1. Safeguards Gary Hannaford, Task Force Chair IESBA Meeting
Madrid, Spain
March 14-17, 2016

2. Overview of Safeguards Project
Phase 1
ED released in December 2015
Comments due by March 21, 2016
Phase 2
The CF Approach to Independence
Review of NAS
Other Conforming Amendments

3. Other Phase II Activities
Safeguards-specific revisions needed to finalized Part C Phase 1 close-off document and the near-final LA proposals
Consideration of the unique challenges faced SMPs in employing safeguards
Consideration of whether additional guidance is needed in the Code to explain the differences in the evaluation of whether a threat is at an acceptable level for PIEs and non-PIEs
Engagement with stakeholders, including regulators, NSS, frms and others, to obtain their input
For Bullet 1 - Safeguards-specific revisions needed to finalized Part C Phase 1 close- off document and the near-final LA proposals. The changes needed fall into more than one category:
Conforming or consequential changes needed to align new terminology or revised concepts in ED-1
Consequential changes resulting from Phase II work (TBD)
Some stakeholders have suggested that the IESBA should further elaborate on the application of the CF for professional accountants in business. Consideration of this work as part of a possible third phase with a TBD TF
Broader discussion needed with respect to timing

4. Re-cap of Safeguards ED-1
Intended to be for the benefit of the 6 new IESBA members

5. The Fundamental Principles in the Code and the Conceptual Framework
Professional Competence and Due Care
Integrity
Objectivity
Confidentiality
Professional Behavior
ED-1 includes proposed Section 120 of the restructured Code, The Conceptual Framework. The CF has been enhanced as a result of Phase 1 of the Safeguards project and sets out requirements and application material for identifying, evaluating and addressing threats to compliance with the fundamental principles
Compliance with the requirements and application material in the CF is required by all PAs, including auditors.
The implications of the enhancements to the CF means that there will be conforming and consequential amendments to other areas in the Code (e.g. Section 400 – Conceptual Framework for Independence)

6. ED-1 – Enhanced Conceptual Framework for Dealing With Threats to the Fundamental Principles
New Information/ Changes in facts
Identifying Threats (R120.5)
Evaluating Threats (R120.6)
Addressing Threats (R120.7)
Overall Assessment (Step-back)
Re-evaluate
Threats (R120.9)
Notes for Gary:
Suggestions from the CAG and the Board have been taken. Para now forms part of the introduction section and provides contextual information about the CF. Revisions made to para R120.3 to clarify that the PA needs to apply the conceptual framework and is more explicit about what the CF entails.
In response to CAG, September 2015 proposals with an overarching requirement to identify, evaluate and address threats have been replaced with four explicit requirements at R120.5 (identifying), R120.6 (evaluating), R (addressing) and R120.9 (re-evaluating threats.)

7. ED-1 Key Terms and Concepts
Reasonable and informed third party (RITP)
Concept is a test performed by a hypothetical person to determine whether the PA has complied with the fundamental principles (i.e., eliminate threats or reduce them to an acceptable level)
RITP test weighs all the relevant facts and circumstances that the PA knows or could reasonably be expected to know at the time of the original evaluation
Acceptable level
A level at which a RITP would likely conclude that the PA complies with the fundamental principles

8. ED-1 Key Terms and Concepts (continue)
Safeguards
Actions, individually or in combination, that the PA takes to effectively eliminate threats to compliance with the fundamental principles or reduce them to an acceptable level
Proposed Section 300 includes examples of safeguards with linkages to threats

9. A PA addresses threats by
ED-1 Enhanced Requirement to Addressing Threats to Compliance with the Fundamental Principles
A PA addresses threats by
Eliminating the circumstance, including interests or relationships that are creating the threats
Applying safeguards, where available or capable of being applied
Declining or discontinuing the specific professional activity or service

10. ED-1 Other Enhancements to the CF
Re-characterize the terms “safeguards created by the profession or legislation” “safeguards in the work environment” or “safeguards implemented by the entity”
No longer safeguards, but rather conditions, policies and procedures that affect the likelihood of a PA’s identification of a threat
New requirement to reinforce that PAs in public practice, including auditors need to apply the CF set out in S120

11. Questions or Comments?

12. Section 400 The Conceptual Framework (CF) for Independence

13. Threats, Fundamental Principles, Independence
Fundamental Principles
Threats to Compliance
Self-interest
Self- review
Advocacy
Familiarity
Intimidation
Integrity 
Objectivity
Independence
Professional Competence and Due Care
Confidentiality
Professional Behavior

