Inducements Mike Ashley – IESBA Member and Task Force Chair IESBA Meeting New York, USA March 12-14, 2018

Overview of the Session Project timeline CAG report back Work through the revised text, noting the main issues raised by respondents to the ED and the TF’s proposals

Project Timeline Exposure Review Next Steps Proposed text approved for exposure by IESBA (Jun 2017) ED issued for 90-day exposure (Sept – Dec 2017) Review TF will discuss feedback on ED and proposed responses with CAG and IESBA in March 2018 Next Steps Expected IESBA approval of proposed text in March 2018 (or June 2018 if necessary)

CAG Report Back The TF review and proposals were presented at the March 2018 CAG meeting CAG Representatives: Were generally supportive of the TF proposals Did not raise any substantive issues Two minor amendments were made in response to comments made CAG representatives

ED Key Features Description of Inducements Compliance with Laws and Regulations Intent Test Application of Conceptual Framework Immediate or Close Family Member Conforming Changes for PAPP and Independence Sections

Description of Inducements ED Responses – Section 250 Description of Inducements Comment Respondents generally supportive of the definition Some were concerned it encapsulates too many concepts, whether defining it as neutral would create confusion A few suggested that it should not capture certain gifts and hospitality that are mere social courtesy Additional examples were also suggested

Description of Inducements ED Responses – Section 250 Description of Inducements Proposal TF proposes: Revising the definition to improve clarity Explicitly stating in the definition that influence of an inducement can be either positive or negative Adding new examples Adding the definition to the glossary of the Code

Matter for IESBA Consideration ED Responses – Section 250 Matter for IESBA Consideration IESBA members are asked if they agree with the TF’s proposed revisions to paragraphs 250.1-250.4A1

Inducements Prohibited by Laws and Regulations ED Responses – Section 250 Inducements Prohibited by Laws and Regulations Comment Respondents generally supportive of proposed text A few suggested the proposals did not add to what is already covered under the fundamental principle of professional behavior Also a suggestion to cover all illegal inducements and not just those related to bribery and corruption Proposal TF continues to believe that it is important to explicitly cover bribery and corruption TF proposes clarifying all illegal inducements are prohibited

Matter for IESBA Consideration ED Responses – Section 250 Matter for IESBA Consideration IESBA members are asked if they agree with the TF’s proposed revisions to paragraph R250.5

Intent Test Majority did not raise any concerns about the intent test ED Responses – Section 250 Intent Test Comment Majority did not raise any concerns about the intent test Some suggested that the intent test is not the appropriate test Actual intent cannot be known Focus should be on potential effect rather than intent Appears to add a new layer of the RITP test Whether intent is suitable in light of cultural differences The intent test may complicate matters and is difficult to operationalize

Intent Test TF proposes retaining the intent test: ED Responses – Section 250 Intent Test Proposal TF proposes retaining the intent test: Accepting or offering inducements with improper intent would breach FP of integrity Intent test takes into account cultural differences TF notes that comments about the RITP test were similar to those raised as part of the Safeguards project and have been dealt as part of that project

Inducements with Improper Intent ED Responses – Section 250 Inducements with Improper Intent Comment Express support from regulator and NSS respondents Some queried whether “trivial and inconsequential” inducements are: Likely to have any improper intent, actual or perceived Likely to have any influence over a person’s behavior A few questioned whether unnecessary burdens would be created if required to assess threats even when an inducement is “trivial and inconsequential” Some suggested more clarity is needed on what is intent to improperly influence behavior

Inducements with Improper Intent ED Responses – Section 250 Inducements with Improper Intent Proposal TF acknowledges that the likelihood of improper intent with inducements that are trivial and inconsequential should be low, but therefore the consideration should be straight-forward However, TF continues to believe these inducements should not be excluded a priori The TF proposes clarifying the accepting or offering of inducements with improper intent is a breach of the FP of integrity

Inducements with Improper Intent ED Responses – Section 250 Inducements with Improper Intent Proposal TF also proposes to: Explaining what an inducement with intent to improperly influence behavior is Explicitly stating the need to apply professional judgment Requiring PAs to consider other actions even if inducement not accepted

Trivial and Inconsequential, Relevant Factors ED Responses – Section 250 Trivial and Inconsequential, Relevant Factors Proposal TF does not believe that the term “trivial and inconsequential” (which is used elsewhere in the restructured and extant Code) needs to be defined TF proposes: Adding new factors to assist PAs to determine intent and evaluate the level of threats Explicitly stating that cultural practice is a factor for consideration

