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N on-Assurance Services

IESBA Meeting Nashville, TN June 17-19, 2 01 9. N on-Assurance Services. Richard Fleck, IESBA Deputy Chair and NAS Task Force Chair. Objective of Today’s Session. To obtain the Board’s views on the Task Force’s proposed revisions to: Section 600, including subsections 601 to 610

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N on-Assurance Services

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  1. IESBA Meeting Nashville, TN June 17-19, 2019 Non-Assurance Services Richard Fleck, IESBA Deputy Chair and NAS Task Force Chair

  2. Objective of Today’s Session • To obtain the Board’s views on the Task Force’s proposed revisions to: • Section 600, including subsections 601 to 610 • Section 400 • To consider matters relevant to Section 950 in advance of developing conforming/ consequential amendments

  3. Key Policy Decisions – March 2019 • Different approaches for PIEs and non-PIEs to be retained • Services provided to PIEs that give rise to self-review threat to be prohibited • Enhanced engagement with TCWG (including pre-approval) • Separate project to review PIE definition – timing accelerated • EM to seek public input (e.g., financial institutions; large private entities) • IAASB’s QM standards include factors for “entities of significant public interest • Necessary to coordinate with IAASB • Aim to align effective dates for PIE and NAS changes

  4. Yes = Prohibited Self-review threat = Prohibit Step 5* Has the firm obtained pre-approval from TCWG for the service? Recap of March 2019 Key Policy Decisions Step 2 Does the service involve assuming a management responsibility? Yes = Proceed to 5 Step 1 Is the service explicitly prohibited? No = Proceed to 3 Step 4 Are all other types of threats at an acceptable level? Yes = Provide NAS Yes = Prohibited No = Prohibited Yes = Prohibited No= Prohibited Proposed Approach to Determine NAS Permissibility (PIEs) Step 3* Does the outcome of the service impact f/s & also create a SR threat? No = Proceed to 2 No = Proceed to 4 * Significant changes being proposed to current Code

  5. Feedback since March 2019 • March 2019 key policy decisions • IFIAR Standards Coordination Group • Forum of Firms Deep Dive • IESBA-NSS • PIOB public interest issues • June 2019 IESBA Agenda Materials • SMPC June 12 Teleconference

  6. IFIAR Standards Coordination Group • Overall sentiment is that project direction is good; several suggestions for Task Force to consider • NAS permissibility • Self-review prohibition: support for “might create”; but calls to clarify “outcome of the service” • Should firms have a responsibility to consider all NAS provided to the entity before accepting the audit engagement? • Some jurisdictions (e.g., US) do not prohibit all tax services – How will tax services be dealt with? • Would it be clearer to specify which NAS are permitted as opposed to developing a process for firms to determine which NAS are not be permissible? • How does the proposed align to the US and the EU approaches?

  7. IFIAR Standards Coordination Group (continue) • The implication of applying the proposals in a group audit context, e.g., • NAS provided to components of PIEs if components are non-PIEs • Non-PIE components are audited by firms outside the firm network • If a component were to flag a week before finalizing an audit report that a prohibited NAS had been provided to the audit client • Whether more guidance is needed in the Code to explain how the concept of “materiality” should be applied in the context of threats to independence • Enhanced transparency about NAS fees/ audit fees • Will it have a real market impact? • Observation that in the EU, NAS fee disclosure had long been required, but the impact of public disclosure only became apparent after the introduction of a “fee cap”

  8. Feedback on Key Policy Decisions Forum of Firms Deep Dive • Support for: • Differential approach to PIEs and non-PIEs in NAS provisions • Support for accelerating project to explore definition of PIE/ listed entities; approach to be coordinated with IAASB • Prohibition on services that give rise to SR threat to PIEs • Importance of clarity of provisions emphasized • Use of “might create” and “directly and indirectly” is unclear and will be problematic for implementation • Questions about how proposals should be applied for divisions and related entities

  9. Feedback on Key Policy Decisions Forum of Firms Deep Dive (continue) • Enhanced auditor communication with TCWG • Concerns about whether the Code is the right vehicle for requiring pre-approval • Concerns that implementation would be a challenge in some jurisdictions because of the corporate governance structures • Concerns that “encouragement” for non-PIEs might lead to inconsistency in terms of application by firms; and some regulators may interpret as a requirement

