International Ethics Standards Board for Accountants IESBA SME/SMP WORKING GROUP REPORT Don Thomson IESBA Board Meeting New York, USA October 17-19, 2011

IESBA – SME / SMP Issues Objectives Feedback & additional input Background Information sources Findings & recommendations Next steps Topics for Discussion

IESBA – SME / SMP Issues Present the Working Group's report Identify & advise the Board –Unique & challenging issues faced by professional accountants in SMEs & SMPs complying with the Code Public interest entity auditor independence excluded – outside the scope of this initiative Objectives

IESBA – SME / SMP Issues Consider various circumstances –Geographic location, size of entity, etc Synopsis desirable –Be careful not to modify or replace Code Informed management important safeguard –Will require explanation –Does not justify inappropriate services Feedback & additional input

IESBA – SME / SMP Issues Tax court & valuation services –Consider threat & adequacy of safeguards –Address threat, not location Address sole practitioners' challenges –Inspection may be an effective safeguard –Consider the risk of corruption –Be careful to avoid double standards Feedback & additional input

IESBA – SME / SMP Issues More than 98% of businesses are SMEs –Major impact on economic & social health Common characteristics of SMEs –Limited number of users of audit/review reports –Dominant owner-manager, limited controls –Resource constraints (time, funds, people, etc) –Value advice & other non-assurance services Background – SMEs

IESBA – SME / SMP Issues SMEs' professional accountants often SMPs SMEs & SMPs not defined in the Code –No definition considered necessary for the findings & recommendations in the report Working Group mandate is SMEs & SMPsWorking Group mandate is SMEs & SMPs Not recommending that SMEs & SMPs be singled out for separate treatmentNot recommending that SMEs & SMPs be singled out for separate treatment Singled out sole practitioners but other recommendations applicable to allSingled out sole practitioners but other recommendations applicable to all –Public interest entity auditor issues excluded Background – SMEs & SMPs

IESBA – SME / SMP Issues Experienced Working Group members Research Consultation –SMP Committee, SMP Forum, SMP poll –National standard-setters –IESBA; IESBA Chair briefed CAG –Other individuals from various jurisdictions Information sources

IESBA – SME / SMP Issues Challenges –Length of the Code & resource constraints Recommendations –Synopsis, Q&As, case studies, etc; align PD Brief synopsis, threats & typical safeguards, hotlinks to relevant areasBrief synopsis, threats & typical safeguards, hotlinks to relevant areas Q&As may address threats to fundamental principles, informed management, etcQ&As may address threats to fundamental principles, informed management, etc –Packaging to facilitate ready access HotlinksHotlinks Possibly an interactive version that enables tailoring to focus on relevant sectionsPossibly an interactive version that enables tailoring to focus on relevant sections Knowledge & Understanding of the Code

IESBA – SME / SMP Issues Intuitive approach to safeguards impeded Importance of informed management unclear Professional judgment may be discouraged SMEs' ability to benefit from the knowledge of their professional accountant to obtain services in addition to audits/reviews may be unduly restricted if ignore circumstances –Often limited number of users, lower risk Safeguards - Challenges

IESBA – SME / SMP Issues Consider clarifying importance of applying professional judgment to circumstances Clarify importance of informed management Consistent framework of safeguards –Enables a more intuitive approach –For audits of entities other than PIEs, consider consistency of valuation & tax advocacy prohibitions with the basic framework Safeguards - Recommendations

IESBA – SME / SMP Issues Challenge –Many safeguards not readily available Recommendation –Develop guidance to help identify safeguards –Encourage consultation, etc –Consider informed management combined with exposure to inspection May be restricted to lower risk engagements with additional communicationMay be restricted to lower risk engagements with additional communication Safeguards – Sole Practitioners, Small SMPs

IESBA – SME / SMP Issues Challenge –SMP alliances may be confused with the Code's concept of a network firm Recommendation –Develop guidance on a network firm Network Firm

IESBA – SME / SMP Issues Challenge –Code does not provide guidance on specific services other than on auditor & other assurance providers' independence Opinions divided amongst those providing input as to whether this warrants actionOpinions divided amongst those providing input as to whether this warrants action Recommendation –When developing future workplans, consider expanding the Code to deal more specifically with non-assurance services, particularly tax Future Expansion of the Code

IESBA – SME / SMP Issues Challenge –SME/SMP issues warrant continuing attention Recommendations –Processes to always address SME/SMP issues –Qualified nominations for Board (& CAG?) –Cooperate closely with SMP Committee –Consider continuation of Working Group Ongoing Consideration of SMEs & SMPs

IESBA – SME / SMP Issues Board &/or Planning Committee –Consider appropriate action arising from the recommendations in this report Next Steps