15 October 2015

FEE comments on the IAASB’s ED: “Responding to Non Compliance or Suspected Non Compliance with Laws and Regulations”

FEE appreciates the IAASB’s efforts to ensure consistency between its ISAs and the recent IESBA proposals to amend the Code of Ethics on NOCLAR. As a general principle, FEE thinks that the IAASB should avoid repeating the principles of the IESBA Code of Ethics in the ISAs and vice versa.

FEE has noted this project by the IAASB, and appreciates the effort to ensure consistency between IAASB’s ISAs and the IESBA Code of Ethics (the Code), in light of the recent IESBA ED on Responding to Non-Compliance with Laws and Regulations (NOCLAR) issued in May 2015.

Although there may be technical merit in opening up existing ISAs for incremental improvement, FEE highlights the importance of a cost-benefit analysis to these decisions. Frequent changes to ISAs, which require retranslation and transposition into local law or local standards, create a significant time commitment and cost burden for many jurisdictions. FEE requests that the IAASB consider whether limited changes to ISAs merit such an investment.

FEE has some concern regarding the implicit assumption by the IAASB as to the outcome of the ongoing IESBA consultation. The explanatory memorandum does not indicate the due process in place to ensure a structured communication between the IAASB and IESBA with regard to this ED. Ideally, it would have seemed preferable for the IESBA’s proposals to have been fully finalised – following appropriate consultation between the two Boards – prior to the IAASB considering the effect on the ISAs. As noted above, considering them earlier in this process may be perceived as implying full IAASB’s support for the IESBA’s current proposals. This also results in difficulties for commentators, who still may be considering the merits of the fundamentals of the NOCLAR IESBA’s project, rather than purely its application to ISAs.

With this in mind, it may be likely that there will be a need for further amendments following the final changes to the IESBA’s proposals. FEE is concerned that the need for consistency between the Code and the IAASB standards has not yet received sufficient focus; FEE would urge the two Boards to continue working together in this regard.

Additionally, some concepts included in the IESBA’s proposals relate to accountants who are not involved in audits or other areas dealt with by the IAASB’s standards (it includes for instance professional accountants in business). Therefore a part of the reproduced text may not be appropriate or relevant to auditing standards. For example, including a category for “securities, markets and trading” might create unrealistic expectations of what is anticipated from professional accountants in the course of conducting e.g. an audit, assurance or other related services engagement.

If the Code were changed to require instances of NOCLAR that a professional accountant believes may be about to occur1, this potentially significantly extends the scope of an audit. FEE is of the view that determining whether to disclose a matter to an appropriate authority, and, as a result, breaching client confidentiality, is a matter for legislation, and not for international standard setters to define.

As a general principle, FEE would like the IAASB to avoid repeating the principles of the Code in the ISAs. The Code is designed to be applied in a different way and, while impacting on the ISAs, has a much wider application. Rather, the IAASB should focus on clarifying and providing guidance on the application of the Code, where relevant, to the relevant standards.

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