Proposed Revisions to the Ethical Standards for Auditors
Comments from ACCA
January 2008
Executive Summary
ACCA welcomes the opportunity to comment on the Consultation Paper Draft Revised Ethical Standards for Auditors issued for comment by the Auditing Practices Board (APB) of the Financial Reporting Council.
We fully support the comments made by the major accountancy professional bodies in the UK and Ireland through the Consultative Committee of Accountancy Bodies (CCAB)1.
We take this opportunity, however, to emphasis some matters which are of particular interest to ACCA because of the worldwide nature of our membership and our international outlook.
We suggest that the APB should not make changes now that would be better made through adopting, in due course, the IFAC Code of Ethics for Professional Accountants (the IFAC Code).
We agree with the continued use of Ethical Standard Provisions Available for Small Entities (ES PASE) and suggest that the APB's effective participation in international standard setting should continue to acknowledge the needs of small entities.
We identify some difficulties with the drafting of new provisions in respect of network firms and, in answering the questions set out in the Consultation Paper, highlight the need for sufficient time to be allowed for firms to implement revisions to policies and procedures.
General Comments
International harmonisation
As an international body, ACCA is in a unique position to comment from a global perspective. We believe that it is generally not helpful for any national standard setter to issue national-specific standards where those standards will necessarily have extra-territorial effect. We believe global problems need global solutions. To that end, we believe global capital markets benefit most from the application of high quality international standards in all jurisdictions.
We are pleased to note, therefore, the strong participation of APB members in the work of the International Auditing and Assurance Standards Board (IAASB) and the IFAC International Ethics Standards Board for Accountants (IESBA) in particular through the appointment of the Chairman of APB as the first Chairman of the IESBA Consultative Advisory Group.
While we recognise the need for some updating of the Ethical Standards (ESs), we suggest that this be confined to the minimum necessary to respond to external changes (in regulation and the IFAC Code) and experience of operation of the ESs 2. We suggest that the eventual adoption in the UK and Ireland of the International Standards on Auditing (ISAs) will provide a suitable opportunity for the APB to move towards adoption of a strengthened IFAC Code.
Smaller entities
As set out in the comments made in the response of the CCAB, we concur with the continuation of the ES PASE. We support, however, a long-term approach under which ethical standards are aimed at audits of smaller entities (the great majority), with additional provisions for large audits.
In recent years the APB has engaged effectively with auditors providing services to small and medium-sized businesses, for example through the APB SME Audit Sub-Committee. APB's participation in international standard setting (referred to above) is informed, therefore, by the views of all sizes of audit firm (and associated stakeholders). We see this as an important factor that will contribute to the eventual development of international standards on a 'think small first' basis.
International Audits
The proposed approach to the application of ES 5 Non-Audit Services Provided to Audit Clients has been prompted by a change in the IFAC Code. A new provision (paragraph [D] of ES 1 Integrity, Objectivity and Independence ) requires the audit firm to be satisfied that network firms that are not involved in the audit comply with the requirement of the IFAC Code.
This contrasts with the requirement in paragraph 46 of ES 1 which applies inter alia in respect of network firms involved in the audit of the group financial statements. Under paragraph 46, the group engagement partner is required to be satisfied that the network firm is objective. Paragraph 47, in present tense explanation, refers to obtaining written confirmation of compliance with the IFAC Code.
The two requirements do not work well together as it appears that:
• the more onerous requirement is in respect of network firms not involved in the audit
• requirement [D] applies whether or not there is an audit of group financial statements, whereas paragraph 46 is restricted to that case
• the engagement partner is under no explicit obligation to be satisfied about the outcome of requirement [D].
We are also concerned as to the position where a network firm is known not to be in compliance with the requirements of the IFAC Code. There appears to be no mechanism for dealing with short-term non-compliance, or non-compliance in respect of aspects of the IFAC Code that are unrelated to the specific audit. Paragraph 26 of ES 1 deals with inadvertent violation of the Standard but is directed only at the audit firm and the engagement partner. A requirement on an engagement partner to ensure that action is taken by a network firm would not be feasible.
We suggest that more consideration is required in order to identify a solution to these problems.
Specific Questions
In this section of our response we answer the questions set out in the Consultation Paper.
Question 1: Do you have any concerns about the nature of the services currently being provided to listed companies by their auditors such that the APB needs to develop further standards and guidance for inclusion in the ESs?
We have no evidence from which we can draw conclusions relating to the nature of the services currently being provided to listed companies by their auditors 3. There are, however, two points that we would wish to make in relation to such matters.
In the light of the substantial decline in non-audit fees reported in the Consultation Paper, we see no pressing need to develop further standards and guidance for inclusion in the ESs.
