The PIOB's recommendations are based on the proposals discussed by the IESBA as of September 2019
For further information and details about the IESBA projects, please refer to the IESBA website:
Update of this document: October 25, 2019
Applicability of a minimum level of Professional Skepticism
or other suitable term
PIOB supports the idea that a minimum level of PS (or other suitable term, such as “critical mindset”) should be applied by all professional accountants.
The PIOB welcomes the current proposals in the ED, including: applicability of professional judgment to all PAs; requirement to exercise professional judgment “with an inquiring mind”; application material on the threat of “automation bias” and on the importance of firm “culture” with a reference to ISQM1.
Significant review of NAS, addressing independence issues
The PIOB expects a significant revision of the provision of NAS, ultimately addressing independence issues.
The PIOB welcomes the current IESBA proposals to prohibit firms and network firms to provide NAS to audit clients which are PIEs, “if a self-review threat will be created in relation to the audit of the financial statements on which the firm will express an opinion”.
The PIOB also welcomes the prohibition for audit firms to provide certain NAS, such as bookkeeping and accounting services, to audit clients which are PIEs, “when the results of such services impact the financial statements on which the firm will express an opinion”. Exceptions are not allowed any longer.
The requirement for audit firms to obtain agreement from TCWG before providing NAS to audit clients which are PIEs, is responsive to PIOB’s suggestions.
The definition of PIE becomes crucial to determine the categories of entities which are subject to stricter provisions in the Code. The possibility for the IESBA to accelerate the project on the definition of PIEs will have an impact on the applicability of the NAS and the other provisions in the Code of Ethics, such as Fees.
Provisions on Tax Services, within NAS, should be reviewed
The current proposals, within the NAS provisions, set a too low bar in allowing tax services.
The text (R 604.4) reads: “A firm or a network firm shall not provide a tax service to an audit client if the service relates to marketing, planning, or opining in favor of the tax treatment for a transaction unless that treatment is more likely than not to be allowable under applicable tax laws and regulations”.
The statement should be reviewed as it may have unintended consequences and be read as promoting aggressive tax planning rather than reasonable conservatism as expected from the audit profession.
Expected Completion Time and coordination with the Fees project
The expected completion time of the NAS project is Q1 2021.
Considering the time elapsed since the first review of NAS (2015), the PIOB encourages the IESBA to maintain NAS as a high priority project and complete it in a timely manner.
The PIOB supports the alignment of the NAS and Fees projects, and their finalization at the same time, given the overlapping aspects between the two projects.
Potential impact of fee levels and their significanceauditor independence
As shown in several researches, the share of revenue from consulting services is increasing in relation to those from audit. Accountancy firms may devote fewer and lower quality resources to audit activities. The relative level of fees in audit and in consulting, as well as overall revenues, should be considered from the perspective of ensuring high quality audits.
The PIOB welcomes the current IESBA proposal, in line with IAASB’s Quality Management Standards, to establish a requirement for the audit firm and the engagement partner, respectively, to establish a quality management system and to determine the sufficiency and appropriateness of resources assigned to the engagement.
For audit clients which are PIEs, the PIOB acknowledges the requirement for audit firms to communicate fees to Those Charged With Governance (TCWG) and to publicly disclose related-fee information.
On fee dependency from a client, the proposed changes require firms to disclose to TCWG whether the total fees from a PIE audit client exceed the threshold of 15% of the total fees received by the firm. The PIOB notes the possibility to end the engagement if the total fees from a PIE audit client exceed the threshold of 15% for five consecutive years.
The definition of PIE becomes crucial to determine the categories of entities which are subject to stricter provisions in the Code. The possibility for the IESBA to accelerate the project on the definition of PIEs will have an impact on the applicability of the Fees and the other provisions in the Code of Ethics, such as NAS.
Expected Completion Time and coordination with the NAS project
The expected completion time of the Fees project is Q1 2021.
The PIOB supports the alignment of the Fees and NAS projects and their finalization at the same time, given the overlapping aspects between the two projects.
Audit Firms’ Business Model may be a barrier to auditor
independence and Audit Quality
The audit firm business model can be seen as a barrier to real independence, to the effective implementation of Professional Skepticism, and to audit quality.
The current approach in the NAS and Fees projects does not challenge the concept of multidisciplinary audit firms.
Recognizing that the business model is a complex issue and that ethical issues are just an aspect of it, the PIOB recommends keeping it into consideration while advancing other projects (NAS, Fees). Continued coordination with the IAASB and other stakeholders is encouraged to identify a way to address the topic.
Ethical implications of Artificial Intelligence (AI)
As a consequence of the increased use of technology by the larger firms and the lack of guidance, it is in the public interest that the IESBA develops guidance and a framework for evaluation of ethical issues and biases when the firms use automation and artificial intelligence to perform audit procedures.
The PIOB appreciates the consideration given by the IESBA to develop guidance on ethical issues when audit firms use technology, to quickly address the relevant issues.
Importance of the definition of PIE and coordination with the IAASB
The definition of PIE is crucial to determine the categories of entities which are subject to stricter provisions in the Code. It affects important projects such as NAS and Fees.
Coordination with the IAASB is sought, to align the ISAs with the Code of Ethics and have a consistent application of the two sets of standards.
The definition of PIE should include all entities which have a public interest impact on society (e.g. financial institutions, listed companies, significant utility companies), as well as those defined as PIEs by national regulators in their own jurisdictions.