14. Safeguards-specific suggested revisions to S400 are limited
S400 - Independence and the Fundamental Principles Agenda Item 6-A Section C Paras. 8–15
Link to independence is addressed in S400 of the proposed restructured Code (Structure ED)
Continued coordination with the Structure Task Force
Proposed new wording for Section 120 to cross-refer to the Section 400 (see paras. 12–15 of Agenda Item 6-A)
Safeguards-specific suggested revisions to S400 are limited
Most changes are conforming in nature to align with proposed ED-1
Some go beyond conforming, and are part of Phase II (e.g., documentation)

15. New stand-alone requirements for firms to:
S400 – Proposed Changes to Align to ED-1 Agenda Item 6-A Section C paras. 16–17 Agenda Item 6-B Paras. R400.10–R A2
Proposals are intended to strike a balance in terms of adding the alignment needed to ED-1 and re-characterizing/ emphasizing certain provisions in the context of threats to independence
Overarching requirement to apply the CF to identify, evaluate and address threats to independence
New stand-alone requirements for firms to:
Identify, evaluate, address and re-evaluate threats to independence
Perform an overall assessment of threats to independence

16. S400 – Proposed Changes to Align with ED-1 (Continue)
New application material to:
Explain that threats to independence are similar to threats to the fundamental principles
Reinforce the importance of the RITP test
Assist firms evaluate threats to independence
Conforming amendments to the provisions pertaining to engagement period

17. Enhanced requirements pertaining to documentation
S400 – Other Suggested Revisions Agenda Item 6-A Paras. 21–22 Agenda Item 6-B Paras. R402.2–402.2A1
Enhanced requirements pertaining to documentation
When an independence matter requires significant analysis or consultation, the firm shall document the nature of the matter and the firm’s rationale for its conclusions
When safeguards are required to reduce a threat to an acceptable level, the firm shall document the nature of the threat and the safeguards in place or applied that reduce the threat to an acceptable level.
CAG broadly expressed support for these proposals
One CAG member (Nigel James of IOSCO) was of the view that para A1 sounded defensive and suggested that the IESBA/ TF revise the wording

18. Matter for IESBA Consideration
IESBA members are asked for views about whether they agree with the Task Force’s conclusions about the proposed revisions to proposed Section 400, including the manner in which reference is made to proposed Section 120
IESBA members are asked for views about other matters discussed in this Section C of Agenda Item 6-A (e.g., proposed revisions related to documentation and engagement period)

19. Communicating with Those Charged with Governance (TCWG) Agenda Item 6-A Section C Paras. 18–20
Extant Code encourages, but does not require, regular communication between the firm and TCWG about independence matters
Requirements exist in the IAASB’s ISA 260 (Revised) for audits of listed entities only
Should the provisions in the Code pertaining to auditor communication with TCWG about independence and the relevant IAASB requirements be aligned?

20. Communicating with TCWG (Continue)
If the requirements for auditor communication about independence matters are aligned to the ISAs:
Should that requirement be for listed entities only, as currently required in the ISAs; or
Should it be for PIEs or all entities
Is there value to adding such requirements in the Code if they are already addressed in the ISAs
IESBA/ IAASB liaison and collaboration needed

21. Matter for IESBA Consideration
IESBA members are asked for views about the Task Force’s proposed recommendations for enhancing auditor communications with TCWG about independence matters in the Code

22. Section 600 Non-Assurance Services

23. NAS – Recap of April 2015 NAS Revisions Agenda Item 6-A Section D Para
Prohibit auditors from assuming management responsibility when providing NAS to audit clients
Remove provisions that permitted an audit firm to provide certain bookkeeping and taxation services to PIE audit clients in emergency situations
Introduce new and clarified application material regarding what constitutes management responsibility
Clarify guidance regarding the concept of “routine or mechanical” services relating to the preparation of accounting records and financial statements for audit clients that are not PIEs

24. NAS – Approach for Considering Revisions Agenda Item 6-A Section D Paras. 24–29
Two possible options for developing proposal
Task Force was of the view that a new NAS section might include:
A clear set of principles and criteria for to determine acceptable levels of threats that are created from providing a NAS to an audit client
A stronger link between the threats to independence and to compliance with the fundamental principles that are created from providing a particular NAS to an audit client
More guidance about how to address threats from providing a NAS (for example, by indicating the specific prohibitions and safeguards that correspond to specific threats)
Options
1. Limit changes to NAS section so that they are conforming in nature to simply align to the changes in the ED-1
2. Take a “fresh-look” at the NAS section and determine how to holistically re-draft so that the NAS section could

25. A firm should not provide a NAS to an audit client if:
NAS – Principles for Identifying, Evaluating and Addressing Threats Agenda Item 6-A Section D Paras. 29–30
A firm should not provide a NAS to an audit client if:
NAS involves assuming management responsibilities
NAS creates a self-review threat and will likely have a material effect on the f/s on which the firm will express an opinion
NAS depends on a particular accounting treatment or presentation in the f/s and the audit team has reasonable doubt as to the appropriateness of the related accounting treatment or presentation of the accounting entries under the relevant financial reporting framework

