N on-Assurance Services

1. Non-Assurance Services IESBA Meeting New York March 11-13, 2019 Richard Fleck, Task Force Chair

2. Agenda • Current landscape • Approach • Timeline • Task Force Proposals • Key Policy Decisions • Fee-related matters • Clarifications, Structural Matters & Other Proposals • Feedback from CAG • NAS Provisions Being Proposed & Matters for IESBA Consideration

3. Current Landscape • NAS provisions already in effect since 2016 • Removal of “emergency situations” bookkeeping & tax services • Clarity about management resp. & “routine or mechanical” services • More revisions to come into effect in June 2019 • NAS prohibitions more prominently identified • Conceptual framework has been enhanced and is more robust • Clearer safeguards that are more closely aligned to threats • Emphasis that if threats cannot be addressed, firm must decline or end the NAS or audit engagement

4. Why Change NAS Provisions Now? • Code provides strong foundation, but more work needed • Public expectations about auditor independence changed • More focus on independence in appearance • Public perception about “acceptable level” of threats to independence is different • Less tolerance from stakeholders for self-review threats in context of NAS • Changes in laws, regulations and firm policies re NAS in many jurisdictions • In certain jurisdictions, some firms no longer provide NAS to audit clients that are listed

5. Task Force Approach • Key aim to clarify circumstances in which firms/ network firms may or may not provide NAS to their audit clients • Focus of revisions are to Section 600 • Conforming/ consequent amendments expected in • Sections 400, 950 • Sections 523, 525 • Most substantive revisions will impact PIEs • Decision trees to help visually illustrate proposals • Targeted outreach in advance of ED exposure

6. NAS Project Timeline* * Does not reflect allTask Force and Staff activities

7. Activities up to ED Exposure • March 2019 (CAG and Board) • Issues and Task Force Proposals • April/ May 2019 • Forum of Firms • IESBA National Standard Setters • June 2019 Board • Consider remaining issues and Task Force Proposals • September 2019 (CAG and Board) • Consider and finalize proposed text  Approve ED for exposure

8. Task Force Proposals

9. Task Force Proposals Key Policy Decisions • Maintain different provisions for audit clients that are PIEs and non-PIEs • Prohibit firms from providing NAS to audit clients that are PIEs if: • The outcome of NAS might be included directly or indirectly in f/s; and • The NAS creates/ might create a SR threat to independence • New provisions re auditor communication with TCWG • For PIEs – new req’t for firms to obtain NAS pre-approval from TCWG • For non-PIEs – this would be encouraged

10. Task Force Proposals Coordination with Fees Task Force • New req’t to establish a threshold for fee disclosure • Ratio of audit fees to services other than audit

11. Task Force Proposals Clarifications and Structural Matters • Expanded explanation of how firms are to apply CF to deal with threats to independence that are created when providing NAS to audit clients • Intended for emphasis and to help drive consistent application of Code • Inclusion of summary list of NAS prohibited due to self-review threat • Existing NAS prohibitions in subsections of S600 • Inclusion of general examples of actions that might be NAS safeguards • Repositioning of provisions re management responsibilities • More clarity about exemption for certain related entities

12. Feedback from CAG • Strong support for prohibiting NAS that create SR threats • Varied views about whether prohibitions should apply only to PIEs • Don’t risk signaling gradations of independence for PIEs & non-PIEs • Consider applicability to public sector entities • Explain what is meant by directly and indirectly included in f/s • Accelerate IESBA future initiative to revise description of PIEs • Effective date for new description of PIEs should align to revised NAS provisions • Strong support for enhanced auditor communication • Pre-approval should be documented • Support for having summary list of NAS prohibitions

13. NAS Revisions Being Proposed

14. Yes = Prohibited Self-review threat = Prohibit Step 2 Does NAS involve assuming a management responsibility? Step 1 Is the type of NAS explicitly prohibited? Yes = Proceed to 5 No = Proceed to 3 Yes = Provide NAS Step 4 Are other types of threats at an acceptable level? Step 5* Has the firm obtained pre-approval for NAS from TCWG? Yes = Prohibited No = Prohibited Yes = Prohibited No= Prohibited Proposed NAS Model – Audit Clients that are PIEs Step 3* Does the outcome of NAS impact f/s and create/ might create SR threats? No = Proceed to 2 No = Proceed to 4

15. Why Focus on PIEs? • Providing NAS to a PIE audit client might be perceived to result in a higher level of a threat to independence in appearance • Therefore, different approaches for PIEs and non-PIEs to be retained • Revisiting definition of PIEs is not part of this project, but: • New AM to explain rationale for different approaches in 600.9 A1 to 600.9 A2 • Intended that EM will include material to: • Summarize stakeholders’ concerns at the description of PIEs in the Code • Views about possible options to address those concerns • Solicit input about how the Code might address PIEs in a future project

16. Matter for IESBA Consideration • IESBA members are asked whether they support the proposal to retain different provisions governing the provision of NAS to PIEs and non-PIEs in the Code.

