IESBA Technicaldirectorinternationalethics Standards Boardforaccountants

Ken Siong

IESBA TechnicalDirectorInternationalEthics Standards BoardforAccountants

Sentbyemail:

Brussels, 18April 2016

Subject:FEEcommentsontheIESBAExposureDraft:ImprovingtheStructureoftheCodeofEthicsfor ProfessionalAccountants–Phase1

Dear SirorMadam,

TheFederationofEuropeanAccountants(TheFederation)ispleasedtoprovideyouwithitscommentson the IESBA ExposureDraft:Improving theStructureoftheCodeofEthicsforProfessionalAccountants–Phase1(theED)proposingamendmentstotheIESBACodeofEthicsforProfessionalAccountants(theCode).

TheFederation’sresponsestothequestionssetoutintheEDcanbefoundintheappendixtothisletter.

Generalcomments

Asafirstremark,thesecommentsshouldbeunderstoodaspreliminaryastheFederationwouldliketoassessPhase2ofthisproject,aswellastheoutcomeofotherEDscurrentlyunderconsultation,beforeexpressinganyfinalopinionontheoverallimpactoftheproposedchangestotheCode.Nevertheless,wewelcomeIESBA’sinitiativeonrestructuringtheCodeasthisiskeytotheobjectiveofenhancingitsunderstandabilityandusabilityandthereforecontributingtowidespreadapplication byprofessionalaccountants.

Thatsaid,webelievethattheproposedtitleismisleadingastheintentionisnotto developstandardsforallpartsoftheCode.Mixingtheterms“Code”and“Standards”inthetitleisnottherightapproach.Webelievethatthefundamentalprinciples(particularlyintegrityandobjectivity)primarilyaddressthemind-setandbehaviouroftheprofessionalaccountant.Assuch,theseprinciplesdonotfitintoapurelylegalisticconceptofcomplianceandenforcement.Onthecontrary,theconceptofindependencewasdevelopedasaproxyforobjectivityandmaywellbesubjecttocomplianceandenforcementmeasures.

Avenued’Auderghem 22-28 •B-1040 Brussels •Tel:+32 28933360•

Itisimportanttodistinguishbetweenthefundamentalprinciplesandthoseprinciplesthatmayresultinstandards.ThefundamentalprinciplesascurrentlysetoutinPartAoftheCodeprimarilyaddressthemind-setandrequiretheprofessionalaccountanttoapplyaconsequentbehaviourandtoexerciseprofessionaljudgment.Standards,inourview,canbederivedfromsuchfundamentalprinciples;butsuchstandardsshouldprimarilybedesignedtoprovideorganisationsandindividualswithaframeworkthatallowsthemtodemonstrateanddocumenttheircompliancewiththerequirements(which,asaconsequence,wouldalsomakethestandardseasiertoenforce).Asanexample,independencecanbeseenasaconceptderivedfromthefundamentalprinciplesthatcanbeenforced.Withoutlosingsightoftheimportanceofenforceability,themainconcernoftheCodeshouldremaintoaddressthemind-setandbehaviouroftheprofessionalaccountantinsteadofpromoting merecompliance with a set of provisions.On the other hand,compliancewith eachof therequirementsdoesnotnecessarilymean compliancewith thefundamentalprinciples,and thisaspectshouldbeemphasised in thisrestructuring exercise.

Wefavoura‘buildingblock’ora‘layered’approachthatcouldbe easilyscalable–acoreblockfor allprofessionalaccountants(includingsmall-andmedium-sizedpracticesthatdonotdealwithPublicInterestEntities)andcomplementingblocksdealingwithspecificactivities orcircumstances.Thiscanbeeasilyimplementedwithaproperelectronictoolthatenables,amongotherfeatures,thedistinctionbetweenprovisionsapplicabletoPublicInterestEntities(PIEs)andnon-PIEsintheproposedPartsBandCoftheCode.ThisapproachwouldalsohelpreducethelengthoftheCodethat needstobeconsidered bymostprofessionalaccountants.

