General comments
ACCA is supportive of the measures proposed to set out the appropriate course of action to take when a professional accountant identifies a breach of the Code, and we are content that the proposals go some way to ensuring that outcomes are proportionate and in the public interest. However, we express some areas of concern in our responses to specific questions raised.
In addition, we are of the opinion that there are weaknesses in the drafting of some of the proposed sections. In particular, it is not clear what is meant by the phrase 'eliminate the interest or relationship' in proposed sections 290.40 and 291.33. We would question whether the word 'eliminate' is appropriate in respect of a relationship, or whether the word 'terminate' is sufficient.
Request for specific comments
1. Do respondents agree that the Code should contain provisions that require professional accountants to address the consequences of a breach of a requirement in the Code? If not why not?
Inevitably, breaches of the Code will occur and, therefore, firms will require guidance in such situations. It is essential that the provisions of the Code focus on the public interest when addressing the implications of breaches, and the public interest would not be well served by a requirement or an assumption that an audit firm should terminate an audit engagement whenever a breach is discovered.
Therefore, we agree that the Code should contain provisions that address breaches of the Code by requiring professional accountants to consider the consequences and take appropriate action. We support the broad requirement of the proposed section 100.10.
2. Do respondents agree with the overall approach proposed to deal with a breach of an independence requirement, including the proposal that the firm may continue with the audit engagement only if those charged with governance agree that action can be taken to satisfactorily address the consequences of the breach and such action is taken?
We agree with the overall approach, and particularly support the link between disclosing breaches to those charged with governance, taking appropriate action, and continuing (or terminating) the audit engagement.
However, we believe that the provisions could be improved with regard to safeguarding future independence on discovery of a breach. Section 290.47 states that the firm may continue to act if those charged with governance agree that 'action can be taken to satisfactorily address the consequences of the breach'. We suggest the addition of the words 'and safeguard future independence'. Similar references to future independence are recommended in proposed sections 290.48, 290.50 and 291.35.
We support the inclusion of the requirement in proposed section 100.10 that any appropriate actions available to the professional accountant who identifies a breach shall be taken 'as soon as possible'.
3. Do respondents agree that a firm should be required to communicate all breaches of an independence requirement to those charged with governance? If not, why not and what should be the threshold for reporting?
In principle, we agree that there should be a requirement to communicate breaches of an independence requirement to those charged with governance. However, the precise requirement must be considered together with the documentation requirement, in order to avoid consequences that are unreasonably burdensome. Proposed section 290.50 would require documentation of 'all the matters discussed with those charged with governance', and this makes the extent of communication with those charged with governance particularly important.
First, we would advocate a modification to the proposed section 290.50, to say that the firm 'shall document as appropriate the action taken and all the matters discussed with those charged with governance'.
Further, it may be necessary to consider the significance (or materiality) of breaches that should be communicated to those charged with governance. In respect of some breaches, an assessment of materiality takes place in determining whether or not the situation meets the definition of a breach (eg section 290.211). However, a problem exists in areas of the Code in which prohibited situations have no regard for materiality (eg the direct financial interests of those set out in section 290.104).
Therefore, we would strenuously support an addition to the proposed sections concerning communication with those charged with governance, to require an assessment of the significance of a breach before determining the need to communicate.
4. Do respondents agree that the reasonable and informed third party test should be used in determining whether an action satisfactorily addresses the consequences of a breach of an independence requirement? If not, why not and what should the test be?
The reasonable and informed third party test is already evident throughout the Code, and we agree that the test is also relevant in respect of the adequacy of actions taken following discovery of a breach of the Code. This test is a useful tool to introduce a level of objectivity to the judgement of a professional accountant. It also focuses the professional accountant on the need to uphold ethical standards in order to maintain the reputation of the professional accountant, his or her professional body, and the profession itself.
5. Do respondents agree that the matters that should be discussed with those charged with governance as proposed in section 290.46 are appropriate? If not, why not? Are there other matters that should be included, or matters that should be excluded?
We agree with the list, in proposed section 290.46, of matters that should be discussed with those charged with governance, although the wording of the fourth item in the list could be improved. It does not appear to provide for a situation in which objectivity has, in fact, been compromised, but action can be taken to restore the integrity of the audit by, for example, re-performing some of the audit work.
6. Do respondents agree with the impact analysis as presented? Are there any other stakeholders, or other impacts on stakeholders, that should be considered and addressed by the IESBA?
We would draw attention to the points raised under questions 3 and 5 above, and the possibility of an unforeseen impact on audit firms and clients.
7. Would the proposal require firms to make significant changes to their systems or processes to enable them to properly implement the requirements? If so, does the proposed effective date provide sufficient time to make such changes?
The proposals in the exposure draft set out considerations and procedures that would currently be regarded as best practice. In addition, instances of discovery of material breaches of the Code are expected to be rare (but please see our comments concerning materiality under 3 above). Firms will be able to refer directly to the requirements of the Code when breaches are discovered. Therefore, we believe that significant changes to firms' systems and processes may not be necessary.
8. Is the abbreviated version of the framework described in Section 290 for dealing with a breach of an independence requirement suitable for Section 291? If not, what do respondents believe Section 291 should contain?
We believe that the abbreviated version of the framework described in Section 290 for dealing with a breach of an independence requirement is suitable for Section 291.