17. NAS Revisions Being Proposed NAS Prohibitions in Laws and Regulations • Jurisdictional laws, regulations and local codes deal with NAS and may be: • More specific to deal with topics that are not addressed in the Code/ or topics may be dealt with a different manner than the IESBA Code • More “rules-based” and include more explicit NAS prohibitions than IESBA Code to accommodate national circumstances Task Force Proposal • R.600.7 to 600.8 A1 require firms to consider and apply NAS jurisdictional laws and regulations

18. NAS Revision Being Proposed Prohibition for NAS that Create Self-Review Threats (PIEs) • R600.11 prohibits firms/ network firms from providing NAS to audit clients that are PIEs if: • The outcome of the service might be included, directly or indirectly, in f/s; and • Providing that service might give rise to a self-review threat to independence • 600.9 A1/ A2 provides more guidance to help identify threats for NAS • 600.10 A3/ A4 develops description of SR threats in relation to NAS • Summary list of examples of NAS prohibitions created by SR threats • 600.11 A2 is drawn from existing NAS prohibitions for PIEs (all except recruiting services)

19. NAS Revision Being Proposed Divergent Views re Having a Summary List in Code

20. NAS Revision Being Proposed Provisions to Support SR Threat Prohibition (PIEs) • 600.10 A4 explains that • The focus on self-review threats is due to the increasing awareness and concerns at the impact on trust in the profession resulting from threats to independence in appearance arising from the provision of NAS to PIEs • Self-review threats to independence in appearance cannot be eliminated and safeguards are not capable of being applied to reduce such threats to an acceptable level • 600.11 A3 explains how to assess outcome of service and likelihood of SR threat

21. NAS Revisions Being Proposed Materiality (PIEs) • In case of SR threat, concept of materiality is relevant only when assessing whether output of NAS will be included, directly or indirectly, in the f/s • Therefore, references to materiality that exist in current NAS prohibitions would be withdrawn where a SR threat arises • Withdraw the exemption in current Code in R601.7 that allowed for the provision of accounting and bookkeeping services that are of a routine and mechanical nature for divisions or related entities of audit client when such services are immaterial to the f/s

22. Threats other than Self-review (PIEs) • Apply CF to identify, evaluate and address all other types of threats to independence

23. Matter for IESBA Consideration • IESBA members are asked whether they support: • The proposal to prohibit the provision of NAS that may give rise to a self-review threats impacting the financial statements to be audited; and • The inclusion of a list of prohibited NAS prohibitions for PIEs in 600.11 A2.

24. NAS Revision Being Proposed Enhanced Auditor Communications with TCWG • 600.19 A1 reminds firms to comply with the provisions in S300 re communications with TCWG • R600.21 to 600.22 A2 apply to PIEs only • Require firms and network firms to obtain approval from TCWG in order to provide NAS to audit clients • Allows flexibility for TCWG to pre-approve on an individual NAS engagement basis or via an established process • NAS that are trivial and inconsequential would not require pre-approval ( RITP test to determine “trivial or inconsequential” NAS) • TF is still exploring how firms should evidence pre-approvals and whether pre-approvals be in writing • 600.20 A1 encourages firms to obtain pre-approvals for non-PIEs

25. Matter for IESBA Consideration • IESBA members are asked whether they support the proposal for: • Enhanced auditor communications with TCWG • Proposed requirement for firms to obtain pre-approval from TCWG for provision of NAS to PIEs

26. Matters Coordinated with Fees Task Force • Regulators suggested IESBA consider including ‘fee-cap’ to the Code → RT participants disagreed • Task Force considered • Most recently adopted EU rules and guidance • Options presented in Fees Final Report to address ratio of audit and NAS fee: • Establish a threshold to level of fees for NAS in relation to audit fees, as a trigger to require to reassess the threats to independence; • Include a cap on the level of fees for NAS in relation to audit fees,

27. Matters Coordinated with Fees Task Force Task Force Proposal • Include req’t to reassess threats to independence once a certain fee threshold is exceeded → alternative to a “fee cap” • Ratio would be audit fees to fees for services other than audit(i.e. audit related, assurance services and NAS) • Firms would be required to: • Disclose and discuss with TCWG • Determine whether to apply safeguards that are specified by the Code • Proposal would apply to audits of clients that are PIEs only

28. Matter for IESBA Consideration • IESBA members are asked whether they support the proposal to establish: • A fee threshold for disclosure of the ratio of audit fees to fees for services other than audit; and • A requirement for firms to reassess threats when the threshold is reached.