  10. Feedback on June 2019 Agenda Materials SMPC Teleconference • No significant issues raised • Question about whether the Task Force considered using or defining the term “non-audit services” • Drafting suggestion to enhance clarity of proposed requirement re evaluation of threats created when multiple NAS are provided to the same client • Question about repeating a reference to RITP test in identifying NAS threats – already an overarching requirement in the conceptual framework

  11. Feedback on Key Policy Decisions PIOB Public Interest Issues as of March 2019 • PIOB expects a significant revision of the provision of NAS, ultimately addressing independence issues • Welcomes prohibition for NAS that create self-review threats; but believes there is a need to clarify what is meant by NAS which “indirectly” affect f/s • Welcomes the prohibition for audit firms to provide certain NAS, such as bookkeeping and accounting services, to audit clients which are PIEs, without exceptions • Pre-approval of NAS and communication with TCWG are necessary proposals as well • Encouragement for IESBA to maintain NAS as a high priority project and complete timely • Support for alignment of the NAS and Fees projects, and their finalization at the same time, given the overlapping aspects between the two projects

  12. Proposed Revisions to Section 600, including subsections (Agenda Items 6-A and 6-B)

  13. Proposed Revisions to Section 600 General Provisions– Introduction • Paras. 600.3 to 600.6 emphasize the need to apply conceptual framework • Firms are expected to understand and apply provisions in S120, S300 and S400 • Proposals emphasize the architecture of the Code and preserve general and more specific NAS provisions in subsections • Some material is repeated for emphasis

  14. Proposed Revisions to Section 600 General Provisions – Requirements and AM • NAS prohibited by laws or regulation (R600.7 to 600.8 A1) • Emphasizes existing material in the Code (R100.3 to 100.3 A1) using the drafting convention that was used for inducement provisions

  15. Proposed Revisions to Section 600 General Provisions – Requirements and AM • Para. R600.9 • New heading gives more prominence to requirement for firms to identify threats prior to accepting NAS engagement • Paras. 600.10 A1 to 600.10 A3 • New AM to help firms identify threats to independence in the context of providing NAS to audit clients

  16. Proposed Revisions to Section 600 General Provisions – Requirements and AM • Para. 600.11 A1 • The bulleted list is re-ordered • Reference to “significant” is removed • The term materiality is used only in the context of f/s • Paras. R600.13 to 600.13 A1 • The material for evaluating threats when firms provide multiple NAS to same audit client is elevated to a requirement with new AM to support it

  17. Proposed Revisions to Section 600 General Provisions – Requirements and AM • Para. 600.14 A2 • New examples of general NAS safeguards added • Para. 600.15 A1 • New description to explain self-review threats in the context of NAS engagements • Paras. R600.16 to 600.16 A1 • Replaced ‘direct or indirect’ with concept of ‘subject to audit procedures’

  18. Proposed Revisions to Section 600 General Provisions – Self-review Firms and network firms shall notprovide to an audit client that is a PIEa NAS if the results of that NAS might be subject to audit procedures during the audit of the f/s on which the firm will express an opinion. (R600.16) A NAS that is subject to audit procedures creates a self-review threat to independence. Where the provision of a NAS to an audit client that is a PIE gives rise to a self-review threat to independence in appearance, such a threat cannot be eliminated and safeguards are not capable of being applied to reduce the threat to an acceptable level. (600.16 A1)

  19. Proposed Revisions to Section 600 General Provisions – Threats Other than Self-review • Firms and network firms will continue to apply conceptual framework to identify, evaluate and address all other types of threat to independence

  20. Proposed Revisions to Section 600 General Provisions – Requirements and AM • Management responsibilities • Prohibition, exception and other provisions re assuming management responsibility moved to Section 400 (i.e., R400.13 to R400.16 of Agenda Item 6-B) • Strengthened provisions to ensure that firms and network firms are satisfied that management makes all significant judgments and decisions (see R400.15) • Entity will still need to designate an individual with suitable skill, knowledge and experience to take ownership and evaluate adequacy and results of NAS • Paras. 600.17 A1 • Enhanced clarity about circumstances in which firms might provide advice and recommendations to assist management

