Independence Public Interest Entities

Public Interest Entities General Provisions • Definition of independence • Conceptual framework • Network firms • Public interest entities • Related entities • Those charged with governance Public Interest Entities General Provisions – cont’d • Documentation • Engagement period • Mergers and acquisitions • Other considerations Public Interest Entities Definition of Independence • Independence of Mind – The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism • Independence in Appearance – The avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that a firm’s, of a member of the audit team’s, integrity, objectivity or professional skepticism has been compromised Public Interest Entities Conceptual Framework Approach – Threats and Safeguards Public Interest Entities Conceptual Framework – Threats • Self-interest – The threat that a financial or other interest will inappropriate influence the professional accountant’s judgment or behavior • Self-review – The threat that a professional accountant will not appropriately evaluate the results of a previous judgment made or service performed on which the accountant will rely when forming a judgment as part of providing the current service • Advocacy – The threat that a professional accountant will promote a client’s position to the point that the accountant’s objectivity is compromised Public Interest Entities Conceptual Framework – Threats • Familiarity – The threat that due to a long or close relationship with a client, a professional accountant will be too sympathetic to their interests or too accepting of their work • Intimidation – The threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the accountant Public Interest Entities Conceptual Framework – Safeguards • Safeguards fall into two broad categories: – Those created by the profession, legislation or regulation; and – Those in the work environment Public Interest Entities Conceptual Framework – Prohibitions When safeguards are never adequate Public Interest Entities Network Firms • Network firms are required to be independent of audit clients of other firms within the network • Network is defined as a larger structure that is: – Aimed at co-operation; and – Clearly aimed at profit or cost sharing or shares common ownership, control or management, common quality control policies and procedures, common business strategy, the use of a common brand-name, or a significant part of professional resources Public Interest Entities Public Interest Entities • Public interest entities defined as: – Listed entities; and – Entities • defined by regulation or legislation as a public interest entity, or • for which the audit is required by regulation or legislation to be conducted in compliance with the same independence requirements that apply to the audit of listed entities Public Interest Entities Legal Services • A firm shall not act in an advocacy role for an audit client in resolving a dispute or litigation when the amounts involved are material to the financial statements • A partner or employee shall not act as General Counsel for legal affairs of an audit client • For other legal services, the significance of any threat created shall be evaluated and safeguards applied when necessary Public Interest Entities Recruiting Services • Providing recruiting services may create threats to independence, which shall be evaluated and safeguards applied when necessary • A firm may generally provide services such as: – Reviewing the professional qualifications of candidates and providing advice on their suitability for a position; and – Interviewing candidates and advising on their competence for financial accounting, administrative or control positions Public Interest Entities Recruiting Services • A firm shall not provide the following services with respect to a director or officer of the audit client or senior management in a position to exert significant influence over the client’s accounting records or financial statements: – Searching for or seeking out candidates for such positions; and – Undertaking reference checks of prospective candidates for such positions Public Interest Entities Corporate Finance Services • Providing corporate finance services may create threats to independence, which shall be evaluated and safeguards applied when necessary • A firm shall not provide corporate finance advice if the effectiveness of the advice depends on a particular accounting treatment or financial statement presentation and: – The audit team has reasonable doubt as to the appropriateness of the accounting treatment or presentation; and – The outcome or consequence of the tax advice would have a material effect on the financial statements Public Interest Entities Fees – Relative Size • Threats are created when fees from an audit client represent a large proportion of the total fees of the firm or a large proportion of the total revenue of an individual partner or an individual office of the firm • The threats shall be evaluated and safeguards applied when necessary Public Interest Entities Fees – Relative Size – cont’d • If the total fees from the client are more than 15% of the firm’s total fees for two years, the firm shall discuss which of the following safeguards to apply with those charged with governance: – A pre-issuance engagement quality control review performed by a professional accountant who is not a member of the firm; or – A post-issuance review equivalent to an engagement quality control performed by a professional accountant who is not a member of the firm • If the total fees significantly exceed 15% of the firm’s total fees , the firm shall determine whether the significance of the threat is such that a pre-issuance review is necessary Public Interest Entities Fees – Overdue • A threat may be created when fees from an audit client remain unpaid for a long time • Generally, the firm is excepted to require payment of any significant unpaid fees before the issue of the audit report for the following year • If fees remain unpaid after the report has been issued, any threat shall be evaluated and safeguards applied when necessary Public Interest Entities Contingent Fees • A contingent fee shall not be charged in respect of an audit engagement • A contingent fee shall not be charged for a non-assurance service provided to an audit client if: – The fee is charged by the firm and the fee is material or expected to be material to the firm; – The fee is charged by a network firm that participates in a significant part of the audit and the fee is material or expect to be material to the network firm; or – The outcome of the non-assurance service, and therefore the amount of the fee, is dependent on a future or contemporary judgment related to the audit of a material amount in the financial statements Public Interest Entities Contingent Fees • For other contingent fee arrangements, threats to independence shall be evaluated and safeguards applied when necessary Public Interest Entities Compensation and Evaluation Policies • Key audit partners shall not be evaluated on or compensated for the partner’s success in selling nonassurance services to their audit clients • A threat may be created if other members of the audit team are evaluated on or compensated for their success in selling non-assurance services to their audit clients The threat shall be evaluated and safeguards applied when necessary Public Interest Entities Gifts and Hospitality • A firm or member of the audit team shall not accept gifts or hospitality from an audit client unless the value is trivial and inconsequential Public Interest Entities Actual or Threatened Litigation • Litigation between the firm or a member of the audit team and an audit client creates a threat to independence • The significance of the threat shall be evaluated and safeguards applied when necessary • If safeguards not reduce the threats to an acceptable level, the firm shall withdraw from the audit engagement Public Interest Entities Reports that Include a Restriction on Use or Distribution • The Code provides for some modifications to the independence requirements for audit engagements where the report includes a restriction on use and distribution, unless the audit is required by law or regulation • The modifications are permitted if the intended users of the report: – Are knowledgeable as to the purpose and limitations of the report; and – Explicitly agree to the application of the modified independence requirements Public Interest Entities Effective Date • The revised Code is effective on January 1, 2011 • Certain transitional provisions apply to the following: – Public interest entities; – Partner rotation; – Non-assurance services; – Fees – relative size; and – Compensation and evaluation policies International Federation of Accountants www.ifac.org