Independence 1 Jean Rothbarth Task Force Chair

Overview Recent activitiesRecent activities Review of significant changesReview of significant changes Objective to approve documentObjective to approve document Basis for conclusions still under constructionBasis for conclusions still under construction

Recent activities October IESBA consideration of comments received and first read of re-draftOctober IESBA consideration of comments received and first read of re-draft TF November addressed IESBA commentsTF November addressed IESBA comments CAG December reviewed revised draftCAG December reviewed revised draft TF met immediately after CAG meeting to address comments and held conference call in January to finalizeTF met immediately after CAG meeting to address comments and held conference call in January to finalize

Entities of Significant Public Interest – ED Proposal All listed entity provisions should apply to significant public interest entities (SPIEs) SPIEs are listed entities and certain other entities that have a large number and wide range of stakeholders Depending on facts and circumstances: – –Normally includes regulated financial institutions – –May include pension funds, government-agencies, government-controlled entities and not-for-profits

Entities of Significant Public Interest – ED Comments – Support Majority agreed with proposal SPIES have a wider range of financial stakeholders, therefore, safeguards including restrictions to address perception issues are more important There is no good explanation for maintaining different independence requirements for listed and non-listed SPIEs

Entities of Significant Public Interest – ED Comments – Concerns 1 respondent suggested adopting EU definition Some felt ED proposal would lead to inconsistent application between jurisdictions Some commented there was no evidence for including all listeds even small listeds More guidance on characteristics of SPIEs needed Not enough emphasis on size Greater alignment with IFRS

SPIEs – Alternative 1 Narrow definition All listed entities; and Entities which have been designated by a regulator to be subject to the same independence requirements as those applicable to a listed entity

SPIEs – Alternative 2 Broader definition All listed entities; and Entities designated by a regulator to be subject to same independence requirements as listed entities Other entities, as determined by the firm, that have public accountability to a large number or wide range of stakeholders. Factors to consider: – –Size relative to the economy – –Social significance in a particular jurisdiction – –Whether the entity holds assets in a fiduciary capacity

PIEs – Approach Narrow definition – listed plus regulator designated PIEs Encourage member bodies and firms to consider whether PIE requirements should be applied to other entities Drop reference to “significant” and refer only to PIEs

PIEs – Comments from CAG members Basel Committee on Banking Supervision of view definition should include regulated banks Question as to whether the proposal was to address all regulators Regulator might not be specific with respect to independence standards

PIEs – TF Proposal All listed entities; Any entity defined by a regulator or by legislation as a public interest entity; and Any entity for which a regulator or legislation requires the audit to be conducted in accordance with all, or substantially all, of any specific audit auditing standards that are applicable to listed entities or the firm to comply with all, or substantially all, of any specific independence requirements that are applicable to listed entities

PIEs – Scenarios Single set of auditing standards, with no additional requirements for listed entities Specific auditing standards for listed entities and the banking regulator requires audits of banks to be conducted in accordance with those requirements Banking regulator has adopted Section 290 as the relevant independence requirements for banks and specifies the listed provisions apply to banks

PIEs – Scenarios Banking regulator has adopted Section 290 as the relevant independence requirements for banks and but does not specify whether the listed provisions apply to banks IFAC Code has been adopted into legislation but there are no specific requirements for categories of entities such as banks

Non-assurance services provided before client becomes audit client If services would not be permitted during period of audit engagement, consider any threats and if not clearly insignificant only accept audit engagement if safeguards are applied to address the threat If non-assurance service has not been completed, and it is not practical to complete or terminate the service, before starting audit services discuss with those charged with governance and only accept engagement if: – –Non-assurance service will be completed within a short period of time; or – –Client has arrangements in place to transition the service to another provider within a short period of time

Partner Rotation – Approach Require partner rotation except when firm has few people with necessary knowledge and experience to serve as key audit partner and the independent regulator in the jurisdiction has provided an exemption in such circumstances and has specified alternative safeguards

Partner Rotation – Time Out Individual should not participate in the audit of the entity, provide quality control for the engagement, consult with the engagement team or the client regarding technical or industry-specific issues, transaction or events or otherwise directly influence the outcome of the engagement.

