Independence 1Independence 1

Jean RothbarthJean RothbarthTask Force ChairTask Force Chair

OverviewOverview

• Recent activitiesRecent activities

• Review of significant changes Review of significant changes

• Objective to approve documentObjective to approve document

• Basis for conclusions still under constructionBasis for conclusions still under construction

Recent activitiesRecent activities

• October IESBA consideration of comments October IESBA consideration of comments received and first read of re-draftreceived 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 TF met immediately after CAG meeting to address comments and held conference call in January to comments and held conference call in January to finalizefinalize

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 2Broader 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 – ApproachPartner Rotation – Approach

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

Partner Rotation – Time OutPartner Rotation – Time Out

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

Key Audit Partner – DefinitionKey Audit Partner – Definition

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

Engagement Team – DefinitionEngagement Team – Definition

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

Valuation Services Valuation Services

• Additional guidance on meaning of significant Additional guidance on meaning of significant subjectivitysubjectivity

• No material valuations for public interest entitiesNo material valuations for public interest entities

Preparation of Tax CalculationsPreparation of Tax Calculations• Preparing tax calculations for the purpose of Preparing tax calculations for the purpose of

preparing accounting entries may create a threat preparing accounting entries may create a threat

• If threat not clearly insignificant apply safeguards If threat not clearly insignificant apply safeguards such as:such as:– Service performed by accountant not a member of the Service performed by accountant not a member of the

audit teamaudit team

– Calculations reviewed by individual not on audit team Calculations reviewed by individual not on audit team

• PIEs– should not perform calculations for the PIEs– should not perform calculations for the purpose of preparing accounting entries that are purpose of preparing accounting entries that are material to the financial statementsmaterial to the financial statements

Tax Planning and Other Advisory ServicesTax Planning and Other Advisory Services

• Self-review threat may be created when advice Self-review threat may be created when advice will affect matters to be reflected in the financial will affect matters to be reflected in the financial statementsstatements

• Cannot provide advice if effectiveness of advice Cannot provide advice if effectiveness of advice depends on particular accounting treatment and depends on particular accounting treatment and reasonable doubt as to appropriateness of reasonable doubt as to appropriateness of treatment and outcome will be material to the treatment and outcome will be material to the financial statementsfinancial statements

Tax ValuationsTax Valuations

• Generally does not threaten independence if results of Generally does not threaten independence if results of valuation are not directly reflected in the financial valuation are not directly reflected in the financial statements and effect is immaterial or valuation subject to statements and effect is immaterial or valuation subject to external review by a tax authority or similar regulatory external review by a tax authority or similar regulatory authorityauthority

• If not subject to external review and is material significance If not subject to external review and is material significance of threat should be evaluated and safeguards applied of threat should be evaluated and safeguards applied

• If results directly reflected in financial statements, guidance If results directly reflected in financial statements, guidance in valuation paragraphs appliesin valuation paragraphs applies

Assistance in Tax DisputesAssistance in Tax Disputes

• Threat may be created when firm represents an Threat may be created when firm represents an audit client in resolution of tax dispute when tax audit client in resolution of tax dispute when tax authorities have notified client that they rejected authorities have notified client that they rejected argument and it is being referred to tax authorityargument and it is being referred to tax authority

• Cannot act as an advocate for an audit client before Cannot act as an advocate for an audit client before a public tribunal or court in a resolution where a public tribunal or court in a resolution where amounts are materialamounts are material

IT Systems

• Non public interest entity– no design Non public interest entity– no design andand implementationimplementation

• Public interest entity – no design Public interest entity – no design or or implementationimplementation

Cooling-off Period Cooling-off Period

• Cooling off period if key audit partner or firm Cooling off period if key audit partner or firm CEO joins client as a director or officer or in CEO joins client as a director or officer or in position to exert significant influence over the position to exert significant influence over the financial statementsfinancial statements

• Key audit partner – f/s of not less than 12 months Key audit partner – f/s of not less than 12 months and partner not a member of the audit teamand partner not a member of the audit team

• CEO – twelve monthsCEO – twelve months

Effective DateEffective Date

• One year after final standard will be issued One year after final standard will be issued (assume issuance December 31, 2008, effective (assume issuance December 31, 2008, effective December 31, 2009)December 31, 2009)

• Transitional provisions:Transitional provisions:– Non-assurance services – a six month period after he effective date Non-assurance services – a six month period after he effective date

to complete any activities in process (June 30, 2010)to complete any activities in process (June 30, 2010)

– Partner rotation and PIEs – one additional year before the new Partner rotation and PIEs – one additional year before the new requirements come into place (December 31, 2010)requirements come into place (December 31, 2010)