Revamped ethics standards for auditors by end-2017

AUDITORS and accountants will get clearer ethical guidance on a broad range of issues by end-2017, said Stavros Thomadakis, chair of the International Ethics Standards Board for Accountants (IESBA).

One issue that will be clarified is what external auditors should do when they find out that their clients have breached a law, while another is how to improve auditor independence.

For the latter issue, lead audit partners will have to comply with a "seven years on and five years off" rule, instead of the "seven years on and two years off" currently.

"The standards we are working on are near their final phase," Dr Thomadakis told The Business Times.

IESBA is in its third year of a major revamp to its Code of Ethics for Professional Accountants, a code which influences the laws of more than 100 jurisdictions around the world, including Singapore. It applies to external auditors as well as, more generally, accountants that prepare financial statements.

IESBA is rewriting the entire handbook to clarify, in plain English, the principles, objectives, requirements and applications of the code, said Dr Thomadakis.

This is because adoption of its rules has become widespread and the ethics board has received many requests for clarity, he said.

The area of auditor ethics has also attracted a lot of attention after the financial crisis. "Therefore the code has to be as useable as possible, subject to scrutiny from constituencies other than auditors and accountants," he said. "We also want to put it in a format that's easily transposed into law."

Discussions with policymakers and investors have resulted in new standards being drafted on two major issues: client non-compliance with rules, and auditor independence.

Currently, there is no clear policy on what auditors should do if they suspect a client of being involved in illegal activity. Here, one issue is the principle of client confidentiality which, for example, might prevent non-compliance with laws and regulations or breaches of environmental regulations from being disclosed or reported.

The revamped ethics code will include a section on how auditors should deal with this situation.

"The purpose of our standards is to allow the auditor to bypass confidentiality and take the steps that must be taken in order to rectify the situation," said Dr Thomadakis.

"This may include alerting management, alerting the board of directors, alerting all the levels of the internal hierarchy. And if that does not work, and there is no outcome - report it publicly, provided there are some protections for the auditor," he said.

"We are not putting in an obligation to look for issues, just an auditor's response should they come across these situations," he added.

The second issue is about "long association", essentially what happens when audit partners work with their clients for so long that they become overly sympathetic and are no longer able to be sceptical in their professional oversight duties.

IESBA rules state that senior audit personnel can serve a maximum of seven years as lead partners, before having to take two years off as a "cooling-off period". Firms can thus be audited by the same person in 14 out of 16 years, which puts the independence of the partner at stake, Dr Thomadakis said.

IESBA will extend the "cooling-off period" to five years for its new standards, he said. "We believe that partner rotation can be an effective tool for maintaining independence. The partner is the decision maker, the critical link," he said.

Singapore Exchange (SGX) rules require "five years on and two years off" for lead audit partners for listed companies.

There is a trade-off to be made on having longer cooling off periods, said Kwok Wui San, a PwC partner who is IESBA deputy chair.

"Being a financial policeman, the familiarity with the subject matter, the client, the management, is very important too. It leads to quality," he said.

Dr Thomadakis said that beyond the ethics code revamp, other items on the agenda include issues of audit fees and auditor compensation for non-audit services.

Ultimately, auditors are still grappling with issues of trust, he noted.

"We want to have standards that work, not standards that are wish lists."

This article was first published on October 19, 2015.
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