Review of Part C Helene Agélii - Task Force Chair IESBA Meeting New York, USA March 13, 2017

Part C - Project Status and Timeline Phase 1: Restructured text approved at December 2016 IESBA meeting and included in Structure ED-2 Phase 2 - Applicability of Part C to PAPPs: Agreed Part C applicable to PAPPs and addition of “applicability paragraphs” Exposed in separate ED in January 2017. Deadline for responses is April 25, 2017 Let’s begin with a short summary of where the Part C project is right now. Phase 2 Applicability paragraphs were also approved for exposure at the December meeting.

Phase 2 – Sec. 250 - Inducements June 2016 IESBA: Proposed enhancements to Sec. 250 September 2016 IESBA: Strawman December 2016 IESBA: First read of proposed text March 2017 IESBA: Second read with view to exposure First Part C session with total focus on the inducement sections Since we’re aiming for exposure; a good thing that this coincides with a Board meeting where we have less papers than usual to prepare. Last week a CAG meeting – overall supportive – but I’ll highlight the discussions and comments that were raised in conjunction to the actual topics Also, we received a number of comments before this meeting, some of them are more of a fundamental nature. The TF met yesterday, we’ve gone through the comments, I encourage you to raise these issues once again. We’ve also received comments from the SMPc – highlight them as well. The issues paper The revised sessions paragraph by paragraph

Phase 2 – Sec. 250 – Inducements: Use of “Inducements” and Title of Sec. 250 IESBA: concern over term “inducements” – not all gifts and hospitality are inducements Task Force Response: Inducements: collective term for different means to influence Improperly and positively Clarification: “inducements” influence behavior, but not necessarily with inappropriate intent Title can be retained During the December meeting the TF suggested that “inducements” should be used as an overarching neutral term, which raised some concerns from the Board. TF decided to look at it once again. First of all; one could question the rationale for using the term at all, since we already concluded that inducement does have a negative connotation, it’s not that easy to translate and it is also pretty unlikely a “search term” in an electronic version. However, the TF concluded that at least for practical reasons it would be helpful to have a collective term, that’s why proposing we keep it. About the neutrality of the word – several dictionaries defines the word in a neutral way: even though it says that inducements are used to influence behavior – it does not say that they are used to influence behavior with an inappropriate intent. Added a definition in p.340.5 A1 to clarify the neutrality of the term: ” An inducement is an object, situation, or action that is used as a means to influence another individual’s behavior. “ Some inducements can be used to encourage positive beneficial behaviors, for example an employer offering incentive programs to its employees. In para. 250.6A1, we stress that “depending on the circumstances” the offering or accepting of inducements might affect the PA’s ability to comply with the FPs. Consistent with this approach, the TF is also of the view that the title “Gifts, Hospitality and other Inducements” can be retained. (Maybe mention that someone might think that why do we then need to change the extant title – gifts and hospitality are likely search terms and also in the titles of the inducements sections in Part 3 and in the Independence Standards.) CAG views: Agree that “inducement” has negative connotation, but this does not affect the standard in the way it is written

Phase 2 – Sec. 250 – Inducements: Use of “Inducements” and Title of Sec. 250 IESBA members are asked for views about the Task Force’s revisions to its December 2016 proposals aimed at clarifying: The intended meaning of the term “inducement” and how it should be considered in the context of the proposed Section 250

Phase 2 – Sec. 250 – Inducements: Bribery and Corruption IESBA: Clarify scope on illegal bribery and corruption Task Force Response: Revised para. 250.3 to reference requirement in para. R250.7 TF believes illegal inducements, such as bribery and corruption, that are adequately covered by laws and regulations should be addressed in the standard but not be the focus of the section. What we’ve done is include a requirement in the standard that would require PAs to understand and comply with all relevant laws and regulation on bribery and corruption. See par. R250.7 The rest of the standard is primarily principles-based and focused on ethical and not illegal dilemmas surrounding inducements. Added some wording in the introduction – a lot of pushback already…

