Submission on amendments to the Code of Ethics for Non-Assurance Services

29 October 2021

Robert Buchanan
Chairperson
New Zealand Auditing and Assurance Standards Board
PO Box 11-250
Manners Street Central
WELLINGTON 6142

Tēnā koe Robert

SUBMISSION ON AMENDMENTS TO THE CODE OF ETHICS FOR NON-ASSURANCE SERVICES

Thank you for the opportunity to comment on Exposure Draft 2021-4, Amendments to Professional and Ethical Standard 1: Non-Assurance Services. We note that the standard is being amended to more closely align with the International Code of Ethics for Professional Accountants issued by the International Ethics Standards Board for Accountants (the IESBA).

We are pleased that the Board is proposing to introduce more stringent requirements than the IESBA. However, in our view the proposed changes don’t go far enough.

In our view, the profession should have one set of independence requirements, set at the highest practical level. A private sector auditor should not operate at a lower standard than a public sector auditor.

Independence lies at the heart of trust and confidence in the audit profession. Without being, and being seen to be, independent the auditor simply cannot carry out their function effectively. In our view, if auditor independence is not sufficiently well protected the profession is likely to lose standing and reputation, and the public is likely to increasingly question the value of audit. In short, our position is that auditors should not be involved in non-assurance work for the entities they audit, and standards should reflect this position.

Although we acknowledge consensus building is generally important for standard setters, there are times when strong principled leadership is more important. We consider this to be one of those times. 

Improving clarity and strengthening content of the Code of Ethics (the Code)

The Code issued by the Board is written for assurance practitioners. It is long and complex. In our view, assurance practitioners and any members of the public who choose to read the Code would be better served by a Code that:

• used simple and straightforward language;
• set a high standard for independence that applied equally to “independence of mind” and “independence in appearance”;
• applied a single standard of independence to all entities and to all assurance engagements;
• required threats to independence (including independence in appearance) to be eliminated rather than mitigated;
• removed materiality as a factor in determining the provision of non-assurance services; and
• recognised that threats to independence can arise through events unrelated to relationships with, or interests in, the audit or assurance entity.

A high and consistent standard for independence

We agree that “appearance of independence” needs to be assessed from the perspective of a reasonable and informed third party. However, to properly apply this test, the assurance practitioner must put themselves “in the shoes” of the users of the assurance report and make their assessment based solely on publicly available information. Otherwise, the test fails.

We recommend a tighter definition of “independence in appearance”:

The avoidance of any facts and circumstances that might cause a reasonable third party informed only by publicly available information to conclude that a firm’s or an audit, review, or assurance team member’s integrity, objectivity, or professional scepticism has been, or may be, compromised.

Such a definition is similar to the notion of judicial independence; a standard to which the assurance profession should be aspiring to achieve, from a public interest perspective.

A single standard of independence for all entities and all assurance engagements

The Code applies different standards of independence based on whether the assurance engagement relates to the audit or review of financial statements of public interest entities or non-public interest entities, or other assurance.

Independence should apply to the assurance practitioner, not to the type of assurance they do. For example, applying a lesser independence standard to other assurance engagements assumes that they are less important than the audit or review of financial statements (and where relevant performance information). We do not support that assumption. For example, some assurance engagements, such as assurance over greenhouse gas emissions, may be seen to be more important than the audit or review of financial statements.

The application of safeguards

We consider that the Code would be more effective if it required the firm and the members of the assurance team to eliminate any threat to independence.

The emphasis on safeguards, in our view, is inappropriate and should be removed. Conflicts need to be eliminated, not mitigated. As Ken Hayne QC (head of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia) noted in his report “there must be recognition that conflicts of interest and conflicts between duty and interest should be eliminated rather than ‘managed’”.¹

Removing materiality as a factor in determining the provision of non-assurance services

Materiality should not have a bearing on the decision to accept or decline a non-assurance engagement. We do not agree with a materiality “exemption” that would allow non-assurance services to be carried out for entities that are not public interest entities, or for those entities where an assurance practitioner provides an assurance engagement other than the audit or review of financial statements.

Recognising other sources of threats to independence

The Code tends to focus on relationships or interests between the audit, review, or assurance entity and the assurance practitioner. However, threats to independence can arise in other situations.

A typical example is when an audit entity is disposing of a significant business unit. A member of the assurance practitioner’s network firm may be asked to act for a third party that is contemplating purchasing the business unit. The network firm will be conflicted because of its requirement to audit the vendor entity and its obligation to maximise the economic benefits to the purchasing third party.

This is a situation that threatens independence in appearance to the extent that no safeguards could effectively mitigate the threat.

In our view, the Code should alert assurance practitioners that threats to independence may arise from circumstances and events that do not directly flow from relationships with, or interests in, the audit or assurance entity.

Comment on the proposed amendments to the Code

Our responses to the questions for respondents are in Attachment 1. In Attachment 2, we have also included additional comments on other matters that came to our attention, some of which relate to the fundamental matters raised above.

I consider this a key moment in time for the XRB and the profession. Making a principled stand on independence will substantially increase the standing of the audit profession to those we are there to serve.

If you wish to further discuss any of the matters raised in this letter, please let me know. I would welcome further discussion.

Nāku noa, nā

John Ryan
Controller and Auditor-General

1: Commonwealth of Australia (2019), Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Volume 1, Final Report, page 45.