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1 Drafting Conventions Ken Dakdduk Task Force Chair.

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1 1 Drafting Conventions Ken Dakdduk Task Force Chair

2 2 Overview Implications of IAASB Clarity projectImplications of IAASB Clarity project “Clearly insignificant”“Clearly insignificant” “Consider”“Consider” “Examples” or “illustrates”“Examples” or “illustrates” “Creates a threat” or “may create a threat”“Creates a threat” or “may create a threat” Threat definitionsThreat definitions

3 3 IAASB Clarity Conventions State objective to be achieved in relation to each ISAState objective to be achieved in relation to each ISA Requirements designed to achieve stated objective will be identified by use of the word “shall”Requirements designed to achieve stated objective will be identified by use of the word “shall” No use of present tenseNo use of present tense Each ISA to contain application materialEach ISA to contain application material –Provides further explanation and guidance supporting proper application of the standards

4 4 IAASB Clarity Conventions Code based on a conceptual frameworkCode based on a conceptual framework –Objective: comply with fundamental principles Separately stating objectives and converting text into application guidanceSeparately stating objectives and converting text into application guidance –Could lengthen the Code; might weaken it –Conclusion: Would not work well in the CodeWould not work well in the Code Whether other approaches would work requires a longer-term effortWhether other approaches would work requires a longer-term effort

5 5 Requirements Accountant should not do somethingAccountant should not do something –¶110.2 “accountant should not be associated with... information... that [is]... false or misleading” Accountant should consider somethingAccountant should consider something –¶140.8 “accountants should consider the following points” Accountant is required to do somethingAccountant is required to do something –¶290.3 “it is... required by this Code... that members... be independent”

6 6 Requirements Accountant is obliged to do somethingAccountant is obliged to do something –¶100.6 “accountant has an obligation to evaluate any threats” Accountant can do something if necessary steps are takenAccountant can do something if necessary steps are taken –¶ “the following safeguards are necessary”

7 7 Not a Requirement Statement of expectationStatement of expectation –¶300.5 “accountant... is expected... to.. encourage an ethics-based culture”

8 8 Principle Shall – to be used to denote:Shall – to be used to denote: –a requirement to comply with specific guidance (e.g., a fundamental principle) no room for judgment; cannot “opt out”no room for judgment; cannot “opt out” –a clear prohibition ¶110.2 “accountant should not be associated with”¶110.2 “accountant should not be associated with”

9 9 Effect of Approach Will result in “shall” being used more often throughout the entire CodeWill result in “shall” being used more often throughout the entire Code Respondents to December 2006 ED perceive Code is moving closer to “rules- based”Respondents to December 2006 ED perceive Code is moving closer to “rules- based” –Use of “shall” could exacerbate this perception –Rules can be based on principles –Current wording retained if requirement is clear

10 10 Clearly Insignificant The Code (¶100.2) requires:The Code (¶100.2) requires: –Identification of threats to compliance with the fundamental principles; –Evaluation of the significance of the threats; and –If threats are not clearly insignificant, application of safeguards to eliminate them or reduce them to an acceptable level.

11 11 Clearly Insignificant Clearly insignificant is lower than acceptable levelClearly insignificant is lower than acceptable level –Clearly insignificant means trivial and inconsequential –No definition of “acceptable level” in the Code Agree it is slightly higher than clearly insignificantAgree it is slightly higher than clearly insignificant When threat is already at an acceptable level (before safeguards applied), no safeguards requiredWhen threat is already at an acceptable level (before safeguards applied), no safeguards required Documentation for independence purposes required only when safeguards are needed to reduce threats to an acceptable levelDocumentation for independence purposes required only when safeguards are needed to reduce threats to an acceptable level

12 12 Task Force Proposal – Eliminate Use of “Clearly Insignificant” Professional accountants shall apply this conceptual framework to:Professional accountants shall apply this conceptual framework to: –identify threats to compliance with the fundamental principles, –evaluate the significance of the threats, and –apply safeguards, when necessary, to eliminate threats or reduce them to an acceptable level

13 13 Task Force Proposal – Define “Acceptable Level” A level at which a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that compliance with the fundamental principles is not compromised.

14 14 Clearly Insignificant – Other Interactions Delete “clearly insignificant” throughout CodeDelete “clearly insignificant” throughout Code Gifts and hospitality – refer to “trivial and inconsequential”Gifts and hospitality – refer to “trivial and inconsequential” Close business relationships – may use “insignificant”Close business relationships – may use “insignificant”

15 15 Task Force Proposal – Documentation Conforming Change (290.29) Documentation is not by itself a determinant of whether a firm is independentDocumentation is not by itself a determinant of whether a firm is independent International auditing standards require documentation of:International auditing standards require documentation of: –conclusions regarding compliance with independence requirements, and –any relevant discussions that support those conclusions When threats require the application of safeguards, that documentation shall also describeWhen threats require the application of safeguards, that documentation shall also describe –the nature of those threats –the safeguards applied to eliminate them or reduce them to an acceptable level