Regardingtheallocationofresponsibilitiesbetweenfirmsandindividuals,wewelcometheapproachofmaintaining theexistinglinkbetween theCode,ISQC1and ISAs andaresatisfiedwiththeapproachtakenbyIESBAindeferringfurtherconsiderationonthismatteruntiltheoutcomeoftheIAASB’sprojectonISQC1.Althoughfirmsandprofessionalaccountantseachhaveresponsibilitiestocomplywithindependencerequirements,theCodeshouldsticktotheprinciplethatitaddressesprofessionalaccountantsingeneral(thatincludefirmsinthedefinition)andthereforeshouldnotincludeanyspecificrequirementsaddressedtofirmsornetworkfirms.

WeappreciatetheopportunitytoprovideinputandhopethatIESBAfindsourcommentshelpfulwhen amending theCode.

ForfurtherinformationonthisFEEletter,pleasecontactNoémiRoberton+TiagoMateuson+3228933376orviaemailat .

Kind regards,

Onbehalf ofthe Federationof European Accountants,

PetrKrizOlivier Boutellis-Taft

PresidentChief Executive

Appendix

RefinementstotheCode

1.Doyouagreewiththeproposals,ordoyouhaveanysuggestionsforfurtherimprovementtothematerialintheED,particularlywithregardto:

(a)Understandability,including theusefulnessofthe Guidetothe Code?

HavinginmindthattheprimaryobjectiveofthisrestructuringexerciseshouldbetomaketheCodeclearer andmore understandable,theFederation applaudsthe introductionof theGuide totheCodeas itwill certainlycontributetothispurpose.

Nevertheless,thereferenceto“AdditionalNon-AuthoritativeGuidance”inpoint13couldbemisinterpretedtounderstandthatitisalsopartoftheCode.ProvidingguidanceisalwayspositivebutwequestiontheneedtospecificallyrefertoitintheGuidetotheCodeandlabellingitas“Non-Authoritative”.Thisreferencein paragraph 13of the Guidecouldthereforebedeleted.

(b)Theclarityoftherelationshipbetweenrequirementsandapplicationmaterial?

TheseparationandrelationshipbetweenrequirementsandapplicationmaterialrepresentsanareaofimprovementintheproposedCode.ThiswillsurelycontributetofacilitateadoptionandimplementationoftheCodeacrossjurisdictions,followingtheFederations’previousrecommendations inthisregard.

(c)Theclarity ofthe principlesbasisofthe Code supportedby specificrequirements?

AnystandardshouldclearlyderivefromthefundamentalprinciplesenshrinedintheCodeandnotthe otherwayaround.Werefer to our general comments.

Thisrestructuringmaybeseenasashifttowardsamorerules-basedcode,withalltheemphasisbeingputonstandards.Sometimestheimpressionisgiventhatprofessionalaccountantsshouldfirstlycomplywiththedetailedandspecificrequirementsandonlyafterwardsfocusontheunderlyingprinciple.

(d)TheclarityoftheresponsibilityofindividualaccountantsandfirmsforcompliancewithrequirementsoftheCode inparticular circumstances?

Asstatedabove,wewelcometheapproachofmaintainingtheexistinglinkbetweentheCode,ISQC1,andISAs.IESBAshoulddeferfurtherconsiderationonthismatteruntiltheoutcomeoftheIAASB’sprojectonISQC1.Althoughfirmsandprofessionalaccountantseachhaveresponsibilitiestocomplywithindependencerequirements,theCodeshouldsticktotheprinciplethatitaddressesprofessionalaccountantsingeneral(thatincludefirmsinthedefinition)andthereforeshouldnotincludeanyspecificrequirements addressedtofirmsornetworkfirms.

Furtherinitiativesonthismattershouldavoidintroducinganyadditionalcomplexityintermsofrequirementsorguidanceapplicabletofirmsandconsidertheimpactonsmall-andmedium-sizedpractices(SMPs)andsolepractitioners.ThisapproachwillhelpensurethattheoverallframeworkoftheCode,ISQC1,andtheISAsremainsclear,understandable,andsuitableforglobalapplicationbyindividualprofessionalaccountants and firmsofall sizes.

(e)The clarity oflanguage?

