The PIOB's recommendations are based on the proposals discussed by the IESBA as of June 2020
For further information and details about the IESBA projects, please refer to the IESBA website:
Update of this document: July 1, 2020
The PIOB expects a significant revision of the provision of NAS, ultimately addressing independence issues
The PIOB expects a significant revision of the provision of NAS to address independence issues.
The PIOB welcomes the current IESBA proposals to prohibit firms and network firms from providing NAS to audit clients that 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 the services create a self-review threat that affects the accounting records or the financial statements on which the firm will express an opinion”. Exceptions are no longer allowed.
The requirement for audit firms to obtain agreement from TCWG before providing NAS to audit clients that are PIEs is a necessary measure responsive to PIOB’s suggestions.
Provisions on Tax Services, within NAS, should be reviewed
The initial proposals, within the NAS provisions, set the bar too low in allowing tax services.
The PIOB requested a revision of the text in R 604.4, which could have unintended consequences and be read as promoting aggressive tax planning rather than reasonable conservatism as expected from the audit profession. The IESBA revised and enhanced the text.
Potential impact of fee levels and their significance on auditor independence
As shown in several studies, the share of revenue from consulting services is increasing in relation to 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.
For audit clients that are PIEs, the PIOB acknowledges the requirement for audit firms to communicate fees to Those Charged With Governance (TCWG) and to disclose fee-related information publicly.
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 audit firm. The PIOB notes the possibility of ending the audit engagement if the total fees from a PIE audit client exceed the threshold of 15% for five consecutive years.
Applicability of a minimum level of Professional Skepticism or other suitable term
PIOB supports the idea that all professional accountants should apply a minimum level of PS (or other suitable term, such as “critical mindset”).
The PIOB welcomes the final text of R&M, including: applicability of professional judgment to all PAs; responsibility of PAs to act in the public interest; 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.
Importance of the definition of PIE and coordination with the IAASB
The definition of PIE is crucial to determine the categories of entities that 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 apply the two sets of standards consistently.
The definition of PIE should include all entities with 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, to ensure the global applicability of the Code of Ethics. Consideration should be given to any other entities outside the financial sector that could pose a threat to financial stability.
Clarify interaction of cooling-off period addressing Objectivity of the Engagement Quality Reviewer with cooling-off in Long Association provisions (Section 540)
The IESBA should clarify that the cooling-off period addressing threats to objectivity of an Engagement Partner (EP), when moving to the role of an Engagement Quality Reviewer (EQR), is different from and does not substitute the cooling-off period required in the Long Association provisions (Section 540) addressing independence and familiarity threats from an audit client.
In addition, Section 540 should explicitly explain the implications of the cooling-off period addressing threats to Objectivity on the 7-year “time-on” allowed with an audit client. Restrictions on the different Key Audit Partners’ roles allowed during that time of service should be clarified. For instance, an Engagement Partner who has served for five years will not be able to become Engagement Quality Reviewer during the remaining “time-on” period, after which he or she will be also affected by the cooling-off period set in Section 540.
The PIOB welcomes the revisions and the guidance included in the Code, however the interactions of the current proposals with other extant requirements in the Code, may create unintended consequences and hinder understandability and applicability of the Code of Ethics.
Cooling-off requirements should be explicit in the Code of Ethics
Identifying threats to Objectivity of the Engagement Quality Reviewer and applying safeguards to address those threats are ethical matters that should be dealt with comprehensively within the Code of Ethics.
While the Code should remain principles-based whenever possible, certain significant matters that impact the public interest may require more prescriptiveness. An extant example is the cooling off period included in Long Association in the Code. The requirement of a cooling-off period for an EP that moves to an EQR role, currently proposed to be included only in ISQM2, is a significant requirement that should be established as a requirement within the Code to ensure consistency of both sets of standards (ISAs and the Code) and within the Code.
Scalability of these requirements should be duly taken into account and, in particular, the implications on the applicability by Small and Medium Practice (SMPs) firms.
Coordination needed between IESBA and IAASB in relation to scope of application of a cooling-off requirement
The scope of the cooling-off requirement in ISQM2 should be fully aligned with the Code of Ethics, especially in relation to applicability to PIEs vs. other types of entities (e.g. listed entities). The PIOB acknowledges the coordination between IESBA and IAASB in developing this project. However, further coordination should be sought to ensure that there is consistent application of requirements across the universe of entities.
Given the different level of adoption of ISAs vs. the Code, the implications on the application of the requirements to different types of entities should be carefully considered.
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 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 one aspect of it, the PIOB recommends considering this issue while advancing other projects (NAS, Fees). Continued coordination with the IAASB and other stakeholders is encouraged to identify ways to address the topic.
Ethical implications of Artificial Intelligence (AI)
As a consequence of the increased use of technology by larger firms and the lack of guidance, it is in the public interest for the IESBA to develop guidance and create a framework for evaluating 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 developing guidance on ethical issues when audit firms use technology and encourages IESBA to address the relevant issues on a timely basis.