NOCLAR Richard Fleck Task Force Chair IESBA Meeting
NOCLAR Richard Fleck, Task Force Chair IESBA Meeting Madrid March 14, 2016 Page 1 | Proprietary and Copyrighted Information
Recap – Key Project Objective • To create framework to guide professional accountants (PAs) in deciding how best to serve public interest when they come across suspected NOCLAR • Balancing acting in public interest vs. confidentiality principle • Debate is about what is reasonable to ask of PAs within their role in the public interest Page 2 | Proprietary and Copyrighted Information
Recap – Project History • Project proposal first discussed October 2009 – Now on third Task Force Chair – Now 19 th Board discussion; discussed with CAG 12 times • First exposure draft issued August 2012 • Three global roundtables in 2014: Hong Kong, Brussels and Washington – 160 senior-level representatives from 27 jurisdictions (including 13 G 20 countries) • Re-ED issued May 2015 with proposed response framework Page 3 | Proprietary and Copyrighted Information
Recap – Strengths of Proposed Response Framework • A holistic and balanced model • Clear threshold for further action • A proportionate approach • Renewed emphasis on “tone at the top” within employing organization • Stimulating increased reporting pursuant to law or regulation • An expanded auditors’ “toolkit” • Rigorous consideration of further action needed in the public interest • Documentation Page 4 | Proprietary and Copyrighted Information
Recap – Why Needed? • Fills current void in the Code • Widely anticipated by stakeholders Page 5 | Proprietary and Copyrighted Information
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 • Outreach to stakeholders Q 4 2015 – Including IFIAR, Forum of Firms, EAIG and EC • Consideration of ED responses December 2015 IESBA meeting – Including preliminary consideration of IOSCO response Page 6 | Proprietary and Copyrighted Information
Recent Activities • Close liaison with IAASB NOCLAR Task Force • Liaison with Structure Task Force – Feedback re draft restructured Sections 225 and 360 • Meeting with IDW February 2016 – Jointly with IAASB representatives – Key concerns from IDW Page 7 | Proprietary and Copyrighted Information
Further Comments from IFAC SMP Committee on March 2016 Agenda Material • Potential adverse impact on audit quality and demand for PAs’ services • De facto disclosure requirement? – PA has no free choice? • Lack of clear definition of “public interest” – Varying degrees of public interest in different types of engagement • Re disclosure: going beyond law or regulation creates uncertainty Page 8 | Proprietary and Copyrighted Information
March 2016 Joint IESBA CAG – IAASB CAG • Broad support for direction on remaining issues • Acknowledgement as one of the most difficult topics to be addressed by IESBA • Comments: – “Key is appropriate balance”; “could tweak forever” – “Proposals fill a gap” – “Yes, breaking new ground, but also be prepared to review experience and be open to change if not working effectively” Page 9 | Proprietary and Copyrighted Information
March 2016 Joint IESBA CAG – IAASB CAG • Concern from IFAC SMP Committee observer re unintended consequences for audit quality? • Counter views – “Expectations already out there” – “Not addressing topic will only widen the expectations gap” – “Proposals will enhance reputation of the profession” Page 10 | Proprietary and Copyrighted Information
March 2016 Joint IESBA CAG – IAASB CAG • Third party test – A concern about enforceability, particularly in jurisdictions where no robust rule of law? • Counter views – “A practical approach to introducing objective evaluation” – “Notion of 3 PT not alien to IFRS, although may be for different purpose re think of information needs of investors and other third parties” – “Not a foreign concept for government auditors; a reasonable approach” Page 11 | Proprietary and Copyrighted Information
March 2016 Joint IESBA CAG – IAASB CAG • Re imminent substantial harm – Is bypass of response process subject to documentation? • Consideration of significant comments on IAASB ED – Overall support for direction of IAASB TF proposals – Why inconsistent terminology re “disclose” vs. “report”? – Support for not opening ISA 250 for more fulsome revision at this time; to be considered by IAASB in due course Page 12 | Proprietary and Copyrighted Information
IOSCO Committee 1 Response • Directionally supportive – Overall appreciation of response framework – 3 rd party test an “amenable” solution to issue of determining need for further action • Comments not accepted – Should the Code advise auditor to also discuss NOCLAR with “significant” or “sizable” shareholders? – Prudent for PAs other than auditors to also be subject to “strong” documentation provision? Page 13 | Proprietary and Copyrighted Information
Substantive Matters Raised by IOSCO Committee 1 Comment Can auditor legitimately report NOCLAR to appropriate authority without following process? Are NOCLAR matters that are material or fundamental in nature the starting point for scope? If so, why scope out clearly inconsequential? TF Response Credible evidence of imminent substantial harm (§ 225. 35, 51; 360. 30) No – wording clarified (§ 225. 5, 8 -9) Page 14 | Proprietary and Copyrighted Information
Substantive Matters Raised by IOSCO Committee 1 Comment Enhance focus on difficulties arising for auditors in group audit situation TF Response Enhanced two-way communication (§ 225. 20 -21, 43, 45) • Further comments raised by IAASB Group Audits Task Force – § 225. 20, 225. 21, 225. 45 Page 15 | Proprietary and Copyrighted Information
Key Comments from IOSCO Committee 1 Comment TF Response Client consent should not be barrier to existing auditor disclosing information about NOCLAR to proposed auditor (unless prohibited by L&R) Consent set aside for NOCLAR (§ 225. 30) Should communication be conditional on proposed auditor first approaching existing auditor? Accepted not conditional (§ 225. 30) What if existing auditor does not/refuses to provide the information? Guidance added (§ 225. 30) • Further comments from IAASB NOCLAR Task Force re withdrawal Page 16 | Proprietary and Copyrighted Information
Draft Restructured Sections 225 and 360 Comments? Page 17 | Proprietary and Copyrighted Information
Next Steps Timing Action March Update to IAASB April IESBA approval under current structure and drafting conventions, subject to outcome of IAASB deliberations June PIOB approval of due process IAASB approval of related changes to IAASB standards July Issuance of final IESBA pronouncement Sept IESBA approval of restructured text for exposure Page 18 | Proprietary and Copyrighted Information
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