16 16 Consider v. evaluate v. determine “Consider” used frequently in the Code“Consider” used frequently in the Code –Could be interpreted as less robust than intended Task Force proposal:Task Force proposal: –Consider = thinking about several matters –Evaluate = assessing and weighing –Determine = concluding and making a decision

17 17 Consider v. evaluate v. determine ¶ When initiating... a... conflict resolution process, a professional accountant shall consider the following¶ When initiating... a... conflict resolution process, a professional accountant shall consider the following –“Consider” is used consistent with our drafting convention; no change ¶ – In considering evaluating the significance of any particular matters¶ – In considering evaluating the significance of any particular matters –Changed “considering” to “evaluating” ¶ Before a firm accepts an engagement... consideration should be given to it shall determine whether providing such a service would create a threat¶ Before a firm accepts an engagement... consideration should be given to it shall determine whether providing such a service would create a threat –Changed “consideration should be given to” to “determine”

18 18 Examples/Illustrate Use of “examples/illustrates” might convey that guidance is not mandatoryUse of “examples/illustrates” might convey that guidance is not mandatory –¶200.1 – This Part of the Code illustrates how the CF... is to be applied Changed “illustrates” to “demonstrates”Changed “illustrates” to “demonstrates”

19 19 Threats “Creates” or “may create” a threat“Creates” or “may create” a threat Code does not define “threats”; for example:Code does not define “threats”; for example: –¶200.4 Examples of circumstances that may create self-interest threats…include…undue dependence on total fees from a client –¶ Threats to independence may be created when a close family member…is a director…of the client…

20 20 Description of Five Categories of Threats Conceptual framework approach first set out in independence section of CodeConceptual framework approach first set out in independence section of Code Framework later expanded to cover entire CodeFramework later expanded to cover entire Code –Descriptions of threat categories (self review, self interest, advocacy, intimidation, familiarity) were made more generic

21 21 Task Force Proposal – Threats To clarify when a threat is created or may be created: – –Include general definition of a “threat” – –Ensure requirement to exercise professional judgment is retained Recommend defining individual threats – –Self review, self interest, advocacy, intimidation, and familiarity

22 22 Threats – Proposed Definition Threats are created by relationships or other circumstances that could compromise a professional accountant’s ability to comply with the fundamental principles – –i.e., the circumstance provides an incentive for the accountant to not comply with the fundamental principles Fundamental principles = integrity, objectivity, professional competence & due care, confidentiality, and professional behavior

23 23 Threats – Proposed Definition Threats are created by relationships or other circumstances that could compromise a professional accountant’s ability to comply with the fundamental principles “Could compromise” means a threat requires evaluation of the relationship or circumstance to determine whether it would compromise compliance –Explicit prohibition against the relationship or circumstance makes evaluation unnecessary

24 24 Threats – Proposed Definition Threats are created by relationships or other circumstances that could compromise a professional accountant’s ability to comply with the fundamental principles Many relationships and circumstances described in the Code would “create” a threat –Will require changing “may create a threat” to “creates a threat” in many parts of the Code

25 25 Threats – Proposed Definition Threats are created by relationships or other circumstances that could compromise a professional accountant’s ability to comply with the fundamental principles Points for discussion –Whether to focus on incentives not to comply; e.g., “relationships... that could provide an incentive for an accountant to not comply with the fundamental principles”

26 26 Threats – Proposed Definition Threats are created by relationships or other circumstances that could compromise a professional accountant’s ability to comply with the fundamental principles Points for discussion –Whether the definition should cover perceptions; e.g., “... that could compromise, or could be perceived to compromise...”

27 27 Threats – Proposed Definition Threats are created by relationships or other circumstances that could compromise a professional accountant’s ability to comply with the fundamental principles Points for discussion –Whether to describe the action required after the definition of “threats” e.g., “Unless the relationship... is prohibited by this Code, a threat requires evaluation of the relationship... to determine whether it would compromise compliance... and, if so, application of safeguards...”

28 28 Self-Interest Threat The threat that a professional accountant will act in his or her own best interest, or in the best interest of a member of his or her immediate or close family member because of a potential benefit from a financial interest in or other relationship with a client of the employerThe threat that a professional accountant will act in his or her own best interest, or in the best interest of a member of his or her immediate or close family member because of a potential benefit from a financial interest in or other relationship with a client of the employer Points for discussionPoints for discussion –Whether “best interest” should be “interest” –Whether “a member of his or her immediate or close family member” should be “his or her firm, employer, or other persons” –Whether “a potential benefit” is necessary

