Safeguards Phase 2 Gary Hannaford, Task Force Chair IESBA Meeting June 19-21, 2017

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

Phase 1 of project agreed in principle in Dec 2016 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

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

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

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)

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

Matter for IESBA Consideration Do IESBA members agree with Task Force’s conclusions about the issues raised relating to permissibility of NAS?

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

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

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

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

Matter for IESBA Consideration Do IESBA members agree with Task Force’s conclusion and proposed revisions relating to prohibition of certain recruiting services?

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

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

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…”

Suggestion to Improve NAS Safeguards 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)

Task Force Preliminary Proposals 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

Matter for IESBA Consideration 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

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

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

Matter for IESBA Consideration IESBA members are asked for views about the TF’s approach to finalize its: Revisions to proposed Section 600 Planned approach for revising proposed Section 950, and the conforming amendments

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

“Factors Relevant to Evaluate Threats” Vs Safeguards 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

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”

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

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

Matter for IESBA Consideration IESBA members are asked for views about Task Force’s proposals in response to feedback received on Phase 1

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

Matter for IESBA Consideration IESBA members are asked to express any other views about the feedback on Safeguards ED-2 and the TF’s proposals