Responding to Suspected Illegal Acts

1. Responding to Suspected Illegal Acts Robert Franchini New York, March 2013

2. Responding to Suspected Illegal Acts Summary of Responses

3. Responding to Suspected Illegal Acts Summary of Responses • Pivotal issues: • Requirement for auditor to disclose to an appropriate authority • Requirement to disclose to external auditor for PAIB and PA performing non-assurance services to non-audit clients • Right with expectation to disclose to an appropriate authority for PAIB and PA performing non-assurance services to non-audit clients • Resolution of secondary issues will depend on how pivotal issues are addressed • Regulators were supportive but raised concerns about the direction of the project • However: almost all respondents were supportive of the IESBA tackling the subject of illegal acts

4. Responding to Suspected Illegal Acts Pivotal Issues Raised by Respondents Requirement for auditor to disclose to an appropriate authority • Purview of national regulators and lawmakers • Potential conflicts with local regulations • Disproportionate to require without legal protections • Doesnotconsider authority’s abilitytointake and processsuchdisclosures • Will fundamentally impact “PA-Client” relationship • Primary responsibility for reporting lies with management and TCWG • Could create conflicts: • PAs that are also lawyers • Lawyers that practice within an accounting network • In services being provided by PAs under legal privilege • Reference made to OECD anti-bribery recommendations of 2009

5. Responding to Suspected Illegal Acts Pivotal Issues Raised by Respondents Requirement for auditor to disclose to an appropriate authority Alternative suggestions • Most respondents were supportive of providing guidance that would help PAs address SIAs • A number of respondents supported the concept that the auditor be permitted to disclose in certain circumstances • Some respondents suggested the IESBA and IFAC engage with governments and regulators through the G20 and IOSCO to explore global principles for reporting of illegal acts (similar to AML)

6. Responding to Suspected Illegal Acts Pivotal Issues Raised by Respondents • Requirement for other PAs to disclose to the external auditor • Receiving such disclosures is the role of management and TCWG and not the external auditor • Conflicts with legal and confidentiality requirements • Companies may be discouraged from engaging PAs to perform forensic accounting, due diligence and services performed under attorney-client privilege • Unclear external auditors’ responsibilities with respect to such disclosures • Auditor forced to deal with vexatious reports or reports unrelated to audit Alternative suggestions • A number of respondents considered such a disclosure as an option that was available to other PAs faced with an SIA rather than a requirement

7. Responding to Suspected Illegal Acts Pivotal Issues Raised by Respondents • Right with expectation for other PAs to disclose to an appropriate authority • Right + expectation = De facto requirement • Purview of national regulators and lawmakers • A professional code cannot provide for a “right” that overrides statutory and regulatory confidentiality Alternative suggestions • Many supported simply a “right” or being “permitted “ to disclose without the expectation to exercise

8. Responding to Suspected Illegal Acts IOSCO – Key Comments • Supportforbetterguidance in Code • Redeliberateto a properbalancebetweenwhat PA iscalledupon and allowedto do withrespecttoSIAs • Doesnotconsider authority’s abilitytointake and processsuchdisclosures • ConfirmsneedtoaddressPAsotherthanauditors • Reconsider: • Typesofillegalactstobecoveredby the proposals • Responsibilitiesof management and TCWG • Responsibilitiesof auditor wherethereisdisagreementwith client • EstablishillegalactswhichcallforstepsincrementaltoISAs • Interactionwith IAASB and its project of auditor communications • Offertodiscussexperienceswithindividual IOSCO members

9. Responding to Suspected Illegal Acts Discussion Tocontinue or notto continue?

10. Responding to Suspected Illegal Acts Discussion Requirement for auditor to disclose to an appropriate authority Requirement to disclose to external auditor for PAIB and PA performing non-assurance services to non-audit clients Right with expectation to disclose to an appropriate authority for PAIB and PA performing non-assurance services to non-audit clients

11. Responding to Suspected Illegal Acts Secondary Issues • Requirement to confirm or dispel the suspicion • Many were supportive but recognized practical challenges • Many were opposed due to perceived constraints: • Is suspicion the right threshold? • Meaning of “reasonable steps”, “suspicion” and “suspected illegal act” • Lack of expertise of PA to determine what is illegal • Non-auditors may not have means or authority to investigate • Requirements and responsibilities should be clear for enforceablity • Conflict with AML requirements re “tipping-off” • In essence it is overly prescriptive Alternative suggestions • ISA 250 already establishes a process for auditor • PA should be permitted to use more judgment • Alternative to “suspected” illegal act, such as “likely”

12. Responding to Suspected Illegal Acts Secondary Issues • Public interest test and escalation threshold • Many were supportive of the concept of this threshold but some expressed concern about the lack of definition of the term • Many respondents were opposed to this threshold due to the lack of objectivity and scope for inconsistent application • IOSCO suggested that it would be in the public interest that any violation should be subject to appropriate handling • Many respondents were concerned that the process seemed to call for escalation of insignificant matters (particularly onerous for SMPs) Alternative suggestions • Threshold based on materiality • Develop guidance around the meaning of public interest

13. Responding to Suspected Illegal Acts Secondary Issues • Types of SIAs to be disclosed • ED: Matters to be disclosed are those pertaining to financial reporting or those in the expertise of the accountant (or subject matter of NAS) • Opinions were split with majority of respondents expressing opposition and a significant minority were supportive • Those expressing opposition did so because they believed that the subject of illegal acts reporting was the purview of national regulators • IOSCO suggested, as did some other respondents, that it would be in the public interest that any violation should be subject to appropriate handling • Interaction with ISAs • Proposals appear to go beyond existing ISAs 240 and 250 • Comments from regulators: • The proposals should be consistent with the ISAs • IESBA should coordinate its project with IAASB

14. Responding to Suspected Illegal Acts Secondary Issues • Meaning of appropriate authority • Difficulty on establishing who to report to • Not all countries have an appropriate authority • Doesnotconsider authority’s abilitytointake and processsuchdisclosures

15. Responding to Suspected Illegal Acts Secondary Issues Discussion

16. Responding to Suspected Illegal Acts Other Issues • Exceptionprovision • Manyrespondentsdidnotgive a viewastheywereopposedtoreportingrequirement and, accordingly, viewed the questionasirrelevant • Manythought the provisionlackedclarity • Some thoughtthat the circumstancesshouldbeexpandedtoinadequatelegalprotection, liabilityrisks, threatsto personal property • Scope ofapplication • PA performingnon-auditservicestoanaudit client versus toannon-audit client • PA performingnon-auditservicestonon-audit client versus auditors • Viewsweredivided on both • Documentation • Many thought the requirement to document was a departure from the existing approach of the Code

17. Responding to Suspected Illegal Acts Other Issues Discussion