Welcome to the International Ethics Standards Board for Accountants (IESBA) eNews.

In This Issue:

1. IESBA Welcomes New Chair
Technical Updates
2. Responding to a Suspected Illegal Act
3. Proposed Change to the Definition of “Those Charged with Governance”
4. Review of Part C of the Code
5. Breach of a Requirement of the Code
6. Reformatting of the Code
7. Strengthening Safeguards against Familiarity Threats
8. Conflicts of Interest
9. Other Matters
Additional News
10. IFAC Is Hiring
11. IESBA Handbook Now Available
12. Upcoming Meetings
13. Share IESBA eNews with Your Colleagues

1. IESBA Welcomes New Chair

Jörgen Holmquist recently began his three-year appointment as the first independent chair of the IESBA. A public member of the IESBA since 2011, he served as director general, DG Internal Market and Services, European Commission from 2007 to 2010, where he was responsible for developing the European Union (EU) regulatory response to the financial crisis, including legislation and policy concerning accounting and auditing.

A key function of the chair is to enable, encourage, and promote a deeper understanding by stakeholders and the public of the strategies and activities of the IESBA. Mr. Holmquist will be active in developing and maintaining effective relationships with national standard setters, regulators, and other key stakeholders.

Mr. Holmquist joined IFAC President Göran Tidström in acknowledging the exemplary contribution and commitment his predecessor Ken Dakdduk brought to the role, and to his position on the board, over the past seven years. To learn more, see Mr. Holmquist's interview in IFAC News and the press release announcing his appointment.

Technical Updates
This section provides an update on recent developments on key projects and a summary of decisions made at the IESBA’s last meeting in June 2012. 

2. Responding to a Suspected Illegal Act

Last month, the IESBA issued Responding to a Suspected Illegal Act. The Exposure Draft (ED) proposes that:

• A professional accountant in public practice providing professional services to an audit client be required to disclose, where the client has not done so, to an appropriate authority, suspected illegal acts that affect financial reporting or fall within the expertise of the professional accountant, and that are of such consequence that reporting would be in the public interest.
• An accountant performing a professional service for a non-audit client and an accountant in business be required to disclose suspected illegal acts to the entity’s external auditor, if any, where the accountant is unable to escalate the matter, or the client/employing organization respectively has failed to take appropriate action, and the matter is of such consequence that the professional accountant determines that disclosure would be in the public interest. If the response to the matter is not appropriate, the professional accountant will have a right to disclose certain suspected illegal acts to an appropriate authority. The accountant would be expected to exercise the right to disclose. An accountant performing a non-assurance service for a non-audit client would have a right to disclose a suspected illegal act that related to the subject matter of the professional service being provided. A professional accountant in business would have a right to disclose a suspected illegal act that affects the financial reporting of the employing organization.
• In exceptional circumstances, a professional accountant would not be required or expected to disclose the suspected illegal act. Exceptional circumstances would arise where a reasonable and informed third party might conclude that the consequences to the professional accountant or others of disclosure are so severe as to justify not complying with the requirement to disclose, for example, where there would be threats to the physical safety of the professional accountant or other individuals. Consequences that are of a commercial nature, such as the loss of a client or income, would not constitute exceptional circumstances.
• Terminating the professional relationship or resigning from the employing organization is not a substitute for disclosure to an appropriate authority.

Visit www.ethicsboard.org to access the ED and submit a comment. Comments are requested by December 15, 2012.

3. Proposed Change to the Definition of “Those Charged with Governance”

The IESBA has issued an Exposure Draft (ED) to revise the definition of the term “those  charged with governance” to more closely align with the definition in ISA 260, Communication with Those Charged with Governance. The ED recognizes that, consistent with ISA 260, communication may be with a subgroup of those charged with governance. Visit www.ethicsboard.org to access the ED and submit a comment. Comments are requested by October 31, 2012.

