The International Ethics Standards Board for Accountants has proposed to strengthen the auditor independence standards in the ethics code to address long associations with audit and assurance clients.
Last Thursday, IESBA, which operates under the auspices of the International Federation of Accountants, released for public comment an exposure draft, Proposed Changes to Certain Provisions of the Code Addressing the Long Association of Personnel with an Audit or Assurance Client. The proposals respond to concerns about the appearance of independence and the need to ensure that the threats created by the long association of audit firm personnel with an audit client are appropriately addressed on all audit engagements.
“The IESBA has not received evidence that the current provisions in the IESBA Code addressing long association, including partner rotation, have not been working effectively in practice,” said interim IESBA chair Wui San Kwok in a statement. “However, developments in key jurisdictions and substantive stakeholder feedback indicate that expectations are shifting on what are considered acceptable safeguards to effectively address long association risks. The IESBA is responsive and is proposing to strengthen certain safeguards in the Code, such as the engagement partner cooling-off’ provisions, to ensure continued public confidence in the independence of the audit process.”
Among the proposed changes are strengthened general provisions for all audit engagements regarding the threats created by long associations between auditors and clients. With respect to partner rotation, IESBA is also proposing an increase in the mandatory “cooling-off” period, from two to five years, for the engagement partner on the audit of a public interest entity.
In addition, the board is proposing strengthened restrictions on the types of activities that can be undertaken with respect to an audit client and audit engagement by any former key audit partner during the cooling-off period. Another proposal would add a requirement to obtain the concurrence of those charged with governance regarding the application of certain exceptions to the rotation requirements.
The Ethics Board is also proposing strengthened provisions in Section 291 of the Ethics Code dealing with assurance engagements.
“The issues that the board considered are complex and interconnected, particularly given that knowledge of and experience with the audit client and its business are important contributors to audit quality,” said IESBA technical director Ken Siong. “The proposals reflect extensive and careful board deliberations into the options, weighing audit quality, cost, and practicality considerations.”
To develop the proposals, the IESBA conducted wide-ranging research, including a benchmarking exercise of jurisdictional requirements, stakeholder outreach and a survey that yielded more than 400 responses from standard setters, audit committees, regulators and firms.
IESBA is inviting all those with an interest in international ethics standards for the accounting profession to respond to the exposure draft and comment by visiting the Ethics Board’s Web site at www.ethicsboard.org. Comments are requested by Nov. 12, 2014. The Ethics Board is encouraging national and regional professional accountancy organizations to share the exposure draft and encourage participation from their members and employees.