Globalization is not a new phenomenon but what is new is both its velocity and how it affects small- and medium-sized entities (SMEs). The impact on SMEs has significant implications for the accounting practices, in particular small- and medium-sized practices (SMPs), that typically serve SMEs. According to the Edinburgh Group (EG)’s recently published report, Growing the Global Economy through SMEs, SMPs may need to carefully critique the services they provide to SMEs seeking to internationalize. As a starting point, the report suggests specific actions for SMPs that include developing more understanding and expertise internally, strengthening relationships with funding institutions, and building international networks of trusted professional and business contacts. SMPs have the potential to become a key agent for the internationalization of small business if they are able to provide SMEs with the advice they need.

Globalization of SMEs

SMEs are a vital and integral part of the global economy. According to the OECD, they account for the majority of private sector employment and GDP as well as a disproportionately large share of new jobs; they are a major source of entrepreneurship and innovation. These SMEs are increasingly becoming part of the global business community. Dramatic changes in communications, transportation, and information technology have accelerated the pace of globalization. SMEs now regularly manufacture products and provide services in many countries and sell to customers and clients around the world—just as large multinational companies have been doing for many years.

The EG report reveals a significant amount of international activity among the SME sector. Almost 75% of the SMPs it surveyed have clients that have some sort of international aspect to their business, even if it is simply buying goods or services from abroad.

Role of SMPs

While globalization presents great opportunities for SMEs—not least new markets for their goods and services—it also poses great challenges. Perhaps the greatest challenge SMEs face is the lack of human capital, including managerial expertise, and financial resources to take advantage of these opportunities. IFAC research indicates that SMEs will likely look to SMPs, their trusted business advisors, to fill the resource gap. The EG report, however, suggests that SMPs themselves must ready themselves to capitalize on the opportunities created by the internationalization of small business. 

Recommendations for SMPs from the EG Report            

The EG report (page 5) makes the following recommendations for SMPs:

1. Provide more proactive support to SMEs in their planning for internationalization, including support in identifying the most attractive, fast-growing international markets.
2. Develop knowledge and information resources to guide SMEs through the red tape challenge associated with international activity, and to help them access all appropriate sources of funding.
3. Build relationships with banks and other key financiers of international investment and trade, to facilitate introductions between these funding sources and SME clients.
4. Identify where SMEs are dealing in foreign currency and seek opportunities to provide value-adding advice in areas such as managing foreign exchange risks and forecasting currency needs.
5. Consider whether additional networking opportunities exist to build relationships with other professionals or to help connect SME clients with each other to create mutually supportive environments and information channels.
6. Assess how the proactive delivery of services targeted at SMEs with international ambitions could help to grow practice income, as well as strengthening client relationships and the firm’s wider reputation.
7. Consider whether developing the international resources available to the practice—for example, by participating in an international network of accountancy firms or building more direct close relationships with firms in other countries—could benefit the firm itself, and its SME clients.

SMEs are increasingly being integrated into the global business community. However, in order for SMEs to maximize the opportunities from internationalizing their business, they need timely advice. SMPs are well placed to provide this counsel.

Resources

IFAC’s website hosts a range of resources and tools to help SMPs implement these recommendations. These resources and tools help SMPs enhance their practice management and build their capacity to offer business advisory services.

On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued the revised version of its Internal Control-Integrated Framework (the Framework). The revised Framework will help improve implementation of internal control but further adjustments are warranted to align internal control across the globe and to help organizations better manage their risks and improve their overall performance.

The Professional Accountants in Business (PAIB) Committee of the International Federation of Accountants (IFAC) has been closely involved in the revision, with two representatives on the COSO advisory council for the project. Additionally, the PAIB Committee submitted two formal comment letters to both COSO internal control exposure drafts.

Key Features of the Revised Framework

The revised Framework uses the same definition of internal control as the previous version and builds on the same five components of internal control: the control environment, risk assessment, control activities, information and communication, and monitoring activities. The Framework also continues to emphasize the importance of management judgment in designing, implementing, and conducting internal control, and in assessing its effectiveness.