4. Review of Part C of the Code

At its June meeting, the IESBA discussed the preliminary recommendations of a Working Group formed to review Part C of the Code of Ethics for Professional Accountants (the Code) and identified areas where further development might be appropriate. For consideration in the IESBA’s next Strategy and Work Plan, the Working Group recommended guidance on two additional issues:

• The responsibility of professional accountants in business (PAIBs) to produce financial reports that are faithful representations of the economics of transactions and to avoid association with misleading information and reports; and
• Situations in which PAIBs are pressured by superiors to violate laws or ethical standards.

The IESBA agreed that the review be extended to identify any other related issues that the IESBA may wish to address in its Strategic Plan for 2014/15.

5. Breach of a Requirement of the Code

At its June meeting, the IESBA discussed amended wording in its proposal to address a breach of the Code. The changes reflect board and CAG members’ comments at meetings held earlier this year. The IESBA’s discussion also benefitted from feedback provided in response to a recent survey of those charged with governance. The IESBA concluded:

• The firm shall discuss all breaches and the action it has taken, or proposes to take, with those charged with governance. The communication shall be as soon as possible, unless those charged with governance have specified an alternative timing for less significant breaches;
• The firm shall communicate the breach in writing to those charged with governance; and
• In addition to complying with any legal or regulatory requirements, the firm shall consider reporting a breach to a member body, relevant regulator, or oversight authority when such reporting is common practice or encouraged in the particular jurisdiction by the member body, regulator, or oversight authority.

The IESBA anticipates publishing the final standard in December with an effective date of January 1, 2014.

6. Reformatting of the Code

At its June meeting, the IESBA reviewed a possible alternative approach to formatting the Code to raise the visibility of its requirements and prohibitions. The IESBA found the possible alternative helpful and requested the proposals be developed further and consideration be given to the views of regulators and those who implement the Code.

7. Strengthening Safeguards against Familiarity Threats

At its February 2012 meeting, the IESBA tentatively agreed it is important to have a position on the key regulatory proposals in Europe, the US, and other jurisdictions that are within the board’s purview. At its meeting in June, the IESBA received a report to assist it in determining its position on mandatory audit firm rotation and other possible safeguards as a means of reducing to an acceptable level the familiarity and self-interest threats that can be created as a result of an auditor’s long association with an audit client. It did not yet form an opinion on these matters and determined that it would continue to monitor developments and the debate in this area.

At its June meeting, the IESBA agreed that it was appropriate to review the provisions in the Code that address partner rotation and requested that a project proposal be prepared to initiate this. The project should address the period that a partner can serve as a key audit partner, the time-out period required, the individuals who should be subject to rotation, and other safeguards that could address the threats created by long association with an audit client. The IEBSA will review a project proposal on these issues at its next meeting in December 2012.

8. Conflicts of Interest

The IESBA discussed a summary of responses (as follows) to the Exposure Draft (ED) addressing conflicts of interest:

• Respondents were generally supportive of the application of the reasonable and informed third-party test and the basis on which threats arising from network firm interests and relationships are addressed in the ED;
• Respondents were supportive of proposals to deal with situations when consent cannot be obtained because it would breach confidentiality; and
• Respondents were supportive of the proposed requirements for professional accountants in business.

The IESBA reached tentative conclusions on the following matters:

• The description of a conflict of interest should be redrafted to provide a linkage between the professional activity and the matters that are in conflict, thus making it clear that a conflict of interest is not created merely because the interests of two clients are in conflict; and
• The guidance on managing conflicts of interest, and obtaining and documenting consent, could be clarified by addressing disclosure and consent separately and providing additional guidance on the types of consent—general, explicit, and implied.

The IESBA will consider revised wording at its December 2012 meeting.

9. Other Matters 

In June, IFAC released a new policy position paper setting out guidance on defining the “public interest.” At its June meeting, the IESBA noted the IFAC Board’s approval of the paper. The IESBA also noted that in its response to the Exposure Draft addressing conflicts of interest, the International Organization of Securities Commissions (IOSCO) had encouraged the IESBA to consider the concept of the public interest as outlined in the Code and whether it should be a fundamental principle. The IESBA agreed that it would consider both of these matters at its December 2012 meeting.

