An SMP Perspective on the IESBA’s Limited Re-exposure of Proposed Changes to the Code Addressing the Long Association of Personnel with an Audit Client

Christopher Arnold | May 5, 2016 |

The International Ethics Standards Board for Accountants® (IESBA®) Code of Ethics for Professional Accountants (the Code) requires that members of both audit and assurance teams and firms be independent of audit and assurance clients. The Code states that familiarity and self-interest threats are created by using the same senior personnel on an audit engagement over a long period of time.

As explained in the article, IESBA Consults on Near Final Long Association Proposals, the IESBA has issued a second consultation in its efforts to reinforce global independence standards to address public concerns about the threats to auditors’ independence created by their long association with audit clients. There are three main issues for discussion:

  1. Cooling-Off Period for the Engagement Quality Control Reviewer (EQCR) on the Audit of a Public Interest Entity (PIE)
    The IESBA proposes that the cooling-off period for the EQCR be increased from two to five years with respect to a listed entity, and to three years with respect to a non-listed PIE.
  2. Jurisdictional Safeguards
    The ED proposes that the cooling-off period of five years for both the Engagement Partner (EP) on PIE audits and the EQCR on listed audits be reduced to three years where jurisdictions have established certain specified robust legislative or regulatory safeguards regarding long association.
  3. Service in a Combination of Roles during the 7-Year Time-On Period
    The ED offers a revised approach to determining how long an individual should cool off after having served as an EP or EQCR, or in a combination of roles, for only part of the seven-year period they have served as a Key Audit Partner (KAP).

The Exposure Draft closes for comment on May 9.

IFAC SMP Committee Response

Contributing to the development, and facilitating the adoption, of international standards are core elements of the IFAC Small and Medium Practices Committee (SMP Committee) Work Plan (see IFAC Engagement with IAASB and IESBA—Representing the Interests of PAIBs & SMPs).

The SMP Committee has been closely following the project on Long Association. It has provided comments on the project in advance of the IESBA meetings and discussed key issues with IESBA representatives as part of its SMP Committee meetings. The SMP Committee submitted a response to the August 2014 Exposure Draft and, in a previous article, Developing the IFAC SMP Committee Response: Proposed Changes to the IESBA Code Regarding Long Association, raised concerns that the proposals may place unreasonable constraints on SMPs and have significant unintended consequences.

The main points in its comment letter response to the 2016 ED include the following:

  • The cooling-off period for the EQCR should not be increased. This is because:
    • The role of the EQCR is quite distinct from the role of the EP, such that the risk of independence and familiarity threats being created by long association of the EQCR with the audit client is significantly lower.
    • Any increase in objectivity that might be achieved by extending the cooling-off period for the EQCR would not materially benefit audit quality, but will instead, in combination with rotation of the EP, likely adversely impact the effectiveness and efficiency of the audit.
    • SMPs may be disproportionately affected by the proposals due to their more limited availability of individuals able to perform the EQCR role.
    • The extension of the cooling-off period for the EQCR may create a competitive disadvantage for SMPs that audit PIEs and listed entities, and there is a risk it could lead to further erosion of competition and choice in the audit market, which is not in the public interest.
  • The SMP Committee is concerned about the added degree of complexity in applying the provisions given the different proposed cooling-off periods for the EP, EQCR, and other KAPs, and additional variances depending on whether the audited entity is a listed or non-listed PIE. Determining which individual audit partners are subject to the provisions of the Code is likely to be challenging in practice. 
  • Notwithstanding that the SMP Committee did not agree with the extension of the cooling-off period to five years for the EP on the audit of PIEs, it supports the proposal to allow for a reduction in the cooling-off period for EPs on audits of PIEs to three years under the conditions specified. 
  • The SMP Committee agrees with the proposed principle for either: a) four or more years; or b) at least two out of the last three years to be used in determining whether the longer cooling-off period applies when a partner has served in a combination of roles during the seven-year time-on period.
  • Keeping up with new regulations and standards has been consistently ranked as one of the top challenges facing SMPs (see the 2015 IFAC Global SMP Survey Results). This supports the need for a stable platform for the Code. The SMP Committee would prefer that the IESBA not make piecemeal changes to the Code and give due consideration to whether it would be practical for these revisions to be introduced as part of other significant changes resulting from other current projects.

Join the Conversation

We are keen to hear the views of professional accountants in SMPs on the approach outlined by the IESBA. Please log in and comment below to share your thoughts on the IESBA’s proposals to reinforce global independence standards to address public concerns about the threats to auditors’ independence created by their long association with audit clients.


Christopher Arnold


Christopher Arnold is a Director at the International Federation of Accountants (IFAC). He leads activities on contributing to and promoting the development, adoption and implementation of high-quality international standards, including the Member Compliance Program, Intellectual Property and Translations. Christopher is also responsible for IFAC’s SME (small- and medium-sized entities), SMP (small- and medium-sized practices) and research initiatives, which include developing thought leadership, public policy and advocacy. He was previously an Audit Manager for Deloitte and qualified as a professional accountant in a mid-tier accountancy practice in London (now called PKF-Littlejohn LLP). Christopher started his career as a Small Business Policy Adviser at the Association of Chartered Certified Accountants (ACCA).   See more by Christopher Arnold


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