29. Assuming Management Responsibility • Under current Code, firms and network firms SHALL NOT assume management responsibilities for audit clients • Task Force believes that the prohibition for assuming mgtresp is always relevant when applying the CF to independence (not only when providing NAS to audit clients) • Accordingly, the Task Force repositioned the provisions relating to mgtresp, including the exemption for certain related entities to the International Independence Standards (i.e., S400) • Clarify and retain provisions that permit firms to provide advice and recommendations to assist management in discharging their responsibilities (see 600.16 A1 to R600.18) • Firm required to ensure that mgt designates individual with suitable skill, knowledge and experience to take ownership and to evaluate adequacy and results of NAS (R600.18)

30. Matter for IESBA Consideration • IESBA members are asked whether they support the clarifications and structural revisions proposed including those that are to: • Help drive consistency in terms of how the CF is applied for NAS; • Reposition provisions re management resp. to Section 400.

31. Exemptions for Certain Entities Under Current Code • Firms/ network firms allowed to assume management responsibilities or provide certain NAS to certain parent/sister/brother entities provided: • Firm does not express opinion on (e.g., audit) the f/s of that entity • Provision of service doesn’t result in firm assuming management responsibility for audited entity • Provision of NAS doesn’t create a SR threat – because the output will not be subject to audit procedures • Firm addresses any other threats created by provision of such services • Types of entities covered by exemption • Parent: (i) entity that has direct or indirect control; (ii) entity with a direct financial interest; (iii) entity with significant influence or whose interest is material • Sister/Brother: Entity under common control

32. Current Code – Categorization of Different Related Entities Parent Entity Sister Co. A Brother Co. C Audited Entity B1 B2 B3

33. Issues arising from Approach in Current Code • US SEC rules and EU approaches are conceptually different • EU prohibit firms from providing black-list-NAS to audit clients that are PIEs and to “parent undertakings” or “controlled undertakings” of PIEs • SEC specifies types of NAS that will impair auditor independence, but allows for exemptions for entities that are not subject to audit • Questions: • Should exemptions permitting services to parent and sister/brother entities in current Code be retained? • Should a different approach be adopted for PIEs and non-PIEs? • Should exemptions be retained for sister/brother entities, but removed for parent entities?

34. NAS Revision Being Proposed Clarifications to Help Drive Consistency (all entities) • More enhancements to explain how firms are to apply CF for NAS • Revised introductory paras in 600.3 to 600.6 • New guidance for identifying threats for NAS • Strengthen provisions for evaluating and addressing threats for NAS (R600.12 and R600.14 repeats req’ts in R120.7 and R120.10) • Application material to consider the combined effect of providing multiple NAS to the same audit client is now elevated to a req’t (see R600.13) • More emphasis that firms are to use the RITP when addressing threats (R600.15 repeats req’tin R120.5(c)) • 600.15 A1/A2 expands on guidance in the Code about NAS safeguards and provides examples of general NAS safeguards

35. Other Proposals • Clarification to periods for which independence is required • Code already requires firms to maintain independence during both audit engagement period, and period covered by the f/s • Responsive to Qs about implications of NAS provided before period covered by f/s: • New AM refer firms to guidance in S400 • Firms/ network firms are required to determine whether a NAS provided prior to being appointed to conduct the audit engagement continue to give rise to threats to independence (R600.26) • No specific “cooling-in” period established • Structural revisions to subsections –Subsections 601 to 603 • Revisions to description and examples of administrative services – Subsection 602

36. Matter for IESBA Consideration • IESBA members are asked whether they support the other proposals being considered by the Task Force, including those intended to: • Clarify the periods for which independence is required in the context of NAS engagements • Improve the structure and flow of the provisions in subsections • Modernize the description and examples of administrative services in Subsection 602

37. The Ethics Board www.ethicsboard.org