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.