1. Page 1 | Proprietary and Copyrighted Information NOCLAR Caroline Gardner NOCLAR Task Force Chair IESBA Meeting New York December 1, 2015

2. Page 2 | Proprietary and Copyrighted Information Comment period on re-ED closed September 4 77 responses received across range of stakeholder categories Responses from three Monitoring Group members: –IFIAR, BCBS and IOSCO Task Force meeting early October 2015 to consider ED responses Background and Recent Activities

3. Page 3 | Proprietary and Copyrighted Information Meeting with IFIAR SCWG October 6 Meeting with Forum of Firms October 20 Meeting with EAIG October 27 Meeting with EC November 18 Teleconference with Chair and staff of IAASB TF December 1 IFAC SMP Committee comment letter November 27 Background and Recent Activities

4. Page 4 | Proprietary and Copyrighted Information Overview of Responses Generally broad support for response framework across stakeholder groups Significant improvement vs. first ED Substantially the “right balance” Addressed concerns about operability and potential for unintended consequences Balances expectations of PA vs responsibilities of management/TCWG Thoughtfully addressed responsibilities of different categories of PAs Proposals provide helpful guidance in applying legal or regulatory reporting requirement

5. Page 5 | Proprietary and Copyrighted Information Some split views on aspects of the proposals within and between the following stakeholder categories: –Regulators and public authorities –IFAC member bodies –Other professional organizations A few respondents not supportive of IESBA addressing the topic –Addressing PAs’ responsibilities regarding NOCLAR should be left to law or regulation –The Code’s conceptual framework sufficient; proposals overly complex and prescriptive Overview of Responses

6. Page 6 | Proprietary and Copyrighted Information A number of recurring concerns among some, particularly: –No clear definition or guidance on meaning of “public interest” in objectives –Potential for increased public expectations gap –Adverse impact on trust relationship between PAs in public practice and clients –PAs being placed at competitive disadvantage vs non-PAs –Forensic-type engagements scoped in? –Appropriately considered high risk of retaliation for PAIBs? Recurring Concerns

7. Page 7 | Proprietary and Copyrighted Information BCBS supportive of proposed response framework –Acknowledgement that IESBA has taken into account differences in legal, regulatory and cultural environments around the world IFIAR view that proposals not sufficiently stringent –Support for mandatory disclosure to appropriate authority for auditors if in public interest and management/TCWG not appropriately responded to the matter –But acknowledgement that IFIAR comment letter reflecting views of many but not necessarily all IFIAR members –Encouragement to finalize project in near future Monitoring Group Members’ Responses

8. Page 8 | Proprietary and Copyrighted Information Significant Comments on Main Elements of Proposed Framework

9. Page 9 | Proprietary and Copyrighted Information Substantial support across all stakeholder categories Objectives Key Elements of Framework Key ConcernsTF Responses/Proposals Perceived circularity between third objective and determination of further action? Greater clarity needed re link between third objective and factors to consider in determining if further action needed? Link determination of further action to public interest vs objectives (§225.4(c), 23, 43) Consequential changes to documentation provisions (§225.34, 49) Could second objective lead to “tipping off” management/TCWG?; recognize L&R that may be more stringent than the Code Moved provision re compliance with L&R upfront; added recognition of need to comply with reporting requirement under L&R (§225.3)

10. Page 10 | Proprietary and Copyrighted Information Objectives Key Elements of Framework Key ConcernsTF Responses/Proposals More appropriate for objectives to focus on (a) avoidance of association with client or employer that knowingly commits illegal act, and (b) PA being satisfied that disclosure made to appropriate authority able to take action? Would result in much narrower objectives Points on disassociation and disclosure also already covered under ED proposals Concept of public interest too subjective; risk of second guessing; more guidance needed Some guidance already provided in ED (§225.31); risk of becoming too prescriptive; however, general guidance in §225.4 deleted  Do IESBA members agree?