Matter for IESBA Consideration ED Responses – Section 250 Matter for IESBA Consideration IESBA members are asked if they agree with the TF’s proposed revisions to paragraphs 250.4A2, 250.6A1-250.11A1

Inducements with No Improper Intent ED Responses – Section 250 Inducements with No Improper Intent Comment A few pointed out this section does not contain any requirement and suggested the provisions could be clearer about what inducements are captured in this section Proposal TF proposes adding: A new requirement to apply the conceptual framework New application material to explain that the threats created by inducements that are trivial and inconsequential will not usually be at an unacceptable level

Inducements with No Improper Intent ED Responses – Section 250 Inducements with No Improper Intent Changes from CAG Discussions Revision from Posted Version (Mark-up): 250.12 A1 If such an inducement is trivial and inconsequential, it does not usually create anythe threats created will usually be that are not at an acceptable level.

Matter for IESBA Consideration ED Responses – Section 250 Matter for IESBA Consideration IESBA members are asked if they agree with the TF’s proposed revisions to paragraphs R250.12-250.12A3

Addressing Threats Comment Proposal TF proposes: ED Responses – s250 Addressing Threats Comment Some suggested explicitly including the option of not offering or accepting an inducement if a threat cannot be reduced to an acceptable level Some questioned the usefulness of the safeguards examples Proposal TF proposes: Including the option of declining or not offering an inducement as an example of action that may eliminate a threat Adding a new safeguard example on returning a gift after it has been initially accepted

Matter for IESBA Consideration ED Responses – Section 250 Matter for IESBA Consideration IESBA members are asked if they agree with the TF’s proposed revisions to paragraphs 250.12A4 – 250.12A5

Immediate or Close Family Members ED Responses – Section 250 Immediate or Close Family Members Comment Most respondents did not have any concerns. A few: Suggested the scope should be extended beyond immediate or close family members Queried how the “closeness of the relationship” can be evaluated Some queried the level of knowledge required of a PA

Immediate or Close Family Members ED Responses – Section 250 Immediate or Close Family Members Proposal TF did not agree that the scope needs to be broadened: This section requires active discouragement by a PA compared to just banning encouragement so should be more narrow in scope Closeness of a relationship assists in determining intent TF proposes: Explaining the term ‘remain alert” in the Basis for Conclusion Requiring PA to take action only when there is actual knowledge

Matter for IESBA Consideration ED Responses – Section 250 Matter for IESBA Consideration IESBA members are asked if they agree with the TF’s proposed revisions to paragraphs R250.13-250.16A3

ED Responses to Section 340 Strong support to align with s250 Most comments for s250 also relevant to s340 Added “potential clients” under the Immediate or Close Family Member section

Matter for IESBA Consideration ED Responses – Section 340 Matter for IESBA Consideration IESBA members are asked if they agree with the TF’s proposed revisions to Section 340

Conforming Amendments to Independence Provisions ED Responses – Sections 420 and 906 Conforming Amendments to Independence Provisions Comment Strong support for revisions to independence sections (ss420 and 906) Some suggested the scope should be expanded (e.g., include all inducements) A few questioned whether the language would lead to conclusion that non-compliance with a requirement in Section 340 would also constitute a breach of the independence provisions and whether this would always be appropriate

Conforming Amendments to Independence Provisions ED Responses – Sections 420 and 906 Conforming Amendments to Independence Provisions Proposal TF did not agree that the scope needs to be broadened TF proposes the text be revised to remind PAs: Gifts and hospitality with improper intent should not be accepted When offering or accepting an inducement, requirements in s340 apply Non-compliance with s340 may have implications for independence

Matter for IESBA Consideration ED Responses – Sections 420 and 906 Matter for IESBA Consideration IESBA members are asked if they agree with the TF’s proposed revisions to Sections 420 and 906

Conforming Amendments to Independence Provisions ED Responses – Sections 420 and 906 Conforming Amendments to Independence Provisions Whether IESBA should consider a future project to align independence sections with s340 Respondents’ comments were mixed TF recommends that the IESBA consider the viability of a future project

Matter for IESBA Consideration ED Responses – Sections 420 and 906 Matter for IESBA Consideration IESBA members are asked for views about the TF’s responses to the respondents’ comments, and whether they agree with the TF’s recommendation of a future project

Next Steps TF meeting in May 2018 to discuss IESBA’s feedback and to develop final proposed text TF to present final proposed text to Sections 250, 340, 420 and 906 to IESBA in June 2018 with a view to obtaining Board approval Subject to Board approval, the effective date of the inducements sections will align with that of the restructured Code