1. Page 1 | Proprietary and Copyrighted Information Part C Jim Gaa, Chair Part C Task Force IESBA Meeting September 16, 2015 New York

2. Page 2 | Proprietary and Copyrighted Information March 2013: Project Proposal approved by IESBA –Phase I addresses Sections 300, 310, 320, 330 and 340 and topics of Pressure and Faithful Representation –Phase II addresses Section 350 (Inducements) and the applicability of Part C to PAPPs Sept 2013: CAG reviewed s370 March 2014: CAG reviewed s320 July 2014: IESBA reviewed s320 & s370 Background

3. Page 3 | Proprietary and Copyrighted Information Phase I ED issued - Nov 2014 –Deadline for comment - Apr 2015 June/July 2015 meeting - IESBA considered significant comments on proposed Section 320 and number of other matters raised Sept 2015 meeting – IESBA to consider significant comments on proposed Section 370 Background

4. Page 4 | Proprietary and Copyrighted Information Nov/Dec 2015 meeting goal: to present final text of Phase I –Final approval under current structure and drafting conventions January 2016: TF to begin Phase II (issues) First half of 2016: IESBA to approve close-off Phase I document (restructured and redrafted under proposed new structure and drafting conventions) Future Actions

5. Page 5 | Proprietary and Copyrighted Information ED proposed two new principles in Section 370: –PAIBs shall not allow pressure to result in breach of fundamental principles –PAIBs shall not place such pressure on others Many respondents supported proposals in paras. 370.1 & 370.2. Number provided suggestions to improve clarity of paragraphs TF: Introductory para needed in order to provide context to section 370 Revise para. 370.2 to clarify that PAIBs should not place pressure on others that would result in breach of fundamental principles Proposed Section 370 Overarching Requirements in 370.1 and 370.2

6. Page 6 | Proprietary and Copyrighted Information ED proposed: –Specific description of pressure and examples to illustrate situations in which pressure may arise –Guidance to follow when faced with pressure to breach the fundamental principles Majority of respondents agreed with the examples provided Several indicated clarity was needed in certain areas Proposed Section 370 Types of Pressure (370.3, 370.4)

7. Page 7 | Proprietary and Copyrighted Information Significant comments and responses: –Last sentence - Pressure to meet a deadline could result in a breach of the fundamental principles, but still be considered routine TF: Delete reference to routine pressure in 370.3 (see below) –Examples in 370.4 imply outcome of task could be different if more time. Lack of time could be a routine occurrence. “unrealistic deadlines” is more appropriate term TF: Agrees Proposed Section 370 Types of Pressure (370.3, 370.4)

8. Page 8 | Proprietary and Copyrighted Information –2nd and 3rd bullets in 370.4 do not indicate where pressure is coming from TF: Beneficial to have narrow and broader examples –NOCLAR bullet does not provide example of a NOCLAR TF: Added example on tax evasion –Few respondents felt examples too detailed TF: Issue previously discussed by IESBA. Range and detail are appropriate. Reflect necessary variety of situations Proposed Section 370 Types of Pressure (370.3, 370.4)

9. Page 9 | Proprietary and Copyrighted Information ED: Section 370 applies to all situations in which pressure from a superior or others threatens compliance with the Fundamental Principles Respondent’s views: reference to routine pressure were mixed TF: Distinction between Pressure to Breach and Routine Pressure not beneficial and should be deleted. Revised guidance focuses on factors to determine if pressure could result in breach of the fundamental principles and how to deal with such pressure Proposed Section 370 Pressure to Breach vs. Routine Pressure (370.3)

10. Page 10 | Proprietary and Copyrighted Information Significant comments and responses: –Guidance needed on how to consider corporate culture and steps to take as a result of an adverse corporate culture TF: Enhancements made to guidance –Consider confidentiality when consulting third party TF: Amended guidance –Benefit to linking guidance on pressure to NOCLAR TF: Added cross reference to NOCLAR (370.4) Proposed Section 370 Pressure to Breach (370.5)