The IESBA has been trial testing an approach to assessing the impact of its proposals and to date has received comments from respondents on three different approaches to developing its impact assessment. The IESBA agreed that it would consider its experience with impact assessment, and the experience of the other standard-setting boards supported by IFAC, at its December 2012 meeting with a view to considering whether there is a favored model to use for future IESBA impact assessments.

Additional News

10. IFAC Is Hiring

The International Federation of Accountants, which supports the operations of the IESBA, is searching for a Technical Director to supervise and coordinate the work of the IESBA. Qualified candidates will have senior level accounting experience, including significant technical experience and a deep working knowledge of ethical and independence standards, in particular, the Code of Ethics for Professional Accountants. Visit Working at IFAC to learn more. Qualified candidates should send a resume and salary requirements to jobs@ifac.org.   

11. IESBA Handbook Now Available

The 2012 Handbook of the Code of Ethics for Professional Accountants is now for sale on the IFAC website. Discounts for bulk orders, students, educators, and those in World Trade Organization developing countries are available.

12. Upcoming Meetings

Meetings of the IESBA and the IESBA Consultative Advisory Group are open to the public. The IESBA plans to next meet by conference call on October 15, 2012, 7:00–9:00 AM Eastern Daylight Time and October 16, 2012, 7:00–8:00 AM Eastern Daylight Time. The next face-to-face meeting of the IESBA is scheduled for December 10–12, 2012 in New York, USA. For more information and to register to attend an IESBA meeting as an observer, visit IESBA Meetings.

13. Share IESBA eNews with Your Colleagues

The IESBA issues regular eNews updates to help keep you informed of its activities and recent developments. Please forward this eNews to any interested colleagues and advise them that they can subscribe to receive IESBA eNews by following these simple steps:

• Register a new account or log in to your existing IFAC web account.
• Go to My Subscriptions to manage your subscription preferences.
• Select "Ethics eNews" from the checklist, as well as any other newsletters or press releases that you would like to receive.

Ken Siong became technical director of the International Ethics Standards Board for Accountants (IESBA) in January 2013, and program and senior director in January 2018. In his role, Mr. Siong manages and oversees the work of the IESBA, including its strategic and operational activities and its work program. As program and senior director, Mr. Siong also plays a key role in developing and strengthening the IESBA’s relationships with its stakeholders.

Mr. Siong previously served as deputy director of the International Auditing and Assurance Standards Board (IAASB). In this capacity, he provided technical direction and support on the development of IAASB standards. He also played a key role in managing the IAASB’s strategic and operational activities, and the IAASB’s relationship with major national auditing standard setters.

Mr. Siong joined the staff of the IAASB in July 2002. Previously, he worked as a senior manager in the assurance practice of PwC in Hong Kong SAR, where he managed a number of transnational audits in various industries.

Mr. Siong graduated from the University of Bristol in the UK with a bachelor’s degree in computer science. He is a member of the Institute of Chartered Accountants in England and Wales, and a member of the Hong Kong Institute of Certified Public Accountants.

The International Federation of Accountants (IFAC), the global organization for the accountancy profession, today issued Policy Position Paper 6, Global Regulatory Convergence and the Accountancy Profession.

Continued efforts to sustain global regulatory convergence are critical for the evolution of a sound, global financial system. Convergence assists in providing solutions to problems highlighted by the global financial crisis and contributes to greater economic certainty and financial stability. To be effective, global convergence requires the support of a broad range of key stakeholders—including politicians, governments, regulatory bodies, and professional accounting organizations—at the national and international levels.

“Global convergence is a significant issue in the current debate about regulatory reform and responses to the financial and sovereign debt crises,” said IFAC Chief Executive Officer Ian Ball. “Crucially, convergence helps users compare financial information, minimizes the effects of systemic economic risks, reduces information costs, and decreases opportunities for regulatory arbitrage.”

IFAC believes that the global public interest is best served by consistent global adoption and implementation of high-quality, internationally accepted financial reporting, auditing, assurance, public sector accounting, accounting education, and ethics standards (including independence requirements for auditors), and by use of these standards for reporting financial information for capital and debt markets. The process of convergence involves national and regional standard setters and regulators either adopting international standards or modifying their own standards to achieve consistency with agreed global norms.