  21. Proposed Revisions to Section 600 General Provisions– Requirements and AM • Auditor communications with TCWG regarding NAS • Para. 600.18 A1 refers to existing provisions in the Code re auditor communication with TCWG and indicates that those provisions are relevant about NAS and NAS fees • Although not required, para. 600.19 A1 signals that firms might wish to communicate with TCWG of non-PIEs (avoids the use of the word “encourage”) • Para. R600.20 to 600.21 A2 • Req’ts for auditor communication with TCWG about NAS  more principles-based • Clarification that “pre-approval” is only one form of auditor communication • Flexibility re how auditor communications are made provided process set by TCWG

  22. Proposed Revisions to Section 600 General Provisions – Auditor Comm with TCWG (1) • Before agreeing to provide a NAS to a PIE, a firm or network firm shall provide to TCWG information about: • The nature of the service to be provided. • Any threats to independence that might be created by the provision of such service. • The actions that the firm or network firm intends to take to address those threats that are not at an acceptable level. (R600.20) • The firm or network firm shall not provide a NAS to an audit client that is a PIE, unless TCWG agree: • To the provision of that NAS, and • With the firm’s or network firm’s conclusion that any threat to independence has been eliminated or safeguards are capable of being applied to reduce such threat to an acceptable level. (R600.21)

  23. Proposed Revisions to Section 600 General Provisions – Auditor Comm with TCWG (2) It is important for the firm and TCWG to decide on the process for obtaining agreement. Such agreement may take the form of pre-approval or concurrence. This may be provided either on an individual engagement basis, under a general policy, or via other means provided that the process to be used is approved by TCWG. Such policies or processes may be applied to individual entities or may be applied within a group. (600.21 A1) The requirements and application material in paragraphs R300.10 and 300.10 A1 are relevant to identifying the individual or individuals within the entity who would be appropriate to obtain agreement about providing the NAS service. (600.21 A2)

  24. Proposed Revisions to Section 600 General Provisions – Requirements and AM • Para. 600.22 A1 • Refer readers to Section 410 of the Code for provisions re: transparency about NAS fees, including ratios • Proposals being developed by Fees Task Force • Para. R600.23 and R400.32 in Agenda Item 6-B • Clarifications for situations in which an audit client later become a PIE and period which independence is required

  25. Proposed Revisions to Section 600 Subsections with Specific NAS Provisions • Introduction • Reminds firms to comply with general NAS provisions • Two subsections (tax and legal) include additional topic-specific general provisions • Description of the NAS • Based on extant material, but in some cases new material is developed (e.g., tax and legal) • Potential threat arising from the provision of particular NAS • Distinguishes provisions that are for: (a) all audit clients; (b) audit clients that are non-PIEs; and (c) audit clients that are PIEs • Strengthened provisions that are much clearer about the specific NAS that firms can and cannot provide to audit clients

  26. Proposed Revisions to Section 600 Specific NAS Provisions – Subsections 601 to 603 • Subsection 601 – Accounting and bookkeeping services • Enhanced clarity about activities that form part of audit process (601.2 A3) • Withdraw the exception that permitted firms/ network firms to provide certain accounting and bookkeeping to divisions and related entities of audit client that PIEs • Subsection 602 – Administrative services • Clarification that admin services can be manual, automated and iterative (602.3 A1) • Additional examples of administrative services in 602.3 A2 • Subsection 603 – Valuation services • Refinements to description of valuation services (603.2 A1) • Valuation services always prohibited for PIEs when self-review threat might be created irrespective of materiality (R603.5)

  27. Proposed Revisions to Section 600 Specific NAS Provisions – Subsection 604 (Tax Services) • General tax services • Delete reference to “tax planning” because it is covered in broader term “tax advisory” (604.2 A1 and elsewhere in Code) • General statement about likelihood of threats in 600.4 A1 (typo in Agenda Item 6-A) • Tax preparation • More specificity about circumstances that create threats (604.4 A1) • Tax calculations, tax advisory • New material to describe tax calculation (604.5 A1) • Tax calculations and tax advisory always prohibited for PIEs when self-review threat might be created irrespective of materiality (R604.8, R604.13)

