Audit Conduct

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IESBA discusses technology, fees, long association and nonassurance services

The International Ethics Standards Board for Accountants (IESBA or the Board) held an open meeting in NYC on March 11 - 13, 2019. Among the topics discussed were: 

Technology Working Group

The Board commented on information the working group has gathered to date and the direction in which it is moving. Comments included: 

  • Stay in scope, i.e., don’t create ethics principles for artificial intelligence (AI), but rather address how the code's fundamental principles should be applied within the accounting and auditing context.
  • The code’s fundamental principles are sufficient but need to clarify how to apply in light of new technology.
  • On Theme E (described in the agenda), which says a professional accountant advising on technology should advise on both risks and benefits, should apply not only to     professional accountants in public practice but also to those in business.
  • Concern about “hybrid" accountability when professional judgment comes from a mixture of human and machine judgment.

Next steps: The working group will continue to gather information and will meet with the National Standards Setters in May 2019.

Long Association Q+As

Staff presented an updated version of the Questions and Answers (Q+A) document on Long Association of Personnel with an Audit Client provisions in the code (also redrafted to align with the new drafting conventions) as firms prepare to implement the revised long association provisions. Board members sought clarification, suggested edits and asked the working group to consider adding visual tools.

Next steps: The working group will consider the comments and update the document to be presented to the Board at a later date.

Fees Project

The Fees Working Group presented its preliminary proposals to the Board, seeking feedback.

Prior to the presentation, the Board's Vice-Chair noted that much of the proposals impacting the fees and nonassurance services projects hinge on a client being distinguished as a "public interest entity" or PIE. In light of this, the IESBA Planning Committee decided that a separate project on the definition of PIE (and the associated definition of "listed entity") will be accelerated (project proposal expected at the September 2019 Board meeting). The effective dates for these three (3) projects will be aligned.

PIE AUDIT CLIENTS
Level of audit fees

Comments included: 

  • do not prescribe a specific level of fees but consider ability to perform a quality audit
  • some questioned whether level of fees presents an independence issue
  • issue is more an issue of due care and competence
  • sustainability of low fees over a period of time more of an issue than individual engagements
  • creates an integrity / public interest issue

The working group chair said they will continue to connect low audit fees to independence and other provisions in the code, e.g. due care and competence.

Role of the audit engagement partner to ensure adequate resources are provided to the engagement: Staff raised a concern about creating provisions in the Code for audit partner responsibilities as those may be more appropriately addressed in the international auditing standards. One inquired whether an IAASB (International Audit and Assurance Standards Board) representative should attend the IESBA meetings when these issues are discussed.

New application material would indicate that Professional Accountants in Business (PAIB) should not exert undue pressure on an auditor to inappropriately reduce audit fees: Members cautioned the working group to be careful in creating such guidance and suggested that an example, rather than a requirement, may be appropriate.

Enhanced transparency (disclose fees to those charged with governance "TCWG" and the public): 

  • one member asked if the auditor does not disclose its fees in the client's financial statement report, do they lack independence?
  • fee disclosure would be required within 30 days (as a general guideline) 

Fee dependency: 

PIE AUDIT CLIENTS

  • discussed threshold of 15 percent of the firm's revenues as a benchmark
  • when reach level, after first year, inform TCWG; in second year, must apply safeguards; after 5 years, must resign audit

Comments included: 

  • in Japan, such rule would have a huge impact on the audit market as some unlisted PIEs are audited by smaller firms; may lead to firm rotation
  • in Belgium, the auditor cannot resign without significant reason, creates a conflict
  • joint audits should be considered a safeguard

Non-PIE AUDIT CLIENTS

Considering a threshold of 30 percent, which would tighten up the current rules and encourage disclosure and discussion with TCWG after the first year; after 3 - 5 years, require pre or post issuance reviews.

  • general view that pre-issuance review is more appropriate than post

Next Steps: IESBA representatives will seek input about the proposals being explored from the Forum of Forms in April 2019 and the National Standard Setters Liaison Group in May 2019.

Nonassurance Services Working Group

The working group chair indicated that an evolving landscape is putting greater emphasis on nonassurance services (NAS) performed for PIEs. He believes the PIE definition will likely be expanded. His group is proposing that NAS that create a self-review threat be prohibited for PIE audit clients and that new provisions regarding auditor communication with TCWG to pre-approve NAS be adopted. He said his group will work with the Fees working group to consider appropriate ratios of NAS fees to audit fees. Comments made in this discussion about the group's proposed approach included: 

  • general consensus that PIE NAS provisions should remain stricter than those for non-PIE audit clients
  • general disagreement that an official "blacklist" of prohibited services would be needed in the code
  • a lot of discussion about the lack of clarity around direct vs. indirect impact on the financial statements (in determining the self-review threat); some disagreement that it would be appropriate to include indirect impact in the provision