Part C – Section 320 Presenting Information

1. Part C – Section 320Presenting Information Jim Gaa, Chair, Part C Task Force IESBA Meeting Toronto, Canada April 7, 2014

2. Background • March 2013: Project Proposal approved by IESBA • September 2013: IESBA and CAG consider Pressure • December 2013: IESBA considered Section 320 • March 2014: CAG considered Section 320 • April 2014: IESBA considers Section 370

3. Fundamental Principle 110.1 Integrity • Paragraph 110.1 of the Code requires all PAs to be straightforward and honest in all professional and business relationships. Integrity also implies fair dealing and truthfulness.

4. Fundamental Principle 110.2 Integrity • Paragraph 110.2 requires a PA not to knowingly be associated with reports, returns, communications or other information where the professional accountant believes that the information: • Contains a materially false or misleading statement; • Contains statements or information furnished recklessly; or • Omits or obscures information required to be included where such omission or obscurity would be misleading. • It also requires that when a PA becomes aware that the PA has been associated with such information, the PA take steps to be disassociated from that information.

5. Fundamental Principle 120.1 Objectivity • Paragraph 120.1 requires all PAs not to compromise their professional or business judgment because of bias, conflict of interest or the undue influence of others.

6. Fundamental Principle 120.2 Objectivity • Paragraph 120.2 requires a PA not to perform a professional activity or service if a circumstance or relationship biases or unduly influences the accountant’s professional judgment with respect to that activity or service.

7. Fundamental Principle 150.1 Professional Behavior • Paragraph 150.1 requires that all PAs comply with relevant laws and regulations and avoid any action that the PA knows or should know may discredit the profession. It utilizes the third party test as the criterion for judging whether an action would be likely to adversely affect the reputation of the profession.

8. Proposed Revisions to Section 320 • Addresses wide range of internal and external, financial and non-financial information • A PAIB shall record, maintain, prepare or present information in a manner that is complete, fair and honest. In doing so the professional accountant shall have regard to the purpose for which the information is to be used, the context in which it is provided and the audience to whom it is addressed.

9. Proposed Revisions to Section 320 • Information shall be prepared and presented: • Without personalbias • In accordance with reporting framework where required • In other situations the PAIB shall disclose necessary relevant information to enable users to form their own judgments • More detailed steps provided to help a PAIB dissociate from misleading information

10. Misleading Information (320.6) • Consistent with the fundamental principle of integrity the professional accountant in business shall not prepare or present information in a manner that is intended to: • Mislead; or • Inappropriately influence decisions, or contractual or regulatory outcomes, that depend on the reported information

11. Misleading Information • Five ways in which a PAIB can be associated with misleading information: A) Inadvertent errors (outside scope of 320) B) True and fair override (outside scope of 320) C) Fraud (prohibited by 150.1) D) Intentional abuse of discretion E) Structuring transactions to mislead

12. Evidence of Misleading Information in Practice • Intentional abuse of discretion • Academic survey indicates such abuse is common • Big bath accounting is an example • Recognition of abuse in auditing standards (ISA 540) • Transaction-based misrepresentation • Misrepresentation by making real decisions • Enron’s special purpose vehicles is an example • 30 years of academic research on these topics

13. Should the Code Explicitly Address These Cases? • Task Force believes intentional abuse of discretion and transaction-based misrepresentation exist. • Fundamental principle (110 - Integrity) implicitly addresses both cases. • But Section 320 is silent on these cases. • Task Force believes the Code should provide robust guidance to PAIBs facing these cases.

14. CAG representatives views included: • Code should incorporate enhanced guidance in relation to circumstances (d) and (e). • Issue exists but it is not an ethics issue. • Misleading information is fraudulent in nature. • Question whether it is possible to mislead without violating accounting frameworks. • Look for motivations beyond those in 320.11.

15. Matters for Board Consideration • Should the Code incorporate enhanced guidance to help PAIBs better understand their responsibilities relating to the fundamental principles when facing the circumstances in cases (d) and (e) above? • What practical guidance in Part C could be given to PAIBs to help them better understand paragraph 110.1 of the Code? • What practical challenges might Representatives foresee in attempting to address cases (d) and (e) in the Code? • Any other comments on proposed changes to Section 320?