Responding to Suspected Illegal Acts

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

2. Responding to Suspected Illegal Acts Summary of Responses

3. Responding to Suspected Illegal Acts Summary of Responses • Pivotal issues: • Requirement for auditor to disclose to an appropriate authority • Requirement to disclose to external auditor for PAIB and PA performing non-assurance services to non-audit clients • Right with expectation to disclose to an appropriate authority for PAIB and PA performing non-assurance services to non-audit clients • Resolution of secondary issues will depend on how pivotal issues are addressed • Regulators were supportive but raised concerns about the direction of the project • However: almost all respondents were supportive of the IESBA tackling the subject of illegal acts

4. Responding to Suspected Illegal Acts Pivotal Issues Raised by Respondents Requirement for auditor to disclose to an appropriate authority • Purview of national regulators and lawmakers • Potential conflicts with local regulations • Disproportionate to require without legal protections • Doesnotconsider authority’s abilitytointake and processsuchdisclosures • Will fundamentally impact “PA-Client” relationship • Primary responsibility for reporting lies with management and TCWG • Could create conflicts: • PAs that are also lawyers • Lawyers that practice within an accounting network • In services being provided by PAs under legal privilege • Reference made to OECD anti-bribery recommendations of 2009

5. Responding to Suspected Illegal Acts Pivotal Issues Raised by Respondents Requirement for auditor to disclose to an appropriate authority Alternative suggestions • Most respondents were supportive of providing guidance that would help PAs address SIAs • A number of respondents supported the concept that the auditor be permitted to disclose in certain circumstances • Some respondents suggested the IESBA and IFAC engage with governments and regulators through the G20 and IOSCO to explore global principles for reporting of illegal acts (similar to AML)

6. Responding to Suspected Illegal Acts Pivotal Issues Raised by Respondents • Requirement for other PAs to disclose to the external auditor • Receiving such disclosures is the role of management and TCWG and not the external auditor • Conflicts with legal and confidentiality requirements • Companies may be discouraged from engaging PAs to perform forensic accounting, due diligence and services performed under attorney-client privilege • Unclear external auditors’ responsibilities with respect to such disclosures • Auditor forced to deal with vexatious reports or reports unrelated to audit Alternative suggestions • A number of respondents considered such a disclosure as an option that was available to other PAs faced with an SIA rather than a requirement

7. Responding to Suspected Illegal Acts Pivotal Issues Raised by Respondents • Right with expectation for other PAs to disclose to an appropriate authority • Right + expectation = De facto requirement • Purview of national regulators and lawmakers • A professional code cannot provide for a “right” that overrides statutory and regulatory confidentiality Alternative suggestions • Many supported simply a “right” or being “permitted “ to disclose without the expectation to exercise

8. Responding to Suspected Illegal Acts Other Areas of Concern of Respondents • Public interest test and escalation threshold • Requirement to confirm or dispel the suspicion • Meaningof key termssuchas “appropriate authority” and “suspected illegal act” • Types of SIAs to be disclosed • Interaction with ISAs

9. Responding to Suspected Illegal Acts IOSCO – Key Comments • Supportforguidance in Code butshouldalsoestablishrequirements • Redeliberateto a properbalancebetweenwhat PA iscalledupon and allowedto do withrespecttoSIAs • Doesnotconsider authority’s abilitytointake and processsuchdisclosures • ConfirmsneedtoaddressPAsotherthanauditors • Reconsider: • Typesofillegalactstobecoveredby the proposals • Responsibilitiesof management and TCWG • Responsibilitiesof auditor wherethereisdisagreementwith client • EstablishillegalactswhichcallforstepsincrementaltoISAs • Interactionwith IAASB and its project of auditor communications • Offertodiscussexperienceswithindividual IOSCO members

10. Responding to Suspected Illegal Acts Exploring an Alternative • Part A • Avoidance of association with client or employer who engages in: • Illegal acts • Unethical behavior • Section 140 – Confidentiality • PA is permitted to override confidentiality in the Code in certain circumstances and if in public interest

11. Responding to Suspected Illegal Acts Exploring an Alternative • Sections 225 and 360 • Consider regulatory requirements regarding reporting of SIAs and comply with them • Align guidance with ISAs 240 and 250 with respect to SIAs • Beyond ISAs 240/250, assess additional guidance for PAs on who they should be talking to, who they should obtain advice from, assisting management and TCWG understand their responsibilities, etc • Determine whether management or TCWG have taken appropriate action • If management response is not appropriate, then consider actions to take • Determine whether disclosure to an appropriate authority would be justified in the public interest (cf first provision in the Code re distinguishing mark of the profession) • Consider factors to make determination on whether to disclose

12. Responding to Suspected Illegal Acts Discussion Requirement for auditor to disclose to an appropriate authority Requirement to disclose to external auditor for PAIB and PA performing non-assurance services to non-audit clients Right with expectation to disclose to an appropriate authority for PAIB and PA performing non-assurance services to non-audit clients Other areas of concern of respondents