Safeguards

1. Safeguards IESBA Meeting September 19-22, 2017 Gary Hannaford, Task Force Chair

2. Objectives • Further consider certain comments on Safeguards ED-2 taking into account June 2017 Board input • Consider “first-read” draft of proposed revisions to Safeguards ED-2

3. Project Timeline

4. Coordination with Others Task Forces • Continued close coordination with Structure Task Force • Introductory paragraphs • Matters relating to use of “may versus might” • Explicit reference to “firms versus network firms” • Task Force works closely with Part C and LA Task Forces to revise safeguards-related proposed texts • No safeguards conforming amendments relating to NOCLAR

5. Recap of Significant Comments on Safeguards ED-2 • General support for project objectives and for proposals • Questions about appropriateness and effectiveness of certain safeguards • Confusion about “factors relevant to evaluating threats” vs. “safeguards” • Requests for post-project actions to promote awareness and adoption • Mixed views about broad prohibition of certain types of recruiting services – support from regulators and NSS, strong concerns from SMPs • Out of scope matters (e.g., NAS permissibility, documentation, materiality)

6. Key Topics for September 2017 Board Discussion • Significant Matters raised during teleconferences • Effectiveness/ appropriateness of safeguards • Factors vs Safeguards • Promoting awareness and assessing project effectiveness • Likelihood of threats • Prohibition of recruiting services • Other key revisions to proposed texts

7. Recap of Proposals in Safeguards ED-2 Overview of Common NAS Safeguards • Using professionals who are not audit team members to perform NAS • Having a professional review audit work or result of NAS • If NAS is performed by an audit team member, using professionals who are not audit team members, with appropriate expertise to review NAS • In some cases, having a professional who was not involved in providing NAS review the accounting treatment or presentation in f/s

8. NAS Safeguards Feedback from Respondents • Questions about withdrawal of certain safeguards • “… obtaining an advice from a third party in certain circumstances, e.g., a supervising or a controlling authority…” • Different language used to describe similar safeguards • Safeguards should be tailored so that they are appropriate to address specific threats • Request for more guidance for PAs to help determine effectiveness of safeguards

9. Task Force Proposals Determining the Effectiveness of Safeguards • PAs’understanding of facts and circumstances and exercising professional judgment (PJ) is critical to applying the CF, including when addressing threats • Safeguards vary depending on facts and circumstances • Determining effectiveness of safeguards requires exercise of PJ • Applyingsafeguards is only oneway to address threats • In some cases, might involve use of RITP to determine effectiveness

10. Task Force Proposals Overview of Revisions Made to Proposed Texts • Emphasize that safeguards are applied to reduce threats to an acceptable level (R120.10(b)) • New AM for addressing threats • Explain relevance of “factors” in addressing threats (120.10 A3) • Align and better link “Addressing Threats” section for PAPPs to CF (300.8 A1) • Reposition examples of “actions that might eliminate threats” and “actions that might be safeguards” • Revise proposed texts for all examples of safeguards involving “a review” • “Having an appropriate professional review …”

11. Task Force Proposals Factors Vs Safeguards • Clarifications made to proposed text to better link overarching requirements in S120 (i.e., Phase 1 work) to specific provisions in the rest of Code • Further explanation that conditions, policies and procedures are essentially “factors relevant to evaluating level of threats” • Explanation about relevance of conditions, policies and procedures in determining whether further actions are needed to address threats

12. Feedback from CAG • CAG generally supportive of Task Force’s proposed revisions • Questions about whether PAs would understand Task Force’s thinking based on proposed texts alone • Requests for guidance in Code to incorporate Task Force’s views (e.g., effectiveness of safeguards depend on specific facts and circumstances and require PAs’ exercise of professional judgment) • Develop new AM to example what is meant by “appropriate”

13. Promoting Awareness and Post Implementation Review Relating to Safeguards • Task Force agrees that other actions beyond refinements to Code are needed to help users understand changes to safeguards in Code and other changes to CF • New “Guide to Code” to help navigation of restructured Code • Basis for Conclusions to focus on highlighting key changes e.g., interaction b/w “factors that are relevant to evaluating threats” and safeguards • Important role for NSS, firms and others to help raise awareness of, revisions and promote/ support their effective implementation

14. Matter for IESBA Consideration • IESBA members are asked for views about proposed revisions to clarify appropriateness and effectiveness of safeguards • Do IESBA members believe new guidance should be developed to describe what is meant by “appropriate”? If yes, what do IESBA member believe should be included in such guidance?

15. Feedback on Safeguards ED-2 Likelihood of Threats Created • Some respondents questioned use of word “might” in NAS section of Code to describe likelihood of threats created • The use of “might” suggest that threat is remote when in reality threat is likely in most situations • Some expressed preference for extant word “may”

16. Task Force Proposal Likelihood of Threats Created • Structure Task Force refined description of “might” • Broader consideration of issues are required and that consideration of this matter is outside of Safeguards project scope • Task Force believes issues could be considered as part of future NAS initiative

17. Matter for IESBA Consideration • Do IESBA members agree with Task Force’s conclusion in response to comments about likelihood of threats created?

