1. Professional Skepticism
Richard Fleck, IESBA WG Chair
IESBA Meeting
New York
December 12-15, 2016

2. Objective
To consider a project proposal to respond to stakeholder calls for greater emphasis on PS in the Code
To consider and possibly approve for exposure, proposed text to emphasize PS in the restructured Code
To consider and possibly approve for exposure, proposed text to introduce “critical mindset” as a requirement
To receive an update on the activities of the tripartite PSWG and discussions at various meetings

3. Activities Since Sept 2016 IESBA Meeting (1)
October 2016 PSWG Meetings
Initial draft proposals considered by PSWG, unanimous support for approach
Some comments and drafting suggestions received
IESBA Project Update at SMPC and Forum of Firms Meetings
IESBA considering feasibility of ST initiative for restructured Code
Emphasize application of PS for audit and assurance engagements
LT initiative to explore extension of concept of PS to all PAs
SMPC Feedback: No specific comments, but general concern about further changes to the Code and what will explicitly be required in terms of documentation of ST intitiative.
For FoFs Ken Presented and indicated the following:
Joint PSWG coordinating SSBs’ response to common issues
Explore feasibility of short term response for restructured Code
To emphasize application of PS for audit and assurance engagements
IESBA consideration Dec 2016
Longer term initiative to explore applicability of PS to all PAs
Support from IAASB CAG, IESBA CAG and other stakeholders
Possible reconsideration of ISA definition of PS?
Articulation of PS linkages with fundamental principles and independence
FOF Feedback: Strong support for coordinated effort among all three SSBs. PS has a specific meaning in the context of audit and assurance. Strong caution about potentially watering down the meaning of PS if it is extended to all PAs for non-audit and assurance. Temper expectations of what can be achieved with standard-setting. Human/ psychological dimension – some people are naturally skeptical, while others are not. James clarified that IESBA has heard similar views from IAASB and its CAG. Cautioned about how to take CAG input into account given that many on the CAG are not auditors. It was suggested that before taking action to extent PS to all PAs, consider field testing what it would mean for each type of non-assurance service.

4. Activities Since Sept 2016 IESBA Meeting (2)
Planning Committee Meeting – October 2016
Received report back on PSWG meeting
Agreed approach involving separate project proposal and early 2017 ED
October 2016 Structure and Safeguards TF Meetings
General support for proposals, but calls for better alignment with the CF (i.e., S120) and questions raised about the level of detail in AM
Chairs and Staff of PS, Structure and Safeguards Teleconference to discuss updated draft, which was later circulated to Structure and Safeguards Task Forces

5. Activities Since Sept 2016 IESBA Meeting (3)
Feedback from IAASB PSWG Reps on Updated Proposals
Continued unanimous support for new AM with description of linkage b/w PS and FPs/ independence
Concerns raised about change from “..shall critically consider…” to “…shall apply a critical mindset…”
Input from IESBA CAG and IAASB Meeting (both on Dec 7)
SMPC Comment letter on IESBA Agenda Materials

6. Recap of How PS is Addressed in Standards
PS is defined in IAASB’s standards
Applies to PAs who perform audits and other assurance engagements only
Code only refers to PS as part of description of independence
Independence applies to audits and other assurance engagements only
IAESB standards refer to PS definition in the IAASB’s standards
PS applies to all PAs, including PAIBs who prepare financial statements

7. Overview of Feedback to IESBA about PS (1)
Information underpinning ethical decisions should be assessed with PS
PS is an attitude of mind and public expects all PAs to have it
Code should emphasize PS in the same way it does independence
Code should address how PS applies to PAIBs
Linkage between PS and the FPs/ independence should be clarified
Drivers and impediments to applying PS and complying with the FPs/ independence requirements are the same

8. Overview of Feedback to IESBA about PS (2)
Important that a coordinated approach be adopted by all SSBs
Concern that extending PS to all PAs would dilute/conflict with IAASB’s standards and its objective to enhance audit quality
Concern that to extend PS to all accountants might have unintended consequences

