Definitions of Listed Entity Public Interest Entity Mike

Definitions of Listed Entity & Public Interest Entity Mike Ashley, Task Force Chair, IESBA Member IESBA Meeting September 14 -18, 21, 29 & October 1, 2020 Virtual

Objectives of Session To discuss issues and TF Views IAASB Meeting Report Back Responses to NAS ED Q. 4 Overarching Objective PIE Definition Local Body Capacity & Questionnaire Firms & Transparency Disclosure Related Entity Effective Date Next Steps To provide feedback on 1 st Read Page 2 | Proprietary and Copyrighted Information

Background Information Gathering Since June 2020 Page 3 | Proprietary and Copyrighted Information

Report Back – IAASB July 2020 PIE Session • First opportunity for IAASB to discuss as a Board • General support for shared overarching objective for additional independence and audit quality related requirements • Support-in-principle for replacing “listed entity” with PIE, but need to consider on a case by case basis • General support for proposed list of PIEs • Similar concerns about local body capacity to refine the high-level PIE definition • Mixed views about suggested transparency disclosure requirement in ISAs Page 4 | Proprietary and Copyrighted Information

Responses to NAS ED Question 4 Respondents were asked to share views on whether the IESBA should consider in undertaking its project to review the definition of a PIE 17 no comments, 42 support, 7 do not support No new significant issues raised by respondents Page 5 | Proprietary and Copyrighted Information

Responses to NAS ED Question 4 Overarching Objective General support for different PIE and non-PIE treatment A few highlighted focus should be on how financial statements are used Suggestions for factors to be taken into consideration PIE Definition Other General support for broad approach, but a few preferred baseline definition Importance of IAASB coordination Definition should be simple, principle-based, allow local variations A few raised local body capacity A few sought more clarity with definition of “Listed entity” Suggestion to review related entity Mixed views about capturing smaller entities Concerns about timing of NAS and Fees project Page 6 | Proprietary and Copyrighted Information

Overarching Objective for Additional Requirements Overarching Objective Significant public interest in the financial condition of certain entities Public confidence in those financial statements are important RECAP for additional requirements (Proposed 400. 8 and 400. 9) Confidence in their audits will enhance public confidence in those financial statements Additional requirements will enhance confidence in their audits which in turn will enhance confidence in those financial statements Page 7 | Proprietary and Copyrighted Information

Expected Role of Local Bodies Overarching Objective for Additional Requirements Overarching Objective IESBA (June 2020) • General support • Key queries about v v ESG reporting requirement Market operators, stock/commodity exchanges Entities subject to financial and prudential regulation Proposed factor relating to potential systemic impact IAASB (July 2020) for additional requirements (Proposed 400. 8 and 400. 9) • General support for common overarching objective • In-principle support for replacing listed entity with PIE in ISAs but needs consideration on case by case basis • Key queries about v Perception of two tiers of audit quality v Meaning of “financial condition” v Minor differences in how it is expressed might be needed Page 8 | Proprietary and Copyrighted Information

In response to comment that “business” is too narrow In response to comment about entities subject to financial and prudential regulatory supervision Clarify this is impact on one’s sector Capture a characteristic common to some public utility entities and FMI entities Clarify this is impact on multiple sectors In response to IAASB comments about 2 tiers of audit quality Page 9 | Proprietary and Copyrighted Information

Other TF Views: • Retain the term “financial condition” in light of previous Board input • No changes with respect to ESG disclosure • Retain last bullet as factor for consideration • No change to reflect minor differences in how the overarching objective should be expressed in the two Boards’ standards • TF will include question in ED to seek views on whether to replace “listed entity” in ISAs with PIE Page 10 | Proprietary and Copyrighted Information

Comment/view on TF views and revisions to 400. 8 and 400. 9 Page 11 | Proprietary and Copyrighted Information

Definition of Public Interest Entity IESBA, IAASB and other stakeholders were generally supportive of the TF’s preferred approach (broad approach) Three key components to this approach Broad Approach A longer and more broadly defined list which local regulators and authorities can modify by tightening definitions, setting size criteria and adding or exempting particular types of entities Role of Code Role of Local Bodies Role of Firms List of common PIE categories Refine the list as appropriate Determine to add to the list Page 12 | Proprietary and Copyrighted Information

Definitions of PIE Expanded List of PIE Categories Role of Code Role of Local Bodies Role of Firms R 400. 14 (June 2020 Version) IESBA and IAASB comments: • Both Boards supportive of the TF’s rationale, e. g. , 80/20 rule • General support for the proposed categories • Category (a) • Suggested “securities”, definition of “financial interest” • No strong views on whether to include the concept of “in the process of being publicly traded” • Category (d) - Some suggested the language is too broad • Category (f) - A few IAASB members queried if it is necessary or appropriate Page 13 | Proprietary and Copyrighted Information

