Definitions of Listed Entity & Public Interest Entity - PowerPoint Presentation

1. Definitions of Listed Entity & Public Interest EntityMike Ashley, Task Force Chair, IESBA MemberIESBA Meeting September 14-18, 21, 29 & October 1, 2020Virtual

2. To discuss issues and TF ViewsObjectives of Session To provide feedback on 1st Read

3. BackgroundInformation Gathering Since June 2020

4. First opportunity for IAASB to discuss as a BoardGeneral support for shared overarching objective for additional independence and audit quality related requirementsSupport-in-principle for replacing “listed entity” with PIE, but need to consider on a case by case basisGeneral support for proposed list of PIEsSimilar concerns about local body capacity to refine the high-level PIE definitionMixed views about suggested transparency disclosure requirement in ISAsReport Back – IAASB July 2020 PIE Session

5. Responses to NAS ED Question 4Respondents were asked to share views on whether the IESBA should consider in undertaking its project to review the definition of a PIE

6. Responses to NAS ED Question 4Overarching ObjectivePIE DefinitionOther

7. Overarching Objective for Additional RequirementsSignificant public interest in the financial condition of certain entitiesPublic confidence in those financial statements are importantConfidence in their audits will enhance public confidence in those financial statements Additional requirements will enhance confidence in their audits which in turn will enhance confidence in those financial statementsOverarching Objective for additional requirements(Proposed 400.8 and 400.9)RECAP

8. Overarching Objective for Additional RequirementsOverarching Objective for additional requirements(Proposed 400.8 and 400.9)IESBA (June 2020)General supportKey queries aboutESG reporting requirementMarket operators, stock/commodity exchangesEntities subject to financial and prudential regulationProposed factor relating to potential systemic impactIAASB (July 2020)General support for common overarching objectiveIn-principle support for replacing listed entity with PIE in ISAs but needs consideration on case by case basisKey queries aboutPerception of two tiers of audit qualityMeaning of “financial condition”Minor differences in how it is expressed might be neededExpected Role of Local Bodies

9. In response to comment that “business” is too narrow In response to comment about entities subject to financial and prudential regulatory supervisionClarify this is impact on one’s sectorCapture a characteristic common to some public utility entities and FMI entities Clarify this is impact on multiple sectors In response to IAASB comments about 2 tiers of audit quality

10. Other TF Views:Retain the term “financial condition” in light of previous Board inputNo changes with respect to ESG disclosureRetain last bullet as factor for considerationNo change to reflect minor differences in how the overarching objective should be expressed in the two Boards’ standardsTF will include question in ED to seek views on whether to replace “listed entity” in ISAs with PIE

11. Comment/view on TF views and revisions to 400.8 and 400.9

12. Definition of Public Interest EntityIESBA, IAASB and other stakeholders were generally supportive of the TF’s preferred approach (broad approach)Three key components to this approachList of common PIE categoriesRefine the list as appropriateDetermine to add to the listBroad ApproachA longer and more broadly defined list which local regulators and authorities can modify by tightening definitions, setting size criteria and adding or exempting particular types of entities

13. Expanded List of PIE CategoriesIESBA and IAASB comments:Both Boards supportive of the TF’s rationale, e.g., 80/20 ruleGeneral support for the proposed categoriesCategory (a)Suggested “securities”, definition of “financial interest”No strong views on whether to include the concept of “in the process of being publicly traded”Category (d) - Some suggested the language is too broadCategory (f) - A few IAASB members queried if it is necessary or appropriateDefinitions of PIER400.14 (June 2020 Version)

14. Expanded List of PIE CategoriesDefinitions of PIEBetter alignment with “financial interest” definitionNo change; it should not cover employers that provides such benefits as one of its functions only More accurately describe investment funds available to the publicNo change; revisions made to 400.16 A1 to address concerns that entity being categorized by law or regulation as a PIE not for the purpose R400.14 (Mark-up)TF will consider whether the term “listed entity” should be replaced when reached a view on R400.20

15. Expanded List of PIE CategoriesDefinitions of PIEComment / viewR400.14400.16 A1

16. Expanded List of PIE CategoriesDefinitions of PIENone were addedFMI, Stock and Commodity ExchangesAudit FirmsOther possible categories considered by IESBA in June 2020TF asked to consider additional categoriesDoes not recommend

17. Expanded List of PIE CategoriesDefinitions of PIEFMI, Stock and Commodity ExchangesAudit FirmsTF asked to consider additional categoriesDoes not recommendComment/view

18. Expected Role of Local Bodies

19. Expected Role of Local Bodies

20. Mitigation Strategy – PAO QuestionnaireExpected Role of Local BodiesPAO QuestionnaireIn collaboration with IFAC’s Quality & Development teamQuestionnaire circulated to about 40 PAOs in July/AugustMostly smaller and less developed jurisdictions19 responses received to dateExpecting another 5-10 by early OctoberParticularly from Central/South America and AfricaAnticipating to also reach francophone African jurisdictions in Q4

21. Mitigation Strategy – PAO QuestionnaireExpected Role of Local BodiesBreakdown by Regions

22. Mitigation Strategy – PAO QuestionnaireExpected Role of Local BodiesPicture so far… Responses from a mixture of PAOs with direct, shared or no authority to revise the PIE definitionMajority already have local PIE definitions (incl. all 6 African jurisdictions)Strong indication from responses that refinement of the PIE definition can be achieved at these jurisdictions without any significant adoption issue relating to local body capacitySome expressed their view that the draft definition is sufficient for them to develop their local definitions1 PAO noted that substantial work needed to persuade local regulator to revise the local lawTF will give an update in Q4Any Comment?

