IESBA Meeting September 19-22, 2017 Safeguards Gary Hannaford, Task Force Chair IESBA Meeting September 19-22, 2017

Objectives Further consider certain comments on Safeguards ED-2 taking into account June 2017 Board input Consider “first-read” draft of proposed revisions to Safeguards ED-2

Project Timeline Dec 2016/ Jan 2017 Phase 1 agreement in principle Phase 2 Exposure Jun 2017 Full review of comments on Safeguards ED-2 Sept 2017 CAG meeting First read of TF revisions to proposed texts Dec 2017 Anticipated approval in conjunction with Structure Gary to remind Board that In June 2017, IESBA did a full review of all respondents’ comments with preliminary TF proposals Section A, paragraphs 6-7 of Agenda Item 3-A and the Safeguards section of the Draft IESBA meeting minutes at Agenda Item 1-C summarize the Board’s input on those preliminary proposals IESBA asked that the TF reach out to certain regulatory respondents (i.e., IFIAR, IOSCO, UKFRC) to further understand their perspectives; TF also determined it appropriate to speak to SMPC reps The issues discussed are summarized in paras 8-32. Focus of presentation will be on outstanding issues. [Invite IESBA members to comment]

Coordination with Others Task Forces Continued close coordination with Structure Task Force Introductory paragraphs Matters relating to use of “may versus might” Explicit reference to “firms versus network firms” Task Force works closely with Part C and LA Task Forces to revise safeguards-related proposed texts No safeguards conforming amendments relating to NOCLAR

Recap of Significant Comments on Safeguards ED-2 General support for project objectives and for proposals Questions about appropriateness and effectiveness of certain safeguards Confusion about “factors relevant to evaluating threats” vs. “safeguards” Requests for post-project actions to promote awareness and adoption Mixed views about broad prohibition of certain types of recruiting services – support from regulators and NSS, strong concerns from SMPs Out of scope matters (e.g., NAS permissibility, documentation, materiality) IESBA agreed to address out of scope matters (e.g,., NAS permissibility) discussion about Strategy after the break

Key Topics for September 2017 Board Discussion Significant Matters raised during teleconferences Effectiveness/ appropriateness of safeguards Factors vs Safeguards Promoting awareness and assessing project effectiveness Likelihood of threats Prohibition of recruiting services Other key revisions to proposed texts Some issues have already been

Overview of Common NAS Safeguards Recap of Proposals in Safeguards ED-2 Overview of Common NAS Safeguards Using professionals who are not audit team members to perform NAS Having a professional review audit work or result of NAS If NAS is performed by an audit team member, using professionals who are not audit team members, with appropriate expertise to review NAS In some cases, having a professional who was not involved in providing NAS review the accounting treatment or presentation in f/s

Feedback from Respondents NAS Safeguards Feedback from Respondents Questions about withdrawal of certain safeguards “… obtaining an advice from a third party in certain circumstances, e.g., a supervising or a controlling authority…” Different language used to describe similar safeguards Safeguards should be tailored so that they are appropriate to address specific threats Request for more guidance for PAs to help determine effectiveness of safeguards

Determining the Effectiveness of Safeguards Task Force Proposals Determining the Effectiveness of Safeguards PAs’ understanding of facts and circumstances and exercising professional judgment (PJ) is critical to applying the CF, including when addressing threats Safeguards vary depending on facts and circumstances Determining effectiveness of safeguards requires exercise of PJ Applying safeguards is only one way to address threats In some cases, might involve use of RITP to determine effectiveness Notes to Gary New description of Safeguards established with AIPT as “Actions, individually or in combination, that PA takes that effectively reduce threats to compliance with FPs to an acceptable level TF believes that proper application of the enhanced CF is sufficient guidance to assist PAs and firms determine the appropriateness and effectiveness of a Safeguard.

