1. IESBA Meeting September 19-22, 2017
Safeguards
Gary Hannaford, Task Force Chair
IESBA Meeting
September 19-22, 2017

2. Objectives
Further consider certain comments on Safeguards ED-2 taking into account June 2017 Board input
Consider “first-read” draft of proposed revisions to Safeguards ED-2

3. Project Timeline Dec 2016/ Jan 2017 Phase 1 agreement in principle
Phase 2 Exposure
Jun 2017
Full review of comments on Safeguards ED-2
Sept 2017
CAG meeting
First read of TF revisions to proposed texts
Dec 2017
Anticipated approval in conjunction with Structure
Gary to remind Board that
In June 2017, IESBA did a full review of all respondents’ comments with preliminary TF proposals
Section A, paragraphs 6-7 of Agenda Item 3-A and the Safeguards section of the Draft IESBA meeting minutes at Agenda Item 1-C summarize the Board’s input on those preliminary proposals
IESBA asked that the TF reach out to certain regulatory respondents (i.e., IFIAR, IOSCO, UKFRC) to further understand their perspectives; TF also determined it appropriate to speak to SMPC reps
The issues discussed are summarized in paras Focus of presentation will be on outstanding issues. [Invite IESBA members to comment]

4. Coordination with Others Task Forces
Continued close coordination with Structure Task Force
Introductory paragraphs
Matters relating to use of “may versus might”
Explicit reference to “firms versus network firms”
Task Force works closely with Part C and LA Task Forces to revise safeguards-related proposed texts
No safeguards conforming amendments relating to NOCLAR

5. Recap of Significant Comments on Safeguards ED-2
General support for project objectives and for proposals
Questions about appropriateness and effectiveness of certain safeguards
Confusion about “factors relevant to evaluating threats” vs. “safeguards”
Requests for post-project actions to promote awareness and adoption
Mixed views about broad prohibition of certain types of recruiting services – support from regulators and NSS, strong concerns from SMPs
Out of scope matters (e.g., NAS permissibility, documentation, materiality)
IESBA agreed to address out of scope matters (e.g,., NAS permissibility) discussion about Strategy after the break

6. Key Topics for September 2017 Board Discussion
Significant Matters raised during teleconferences
Effectiveness/ appropriateness of safeguards
Factors vs Safeguards
Promoting awareness and assessing project effectiveness
Likelihood of threats
Prohibition of recruiting services
Other key revisions to proposed texts
Some issues have already been

7. Overview of Common NAS Safeguards
Recap of Proposals in Safeguards ED-2
Overview of Common NAS Safeguards
Using professionals who are not audit team members to perform NAS
Having a professional review audit work or result of NAS
If NAS is performed by an audit team member, using professionals who are not audit team members, with appropriate expertise to review NAS
In some cases, having a professional who was not involved in providing NAS review the accounting treatment or presentation in f/s

8. Feedback from Respondents
NAS Safeguards
Feedback from Respondents
Questions about withdrawal of certain safeguards
“… obtaining an advice from a third party in certain circumstances, e.g., a supervising or a controlling authority…”
Different language used to describe similar safeguards
Safeguards should be tailored so that they are appropriate to address specific threats
Request for more guidance for PAs to help determine effectiveness of safeguards

9. Determining the Effectiveness of Safeguards
Task Force Proposals
Determining the Effectiveness of Safeguards
PAs’ understanding of facts and circumstances and exercising professional judgment (PJ) is critical to applying the CF, including when addressing threats
Safeguards vary depending on facts and circumstances
Determining effectiveness of safeguards requires exercise of PJ
Applying safeguards is only one way to address threats
In some cases, might involve use of RITP to determine effectiveness
Notes to Gary
New description of Safeguards established with AIPT as “Actions, individually or in combination, that PA takes that effectively reduce threats to compliance with FPs to an acceptable level
TF believes that proper application of the enhanced CF is sufficient guidance to assist PAs and firms determine the appropriateness and effectiveness of a Safeguard.

