Page 1 Review of Part C of the Code Jim Gaa IESBA December 2012 New York, USA

Page 2 To inform the development of IESBA’s Strategy and Work Plan Preliminary Report to June IESBA Survey to identify priorities: August Presentation to PAIB Committee: September Presentation to CAG: September Background Review of Part C of the Code

Page 3 Jim Gaa (Chair) Larry Kean (SME -- USA) Alice McCleary (Board member) Ian Rushby (PAIB Committee -- UK) Lisa Snyder (Technical Adviser) Significant input from PAIB/SME perspective Working Group Membership Review of Part C of the Code

Page 4 3 highest priority issues 3 important issues to draw to attention of IESBA 4 lower priority issues to be aware of Recommendations Review of Part C of the Code

Page 5 Pressure by Superiors and Others to Engage in Unethical or Illegal Acts (Sections 310, 320, and 340). Preparing and Reporting of Information (Section 320) Faithful representation Professional and financial reporting standards Dissociation Earnings Management Facilitation payments and bribes (Section 350: Inducements) Highest Priority Issues Review of Part C of the Code

Page 6 Top issue according to working group surveys Sections 310, 320 and 340 need to be combined 340 is too narrowly described Many PAIBs not involved in reporting and pressures are not limited to reporting Pressure is from corporate culture, bullying and threats of job loss. Not only personal financial gain Motivations in Section 340 should be expanded No guidance requiring a senior PAIB not to inappropriately pressure subordinates. Pressure by Superiors Review of Part C of the Code

Page 7 Faithful representation: Only a brief mention of the PAIB’s responsibility. The structure of a revised principle-based section would be (a)a more positive and fuller statement of the responsibility of PAIBs to prepare and report information that is a faithful representation of economic events and state of affairs, (b) a discussion of the threats to providing such depictions (including the motives for altering or manipulating the information), and (c) presentation of safeguards. Need to build on, but not overlap with, the work of financial reporting standard setters. Preparing and Reporting of Information: Review of Part C of the Code

Page 8 Professional and financial reporting standards Clarify the intent of the requirement that information be prepared or presented fairly and honestly (in addition to be in accordance with professional standards); and If and, if so, how the “relevant professional standards” in are intended to differ from the “applicable financial reporting standards” in and if no difference is intended, to delete one or the other. Preparing and Reporting of Information Review of Part C of the Code

Page 9 Dissociation Unclear how a PAIB can dissociate from misleading reports, either internal or external, other than by resigning. Provide guidance on how a PAIB can practically dissociate from misleading reports. Preparing and Reporting of Information Review of Part C of the Code

Page 10 Earnings Management Earnings management ranges from ethically neutral, to unethical to fraudulent. Examples include reducing expenditure to increase profits, prudent accounting policies and financial engineering to misrepresent results. Explore whether it is possible to describe or define earnings management in a way that supports guidance in the Code Preparing and Reporting of Information Review of Part C of the Code

Page 11 Perennial Problem Section 350 is focussed on receiving offers. Increase the emphasis on making offers to align more closely with practical challenges faced by PAIBs. Consider whether additional guidance that recognizes the diversity of cultures would be helpful to PAIBs working across different cultures and jurisdictions. Facilitation payments and bribes Review of Part C of the Code

Page 12 Scope of Part C is sufficient: “Business Ethics” are not Part C specific. Specific Guidance Relevant to Professional Accountants in the Public Sector? Explicit consideration of relevant issues but no separate “Part D” Clarify applicability of Part C to Professional Accountants in Public Practice: Quick Fix? Three Other Important Issues Review of Part C of the Code

Page 13 Conflicting Business Partner vs. Controller roles Independence requirements for internal auditors Advocacy threats to fundamental principles Other matters raised by respondents Lower priority issues for the future Review of Part C of the Code

Page 14 Pressure by Superiors and Others to Engage in Unethical or Illegal Acts. Preparing and Reporting of Information Faithful representation Professional and financial reporting standards Dissociation Earnings Management Facilitation payments and bribes Scope/Public Sector/Public Practice Lower priority issues Discussion of Recommendations Review of Part C of the Code