Module 19: IFAC Code of Ethics and EU Ethics and

Independence Requirements2. Ethics and Independence in the EU

 Dr. Harald Ring,

Chairman, Ethics Working Party European Federation of Accountants (FEE)

Advanced Programme in Accounting and Auditing Regulation

Advanced Programme in Accounting and Auditing Regulation

I. IntroductionII. Developing independence principles inside and

outside EUIII. Conceptual approach versus rules-based

approachIV. Conceptual approach

1. Functioning2. Threats3. Safeguards4. Advantages

Structure (1)Structure (1)

V. Key independence issues in the EU Recommen-dation / IFAC Code of Ethics

VI. Restrictions on non-audit services1. EU / IFAC2. Sarbanes-Oxley Act / PCAOB Docket Rule on Tax

Services

VII. Current status of the implementation of the EU Recommendation in Europe

1. Principal findings2. Summary of the results of the FEE Survey

VIII. Outlook

Structure (2)Structure (2)Structure (2)Structure (2)

Central requirements of the revised Directive on Statutory Audit (8th EU Directive) with regard to ethics and independence of statutory auditors

– Statutory auditors should adhere to the highest ethical standards, covering their

• public interest function

• integrity and objectivity

• professional competence and due care (Recital 8)

I. Introduction (1)I. Introduction (1)I. Introduction (1)I. Introduction (1)

– Statutory auditors should be bound by strict rules on confidentiality and professional secrecy (Recital 9)

– Statutory auditors should be independent when carrying out a statutory audit (Recital 10)

I. Introduction (2)I. Introduction (2)I. Introduction (2)I. Introduction (2)

1.Inside EU– FEE Position Paper „Audit Independence and

Objectivity“ (1995)– FEE Study „The Role, Position and Liability of

the Statutory Auditor in the EU“ (January 1996)– FEE Common Core of Principles of Audit

Independence and Objectivity – Initial Recommendations (July 1998)

II. Developing independence II. Developing independence principles inside and outside EU (1)principles inside and outside EU (1)

II. Developing independence II. Developing independence principles inside and outside EU (1)principles inside and outside EU (1)

– EU Commission “Recommendations on Statutory Auditors‘ Independence in the EU: A Set of Fundamental Principles” (16/5/2002)

• Factual, but no legal binding for member states

– FEE Study „Considerations on the implementation of the Framework Approach“ (October 2004)

– Revised 8th Directive on Statutory Audit (30/9/2005)• Obligation for member states to implement into national law

– FEE Survey on the Implementation of the EU Recommendation on Independence (Feb. 2006)

II. Developing independence II. Developing independence principles inside and outside EU (2)principles inside and outside EU (2)

II. Developing independence II. Developing independence principles inside and outside EU (2)principles inside and outside EU (2)

2. Outside EU

– IFAC Code of Ethics for Professional Accountants (November 2001)• Mandatory for IFAC member bodies• Currently under review

– Sarbanes-Oxley Act (30 July 2002)• To be applied by companies listed in the US

and their auditors

II. Developing independence II. Developing independence principles inside and outside EU (3)principles inside and outside EU (3)

II. Developing independence II. Developing independence principles inside and outside EU (3)principles inside and outside EU (3)

– PCAOB Docket Rule 017 „Ethics and Independence Rules Concerning Independence, Tax Services and Contingent Fees (26 July 2005)

• To be applied by companies listed in the US and their auditors

II. Developing independence II. Developing independence principles inside and outside EU (4)principles inside and outside EU (4)

II. Developing independence II. Developing independence principles inside and outside EU (4)principles inside and outside EU (4)

– 8th EU Directive / EU Recommendation / IFAC Code

• Based on a conceptual/framework/principles-based/threats - safeguards approach

– Some national systems of audit regulation/ Sarbanes-Oxley Act

• Rules-based approach = cook book approach

III. III. Conceptual approach Conceptual approach versus rules-based approachversus rules-based approach

III. III. Conceptual approach Conceptual approach versus rules-based approachversus rules-based approach

1. Functioning2. Threats

– Self-interest– Self-review– Advocacy– Familiarity– Intimidation

3. Safeguards– Professional, legislative or regulatory– Within the work environment

IV. The Conceptual Approach (1)IV. The Conceptual Approach (1)IV. The Conceptual Approach (1)IV. The Conceptual Approach (1)

4. Advantages– Allows for the most infinite variatons in

circumstances that arise in practice– Can cope with the rapid changes of the modern

business environment– Prevents the use of legalistic devices to avoid

compliance– Requires auditors to consider actively, and to

be ready to demonstrate the efficacy of arrange-ments for safeguarding independence

IV. The Conceptual Approach (2)IV. The Conceptual Approach (2)IV. The Conceptual Approach (2)IV. The Conceptual Approach (2)

• Financial interest• Business relationships• Employment with the audit client• Managerial or supervisory role in audit client• Establishing employment with auditing firm• Family and other personal relationships• Non-audit services• Audit and non-audit fees• Litigation• Senior personal acting for a long period of time

V. Key issues of independence in V. Key issues of independence in the EU Recommendation/ IFAC Codethe EU Recommendation/ IFAC Code

V. Key issues of independence in V. Key issues of independence in the EU Recommendation/ IFAC Codethe EU Recommendation/ IFAC Code

1.EU Recommendation / IFAC Code– General principle– Specific situations where special risks have to

be considered, e.g.• Preparing accounting records and financial

statements (appendix 1)• Valuation services (appendix 2)

2.Sarbanes-Oxley Act Sect. 201/202 / PCAOB Docket Rule on Tax Services

VI. Restrictions on non-audit servicesVI. Restrictions on non-audit servicesVI. Restrictions on non-audit servicesVI. Restrictions on non-audit services

VII. Current status of implementation VII. Current status of implementation of the EU Recommendation in Europeof the EU Recommendation in Europe

1.Principal findings

2.Summary of the results of the FEE Survey (appendix 3)

VIII. OutlookVIII. Outlook

• Transposition of the Directive on Statutory Audit into national law– Work to be done by FEE