9. IESBA WG Proposals
Short term proposals aimed enhancing robustness of the Code include
New application material to explain the linkage between PS and the FPs/ independence (for audits and assurance only)
New requirement in the conceptual framework for all PAs to apply a critical mindset to achieve compliance with the FPs
Step forward in advance of longer-term discussion about whether PS should apply to all PAs, and whether the IAASB definition of PS should be changed

10. New AM – Clarifying Linkage to FPs/ Independence
Restructured Code
Opportunity to expand on reference to PS in the Code and explain the linkage between PS and the FPs/ independence of mind
New AM (applicable for audits and assurance only) explain
How compliance with each FP, other than confidentiality, might reinforce PS when performing audits, reviews and other assurance engagements
That threats to compliance with FPs and threats to applying PS are the same

11. New Requirement – Applying A Critical Mindset (1)
Key element of the process by which PA applies the conceptual framework (CF) to achieve compliance with the fundamental principles
Not a euphemism for professional skepticism
Has the same standing as, and complements req’ts to:
Exercise professional judgment
Use the reasonable and informed third party test
Remain alert for changes in the information available
Further enhances the CF (i.e., the process for identifying, evaluating and addressing threats)

12. New Requirement – Applying A Critical Mindset (2)
Intended to add a degree of rigor to judgments and conclusions made, because PAs will be required
Not to take information at face value, but rather apply a critical mindset to understand facts and circumstances when identifying, evaluating and addressing threats to compliance with the FPs
Think critically when considering compliance with the FPs while undertaking professional activities
Does not use term “professional skepticism” (or components of definition) to avoid confusion with IAASB standards

13. Why Consider Public Exposure Now?
Opportunity for input on LT project
Proposal is a ST measure to enhance restructured Code, but might also inform longer term SSBs’ discussions
ED questions might seek to understand:
Whether proposed new AM to clarify linkage is helpful
Implications of proposed req’t for all PAs to “apply a critical mindset”
Whether there are some professional activities for which “critical mindset” should not be applied
Whether and how PS should be applied by all PAs

14. IESBA CAG Dec 7 Teleconference
Support for proposal and for exposure (if approved by IESBA)
Advised to provide more contextual information about project in PP
Clarify whether consideration of “preconceptions” is the PA’s or others’
Explain how ST project fits in with LT initiatives
Indicate that proposals are not intended to preempt LT/ change current PS defn
Refine impact analysis section of PP – if no change in cost, is there value?
Clarify the problem that proposals seek to fix with new “critical mindset” req’t

15. Feedback from IAASB Dec 7 Meeting
Strong support for coordinated efforts of SSBs
Acknowledgement of responsiveness in proposing “critical mindset” (as opposed to PS) requirement for all Pas
Questions raised included:
Difference between term “critical mindset” and PS
Whether “critical mindset” is a component of professional judgment
Whether PAIBs understand what is meant by PS
Whether time needed to “flesh out” the link between PS and FPs

16. Specific Suggestions from IAASB
Consider different terminology “shall critically think” vs “shall apply a critical mindset”
Clarify:
Meaning of “critical mindset”
Expectations of PAs
How PAs should document application of “critical mindset”

17. Action Points/Questions Arising From Consultations
Refinements needed to project proposal to address feedback from IESBA CAG
Is the terminology –“critical mindset”– appropriate? Is there a better term?
Can more be done to distinguish “critical mind-set” from PS?
Is there more to be said about the way PAs should apply/document critical mind-set?
Can application material be improved?

18. Matters for IESBA Consideration (1)
Three questions for the Board
Do IESBA members support a project to introduce:
The requirement of a “critical mindset” to enhance compliance with the FPs (for all professional accountants)
New application material to explain the linkage between PS and the FPs/ independence (for audits and assurance only)

19. Matters for IESBA Consideration (2)
If so, do IESBA members support the project proposal (2-C)
If so, what comments do IESBA members have on the proposed text (2-B)