So what has changed? The revised Framework now:

• articulates the fundamental concepts underlying the five components in the form of 17 guiding principles and more detailed points of focus;
• takes into account environmental changes, such as increased globalization, complexity, and regulation, the growing importance of technology, and increased expectations for better governance oversight and fraud prevention;
• expands the operations objective from “effective and efficient use of the entity’s resources” to “effectiveness and efficiency of the entity’s operations, including operational and financial performance goals, and safeguarding assets against loss;”
• broadens the reporting objective from “published financial statements” to “internal and external financial and non-financial reporting;” and
• provides additional approaches and examples relevant to operations, compliance, and non-financial reporting objectives.

COSO also issued two additional publications.

• Illustrative Tools for Assessing Effectiveness of a System of Internal Control assists users when assessing effectiveness of internal control based on the requirements of the Framework.
• Internal Control over External Financial Reporting: A Compendium of Approaches and Examples assists users when applying the Framework to external financial reporting objectives.

The revised Framework will supersede the original Framework at the end of 2014, giving organizations time to transition. COSO anticipates a relatively easy transition process for those organizations that have properly applied the original Framework (1992). In fact, the new principles and points of focus should make it easier for organizations to see what is covered and where gaps may exist.

IFAC PAIB Committee’s View

The IFAC PAIB Committee commends COSO for being one of the first and foremost thought leaders in internal control, starting with the publication of the original Framework and followed by a series of related high-quality publications. The committee agrees that while many of the underlying concepts of the original Framework have proven themselves over time, global developments, including the financial crises, in recent years required a revision.

However, while the revised Framework represents a step forward in articulating principles of effective internal control and incorporating a number of considerations relevant to today’s complex business environment, there remains work to be done to advance and harmonize risk management and internal control guidelines across the globe and to better support organizations dealing with the many economic, social, and environmental challenges they face.

The PAIB Committee believes that it is in COSO’s long-term interest to continue evolving its Framework in order to make it more relevant to the broader global community and the challenges faced, and stands ready to assist COSO make progress in this area. The PAIB Committee has formulated a number of recommendations for further development.

• For the Framework to remain relevant in an environment of greater global integration, COSO should further integrate its Internal Control Framework with its Enterprise Risk Management (ERM) Framework, released in 2004, as well as better align it with the concepts and terminology in other frameworks, standards, and guidelines on governance, risk management, and internal control from across the globe. This will enable organizations to make internal control a natural and integrated part of their overall risk management and governance arrangements.
• The Framework should embrace a wider perspective than its current limited application to internal control over reporting, operations, and compliance, for example, by broadening the definition of internal control so as to permit the inclusion of other areas, such as business strategy and finance, in which internal control also plays a crucial role. Before the string of financial crises, many organizations were overly focused on financial reporting controls. These crises highlighted the fact that many, if not most, of the risks that affected organizations derived from external circumstances. This includes the increasing social and environmental risks that organizations encounter, such as mitigating the threats and taking advantage of the opportunities related to global warming.
• As the achievement of objectives is at the heart of the COSO definition of internal control, objective setting should be included in the components of internal control. This would assure better alignment with the related COSO ERM Framework, which includes objective setting as a separate component, and emphasize that strengthening an entity’s systems of internal control can only be done from the perspective of the organization’s objectives.
• The Framework should further align the various concepts and terminology in relation to risk management and internal control with the other standards, guidance, and frameworks that have been issued since the conception of the original Framework. This includes the definitions of risk and internal control, balancing the positive and negative sides of risk, and rethinking of difficult to understand concepts such as risk appetite and inherent controls.

Constructive Dialogue

IFAC is well-positioned to facilitate a constructive dialogue with the issuers of standards, guidance, and frameworks in the area of governance, risk management, and internal control across the world on how the terminology, various concepts, and guidelines could be better aligned in the future.[1]

Further international alignment is an ambitious and challenging goal, but the potential benefits are significant. It is up to all those responsible for developing, implementing, using, and enforcing requirements and guidelines on governance, risk management, and internal control to work together to produce globally-aligned terminology, concepts, and guidelines that are relevant to all. IFAC and the PAIB Committee look forward to contributing to this collaborative effort.

Additional IFAC Guidance

Despite the existence of sound internal control guidelines, such as the revised COSO Framework, it is often theapplication of such guidelines that fails or could be further improved in many organizations. With the International Good Practice Guidance, Evaluating and Improving Internal Control in Organizations (IFAC, 2012), the PAIB Committee provides a practical guide focused on how professional accountants in business can support their organization in evaluating and improving internal control as an integral part of its governance system and risk management. The guidance is complementary to existing internal control guidelines and is based on those internal control matters that often cause difficulties in practice. Both the full guidance as well as an executive summary are available free of charge on the IFAC website. 

