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Responding to Suspected Illegal Acts

Responding to Suspected Illegal Acts. Robert Franchini New York, September 2013. Responding to Suspected Illegal Acts. Task Force Proposals. Alignment with ISA terminology of “non-compliance”:

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Responding to Suspected Illegal Acts

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  1. Responding to Suspected Illegal Acts Robert Franchini New York, September 2013

  2. Responding to Suspected Illegal Acts Task Force Proposals • Alignment with ISA terminology of “non-compliance”: • Definition currently proposed for SIA is identical to the ISA definition of “non-compliance with laws and regulations” • Use of “identified or suspected” is more precise • Use of “non-compliance” is less emotive and recognizes that all forms of non-compliance should be brought to the attention of management • Reduces differences with ISA 250 and will facilitate discussions with IAASB

  3. Responding to Suspected Illegal Acts Task Force Proposals • PA “permitted” to override duty of confidentiality in certain circumstances (Section 140): • For the reasons set out in existing Code, and • When disclosing identified or suspected non-compliance in the circumstances described in Sections 225 and 360 • Section 150 amended to clarify that not responding to identified or suspected non-compliance would be inappropriate conduct

  4. Responding to Suspected Illegal Acts Task Force Proposals on Section 225 (1/5) • Task Force proposals: • One section dealing with all PAs in public practice, although some distinction is made where necessary • No differentiation between clients that are individuals and that are entities • Need to comply with regulatory process for addressing illegal acts, if any • Primary responsibility of addressing the matterlies with the client, its management and TCWG • Provide more guidance to assist the PA deal with difficult situation

  5. Responding to Suspected Illegal Acts Task Force Proposals on Section 225 (2/5) • Task Force proposes the following around the process of understanding the matter and communicating with the client: • Less prescription / more guidance and explanation • Explain why the PA should discuss with the client • Explain need for a PA performing a NAS to an audit client to discuss with audit engagement partner • Assessing whether the client understands its responsibilities • Obtain legal advice if it is suspected that management and TCWG are involved or information is not forthcoming

  6. Responding to Suspected Illegal Acts Task Force Proposals on Section 225 (3/5) • Task Force proposes the following around the process of evaluating the response of the client: • Requirement to assess the response of the client • Possible courses of action if response is not appropriate • If client has not appropriately addressed the matter or the PA is unable to so the PA determines whether to disclose the matter to an appropriate authority

  7. Responding to Suspected Illegal Acts Task Force Proposals on Section 225 (4/5) • Task Force has developed the following guidance to assist the PA in determining whether to disclose: • Overriding confidentiality is only appropriate when the PA judges disclosure to be in the public interest • Factors to consider in determining whether to disclose: • Whether it is in the public interest (225.19) • Degree to which information is substantiated, identifying an appropriate authority, and assessing whether there is protection (225.20)

  8. Responding to Suspected Illegal Acts Task Force Proposals on Section 225 (5/5) • For audit clients that are PIEs there is a presumption that the PA will disclose when: • The matter is material to the financial statements and the statements do not reflect the matter • There is an appropriate authority to receive the disclosure • The client has not self-reported • There is protection from civil and criminal liability • Requirement to document when disclosure has not been made

  9. Responding to Suspected Illegal Acts Task Force Proposals on Section 360 • For PAIBs the proposed section is aligned to the new proposals for Section 225 • No “presumption” to disclose for PIEs

  10. Responding to Suspected Illegal Acts Discussion CAG members are asked whether they support the Task Force’s proposed changes to Section 225 and 360 in particular: • Alignment with terminology of ISAs • “Permission” to override confidentiality rather than “requirement” or “right with expectation to exercise” • Ethical obligation to respond to non-compliance • Alternative approach to addressing the matter • Presumption of disclosure for auditors of PIEs? Does this create a de facto requirement • Proposed changes to provisions for PAIBs

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