10. Overview of Revisions Made to Proposed Texts
Task Force Proposals
Overview of Revisions Made to Proposed Texts
Emphasize that safeguards are applied to reduce threats to an acceptable level (R120.10(b))
New AM for addressing threats
Explain relevance of “factors” in addressing threats ( A3)
Align and better link “Addressing Threats” section for PAPPs to CF (300.8 A1)
Reposition examples of “actions that might eliminate threats” and “actions that might be safeguards”
Revise proposed texts for all examples of safeguards involving “a review”
“Having an appropriate professional review …”
Gary to consider stating that the TF believes that the use of the word “appropriate” signals need for exercising professional judgment based on an understanding of the specific facts and circumstances to determine who should be the right person to conduct review in order for the safeguard to be effective in addressing the threat

11. Task Force Proposals
Factors Vs Safeguards
Clarifications made to proposed text to better link overarching requirements in S120 (i.e., Phase 1 work) to specific provisions in the rest of Code
Further explanation that conditions, policies and procedures are essentially “factors relevant to evaluating level of threats”
Explanation about relevance of conditions, policies and procedures in determining whether further actions are needed to address threats

12. CAG generally supportive of Task Force’s proposed revisions
Feedback from CAG
CAG generally supportive of Task Force’s proposed revisions
Questions about whether PAs would understand Task Force’s thinking based on proposed texts alone
Requests for guidance in Code to incorporate Task Force’s views (e.g., effectiveness of safeguards depend on specific facts and circumstances and require PAs’ exercise of professional judgment)
Develop new AM to example what is meant by “appropriate”

13. Promoting Awareness and Post Implementation Review Relating to Safeguards
Task Force agrees that other actions beyond refinements to Code are needed to help users understand changes to safeguards in Code and other changes to CF
New “Guide to Code” to help navigation of restructured Code
Basis for Conclusions to focus on highlighting key changes e.g., interaction b/w “factors that are relevant to evaluating threats” and safeguards
Important role for NSS, firms and others to help raise awareness of, revisions and promote/ support their effective implementation

14. Matter for IESBA Consideration
IESBA members are asked for views about proposed revisions to clarify appropriateness and effectiveness of safeguards
Do IESBA members believe new guidance should be developed to describe what is meant by “appropriate”? If yes, what do IESBA member believe should be included in such guidance?

15. Likelihood of Threats Created
Feedback on Safeguards ED-2
Likelihood of Threats Created
Some respondents questioned use of word “might” in NAS section of Code to describe likelihood of threats created
The use of “might” suggest that threat is remote when in reality threat is likely in most situations
Some expressed preference for extant word “may”

16. Likelihood of Threats Created
Task Force Proposal
Likelihood of Threats Created
Structure Task Force refined description of “might”
Broader consideration of issues are required and that consideration of this matter is outside of Safeguards project scope
Task Force believes issues could be considered as part of future NAS initiative

17. Matter for IESBA Consideration
Do IESBA members agree with Task Force’s conclusion in response to comments about likelihood of threats created?

18. Prohibition of Certain Recruiting Services
Extant Code prohibit certain recruiting services for PIEs
Director or officer of the entity
Senior management in a position to exert significant influence over preparation of client’s accounting records or f/s on which firm will opine
Recruiting services prohibited
Searching for or seeking out candidates for above positions
Undertaking reference checks of prospective candidates for above positions
Safeguards ED-2 extended prohibition to all entities

19. New general description of recruiting services
Task Force Proposals
Recruiting Services
New general description of recruiting services
New requirement with specific actions for firms to help avoid assuming management responsibilities
Similar to IT and internal audit
New subheading to emphasize that only certain types of recruiting services are prohibited
Re-ordered paragraphs to enhance readability and flow

20. Prohibition of Certain Recruiting Services
SMPC Concerns
SMPC believes that prohibition on certain types of recruiting services may not be in the public interest
Auditor is not making a management decision
Threat is not of the magnitude that IESBA proposal implies
Proposal does not give sufficient consideration of a typical SME environment
In a number of jurisdictions, SMP often helps SME recruit right members to mgt team
Gary to note that these views were also expressed during CAG, by SMPC observer

