Section 290 - Independence - Audit and Review Engagements
Comments from ACCA
October 2007
ACCA welcomes the opportunity to comment on the proposed revision of section 290 Independence – Audit and Review Engagements and section 291 Independence – Other Assurance Engagements of the Code of Ethics for Professional Accountants (the Code) issued for comment by the International Ethics Standards Board for accountants (IESBA) of the International Federation of Accountants (IFAC).
We believe the primary objective of the strengthening of the independence provisions of the Code should be to enhance both the perceived and actual objectivity of those performing assurance engagements, thereby enhancing audit quality.
We support, therefore, the aim of the IESBA to retain the principles–based approach to addressing the areas of internal audit, fees and contingent fees. We are, nevertheless, concerned that proposed revisions has further moved the Code to become a legalistic, rules-based standard, which can only encourage creative, loophole-based avoidance. We believe the robustness of the principles-based approach is being undermined by the proliferation of detailed underlying rules.
Internal Audit
We are broadly supportive of the changes proposed by the IESBA. In particular, we agree with the IESBA's view that:
- an audit firm should not provide internal audit services to audit clients where this involves the firm in performing management functions or reviewing its own work
- audit firms assisting audit clients with the performance of a significant part of their internal audit function should only do so if audit clients allocates sufficient resources to the activity
and
- it is not appropriate to have a more restrictive requirement for audit clients that are entities of significant public interest; the requirements should be the same for all audit clients.
However, we believe paragraph 290.188 is confusing and should be clarified. We believe a distinction should be drawn between internal audit and internal control within the audit client because it is the service provided by the firm's personnel which may become part of the audit client's internal controls, not the individuals themselves.
Fees – Relative Size
We are broadly supportive of the proposed changes, in particular the safeguards suggested to mitigate the threats. We are, nevertheless, concerned at the bright-line nature of the fee dependency provisions. The inclusion of a fixed percentage (15%) limit on fees from any one client is at odds with the principles-based approach. This is because it does not consider other factors within the audit environment such as the significance of the fee to a particular office or a particular partner.
Similarly, t he varying legal and cultural frameworks in different jurisdictions may result in very different influences on what levels of income and other factors would be likely to result in fee dependency.
In particular, we are concerned that:
- a fixed percentage by its very nature, is arbitrary and does not take into account specific circumstances. This could mean 14.9% of total fees would be acceptable whereas 15.1% would not
- the basis and period for computing a fixed percentage may vary, depending on the types of services provided, the cut-off period, etc.
- a fixed percentage might have a disproportionate impact on smaller audit firms having one or very few significant public interest entities as an audit client
- there is a risk that auditors of significant public interest entities would only consider whether the percentage rule applies and would not consider the concept as a whole (fees related to network, firm, office, partner) as noted above
and
- a fixed percentage may also impact on the concentration and choice in the audit market. A degree of flexibility is needed because stringent inflexible requirement relating to audits may further hinder small firms from becoming auditors of entities of significant public interest in some jurisdictions. We would refer you to the UK Financial Reporting Council Discussion Paper: Choice in the UK Audit Market in this regard.
(Full document available in PDF format in the "See also" section).
Fees – Overdue
We are supportive of the proposed changes.
Contingent Fees
We are broadly supportive of the proposed changes to section 290. However, the proposed changes to section 291 appear to impose stricter requirements than those in relation to section 290.
Paragraph 291.153 refers to whether the amount is dependent on the ‘result' of the assurance engagement. However, this requirement does not appear to allow for any exception based on materiality, unlike paragraph 290.219(b). This is because the word ‘result' could be interpreted much more widely - for example if an event is dependent on the mere fact that the report is ‘signed off' - than the equivalent requirement in paragraph 290.219(b), where the term ‘result' is no longer used. We would suggest, therefore, that the requirements concerning contingent fees be consistently applied across both section 290 and section 291.
Special Considerations on Application in Audit of Small Entities
We believe the public interest is best served by developing principles-based standards, which cater for varying circumstances often applicable to audits of small entities. We accept that a Code containing nothing but a general discussion of principles, threats and safeguards is unlikely to completely meet the needs of the modern, complex profession and that examples of how these should be applied are necessary. However, the examples should not become prescriptive rules; the aim should be to deter auditors from ‘tick-box' compliance with the form of the requirement rather than the substance (see our comments under Fees – Relative Size ).
In particular, the introduction of a fixed percentage limit on fees from an entity of significant public interest might have a disproportionate impact on smaller audit firms, which may further hinder small audit firms from becoming auditors of entities of significant public interest in some jurisdictions.
Developing Nations
The comments noted in relation to small entities above also apply.