Transcript Drafting Conventions Ken Dakdduk Task Force Chair Overview • • • • • • Implications of IAASB Clarity project “Clearly insignificant” “Consider” “Examples” or “illustrates” “Creates a threat” or “may create a threat” Threat.

Drafting Conventions
Ken Dakdduk
Task Force Chair
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Overview
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Implications of IAASB Clarity project
“Clearly insignificant”
“Consider”
“Examples” or “illustrates”
“Creates a threat” or “may create a threat”
Threat definitions
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IAASB Clarity Conventions
• State objective to be achieved in relation to each
ISA
• Requirements designed to achieve stated objective
will be identified by use of the word “shall”
• No use of present tense
• Each ISA to contain application material
– Provides further explanation and guidance supporting
proper application of the standards
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IAASB Clarity Conventions
• Code based on a conceptual framework
– Objective: comply with fundamental principles
• Separately stating objectives and converting
text into application guidance
– Could lengthen the Code; might weaken it
– Conclusion:
• Would not work well in the Code
• Whether other approaches would work requires a
longer-term effort
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Requirements
• Accountant should not do something
– ¶110.2 “accountant should not be associated with . . .
information . . . that [is] . . . false or misleading”
• Accountant should consider something
– ¶140.8 “accountants should consider the following
points”
• Accountant is required to do something
– ¶290.3 “it is . . . required by this Code . . . that members
. . . be independent”
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Requirements
• Accountant is obliged to do something
– ¶100.6 “accountant has an obligation to
evaluate any threats”
• Accountant can do something if necessary
steps are taken
– ¶290.132 “the following safeguards are
necessary”
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Not a Requirement
• Statement of expectation
– ¶300.5 “accountant . . . is expected . . . to . .
encourage an ethics-based culture”
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Principle
• Shall – to be used to denote:
– a requirement to comply with specific guidance
(e.g., a fundamental principle)
• no room for judgment; cannot “opt out”
– a clear prohibition
• ¶110.2 “accountant should not be associated with”
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Effect of Approach
• Will result in “shall” being used more often
throughout the entire Code
• Respondents to December 2006 ED
perceive Code is moving closer to “rulesbased”
– Use of “shall” could exacerbate this perception
– Rules can be based on principles
– Current wording retained if requirement is clear
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Clearly Insignificant
• The Code (¶100.2) requires:
– Identification of threats to compliance with the
fundamental principles;
– Evaluation of the significance of the threats;
and
– If threats are not clearly insignificant,
application of safeguards to eliminate them or
reduce them to an acceptable level.
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Clearly Insignificant
• Clearly insignificant is lower than acceptable level
– Clearly insignificant means trivial and inconsequential
– No definition of “acceptable level” in the Code
• Agree it is slightly higher than clearly insignificant
• When threat is already at an acceptable level
(before safeguards applied), no safeguards
required
• Documentation for independence purposes
required only when safeguards are needed to
reduce threats to an acceptable level
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Task Force Proposal – Eliminate Use of
“Clearly Insignificant”
• Professional accountants shall apply this
conceptual framework to:
– identify threats to compliance with the
fundamental principles,
– evaluate the significance of the threats, and
– apply safeguards, when necessary, to eliminate
threats or reduce them to an acceptable level
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Task Force Proposal – Define “Acceptable
Level”
A level at which a reasonable and informed
third party would be likely to conclude,
weighing all the specific facts and
circumstances, that compliance with the
fundamental principles is not compromised.