Overview of Revisions Made to Proposed Texts Task Force Proposals Overview of Revisions Made to Proposed Texts Emphasize that safeguards are applied to reduce threats to an acceptable level (R120.10(b)) New AM for addressing threats Explain relevance of “factors” in addressing threats (120.10 A3) Align and better link “Addressing Threats” section for PAPPs to CF (300.8 A1) Reposition examples of “actions that might eliminate threats” and “actions that might be safeguards” Revise proposed texts for all examples of safeguards involving “a review” “Having an appropriate professional review …” Gary to consider stating that the TF believes that the use of the word “appropriate” signals need for exercising professional judgment based on an understanding of the specific facts and circumstances to determine who should be the right person to conduct review in order for the safeguard to be effective in addressing the threat

Task Force Proposals Factors Vs Safeguards Clarifications made to proposed text to better link overarching requirements in S120 (i.e., Phase 1 work) to specific provisions in the rest of Code Further explanation that conditions, policies and procedures are essentially “factors relevant to evaluating level of threats” Explanation about relevance of conditions, policies and procedures in determining whether further actions are needed to address threats

CAG generally supportive of Task Force’s proposed revisions Feedback from CAG CAG generally supportive of Task Force’s proposed revisions Questions about whether PAs would understand Task Force’s thinking based on proposed texts alone Requests for guidance in Code to incorporate Task Force’s views (e.g., effectiveness of safeguards depend on specific facts and circumstances and require PAs’ exercise of professional judgment) Develop new AM to example what is meant by “appropriate”

Promoting Awareness and Post Implementation Review Relating to Safeguards Task Force agrees that other actions beyond refinements to Code are needed to help users understand changes to safeguards in Code and other changes to CF New “Guide to Code” to help navigation of restructured Code Basis for Conclusions to focus on highlighting key changes e.g., interaction b/w “factors that are relevant to evaluating threats” and safeguards Important role for NSS, firms and others to help raise awareness of, revisions and promote/ support their effective implementation

Matter for IESBA Consideration IESBA members are asked for views about proposed revisions to clarify appropriateness and effectiveness of safeguards Do IESBA members believe new guidance should be developed to describe what is meant by “appropriate”? If yes, what do IESBA member believe should be included in such guidance?

Likelihood of Threats Created Feedback on Safeguards ED-2 Likelihood of Threats Created Some respondents questioned use of word “might” in NAS section of Code to describe likelihood of threats created The use of “might” suggest that threat is remote when in reality threat is likely in most situations Some expressed preference for extant word “may”

Likelihood of Threats Created Task Force Proposal Likelihood of Threats Created Structure Task Force refined description of “might” Broader consideration of issues are required and that consideration of this matter is outside of Safeguards project scope Task Force believes issues could be considered as part of future NAS initiative

Matter for IESBA Consideration Do IESBA members agree with Task Force’s conclusion in response to comments about likelihood of threats created?

Prohibition of Certain Recruiting Services Extant Code prohibit certain recruiting services for PIEs Director or officer of the entity Senior management in a position to exert significant influence over preparation of client’s accounting records or f/s on which firm will opine Recruiting services prohibited Searching for or seeking out candidates for above positions Undertaking reference checks of prospective candidates for above positions Safeguards ED-2 extended prohibition to all entities

New general description of recruiting services Task Force Proposals Recruiting Services New general description of recruiting services New requirement with specific actions for firms to help avoid assuming management responsibilities Similar to IT and internal audit New subheading to emphasize that only certain types of recruiting services are prohibited Re-ordered paragraphs to enhance readability and flow

Prohibition of Certain Recruiting Services SMPC Concerns SMPC believes that prohibition on certain types of recruiting services may not be in the public interest Auditor is not making a management decision Threat is not of the magnitude that IESBA proposal implies Proposal does not give sufficient consideration of a typical SME environment In a number of jurisdictions, SMP often helps SME recruit right members to mgt team Gary to note that these views were also expressed during CAG, by SMPC observer

SMPC Concerns (continue) Prohibition of Certain Recruiting Services SMPC Concerns (continue) Align wording in 609.3 A1 to R609.7 “…searching for or seeking out candidates…” and “…undertaking reference checks…” vs. “…sourcing or identifying potential candidates…” and “…reviewing the professional qualifications or competence of applicants and determining their suitability for the role…” Clarify which recruiting services in 609.3 A1 are prohibited for all audit clients

