Drafting Conventions

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Drafting Conventions

• Ken Dakdduk
• Task Force Chair

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Overview

• 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 rules-based
• 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 threatsincludeundue dependence on
  total fees from a client
• 290.129 Threats to independence may be created
  when a close family memberis a directorof 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 accountants 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 accountants 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 accountants 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 accountants 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 accountants 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 accountants 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 clients or employers 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 individuals
  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 clients industry

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Discussion