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Clearly Insignificant – Other Interactions
• Delete “clearly insignificant” throughout
Code
• Gifts and hospitality – refer to “trivial and
inconsequential”
• Close business relationships – may use
“insignificant”
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Task Force Proposal – Documentation
Conforming Change (290.29)
• Documentation is not by itself a determinant of
whether a firm is independent
• International auditing standards require documentation
of:
– conclusions regarding compliance with independence
requirements, and
– any relevant discussions that support those conclusions
• When threats require the application of safeguards,
that documentation shall also describe
– the nature of those threats
– the safeguards applied to eliminate them or reduce them to
an acceptable level
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Consider v. evaluate v. determine
• “Consider” used frequently in the Code
– Could be interpreted as less robust than
intended
• Task Force proposal:
– Consider = thinking about several matters
– Evaluate = assessing and weighing
– Determine = concluding and making a decision
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Consider v. evaluate v. determine
• ¶100.17 - When initiating . . . a . . . conflict resolution
process, a professional accountant shall consider the
following
– “Consider” is used consistent with our drafting convention; no
change
• ¶290.11 – In considering evaluating the significance of any
particular matters
– Changed “considering” to “evaluating”
• ¶290.157 - Before a firm accepts an engagement . . .
consideration should be given to it shall determine whether
providing such a service would create a threat
– Changed “consideration should be given to” to “determine”
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Examples/Illustrate
• Use of “examples/illustrates” might convey
that guidance is not mandatory
– ¶200.1 – This Part of the Code illustrates how
the CF . . . is to be applied
• Changed “illustrates” to “demonstrates”
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Threats
• “Creates” or “may create” a threat
• Code does not define “threats”; for example:
– ¶200.4 Examples of circumstances that may
create self-interest threats…include…undue
dependence on total fees from a client
– ¶290.129 Threats to independence may be
created when a close family member…is a
director…of the client…
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Description of Five Categories of Threats
• Conceptual framework approach first set out
in independence section of Code
• Framework later expanded to cover entire
Code
– Descriptions of threat categories (self review,
self interest, advocacy, intimidation,
familiarity) were made more generic
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Task Force Proposal – Threats
• To clarify when a threat is created or may be
created:
– Include general definition of a “threat”
– Ensure requirement to exercise professional
judgment is retained
• Recommend defining individual threats
– Self review, self interest, advocacy,
intimidation, and familiarity
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Threats – Proposed Definition
• Threats are created by relationships or other
circumstances that could compromise a
professional accountant’s ability to comply with
the fundamental principles
– i.e., the circumstance provides an incentive for the
accountant to not comply with the fundamental
principles
• Fundamental principles = integrity, objectivity,
professional competence & due care,
confidentiality, and professional behavior
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Threats – Proposed Definition
• Threats are created by
relationships or other
circumstances that could
compromise a professional
accountant’s ability to
comply with the
fundamental principles
• “Could compromise”
means a threat requires
evaluation of the
relationship or
circumstance to determine
whether it would
compromise compliance
– Explicit prohibition against
the relationship or
circumstance makes
evaluation unnecessary
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Threats – Proposed Definition
• Threats are created by
relationships or other
circumstances that
could compromise a
professional
accountant’s ability to
comply with the
fundamental principles
• Many relationships and
circumstances
described in the Code
would “create” a threat
– Will require changing
“may create a threat”
to “creates a threat” in
many parts of the Code
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Threats – Proposed Definition
• Threats are created by
relationships or other
circumstances that
could compromise a
professional
accountant’s ability to
comply with the
fundamental principles
• Points for discussion
– Whether to focus on
incentives not to
comply; e.g.,
“relationships . . . that
could provide an
incentive for an
accountant to not
comply with the
fundamental
principles”
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Threats – Proposed Definition
• Threats are created by
relationships or other
circumstances that
could compromise a
professional
accountant’s ability to
comply with the
fundamental principles
• Points for discussion
– Whether the definition
should cover
perceptions; e.g., “. . .
that could compromise,
or could be perceived
to compromise . . .”
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Threats – Proposed Definition
• Threats are created by
relationships or other
circumstances that could
compromise a professional
accountant’s ability to
comply with the
fundamental principles
• Points for discussion
– Whether to describe the
action required after the
definition of “threats” e.g.,
“Unless the relationship . . .
is prohibited by this Code, a
threat requires evaluation of
the relationship . . . to
determine whether it would
compromise compliance . . .
and, if so, application of
safeguards . . .”
