Attachment 2 – Additional comments on the proposals
Submission on amendments to the Code of Ethics for Non-Assurance Services.
As well as the matters raised in the covering letter and in Attachment 1, we have a number of detailed comments on the Exposure Draft as set out below.
| Paragraph | Comment |
| Paragraph 11 of the invitation to comment | The invitation to comment correctly observes that independence in appearance is critical; irrespective of whether the entity is a PIE. However, the Board intends to adopt the revised IESBA provisions that are limited to prohibiting assurance practitioners from accepting certain non-assurance services that might create a self-interest threat for audit or review clients that are PIEs. In addition, there is a specific prohibition on the provision of tax advisory and tax planning services for audit and review clients that are PIEs. The proposals do not adequately address independence in appearance, in that:
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| R600.14 | This requirement specifies the process that the assurance practitioner should follow to determine whether a non-assurance service can be carried out for an audit or review client that is not a PIE, where the service might create a self-review threat. If the Code is also intended to give the public confidence that assurance practitioners are independent (as we consider it should), this is an example of the complexity in the Code that fails to give that confidence. In addition, the assessments in (a) and (b) of R600.14 enable the assurance practitioner to examine the nature of the non-assurance engagement in minute detail and determine whether the results of the engagement will be encountered as part of the audit or review. A sceptical person might conclude that R600.14 is designed to allow fine adjustments to be made to the scope of the non-assurance engagement so that it is permitted under the Code. |
| R600.25 | We note this requirement does not contain a “shall” statement. |
| R600.26(c)(iv) | This is a condition requiring the firm to address other threats created by providing such services that are not at an acceptable level. Should the “not” be removed? |
| 601.5 A2 | This paragraph gives examples of “accounting and bookkeeping services” that might be regarded as routine or mechanical in nature and that might be carried out by an assurance practitioner for audit or review clients that are not PIEs. The fact that processes may be routine or mechanical is not a reason for permitting an assurance provider to carry out these services for the entity they are required to audit or review. These are processes over which the assurance practitioner is required to express an independent opinion. That an assurance provider, for example, is permitted to prepare payroll calculations stretches the credibility of the independent assurance they are required to provide. The one exception, in our view, relates to carrying out compilation engagements in the unique circumstances described in our response to question 5 in Attachment 1. |
| Subsection 604 generally | In our view, the Code should prohibit assurance practitioners from entering into any form of tax service with the entity, as described in A, B, C, D and E of subsection 604. The prohibition should apply to all audit clients, review clients, and assurance clients irrespective of whether the entity is a PIE. The threats to independence arising from tax services are so significant that they should not be accepted. Furthermore, mitigations cannot be applied to reduce the independence threats to an acceptable level. |
| 604.22 A1 | This paragraph states that a factor to be taken into account in identifying self-review or advocacy threats created by assisting an audit or review client in the resolution of tax disputes is whether the proceedings are conducted in public. It suggests if a dispute can be resolved “behind closed doors” then that lessens the threat to independence. Public confidence in assurance practitioners is diminished if a lack of transparency in process is seen as a mitigating factor in deciding whether non-assurance services can be accepted. |
| 605.2 A2 | There is a comment in this paragraph that suggests if internal audit involves matters that are “operational in nature” they do not necessarily relate to matters that will be subject to consideration in relation to the audit or review of the financial statements and can be accepted. This statement conveys a very narrow view of the purpose of the financial statements which, in part, is to fairly present the financial consequences of an entity’s operations. We suggest that assurance practitioners becoming involved in matters that are operational in nature does not automatically reduce the threats to independence from the perspective of the external auditor. |
| R610.6 | This requirement sets out a two-step process to be followed when deciding whether advice in relation to corporate services can be provided. The process requires that both steps need to be considered through the use of the connector “and”. However, in our view, if the advice depends on a particular accounting treatment or presentation in the financial statements (the first step) then that is a sufficient basis for not accepting the engagement because it presents an unacceptable threat to independence. |
| 605.5 A1, 606.6 A1 607.7 A2 607.8 A1 608.6 A1 608.10 A1 609.4 A4 610.7 A1 610.8 A1 900.32 A1 |
We have a concern that some of the safeguards in the Code are focused solely on mitigating threats to “independence of mind”, but do little to mitigate threats to “independence in appearance”. These paragraphs refer to the safeguard of using professionals who are not audit or review team members to perform non-assurance services. This safeguard does not satisfy the test of the reasonable third party informed only by publicly available information. The users of assurance practitioners’ reports tend to view non-assurance services as an indicator that a firm may be compromising the quality of the assurance engagement. |
| As stated in our covering letter, we also encourage the consideration of several fundamental matters. 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:
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