Independence Audit and Review Engagements
Comments from ACCA
August 2008
ACCA welcomes this opportunity to comment on the International Ethics Standards Board for Accountants' (IESBA) exposure draft: Section 290 of the Code of Ethics – Audit and Review Engagements .
The IFAC Code of Ethics for Professional Accountants (the Code) is intended to follow a principles-based approach, which ACCA wholly endorses. Applied properly, the needs of entities of all sizes would be catered for in the Code. We are concerned that the proposed new restrictions move section 290 further away from the threats and safeguards approach, as they take no account of the significance of the threat.
Section 290 is becoming a legalistic, rules-based standard, which will only encourage creative, loophole-based avoidance. We believe the robustness of the principles-based approach is being undermined by the proliferation of detailed underlying rules.
Internal audit services
Question1: Respondents are asked for their views on whether the proposed restriction on providing internal audit services to public interest audit clients is appropriate.
We believe the position adopted by the IESBA in July 2007 was appropriate. In our view, additional prohibitions should only be introduced if it is clear that there are significant threats in the vast majority of circumstances and that public confidence in audit and review engagements is adversely affected by the absence of a prohibition.
We believe a fuller analysis of the threats and the adequacy of the safeguards is required, taking into account the public interest. The IESBA has not provided any market-based factual evidence or regulatory impact assessment to support its proposals. We believe the IESBA should carry out research into the need for and effects of the proposed changes before embarking on them.
We do not believe, therefore, that the proposed ‘blanket' prohibitions are justified. There needs to be recognition that often, safeguards are available, and that professional standards should not unreasonably fetter the ability of businesses to have access to professional services in the most cost-effective manner.
Question2: Respondents are asked for their views as to whether there should be an exception for immaterial internal audit services provided to an audit client that is a public interest entity.
The fact that views are sought on whether an exception for immaterial internal audit services provided to an audit client that is a public interest entity exposes the fact that the IESBA has failed to produce standards that are in the public interest. Section 290 seeks to impose rules designed for the audits of significant listed companies - for example SEC-registered entities - on even the smallest public interest entity. It disregards the basic principle that regulation should be proportionate. We nevertheless believe there should be an exception for immaterial internal audit services provided to an audit client that is a public interest entity.
Fees – relative size
Question3: Respondents are asked for their views on the appropriateness of the required frequency of the application of the safeguard and the requirement to determine whether a pre-issuance review is required in those instances when total fees significantly exceed 15%.
We are broadly supportive of the proposals concerning the required frequency of the application of the safeguards when the total fees exceed 15%.
Comments on other matters
Special considerations on application in audit of small entities
We do not believe section 290 deals adequately with the audit of small public interest entities. Such entities are common in many jurisdictions. For the independence provisions to be useful, they need to be user-friendly and easy to apply in practice. The IESBA needs to think ‘small first'; an approach which ACCA wholeheartedly supports.
We believe the proposed standard will have a particularly damaging impact on small businesses (both audit firms and clients). Any system of regulation of the auditing profession must be proportionate. The need for auditors to be independent needs to be balanced with the needs of the client.
Many businesses rely on their accountants as a ‘one-stop' source of advice. As a result, the proposed standard will unnecessarily prevent clients from using a trusted adviser who knows their business needs. The consequence of these restrictions will be that the cost of audit and other professional services will be unnecessarily higher for small public interest entities.
A particular safeguard may provide substantial benefit at a relatively modest cost when applied to say, SEC-registered entities but the converse will be true when the same safeguard is applied to other public interest entities. It makes no sense, therefore, to impose standards which are designed for SEC-registered entities on smaller public interest entities.
Developing nations
The comments noted under Special considerations on application in audit of small entities also apply to developing nations. In our view, the proposed changes to section 290 disregards the basic principle that regulation should be proportionate and will damage smaller businesses that make up the bulk of many economies.
In our view, the proposed standards simply burden audit firms and in particular small audit firms. This in turn impacts on their clients. The proposed standards will limit choice meaning that businesses face increased costs of professional advice and will be denied the option of receiving pro-active advice from their known and trusted adviser who understands their business and needs.