The general approach to non-audit services in ES 5 is principles-based; accordingly, any new services are necessarily subject to analysis of their threats and safeguards. This argues that any further specific provisions, especially any that go beyond the IFAC Code, must be of considerable importance to justify their inclusion.
Question 2: Do you agree with the APB's view that there is no need to make major changes to the ESs? If not, why not?
While we agree with the APB's view at this time, we consider that the eventual adoption of the IFAC Code is in the public interest in the UK and Ireland. We have presented our arguments in support of that view in earlier responses and do not repeat them here.
We suggest that the adoption, in the UK and Ireland, of the ISAs will provide a suitable opportunity for the APB to reconsider its position.
Question 3: Do you believe that any of the proposed changes to ES s will add to audit cost? If so which changes and why?
All changes necessarily result in some cost to the audit as they require assimilation though changes to firms' documentation and training. Accordingly, we question whether there really is a need to change terms such as 'should' to 'shall' or 'audit client' to 'audited entity' when the existing text is already understood. It would be simpler to retain the existing terms until the IFAC Code is adopted.
We have a particular concern regarding the use of 'shall' to denote a requirement. The Consultation Paper explains that the IESBA is considering the implications of the new drafting conventions adopted by the IAASB in its 'Clarity Project'. Accordingly, as the APB is supportive of this it is proposing to apply the proposed new IFAC drafting convention by using the word 'shall', rather than 'should' to denote a requirement.
'Cherry picking' one aspect of the Clarity Project drafting conventions (if the APB does not adopt the IFAC Code, but adopts the ISAs) could result in an expectation gap whereby auditors and others assume that the requirements of ESs can be treated exactly the same as ISAs even though they are of a different nature.
The Clarity Project drafting conventions go much beyond what might appear to be a simple word substitution. The use of 'shall' is accompanied by other Clarity Project conventions that deal with, for example, the objectives of the auditor and circumstances where requirements are not relevant in the specific circumstances of an audit. The 'Clarified' ISAs are also significantly different in structure and content to the extant ISAs; present tense statements are eliminated.
We suggest that it is premature to make this isolated change before the IESBA decides how it is to adopt the Clarity Project drafting conventions.
Question 4: Given that the revised ES s will be effective for audits of financial statements for periods commencing on or after 6 April 2008, are there any changes to the ES s proposed by the APB which will be difficult to implement? If so, are transitional arrangements necessary?
The further provisions regarding the effective date in the extant ISAs (eg in ES 1) relate to the completion of audits under existing ethical standards and an extended time to allow implementation of revisions to policies and procedures. In ES 1, the first of these has been retained (proposed paragraph 58) but the later has not.
The permission in proposed paragraph 58 is not required in this revision as such audit engagements are subject to the extant ESs which are to be superseded. This wording may be retained if it is intended only as guidance.
The extended time to allow implementation of revisions to policies and procedures should be reintroduced as it is unrealistic to expect even minor changes to be capable of global implementation by 6 April 2008.
Question 5: The arguments outlined above appear evenly balanced and therefore the APB would appreciate commentators' views on whether to retain the existing requirement for audit engagement partners on listed companies to rotate after five years or move to seven years. What are your reasons for this view?
Please refer to the comments made in the response of the CCAB.
Question 6: Do you believe that APB should retain the existing requirement for audit engagement partners on listed companies to have a 'cooling-off' period of five years? What are your reasons for this view?
Please refer to the comments made in the response of the CCAB. We suggest that the requirement should be the same as that in the IFAC Code (currently a minimum of two years). Under a principles-based approach a longer 'cooling-off' period would be adopted where judged a necessary safeguard.
Question 7: Do you support the approach of the APB to continue relief for the auditors of smaller entities from a small number of the requirements in the ES s for a further period of time?
Please refer to the comments made in the response of the CCAB.
Question 8: Do you support the proposed strengthening of the ES s with respect to valuations, actuarial valuation services and litigation support services?
Please refer to the comments made in the response of the CCAB concerning the finalisation of the changes to the IFAC Code. Subject to the above, w e support the proposed strengthening as it is apropriate to align the ESs with the IFAC Code.
Question 9: Do you support the proposed relaxation of ES s with respect to certain financial interests in audit clients held by immediate family members of partners where those partners are not involved in that audit?
We agree with the reasoning advanced by the APB for relaxing this rule.
Question 10: Do you support the proposed relaxation of ES s with respect to certain business relationships with audit clients?
We agree with the reasoning advanced by the APB for relaxing this rule.
1. A copy of the CCAB letter is attached for ease of reference.
2. Later in this response, our answer to question 3 refers to proposed changes that could be deferred.
3. The APB will be aware of concerns expressed by the Treasury Committee in its report The run on the Rock concerning a particular conflict of interest between the statutory role of the auditor and the other work it may undertake for a financial institution.