Safeguards

1. Safeguards Gary Hannaford, Task Force Chair IESBA Meeting New York, USA September 15, 2015

2. Project and Agenda Item Objectives Project Objective • To review the clarity, appropriateness and effectiveness of safeguards in Sections 100 and 200 and those safeguards that pertain to NAS in Section 290 of the Code Agenda Item Objective • To discuss issues and related Task Force (TF) proposals, and to consider a first-read draft of proposed revised provisions in Sections 100 and 200 of the Code as these relate to safeguards

3. TF’s Activities To-Date • January 2015 – Approval of project proposal • March/April 2015 – Initial discussions with IESBA CAG and Board • June/ July 2015 – Indicative Board direction provided to TF on key issues • August 2015 – TF Chair/ CAG Chairman teleconference • September 2015 – TF Chair/ SMPC Ethics Task Force Chair teleconference and feedback on TF’s proposals from IESBA CAG

4. Safeguards: Approach and Timing

5. Outline for Proposed Revisions to the CF • Introduction and Fundamental Principles • Introduction • Fundamental Principles • Conceptual Framework • Requirements and Application Material • Reasonable and Informed Third Party • Identifying Threats • Evaluating Threats • Addressing Threats • Re-evaluation of Threats

6. Clarifying the Conceptual Framework (CF) • Alignment to re identifying, assessing and responding to risks of material misstatement • Re-focus PA’s on identifying, evaluating and addressing threats, rather than simply applying safeguards, thereby reducing ambiguities regarding the objective of the CF • More prominent and robust principles-based requirements that continue to require PAs to exercise of professional judgment • More guidance to assist PAs consistently apply the CF • New more robust description of safeguards

7. Description of a Safeguard • Specific actions or measures that the PA takes to effectively eliminate identified threats to the fundamental principles or reduce them to an acceptable level • Safeguards, which may be individual or a combination of specific actions or other measures, are effective when they eliminate or reduce the level of the threat to an acceptable level, such that the fundamental principles are not compromised, or are not likely to be compromised

8. Rationale for New Description of a Safeguard • The term “safeguards” is used in an inconsistent manner throughout the extant Code • New description combined with clarified CF is intended to: • Enhance the robustness of the Code, by addressing actual and perceived concerns that have been raised relating to PAs application of safeguards • Better link the concept of safeguards to threats to compliance with the fundamental principles

9. Conditions or Factors in a Work Environment • TF is of the view that certain conditions or factors may exist in a work environment that are conducive to compliance with the fundamental principles • Because they are not specific actions or measures designed to address a specific threat, TF believes that these conditions or factors would not always eliminate or reduce a threat to compliance with the fundamental principles, therefore, they are not safeguards • Significance of a threat may increase if such conditions or factors are not present • Those conditions or factors support the application of safeguards, and therefore should be considered as part of the PA’s evaluation of threats

10. New Guidance Relating to “Stepping Back” • Acknowledgment that identification, evaluation and addressing of threats is an iterative process • “Stepping back” is an important part of applying the CF • PA re-evaluates threats and safeguards if new information indicates an inconsistency with the PA’s original identification and evaluation • More robust guidance to better explain the process of “stepping back” so that it is more closely linked to the reasonable and informed third party test

11. Reasonable and Informed Third Party • A conceptual person who possesses suitable skills, knowledge and experience to evaluate the appropriateness of the PA’s conclusions. • Evaluation entails weighing all the specific facts and circumstances that the PA knows, or could reasonably be expected to know, at the time, to objectively determine whether the relevant threats to compliance with the fundamental principles will be eliminated or reduced to an acceptable level

12. Other General Enhancements Relating to Safeguards • Streamlined examples of safeguards in Section 200 (See paras. 200.4–200.8 and 200.5 of Agenda Item 3-B)) • Considered examples of policies and procedures in ISCQ 1 • The terms “material” and “significant” intentionally avoided • Because those terms are used in an inconsistent manner throughout the extant Code (in some cases meaning is different from how term is described in the ISAs) • For future TF work relating to NAS, material in same context as ISAs is acceptable and terms will be retained

13. Proposed Revisions to Section 200 – Application of the CF Approach by PAs in Public Practice • Proposed revisions to Section 200 to follow the same format, and build on the content of Section 100, with more specific requirements and guidance for PAs in public practice • TF aims to clarify the linkage between the Sections 100 and 200 of the Code, thereby strengthening the foundational requirements and principles related to compliance with the fundamental principles of the Code (see paragraphs 200.3, 200.4, 200.6, 201.12 and 200.15 of Agenda Item 3-B)

14. Issues for Future Consideration by the TF – Required Communications with TCWG • TF believes that communication with TCWG increases transparency around the identification and evaluation of threats to compliance with the fundamental principles, and the actions or measures taken to eliminate or reduce those threats to an acceptable level • TF plans to consider, as part of its work on NAS, how and whether requirements or guidance in the Code can be strengthened or clarified to encourage PAs and firms, in particular auditors, to communicate with TCWG

15. Other Issues for Future Consideration by the TF • Consider the clarity, appropriateness and effectiveness of safeguards that pertain to NAS in Section 290 • Consider whether the extant Code includes sufficient and appropriate documentation requirements related to safeguards • Consider whether additional guidance is needed in the Code to explain the differences between the evaluation of the significance of the threat and the acceptable level for a PIE and a non-PIE TF plans to continue to consider and take into account the challenges faced by the SMPC community as it progresses its work

16. Alignment and Coordination with Structure Project • TF continues to closely coordinate its work with the Structure project, but standalone Safeguards ED planned • Proposed revisions in extant Code will be in the format and language of draft re-structured code • TF continues to explore options for presenting the changes in the ED so that respondents can easily identify the changes being proposed • Board approval of Safeguards ED expected to be concurrent with Structure project, at the December 2015 IESBA meeting