The International Ethics Standards Board for Accountants (IESBA) has embarked on a major revamp of the Code of Ethics for Professional Accountants.
After 35 years and adoption or use in more than 100 jurisdictions, IESBA’s Code of Ethics for Professional Accountants is entering a new phase in its evolution, one that could have far-reaching implications.
The proposed changes aim to shake up the code and, as a result, enhance its clarity, usability, and enforceability according to Stavros Thomadakis, Chairman of IESBA.
“The first edition of the code was issued in 1980, long before laptops, email and cell phones,” he said. “It’s not only technology, but also the environments in which accountants operate that have evolved at great speed. The types of work, and how accountants perform their professional activities, have changed dramatically since then and the code has had to evolve to remain relevant and robust.”
Against this backdrop, the code has become lengthier and more complex. According to IESBA’s Technical Director, Ken Siong, the code has grown substantially since 2000.
“It’s no surprise that after Enron and the increased public focus on auditor independence, the length of the code has increased by over 50 per cent,” he said. “After hearing from stakeholders, the Board decided that it was time to undertake a strategic review of the structure of the code to make it more user-friendly and accessible for our global audience.”
Ireland and the UK are among the 100 plus jurisdictions around the world that have either adopted or based national ethics standards on the code. Though audits of financial statements in Ireland and the UK are subject to the auditor independence requirements of the UK-based Financial Reporting Council (FRC), Chartered Accountants Ireland has adopted the code.
The code applies to cross-border audits and, according to the FRC, compliance with the FRC’s independence standards will result in compliance with the code.
Task Force Established to Simiplify the Code
Although adoption of the code has increased steadily over the years, the Board has recently heard a consistent message from stakeholders that the complexity of the code, as well as how it is written, make it difficult to understand for both English and non-native English speakers. The Board therefore formed a six-person Structure of the Code Task Force in April 2014 chaired by Don Thomson, a Board member and a partner at Grant Thornton Canada.
The task force set out to simplify the code. This involved implementing a completely new structure, reorganising parts of the code, clarifying where necessary, and exploring how technology could improve accessibility and presentation of the code in a digital and mobile world. The ultimate goal was to make the code more usable, accessible, and enforceable.
The first output from the task force’s efforts was the 2014 consultation paper entitled Improving the Structure of the Code of Ethics for Professional Accountants. The consultation sought input on approaches that could be taken to improve the clarity and usability of the code, including:
- Restructuring the code to better distinguish requirements from guidance;
- Reorganising the content of the code, including rebranding the code or parts thereof, as international standards;
- Identifying responsibility for compliance in particular circumstances;
- Simplifying the wording of the code so that it can be more readily understood.
By February of this year, the consultation had received nearly 60 responses from around the world. In April, the board deliberated these responses and an Exposure Draft is planned for approval later this year.
Describing the group’s work to simplify the language of the code, IESBA member and partner at KPMG UK, Peter Hughes said: “Working on the structure and the drafting conventions of the code brings home just how complex it is, and potentially how ambiguous it might be – particularly when it’s translated into other languages and read by different audiences.
“But the task of trying to come up with the mot juste for a particular word in the code has taught me the truth of the adage that the US and the UK are two countries divided by a common language. And, I am sure the same applies no matter which two English speaking countries you are comparing.”
Practical Implications
With widespread changes on the table, stakeholders may wonder what isn’t changing, and how the changes will affect the many jurisdictions that have already adopted the code.
According to Mr Thomson, the restructured code is certainly going to be recognisable. “We are not changing the conceptual framework that is applicable throughout the code, and we are keeping the same requirements and guidance,” he said. “The code will be easier to use and enforce, distinguishing requirements more clearly from guidance, spotlighting the overarching principles, and clarifying responsibility and language. In addition, through an electronic code – a first version of which is already accessible on the IESBA website – we will enhance navigability and functionality.
“What hasn’t and will not change is the principles basis of the code,” added Mr Thomadakis.“Given our international role, we must produce a code that is global in scope and operable globally. This can only be achieved by remaining principles-based.”
The principles basis is also critical for the scalability of the code – allowing practitioners and accountants in businesses of all types and sizes to apply the code in a manner consistent with the contexts in which they operate and proportionate to their roles and responsibilities. Small- and medium-sized practices (SMPs) in particular face challenges in keeping up with changes in standards and regulations.
The IFAC SMP Committee submitted a comment letter to the IESBA’s consultation paper earlier this year. While it is supportive of the general direction of the proposals, it pointed out that rebranding parts of the code could lead to the misperception that the code is rules-based.
According to a discussion in the Global Knowledge Gateway with SMP Committee staff, “Separating standards on specific topics and rebranding the code as the International Standards on Ethics would be a more onerous undertaking and a move away from principles to a more rules-based approach. Rebranding the code without developing a full set of such standards is unlikely to have a significant impact on improving its visibility and enforceability.”
On the other hand, rebranding parts of the code as standards – such as the section on independence – could improve its structure and clarity, and enhance enforceability in areas where there are heightened stakeholder expectations regarding the accountant’s public interest requirements. Doing so could also improve the transparency of changes to the code.
IESBA is expected to include its recommendations regarding rebranding in the package of proposals it will consider for approval by the end of this year with the final restructured code scheduled for approval by 2017. “Today, as economies recover from the financial crisis and as jurisdictions experience heightened levels of regulatory activity, the profession – particularly auditors – is being challenged as never before to demonstrate the highest standards of ethical conduct in the public interest,” added Mr Thomadakis.“The need for clear and robust ethics requirements and guidance has never been more timely.”
New Non-Compliance Framework
IESBA is restructuring the code while it is progressing enhancements to individual and new sections of the code. Its scope includes a new framework to guide professional accountants in how to best serve the public interest when responding to identified or suspected acts of non-compliance with laws and regulations. This has been a long and complex project, given the challenges of addressing whistleblowing on a global basis.
IESBA’s Exposure Draft entitled Responding to Non-Compliance with Laws & Regulations is currently open for comment and the Board encourages professional accountancy organisations and all other stakeholders who have a role or interest in addressing the relevant issues to comment by the deadline of 4th September 2015.
This article was authored exclusively for Accountancy Ireland by the International Federation of Accountants. It is reprinted here with the permission of Accountancy Ireland.