IFAC President Warren Allen and IIA President/CEO Richard Chambers discuss the recently signed Memorandum of Understanding with Compliance Week.

Interview translated into English by IFAC and conducted by El País in Spanish. For original in Spanish, see: Entrevista con Jörgen Holmquist Presidente del Comité Internacional de Ética del Sector de Auditoría (IESBA)

English translation: 

Jörgen Holmquist is the chair of the International Ethics Standards Board for Accountants (IESBA).

Question. Why is IESBA working on a revision of the Code of Ethics for Professional Accountants (the Code)?

Answer. The issue is not to modify the content of the Code but its structure. It is difficult to read and the purpose of the revision is to make it more accessible, particularly for the small and medium size audit firms. We are in consultation within the sector and regulators to see how we can improve the structure of the Code.

Q. Would you say auditors bear some responsibility for the financial crisis?

A. There are many parties responsible for this crisis: bankers, politicians, supervisors … Auditors also bear their share of responsibility. It is not as much a problem of independence or of ethics in front of their clients but rather of failures in the way audits were performed since the work of auditors should have resulted in better information to judge what was going on.

Q. Have lessons been drawn from the recent mistakes?

A. Auditors are reflecting on how to improve their work. It is still an ongoing process. From point of view of Ethics there are several things to be considered: how to strengthen independence, how to improve rotation rules, how to proceed when irregularities are identified…

Q. Are auditors contributing to restore confidence in the markets?

A. Confidence in auditors is important and necessary since one of the services they render is to make it possible for investors to trust corporate information. This service has not changed and I believe it is generally well accomplished, although in the cases where the role of the auditor is at question it is obviously necessary to find a solution.

Q. Revenues from services other than audit are increasing in many cases, does this put the auditor’s independence at risk?

A. We cannot generalise. It is clearly stated in the Code of Ethics that there are certain services that the auditor cannot provide. We are now reviewing these rules to see if they need to be strengthened.

Q. Would you be in favour of setting a limit to such services?

A. The real challenge is to find a balance between the different sources of income. Revenues from other services should not subsidise audit, rather audit fees should fully cover the cost of audit services. In cases where revenues from other services are very significant there could be a problem, but it is very difficult to say where to set the limit, since the appropriate limit differs depending on the circumstances. Transparency is very important in these cases: let the market know what pays what and then the Audit Committee of the company should decide on such matters.

Q. The European Union has been trying to increase competition in the market for years, what do you think about this?

A. The rotation of the audit firms is not the panacea, it has advantages but also disadvantages. To improve the way the sector works there are more important issues at stake. Moreover, we have to take into account that in the course of the auditor’s engagement with the company audit partners and directors of the company usually change.

Q. Do you believe there is real competition in this industry? How do you explain the increase of revenues of the big companies year after year despite the crisis?

A. It doesn’t surprise me that revenues are stable or increasing because the crisis brings forward demand for more services. If we take a close look to the sector we see a fair amount of competition between small and medium firms. It is maybe less so in the case of the big four where there is more concentration There should be a few more players at that level, but how can this be achieved? There is no easy answer to this question.

Q. There is the feeling that auditors profited from the problem and now they profit from the solution…

A. I see what you are saying but for me the issue is whether the auditors conduct themselves in an ethical manner and whether they produce quality work. Auditors’ workload has significantly increased because of the crisis which has led to more hours worked. The trend points to a reduction of hourly fees. I don’t believe that auditors as a general rule are profiting from the crisis.

Q. The big four are all Anglo-Saxon; do you think it would be interesting to promote a big European firm?

A. It is difficult to create a brand new company that can compete with the big four because what the clients require is a worldwide network that can provide services in any country where they have a presence. 

Entrevista con Jörgen Holmquist, presidente del Comité Internacional de Ética del Sector de Auditoría (IESBA), en El País

The pace of change and increased complexity in audit and financial reporting standards over the past few years has been dramatic and may weigh disproportionately on smaller accounting practices who typically audit smaller entities. This burden is being exacerbated by the difficult economic environment, which is prompting clients to put pressure on their accountants to lower fees. As a result, it is getting harder for practices to maintain sufficient profitability from audit work.

