IESBA proposes major revisions to independence standards for auditors

The International Ethics Standards Board for Accountants has released two exposure drafts for proposed ethical standards aimed at strengthening the non-assurance services and fee-related independence provisions of the International Code of Ethics for Professional Accountants.

Among the key changes proposed in the exposure draft on proposed Revisions to the Non-Assurance Services Provisions of the Code are a prohibition on providing non-assurance services to an audit client that is a public interest entity if a self-review threat to independence will be created; and further tightening of the circumstances in which materiality may be considered in determining the permissibility of a non-assurance service.

The exposure draft also strengthens some of the provisions pertaining to auditor communication with those charged with governance, including, for public companies, a requirement for pre-approval of non-assurance services by those charged with governance. There are also stricter requirements regarding the provision of some non-assurance services, including certain tax and corporate finance advice. The exposure draft also includes enhanced guidance to help firms evaluate the level of threats to independence when providing non-assurance services to audit clients.

Courtesy of IFAC

Among the main proposed changes in the exposure draft on Proposed Revisions to the Fee-Related Provisions of the Code are a prohibition on firms allowing the audit fee to be influenced by the provision of services other than audit to the audit client. In the case of public interest entities, there’s a new requirement to cease to act as auditor if fee dependency on the audit client continues beyond a specified period. Another provision includes communication of fee-related information to those charged with governance and to the public to help with their judgments about auditor independence. The exposure draft on fee-related provisions also includes enhanced guidance on identifying, evaluating and addressing threats to independence in relation to other fee-related matters, including the proportion of fees for services other than audit to the audit fee.

“Auditor independence, in fact and in appearance, is fundamental to public confidence in the financial statement audit, and in turn in the integrity of the entire financial system,” said IESBA chairman Dr. Stavros Thomadakis in a statement. “Our proposals are a timely response to growing public perceptions about the need to reinforce auditor independence, as well as specific concerns from the regulatory community and the Public Interest Oversight Board, especially in relation to audits of PIEs. The more stringent provisions concerning the offer of NAS to PIE audit clients, as well as the transparency and other substantive proposals concerning fees, further raise the bar on auditor independence in the public interest.”

The proposals come amid a recent proposal by the Securities and Exchange Commission to loosen some of the traditional auditor independence rules in the U.S. despite concerns over audit firms’ involvement in a series of accounting scandals (see SEC proposes to relax long-standing auditor independence rules).

The IESBA developed the proposals with the help of the International Auditing and Assurance Standards Board. Both boards are affiliated with the International Federation of Accountants, but have come under pressure to overhaul their governance structure from international audit and financial regulators. The two boards said they plan to continue working together on finalizing the proposals.

The IESBA is asking for feedback on both exposure drafts from various stakeholders, including investors and other users of financial statements, the corporate governance community, the regulatory and audit oversight community, preparers, firms, national standard setters, IFAC member bodies, academics and others. Comments are requested by May 4, 2020.

The IESBA plans to host webinars during the comment period to provide an overview of the exposure drafts. Follow the IESBA on Twitter (@Ethics_Board) for updates on how to register for these events.