tools Note to Gary – for all except the last main bullet, consider walking through text to provide further explanation.

Determining Whether an Action is a Safeguard Safeguards Determining Whether an Action is a Safeguard Acceptable level is the level at which a PA applying the RITP test would likely conclude that the PA complies with the FPs Safeguards are actions, individually or in combination, that PA takes that effectively reduces threats to compliance with the FPs to an acceptable level

Application of the Enhanced CF Safeguards Application of the Enhanced CF Note to Gary – this diagram can be used to explain that material in paras 9-16 of the issues paper Identifying threats – para 120.6 Evaluating threats – para 120.7 – 120.9 Addressing threats – para 120.10-120.11

General Matters Relating to Safeguards Questions? Note to Don and Gary – provide IEBSA members an opportunity to comment on general remarks before walking

Structure and Safeguards Walk-through Revisions in Agenda Item 2-C

Substantive Advance Input Structure Guide to the Code Paragraph 4 – Alignment to revised Applicability paras and reference made to listing of abbreviations to Glossary Paragraph 9 – Refinements to how reference is made to FP and CF in Part 1, and addition of “relevant” to provisions Substantive Advance Input Questions raised about reference to contractors in para 4 T

Structure and Safeguards Part 1 – Sections 100-120 120.7 A1 – AM for acceptable level moved up and new subheading added for “Factors Relevant in Evaluating the Level of Threats” 120.8 A3 – New AM explains that discussions/ consultation with others might assist PAs understand factors 120.12 A1 (and throughout Code) – “Parts 4A and 4B replaced with International Independence Standards Substantive Advance Input Question about whether SG description in 120.10 A2 should refer to “firms” TF to address this comment when we get to S600

Matter for IESBA Consideration Guide and Part 1 Matter for IESBA Consideration Do Board members Agree with the proposed revisions to the Guide and Part 1? Have any comments on the advance input highlighted in this presentation? Have any additional substantive input?

Structure and Safeguards Part 2 – Sections 200-270 [1] 200.5 A3 – Deleted first sentence to avoid repeating 100.1 200.6 A1 – Refinements to align to 300.6 A1, and to improve examples relating to self-interest threats 200.7 A1 – Refinements to drafting to be consistent 300.7 A1 R200.9 to 200.9 A1 – Refinements to minimize duplication Substantive Advance Input None as of December 2, 2017 Suggestions to improve drafting of R200.9 to 200.9 A1

Structure and Safeguards Part 2 – Sections 200-270 [2] 220.8 A1 to 220.8 A2 – Clarifications for addressing information that is misleading 220.11 A2 – Moved reference to NOCLAR from 220.8 A1 R260.21/R260.26 – Avoids use of “shall not constitute” by referring to R114.1(d) allowing disclosure Substantive Advance Input None as of December 2, 2017

Structure and Safeguards Part 2 – Sections 200-270 [3] 270.3 A4 – Merged and streamlined old 270.3 A4 and 270.3 A5 to avoid repetition; overarching principle re consultation added to CF in 120.8 A3 270.3 A5 – Deleted superfluous last sentence Substantive Advance Input None as of December 2, 2017

Matter for IESBA Consideration Part 2 Matter for IESBA Consideration Do Board members Agree with the proposed revisions to Part 2? Have any comments on the advance input highlighted in this presentation? Have any additional substantive input?

Structure and Safeguards Part 3 – Sections 300-360 [1] 300.8 A2 – Refinements to examples of actions that might be SGs 300.8 A4 – Refinements to description of “appropriate reviewer” which will be used throughout Code Substantive Advance Input Appropriate reviewer Consistency in specific examples across Code Should description explain that individual is internal vs external to firm? We received drafting refinements from Hiro and Liesbet to improve para 300.8 A3.

Structure and Safeguards Part 3 – Sections 300-360 [2] 330.4 A2 to 330.4 A3 – Revisions to examples of factors created by contingency fees and actions that might be SGs 330.5 A1 to 330.5 A4 – Ref to advocacy threat added and refinements made to actions that might be SGs Substantive Advance Input Questions raised about whether disclosure is an appropriate SG to address self-interest threat

Substantive Advance Input None as of December 2, 2017 Structure Part 3 – Sections 300-360 [3] R360.26, R360.27, R360.37 and R360.38 Aligned with revisions in R260.21/R260.26 to avoid use of “shall not constitute” and refer to R114.1(d) Substantive Advance Input None as of December 2, 2017

Matter for IESBA Consideration Part 3 Matter for IESBA Consideration Do Board members Agree with the proposed revisions to Part 3? Have any comments on the advance input highlighted in this presentation? Have any additional substantive input?