The good news is that automation, made possible by recent developments in technology and by process improvements, can help practices simultaneously boost the quality and efficiency of their audit work—in turn, lowering costs and ensuring its profitability. 

Increasing Audit Quality          

Automating your micro-entity audit practice provides an opportunity to improve audit quality at both firm-wide and individual engagement levels. At the firm level, setting up standardized templates helps ensure that all phases have been completed in every audit. Customized checklists can be updated as needed and incorporated into individual engagement files at the beginning of every engagement.

File automation can significantly increase quality at the engagement level as well. If you import data from one application program to another, data conversion errors should be eliminated and grouping and arithmetical errors can be minimized.

A word of caution: as every audit is unique, make sure you customize each and every file. The generic firm template is a great place to start but it is only a start. Customization for things such as industry characteristics and internal controls are as essential as fully automating the underlying file structure.

Boosting Engagement Efficiency

Much of the tangible output of auditing is very similar from file to file: individual practitioners typically use common file structures and similar checklists and forms. In addition, commercial audit file, spreadsheet, word processing, and database platforms often allow for seamless and rapid data sharing between applications and client files. None of these features are new, but are you using them to maximum advantage? There are many easy-to-implement ways to increase the efficiency of every micro-entity audit. The trick is to be creative and use your imagination. Here are a few suggestions.

Pre-Engagement Phase

When using commercially available software for micro-entity audit engagements, you can:

• Roll forward last year’s electronic file almost instantly;
• Call the client, or send an email, to discuss timing, and ask if there were significant events/changes over the past year; and
• Assuming not, email an engagement letter, an audit strategy letter, and a list of the materials you will need when you visit the client to begin the audit. All of these documents should have been already prepared as part of the file update.

Engagement Processing and Assembly

Following the pre-engagement phase, ask your client to email you a trial balance in a format you can import into the audit file.

Fieldwork Phase

An efficient automated audit of a micro-entity might progress as follows:

Arrive at the client’s office with the rolled-forward audit file. After an initial discussion with the client, update your rolled-forward schedules, documenting your knowledge of the client’s business for any industry, environment, and entity control changes since last year.

Program the engagement and performance materiality calculations and sample size calculations, based on the imported trial balance.

Review the multi-year account analyses (e.g., key ratio analysis such as gross profit percentage), all of which can be pre-programmed.

Print confirmations required and have them signed at your client’s office.

Review for relevance and complete the rolled-forward engagement checklists. (Again, a word of caution: avoid falling into the trap of simply repeating last year’s procedures without having first used your professional judgment).

Draft key points for communication to management and those charged with governance as required by International Standard on Auditing (ISA) 260, Communication with Those Charged with Governance, and ISA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and Management, at the client’s office as they arise and review them with the client to ensure you have your facts right.

Forming an Opinion Phase

Review the post-fieldwork analytical review automatically updated for your audit adjustment.

Email the adjusted trial balance and proposed audit adjustments to your client.

Email the client the letter of representation and an updated ISA 260 audit summary document.

Email/mail a copy of the signed auditor’s report and an invoice once appropriate personnel have accepted responsibility for the statements.

The above assumes you have taken time to standardize data fields across all your client files. Client names and address fields, year-end and other dates, and other standard documentation can all be programmed into a master file containing individual templates for correspondence, planning lists, etc. Firm-wide standardization is essential if you want to maximize efficiency with automation.

Be Smart About the Automation Process

There are a number of cautions to heed before embarking on even a modest automation project.

1) Be realistic. The initial automation process will likely take longer than you think.

2) Spend time up-front to get it right. If you have an error in your template, you will have to fix it each time you use it. That significantly increases the cost of automation.

3) Aim for consistency across clients. Using standardized templates for analytical schedules, financial statements, statement coding, and file indexing avoids having to reinvent the wheel on every micro-entity audit engagement.

Summary

Automation of your practice is an exacting process requiring project management skills and a significant time commitment from senior members of the firm. If you have the discipline to make it happen, automation will pay off over the long term many times over.

IFAC Resources

IFAC hosts a range of resources and tools, including guides and articles, to help implement audit and quality control standards: See Resources and Tools at www.ifac.org/SMP. 

In “How accounting standards such as IPSASs will return the UK to growth,” Paul Williams reports how a senior member of ACCA’s Global Forum believes public sector finances will play a critical role both in economic recovery and preventing future crises. 