Key Audit Partner – Definition The engagement partner, the individual responsible for the engagement quality control review, and other audit partners, if any, on the engagement team who make key decisions or judgments on significant matters with respect to the audit of the financial statements on which the firm will express an opinion. Depending on the circumstances and the role of the individuals on the audit, other “audit partners” may include, for example, audit partners responsible for significant subsidiaries or divisions.

Engagement Team – Definition All partners and staff performing the engagement, and any individuals engaged by the firm or a network firm who perform assurance procedures on the engagement. This excludes external experts engaged by the firm or a network firm.

Valuation Services Additional guidance on meaning of significant subjectivityAdditional guidance on meaning of significant subjectivity No material valuations for public interest entitiesNo material valuations for public interest entities

Preparation of Tax Calculations Preparing tax calculations for the purpose of preparing accounting entries may create a threatPreparing tax calculations for the purpose of preparing accounting entries may create a threat If threat not clearly insignificant apply safeguards such as:If threat not clearly insignificant apply safeguards such as: –Service performed by accountant not a member of the audit team –Calculations reviewed by individual not on audit team PIEs– should not perform calculations for the purpose of preparing accounting entries that are material to the financial statementsPIEs– should not perform calculations for the purpose of preparing accounting entries that are material to the financial statements

Tax Planning and Other Advisory Services Self-review threat may be created when advice will affect matters to be reflected in the financial statementsSelf-review threat may be created when advice will affect matters to be reflected in the financial statements Cannot provide advice if effectiveness of advice depends on particular accounting treatment and reasonable doubt as to appropriateness of treatment and outcome will be material to the financial statementsCannot provide advice if effectiveness of advice depends on particular accounting treatment and reasonable doubt as to appropriateness of treatment and outcome will be material to the financial statements

Tax Valuations Generally does not threaten independence if results of valuation are not directly reflected in the financial statements and effect is immaterial or valuation subject to external review by a tax authority or similar regulatory authorityGenerally does not threaten independence if results of valuation are not directly reflected in the financial statements and effect is immaterial or valuation subject to external review by a tax authority or similar regulatory authority If not subject to external review and is material significance of threat should be evaluated and safeguards appliedIf not subject to external review and is material significance of threat should be evaluated and safeguards applied If results directly reflected in financial statements, guidance in valuation paragraphs appliesIf results directly reflected in financial statements, guidance in valuation paragraphs applies

Assistance in Tax Disputes Threat may be created when firm represents an audit client in resolution of tax dispute when tax authorities have notified client that they rejected argument and it is being referred to tax authorityThreat may be created when firm represents an audit client in resolution of tax dispute when tax authorities have notified client that they rejected argument and it is being referred to tax authority Cannot act as an advocate for an audit client before a public tribunal or court in a resolution where amounts are materialCannot act as an advocate for an audit client before a public tribunal or court in a resolution where amounts are material

IT Systems Non public interest entity– no design and implementationNon public interest entity– no design and implementation Public interest entity – no design or implementationPublic interest entity – no design or implementation

Cooling-off Period Cooling off period if key audit partner or firm CEO joins client as a director or officer or in position to exert significant influence over the financial statementsCooling off period if key audit partner or firm CEO joins client as a director or officer or in position to exert significant influence over the financial statements Key audit partner – f/s of not less than 12 months and partner not a member of the audit teamKey audit partner – f/s of not less than 12 months and partner not a member of the audit team CEO – twelve monthsCEO – twelve months

Effective Date One year after final standard will be issued (assume issuance December 31, 2008, effective December 31, 2009)One year after final standard will be issued (assume issuance December 31, 2008, effective December 31, 2009) Transitional provisions:Transitional provisions: –Non-assurance services – a six month period after he effective date to complete any activities in process (June 30, 2010) –Partner rotation and PIEs – one additional year before the new requirements come into place (December 31, 2010)