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Safeguards

This document recaps the safeguards approach discussed at the IESBA meeting and outlines revisions made to proposals, including the reasonable and informed third party test, evaluating threats, and applying safeguards. It clarifies the concept of an acceptable level and emphasizes the importance of identifying, evaluating, and addressing threats to compliance with fundamental principles. The text also covers the role of safeguards, re-evaluating threats, and applying the Code of Ethics for Professional Accountants in Public Practice.

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Safeguards

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  1. Safeguards Gary Hannaford, Task Force Chair IESBA Meeting New York, USA November/ December, 2015

  2. Safeguards – Recap of Approach and Timing

  3. Summary of Revisions Made to Proposals • Overarching requirement to comply with the CF retained • Supported with explicit requirements for the PA to identify, evaluate and address threats to compliance to the fundamental principles • Refinements to the description of “reasonable and informed third party” • Improved, affirmative explanation of the term “acceptable level” • Clarification of what constitutes a safeguard • New requirement relating to the PA’s re-evaluation of threats

  4. Application of the CF Reasonable and Informed Third Party Test (R120.4) New Information Re-evaluation of Threats (R120.9)

  5. Reasonable and Informed Third Party (RITP) • Concept involves a hypothetical person • Person possess skills, knowledge and experience to objectively evaluate the PA’s judgments and conclusions • Ultimately, RITP evaluation is to determine whether the PA has complied with the fundamental principles (i.e., that the PA has eliminated threats or reduced them to an acceptable level) • RITP evaluation is based on information available to PA at the time of original evaluation of threats

  6. Revised Definition of “Acceptable Level” • CAG and IESBA members expressed concerns with previously presented S100.15 • Revisions are responsive to suggestions made and are intended to clarify what is meant by “acceptable level” in an affirmative manner • An acceptable level is a level at which a reasonable and informed third party would likely conclude that the PA has complied with the fundamental principles • Questions have been raised about whether revised definition is appropriate as application material

  7. Identifying and Evaluating Threats • Understand facts and circumstances, including professional activities, interests and relationships, that may might compromise compliance with the fundamental principles • Determine whether there are qualitative or quantitative factors (e.g., combined effect of multiple threats, if applicable) • Identify the conditions, policies and procedures that might impact the level of the threat • Are they functioning effectively?

  8. Addressing Threats • A PA addresses threats by either: • Applying safeguards; or • Declining or discontinuing the specific professional activity or service involved (i.e., when safeguards are not available, or cannot be applied)

  9. Revision to Proposed Description of Safeguards • Safeguards are actions, individually or in combination, that the PA takes to eliminate threats to compliance with the fundamental principles or reduce them to an acceptable level • Actions are safeguards when they are effective in eliminating threats or reducing them to an acceptable level, such that the PA complies with the fundamental principles

  10. Features of Safeguards • Must be effective to address specific threats • May be an individual or a combination of specific actions • Effective when they eliminate or reduce the level of the threat such that the fundamental principles are complied with • PA needs to exercise professional judgement to determine whether an action is a safeguard

  11. Re-evaluating Threats • Does not require the PA to do a radical re-think • Re-evaluation is necessary only if the PA becomes aware of new information that might impact whether a threat has been eliminated or reduced to an acceptable level • Facts and circumstances might change over time • New information about threats might become available • Appropriateness of safeguards might change • PA should remain alert throughout the professional activity or service in order to identify such changes

  12. At Any Point in Applying the CF…….

  13. Application of CF for PA in Public Practice • Stronger linkage and improved alignment between S120 that applies to all PAs and S300 that applies to PAs in public practice • New requirement in S300 that emphasizes the PA’s responsibility to comply with each of the fundamental principles and apply the CF set out in S120 • New introductory material to clarify how the CF set out in S120 applies to PAs in public practice • Application material builds on, but does not repeat the material in S120

  14. Matters for Further Consideration – Phase II • Revision of safeguards that pertain to NAS in extant S290 of the Code • Consequential amendments pertaining to safeguards • Documentation requirements related to safeguards, if deemed necessary, and whether there is a need for further alignment to ISA 220

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