This article first appeared in Auditores, the magazine of the Instituto de Censores Jurados de Cuentas de España (ICJCE), the professional body in Spain and a member of IFAC.

Why is the IESBA considering a review of the structure of its Code of Ethics for Professional Accountants (the Code)?

Well, we have heard from a number of stakeholders, particularly small- and medium-sized practices (SMPs) and professional accountants working in small- and medium-sized entities (SMEs), about the challenges they face in understanding and applying the requirements in the Code. Let’s be clear—the Code contains robust standards on ethics for the accounting profession. But after years of evolution, the Code has become a complex set of standards, with sections that contain long paragraphs and sentences that many find difficult to understand and translate. At the same time, we have heard from our regulatory stakeholders about the need to increase the visibility of the requirements and prohibitions in the Code, and to clarify who is responsible for meeting them, in order to facilitate enforcement. So we are responding to the concerns by taking a fresh look at the structure of the Code to see if there are ways to enhance its readability, understandability, and accessibility, and assist in its enforcement. So, in essence, it is an effort at modernizing the Code.

However, I must make clear that our initiative to review the structure of the Code is not intended to introduce changes to the basic principles and rules in the Code. While we are considering the feasibility of making the requirements and content of the Code more accessible, by different means, we are NOT planning any changes to the Code itself in the short term. The changes in the structure of the Code will be for the long term, after we have launched a full consultation and achieved buy-in from our stakeholders.

In difficult times such as these, is the auditor providing enough assurance on the veracity of financial information supplied by companies? Is the audit profession helping to restore confidence?

The role of the audit profession has really never changed, in times of economic boom or bust—the profession has always been, and will continue to be, a watchdog protecting the public interest. That is why, in most jurisdictions, auditors are granted a statutory mandate to carry out audits. The essential responsibility of auditors is to express an independent opinion on the truth and fairness of a company’s financial statements. It is the independence with which auditors fulfill their role that gives credibility and adds value to their audit opinions. But in the difficult times we live in, there are continual challenges (or threats, to use our jargon) to auditors’ independence. The Code demands that auditors implement appropriate safeguards to protect their independence against such challenges. So, yes, the audit profession absolutely has a critical role to play in restoring confidence in the financial markets—and the public has a right to expect that it fulfills this role in full compliance with ethical requirements, including independence.

But let’s not forget that the environment in which auditors operate is dynamic, so new threats to their independence can always arise. That is why we must be on our guard and make sure that the Code is capable of evolving to address new challenges.

What are the main conflicts of interest that may be encountered by auditors during the planning stage?

First, let’s be clear that a conflict of interest creates a threat to the auditor’s objectivity and may create threats to other fundamental ethical principles. Conflicts of interest may arise in various circumstances, and I would not say that there are some types of conflicts that are necessarily more common than others. But in an audit context, some of the conflicts one might encounter include, for example, auditing royalties payable by the audit client to a licensor owned by the engagement partner’s immediate family, or using confidential information obtained when planning the audit of the client for purposes of a due diligence service for another client that is considering acquiring the audit client.

One of the main recent changes to the Code was better identification of the circumstances in which a professional accountant may encounter potential conflicts of interest. Are these circumstances newly identified or were they in need of better definition?

I would say it is closer to the latter. The Ethics Board concluded that it would be difficult to develop a definition that would be sufficiently broad to encompass the diverse activities of professional accountants but that would be sufficiently precise to avoid capturing situations that are not conflicts of interest. Accordingly, it determined that it would be more appropriate to provide a more comprehensive description of circumstances that might create a conflict of interest, together with supporting examples to facilitate implementation.

Issues related to auditors’ insider information are detailed in the Code. What are the improvements on this matter?

Quite apart from the strict laws that exist in most jurisdictions regarding insider trading, the Code has always taken a strong position regarding the inappropriate use of insider information. In particular, paragraph 140.1(b) of the Code prohibits auditors from using confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of third parties. Equally, paragraph 340.3 of the Code prohibits professional accountants in business from using confidential information for personal gain. So the Code’s position on this matter is unequivocal, and that must be right. Insider trading, however, defined in national laws and regulations, is unethical and harmful to society, and must be rigorously sanctioned when it occurs.