Definitions of PIE Expanded List of PIE Categories Role of Code Role of Local Bodies Role of Firms R 400. 14 (Mark-up) Better alignment with “financial interest” definition TF will consider whether the term “listed entity” should be replaced when reached a view on R 400. 20 No change; it should not cover employers that provides such benefits as one of its functions only More accurately describe investment funds available to the public No change; revisions made to 400. 16 A 1 to address concerns that entity being categorized by law or regulation as a PIE not for the purpose Page 14 | Proprietary and Copyrighted Information

Definitions of PIE Expanded List of PIE Categories R 400. 14 Role of Code Comment / view Role of Local Bodies Role of Firms 400. 16 A 1 Page 15 | Proprietary and Copyrighted Information

Definitions of PIE Expanded List of PIE Categories Role of Code Role of Local Bodies Role of Firms Other possible categories considered by IESBA in June 2020 TF asked to consider additional categories Custodians Charities Public Utility Entities Public Sector Entities Large Private Companies Private Equity Funds Systemically Significant Entities Public Accountability Entity FMI, Stock and Commodity Exchanges Audit Firms None were added Does not recommend Page 16 | Proprietary and Copyrighted Information

Definitions of PIE Expanded List of PIE Categories Comment/view Role of Code Role of Local Bodies Role of Firms TF asked to consider additional categories FMI, Stock and Commodity Exchanges Audit Firms Does not recommend Page 17 | Proprietary and Copyrighted Information

Expected Role of Local Bodies Role of Code Role of Local Bodies Current Approach • Proposed definition needs to be refined as appropriate at local level because of its high-level nature • If not, the new definition might inadvertently scope in the wrong entities or not scope in others where appropriate Concern Role of Firms • Some local bodies do not have capacity to refine the highlevel definition or simply adopt it as is Page 18 | Proprietary and Copyrighted Information

Expected Role of Local Bodies Role of Code Role of Local Bodies Role of Firms Mitigation strategy Develop non Overarching objective authoritative guidance material Longer transition period PAO questionnaire Rebuttable presumption Page 19 | Proprietary and Copyrighted Information

Expected Role of Local Bodies Mitigation Strategy – PAO Questionnaire Role of Code Role of Local Bodies Role of Firms PAO Questionnaire • • • In collaboration with IFAC’s Quality & Development team Questionnaire circulated to about 40 PAOs in July/August v Mostly smaller and less developed jurisdictions 19 responses received to date Expecting another 5 -10 by early October v Particularly from Central/South America and Africa Anticipating to also reach francophone African jurisdictions in Q 4 Page 20 | Proprietary and Copyrighted Information

Expected Role of Local Bodies Mitigation Strategy – PAO Questionnaire Role of Code Breakdown by Regions Asia - Pacific Role of Local Bodies • China, Hong Kong, Indonesia, South Korea, Malaysia, Myanmar, Taiwan, Singapore, Thailand, Vietnam Africa • Ghana, Nigeria, Rwanda, Tanzania, Uganda, Zimbabwe Americas & Caribbean Role of Firms • Argentina, Brazil Europe & Central Asia • Portugal Page 21 | Proprietary and Copyrighted Information

Expected Role of Local Bodies Mitigation Strategy – PAO Questionnaire Role of Code Picture so far… • • Role of Local Bodies • Role of Firms • Responses from a mixture of PAOs with direct, shared or no authority to revise the PIE definition Majority already have local PIE definitions (incl. all 6 African jurisdictions) Strong indication from responses that refinement of the PIE definition can be achieved at these jurisdictions without any significant adoption issue relating to local body capacity v Some expressed their view that the draft definition is sufficient for them to develop their local definitions v 1 PAO noted that substantial work needed to persuade local regulator to revise the local law TF will give an update in Q 4 Any Comment? Page 22 | Proprietary and Copyrighted Information

Expected Role of Local Bodies Mitigation Strategy – Rebuttable Presumption Role of Code Role of Local Bodies Role of Firms Rebuttable Presumption • TF considering the use of rebuttable presumption in some circumstances to address the risk of: v Local body not having the capacity to refine the list v The list is adopted without local refinement § TF considered the South African Code which uses a rebuttable presumption: v In addition to the extant Code definition, it has an extra list of PIE categories v The rebuttable presumption applies to this extra list § TF seeks Board’s directional input on whether to pursue the approach of a limited rebuttable presumption Page 23 | Proprietary and Copyrighted Information

Expected Role of Local Bodies Mitigation Strategy – Rebuttable Presumption Role of Code South African Example IRBA Code of Professional Conduct for Registered Auditors Definition R 400. 8 a SA R 400. 8 b SA Role of Local Bodies Role of Firms Page 24 | Proprietary and Copyrighted Information

Expected Role of Local Bodies Mitigation Strategy – Rebuttable Presumption Role of Code Role of Local Bodies Role of Firms Comment/view on • • Directional input on whether TF should pursue the approach of a limited rebuttable presumption If so, views on: v How the determination might be made if the failure to implement local refinements was intentional v Whether the discretion should itself simply be left to the local regulators v Whether allowing the rebuttable presumption will discourage local regulators from making the necessary refinements Page 25 | Proprietary and Copyrighted Information

