AICPA/IESBA Convergence

1. AICPA/IESBA Convergence Lisa Snyder, CPA, CGMA Director, AICPA Professional Ethics IESBA Meeting London January 12-14, 2015

2. AICPA/IESBA Convergence U.S. Regulators/Standard-Setters • American Institute of CPAs (AICPA) • State boards of accountancy • 55 states/jurisdictions • Oversee CPA license • Public Company Accounting Oversight Board (PCAOB) • Securities and Exchange Commission (SEC) • Government Accountability Office (GAO) • Incorporated CF for Independence (2011) • Banking Regulators (FDIC) • Department of Labor (DOL)

3. AICPA/IESBA Convergence AICPA • AICPA • Voluntary membership organization • 400,000 members • Includes members in business, public practice, government, education • AICPA bylaws require members comply with AICPA Code of Professional Conduct • Failure to comply may result in disciplinary action

4. AICPA/IESBA Convergence AICPA PEEC • AICPA Professional Ethics Executive Committee (PEEC) • Establishes independence & ethics standards for CPA profession • AICPA Code of Professional Conduct • Non-listed entities only • Revisions to AICPA Code require full due process • Rule changes require vote by membership • Interpretations of rules require exposure to membership • All standard-setting discussions held in open meetings

5. AICPA/IESBA Convergence AICPA PEEC • PEEC Composition (20 members) • 12 members public practice (Big 4, Large, SMP) • 3 public members (non-CPAs/non-AICPA members) • 4 members from state boards of accountancy • 1 member in business • PEEC Task Forces • “Convergence task forces” to consider new/revised IESBA standards

6. AICPA/IESBA Convergence Convergence Efforts • Recognition of IESBA Code for Audits of Group F/S and Network Firms • Incorporation of Conceptual Frameworks • Network Firms • Ethical Conflict (Resolution) • Conflicts of Interest • Definition of Those Charged With Governance • Confidential Info Obtained From Employment Activities • Management Responsibilities • Breaches of Independence

7. AICPA/IESBA Convergence Convergence Challenges • Members must comply with AICPA Code and state board rules • AICPA and NASBA initiative to promote revised AICPA Code • 17 states adopt extant Code / 23 states have own rules / 15 states adopt portion • State rules changes often require legislative action • Convergence with U.S. standard-setters/regulators • SEC/PCAOB set rules for listed entities • AICPA has no authority to set standards for listed entities/PIEs • Code revisions require due process/membership “support” • Compliance with U.S. laws (e.g., federal anti-trust laws) • U.S. litigious environment

8. AICPA/IESBA Convergence Revised AICPA Code (Codification Project) • Revised/Codified AICPA Code effective Dec. 15, 2014 • Similar drafting conventions as IESBA used • Use “should/must” instead of “shall” • Incorporates Conceptual Framework (CF) approach • Significant move towards convergence with IESBA • Each topic identifies relevant threats and safeguards • Two new CFs for members in public practice and business • CFs only used when no guidance in Code exists or guidance refers member to CF to evaluate threats

9. AICPA/IESBA Convergence Revised AICPA Code (Codification Project) • Revised Code Structure • Preface • Principles • Defined terms, Application of Code • New/revised, pending and deleted standards for past year • Part 1: Members in public practice (includes independence) • Part 2: Members in business • Part 3: All Other Members

10. AICPA/IESBA Convergence AICPA Code vs. IESBA Code • AICPA Code “substantially equivalent” to IESBA Code • Would lead to the same result • Requires compliance with rules vs. principles • Most independence requirements apply to all audit/assurance clients • No separate section (Section 291) for “other assurance engagements” • Do not address listed entities/PIEs • Some AICPA rules more restrictive • Contains additional topics / more detailed guidance on certain topics • Excludes certain topics or topic only identified as threat in AICPA CF

11. AICPA/IESBA Convergence Recognition of IESBA Code • Audit of Group Financial Statements • A member of group engagement team will not be in violation of a particular rule if foreign component auditor (FCA) departed from AICPA Code provided FCA’s conduct, at a minimum, complies with IESBA Code • Members of U.S. group engagement team must comply with AICPA Code • Network Firms • Independence of firm will not be impaired if another network firm located outside U.S. departed from AICPA Code provided other firm’s conduct, at a minimum, complies with IESBA Code

12. AICPA/IESBA Convergence Rules vs. Principles • AICPA must enforce rules (based on principles) • Most authoritative guidance issued as interpretations of the rules

13. AICPA/IESBA Convergence Threats • AICPA/IESBA Codes cover same threats but some different terms

14. AICPA/IESBA Convergence AICPA vs. IESBA Code • Examples of AICPA more restrictive requirements • Prohibit loans to audit client even if immaterial • Independence required for client affiliates/related entities for non-PIEs • Documentation requirement for non-assurance services • Prohibit expert witness services and representing client in (tax) court • Examples of topics only identified as specific threat in AICPA CF • Fees – Relative Size • Non-authoritative guidance also issued; SEC “no action” letter for listed entities • Compensation & Evaluation Policies (SEC rules for listed entities) • Long association (SEC rules for listed entities)

15. AICPA/IESBA Convergence AICPA vs. IESBA Code • Examples of topics not addressed in AICPA Code • Professional appointments (client/engagement acceptance) • Addressed in AICPA QC standards • Second opinions • Addressed in AICPA Audit Standards • Examples of topics not addressed in IESBA Code • Outsourcing services to third parties • Subordination of judgment • Indemnification and limitation of liability agreements • Investment advisory/management services • Network Firms • Ethical Conflict (Resolution) • Conflicts of Interest • Definition of Those Charged With Governance • Confidential Info Obtained From Employment Activities • Management Responsibilities • Breaches of Independence (Exposure Draft)

16. AICPA/IESBA Convergence AICPA vs. IESBA Code • Other Differences - Breaches (Independence) • In order to address breach, firm must have established policies/procedures that provide reasonable assurance independence is obtained (i.e., must comply with QC standards) • If breach results in significant threat such that engagement team’s integrity, objectivity and professional skepticism are compromised, no actions can be taken to satisfactorily address breach • Rebuttable presumption that no actions could satisfactorily address the breach when lead engagement partner/individual in position to influence engagement: • Committed the breach; or • Knows of a breach and fails to ensure breach is promptly communicated/known by an appropriate individual within the firm

17. AICPA/IESBA Convergence SEC/PCAOB Rules More Restrictive • Non-audit Services: • Bookkeeping  • Financial information systems design/ implementation • Appraisal, actuarial and valuation services • Internal audit services; • Human resources; • Audit committee pre-approval • Partner rotation • Cooling-off requirement (for employment at audit client) • Tax Services for Persons in FROR (PCAOB)

18. AICPA/IESBA Convergence Questions