Audit regulation is currently being discussed at different international strata, with particular focus on the question of independence. Don’t you think that compliance with the Code is enough to curtail the potential risks?

Well, the Ethics Board certainly believes the Code provides a robust set of independence rules for global application. We completed two significant projects four to five years ago that led to further strengthening of the independence requirements in the Code. So, many countries around the world, ranging from Australia, Brazil, and China to Japan and South Africa, have benchmarked or aligned their independence requirements with those in the Code. Even with respect to the EU, a February 2013 study from the Fédération des Experts Comptables Européens (FEE) revealed that the independence provisions in the Code are more robust with respect to audits of public interest entities (PIEs) than those in the current EU frameworks on auditor independence. So I believe the Code will stand up to scrutiny.

But of course, we have to respect the sovereignty of nations to review their independence frameworks as they consider necessary, particularly in the aftermath of the global financial crisis, to satisfy themselves that these continue to safeguard auditor independence. So I welcome the debates on independence in the various forums, and that can only be in the public interest. This is not to suggest that the Ethics Board is content with the status quo as far as the Code is concerned. Far from it, we have commenced projects to review the provisions in the Code, addressing long association of senior personnel with an audit client, and the provision of non-assurance services to audit clients. But let me be clear that we are not prejudging from these projects that changes will be needed in these areas. However, we want to make sure that our requirements continue to support auditor independence in a robust and appropriate way.

Do you consider it necessary for IESBA to open a debate on issues related to the independence of the auditor and on the provision of services other than audit, precisely now that these issues are being reviewed by other regulatory entities on an international basis?

It is important to remember that the Ethics Board does not set standards in a vacuum. We recognize that the external environment may evolve very rapidly and we must be prepared to take action as needed. So, we carefully monitor emerging issues or developments internationally that may be of relevance to our work, and discuss the implications of the most significant ones for our strategy and work program. We may decide after careful analysis of environmental developments and discussions with our stakeholders that adjustments to our strategy are necessary, as we did last year when we added four new work streams to our current strategy. But this doesn’t mean we commence a project to respond to every emerging issue or development—our resources are finite after all and must be carefully managed. However, as I noted above, we have already started projects in the areas of long association and non-assurance services to determine whether changes to the Code are needed to further strengthen auditor independence.

Do you deem it necessary for audit companies to strengthen their Chinese walls (professional confidentiality both for employees as well as a physical separation of the technologies or the working teams) among their different divisions? Please, could you detail any necessary procedures?

The Code’s provisions addressing the fundamental principle of confidentiality are clear. Paragraph 140.4 requires a professional accountant to maintain confidentiality of information within the firm. Paragraph 140.5 requires a professional accountant to take reasonable steps to ensure that staff under the professional accountant’s control and persons from whom advice and assistance is obtained respect the professional accountant’s duty of confidentiality. It is the responsibility of the audit firms to take whatever actions are necessary to comply with these requirements, including segregating teams on different engagements as needed, and protecting the confidentiality of documentation containing client information.

Do you think that setting a cap on the percentage of revenues that may derive from one single client as a general rule, both for public interest entities (PIEs) and small- and medium-sized entities (SMEs), resolves the independence problem? Or would it rather be desirable in the case of SMEs, so as to avoid this problem, to apply the safeguards of the IESBA Code, such as increasing quality controls?

The tool has to fit the purpose. The level of public interest in the audit of a PIE will of course be different from the audit of an SME. So a one-size-fits-all approach may not necessarily be the right answer in every case. That is why I believe the threats and safeguards approach in the Code with respect to evaluating the impact of fees from a given client on independence is the right one. In particular, paragraph 290.220 of the Code states that when the total fees from an audit client represent a large proportion of the total fees of the firm expressing the audit opinion, the dependence on that client and concern about losing the client creates a self-interest or intimidation threat. The Code explains that the significance of the threat will depend on various factors such as the operating structure of the firm and the significance of the client qualitatively and/or quantitatively to the firm. The Code in this case requires the firm to evaluate the significance of the threat and apply appropriate safeguards to eliminate the threat or reduce it to an acceptable level. Among a number of possible safeguards could be to use external quality control reviews.

Of course, for PIEs, the Code already imposes a 15% cap on total fees from an audit client and its related entities relative to the total fees received by the firm as a whole. That is a position that the board believes is appropriate with respect to PIE audits.