In addition, the public interest is served when regulatory arrangements involving auditor registration and licensing requirements, the public oversight of auditors of public interest entities, and arrangements that promote greater cross-border trade-in-services are globally consistent and based on cooperation and mutual recognition.

“Successful global solutions require national governments and regulators to avoid the temptation to implement legislative and regulatory reforms without considering the global agenda, and without a serious commitment to cooperating with national and international counterparts,” continued Mr. Ball. "Reforms that have extra-territorial impacts, or regulatory actions that require entities to potentially violate or bypass the laws of other countries, exacerbate current problems in the global financial system."

About IFAC
IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 167 members and associates in 127 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

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Global regulatory convergence is an essential element of the globalization of capital and debt markets, and is important in promoting the comparability of financial information, minimizing the effects of systemic economic risks, and helping to create a level playing field for international competition. For the accountancy profession, regulatory convergence includes the globally consistent adoption and implementation of high-quality internationally accepted financial reporting, auditing, assurance, and auditor independence standards.

The Journal of Accountancy covers the IAASB roundtable meeting recently held in New York City.

The Professional Accountants in Business (PAIB) Committee of the International Federation of Accountants (IFAC) has issued new International Good Practice Guidance (IGPG), Evaluating and Improving Internal Control in Organizations, highlighting areas where the practical application of existing internal control standards and frameworks often fails in many organizations.

This new guidance is important to a professional accountant in business who works with his/her organization to continuously evaluate and improve internal control, and ensure that internal control is an integrated part of the organization’s systems of governance and risk management.

In this guidance, internal control is defined as “an integral part of an organization’s system of governance and ability to manage risk, which is understood, effected, and actively monitored by the governing body, management, and other personnel to take advantage of the opportunities and to counter the threats to achieving the organization’s objectives.” Better integrated internal control can save the organization time and money, and promote the creation and preservation of value.

At the heart of the IGPG are nine key principles for evaluating and improving internal control systems (see Key Principles) complemented by guidance on how to implement them. Questions that the guidance is designed to help answer are:

• What should be the scope of internal control?
• Who should be responsible for internal control?
• How should controls be selected, implemented, and applied?
• How can internal control be better ingrained into the DNA of the organization?
• How should the organization report on internal control performance?

Evaluating and improving internal control are among the core competencies of many professional accountants in business. Therefore, professional accountants can play a leading role in ensuring that internal control forms an integral part of an organization’s governance system and risk management. With an integrated, organization-wide approach to risk management and internal control, professional accountants in business also encourage the practice that risks be viewed and treated in a more holistic way; that is, with improved internal control.

The guidance concludes with a limited list of relevant resources from IFAC, its member bodies, and other relevant organizations. It can be downloaded free of charge from www.ifac.org/paib.

Key Principles of Evaluating and Improving Internal Control

The principles below represent good practice for evaluating and improving systems for internal control.

1. Internal control should be used to support the organization in achieving its objectives by managing its risks, while complying with rules, regulations, and organizational policies. The organization should therefore make internal control part of risk management and integrate both in its overall governance system.
2. The organization should determine the various roles and responsibilities with respect to internal control, including the governing body, management at all levels, employees, and internal and external assurance providers, as well as coordinate the collaboration among participants.
3. The governing body and management should foster an organizational culture that motivates members of the organization to act in line with risk management strategy and policies on internal control set by the governing body to achieve the organization’s objectives. The tone and action at the top are critical in this respect.
4. The governing body and management should link achievement of the organization’s internal control objectives to individual performance objectives. Each person within the organization should be held accountable for the achievement of assigned internal control objectives.
5. The governing body, management, and other participants in the organization’s governance system should be sufficiently competent to fulfill the internal control responsibilities associated with their roles.
6. Controls should always be designed, implemented, and applied as a response to specific risks and their causes and consequences.
7. Management should ensure that regular communication regarding the internal control system, as well as the outcomes, takes place at all levels within the organization to make sure that the internal control principles are fully understood and correctly applied by all.
8. Both individual controls as well as the internal control system as a whole should be regularly monitored and evaluated. Identification of unacceptably high levels of risk, control failures, or events that are outside the limits for risk taking could be a sign that an individual control or the internal control system is ineffective and needs to be improved.
9. The governing body, together with management, should periodically report to stakeholders the organization’s risk profile as well as the structure and factual performance of the organization’s internal control system.

