NOCLAR Caroline Gardner NOCLAR Task Force Chair IESBA
NOCLAR Caroline Gardner NOCLAR Task Force Chair IESBA Meeting New York December 1, 2015 Page 1 | Proprietary and Copyrighted Information
Background and Recent Activities • Comment period on re-ED closed September 4 • 77 responses received across range of stakeholder categories • Responses from three Monitoring Group members: – IFIAR, BCBS and IOSCO • Task Force meeting early October 2015 to consider ED responses Page 2 | Proprietary and Copyrighted Information
Background and Recent Activities • Meeting with IFIAR SCWG October 6 • Meeting with Forum of Firms October 20 • Meeting with EAIG October 27 • Meeting with EC November 18 • Teleconference with Chair and staff of IAASB TF December 1 • IFAC SMP Committee comment letter November 27 Page 3 | Proprietary and Copyrighted Information
Overview of Responses • Generally broad support for response framework across stakeholder groups Significant improvement vs. first ED Substantially the “right balance” Balances expectations of PA vs responsibilities of management/TCWG Thoughtfully addressed responsibilities of different categories of PAs Addressed concerns about operability and potential for unintended consequences Proposals provide helpful guidance in applying legal or regulatory reporting requirement Page 4 | Proprietary and Copyrighted Information
Overview of Responses • Some split views on aspects of the proposals within and between the following stakeholder categories: – Regulators and public authorities – IFAC member bodies – Other professional organizations • A few respondents not supportive of IESBA addressing the topic – Addressing PAs’ responsibilities regarding NOCLAR should be left to law or regulation – The Code’s conceptual framework sufficient; proposals overly complex and prescriptive Page 5 | Proprietary and Copyrighted Information
Recurring Concerns • A number of recurring concerns among some, particularly: – No clear definition or guidance on meaning of “public interest” in objectives – Potential for increased public expectations gap – Adverse impact on trust relationship between PAs in public practice and clients – PAs being placed at competitive disadvantage vs non-PAs – Forensic-type engagements scoped in? – Appropriately considered high risk of retaliation for PAIBs? Page 6 | Proprietary and Copyrighted Information
Monitoring Group Members’ Responses • BCBS supportive of proposed response framework – Acknowledgement that IESBA has taken into account differences in legal, regulatory and cultural environments around the world • IFIAR view that proposals not sufficiently stringent – Support for mandatory disclosure to appropriate authority for auditors if in public interest and management/TCWG not appropriately responded to the matter – But acknowledgement that IFIAR comment letter reflecting views of many but not necessarily all IFIAR members – Encouragement to finalize project in near future Page 7 | Proprietary and Copyrighted Information
Significant Comments on Main Elements of Proposed Framework Page 8 | Proprietary and Copyrighted Information
Key Elements of Framework Objectives • Substantial support across all stakeholder categories Key Concerns Perceived circularity between third objective and determination of further action? Greater clarity needed re link between third objective and factors to consider in determining if further action needed? Could second objective lead to “tipping off” management/TCWG? ; recognize L&R that may be more stringent than the Code TF Responses/Proposals Link determination of further action to public interest vs objectives (§ 225. 4(c), 23, 43) Consequential changes to documentation provisions (§ 225. 34, 49) Moved provision re compliance with L&R upfront; added recognition of need to comply with reporting requirement under L&R (§ 225. 3) Page 9 | Proprietary and Copyrighted Information
Key Elements of Framework Objectives Key Concerns TF Responses/Proposals More appropriate for objectives to focus on (a) • avoidance of association with client or employer that knowingly commits illegal act, and (b) PA • being satisfied that disclosure made to appropriate authority able to take action? Concept of public interest too subjective; risk of second guessing; more guidance needed Would result in much narrower objectives Points on disassociation and disclosure also already covered under ED proposals Some guidance already provided in ED (§ 225. 31); risk of becoming too prescriptive; however, general guidance in § 225. 4 deleted Ø Do IESBA members agree? Page 10 | Proprietary and Copyrighted Information
