ICAS responds to the IESBA Exposure Draft on proposed revisions to the definitions of listed entity and public interest entity in the Code of Ethics
Ann Buttery reports on the ICAS Ethics Board’s response to the IESBA Exposure Draft on proposed revisions to the definitions of listed entity and public interest entity in the Code of Ethics.
The ICAS Ethics Board has responded to the International Ethics Standards Board for Accountants (IESBA) Exposure Draft Proposed Revisions to the Definitions of Listed Entity and Public Interest Entity in the Code in relation to proposed revisions to the International Independence Standards - Part 4 of the IESBA Code of Ethics - which apply to professional accountants in public practice when providing assurance services.
The ICAS Code of Ethics is substantively based on the IESBA Code; however, auditors undertaking an audit in the UK, and professional accountants undertaking other public interest assurance engagements in compliance with the engagement standards issued by the FRC, are required to comply with the requirements of the Financial Reporting Council's (FRC) Ethical Standard. The FRC closely monitors developments in the IESBA Code.
IESBA’s proposed revisions
IESBA’s Exposure Draft proposes revisions which include the following and are discussed in more detail below:
- The introduction of an overarching objective for additional auditor independence requirements to enhance confidence in the audit of financial statements of Public Interest Entities (PIEs).
- The provision of guidance on factors to consider when determining the level of public interest in an entity.
- The expansion of the extant definition of a PIE to a list of categories of entities that should be treated as PIEs, subject to refinement by the relevant local bodies responsible for standard setting as part of the adoption and implementation process.
- The replacement of the term ‘listed entity’ with the term ‘publicly traded entity’, and a new definition of ‘publicly traded entity’ in the Glossary to the Code.
- A new requirement for firms to determine if additional entities, or certain categories of entities, should be treated as PIEs for auditor independence purposes.
- A new requirement for firms to disclose if an audit client has been treated as a PIE.
Overall, ICAS is generally supportive of IESBA’s proposals and believes that the new provisions will be beneficial to users of the Code.
The introduction of an overarching objective for additional auditor independence requirements to enhance confidence in the audit of financial statements of PIEs
As explained in IESBA’s Explanatory Memorandum, IESBA has taken the view that it would be important to clarify in the Code that for the audits of financial statements of PIEs there are additional auditor independence requirements within the Code, reflecting the significant public interest in the financial condition of these entities.
As such, IESBA has set out an overarching objective in proposed paragraphs 400.8 and 400.9. encapsulating the following:
- There are types of entities for which there is significant public interest in their financial condition and hence their financial statements;
- It is important that there is public confidence in those financial statements. A major contributor to that confidence is in turn confidence in the audit of such financial statements; and
- Confidence in such audits will be enhanced by additional auditor independence requirements.
ICAS is supportive of this overarching objective however suggests that the paragraphs could be made clearer with some additional text.
The provision of guidance on factors to consider when determining the level of public interest in an entity
IESBA proposes a non-exhaustive list of factors in paragraph 400.8 as guidance for determining the level of public interest in the financial condition of entities as follows:
- The nature of the business or activities, such as taking on financial obligations to the public as part of an entity’s primary business.
- Whether the entity is subject to regulatory supervision designed to provide confidence that the entity will meet its financial obligations.
- Size of the entity.
- The importance of the entity to the sector in which it operates including how easily replaceable it is in the event of financial failure.
- Number and nature of stakeholders including investors, customers, creditors and of employees.
- The potential systemic impact on other sectors and the economy as a whole in the event of financial failure of the entity.
This list is intended to be used by relevant local bodies when refining the definition of PIE as part of their adoption and implementation process as well as by firms to determine if additional entities should be treated as PIEs (see further discussion below).
ICAS agrees with this proposed list of factors, other than suggesting some additional text to provide further clarity for users.
The expansion of the extant definition of a PIE to a list of categories of entities that should be treated as PIEs, subject to refinement by the relevant local bodies responsible for standard setting as part of the adoption and implementation process
The extant Code defines a ‘public interest entity’ as:
- A listed entity; or
- An entity: (i) Defined by regulation or legislation as a public interest entity; or (ii) For which the audit is required by regulation or legislation to be conducted in compliance with the same independence requirements that apply to the audit of listed entities. Such regulation might be promulgated by any relevant regulator, including an audit regulator. Other entities might also be considered to be public interest entities, as set out in paragraph 400.8.
In the Explanatory Memorandum, IESBA notes that whilst many jurisdictions adopt the IESBA definition, some have made varying types of refinement to the PIE definition in their local codes or have defined their PIEs using terms defined in laws or regulations.
IESBA now therefore proposes a broad approach that is made up of three key components:
(a) Role of Code – Development of a longer and broader list of high-level categories of entities as PIEs in the Code;
(b) Role of Local Bodies – Refinement of IESBA’s categories by local bodies (such as regulators or oversight bodies, national standard setters and professional accountancy bodies) through tightening definitions, setting size criteria and adding new types of entities or exempting particular entities; and
(c) Role of Firms – Determination by firms whether to treat any additional entities, or certain categories of entities, as PIEs.