TheFederationsupportsIESBA’sattempttoenhanceclarityoflanguageoftherequirementsstatedintheCode,namelytheuseofsimplerandshortersentencesandtheincreaseduseoftheactivevoice.Itisgreatlyachievedinanumberofinstances,butneedstobeassessedmoregenerallyandwithathoroughanalysisthatwehavenotyetperformed.Thereareafewinstanceswhereconcisenesscould beconsidered further,forinstance,in theGuidetotheCode:

• paragraph 4:theexplanation ofthe purposeofthe Glossarycould beshorter
• paragraph 5:could beclearerbystating that“thecontent ofeachsection is:[…]”

(f)Thenavigability ofthe Code, including:

i.Numberingandlayout ofthe sections;

Thenewnumberingconventionisconfusingastherearethreetypesofnumberingaccordingtothenatureoftheprovision,namelyforintroduction,requirements,andapplicationmaterial.Thisnumberingconventioncanalsobeanobstacleforaclearreferencetoacertainprovision,thereforeharming theobjectiveof enhancing theusabilityofthe Code.

Additionally,thelinkbetweenthegeneralindependencerequirementincludedinsection400andthespecificrequirementsincludedinsection410andfurtherneed tobeexplained.Itshouldbe clearhowthe specificindependencerequirements allderivefrom the general ruletobeindependent.

ii.Suggestionsforfutureelectronicenhancements;and

Therearecertainjurisdictionsinwhichitisnecessaryforapaper/pdfversionoftheCodetobepublishedintheofficialjournaloftherelevantministry.Therefore,anyelectronicversionoftheCodeshouldalwaysbeaccompaniedbyausablepaper/pdfversion.Enhanceduser-friendliness,although ofvitalimportance,shouldnotcomeattheexpenseof implementation.

Asstatedinthegeneralcomments,itwouldalsobeveryusefultodistinguishbetweenprovisionsapplicabletoPIEsandnon-PIEsintheproposedParts BandCoftheCode.ThisdistinctioncouldhelpmaketheprovisionsoftheCodemoreunderstandabletoSMPsandcanbeeasilyimplementedwitha properelectronictool.

Despitetheeffortsmade,thereisstillroomforimprovementtomakecleartoSMPswhatprovisionsof theCodeareapplicableto themornot.

iii.Suggestionsfor future tools?

TheFederationsuggeststhatIESBAdevelop casestudiesor examples onhowtousetherestructuredCode.Someguidanceonthethoughtprocessthatneedstotakeplaceinspecificsituationswouldalsobeveryhelpfulforpractitioners.Thiscouldbedoneviafrequentlyaskedquestions,interactivetraining materials,webinars, etc.

(g)TheenforceabilityoftheCode?

Asmentionedabove,overtimeenforceabilityhasbecomeabenchmarktodefineastandard,sometimesleadingstandard-setterstooverridetheactualcontentofthestandard.Itisimportanttodistinguishbetweenthefundamentalprinciplesandthoseprinciplesthatmayresultinstandards.ThefundamentalprinciplesascurrentlysetoutinPartAoftheCodeprimarilyaddressthemind-setandrequiretheprofessionalaccountanttoapplyaconsequentbehaviourandtoexerciseprofessionaljudgment.Standardscanbederivedfromsuchfundamentalprinciples,butsuchstandardsshouldprimarilybedesignedtoprovideorganisationsandindividualswithaframeworkthatallowsthemtodemonstrateanddocumenttheircompliancewiththerequirements(whichwouldalsomakethestandardseasiertoenforce).Asanexample,independencecanbeseenasaconceptderivedfromthefundamental principles –that can beenforced.

Withoutlosingsightoftheimportanceofenforceability,webelievethatthemainconcernoftheCodeshouldbetoaddressthemind-setandbehaviouroftheprofessionalaccountantinsteadofpromotingmerecompliance with a set ofprovisions.On the other hand,compliancewith eachof therequirementsdoesnotnecessarilymeancompliancewiththefundamentalprinciplesandthisaspectshould beemphasised in thisrestructuring exercise.

2.DoyoubelievetherestructuringwillenhancetheadoptionoftheCode?

IntroducingmoreclarityandunderstandabilitytotheCodewillsurelyenhanceapplicationbyauditfirmsthatarealreadyusingit,inmostcasesasastrongbasisfortheirinternationalethicsrules,andcould have a positiveimpactonrelationshipswithsupervisoryauthorities.