Matter for IESBA Consideration IESBA members asked for views about proposed revisions relating to recruiting services of Code (i.e., subsection 609)

Other Key Revisions to Proposed Texts – S600 Explicit reference to category of threats in introductory section and in describing action that might address threats Advocacy threats added in 603.1 and 604.10 New factors for evaluating advocacy threats, as needed New subheading titled “Accounting and Bookkeeping Services that are Routine and Mechanical” The word “taxation” is change to “tax”

Revisions to Proposed Section 950 Several changes aimed at achieving consistency in light of revisions to S600 (950.4, 950.5 A1 and R950.8) Re-ordered certain paragraphs to enhance readability Revisions to provisions relating to prohibiting the assumption of mgt responsibilities to align them more closely with those in extant Code (R950.6 to 950.7 A2)

Revisions to Conforming Amendments Refinements to proposed texts to clarify guidance for applying CF across various sections in Code Add new AM for addressing threats in 200.7 A1 and 300.8 A1 to 300.8 A3 Delete duplicative req’ts in R270.5 and R600.9(c) Revisions aimed at achieving consistency

Matter for IESBA Consideration IESBA members asked for views about revisions to proposed texts (i.e., S600, S950 and conforming amendments to AIPT and to other Structure, Part C and LA proposals) S600 is in Agenda Item 3B S950 is in Agenda Item 3C Conforming Amendments to: - AIPT is in Agenda Item 3-D - S800 and Part 4B is in Agenda Item 2-B - Part C is in Agenda Item 8-A - LA is in Agenda Item 6-A

What Changes? Gary to explain that thinking careful about drafting suggestions that in some care suggest that need to repeat material that is covered in other areas of the Code takes TIME and in some cases require consultation with other Task Forces, in particular Structure TF

Conditions, Policies and Procedures Can enhance PAs acting ethically/ complying with FPs Help PA identify threats (120.6 A1) Impact “level of threat” (120.7 A2) General examples in 120.7 A2, specific examples = “factors …” Not designed to deal with specific threats, and not always be effective in eliminating threats or reducing them to AL Not safeguards, but certainly relevant to PA’s determination about whether threat is AL (BfC only, old 120.10 A3 deleted) In response to Mike’s comments – added a sentence to para 120.6 A1 to refer to examples of “conditions, policies and procedures” in 120.7 A1.

Determining Effectiveness of Safeguards Term “safeguards” used to refer to actions that might be effective in addressing threats Provisions in R120.5 relevant to addressing threats Proposed Revisions Add AM to emphasize importance of PJ in determining whether a safeguard is effective (see 120.10 A3) Agree that trying to explain link b/w factors and safeguards in Code might confuse users into thinking that factors are safeguards (deleted in 120.10 A3) Add description of “appropriate professional” (300.8 A3 and Glossary)

Determining Effectiveness of Safeguards (2) Within each paragraph with an example of safeguards Picked up “…in certain circumstances…” from 300.8 A1 to emphasize that PAs need to “think” about specific facts and circumstances in determining whether an action will address a threat Mindful drafting refinements to avoid repetition while continuing to link examples of safeguards to specific threats and circumstance creating threat Today’s turnaround show changes in S600 and S410 only Board will also see revisions with input from today’s discussion in Part C and LA turnaround materials tomorrow Gary to focus Board on S600 in Agenda Item 3-B and in S410 in Agenda Item 3-D Collective input from this meeting’s discussion will be used to update all examples of safeguards across the Code during October meeting and will be presented in December 2017 meeting materials

Other Revisions in Section 600 Advocacy threats Explicit mention in relation to assuming mgt responsibility Factor and safeguards Explicit reference to self-interest threats Internal Audit and IT (Subsections 605 and 606) Revisions to description of recruiting services Fine tuning text and changes to minimize repetition