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Self-Interest Threat
• The threat that a professional accountant will act in his or
her own best interest, or in the best interest of a member of
his or her immediate or close family member because of a
potential benefit from a financial interest in or other
relationship with a client of the employer
• Points for discussion
– Whether “best interest” should be “interest”
– Whether “a member of his or her immediate or close family
member” should be “his or her firm, employer, or other
persons”
– Whether “a potential benefit” is necessary
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Circumstances That Create Self-Interest
Threats ¶200.4
• A member of the audit team having a direct financial
interest in an audit client
• Undue dependence on total fees from a client
• Having a significant business relationship with a client
• Concern about the possibility of losing a client
• Potential employment with a client
• Contingent fees relating to an assurance engagement
• The discovery of a significant error in the performance of a
re-evaluation of a professional services engagement
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Self-Review Threat
• The threat that a professional accountant will not
appropriately re-evaluate the results of a previous
service that he or she will rely upon in forming a
judgment as part of providing a current service or
because he or she, or others within his or her firm
or organization, performed the previous service
• Points for discussion
– Whether “a current service” should be “another
service”
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Circumstances That Create Self-Review
Threats ¶200.5
• Reporting on the operation of financial systems after being
involved with their design or implementation
• Having prepared the original data used to generate records
that are the subject matter of the engagement.
• A member of the assurance team being, or having recently
been, a director or officer of that client
• A member of the assurance team being, or having recently
been, employed by the client in a position to exert
significant influence over the subject matter of the
engagement
• Performing a service for a client that directly affects the
subject matter of the assurance engagement.
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Advocacy Threat
• The threat that a professional accountant
who promotes a client’s or employer’s
position may do so to the point that his or
her objectivity is compromised
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Circumstances That Create Advocacy Threats
¶200.6
• Promoting shares in a listed entity when that
entity is a financial statement audit client
• Acting as an advocate on behalf of an
assurance client in litigation or disputes with
third parties
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Familiarity Threat
• The threat that a professional accountant will become too
sympathetic to the interests of a client or employer or will
not appropriately evaluate the worked performed by the
client or employer because the work
– (i) involves issues that are familiar to the professional
accountant, or
– (ii) was performed by an individual familiar to the
professional accountant
• Points for discussion
– Whether (i) should read “involves matters that the professional
accountant has been closely associated with”
– Whether (ii) should read “was performed by an individual with
whom the professional accountant has a close relationship”
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Circumstances That Create Familiarity
Threats ¶200.7
• A member of the engagement team having a close or
immediate family relationship with a director or officer of
the client
• A member of the engagement team having a close or
immediate family relationship with an employee of the
client who is in a position to exert direct and significant
influence over the subject matter of the engagement
• A director or officer of the client or an employee in a
position to exert direct and significant influence over the
subject matter of the engagement was recently a partner of
the firm
• Accepting gifts or preferential treatment from a client,
unless the value is trivial or inconsequential
• Long association of senior personnel with the assurance
client
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Intimidation Threat
• The threat that a professional accountant will subordinate
his or her judgment to that of [an individual associated
with] a client or employer because of their
– (i) reputation, or
– (ii) because of their attempts to exercise excessive influence
over him or her
• Points for discussion
– Whether (i) should read “[the individual’s] reputation or expertise”
– Whether (ii) should read “will be deterred from acting objectively
because the [individual associated with the] client or employer is
aggressive or dominant or attempts to exercise excessive influence
over him or her”
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Circumstances That Create Intimidation
Threats ¶200.8
• Being threatened with dismissal or replacement in
relation to a client engagement
• Being threatened with litigation by the client
• Being pressured to reduce inappropriately the
extent of work performed in order to reduce fees
• The client hires as part of its management team an
expert on determining fair values of assets in the
client’s industry
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Discussion
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