Key Elements of Framework Scope • Substantial support across all stakeholder categories Key Concerns TF Responses/Proposals Emphasize inherent limitations re auditors’ ability to identify NOCLAR, as in ISAs? No – objectives of Code and ISAs different Scope of L&R too limited and narrower than in ISA 250? Require all PAs to respond to any NOCLAR No – should be a personal responsibility to respond to NOCLAR outside of scope of L&R covered Auditors not considering all required irregularities to respond to under L&R? ED already required PAs to understand comply with applicable L&R; however, further emphasis added re complying with reporting requirement in L&R (§ 225. 3) Page 11 | Proprietary and Copyrighted Information
Key Elements of Framework Scope Key Concerns TF Responses/Proposals What about NOCLAR committed by parties who work for organization other than employees? Refine definition of NOCLAR to cover acts committed by these parties (§ 225. 2) Forensic-type engagements should not be scoped in re disclosure provisions Relevant provision clarified (§ 225. 46) Ø Do IESBA members agree? Page 12 | Proprietary and Copyrighted Information
Key Elements of Framework Differential approach for Different Categories of PAs • Substantial support across all stakeholder categories Key Concerns TF Responses/Proposals Better approach: differentiate on basis of expected level of understanding of L&R? No – potential for significant uncertainty Why not exempt non-auditors in public practice and non-senior PAIBs from response framework given constraints on access to information, etc? No – response framework for them already not demanding Why should non-auditors in public practice not be subject to same response framework as auditors? No – not have same level of access to info and management/TCWG as auditors Ø Do IESBA members agree? Page 13 | Proprietary and Copyrighted Information
Key Elements of Framework Factors to Consider re Further Action • Substantial support across all stakeholder categories Key Concerns TF Responses/Proposals • Terms such as “credible evidence” and “substantial harm” too vague and subjective • Allow room for appropriate professional judgment • Could the factors be read narrowly to mean further action needed only when all of them are fulfilled? • • What if there is difference in professional judgment about whether the matter is in fact an instance of NOCLAR? Risk of making the Code prescriptive by providing overly detailed guidance Ø Do IESBA members agree? Page 14 | Proprietary and Copyrighted Information
Key Elements of Framework Third Party Test • Substantial support across all stakeholder categories Key Concerns TF Responses/Proposals • Test creating de facto requirement to disclose to appropriate authority? • • Test too subjective? Test intended to ensure objective and rigorous assessment of need for further action • Test can only be applied in hindsight? • • Unlikely third party would have needed experience; better to replace with another PA? Whether disclosure required will depend on objective assessment of specific facts and circumstances Ø Do IESBA members agree? Page 15 | Proprietary and Copyrighted Information
Key Elements of Framework Possible Courses of Further Action • Substantial support across all stakeholder categories Key Concerns TF Responses/Proposals • • These arguments already discussed at length at the Board • Approach in ED is robust in context of need for global operability • Disclosure to appropriate authority should be mandated if in public interest and not contrary to L&R Not for IESBA to address disclosure issue under the Code; should be left to L&R Ø Do IESBA members agree? Page 16 | Proprietary and Copyrighted Information
Key Elements of Framework Factors to Consider re Disclosure to Appropriate Authority • Substantial support across all stakeholder categories Key Concerns TF Responses/Proposals • Factor addressing “robust and credible legal protection” may give PAs an “out” not to disclose? • • Why not also recognize legal risks PAs may face in disclosing the matter? • Factors too vague and subjective? • Give greater prominence to statement re disclosure precluded if contrary to L&R Changes in response to these suggestions may unsettle delicate balance achieved in ED Statement relocated (§ 225. 30) Ø Do IESBA members agree? Page 17 | Proprietary and Copyrighted Information
Key Elements of Framework Documentation • Substantial support across all stakeholder categories Diverse Views and Suggestions TF Responses/Proposals • Why not same approach to documentation for all categories of PA? • • Why go beyond documentation requirements in ISAs? • Why not impose documentation requirement also on non-auditors in public practice and senior PAIBs? • Need for scope of documentation for non-senior PAIBs to be narrower? On balance, not recommending changes to ED approach Changes made (§ 360. 36 and 30) Ø Do IESBA members agree? Page 18 | Proprietary and Copyrighted Information
