Module 19: IFAC Code of Ethics and EU Ethics and Independence Requirements 2. Ethics and Independence in the EU Dr. Harald Ring, Chairman, Ethics Working Party European Federation of Accountants (FEE) Advanced Programme in Accounting and Auditing Regulation

I.Introduction II.Developing independence principles inside and outside EU III.Conceptual approach versus rules-based approach IV.Conceptual approach 1.Functioning 2.Threats 3.Safeguards 4.Advantages Structure (1)

V.Key independence issues in the EU Recommen- dation / IFAC Code of Ethics VI.Restrictions on non-audit services 1.EU / IFAC 2.Sarbanes-Oxley Act / PCAOB Docket Rule on Tax Services VII.Current status of the implementation of the EU Recommendation in Europe 1.Principal findings 2.Summary of the results of the FEE Survey VIII. Outlook Structure (2)

Central requirements of the revised Directive on Statutory Audit (8 th EU Directive) with regard to ethics and independence of statutory auditors –Statutory auditors should adhere to the highest ethical standards, covering their public interest function integrity and objectivity professional competence and due care (Recital 8) I. Introduction (1)

–Statutory auditors should be bound by strict rules on confidentiality and professional secrecy (Recital 9) –Statutory auditors should be independent when carrying out a statutory audit (Recital 10) I. Introduction (2)

1.Inside EU –FEE Position Paper „Audit Independence and Objectivity“ (1995) –FEE Study „The Role, Position and Liability of the Statutory Auditor in the EU“ (January 1996) –FEE Common Core of Principles of Audit Independence and Objectivity – Initial Recommendations (July 1998) II. Developing independence principles inside and outside EU (1)

–EU Commission “Recommendations on Statutory Auditors‘ Independence in the EU: A Set of Fundamental Principles” (16/5/2002) Factual, but no legal binding for member states –FEE Study „Considerations on the implementation of the Framework Approach“ (October 2004) –Revised 8 th Directive on Statutory Audit (30/9/2005) Obligation for member states to implement into national law –FEE Survey on the Implementation of the EU Recommendation on Independence (Feb. 2006) II. Developing independence principles inside and outside EU (2)

2.Outside EU –IFAC Code of Ethics for Professional Accountants (November 2001) Mandatory for IFAC member bodies Currently under review –Sarbanes-Oxley Act (30 July 2002) To be applied by companies listed in the US and their auditors II. Developing independence principles inside and outside EU (3)

–PCAOB Docket Rule 017 „Ethics and Independence Rules Concerning Independence, Tax Services and Contingent Fees (26 July 2005) To be applied by companies listed in the US and their auditors II. Developing independence principles inside and outside EU (4)

–8 th EU Directive / EU Recommendation / IFAC Code Based on a conceptual/framework/principles- based/threats - safeguards approach –Some national systems of audit regulation/ Sarbanes-Oxley Act Rules-based approach = cook book approach III. Conceptual approach versus rules-based approach

1.Functioning 2.Threats –Self-interest –Self-review –Advocacy –Familiarity –Intimidation 3.Safeguards –Professional, legislative or regulatory –Within the work environment IV. The Conceptual Approach (1)

4. Advantages –Allows for the most infinite variatons in circumstances that arise in practice –Can cope with the rapid changes of the modern business environment –Prevents the use of legalistic devices to avoid compliance –Requires auditors to consider actively, and to be ready to demonstrate the efficacy of arrange- ments for safeguarding independence IV. The Conceptual Approach (2)

Financial interest Business relationships Employment with the audit client Managerial or supervisory role in audit client Establishing employment with auditing firm Family and other personal relationships Non-audit services Audit and non-audit fees Litigation Senior personal acting for a long period of time V. Key issues of independence in the EU Recommendation/ IFAC Code

1.EU Recommendation / IFAC Code –General principle –Specific situations where special risks have to be considered, e.g. Preparing accounting records and financial statements (appendix 1) Valuation services (appendix 2) 2.Sarbanes-Oxley Act Sect. 201/202 / PCAOB Docket Rule on Tax Services VI. Restrictions on non-audit services

VII. Current status of implementation of the EU Recommendation in Europe 1.Principal findings 2.Summary of the results of the FEE Survey (appendix 3)

VIII. Outlook Transposition of the Directive on Statutory Audit into national law –Work to be done by FEE