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The IESBA believes that any breach of a provision of the IESBA Code should be treated as a matter of utmost importance. Therefore, the IESBA has proposed changes that will provide guidance to a professional accountant on the action to be taken in such situations.
Some authorities (e.g. the US Securities and Exchange Commission, the US Government Accountability Office, the UK Auditing Practices Board, and the Australian Accounting Professional and Ethical Standards Board) have built into their standards and regulations provisions that set out mandatory processes for dealing with violations. Not all jurisdictions, however, have a regulator that is able to deal with violations, and not all regulators have a regulatory process for dealing with them. In those situations, those charged with governance and audit firms are left to address violations on an ad hoc basis; there is no guidance on the steps that must be taken if the firm has identified a violation. The IESBA is of the view that the Code should provide such a framework to promote consistent analysis and outcomes.
Having concluded that the Code should contain a provision that addresses the implications of a violation of an independence requirement in the Code, the IESBA considered whether there should be a provision to address violations of other requirements in the Code. The IESBA believes it is important for the Code to include a general provision to promote ethical behaviour by professional accountants if a violation of other requirements in the Code occurs.
The proposal requires a firm to determine whether termination of the audit engagement is necessary or whether action can be taken to address satisfactorily the consequences of a breach such that the firm can still issue an audit opinion. When a breach of an independence provision is identified, the firm would be required to:
In determining whether action can be taken to address satisfactorily the consequences of the breach, the firm is required to take into account whether, even if such action can be taken, a reasonable and informed third party, weighing the significance of the breach, would be likely to conclude that the firm’s objectivity would be compromised such that the firm is unable to issue an audit report. The IESBA is of the view that this is an appropriately high threshold for making the determination and is consistent with the general thrust of the Code, which requires an accountant's judgements to take into account the views of a reasonable and informed third party.
The proposal requires a firm to discuss all breaches with those charged with governance. The IESBA considered whether, consistent with the reporting requirements or practice in some jurisdictions, there should be a de minimis test, whereby insignificant breaches are not disclosed to those charged with governance. The IESBA concluded that such an approach would entail too much subjectivity as to whether a breach was significant or insignificant, and thus whether it was necessary to report the breach. The IESBA also considered whether those charged with governance should determine which breaches should be communicated by the firm. Requiring disclosure of all breaches addresses the perceived self-interest that some may believe a firm has not to report a breach. The IESBA, therefore, concluded that all breaches should be discussed with those charged with governance, irrespective of the significance of the breach.