Proposed paragraph R400.14 provides the broad list of high-level categories which then need to be further refined by local bodies:
“R400.14 For the purposes of this Part, a firm shall treat an entity as a public interest entity when it falls within any of the following categories:
(a) A publicly traded entity;
(b) An entity one of whose main functions is to take deposits from the public;
(c) An entity one of whose main functions is to provide insurance to the public;
(d) An entity whose function is to provide post-employment benefits;
(e) An entity whose function is to act as a collective investment vehicle and which issues redeemable financial instruments to the public; or
(f) An entity specified as such by law or regulation to meet the objective set out in paragraph 400.9.”
ICAS is supportive of the broad approach proposed by IESBA to provide a high-level list of categories of PIEs which are then refined by relevant local bodies as part of the adoption and implementation process; however, believes that this approach could be better signposted within the new provisions within the Code.
The replacement of the term ‘listed entity’ with the term ‘publicly traded entity’, and a new definition of ‘publicly traded entity’ in the Glossary to the Code
The extant Code defines a ‘listed entity’ as: “An entity whose shares, stock or debt are quoted or listed on a recognised stock exchange, or are marketed under the regulations of a recognised stock exchange or other equivalent body”.
IESBA proposes a new term - ‘publicly traded entity’ - to replace ‘listed entity’. The proposed new term is intended to scope in more entities as it is not confined to shares, stock or debt traded only in formal exchanges but also encompasses those in second-tier markets or over-the-counter trading platforms. The new term also aims to remove the confusion created by the term ‘recognised stock exchange’ in the extant definition of listed entity.
IESBA proposes to define a ‘publicly traded entity’ as: “An entity that issues financial instruments that are transferrable and publicly traded.”
ICAS supports the use of the new term ‘publicly traded entity’ as IESBA explains in the Explanatory Memorandum however believes that the definition of ‘publicly traded entity’ in the Glossary is somewhat circular which might not help users understand IESBA’s intentions. For the benefit of users, ICAS suggests IESBA’s intention re the terms ‘publicly traded’ and ‘financial instruments’ are explained further in the Glossary and suggests consideration being given to using some of the detail provided within IESBA’s Explanatory Memorandum for the definition.
A new requirement for firms to determine if additional entities, or certain categories of entities, should be treated as PIEs for auditor independence purposes
IESBA proposes a new requirement for firms to determine if additional entities, or certain categories of entities, should be treated as PIEs for independence purposes, replacing the extant application material that encourages firms to make such a determination.
Proposed paragraph 400.16 A1 includes a list of factors for firms to consider.
ICAS supports the proposal to introduce a requirement for firms to determine if any additional entities should be treated as PIEs however suggests that the inclusion of some further detail from the Explanatory Memorandum within some of the bullet points in paragraph 400.16 A1 might be helpful for users.
A new requirement for firms to disclose if an audit client has been treated as a PIE
IESBA proposes a new requirement for firms to publicly disclose if they have treated an audit client as a PIE and is also seeking views about different ways in which such disclosure may be made (including within the auditor’s report).
Given the objective of the additional requirements and application material for PIEs is to enhance stakeholder confidence in an entity’s financial statements through enhancing confidence in the audit of those financial statements, ICAS supports the proposal for firms to disclose if they have treated an audit client as a PIE. ICAS also believes that the most appropriate mechanism would be via the audit report.
ICAS ethics resources
ICAS is committed to providing ethics resources and support to its Members. Since 2015, ICAS has published a series of publications, guidance and resources as part of the Power of One initiative which are all available on icas.com.
In November 2020, to mark the fifth anniversary of The Power of One, ICAS issued second editions of its series of publications on ethical leadership:
- Ethics -The Power of One
- The Power of One – Personal responsibility and ethical leadership
- The Power of One – Moral Courage
- The Power of One – Personal Reputation
- The Power of One – Organisational culture and values
- The Power of One – The CA and the organisation
- The Ethical Journey – The Right, the Good and the Virtuous
ICAS also offers the following:
- guidance on conflict of interest;
- an ethical decision making framework;
- ethics videos;
- case studies, including CAs’ real-life ethical dilemmas featured within the ICAS research publication Speak up? Listen Up? Whistleblow?; and
- research.
From 1 January 2021, compulsory ethics CPD is introduced for all ICAS Members. This does not involve compulsory attendance at courses or the purchase of material – it could simply mean some reading of ethics-related material available online. In addition to ICAS’ own ethics resources as noted above, other websites provide useful sources of information as explained here.
If you have an ethical query, including a query on the provisions within the Code of Ethics in relation to values of equality, diversity and inclusion, ICAS offers an ethics helpline service.
ICAS is also partnered with whistleblowing charity Protect to provide members and students with access to an independent, confidential helpline. This service offers free advice regarding whistleblowing and speaking up.