How is the audit affected by the new definition of “engagement team” and to what extent has this been agreed with the ISAs?

The amendments to the definition of “engagement team” clarify the relationship between an external auditor’s use of internal auditors to provide direct assistance on the external audit in accordance with the International Auditing and Assurance Standards Board (IAASB)’s International Standard on Auditing (ISA) 610 (Revised 2013), Using the Work of Internal Auditors, and the meaning of an engagement team under the Code. The change to the definition should not affect audits because the sole purpose of the change is to eliminate a perceived inconsistency between the Code and the ISAs. In developing the change to the definition, I was pleased that the Ethics Board and the IAASB worked closely together to ensure that the amended definition would be fully consistent with the ISAs.

But of course, jurisdictions have different views on the appropriateness of using internal auditors to provide direct assistance on the external audit; the Code is not advocating one position or the other.

What sort of procedures will IESBA have to implement and maintain for the ISAs to be in agreement with the Code of Ethics?

Well, we certainly maintain close contact with the IAASB, and that is by necessity given that the Code and the ISAs are so closely linked. We have regular interactions with the IAASB at various levels—at the staff level, at the task force level (as we did on our project on the definition of “engagement team” and the IAASB’s project to revise ISA 610), and at the leadership level through quarterly meetings or teleconferences. We recognize the critical importance of these interactions as we are increasingly finding that issues being addressed on each board’s agenda have implications for the standards of the other board. I would also add that both boards have the benefit of the advice from their consultative advisory groups (CAGs), which have significant overlap in their memberships. As a result, the CAGs are often able to share ethics and audit perspectives on issues of mutual relevance to the two boards. So we do have processes internally to make sure that the Code and the ISAs stay aligned with each other as they evolve.

What are the main objectives for strengthening the Code in respect to the auditor’s actions upon encountering a breach of a requirement of the Code?

The Ethics Board released changes to the Code addressing a breach of a requirement of the Code in March 2013. The main objective of the project was to respond to a concern that the current provisions addressing an inadvertent breach of the Code, including independence requirements, could be misread as implying that all inadvertent breaches can be corrected by applying necessary safeguards. What we have now established in the Code is a robust framework, in particular for auditors to deal with breaches to the independence requirements of the Code. The provisions include strict requirements for communicating all breaches to those charged with governance and documentation.

What is the deadline to complete the revision of the Code of Ethics and to publish the final version?

The 2013 edition of the Handbook of the Code of Ethics for Professional Accountants will be available in May. This edition will contain the revised pronouncements addressing conflicts of interest, a breach of a requirement of the Code, and the definition of “engagement team,” which will take effect next year.

Do you consider that in today’s difficult financial environment, the auditor is satisfactorily fulfilling its public interest role and complying with ethics principles, such as honesty, independence, objectivity, and professional best practice?

Even though I am not an auditor or accountant and have never worked as one, I strongly believe that the vast majority of the audit profession live up to those principles. It helps that most auditors are required, often by law or regulation as a condition of their license, to go through rigorous training and develop core competencies, including a full understanding of the fundamental ethical principles that are the bedrock of the profession and are embodied in the Code. It is a fact of life, however, that in a very small minority of cases, members of any profession succumb to pressure to act unethically. This is when I strongly feel the disciplinary and enforcement regime in the particular jurisdiction should take action to deal with these isolated cases and prevent the profession as a whole from being cast into disrepute.

If you had to choose one single, fundamental ethics principle to rule over the professional activity of all auditors, what would it be?

That would be a fruitless task because no one fundamental principle overrides all the others. The five fundamental principles (integrity, objectivity, professional competence and due care, confidentiality, and professional behavior) that are established in the Code constitute one body of core principles that cannot be taken apart. Auditors must comply with each and all of them in every audit engagement they perform.

© Instituto de Censores Jurados de Cuentas de España (ICJCE). Spain. 2013.

This material belongs to ICJCE, therefore attributed to it all rights and related operating on it in any way, method or medium.

More than 150 attendees from 14 countries, including ASEAN, gathered on May 7, 2013 at a symposium to discuss strategies for building investor confidence through a strong financial reporting infrastructure that supports the integration of the ASEAN capital markets.

AccountacyAge has published an in-depth interview with IFAC’s new CEO, Fayezul Choudhury, which discusses some of his goals as he takes the reins at IFAC.