Responding to Suspected Illegal Acts

Responding to Suspected Illegal Acts Robert Franchini New York, June 2013

Responding to Suspected Illegal Acts Recent Activity • Task force reconvened to develop alternative approach • April 2013 CAG Meeting • Agreed that alternative approach worth exploring • April 2013 Presentation to IFIAR • May 2013 NSS Meeting • Most viewed it as an improvement from ED • Some specific wording may need adjusting to avoid setting wrong tone (re “confidentiality” and “exceptional circumstances”) • June 2013 Discussion with IAASB

Responding to Suspected Illegal Acts Recent Activity • June 2013 IOSCO C1 Sub-Comm on Auditing • Supportive of a requirement for auditors especially for PIEs • Tone of factors would seem to lead the professional accountant not to disclose rather than disclose • Could lead the PA just to resign • “Exceptional circumstances” would appear to be inappropriate wording • Ultimately, would the straw-man lead to greater disclosure? • Requirements for auditors should be separated from those for other PAs • If IESBA believes that a change in laws and regulations re legal protections is required, it should say so

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 • Where the PA judges that disclosure to an appropriate authority would be in the public interest as set out in sections 225 and 360 IESBA members are asked whether they support the Task Force’s proposed changes to Section 140

Responding to Suspected Illegal Acts Task Force Proposals • Task Force proposes that the need for a PA to address a suspected illegal act should be anchored to the fundamental principle of professional behavior IESBA members are asked whether they agree with the proposed change to Section 150 “Professional Behavior”

Responding to Suspected Illegal Acts Task Force Proposals on Section 225 (1/8) • Task Force proposals: • One section dealing with all PAs in public practice • 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 SIAs lies with the client, its management and TCWG

Responding to Suspected Illegal Acts Task Force Proposals on Section 225 (2/8) • Task Force proposes the following around the process of communicating with the client: • Less prescription / more guidance and explanation • Explain why the PA should discuss with the client • Need for a PA performing a NAS to an audit client to discuss with audit engagement partner • Assist the client in understanding its responsibilities • What to do if it is suspected that management and TCWG are involved or information is not forthcoming

Responding to Suspected Illegal Acts Task Force Proposals on Section 225 (3/8) • Task Force proposes the following around the process of evaluating the response of the client: • How to evaluate the response of the client • Possible courses of action if response is not appropriate • In “exceptional circumstances”: • Disclose the matter to an appropriate authority • Withdrawing from the engagement and professional relationship (although not a substitute for complying with this section)

Responding to Suspected Illegal Acts Task Force Proposals on Section 225 (4/8) • 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 or not to disclose • Factors to consider in identifying an appropriate authority

Responding to Suspected Illegal Acts Task Force Proposals on Section 225 (5/8) IESBA members are asked whether they support the Task Force’s proposed changes to Section 225 and in particular: • One section for PAs in public practice? • Clients that are individuals are adequately addressed? • Are the proposals re disclosure sufficiently robust or can they be strengthened without becoming a de facto requirement? • Nature and extent of enhanced guidance is appropriate? • Are there other matters to be considered?

Responding to Suspected Illegal Acts Task Force Proposals on Section 225 (6/8) • With respect to threshold for action the Task Force proposes: • Relatively low threshold (suspicion) for investigation • “Reason to believe” threshold for raising the matter with management • No further threshold for disclosure other than “public interest” IESBA members are asked whether they support the Task Force’s proposals re thresholds

Responding to Suspected Illegal Acts Task Force Proposals on Section 225 (7/8) • With respect to types of illegal acts to be disclosed the Task Force proposes that there be no limitation IESBA members are asked whether they support the Task Force’s proposal in respect of type of illegal act to be disclosed

Responding to Suspected Illegal Acts Task Force Proposals on Section 225 (8/8) • The Task Force proposes that documentation be only encouraged rather than required IESBA members are asked whether they support the Task Force’s proposal

Responding to Suspected Illegal Acts Task Force Proposals on Section 360 • The Task Force has restructured section 360 along the lines proposed for section 225. • Recognition of the importance of internal policies and mechanisms in the employing organization and how they should be used by the PA IESBA members are asked whether they support the Task Force’s proposal

Responding to Suspected Illegal Acts