Developing the SMP Committee Response: The Code of Ethics and Non-Assurance Services for Audit Clients

Christopher Arnold | July 22, 2014 | 1

Auditor independence, both in mind and appearance, is widely regarded as the foundation of the audit profession. Its maintenance is crucial to ensuring continued public trust in the work of the audit profession and, as such, the profession’s strength and stature rest on it. Hence the significance of the International Ethics Standards Board for Accountants (IESBA)’s efforts to reinforce the auditor’s independence in regards to provisions on non-assurance services firms can provide to their audit clients. This recently culminated in the release for public comment of the Exposure Draft (ED), Proposed Changes to Certain Provisions of the Code Addressing Non-Assurance Services for Audit Clients.

This ED comes two months after the European Parliament backed Commission proposals on new rules to boost the quality of audits across Europe, including far reaching measures to strengthen the independence regime in Europe. The ED’s proposed changes aim to clarify and strengthen the non-assurance provisions in the Code of Ethics for Professional Accountants (the Code) by:

  • Providing additional guidance and clarification regarding what constitutes management responsibility, including enhanced guidance regarding how the auditor can better satisfy itself that client management will make all judgments and decisions that are the responsibility of management, when the auditor provides non-assurance services to an audit client;
  • Providing better guidance and clarification on the concept of “routine or mechanical” services relating to the preparation of accounting records and financial statements for non-public interest entity audit clients; and
  • Removing the provision that permits an audit firm to provide certain bookkeeping and taxation services to public-interest entity (PIE) audit clients in emergency situations.

In developing the proposals, the board has tried to take into account the unique and challenging issues professional accountants in small- and medium-sized entities (SMEs) and practices (SMPs) face when complying with the Code. Accordingly, the IESBA has specifically requested comments regarding the impact of the proposed changes for SMPs, especially the changes regarding management responsibilities.

The IFAC Small and Medium Practices (SMP) Committee will be responding to these proposals. Indeed, it has been closely monitoring the development of the ED from the outset, providing input by way of comment letters from an SMP/SME perspective on board agenda materials. The SMP Committee has developed preliminary views in response to various questions posed in the ED.

  • We support the IESBA’s work in this area and the proposals to bring greater clarity to the provisions on non-assurance services within the Code.
  • There may be situations that warrant the retention of the emergency exceptions pertaining to bookkeeping and taxation services for PIEs, in particular for smaller PIEs such as charities. If these provisions are removed, further amendments should be made to the Code that would allow the provision of such services for a short period of time in emergency situations, providing the firm introduces appropriate safeguards.
  • We welcome the additional clarity in paragraph 290.164 that now makes it clear that providing advice and recommendations to assist management in discharging its responsibilities is not assuming a management responsibility.
  • We have concerns on some of the new wording used in the examples of management responsibilities in paragraph 290.163. In our view, the determination of what activities may be considered management responsibility will require the auditor’s professional judgment and will depend on circumstances.
  • From an SMP/SME perspective, the requirement for management to take responsibility for all judgments and decisions and understand the non-assurance services being provided should be sufficient and the new level of detail in paragraph 290.165 is overly prescriptive.
  • The enhanced guidance should assist engagement teams to better meet the requirement of not assuming a management responsibility.
  • We are concerned that the proposed guidance on “routine or mechanical” may create more ambiguity for SMPs and encourage the IESBA to carefully consider expanding the list of examples for services which are considered routine or mechanical on audit clients that are not PIEs.

To help the SMP Committee develop its response it would be keen to hear the views of professional accountants in SMPs and SMEs. Please share with us your thoughts on the proposed changes to the provisions of the Code addressing non-assurance services for 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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Kari Lydman July 24, 2014

Please be so kind and find my comments below: - independence in mind is more important than in appearance but as the state of mind is a difficult to disclose and judge, the appearance is also important - although independence in appearance is never enough to those who want to claim that there is a problem in the mind's independence - but the auditor has to live with this dilemma and own the independence in mind; that is all he/she can gradually do - it is in every stakeholders' interest (incl. the public interest), that "things" (financial statements, tax returns etc.) in a SME/micro entity are true and correct and thus legal in all respects - if the auditor helps his/her client in achieving this goal, it is a secondary issue how he/she does it - thus all example lists of allowed/restricted services should be generic, or if guidance is needed, it should be very clear, unambiguous - to enhance the understanding of the differencies of the responsibilities of the management and of the auditor, emphasising is welcomed - activities and their responsibilities: management prepares and controls, auditor audits the outcomes of that preparation - the roles and responsibilities of the auditor and the client should be emphasized to the whole audit engagement team and to the whole management of the client - if this is the case and the auditor is honestly independent in mind, lists of what is allowed and what is not can be shorter Regards, Kari


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