11. Page 11 | Proprietary and Copyrighted Information –Suggestions on how to improve the clarity of wording and structure of guidance TF: Amendments made to wording and structure based on comment received. Changed order of examples of factors in 370.5 to reflect sequence in which steps may be taken –Consider inclusion of a 3rd party test TF: Considered third party test. TF believes evaluation of pressure is personal issue that 3rd party test does not reflect Proposed Section 370 Pressure to Breach (370.5)

12. Page 12 | Proprietary and Copyrighted Information ED proposed actions to consider after determining pressure would lead to breach of fundamental principles Respondents generally agreed. Many providing suggestions on how clarity and structure could be improved TF: Revised and reordered actions to reflect more realistic progression. Added example suggesting discussion with a supervisor and example to explain how restructuring or segregating responsibilities could resolve the issue Proposed Section 370 Responding to Pressure to Breach the Fundamental Principles (370.6)

13. Page 13 | Proprietary and Copyrighted Information Significant comments and responses: –Clarity needed on phrase “constructive challenge” and need to consider translation of phrase into other languages TF: Replaced “constructive challenge” with “discuss the matter”. Added discussion with supervisor (if individual is not exerting pressure) –Concern that restructuring or segregating would not resolve issue TF: Revised bullet - restructuring or segregating only appropriate where doing so would eliminate threat or reduce it to an acceptable level. Added example to clarify guidance Proposed Section 370 Responding to Pressure to Breach the Fundamental Principles (370.6)

14. Page 14 | Proprietary and Copyrighted Information –Guidance on documentation could be enhanced TF: Amended guidance accordingly and aligned to Section 320 Proposed Section 370 Documentation (370.7)

15. Page 15 | Proprietary and Copyrighted Information ED proposed to refer PAIB to appropriate sections of Part C when the PAIB faces pressure All respondents agreed cross referencing is beneficial TF: Moved references from paragraph 370.9 to paragraph 370.4 Proposed Section 370 Reference to Other Parts of the Code (370.9)

16. Page 16 | Proprietary and Copyrighted Information –Many respondents supported the examples being provided. Several respondents concerned lists of examples could be seen as all-inclusive TF: Added “including” to introductory wording to 370.5 and 370.6 –Many respondents provided suggestions where additional examples could be added. TF: Reviewed the examples and added or clarified several Matters Common to Sections 320 and 370 Lists of Examples

17. Page 17 | Proprietary and Copyrighted Information –In certain circumstances may be beneficial for the guidance being provided to be tailored to take into account seniority of the PAIB TF:- Statement in 300.5: higher expectation for more senior PAIBs - Other than NOCLAR, no distinction between “senior” and “other” in Code - NOCLAR concerns situations with a significant public interest element - PAIB has identified NOCLAR by another but is not directly involved - Differentiation needs to ensure “other” PAIBs not relieved of responsibilities - Given variety of organizational structures, attempting to differentiate responsibilities by seniority would be extremely complex and confusing Matters Common to Sections 320 and 370 Tailoring Guidance to the PAIB’s Level of Seniority

18. Page 18 | Proprietary and Copyrighted Information –Useful to clarify description of salaried employee may include executive management in event that PAIB not a “director” of company TF: Definition of “PAIB” in “Definitions” section is clear. Term “salaried” should be deleted from paragraph 300.3 in order to prevent confusion –Need to define “pressure” TF: Reaffirmed that there is little benefit in defining “pressure” Matters Common to Sections 320 and 370 Salaried Employee and Additional Guidance

19. Page 19 | Proprietary and Copyrighted Information ED proposed guidance on understanding and adhering to “fair and honest” principle Main Board comments and TF responses/proposals: –Consider making compliance with fundamental principles explicit TF: Introductory wording of 320.2 states compliance with fundamental principles is necessary “Fair and honest” is redundant and so deleted from 320.2 to focus guidance on compliance with the fundamental principles For consistency, also deleted from 320.3 Proposed Revised Section 320 “Fair and Honest” Principle (320.3)