  28. Proposed Revisions to Section 600 Specific NAS Provisions – Subsection 604 (continue…) • Tax calculations, tax advisory • New material to describe tax calculation (604.5 A1) • Tax calculations and tax advisory always prohibited for PIEs when self-review threat might be created irrespective of materiality (R604.8, R604.13) • Tax valuation • New material to describe tax valuation (604.14 A1) • For PIEs, tax valuation services that will have an indirect effect on f/s are prohibited unless certain conditions are met; no allowance for materiality (R604.17) • Assistance in resolution of tax disputes • New material to describe providing assistance in resolution of tax disputes (604.18 A1) • Providing assistance in resolution of tax disputes prohibited for PIEs when self-review threat might be created irrespective of materiality (R604.21 and R604.23)

  29. Proposed Revisions to Section 600 Specific NAS Provisions – Subsections 605 and 606 • Subsection 605 – Internal audit • Internal audit services are always prohibited for PIEs when self-review threat might be created irrespective of materiality/ significance (R605.6) • Examples of services that are prohibited for internal audit in 605.6 A1 is more restrictive with reference to materiality/ significance removed • Subsection 606 – Information technology (IT) systems • IT systems services are always prohibited for PIEs when self-review threat might be created irrespective of materiality/ significance (R606.6) • Examples of services that are prohibited for IT system services in 606.6 A1 is more restrictive with reference to materiality/ significance removed

  30. Proposed Revisions to Section 600 Specific NAS Provisions – Subsections 607 to 608 • Subsection 607 – Litigation support • For audit clients that are PIEs, new prohibition for litigation support services that might create self-review threats; no allowance for materiality (R607.5) • New AM to provide example of prohibited litigation support services (607.5 A1) • Subsection 608 – Legal • Based on extant material, new material is developed to help enhance readability (608.2 A2) • Legal services are that might create self-review threats always prohibited for PIEs irrespective of materiality/ significance (R608.4) • Audit clients that are PIEs prohibited from: • Acting as general counsel (R608.7) • Acting in an advocacy role (R608.8)

  31. Proposed Revisions to Section 600 Specific NAS Provisions – Subsections 609 and 610 • Subsection 609 – Recruiting services • No changes except for new headings • Subsection 610 – Corporate finance services • Retain existing prohibitions - corporate finance services that involve promoting, dealing in, or underwriting the audit client’s shares and services providing advice where the effectiveness of such advice depends on a particular accounting treatment or presentation the in f/s (R610.5 to R610.6) • Providing corporate finance services to audit clients that are PIEs always prohibited when self-review threat might be created irrespective of materiality (R610.7)

  32. Proposed Revisions to Section 600 Comments that Did Not Result in Changes • Establish a description for non-assurance services/ non-audit services • Provide additional guidance for application of proposals in a group audit context • New provisions for auditor communication with TCWG should be aligned to/ coordinated with the IAASB • ISA 260 (Revised) apply to listed entities vs Task Force proposals apply to PIEs

  33. Matters Relevant to Section 950 • Proposed conforming/consequential amendments to Section 950 for IESBA consideration in September 2019 • Will reflect the Board’s input on Section 600 and the feedback on Part 4B/ISAE 3000 ED (some comments may extend beyond ISAE 3000 alignment and might related to NAS) • Concept of a PIE applies only for audit and review engagements (i.e., only in Part 4A); Task Force to consider: • Whether Code should reflect the concept of public interest in S950 and, if so, how? • Whether there are laws and regulation that prohibit the provision of certain NAS to assurance clients that are PIEs? • Whether the prohibition re self-review threats should be extended to assurance engagements (other than audit and review) that have a public interest function?

  34. Collaboration/ Coordination with Others • Collaboration required with • Fees Task Force - re auditor communication with TCWG; transparency about NAS fees (which will involve collaboration with IAASB) • Part 4B/ISAE 3000 Task Force – re conforming/ consequential amendments to Section 950

  35. NAS Timeline

  36. Next Steps • Continued consultation and input welcome • Task Force meeting July 23-25, 2019 • Consideration by CAG – September 9, 2019 • Aim is to approve ED at (or shortly after) September Board mtg • Plan is to circulate revised drafts to Board in advance of September mtg • Advance comments on revisions in advance of the September meeting helpful

  37. The Ethics Board www.ethicsboard.org

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