Structure and Safeguards Part 4A – Sections 400-410 [1] 400.4 and throughout – Abbreviations for titles of standards defined in Glossary 400.7 – Refinements to align with changes to CF 410.3 A6, 410.7 A2 and 410.12 A3 – Refinements and revisions to actions that might be SGs Substantive Advance Input None as of December 2, 2017

Matters for IESBA Consideration Part 4A – Sections 400s Matters for IESBA Consideration Do Board members Agree with the proposed revisions to the 400 series? Have any comments on the advance input highlighted in this presentation? Have any additional substantive input?

Part 4A – Sections 510-523 510.10 A1 to 510.10 A13 – Refinements to actions that might be SGs in relation to financial interests – other circumstances Added subheadings to improve readability 520.6 A1 to 520.6 A2 – Added “intimidation threats” 522.4 A3 – “…individual conducting review…” replaced with “…appropriate reviewer…” Substantive Advance Input 510.10 A1 – Question about placement of close/immediate family

Part 4A – Sections 524-540 524.4 A2 – Clarified which provisions are being referenced 525.3 A1 to 525.3 A2 – Refinements to SGs relating to threats created from a loan of personnel 540.3 A6 – Refinements to examples of SGs in LA section to enhance consistency in drafting Substantive Advance Input 525.3A1 – additional examples of SGs suggested

Matters for IESBA Consideration Part 4A – 500s Matters for IESBA Consideration Do Board members Agree with the proposed revisions to the 500-series? Have any comments on the advance input highlighted in this presentation? Have any additional substantive input?

Part 4A – Section 600 General Provisions [1] 600.4 A1 to 600.5 A4 –Re-ordered to improve flow of provisions for evaluating threats 600.6 A1 to 600.6 A2 – Additional explanation to emphasize the application of certain overarching provisions to address threats in the context of providing NAS to audit clients Substantive Advance Input Material in 600.6 A1 to 600.6 A2 appear duplicative To align with 600.6 A1, should “firm” be added to 120.10 A1? Several editorial suggestions received for S600. For example, suggestions about whether 600.4 A1 s/b “considers providing” or “provides”

Part 4A – Section 600 General Provisions [2] R600.9 – Clarification to “R” para that did not include “shall” R600.10 – Reversal of inadvertent revision to Sept draft Substantive Advance Input 600.7 A2 – “create” vs “might create” advocacy threat

Part 4A – Section 600 Subsections Safeguards Part 4A – Section 600 Subsections 604.5 A1 to 604.6 A1 – Clarifications to provisions re tax calculations for the purpose of preparing accounting entries Substantive Advance Input 603.3 A4 – If there are no SG to address advocacy threat, is service prohibited? SMPC continue to express concern re prohibition in R609.7

Matters for IESBA Consideration Part 4A – Section 600 Matters for IESBA Consideration Do Board members Agree with the proposed revisions to Section 600, including subsections? Have any comments on the advance input highlighted in this presentation? Have any additional substantive input?

Part 4B – Section 800 800.4 A1 – Para better positioned after R800.3 Substantive Advance Input 800.4 A1 – Para better positioned after R800.3 800.10 A1 – Should be more closely aligned with extant 290.509

Matters for IESBA Consideration Section 800 Matters for IESBA Consideration Do Board members Agree with the proposed revisions to Section 800? Have any comments on the advance input highlighted in this presentation? Have any additional substantive input?

Part 4B – Sections 900 to 990 [1] 900.6 – Refinements to align with changes to CF 900.13 – Revision to address comment on Structure ED-2, thereby further aligning to material in extant Code R900.16 – Deleted 1st sentence, and other refinements made in response to suggestion from IESBA member Substantive Advance Input 900.31 A1 – Reverse revisions to avoid change in meaning

Part 4B - Sections 900 to 990 [2] 910.8 A2 to 910.8 A7 – Aligned to changes made in S510 in Part 4A re financial interests – other circumstances 920.4 A1 – Addition of reference to “intimidation” threat for consistency and to align with 920.2 and 920.5 A2 Substantive Advance Input None as of December 2, 2017

Safeguards Part 4B – Sections 900-900 [3] 940.3 A6 – Refinements to examples of SGs in LA section to enhance consistency in drafting 950.5 A1, R950.7 and 950.7 A2 – Revisions and refinements to better align with changes to S600 and the provisions in extant Code for assurance engagements Responsibility for assuming mgt responsibility in the context of assurance engagements is narrower than in audit context Substantive Advance Input None as of December 2, 2017

Part 4B – Sections 900-990 [4] Section 999 – Retitled to Section 990, name remains unchanged 990.7 – Deleted because Section 990 does not provide any modification to in relation to network firms in R900.16 Substantive Advance Input 990.4 A1 – Para better positioned after R990.3

Matters for IESBA Consideration Section 900s Matters for IESBA Consideration Do Board members Agree with the proposed revisions to the 900 series? Have any comments on the advance input highlighted in this presentation? Have any additional substantive input?