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On July 11, the staff of the International Ethics Standards Board for Accountants (IESBA) released a questions and answers (Q&As) document that helps to explain key revisions to the non-assurance services (NAS) provisions of the International Code of Ethics for Professional Accountants (including International Independence Standards).
The revised NAS provisions will be effective for audits of financial statements for periods beginning on or after December 15, 2022.
Twenty-three (23) Q&As comprise the new guidance, which read with the final pronouncement and Basis for Conclusions should help national standards setters, professional accountancy organizations, and professional accountants in public practice auditing PIEs implement the revised provisions. Various other stakeholders (e.g., regulators, those charged with governance, investors, and educators) can also benefit by gaining an understanding of the key changes to the NAS provisions. The new guidance, which the IESBA staff will update after the technology-related revisions to the Code are finalized, does not amend or override the Code, which is the only authoritative source for independence and ethics provisions. The Q&As should be read in conjunction with the IESBA Code.
The Q&As appear in five (5) broad categories. Key points are noted in each of the categories below:
General Prohibitions and Applying the Conceptual Framework to NAS
Q&A 2 provides guidance on the prohibition that firms (which includes network firms) not assume management responsibilities for an audit client. The prohibition was moved from Section 600, Provisions of Non-assurance Services to an Audit Client, to Section 400, Applying the Conceptual Framework to Independence for Audit and Review Engagements, to clarify that the prohibition applies not only to the performance of NAS for an audit client, but to all aspects of the relationship between the firm and the client. In addition to providing a general description of management responsibility, Q&A 2 directs the reader to the (i) general activities that would be prohibited, and (ii) specific types of NAS that may (or may not) be considered a management responsibility.
Q&A 3 reminds firms to apply the conceptual framework even when a NAS proposed to an audit client that is a public interest entity (PIE audit client) is not expressly prohibited.
Q&A 6 and 7 give examples of safeguards and other actions that might address threats to independence when a firm provides NAS to an audit client.
Q&A 8 provides examples of when multiple NAS performed for an audit client might create threats to independence. A fact pattern lays out an instance where provision of an additional NAS might impact a previous evaluation of the self-review threat in an audit of a PIE.
Self-review Threats
A significant change in the international independence standards for PIE audit clients is the prohibition on the performance of NAS to a PIE audit client if the NAS might create a self-review threat.
Q&A 9 describes how firms should apply the “two-prong test” to determine whether providing a NAS might create a self-review threat to independence.
Q&A 10 asks whether the provision of advice and recommendations to a PIE audit client would always create a prohibited self-review threat to independence. The answer provides guidelines, focusing on the proper application of the two-prong test, and examples.
Q&A 11 provides examples of the types of activities that firms could perform for PIE audit client because they are part of a normal audit process, e.g., proposing adjusting journal entries based on audit findings.
Q&A 12 clarifies that materiality of the outcome or results of a proposed NAS to a PIE audit client’s financial statements is not a relevant factor in determining whether a self-review threat exists.
Q&A 13 clarifies that an audit client that is a listed entity includes all the client’s related entities, i.e., the prohibition on NAS that might create self-review threats extends to those other related entities. For other PIE audit clients (e.g., large private insurer), the provisions apply only to entities the client can control, directly or indirectly, unless the firm has reason to believe that a relationship or situation involving a related entity is relevant to its independence.
Q&A 14 provides a non-exhaustive list of examples of NAS that might create a self-review threat and therefore, would not be permissible for PIE audit clients.
Specific Types of NAS
Q&A 15 describes a new provision in the Code that allows a firm to prepare statutory financial statements for certain related entities of a PIE audit client if several conditions are met.
Q&A 16 discusses the rationale for banning the provision of certain tax advisory and planning services to a PIE audit client because they might create a self-review threat to independence.
Q&A 17 speaks to the rationale for extending the existing prohibition on corporate financial services in which a firm promotes, deals in, or underwrites an audit client’s shares, debt, or other financial instruments to also include providing advice to any entity or person on investment in the client’s shares, debt, or other financial instruments.
Firm Communication with Those Charged with Governance (TCWG)
Q&A 18 describes a new provision that requires firms to obtain concurrence from those charged with governance (TCWG or governance body) of a PIE audit client before providing NAS to the client or its related entities. The answer also describes the rationale for the requirement and how it should be carried out. Further, when a firm wishes to provide NAS to the parent entity of a PIE audit client, the requirement applies even if the PIE audit client is (i) immaterial to the parent, or (ii) not a listed entity, which represents a departure from the Code’s definition and application of related entity.
Q&A 19 discusses how and when communication between a PIE audit client’s governance body and the firm should occur and describes how the firm and TCWG may agree to implement the reviews.
Q&A 20 addresses how a firm and TCWG should proceed if a law, regulation, professional standard, or commercial reason does not permit the firm to fully divulge information about a proposed NAS to the PIE’s governance body. However, if the firm is unable to provide any information to TCWG about a proposed NAS (or TCWG disagrees with the firm’s conclusion that threats created by provision of NAS would be at an acceptable level), the firm should not perform the NAS or end the audit engagement.
Other Matters (Transition Issues and Documentation)
Q&A 21 and 22 address issues related to the transition period (July 1, 2023 – June 30, 2024) that applies when a firm was engaged to perform NAS that were permissible under the extant Code but became prohibited under the revised NAS provisions on December 15, 2022.
Click here to see all resources the IESBA has provided on the new NAS provisions and here to read the Q&As document.
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