Role of Firms Role of Code Role of Local Bodies New Requirement (R 400. 17) • Elevate AM to requirement v Firms required to determine if additional entities be treated as PIEs v General support from stakeholders • List of additional factors for consideration v Kept factor about entity likely to become PIE as no strong views from both boards Role of Firms Page 26 | Proprietary and Copyrighted Information

TF Preliminary View Role of Firms Role of Code Transparency Disclosure (R 400. 18) • Proposed new requirements for firms to publicly disclose if an audit client was treated as PIE R 400. 18 Role of Local Bodies • • Role of Firms A firm shall publicly disclose in the auditor’s report that an audit client was treated as a public interest entity [to be discussed with IAASB] At July IAASB PIE session, mixed views from IAASB members Following discussions with TF representatives, IAASB representatives developed 3 options for IAASB to consider in future meetings Page 27 | Proprietary and Copyrighted Information

Role of Firms Transparency Disclosure Role of Code Role of Local Bodies Role of Firms For consideration by IAASB: Option 1 • No change to auditor’s reports Option 2 • IAASB to consider this as part of its Auditor Reporting Post-Implementation Review (survey due October 2020) Option 3 • IAASB to consider revisions to ISA 700. 28 (c) Page 28 | Proprietary and Copyrighted Information

Role of Firms Role of Code Comment/view on Proposed paragraph R 400. 17 and R 400. 18; and the 3 options on transparency disclosure for consideration by IAASB Role of Local Bodies Role of Firms Page 29 | Proprietary and Copyrighted Information

Related Entity General • 4 IESBA project teams addressing different aspects of Related Entity (RE) in the Code • Extant Code (R 400. 20): v Listed Entity – All 5 RE categories (Upstream, downstream, sister entities) v Others (including other PIEs) – Downstream (Client has direct/indirect control) • Key question for PIE project: v Whether the full set of RE applicable to a listed entity audit client in paragraph R 400. 20 should be extended to all PIE audit clients as well? Page 30 | Proprietary and Copyrighted Information

Related Entity Whether the full set of RE applicable to a listed entity audit client in paragraph R 400. 20 should be extended to all PIE audit clients as well A prima facie case? Reasons to rebut? Other factors Page 31 | Proprietary and Copyrighted Information

Related Entity Whether the full set of RE applicable to a listed entity audit client in paragraph R 400. 20 should be extended to all PIE audit clients as well • No strong philosophical reason for not extending the full set of RE categories to PIEs A prima facie case? • Considered view of IESBA Independence project v Reason for not extending seems more about the nature of the upstream entity (e. g. , government bodies) than the nature of the PIE itself • Of the view there is a prima face case Page 32 | Proprietary and Copyrighted Information

Related Entity Whether the full set of RE applicable to a listed entity audit client in paragraph R 400. 20 should be extended to all PIE audit clients as well 2 concerns raised by IESBA members a) Logistical challenge Reasons to rebut? • Difficulty in identifying entities as RE for some non-listed clients; information may not be up to date a) Sovereign wealth funds (SWFs) • • • SWFs with interests in many portfolio entities Impact on services that can be provided to other sister entities Considering exception for definition of “related party” in ISA 550 Page 33 | Proprietary and Copyrighted Information

Related Entity Whether the full set of RE applicable to a listed entity audit client in paragraph R 400. 20 should be extended to all PIE audit clients as well • Impact on other sections of the Code: v Other factors v Sections 400 – 540, such as Financial Interests, Loans and Guarantees, Business Relationships etc One option is a piecemeal approach – not practical to undertake this work under this project • Other considerations include: v v Replace “listed entity” in R 400. 20 with category (a) in R 400. 14 Allow for local exclusions (e. g. , government-controlled entities) Page 34 | Proprietary and Copyrighted Information

Related Entity Comment / view • • TF intends to seek input including practical examples from Fo. F in October 2020 In the meantime, seek comments from Board how best to approach topic, including: v Logistical challenge v SWF and exception in ISA 550 v Impact on other standards in Part 4 A v Replace “listed entity” in R 400. 20 with Category (a) of R 400. 14 Page 35 | Proprietary and Copyrighted Information

Effective Date Comment/view: Possible timeline Effective Date, taking into account: • Timing of PIE ED v Dec 20 or Mar 21? • Need for long transition period as part of local adoption process • Transition period for firms, including Fo. F members pending refinement at local level • Board discussion on NAS and Fees effective dates Page 36 | Proprietary and Copyrighted Information

Next Steps October November December Joint CAG Meeting IAASB PIE Session IESBA Meeting PAO questionnaire & Fo. F input Stakeholders outreaches Coordination with IAASB Page 37 | Proprietary and Copyrighted Information

Any Other Comments Page 38 | Proprietary and Copyrighted Information

The Ethics Board www. ethicsboard. org 39