20. Page 20 | Proprietary and Copyrighted Information ED proposed enhanced guidance to address misuse of discretion Main Board comments and TF responses/proposals: –Consider aligning guidance with ISA 540 TF: Example of fair value estimates incorporated into 320.3 –Clarify phrase “to influence contractual or regulatory outcomes”. Consider whether this dilutes requirement not to use discretion to mislead TF: Wording changed. Proposed Revised Section 320 Misuse of Discretion (320.3)

21. Page 21 | Proprietary and Copyrighted Information Main Board comments and TF responses/proposals: –Reconsider the decision to change this example as seems to make guidance more ambiguous TF agrees that because of difficulty in determining intentions of others, it is difficult to differentiate in practice between transactions timed for a legitimate business purpose and transactions timed with the intention to mislead –Clarify that unethical action is the decision to engage in a transaction (at a point in time) not accounting of the transaction TF: Clarification added - example relates to intention in timing of the transaction, not the subsequent accounting for the transaction Proposed Revised Section 320 Manipulating Timing of Transactions (320.3)

22. Page 22 | Proprietary and Copyrighted Information –Clarify: commercial decisions should not be 2nd guessed with hindsight TF: Guidance is only applicable when intention is to mislead. Business judgment rule makes 2 nd guessing unlikely First bullet in 320.3 - consider referring to ISA 540 for example of manipulating fair value estimates. TF: Added example of fair value estimates –Why change “manipulate” to “misrepresent” in paragraph 320.3? TF: “Misrepresent” relates more closely to title of Section 320, and to 320.2 Replaced “manipulate” with “mislead” where appropriate (3 rd bullet) Proposed Revised Section 320 Manipulating Timing of Transactions (320.3)

23. Page 23 | Proprietary and Copyrighted Information ED: Proposed guidance emphasized: purpose, context, and audience Main Board comments and TF responses/proposals: –Add disclaimers as a safeguard TF: Principles-based Code should not suggest a disclaimer Added a recommendation to consider clarifying the purpose, audience and context in presentation of information Proposed Revised Section 320 Information prepared in the absence of a reporting framework (320.4)

24. Page 24 | Proprietary and Copyrighted Information –Clarify extent of due diligence needed TF: Beyond the remit of a principles-based Code Would vary by job function Additional guidance on clarification of the intended audience added –Change “relevant, necessary estimates …” to “relevant estimates … assumptions, where appropriate, …” TF: Changed wording accordingly Proposed Revised Section 320 Information prepared in the absence of a reporting framework (320.4)

25. Page 25 | Proprietary and Copyrighted Information Board comments received and Task Force responses/proposals: –Consider 3 rd party test to gauge the nature and extent of actions TF: “Reasonable steps” removal and guidance over “steps” removes the need for a 3 rd part test –Unclear what it means to “use professional judgment to be satisfied…” TF: Revised wording: determine what steps to take to ensure that 320.2 is satisfied Proposed Revised Section 320 Third Party Test, Professional Judgment (320.4)

26. Page 26 | Proprietary and Copyrighted Information ED proposed “reasonable steps” when replying on work of others, to fulfil the obligations that flow from the “fair and honest” principle. TF proposed “reasonable steps” be replaced by “professional judgment” Board comments received and Task Force responses/proposals: –What would constitute “reasonable steps” and possible examples of these steps? TF: “Reasonable steps” has been removed and guidance on “steps” added, based on 130.5 and 210.8 Proposed Revised Section 320 Reasonable Steps (320.5, 320.6)

27. Page 27 | Proprietary and Copyrighted Information Board comments received and Task Force responses/proposals: –Reliance on work of others does create significant threats. For colleagues, however, having an elaborate process would be overkill TF: Revised wording includes steps. Phrase “external and internal” added as information may come from within the organization. “If any” and prior association added to indicate no steps may be sufficient when relying on internal sources –External valuation specialists may be used - what steps they should take with respect to these parties - audit inspection reports regularly emphasize findings concerning fair value estimates TF: Added steps applicable to internal and external sources Proposed Revised Section 320 Reliance on Work of Others (320.5)

