21 May 2015

FEE: Comment letter on IESBA ED 'Proposed Changes to the Code Addressing the Long Association of Personnel with an Audit or Assurance Client

FEE commented on the IESBA ongoing project on the proposed changes to certain provisions of the Code addressing the long association of personnel with an audit or assurance client. FEE urges IESBA to take the recent European developments into account in its efforts to strive for global convergence.

The IESBA Code currently requires a ‘cooling-off period’ of two years and the proposed changes include a ‘cooling-off period’ of five years.

The EU Regulation No 537/2014 on specific requirements regarding statutory audit of public-interest entities (the Regulation) states that “[…] the Key Audit Partners (KAP) responsible for carrying out a statutory audit shall cease their participation in the statutory audit of the audited entity not later than seven years from the date of their appointment. They shall not participate again in the statutory audit of the audited entity before three years have elapsed following that cessation. […]”.

Furthermore, the Regulation requires the statutory auditor or the audit firm to “establish an appropriate gradual rotation mechanism with regard to the most senior personnel involved in the statutory audit […]”.

As IESBA is aware, this Regulation has also introduced audit firm rotation for statutory audit of public interest entities which will become mandatory in the 31 jurisdictions of the EEA. This requirement, resulted from long lasting legislative proceedings and negotiations, is regarded by legislators as the main measure to address the familiarity threat to an auditor’s independence that may arise from long association with an audit client.

Instead of seeking to strengthen existing provisions on internal rotation only, we urge IESBA to take these recent European developments into account in its efforts to strive for global convergence. A holistic approach should be taken, based on an analysis of the interaction of the different approaches and measures that exist to mitigate the familiarity threat, e.g. mandatory firm rotation, KAP rotation, and rotation of engagement partners and senior personnel.

This EU perspective is strategic for IESBA now that the final provisions on such matters have to be implemented in the EEA by mid-2016. The IESBA Board should not undermine provisions that are already in place at the jurisdictional level to address long association and which are seen by many as more demanding when combined. Therefore, a level of flexibility is needed in the Code to take into account the different systems in place to achieve the appropriate mix of safeguards to mitigate the familiarity threat.

Full letter

© FEE