Other Key Issues Page 19 | Proprietary and Copyrighted Information
Other Key Issues Key Issue TF Responses/Proposals • Provide more guidance re disclosure to firm/network firm Changes made (§ 225. 41 -42) • For non-auditors in public practice, better for disclosure to the external auditor to be required consideration vs potential course of further action? Accepted (§ 225. 41) • For group audits, require component auditor to inform group auditor Accepted (§ 225. 20) Page 20 | Proprietary and Copyrighted Information
Other Key Issues Key Issue • Requirement for auditors to understand application of L&R to the circumstances going beyond ISAs? • More guidance needed to address cross-border engagements and interaction of the Code with local law? • Why should communication between existing and proposed auditors be subject to client consent? TF Responses/Proposals Accepted (§ 225. 11, 36) No – NSS and firms should address on case-by-case basis; not practicable for Code to do so Accepted (§ 210. 13 -14) Page 21 | Proprietary and Copyrighted Information
Other Key Issues – Section 360 Key Issue TF Responses/Proposals • Term “senior PAIB” not universally understood? Concept widely understood in NOCLAR roundtables and also broadly accepted by ED respondents • Realistic to expect PAIBs to deter NOCLAR? Requirement only to seek to deter • Why require senior PAIB to disclose NOCLAR to external auditor in all circumstances? • Why resignation from employing organization not also an option for non-senior PAIB? Accepted (§ 360. 17) Inappropriate to set up this expectation given more limited authority and sphere of influence Ø Do IESBA members agree? Page 22 | Proprietary and Copyrighted Information
Selected Other Matters Page 23 | Proprietary and Copyrighted Information
Selected Other Matters Matter Raised TF Responses/Proposals • What if auditor is made aware of the NOCLAR outside of the audit? Accepted (§ 225. 1, 11, 36) • Prompting management/TCWG to take action too close to taking on management responsibility? Accepted (§ 225. 17) • Requirement needed for auditor to monitor and assess client response? Accepted re requirement to assess (§ 225. 21) • Consider communicating directly with users when seeking disassociation? No – same consideration also in any other withdrawal situation; leave to L&R Page 24 | Proprietary and Copyrighted Information
Selected Other Matters Matter Raised TF Responses/Proposals • Ethical to accept bounty payments in complying with the Code re NOCLAR? No – general requirement to act in good faith (§ 225. 32, 47) • Recognize confidentiality is also in public interest Accepted (§ 140. 7) Ø Do IESBA members agree? Page 25 | Proprietary and Copyrighted Information
Significant Comments from IOSCO C 1 Page 26 | Proprietary and Copyrighted Information
Key Comments from IOSCO C 1 Comment TF Reactions Overall appreciation of response framework and implicit support Can relief from confidentiality be automatic, i. e. , can PA legitimately report NOCLAR to appropriate authority without following process? IESBA views? Are NOCLAR matters that are material or fundamental in nature the starting point for scope? If so, why scope out clearly inconsequential? Can clarify drafting Should the Code advise auditor to also discuss the matter with “significant” or “sizable” shareholders? Potential complications Enhance focus on difficulties arising for auditors in group audit situation To further consider Page 27 | Proprietary and Copyrighted Information
Key Comments from IOSCO C 1 Comment TF Reactions Third party test an “amenable” solution to issue of determining need for further action Prudent for PAs other than auditors to also be subject to strong documentation provision Not sharing this view Client consent should not be barrier to existing auditor disclosing known information to proposed auditor (unless prohibited by L&R) Should communication be conditional on proposed auditor first approaching existing auditor? IESBA views? What if existing auditor does not/refuses to provide the information? To further consider Page 28 | Proprietary and Copyrighted Information
Timing of Issuance and Next Steps Page 29 | Proprietary and Copyrighted Information
Timing of Issuance of Final NOCLAR Provisions • Issue under current structure and drafting conventions when approved or wait until pronouncement restructured? Page 30 | Proprietary and Copyrighted Information
Next Steps Timing Action Dec 2015 Update to IAASB Feb 2016 Discussion with IOSCO C 1 (? ) Discussion with CAG and IAASB March IESBA approval under current structure and drafting conventions June Consideration of draft restructured text Sept IESBA approval of restructured text for exposure Page 31 | Proprietary and Copyrighted Information
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