28. Page 28 | Proprietary and Copyrighted Information –“Professional Judgment” is a given in the Code. Change from “Reasonable Steps” to “Professional Judgment” doesn’t add anything –Consider taking the middle ground: “…use professional judgment to determine what steps to take…” TF: Changed guidance to accommodate middle ground option Possible steps to take added Revised guidance is based on paragraphs 130.5 and 210.8 Proposed Revised Section 320 Reliance on Work of Others (320.5)

29. Page 29 | Proprietary and Copyrighted Information –Term “others” should be clarified –Colleagues are subject to internal controls. Some may be inaccessible TF: “External and internal” added in acknowledgement that information may be received from a colleague. Phrase “if any” added to indicate no steps may be appropriate when relying on internal sources Proposed Revised Section 320 Reliance on Work of Others (320.5)

30. Page 30 | Proprietary and Copyrighted Information Current Code: No guidance according to seniority, especially where the PAIB has reason to believe information is misleading –Except: 300.5 includes a higher expectation for more senior PAIBs – but no strict distinction between senior and other PAIBs NOCLAR treats senior PAIBs differently from other PAIBs Proposed Revised Section 320 Differentiating Between “Senior” PAIBs and “Other” PAIBs

31. Page 31 | Proprietary and Copyrighted Information June/July 2015 IESBA meeting –IESBA member: NOCLAR (proposed section 360) differentiates “senior” and “other” PAIBs - same approach could be used –IESBA member: distinction is appropriate for NOCLAR not suitable for other sections of Part C Proposed Revised Section 320 Differentiating Between “Senior” PAIBs and “Other” PAIBs

32. Page 32 | Proprietary and Copyrighted Information TF: Retain revised guidance in 300.5 (Agenda Item C-7) NOCLAR concerns situations with a significant public interest element PAIB has identified a potential NOCLAR by another party but is not directly involved Variety of organizational structures and the place of PAIBs within them, differentiating between “senior” and “other” PAIBs in other sections of Part C would involve great complexity and may generate the “wrong” answers for particular situations. Proposed Revised Section 320 Differentiating Between “Senior” PAIBs and “Other” PAIBs

33. Page 33 | Proprietary and Copyrighted Information –Consider whether matter of professional skepticism is about finding opportunity to message the fundamental principle of due care TF: Specific steps relating to due care added to consider when relying on the work of others (320.5) Proposed Revised Section 320 Professional Skepticism / Due Care

34. Page 34 | Proprietary and Copyrighted Information Board comments and TF responses/proposals: –Part C should apply to unintentional errors TF: Unintentional errors covered by Section 330. PAIB should attempt to have unintentional error changed. If no action is taken, misstatement is intentional - within the scope of Section 320 and/or 360. –Resignation (320.8): Reconsider whether appropriate to change “shall consider” to “may consider”. Consider whether change is reasonable for all levels of PAIBs TF: Change to “may consider” maintained, and is appropriate for all PAIBs. Proposed Revised Section 320

35. Page 35 | Proprietary and Copyrighted Information –Inconsistency in wording: matter “resolved” although info still misleading TF: Change “resolved” to “addressed” –Is Part C applicable to accountants in government and education? TF: Paragraph 300.3 enhanced by clarifying what constitutes a PAIB and adding types of employing organization –Ensure guidance on resignation consistent with other sections of Part C. TF: Amended guidance to ensure consistency Proposed Revised Section 320

36. Page 36 | Proprietary and Copyrighted Information Board comments and TF responses/proposals: –Add “whistle-blowing procedure” into first bullet of 320.6 as may not be included in ethics policy TF: Agreed, as possible to have whistleblowing policy without ethics policy –Add additional guidance in 300.5 indicating useful to consult ethics and whistle-blowing policies to maintain ethics based culture TF: Paragraph 300.5 is high level statement. Should not include detailed procedures and practicalities such as those suggested Proposed Revised Section 320

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