11. Page 11 | Proprietary and Copyrighted Information Substantial support across all stakeholder categories Scope Key Elements of Framework Key ConcernsTF Responses/Proposals Emphasize inherent limitations re auditors’ ability to identify NOCLAR, as in ISAs? No – objectives of Code and ISAs different Scope of L&R too limited and narrower than in ISA 250? Require all PAs to respond to any NOCLAR No – should be a personal responsibility to respond to NOCLAR outside of scope of L&R covered Auditors not considering all required irregularities to respond to under L&R? ED already required PAs to understand and comply with applicable L&R; however, further emphasis added re complying with reporting requirement in L&R (§225.3)

12. Page 12 | Proprietary and Copyrighted Information Scope Key Elements of Framework Key ConcernsTF Responses/Proposals What about NOCLAR committed by parties who work for organization other than employees? Refine definition of NOCLAR to cover acts committed by these parties (§225.2) Forensic-type engagements should not be scoped in re disclosure provisions Relevant provision clarified (§225.46)  Do IESBA members agree?

13. Page 13 | Proprietary and Copyrighted Information Substantial support across all stakeholder categories Differential approach for Different Categories of PAs Key Elements of Framework Key ConcernsTF Responses/Proposals Better approach: differentiate on basis of expected level of understanding of L&R? No – potential for significant uncertainty Why not exempt non-auditors in public practice and non-senior PAIBs from response framework given constraints on access to information, etc? No – response framework for them already not demanding Why should non-auditors in public practice not be subject to same response framework as auditors? No – not have same level of access to info and management/TCWG as auditors  Do IESBA members agree?

14. Page 14 | Proprietary and Copyrighted Information Substantial support across all stakeholder categories Factors to Consider re Further Action Key Elements of Framework Key ConcernsTF Responses/Proposals Terms such as “credible evidence” and “substantial harm” too vague and subjective Could the factors be read narrowly to mean further action needed only when all of them are fulfilled? What if there is difference in professional judgment about whether the matter is in fact an instance of NOCLAR? Allow room for appropriate professional judgment Risk of making the Code prescriptive by providing overly detailed guidance  Do IESBA members agree?

15. Page 15 | Proprietary and Copyrighted Information Substantial support across all stakeholder categories Third Party Test Key Elements of Framework Key ConcernsTF Responses/Proposals Test creating de facto requirement to disclose to appropriate authority? Test too subjective? Test can only be applied in hindsight? Unlikely third party would have needed experience; better to replace with another PA? Test intended to ensure objective and rigorous assessment of need for further action Whether disclosure required will depend on objective assessment of specific facts and circumstances  Do IESBA members agree?

16. Page 16 | Proprietary and Copyrighted Information Substantial support across all stakeholder categories Possible Courses of Further Action Key Elements of Framework Key ConcernsTF Responses/Proposals Disclosure to appropriate authority should be mandated if in public interest and not contrary to L&R Not for IESBA to address disclosure issue under the Code; should be left to L&R These arguments already discussed at length at the Board Approach in ED is robust in context of need for global operability  Do IESBA members agree?

17. Page 17 | Proprietary and Copyrighted Information Substantial support across all stakeholder categories Factors to Consider re Disclosure to Appropriate Authority Key Elements of Framework Key ConcernsTF Responses/Proposals Factor addressing “robust and credible legal protection” may give PAs an “out” not to disclose? Why not also recognize legal risks PAs may face in disclosing the matter? Factors too vague and subjective? Changes in response to these suggestions may unsettle delicate balance achieved in ED Give greater prominence to statement re disclosure precluded if contrary to L&R Statement relocated (§225.30)  Do IESBA members agree?

18. Page 18 | Proprietary and Copyrighted Information Substantial support across all stakeholder categories Documentation Key Elements of Framework Diverse Views and SuggestionsTF Responses/Proposals Why not same approach to documentation for all categories of PA? Why go beyond documentation requirements in ISAs? Why not impose documentation requirement also on non-auditors in public practice and senior PAIBs? On balance, not recommending changes to ED approach Need for scope of documentation for non-senior PAIBs to be narrower? Changes made (§360.36 and 30)  Do IESBA members agree?