26. A firm should not provide a NAS to an audit client if:
NAS – Principles for Identifying, Evaluating and Addressing Threats (Continue)
A firm should not provide a NAS to an audit client if:
NAS will contribute to a significant component of the internal control over financial reporting or will form part of information that is significant to the client’s accounting records or f/s on which the firm will express an opinion
NAS causes the firm to act in an advocacy role that involves resolving a dispute or litigation when the amounts involved are material to the f/s on which the firm will express an opinion
NAS involves promoting, dealing in, or underwriting an audit client’s shares

27. NAS – Materiality Agenda Item 6-A Section D Para. 35
Task Force is exploring whether guidance should be added to the Code to explain how firms should consider materiality and significance (i.e., quantitative and qualitative considerations) in determining the level of a threat created by providing a NAS to an audit client
Plans to leverage a previously released IESBA Staff Q&A on the topic of materiality and the work of others (IASB and IAASB)
It would not be appropriate to develop a new description of materiality

28. NAS – Examples of Safeguards Agenda Item 6-A, Section D, Paras. 36–37
Not including individuals who provided the NAS as audit team members (self-review)
Having another professional accountant review the audit and NAS work as appropriate (self-review, self-interest and familiarity)
Engaging another firm to evaluate the results of the NAS (self-review, self-interest, familiarity and advocacy)
Having another firm re-perform the NAS to the extent necessary to enable that other firm to take responsibility for the service (self-review, self-interest, familiarity and advocacy)

29. NAS Not Addressed in the Code Agenda Item 6-A Section D Para. 38
Code does not include an all-inclusive list of the NAS that might be provided to an audit client
Proposed restructured Code includes a definition of the term “assurance engagement” but does not define the term “non-assurance service”
Task Force believes that given the evolving nature of NAS, in particular in the international context, it would be preferable not to define NAS in the Code
Task Force believes its planned approach for revising NAS section will address situations/ NAS not expressly referenced in the Code

30. IESBA/ IAASB liaison and collaboration needed
NAS – Communicating with TCWG About NAS Provided to an Audit Client Agenda Item 6-A Section D Paras. 39–42
Should firms be required to consider when and how to communicate with TCWG about providing NAS to an audit client? For example, should firms be required to:
Inform TCWG of the NAS that is provided to the audit client
Obtain pre-approval or concurrence of TCWG regarding providing a NAS to an audit client
IESBA/ IAASB liaison and collaboration needed

31. NAS – What Should a Firm Communicate to TCWG
NAS – What Should a Firm Communicate to TCWG? Agenda Item 6-A Section D Para. 42
Description of the NAS provided during the period covered by the f/s for audit and NAS provided by the firm and network firms to the entity
The nature and amount of the fees for the above NAS
The steps taken by management to avoid the risk of the firm assuming a management responsibility
The safeguards put in place to eliminate the threat or reduce it to an acceptable level
If necessary, any consultation with other individuals within the firm or network or with a professional body
A conclusion that the firm is independent

32. Familiarity Threats Agenda Item 6-A, Section D, paras. 44–45
Feedback on August 2014 ED suggest that the IESBA should consider whether the description of "familiarity threat" should be expanded to include "financial information"
The EM to the February 2016 LA ED acknowledges that it is reasonable to conclude that a familiarity threat may also be created as a result of an individual’s LA with the financial information which forms the basis of the financial statements

33. Matters for IESBA Consideration
IESBA members are asked for their views about the Task Force’s planned approach for revising the NAS section of the extant Code
IESBA members are asked to react to the issues identified and the Task Force’s proposals for moving forward

34. Next Steps
Coordination and liaison with other Task Forces, including the Structure Task Force
Engagement and outreach – targeted discussions with certain stakeholder groups
Regulators and audit oversight authorities,
Firms, including SMPs
National standard setters
Liaison with the IAASB
Planned Outreach
IFAC SMP Committee (March 2016).
Forum of Firms (May 2016).
IESBA-NSS Liaison Group (June 2016).

35. IESBA/ IAASB Potential Matters for Discussion
Implications of proposed revisions in ED-1
Proposed revised description of, and reference to safeguards and its impact on the ISAs, in particular ISA 260 (Revised)
Proposal to drop the terms: “safeguards created by the profession, legislation or regulation”, “safeguards within the entity”, and “safeguards within the firm’s own systems and procedures” from the Code
Enhancing auditor communications to TCWG about
Threats to the fundamental principles and threats to independence and how they are addressed
NAS provided to audit clients