21. SMPC Concerns (continue)
Prohibition of Certain Recruiting Services
SMPC Concerns (continue)
Align wording in A1 to R609.7
“…searching for or seeking out candidates…” and “…undertaking reference checks…” vs. “…sourcing or identifying potential candidates…” and “…reviewing the professional qualifications or competence of applicants and determining their suitability for the role…”
Clarify which recruiting services in A1 are prohibited for all audit clients

22. Matter for IESBA Consideration
IESBA members asked for views about proposed revisions relating to recruiting services of Code (i.e., subsection 609)

23. Other Key Revisions to Proposed Texts – S600
Explicit reference to category of threats in introductory section and in describing action that might address threats
Advocacy threats added in and
New factors for evaluating advocacy threats, as needed
New subheading titled “Accounting and Bookkeeping Services that are Routine and Mechanical”
The word “taxation” is change to “tax”

24. Revisions to Proposed Section 950
Several changes aimed at achieving consistency in light of revisions to S600 (950.4, A1 and R950.8)
Re-ordered certain paragraphs to enhance readability
Revisions to provisions relating to prohibiting the assumption of mgt responsibilities to align them more closely with those in extant Code (R950.6 to A2)

25. Revisions to Conforming Amendments
Refinements to proposed texts to clarify guidance for applying CF across various sections in Code
Add new AM for addressing threats in A1 and A1 to A3
Delete duplicative req’ts in R270.5 and R600.9(c)
Revisions aimed at achieving consistency

26. Matter for IESBA Consideration
IESBA members asked for views about revisions to proposed texts (i.e., S600, S950 and conforming amendments to AIPT and to other Structure, Part C and LA proposals)
S600 is in Agenda Item 3B
S950 is in Agenda Item 3C
Conforming Amendments to:
- AIPT is in Agenda Item 3-D
- S800 and Part 4B is in Agenda Item 2-B
- Part C is in Agenda Item 8-A
- LA is in Agenda Item 6-A

27. What Changes?
Gary to explain that thinking careful about drafting suggestions that in some care suggest that need to repeat material that is covered in other areas of the Code takes TIME and in some cases require consultation with other Task Forces, in particular Structure TF

28. Conditions, Policies and Procedures
Can enhance PAs acting ethically/ complying with FPs
Help PA identify threats (120.6 A1)
Impact “level of threat” (120.7 A2)
General examples in A2, specific examples = “factors …”
Not designed to deal with specific threats, and not always be effective in eliminating threats or reducing them to AL
Not safeguards, but certainly relevant to PA’s determination about whether threat is AL (BfC only, old A3 deleted)
In response to Mike’s comments – added a sentence to para A1 to refer to examples of “conditions, policies and procedures” in A1.

29. Determining Effectiveness of Safeguards
Term “safeguards” used to refer to actions that might be effective in addressing threats
Provisions in R120.5 relevant to addressing threats
Proposed Revisions
Add AM to emphasize importance of PJ in determining whether a safeguard is effective (see A3)
Agree that trying to explain link b/w factors and safeguards in Code might confuse users into thinking that factors are safeguards (deleted in A3)
Add description of “appropriate professional” (300.8 A3 and Glossary)

30. Determining Effectiveness of Safeguards (2)
Within each paragraph with an example of safeguards
Picked up “…in certain circumstances…” from A1 to emphasize that PAs need to “think” about specific facts and circumstances in determining whether an action will address a threat
Mindful drafting refinements to avoid repetition while continuing to link examples of safeguards to specific threats and circumstance creating threat
Today’s turnaround show changes in S600 and S410 only
Board will also see revisions with input from today’s discussion in Part C and LA turnaround materials tomorrow
Gary to focus Board on S600 in Agenda Item 3-B and in S410 in Agenda Item 3-D
Collective input from this meeting’s discussion will be used to update all examples of safeguards across the Code during October meeting and will be presented in December 2017 meeting materials

31. Other Revisions in Section 600
Advocacy threats
Explicit mention in relation to assuming mgt responsibility
Factor and safeguards
Explicit reference to self-interest threats
Internal Audit and IT (Subsections 605 and 606)
Revisions to description of recruiting services
Fine tuning text and changes to minimize repetition