Page 1 | Confidential and Proprietary Information Responding to Suspected Illegal Acts Robert Franchini New York, March 2013

Page 2 | Confidential and Proprietary Information Summary of Responses Responding to Suspected Illegal Acts Overall Support? Category of RespondentYesPart Support/ Concerns NoTotal IFAC Member Bodies Firms12 Regulators and Public Authorities1315 National Standard Setters33 Other Professional organizations41418 Individuals & Others112 Total

Page 3 | Confidential and Proprietary Information Pivotal issues: –Requirement for auditor to disclose to an appropriate authority –Requirement to disclose to external auditor for PAIB and PA performing non-assurance services to non-audit clients –Right with expectation to disclose to an appropriate authority for PAIB and PA performing non-assurance services to non-audit clients Resolution of secondary issues will depend on how pivotal issues are addressed Regulators were supportive but raised concerns about the direction of the project However: almost all respondents were supportive of the IESBA tackling the subject of illegal acts Summary of Responses Responding to Suspected Illegal Acts

Page 4 | Confidential and Proprietary Information Requirement for auditor to disclose to an appropriate authority –Purview of national regulators and lawmakers –Potential conflicts with local regulations –Disproportionate to require without legal protections –Does not consider authority’s ability to intake and process such disclosures –Will fundamentally impact “PA-Client” relationship –Primary responsibility for reporting lies with management and TCWG –Could create conflicts: PAs that are also lawyers Lawyers that practice within an accounting network In services being provided by PAs under legal privilege –Reference made to OECD anti-bribery recommendations of 2009 Pivotal Issues Raised by Respondents Responding to Suspected Illegal Acts

Page 5 | Confidential and Proprietary Information Requirement for auditor to disclose to an appropriate authority Alternative suggestions –Most respondents were supportive of providing guidance that would help PAs address SIAs –A number of respondents supported the concept that the auditor be permitted to disclose in certain circumstances –Some respondents suggested the IESBA and IFAC engage with governments and regulators through the G20 and IOSCO to explore global principles for reporting of illegal acts (similar to AML) Pivotal Issues Raised by Respondents Responding to Suspected Illegal Acts

Page 6 | Confidential and Proprietary Information Requirement for other PAs to disclose to the external auditor –Receiving such disclosures is the role of management and TCWG and not the external auditor –Conflicts with legal and confidentiality requirements –Companies may be discouraged from engaging PAs to perform forensic accounting, due diligence and services performed under attorney-client privilege –Unclear external auditors’ responsibilities with respect to such disclosures –Auditor forced to deal with vexatious reports or reports unrelated to audit Alternative suggestions –A number of respondents considered such a disclosure as an option that was available to other PAs faced with an SIA rather than a requirement Pivotal Issues Raised by Respondents Responding to Suspected Illegal Acts

Page 7 | Confidential and Proprietary Information Right with expectation for other PAs to disclose to an appropriate authority –Right + expectation = De facto requirement –Purview of national regulators and lawmakers –A professional code cannot provide for a “right” that overrides statutory and regulatory confidentiality Alternative suggestions –Many supported simply a “right” or being “permitted “ to disclose without the expectation to exercise Pivotal Issues Raised by Respondents Responding to Suspected Illegal Acts

Page 8 | Confidential and Proprietary Information Support for better guidance in Code Redeliberate to a proper balance between what PA is called upon and allowed to do with respect to SIAs Does not consider authority’s ability to intake and process such disclosures Confirms need to address PAs other than auditors Reconsider: –Types of illegal acts to be covered by the proposals –Responsibilities of management and TCWG –Responsibilities of auditor where there is disagreement with client –Establish illegal acts which call for steps incremental to ISAs Interaction with IAASB and its project of auditor communications Offer to discuss experiences with individual IOSCO members IOSCO – Key Comments Responding to Suspected Illegal Acts

Page 9 | Confidential and Proprietary Information To continue or not to continue? Discussion Responding to Suspected Illegal Acts

Page 10 | Confidential and Proprietary Information Requirement for auditor to disclose to an appropriate authority Requirement to disclose to external auditor for PAIB and PA performing non-assurance services to non-audit clients Right with expectation to disclose to an appropriate authority for PAIB and PA performing non-assurance services to non-audit clients Discussion Responding to Suspected Illegal Acts

Page 11 | Confidential and Proprietary Information Requirement to confirm or dispel the suspicion –Many were supportive but recognized practical challenges –Many were opposed due to perceived constraints: Is suspicion the right threshold? Meaning of “reasonable steps”, “suspicion” and “suspected illegal act” Lack of expertise of PA to determine what is illegal Non-auditors may not have means or authority to investigate Requirements and responsibilities should be clear for enforceablity Conflict with AML requirements re “tipping-off” In essence it is overly prescriptive Alternative suggestions –ISA 250 already establishes a process for auditor –PA should be permitted to use more judgment –Alternative to “suspected” illegal act, such as “likely” Secondary Issues Responding to Suspected Illegal Acts

Page 12 | Confidential and Proprietary Information Public interest test and escalation threshold –Many were supportive of the concept of this threshold but some expressed concern about the lack of definition of the term –Many respondents were opposed to this threshold due to the lack of objectivity and scope for inconsistent application –IOSCO suggested that it would be in the public interest that any violation should be subject to appropriate handling –Many respondents were concerned that the process seemed to call for escalation of insignificant matters (particularly onerous for SMPs) Alternative suggestions –Threshold based on materiality –Develop guidance around the meaning of public interest Secondary Issues Responding to Suspected Illegal Acts

Page 13 | Confidential and Proprietary Information Types of SIAs to be disclosed –ED: Matters to be disclosed are those pertaining to financial reporting or those in the expertise of the accountant (or subject matter of NAS) –Opinions were split with majority of respondents expressing opposition and a significant minority were supportive –Those expressing opposition did so because they believed that the subject of illegal acts reporting was the purview of national regulators –IOSCO suggested, as did some other respondents, that it would be in the public interest that any violation should be subject to appropriate handling Interaction with ISAs –Proposals appear to go beyond existing ISAs 240 and 250 –Comments from regulators: The proposals should be consistent with the ISAs IESBA should coordinate its project with IAASB Secondary Issues Responding to Suspected Illegal Acts

Page 14 | Confidential and Proprietary Information Meaning of appropriate authority Difficulty on establishing who to report to Not all countries have an appropriate authority Does not consider authority’s ability to intake and process such disclosures Secondary Issues Responding to Suspected Illegal Acts

Page 15 | Confidential and Proprietary Information Discussion Secondary Issues Responding to Suspected Illegal Acts

Page 16 | Confidential and Proprietary Information Exception provision –Many respondents did not give a view as they were opposed to reporting requirement and, accordingly, viewed the question as irrelevant –Many thought the provision lacked clarity –Some thought that the circumstances should be expanded to inadequate legal protection, liability risks, threats to personal property Scope of application –PA performing non-audit services to an audit client versus to an non-audit client –PA performing non-audit services to non-audit client versus auditors –Views were divided on both Documentation –Many thought the requirement to document was a departure from the existing approach of the Code Other Issues Responding to Suspected Illegal Acts

Page 17 | Confidential and Proprietary Information Discussion Other Issues Responding to Suspected Illegal Acts