19. Page 19 | Proprietary and Copyrighted Information Other Key Issues

20. Page 20 | Proprietary and Copyrighted Information Other Key Issues Key IssueTF Responses/Proposals Provide more guidance re disclosure to firm/network firm Changes made (§225.41-42) For non-auditors in public practice, better for disclosure to the external auditor to be required consideration vs potential course of further action? Accepted (§225.41) For group audits, require component auditor to inform group auditor Accepted (§225.20)

21. Page 21 | Proprietary and Copyrighted Information Other Key Issues Key IssueTF Responses/Proposals Requirement for auditors to understand application of L&R to the circumstances going beyond ISAs? Accepted (§225.11, 36) More guidance needed to address cross-border engagements and interaction of the Code with local law? No – NSS and firms should address on case-by-case basis; not practicable for Code to do so Why should communication between existing and proposed auditors be subject to client consent? Accepted (§210.13-14)

22. Page 22 | Proprietary and Copyrighted Information Other Key Issues – Section 360 Key IssueTF Responses/Proposals Term “senior PAIB” not universally understood?Concept widely understood in NOCLAR roundtables and also broadly accepted by ED respondents Realistic to expect PAIBs to deter NOCLAR?Requirement only to seek to deter Why require senior PAIB to disclose NOCLAR to external auditor in all circumstances? Accepted (§360.17) Why resignation from employing organization not also an option for non-senior PAIB? Inappropriate to set up this expectation given more limited authority and sphere of influence  Do IESBA members agree?

23. Page 23 | Proprietary and Copyrighted Information Selected Other Matters

24. Page 24 | Proprietary and Copyrighted Information Selected Other Matters Matter RaisedTF Responses/Proposals What if auditor is made aware of the NOCLAR outside of the audit? Accepted (§225.1, 11, 36) Prompting management/TCWG to take action too close to taking on management responsibility? Accepted (§225.17) Requirement needed for auditor to monitor and assess client response? Accepted re requirement to assess (§225.21) Consider communicating directly with users when seeking disassociation? No – same consideration also in any other withdrawal situation; leave to L&R

25. Page 25 | Proprietary and Copyrighted Information Selected Other Matters Matter RaisedTF Responses/Proposals Ethical to accept bounty payments in complying with the Code re NOCLAR? No – general requirement to act in good faith (§225.32, 47) Recognize confidentiality is also in public interest Accepted (§140.7)  Do IESBA members agree?

26. Page 26 | Proprietary and Copyrighted Information Significant Comments from IOSCO C1

27. Page 27 | Proprietary and Copyrighted Information Key Comments from IOSCO C1 CommentTF Reactions Overall appreciation of response framework and implicit support Can relief from confidentiality be automatic, i.e., can PA legitimately report NOCLAR to appropriate authority without following process? IESBA views? Are NOCLAR matters that are material or fundamental in nature the starting point for scope? If so, why scope out clearly inconsequential? Can clarify drafting Should the Code advise auditor to also discuss the matter with “significant” or “sizable” shareholders? Potential complications Enhance focus on difficulties arising for auditors in group audit situation To further consider

28. Page 28 | Proprietary and Copyrighted Information Key Comments from IOSCO C1 CommentTF Reactions Third party test an “amenable” solution to issue of determining need for further action Prudent for PAs other than auditors to also be subject to strong documentation provision Not sharing this view Client consent should not be barrier to existing auditor disclosing known information to proposed auditor (unless prohibited by L&R) Should communication be conditional on proposed auditor first approaching existing auditor? IESBA views? What if existing auditor does not/refuses to provide the information?To further consider

29. Page 29 | Proprietary and Copyrighted Information Timing of Issuance and Next Steps

30. Page 30 | Proprietary and Copyrighted Information Issue under current structure and drafting conventions when approved or wait until pronouncement restructured? Timing of Issuance of Final NOCLAR Provisions

31. Page 31 | Proprietary and Copyrighted Information Next Steps TimingAction Dec 2015Update to IAASB Feb 2016Discussion with IOSCO C1 (?) March Discussion with CAG and IAASB IESBA approval under current structure and drafting conventions JuneConsideration of draft restructured text SeptIESBA approval of restructured text for exposure

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