About International Good Practice Guidance

International Good Practice Guidance (IGPG) issued by the PAIB Committee cover areas of international and strategic importance in which professional accountants in business are likely to engage. In issuing principles-based guidance, IFAC seeks to foster a common and consistent approach to those aspects of the work of professional accountants in business not covered by international standards. IFAC seeks to clearly identify principles that are generally accepted internationally and applicable to organizations of all sizes in commerce, industry, education, and the public and not-for-profit sectors. Previously issued IGPG are available on the IFAC website, including Preface to IFAC’s International Good Practice Guidance.

About the PAIB Committee

The PAIB Committee serves IFAC member bodies and professional accountants worldwide who work in commerce, industry, financial services, education, and the public and the not-for-profit sectors. Its aim is to promote and contribute to the value of professional accountants in business by increasing awareness of the important roles professional accountants play, supporting member bodies in enhancing the competence of their members, and facilitating the communication and sharing of good practices and ideas.

About IFAC

IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 167 members and associates in 127 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

Copyright © July 2012 by the International Federation of Accountants (IFAC). All rights reserved. Contact permissions@ifac.org for permission to reproduce, store, or transmit this document.

The International Accounting Standards Board (IASB) and the IFRS Foundation issued Invitation to Comment (ITC): IASB and IFRS Interpretations Committee Due Process Handbook in May 2012. As an organization that supports four independent, international standard-setting boards, IFAC recognizes the public interest imperative of having in place robust and transparent due process arrangements for standard setting. 

Susan Coffey, CPA, CGMA, is Senior Vice President, Public Practice & Global Alliances at the American Institute of CPAs (AICPA). In this role, she is responsible for supporting and enhancing the quality of CPA firm practices, and overseeing AICPA’s international relations initiatives.

Ms. Coffey works to support and enhance the quality of CPA firm practices, by leading AICPA activities related to professional standards, business and financial reporting, taxation, professional ethics, practice monitoring, state legislation/regulation and CPA firm services. She is also responsible for creating and fostering new alliances across the globe, to support and strengthen the value of the US CPA abroad.

Her responsibilities span a number of diverse communities and stakeholders, both domestic and international.  Her wide range of experience allows her to bring a broad view to strategic planning, risk management, and problem-solving.

Under her leadership, Ms. Coffey’s teams work to serve and protect the public, by working with the federal and state regulatory communities to review, enact, and enhance rules, regulations, and laws that protect the public, promote uniformity, and provide for the efficient practice of public accountancy.

A licensed CPA in New York and New Jersey, Ms. Coffey is a member of the AICPA and the New Jersey Society of CPAs.  She is also a member of the Professional Practice Executive Committee of the Center for Audit Quality, an AICPA affiliate, and the Advisory Council for Prince Charles’ Accounting for Sustainability Project.

Prior to joining the AICPA, Ms. Coffey worked for PricewaterhouseCoopers' accounting and auditing practice. She holds a BS degree in accounting from Fairfield University in Fairfield, Connecticut.

Jim Knafo is a Technical Advisor for IFAC Board Member Kathryn Byrne as well as a member of the IFAC Membership Committee. He previously served on the IFAC Compliance Advisory Panel.

Mr. Knafo is the Director, Global Alliances – Public Practice at the Association of International CPAs. In this role, he represents the US accounting profession internationally, helps develop and implement international strategy, and leads the global alliances team.

In addition, Mr. Knafo is a Director on the board of the Confederation of Asian and Pacific Accountants (CAPA) and a member of the CAPA Governance Committee and the Professional Accountancy Organization Development & Advisory Group. He is also a Technical Advisor for the Global Accounting Alliance Board.

Mr. Knafo is a graduate of the University of Toronto and holds several accounting certifications in the US and Canada, including CPA and CGMA credentials.