Theaimoftherevisedstructureshouldbetoenableusersandstakeholderstobetterunderstandhowthefundamentalprinciplesapply,thecircumstancesinwhichthethreats-and-safeguardsapproachisapplied,and(whererelevant)whatisrequiredfromprofessionalaccountantsinspecificsituations.Thisexercisemaythencontributetoimprovingclarityandconsistency,enhancingimplementation.

However,itisdoubtfulthattherestructuringoftheCodeascurrentlyproposedwillincreasethelikelihoodoftheCodebeingadoptedandeffectivelyimplementedintolawsandregulations.Thelegislativeand regulatoryframeworksusedthroughout theworldarequitedifferent, and evenwithincertaincountriesseverallegislativeandregulatorybodiesmayberesponsiblefordifferentsubjectsaddressed in theCode.

3.DoyoubelievethattherestructuringhaschangedthemeaningoftheCodewithrespecttoanyparticularprovisions?Ifso,pleaseexplainwhyandsuggestalternativewording.

Forthesakeofconsistency,wethinkthattheproposed 112.3.A1and112.3.A2should notbementionedunder“objectivity”asindependenceonlyrelatestoaudit,review,andotherassuranceengagementscarriedout byprofessionalaccountantsin publicpractice.

Anotherexampleisthefundamentalprincipleofprofessionalbehaviour.IntheextantCodethereisaninconsistencybetweensubparagraphe)of100.5thatstated“tocomplywithrelevantlawsandregulationsandavoidanyactionthatdiscreditsthe profession”and150.1whichstatedformerly“tocomplywithrelevantlawsandregulationsandavoidanyactionthattheprofessionalaccountantknowsorshouldknowmaydiscredittheprofession”.IntheproposedCode,IESBAtookthislastdefinition,replacing“may”for“might”,makingtheprinciplemorestringentinawaythat theavoidancerelatestoanyactionthat“theprofessionalaccountantknowsorshouldknowmightdiscredit the profession”.Wethinkthatit is thedefinition in subparagraphe) of100.5thatshouldbekeptand urgeIESBAto make itconsistentin theCode.

RegardingR100.4,whichcorrespondsto100.10oftheextantCode,wequestionthemoveofthisparagraphtotheIntroductionofCode.Itshouldbeincludedinsection110asitisarequirementforprofessionalaccountants.Inaddition,thisisagoodopportunitytointroduceareferencetoactionstostopthebreach.Today,theprofessionalaccountantisrequiredtoaddresstheconsequencesofthebreachanddeterminewhethertoreport the breach,butnospecificaction mustbetakentostopthe activitythatcausesthebreach.

OtherMatters

4.Doyouhaveanycommentsontheclarityandappropriatenessoftheterm“audit”continuing to include“review”for the purposesoftheindependencestandards?

Itshouldbestatedthatindependenceequallyappliestoreviewengagementsinsteadofmentioningthat theauditengagementincludes thereview.

5.Doyouhaveanycommentsontheclarityandappropriatenessoftherestructuredmaterialinthewaythatitdistinguishesfirmsandnetworkfirms?

Regardingthereferencetofirmsandnetworkfirms,theproposedrestructuredCodeintroducesaparadigmshiftasitamendsthepreviousgeneralrulebyclearlydistinguishingbetweenthetwoconcepts.

TheFederationbelievesthatthisamendmentintroducessomeclarityandcertaintyregardingtheaddresseesoftheprovisions,which contributestotheunderstandabilityoftheCode.

Aspreviouslymentioned,theCodeshouldsticktotheprinciplethatitaddressesprofessionalaccountantsingeneral(thatincludefirmsinthedefinition)andthereforeshouldnotincludeanyspecificrequirementsaddressed tofirms ornetworkfirms.

6.IstheproposedtitlefortherestructuredCodeappropriate?

Asstatedinthegeneralcomments,theFederationbelievesthattheproposedtitleismisleadingastheintentionisnottodevelopstandardsforallpartsoftheCode.Mixingtheterms“Code”and“Standards” in thetitleis nottherightapproach.Pleasereferto our generalcomments.

Thefundamentalprinciples(particularlyintegrityandobjectivity)primarilyaddressthemind-setandbehaviouroftheprofessionalaccountant.Assuch,theseprinciplesdonotfitintoapurelylegalisticconceptofcomplianceandenforcement.Onthecontrary,theconceptofindependencewasdevelopedasaproxyforobjectivityandmaywellbesubjecttocomplianceandenforcementmeasures.