18. Prohibition of Certain Recruiting Services • Extant Code prohibit certain recruiting services for PIEs • Director or officer of the entity • Senior management in a position to exert significant influence over preparation of client’s accounting records or f/s on which firm will opine • Recruiting services prohibited • Searching for or seeking out candidates for above positions • Undertaking reference checks of prospective candidates for above positions • Safeguards ED-2 extended prohibition to all entities

19. Task Force Proposals Recruiting Services • New general description of recruiting services • New requirement with specific actions for firms to help avoid assuming management responsibilities • Similar to IT and internal audit • New subheading to emphasize that only certain types of recruiting services are prohibited • Re-ordered paragraphs to enhance readability and flow

20. Prohibition of Certain Recruiting Services SMPC Concerns • SMPC believes that prohibition on certain types of recruiting services may not be in the public interest • Auditor is not making a management decision • Threat is not of the magnitude that IESBA proposal implies • Proposal does not give sufficient consideration of a typical SME environment • In a number of jurisdictions, SMP often helps SME recruit right members to mgt team

21. Prohibition of Certain Recruiting Services SMPC Concerns (continue) • Align wording in 609.3 A1 to R609.7 • “…searching for or seeking out candidates…” and “…undertaking reference checks…” vs. “…sourcing or identifying potential candidates…” and “…reviewing the professional qualifications or competence of applicants and determining their suitability for the role…” • Clarify which recruiting services in 609.3 A1 are prohibited for all audit clients

22. Matter for IESBA Consideration • IESBA members asked for views about proposed revisions relating to recruiting services of Code (i.e., subsection 609)

23. Other Key Revisions to Proposed Texts – S600 • Explicit reference to category of threats in introductory section and in describing action that might address threats • Advocacy threats added in 603.1 and 604.10 • New factors for evaluating advocacy threats, as needed • New subheading titled “Accounting and Bookkeeping Services that are Routine and Mechanical” • The word “taxation” is change to “tax”

24. Revisions to Proposed Section 950 • Several changes aimed at achieving consistency in light of revisions to S600 (950.4, 950.5 A1 and R950.8) • Re-ordered certain paragraphs to enhance readability • Revisions to provisions relating to prohibiting the assumption of mgt responsibilities to align them more closely with those in extant Code (R950.6 to 950.7 A2)

25. Revisions to Conforming Amendments • Refinements to proposed texts to clarify guidance for applying CF across various sections in Code • Add new AM for addressing threats in 200.7 A1 and 300.8 A1 to 300.8 A3 • Delete duplicative req’ts in R270.5 and R600.9(c) • Revisions aimed at achieving consistency

26. Matter for IESBA Consideration • IESBA members asked for views about revisions to proposed texts (i.e., S600, S950 and conforming amendments to AIPT and to other Structure, Part C and LA proposals)

27. What Changes?

28. Conditions, Policies and Procedures • Can enhance PAs acting ethically/ complying with FPs • Help PA identify threats (120.6 A1) • Impact “level of threat” (120.7 A2) • General examples in 120.7 A2, specific examples = “factors …” • Not designed to deal with specific threats, and not always be effective in eliminating threats or reducing them to AL • Not safeguards, but certainly relevant to PA’s determination about whether threat is AL (BfC only, old 120.10 A3 deleted)

29. Determining Effectiveness of Safeguards • Term “safeguards” used to refer to actions that might be effective in addressing threats • Provisions in R120.5 relevant to addressing threats • Proposed Revisions • Add AM to emphasize importance of PJ in determining whether a safeguard is effective (see 120.10 A3) • Agree that trying to explain link b/w factors and safeguards in Code might confuse users into thinking that factors are safeguards (deleted in 120.10 A3) • Add description of “appropriate professional” (300.8 A3 and Glossary)

30. Determining Effectiveness of Safeguards (2) • Within each paragraph with an example of safeguards • Picked up “…in certain circumstances…” from 300.8 A1 to emphasize that PAs need to “think” about specific facts and circumstances in determining whether an action will address a threat • Mindful drafting refinements to avoid repetition while continuing to link examples of safeguards to specific threats and circumstance creating threat • Today’s turnaround show changes in S600 and S410 only • Board will also see revisions with input from today’s discussion in Part C and LA turnaround materials tomorrow

31. Other Revisions in Section 600 • Advocacy threats • Explicit mention in relation to assuming mgt responsibility • Factor and safeguards • Explicit reference to self-interest threats • Internal Audit and IT (Subsections 605 and 606) • Revisions to description of recruiting services • Fine tuning text and changes to minimize repetition