Inducements Mike Ashley – IESBA Member and Task Force Chair IESBA CAG Meeting New York, USA March 5-6, 2018

Overview of the Session Project timeline and report-back Highlight significant issues raised by respondents to ED: Sections 250, 340, 420 and 906 Discuss TF proposed responses Obtain CAG’s views in advance of Board meeting

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 (Mar and Jun 2018) Next Steps Expected IESBA approval of proposed text in June 2018

CAG Report Back TF/IESBA responses to key matters raised by CAG at the September 2017 meeting: Whether the text should specifically address cultural differences Whether the Code should require PAs to comply with internal policies and procedures

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

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

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

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

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

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

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

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

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 CAG Consideration CAG Representatives are asked for views about TF’s responses to respondents comments, and whether they agree with the proposed revisions to ED