23. Mitigation Strategy – Rebuttable PresumptionRebuttable PresumptionTF considering the use of rebuttable presumption in some circumstances to address the risk of:Local body not having the capacity to refine the list The list is adopted without local refinementTF considered the South African Code which uses a rebuttable presumption:In addition to the extant Code definition, it has an extra list of PIE categoriesThe rebuttable presumption applies to this extra list TF seeks Board’s directional input on whether to pursue the approach of a limited rebuttable presumption Expected Role of Local Bodies

24. Mitigation Strategy – Rebuttable PresumptionSouth African ExampleExpected Role of Local BodiesDefinitionR400.8a SAR400.8b SAIRBA Code of Professional Conduct for Registered Auditors

25. Mitigation Strategy – Rebuttable PresumptionExpected Role of Local BodiesComment/view on Directional input on whether TF should pursue the approach of a limited rebuttable presumptionIf so, views on: How the determination might be made if the failure to implement local refinements was intentionalWhether the discretion should itself simply be left to the local regulatorsWhether allowing the rebuttable presumption will discourage local regulators from making the necessary refinements

26. Role of FirmsNew Requirement (R400.17)Elevate AM to requirement Firms required to determine if additional entities be treated as PIEs General support from stakeholdersList of additional factors for consideration Kept factor about entity likely to become PIE as no strong views from both boards

27. TF Preliminary ViewRole of FirmsTransparency Disclosure (R400.18)Proposed new requirements for firms to publicly disclose if an audit client was treated as PIE R400.18 A firm shall publicly disclose in the auditor’s report that an audit client was treated as a public interest entity [to be discussed with IAASB] At July IAASB PIE session, mixed views from IAASB membersFollowing discussions with TF representatives, IAASB representatives developed 3 options for IAASB to consider in future meetings

28. Role of FirmsTransparency DisclosureFor consideration by IAASB:

29. Role of FirmsComment/view on Proposed paragraph R400.17 and R400.18; and the 3 options on transparency disclosure for consideration by IAASB

30. Related EntityGeneral 4 IESBA project teams addressing different aspects of Related Entity (RE) in the CodeExtant Code (R400.20): Listed Entity – All 5 RE categories (Upstream, downstream, sister entities)Others (including other PIEs) – Downstream (Client has direct/indirect control)Key question for PIE project:Whether the full set of RE applicable to a listed entity audit client in paragraph R400.20 should be extended to all PIE audit clients as well?

31. Related EntityA prima facie case?Whether the full set of RE applicable to a listed entity audit client in paragraph R400.20 should be extended to all PIE audit clients as wellReasons to rebut?Other factors

32. Related EntityA prima facie case?Whether the full set of RE applicable to a listed entity audit client in paragraph R400.20 should be extended to all PIE audit clients as wellNo strong philosophical reason for not extending the full set of RE categories to PIEsConsidered view of IESBA Independence projectReason for not extending seems more about the nature of the upstream entity (e.g., government bodies) than the nature of the PIE itselfOf the view there is a prima face case

33. Related EntityReasons to rebut?Whether the full set of RE applicable to a listed entity audit client in paragraph R400.20 should be extended to all PIE audit clients as well2 concerns raised by IESBA membersLogistical challengeDifficulty in identifying entities as RE for some non-listed clients; information may not be up to date Sovereign wealth funds (SWFs)SWFs with interests in many portfolio entitiesImpact on services that can be provided to other sister entitiesConsidering exception for definition of “related party” in ISA 550

34. Related EntityOther factorsWhether the full set of RE applicable to a listed entity audit client in paragraph R400.20 should be extended to all PIE audit clients as wellImpact on other sections of the Code: Sections 400 – 540, such as Financial Interests, Loans and Guarantees, Business Relationships etcOne option is a piecemeal approach – not practical to undertake this work under this projectOther considerations include:Replace “listed entity” in R400.20 with category (a) in R400.14Allow for local exclusions (e.g., government-controlled entities)

35. Related EntityComment / viewTF intends to seek input including practical examples from FoF in October 2020In the meantime, seek comments from Board how best to approach topic, including:Logistical challengeSWF and exception in ISA 550Impact on other standards in Part 4AReplace “listed entity” in R400.20 with Category (a) of R400.14

36. Comment/view:Effective Date, taking into account:Timing of PIE ED Dec 20 or Mar 21?Need for long transition period as part of local adoption processTransition period for firms, including FoF members pending refinement at local levelBoard discussion on NAS and Fees effective dates Effective DatePossible timeline

37. Next Steps

38. Any Other Comments

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