Breach of a requirement of the ethics code

Project Status

This is an active project

Staff

Ken Siong

Task Force

Kate Spargo (Chair)
Wui San Kwok
Alice McCleary
Marisa Orbea

Objective(s) of project

This project reconsidered the paragraphs in the Code that address an inadvertent violation of the Code.

Background

The Code contains several paragraphs that address an inadvertent violation of a provision of the Code and state such a violation will be deemed not to compromise compliance with the fundamental principles, or independence, provided certain conditions are met.  The IESBA determined that a project should be commenced to re-consider these paragraphs.

Task Force progress / Board discussions to date

The Planning Committee of the IESBA determined that it would recommend the IESBA commence a project to address this matter.

The IESBA Consultative Advisory Group (CAG) discussed a draft project proposal at its September 2010 meeting

At its October 2010 meeting the IESBA approved a project proposal.

At its February 2011 meeting the IESBA, discussed the significant issues that would be addressed in the project including:

·         The need for provisions to address an inadvertent violation of a an independence requirement;

·         Use of the term “inadvertent”;

·         Use of the phrase “deemed not to compromise independence”

·         Whether the provisions should address all violations of an independence requirement;

·         The actions to be taken once a violation of an independence provision is discovered; and

·         The need for a provision to address a violation of a violation of a requirement that does not relate to independence. 

The IESBA CAG discussed these matters at its March 2011 meeting. 

At its June 2011 meeting the IESBA gave a first read to an exposure draft. The IESBA discussed:

·         Use of the term “breach” as opposed to “inadvertent’ to improve consistency with other drafting within the Code; and

·         Actions to be taken after a breach is identified. 

The IESBA met by conference call in July 2011 to discuss a further draft. 

The CAG discussed a proposed exposure draft at its September 2011 meeting. 

At its October 2011 meeting, the IESBA approved an exposure draft. Under the exposure draft:

·         If a professional accountant identifies a breach of a requirement of the Code, that is not related to independence, the accountant shall take whatever actions might be available, as soon as possible, to satisfactorily address the consequences of the breach – including determining whether to report the breach to those who may have been affected by the breach;

·         If a professional accountant in public practice identifies a breach of an independence requirement of the Code, the accountant shall:

o   Communicate the matter to those charged with governance and terminate, suspend or eliminate the interest or relationship that caused the breach;

o   Consider whether there are any legal or regulatory requirements that apply with respect to the breach and, if so, comply with those requirements;

o   Evaluate the significance of the breach and its impact on the firm’s objectivity and ability to issue an audit report;

o   Determine whether action can be taken to satisfactorily address the consequences of the breach;

o   If action cannot be taken, after discussion with hose charged with governance, take the steps necessary to terminate the audit engagement in compliance with any applicable legal or regulatory requirements relevant to terminating the audit engagement;

o   If action can be taken discuss the breach and the action proposed with those charged with governance as soon as possible;

o   If those charged with governance agree that action can be taken to satisfactorily address the consequences of the breach, continue with the audit engagement, if those charged with governance do not agree, take the steps necessary to terminate the audit engagement in compliance with any applicable legal or regulatory requirements relevant to terminating the audit engagement;

o   Document the action taken and all the matters discussed with those charged with governances and, if applicable relevant regulators.

The exposure draft comment period ended on January 23, 2012.

At its June 2012 meeting, the  IESBA considered significant comments received on exposure, and proposed changes to the exposure draft wording in response to these comments.

As part of this project, the IESBA undertook a survey of directors and audit committee members regarding its proposals to strengthen the framework that would apply when there has been a breach of its independence requirements. A summary of the survey responses can be accessed here. The survey responses were considered as part of the discussion of the topic at the June 2012 meeting.

At its October 2012 meeting, the  IESBA considered refinements to the wording of the proposals presented at the June 2012 meeting.

Next Steps

The IESBA will consider the final proposals with the aim of approving them at its December 2012 meeting.