Breach of a Requirement of the Code

Objective

Objective

To reconsider the provisions in the Code that address an inadvertent violation of the Code.

Background

The Code contains several provisions that address an inadvertent violation of a provision of the Code. They indicate that such a violation will be deemed not to compromise compliance with the fundamental principles, or independence, provided certain conditions are met. The IESBA determined that a project should be commenced to re-consider these provisions as they could be misread as implying that all inadvertent violations can be corrected by applying necessary safeguards.

Task Force progress / Board discussions to date

The IESBA Consultative Advisory Group (CAG) discussed a draft project proposal at its September 2010 meeting

At its November 2010 meeting, the IESBA approved a project proposal.

At its February 2011 meeting, the IESBA discussed the significant issues to be addressed in the project including:

  • The need for provisions to address an inadvertent violation of an independence requirement;
  • Use of the term “inadvertent”;
  • Use of the phrase “deemed not to compromise independence”;
  • Whether the provisions should address all violations of an independence requirement;
  • The actions to be taken once a violation of an independence provision is discovered; and
  • The need for a provision to address a violation of a requirement that does not relate to independence.

The IESBA CAG discussed these matters at its March 2011 meeting.

At its June 2011 meeting, the IESBA considered a first read of proposed changes to the Code. The IESBA discussed:

  • Use of the term “breach” as opposed to “inadvertent’ to improve consistency with other drafting within the Code; and
  • Actions to be taken after a breach is identified.

The IESBA met by conference call in July 2011 to discuss a further draft.

The CAG discussed a proposed exposure draft at its September 2011 meeting.

At its October 2011 meeting, the IESBA approved an exposure draft. Under the exposure draft:

  • If a professional accountant identifies a breach of a requirement of the Code that is not related to independence, the accountant shall take whatever actions might be available, as soon as possible, to satisfactorily address the consequences of the breach – including determining whether to report the breach to those who may have been affected by the breach;
  • If a professional accountant in public practice identifies a breach of an independence requirement of the Code, the accountant shall:
    • Communicate the matter to those charged with governance and terminate, suspend or eliminate the interest or relationship that caused the breach;
    • Consider whether there are any legal or regulatory requirements that apply with respect to the breach and, if so, comply with those requirements;
    • Evaluate the significance of the breach and its impact on the firm’s objectivity and ability to issue an audit report;
    • Determine whether action can be taken to satisfactorily address the consequences of the breach;
    • If action cannot be taken, after discussion with those charged with governance, take the steps necessary to terminate the audit engagement in compliance with any applicable legal or regulatory requirements relevant to terminating the audit engagement;
    • If action can be taken, discuss the breach and the action proposed with those charged with governance as soon as possible;
    • If those charged with governance agree that action can be taken to satisfactorily address the consequences of the breach, continue with the audit engagement
    • if those charged with governance do not agree, take the steps necessary to terminate the audit engagement in compliance with any applicable legal or regulatory requirements relevant to terminating the audit engagement;
    • Document the action taken and all the matters discussed with those charged with governances and, if applicable, relevant regulators.

The exposure draft comment period ended on January 23, 2012.

At its February 2012 meeting, the IESBA discussed the responses to the first five questions in the exposure draft.

The IESBA CAG considered significant comments received on the exposure draft at its March 2012 meeting.

 

At its June 2012 meeting, the IESBA further considered significant comments received on exposure, and proposed changes to the exposure draft wording in response to these comments.

As part of this project, the IESBA undertook a survey of directors and audit committee members regarding its proposals to strengthen the framework that would apply when there has been a breach of the Code’s independence requirements. A summary of the survey responses can be accessed here. The survey responses were considered as part of the discussion of the topic at the June 2012 meeting.

The IESBA CAG considered proposed changes to the exposure draft wording in response to the significant comments on the exposure draft at its September 2012 meeting.

At its October 2012 meeting, the IESBA considered refinements to the wording of the proposals presented at the June 2012 meeting.

Next Steps

At its December 2012 meeting, the IESBA approved the changes to the Code as a final standard. The final standard was released in March 2013 on the IESBA website after the Public Interest Oversight Board confirmed that due process had been followed in the project. The changes will be effective on April 1, 2014. A Basis for Conclusions provides background to the project, main comments received on the exposure draft, and the IESBA’s conclusions regarding these comments in developing the final standard.