29 29 Circumstances That Create Self-Interest Threats ¶200.4 A member of the audit team having a direct financial interest in an audit clientA member of the audit team having a direct financial interest in an audit client Undue dependence on total fees from a clientUndue dependence on total fees from a client Having a significant business relationship with a clientHaving a significant business relationship with a client Concern about the possibility of losing a clientConcern about the possibility of losing a client Potential employment with a clientPotential employment with a client Contingent fees relating to an assurance engagementContingent fees relating to an assurance engagement The discovery of a significant error in the performance of a re-evaluation of a professional services engagementThe discovery of a significant error in the performance of a re-evaluation of a professional services engagement

30 30 Self-Review Threat The threat that a professional accountant will not appropriately re-evaluate the results of a previous service that he or she will rely upon in forming a judgment as part of providing a current service or because he or she, or others within his or her firm or organization, performed the previous serviceThe threat that a professional accountant will not appropriately re-evaluate the results of a previous service that he or she will rely upon in forming a judgment as part of providing a current service or because he or she, or others within his or her firm or organization, performed the previous service Points for discussionPoints for discussion –Whether “a current service” should be “another service”

31 31 Circumstances That Create Self-Review Threats ¶200.5 Reporting on the operation of financial systems after being involved with their design or implementationReporting on the operation of financial systems after being involved with their design or implementation Having prepared the original data used to generate records that are the subject matter of the engagement.Having prepared the original data used to generate records that are the subject matter of the engagement. A member of the assurance team being, or having recently been, a director or officer of that clientA member of the assurance team being, or having recently been, a director or officer of that client A member of the assurance team being, or having recently been, employed by the client in a position to exert significant influence over the subject matter of the engagementA member of the assurance team being, or having recently been, employed by the client in a position to exert significant influence over the subject matter of the engagement Performing a service for a client that directly affects the subject matter of the assurance engagement.Performing a service for a client that directly affects the subject matter of the assurance engagement.

32 32 Advocacy Threat The threat that a professional accountant who promotes a client’s or employer’s position may do so to the point that his or her objectivity is compromisedThe threat that a professional accountant who promotes a client’s or employer’s position may do so to the point that his or her objectivity is compromised

33 33 Circumstances That Create Advocacy Threats ¶200.6 Promoting shares in a listed entity when that entity is a financial statement audit clientPromoting shares in a listed entity when that entity is a financial statement audit client Acting as an advocate on behalf of an assurance client in litigation or disputes with third partiesActing as an advocate on behalf of an assurance client in litigation or disputes with third parties

34 34 Familiarity Threat The threat that a professional accountant will become too sympathetic to the interests of a client or employer or will not appropriately evaluate the worked performed by the client or employer because the workThe threat that a professional accountant will become too sympathetic to the interests of a client or employer or will not appropriately evaluate the worked performed by the client or employer because the work –(i) involves issues that are familiar to the professional accountant, or –(ii) was performed by an individual familiar to the professional accountant Points for discussionPoints for discussion –Whether (i) should read “involves matters that the professional accountant has been closely associated with” –Whether (ii) should read “was performed by an individual with whom the professional accountant has a close relationship”

35 35 Circumstances That Create Familiarity Threats ¶200.7 A member of the engagement team having a close or immediate family relationship with a director or officer of the clientA member of the engagement team having a close or immediate family relationship with a director or officer of the client A member of the engagement team having a close or immediate family relationship with an employee of the client who is in a position to exert direct and significant influence over the subject matter of the engagementA member of the engagement team having a close or immediate family relationship with an employee of the client who is in a position to exert direct and significant influence over the subject matter of the engagement A director or officer of the client or an employee in a position to exert direct and significant influence over the subject matter of the engagement was recently a partner of the firmA director or officer of the client or an employee in a position to exert direct and significant influence over the subject matter of the engagement was recently a partner of the firm Accepting gifts or preferential treatment from a client, unless the value is trivial or inconsequentialAccepting gifts or preferential treatment from a client, unless the value is trivial or inconsequential Long association of senior personnel with the assurance clientLong association of senior personnel with the assurance client

36 36 Intimidation Threat The threat that a professional accountant will subordinate his or her judgment to that of [an individual associated with] a client or employer because of theirThe threat that a professional accountant will subordinate his or her judgment to that of [an individual associated with] a client or employer because of their –(i) reputation, or –(ii) because of their attempts to exercise excessive influence over him or her Points for discussionPoints for discussion –Whether (i) should read “[the individual’s] reputation or expertise” –Whether (ii) should read “will be deterred from acting objectively because the [individual associated with the] client or employer is aggressive or dominant or attempts to exercise excessive influence over him or her”

37 37 Circumstances That Create Intimidation Threats ¶200.8 Being threatened with dismissal or replacement in relation to a client engagementBeing threatened with dismissal or replacement in relation to a client engagement Being threatened with litigation by the clientBeing threatened with litigation by the client Being pressured to reduce inappropriately the extent of work performed in order to reduce feesBeing pressured to reduce inappropriately the extent of work performed in order to reduce fees The client hires as part of its management team an expert on determining fair values of assets in the client’s industryThe client hires as part of its management team an expert on determining fair values of assets in the client’s industry

38 38 Discussion


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