Page 1 | Confidential and Proprietary Information Emerging Issues Jim Gaa, Member – Emerging Issues and Outreach Committee IESBA CAG Meeting New York, USA September 14, 2015

Page 2 | Confidential and Proprietary Information Activities since last CAG Discussion Emerging Issues and Outreach Committee (EIOC): –Four teleconference meetings –Three in-person meetings IESBA Staff met with IFAC Compliance Staff to consider how adoption is monitored for IFAC member bodies Emerging Issues and Outreach Committee

Page 3 | Confidential and Proprietary Information Presentations on status of adoption in G20 / financial centers: –Presentations due to conclude at Nov/Dec 2015 Board meeting –Review of key differences as an indication of adoption issues –Move attention toward adoption in other jurisdictions Outreach performed with IFIAR and INTOSAI Emerging Issues and Outreach Committee

Page 4 | Confidential and Proprietary Information The Rise of Advisory Services in Audit Firms (Harris) Initial Findings Regarding the Effects of Mandatory Audit Firm Rotation in Europe (PCAOB/Ferguson) Current Trends in the Audit Industry (IFIAR) AFM Report (Netherlands Authority for Financial Markets) Toshiba Accounting Scandal Emerging Issues and Outreach Committee Recent International Developments

Page 5 | Confidential and Proprietary Information Steven Harris speech: elaborates on investor concerns that were conveyed at the September 2014 CAG meeting In US, largest accounting firms’ expanding lines of business activity and consequential investor concerns about the future direction of audit quality Emerging Issues and Outreach Committee The Rise of Advisory Services in Audit Firms

Page 6 | Confidential and Proprietary Information EU mandatory firm rotation primarily aimed at increasing competition and not for audit quality reasons Push toward mandatory audit firm retendering and rotation is leading to lower audit fees in Europe, and triggering audit quality concerns Emerging Issues and Outreach Committee Initial Findings Regarding the Effects of Mandatory Audit Firm Rotation in Europe

Page 7 | Confidential and Proprietary Information Regulators are noticing some disturbing trends in Europe since approval of mandatory audit firm rotation –Audit fees seemed to drop between 20 and 40 percent in majority of European countries New rules may be creating serious labor problems In practice appeared to increase concentration not decrease it –Less competition Emerging Issues and Outreach Committee Initial Findings Regarding the Effects of Mandatory Audit Firm Rotation in Europe

Page 8 | Confidential and Proprietary Information IFIAR meeting (Apr. 2015) considered audit quality issues Considered how changes in the economic environment and in the market for audit services have affected the audit industry, notably: –Impact on audit quality of NAS and low growth in audit fees –Staffing –Changes in audit technology –Commoditization of the audit –Possibly need increased transparency of governance, structure & operations Emerging Issues and Outreach Committee Current Trends in the Audit Industry

Page 9 | Confidential and Proprietary Information Report summarizes results of inspections of quality of statutory audits conducted by Big 4 firms Reviewed 10 statutory audits at each Big 4 firm. Classified 18 as “inadequate” Emerging Issues and Outreach Committee AFM 2014 Report

Page 10 | Confidential and Proprietary Information The most commonly occurring deficiencies concern: –Tests of controls –Substantive analytical procedures –Critical evaluation of the audit evidence obtained Remedial measures were greater in number than measures taken in response to September 2010 report Root causes for the deficiencies varied considerably Emerging Issues and Outreach Committee AFM 2014 Report

Page 11 | Confidential and Proprietary Information Request for firms to deepen analyses of root causes & reasons Firms expected to –assess whether measures are effective and take different or additional measures if necessary. Make root cause analyses part of their quality control procedures –implement remedial measures while focusing on public interest Emerging Issues and Outreach Committee AFM 2014 Report

Page 12 | Confidential and Proprietary Information Give special attention and priority to the following matters: –Strengthening of governance –Creating a quality-oriented culture –Embedding statutory quality standards –Increasing transparency with respect to quality Emerging Issues and Outreach Committee AFM 2014 Report

Page 13 | Confidential and Proprietary Information AFM advised the legislature to make additions to the law: –Suitability tests to be conducted by the AFM –The AFM to submit findings and conclusions from suitability tests directly to the bodies responsible for governance –Mandatory implementation of corrective and improvement measures –Introduction of additional categories for PIEs Mandatory supervisory boards Emerging Issues and Outreach Committee AFM 2014 Report

Page 14 | Confidential and Proprietary Information Pre-tax profits overstated by US$2billion over 7 years Share price has decreased by 34% Top executives set unrealistic targets and played a role in misreporting Highlights importance of: –Pressure to breach Fundamental Principles –Financial reports prepared in accordance with Fundamental Principles –Effectiveness of recent changes in corporate governance Emerging Issues and Outreach Committee Toshiba Accounting Scandal

The Ethics Board