Thatsaid,itisimportanttodistinguishbetweenthefundamentalprinciplesandthoseprinciplesthatmayresultinstandards.ThefundamentalprinciplesascurrentlysetoutinPartAoftheCodeprimarilyaddressmind-setandrequiretheprofessionalaccountanttoapplyaconsequentbehaviourandtoexercisepersonaljudgment.Standardscanbederivedfromsuchfundamentalprinciples,butsuchstandardsshouldprimarilybedesignedtoprovideorganisationsandindividualswithaframeworkthatallowsthemtodemonstrateanddocumenttheircompliancewiththerequirements(which would also makethestandardseasierto enforce).

Forexample,thefundamentalprincipleofobjectivityshouldremaininaCodeofEthics,whilstthoseprovisionsthat canberegardedasderivedfromthisfundamentalprinciple–inparticulartheprovisionsrelatedtoindependenceinappearance–mightbeconsideredsuitableforstandards.Onthisbasis,IESBA maywish toconsiderdistinguishing between thecontentof thecurrent sections290and291oftheCodeonindependenceforassuranceengagements(e.g.as“independencestandards”)andtherestoftheCode.SuchadistinctionshouldneverthelessnotresultinasimplisticseparationinordertoadapttheoverallconceptualframeworkapproachofthecurrentPartAoftheCodeappropriately.

RequestforGeneralComments

Inadditiontotherequestforspecificcommentsabove,theIESBAisalsoseekingcommentsonthematterssetoutbelow:

(a)SmallandMediumPractices(SMPs)–The IESBAinvitescommentsregardingtheimpactofthe proposedchangesforSMPs.

TheFederationbelievesthatitwouldbeveryusefultodistinguishbetweenprovisionsapplicabletoPIEsandnon-PIEsintheproposedPartsBandCoftheCode.ThisdistinctioncouldhelpmaketheprovisionsoftheCodemoreunderstandabletoSMPs.Thereisstillroomforimprovementtomakeclear toSMPswhatprovisionsof theCode areapplicable to them or not.

Wefavoura‘buildingblock‘ora‘layered’approachthatcouldbe easilyscalable–acoreblockfor allprofessionalaccountants(includingSMPsthatdonotdealwithPIEs)andcomplementingblocksdealingwithspecificactivitiesorcircumstances.ThisapproachwouldalsohelpreducethelengthoftheCodethatneedstobeconsideredbymostprofessionalaccountants.Thiscoreblockshouldcontaintheoverarchingmatterssuchasthefundamentalprinciplesandfurtherlayerswouldcontainmoredetailed requirements.Wethink thattheelectronicCodecan help inthisregard.

(b)DevelopingNations—RecognizingthatmanydevelopingnationshaveadoptedorareintheprocessofadoptingtheCode,theIESBAinvitesrespondentsfromthesenationstocommentontheproposals,andinparticular,onanyforeseeabledifficultiesinapplying themintheir environment.

TheFederation hasno comment onthisquestion.

(c)Translations—Recognizingthatmanyrespondentsmayintendtotranslatethefinalpronouncementforadoptionintheirenvironments,theIESBAwelcomescommentonpotentialtranslationissuesrespondentsmaynoteinreviewingtheproposals.

Fornon-English-speakingcountriesandcountriesthathaveonlyrecentlytranslatedtheCode,themodificationofthestructureoftheCodewilllikelybeverycostlyinordertoadapttheircurrentprovisionsto the newstructureoftheCode.

Ontheotherhand,changingthemeaningofsomeprovisionsintheCode,asreferredtoinourresponsetoquestion3,mayhaveanimpactonthetranslationoftheCode.Thiswillneedtobeproperlyassessed.

Asstatedinthe general comments,theFederation wouldliketoassessPhase 2 ofthisprojectbeforeexpressingits finalopinion onthe overallimpactof theproposedchangestotheCode.Astrong cost-benefitexercisewillneedtotakeplaceafterconsolidatingPhase1andPhase2–notonlyfromIESBA,butalsofromusers and otherstakeholders.