An SMP Perspective on IESBA’s Proposed Revisions to Safeguards in Code of Ethics for Professional Accountants

Raymond Cheng, Christopher Arnold | March 18, 2016 |

Developed by the International Ethics Standards Board for Accountants® (IESBA®, the Ethics Board), the Code of Ethics for Professional Accountants (the Code) establishes ethical requirements for professional accountants. It contains three parts: Part A establishes the fundamental principles of professional ethics for accountants and provides a conceptual framework for applying those principles. Parts B and C illustrate how the conceptual framework is to be applied by professional accountants in public practice (Part B) and in business (Part C). In December 2015, the Ethics Board issued an Exposure Draft, Proposed Revisions Pertaining to Safeguards in the Code—Phase 1 (Safeguards ED), which includes enhanced requirements and application material pertaining to the application of the Code’s conceptual framework, including safeguards.

Key enhancements proposed in the Safeguards ED, which is presented in accordance with the new structure and drafting conventions (see Structure Update), include:

  • More robust and prominent requirements related to the application of the conceptual framework, including a required overall assessment of the judgments made and conclusions reached;
  • A clearer and more robust description of the concept of “safeguards,” and clarified and streamlined examples of safeguards; and
  • New guidance regarding the application of the concept of a “reasonable and informed third party” that is essential to properly applying the conceptual framework.

The Exposure Draft closes for comment on March 21.

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 generally supportive of the approach and direction of the Safeguards project since it was first included on the IESBA Work Plan. Overall, it supports the board’s proposed revisions to the extant Code pertaining to the conceptual framework. The main points in its comment letter response include:

  • The opportunity to exercise their professional judgment is extremely important to professional accountants, as well as to their clients. It's important that the Ethics Board maintains a principles-based approach in proposing changes to the Code in the area of threats and safeguards and does not seek to impose rigid requirements that may prove difficult for SMPs to use their judgement in applying.
  • The Ethics Board’s plans to consider in the future whether additional guidance is needed in the Code to explain the differences in evaluating whether a threat is at an acceptable level for a public interest entity (PIE) and an entity that is not a PIE should be a higher priority. This guidance may be particularly helpful for SMPs who primarily (if not exclusively) service small- and medium-sized entities (SMEs).
  • The new overarching requirements for all professional accountants to apply the conceptual framework (R120.3 and R300.2) should be replaced with overarching objectives for professional accountants, which are supported by more specific requirements. Broad requirements can be difficult to apply in practice (including monitoring compliance, etc.) and using more general objectives means the requirements, and, thus, the actions to fulfill them, can be more specific and far clearer.
  • The SMP Committee supports the proposed change of approach for how certain conditions, policies, and procedures established by the profession, legislation, regulation, firm, or employing organization can affect compliance with the fundamental principles and can be taken into account when identifying and evaluating threats, as they may potentially reduce or eliminate one or more particular threat.
  • The SMP Committee generally agrees with the revised description of “reasonable and informed third party,” the proposed revisions to an “acceptable level,” and the inclusion of this as application material in the section on Evaluating Threats. However, the SMP Committee does not believe that additional third-party tests are appropriate elsewhere in the Code.
  • The SMP Committee agrees that the revised description of safeguards establishes a stronger correlation between “threats and safeguards” and the fundamental principles in the Code. However, a concern was raised about the inclusion of the word “effectively” in place of “may” in the description. For a variety of reasons, safeguards themselves may not be a “watertight” response to the threats and, therefore, the term “effectively” may not be accurate, especially when translated.

The SMP Committee recognizes and appreciates that the IESBA has acknowledged that SMPs can face distinct practical challenges in applying safeguards, often due to their limited resources. In particular, it looks forward to assisting the Ethics Board as it considers the unique challenges faced by SMPs as part of Phase II of the project.

The IESBA commenced deliberation of the issues as part of Phase II of the Safeguards project at its March 2016 meeting. Phase II will be informed by the feedback from the respondents to the December 2015 ED. This phase will include:

(a)  A review of the clarity, appropriateness, and effectiveness of safeguards that pertain to non-assurance services (NAS);

(b)  A review of the conceptual framework approach to independence, in light of the proposed revised description of the conceptual framework in Phase I;

(c)  Consideration of whether there is a need for alignment with the requirements and application material in ISA™ 230, Audit Documentation, with respect to documentation of safeguards in the context of audits of financial statements; and

(d)  An update of other areas in the Code based on new terminology or revised concepts developed under the Phase I.

The SMP Committee will continue to provide input to the IESBA as the Safeguards project progresses.

Join the Conversation

We would be keen to hear the views of professional accountants in SMPs and SMEs on the approach outlined by the IESBA. Please log in and comment below to share your thoughts on the proposed revisions pertaining to safeguards in the IESBA Code of Ethics for Professional Accountants (the Code).


Raymond Cheng

IFAC SMP Committee Member and Ethics Task Force Chair

Raymond Cheng is the managing partner of HLB Hodgson Impey Cheng in Hong Kong, where he is responsible for managing the firm's overall practice and day-to-day operations. He also serves as a council member of HLB International. He specializes in corporate audits and IPOs and has extensive experience in auditing financial services companies. He served as an HKICPA council member since 2010 and is also deputy chair of the Ethics Committee. Mr. Cheng became a member of the Small and Medium Practices Committee in January 2015. See more by Raymond Cheng

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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