Global ethics board plans overhaul of auditor independence rules

The International Ethics Standards Board for Accountants (IESBA) is consulting on significant revisions to the ethics code relating to provision of non-assurance services and fees to client companies in a bid to strengthen auditor independence

The two exposure drafts are aimed at strengthening the rules and framework to reduce potential client conflicts through an overhaul of the provisions on non-assurance services (NAS) and fee-related independence rules. The proposals entail a fundamental overhaul of the International Code of Ethics for Professional Accountants.

The proposals on the provision of non-audit services (NAS) would effectively prohibit audit firms from providing NAS to audit clients that are public interest entities, if firms deem there is a potential conflict of interest.

The key changes to the NAS provisions include:

  • a prohibition on providing NAS to an audit client that is a public interest entity (PIE) if a self-review threat to independence will be created;
  • further tightening of the circumstances in which materiality may be considered in determining the permissibility of a NAS;
  • strengthened provisions regarding auditor communication with those charged with governance (TCWG), including, for PIEs, a requirement for NAS pre-approval by TCWG; and
  • stricter requirements regarding the provision of some NAS, including certain tax and corporate finance advice.

The NAS exposure draft also includes enhanced guidance to assist firms in evaluating the level of threats to independence when providing NAS to audit clients. 

Among the key proposed changes to the fee-related provisions include:

  • 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 PIEs, a requirement to cease to act as auditor if fee dependency on the audit client continues beyond a specified period; and
  • communication of fee-related information to TCWG and to the public to assist their judgments about auditor independence.

The Fees exposure draft 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 chair Dr Stavros Thomadakis.

‘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 were developed in cooperation with the International Auditing and Assurance Standards Board (IAASB) under the established coordination framework. The IESBA will continue to work with the IAASB to finalise the proposals.

The closing date for comment is 4 May 2020.

IESBA exposure draft, IESBA Proposed Revisions to the Non-Assurance Services Provisions of the Code, issued 21 Jan 2020

IESBA exposure draft, IESBA Proposed Revisions to the Fee-Related Provisions of the Code, issued 21 Jan 2020

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