The IFAC Supports Stronger Independence Rules
by Terri Eyden on
By Anne Rosivach
The International Ethics Standards Board for Accountants (IESBA), an independent international standards board supported by the International Federation of Accountants (IFAC), has proposed strengthening current rules for auditor independence.
The proposed changes to the IESBA Code of Ethics for Professional Accountants require an audit firm that identifies a breach in independence to discuss the breach (regardless of the significance of the breach) with those charged with governance, such as the audit committee, as soon as possible. The firm would also be required to discuss the remedial actions it proposes to take and obtain the audit committee's concurrence that the actions are satisfactory, the IESBA states.
IFAC is comprised of 167 members and associates in 127 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.
What's Considered a Breach
Following are examples of what constitutes a breach of the IESBA’s independence requirements:
- A valuation service is reassessed and determined to be material to the financial statements.
- After assignment to the audit team, it becomes clear that the spouse of the team member, who is employed by the audit client, has the ability to exert significant influence over the client’s accounting records.
- A broker of the partner’s spouse buys shares of stock unaware that the spouse is not permitted to own the shares.
The proposals were published in an Exposure Draft (ED) in October 2011.
The ED states further that:
"If those charged with governance agree that action can be taken to satisfactorily address the consequences of the breach, continue with the audit engagement, if those charged with governance do not agree, take the steps necessary to terminate the audit engagement in compliance with any applicable legal or regulatory requirements relevant to terminating the audit engagement."
IESBA proposes two significant changes to the language of the code. The current code refers to "inadvertent" violations of the requirement. The IESBA proposes eliminating "inadvertent" and changing "violation" to "breach."
"The IESBA concluded that a provision that included 'inadvertent' inappropriately diverted attention from the violation itself." The current code uses both "violation" and "breach," and the IESBA concluded that "breach" was a better term and would improve consistency of terminology.
Published comments generally support the ED, although to some, the requirements seem disproportionate and may not serve the public interest.
The ED comment period ended on January 23, 2012. The IESBA is continuing to solicit feedback on its proposals by encouraging directors and audit committee members to respond to its short survey – Breach of an Independence Requirement – posted on its website.
In the United States, the AICPA, Department of Labor, and the Securities and Exchange Commission all have rules regarding auditor independence.