Definition of Bribery and Corruption TF’s rationale for not including a definition Generic definition: Adverse precedent Might imply Section 250 aimed at bribery and corruption No single global definition to reference CAG views: 11 indicated that definition not needed. 5 in favor of including definition Earlier we’ve considered whether we should define B&C within the standard but agreed not to for a number of reasons. Nothing in these agenda papers about a definition. However raised in the CAG papers as a response to the September CAG meeting and the Board discussions afterwards. IOSCO concern: Don’t stop short by saying that IESBA considered other people’s definition and couldn’t find a suitable once and hence stopped. IESBA should be taking responsibility to devise a definition. There are several things in the IESBA Code that are different from what is expected from a regulatory perspective. PA must follow the laws in a jurisdiction, regardless of what is in the Code. Could the IESBA Code could be as aspirational as relates to BC? Set a standard to what the IESBA believes definition of BC should be and then leave up to jurisdictions to determine whether the IESBA definition conflicts with their laws and regulations. If conflict then PA goes with that jurisdictions laws. This is what the IESBA should be aspiring to. Also enforceability “Might be good” – raise the bar but also acknowledge cultural differences Those against a definition: Could create conflicts Legislative issue not ethical one Not necessary A definition would not improve the guidance in the section, we don’t think that on balance the advantages of having a definition would override the disadvantages. First of all: the Code is dealing with ethical dilemmas. We believe that G&H probably one of the few topics in the Code that actually concerns every single PA. When we strated revising this section it was with the intent to provide more robust and practical tools to use when facing these situations. In other words, we’ve tried to taken an approach that would involve the majority of likely situations, not primary be focusing on the much less common situations that might be illegal in some jurisdictions and not in others Code include several definitions, some of them might be defined differently in other jurisdictions or ethical Codes. Unlike a lot of other issues dealt with in the Code B&C are legal terms for criminal actions. It would be difficult to develop a specific definition that can be applied globally given the variety of jurisdictional definitions. Add confusion Bribery and corruption are widely used and generally understood terms. A generic definition within the Code could set an adverse precedent and may raise questions about whether other widely used terms should also be defined. Also, inclusion of a definition could incorrectly suggest that the scope of Section 250 is aimed at addressing bribery and corruption. Then not visit this section. There was also a suggestion to consider including a reference to a definition(s) outside the Code but the TF concluded that there was no such single globally accepted definition.

Phase 2 – Sec. 250 – Inducements: Bribery and Corruption IESBA members are asked for views about the Task Force’s revisions to its December 2016 proposals aimed at clarifying: The scope of the proposed Section 250 IESBA members are asked for views about including definitions of bribery and corruption in Section 250

Phase 2 – Sec. 250 – Inducements: RITP IESBA: Maintain RITP test “Anyone” test not established Task Force Response: “Anyone” test could forbid any inducements Difficult to enforce Revert back to RITP test CAG and SMPC views In determining whether the inducement is made or can be perceived with an intent to improperly influence the PA, the proposal incorporates the reasonable and informed third party test. Board considered whether a different test might be more appropriate, such as the “man/woman on the bus/street” for purposes of evaluating an inducement. The TF concluded that the RITP test was appropriate and noted that using the “man on the street” test could result in prohibiting all inducements. The TF was also concerned about including a test that would set a new precedent in the Code and if we were to consider such a test it would have to be established first and could have broader applicability to other standards in the Code. Overall support from the CAG SMPC: agree to revert back to RITP. RITP would also address cultural differences

Phase 2 – Sec. 250 – Inducements: RITP IESBA members are asked for views on the Task Force’s conclusion that the RITP test is relevant in Section 250

Phase 2 – Sec. 250 – Inducements: Intent IESBA: Replace with more objective test Task Force Response: Intent only be evaluated to certain extent Subjectivity limited: “the accountant has reason to believe” (R250.10/11) Objectivity: Factors in 250.10 A1 If PA believes there is actual or perceived intent, cannot offer or accept the inducement, regardless of trivial and inconsequential

Phase 2 – Sec. 250 – Inducements: Intent CAG views: Is there a need to separate between intent test and other threats? How “inducement” is used would affect the manner in which intent would be considered SMPC: Intent cannot be fully known. Degree of guess work Evaluation of intent linked to compliance with FPs

Phase 2 – Sec. 250 – Inducements: Intent IESBA members are asked it they: Agree with the Task Force’s conclusions to retain the intent test? Believe that intent should be considered as a threat and not as a separate test?

Phase 2 – Sec. 250 – Inducements: Factors IESBA: Duplication confusing Using “red flags” to assess threats Task Force Response: Reference added to 250.14 A1 Reverse approach considered Considering more examples of factors to consider

Phase 2 – Sec. 250 – Inducements: Factors IESBA members are asked for views on the revisions made of the factors for evaluating the level of any threats with a reference paragraph

Phase 2 – Sec. 250 – Inducements: Recusing Section 270: consider if recusal addresses threat Proposals aligned with Section 270 One of the proposed actions to address the threat is recusal. A PA cannot simply recuse and address the threat by “passing the bucket”. In addition to removing themselves, the PA has to be satisfied that the individual who’ll be making such decisions can do so in an objective manner.

Phase 2 – Sec. 250 – Inducements Immediate and Close Family Members PAs need to: Discuss threats with relevant family members Advise not to offer/accept inducement if threats exist Evaluate threats if offered/accepted, unless trivial and inconsequential Use same factors if PA offered/received inducement directly Additional factor: relationship between 3 parties Refrain from making any business decisions with counterparty The TF is proposing further guidance on inducements offered or accepted by immediate and close family members: The TF believes it is important for a PA to remain alert to the fact that inducements might not always be focused on the PA directly but can be used, for example, to influence the PA through their immediate or close family members. The TF recognized that we can’t have any requirements directed to the PA’s immediate/close family since the Code is not enforceable against them. However, consistent with the extant Code, if a PA is aware of a family member offering or accepting an inducement, the PA should be required to evaluate any threats to the PA’s compliance with the fundamental principles that might arise. This slide describes the requirements for the PA with regard to immediate or close family members. Read from slide. Relationship between each of the parties: PA – family member, PA – CP, and family member - CP

Phase 2 – Sec. 250 – Inducements: Recusing and Immediate and Close Family Members IESBA members are asked for views on the revisions to the proposed guidance outlined above

Phase 2 – Sec. 250 – Inducements: Conforming Amendments Sec. 340 – Prof. Accountants in Public Practice (PAPP) Counterparty is client Include offering of inducements Examples: Client / PAPP appropriate Not applicable to audits, reviews and other assurance engagements Sec. 420/906 - applicable to audits, reviews and other assurance engagements Broader than just dealing with gifts and hospitality Because of the guidance in the Independence Sections, the applicability of section 340 to inducements in audit reviews and other assurance situations is a bit unclear. It’s also unclear how Part 3 relates to the Independence Standards, especially when the same topic is being dealt with in both Parts. Currently, these section just relate to gifts and hospitality.

Phase 2 – Sec. 250 – Inducements: Conforming Amendments Divergence between Sec 340 and Sec. 420/906 Sec. 420/906 Can only accept if “trivial and inconsequential” Useful requirements and application material Section 340 No directions on offering. Change would be substantive. Stricter guidance compared to S340, not much room for addressing threats. TF proposes to keep this divergence. However, parts in S340 still applicable: Intent test Immediate and close family members - Offering of an inducement not considered a conforming change

Phase 2 – Sec. 250 – Inducements: Conforming Amendments IESBA members are asked for views on: the relationship between Section 340 and Sections 420/906 - the issues addressed in proposed Sections 420/906

Release ED: April 2017 with 90 day comment period The Way Forward Release ED: April 2017 with 90 day comment period Finalize Phase 2: With restructured Code Read from slide.