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KPMG LLP
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Canary Wharf
London E14 5GL
United Kingdom
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s
Private & confidential
Jan Munro
International Ethics Standards Board for
Accountants
545 Fifth Avenue, 14th Floor
New York
New York 1017
United States of America
23 January 2012
Dear Jan
Exposure Draft: Proposed Changes to the Code of Ethics for Professional Accountants
Related to Provisions Addressing a Breach of a Requirement of the Code
On behalf of the member firms of KPMG International we are pleased to provide comments on
the above Exposure Draft.
We welcome the publication of the Exposure Draft and are fully supportive of the IESBA’s goal
to provide a robust framework in the Code for addressing a breach of an independence
requirement. We concur with the Board’s view that whether the action causing the breach was
inadvertent or not should not affect the need to focus on the impact on the firm’s objectivity and
the actions necessary to address the consequences of the breach.
While we are broadly supportive of the overall approach, we are concerned that the Exposure
Draft requires all breaches, whatever their significance, to be communicated to those charged
with governance as soon as possible. We note that the IESBA considered whether, consistent
with the reporting requirements or practice in some jurisdictions, there should be a de minimis
test whereby insignificant breaches are not disclosed to those charged with governance, but that
it concluded that such an approach would entail too much subjectivity. We believe that the firm
should be permitted to exercise judgment as to whether a breach is of such significance that it
should be disclosed to the audit committee as soon as possible. Compliance with the Code of
Ethics and, in particular, its conceptual framework requires the exercise of professional
judgment at every stage and the requirement of ISA 260, in the case of listed entities, is to report
to those charged with governance all relationships and other matters that, in the auditor’s
professional judgment, may reasonably be thought to bear on independence. While we do not
agree, therefore, that the perceived self-interest that a firm has not to report a breach is too great
to permit the firm to exercise such judgment, we would support an approach which permits
those charged with governance to determine on what basis breaches should be communicated by
the firm. We would consider that an appropriate policy, for example, might be that those
breaches that the firm considers may reasonably bear on independence are reported to those
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG
Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss
entity.
Registered in England No OC301540
Registered office: 15 Canada Square, London, E14 5GL
ABCD
KPMG LLP
Exposure Draft: Proposed Changes to the Code of Ethics for Professional Accountants Related to
Provisions Addressing a Breach of a Requirement of the Code
23 January 2012
charged with governance as soon as possible in line with the requirements of the Exposure Draft
whilst other matters (which might include, for example, breaches of a trivial nature involving
the personal independence of individuals who are not members of the audit team) are reported
on a timely basis, taking into account the lesser significance of these matters.
Our responses to each of the questions included in the Exposure Draft are set out in the
Appendix to this letter.
Please contact me if you would like to discuss any of the points raised in this letter.
Yours sincerely
Peter Hughes
Partner-in-charge, Global Independence Group
KPMG LLP
c.c.
Larry Leva, New York
Scott Vance, Toronto
Rod Devlin, Paris
Sylvia Smith, London
2
ABCD
KPMG LLP
Exposure Draft: Proposed Changes to the Code of Ethics for Professional Accountants Related to
Provisions Addressing a Breach of a Requirement of the Code
23 January 2012
B Response to the specific questions set out in the Exposure Draft
1 Do respondents agree that the Code should contain provisions that require professional
accountants to address the consequences of a breach of a requirement in the Code? If not
why not?
We welcome the publication of the Exposure Draft and are fully supportive of the IESBA’s
goal to provide a robust framework in the Code for addressing a breach of an independence
requirement. We support the use of the term “breach” rather than “violation” and concur
with the Board’s view that whether the action causing the breach was inadvertent or not
should not affect the need to focus on the impact on the firm’s objectivity and the actions
necessary to address the consequences of the breach.
2 Do respondents agree with the overall approach proposed to deal with a breach of an
independence requirement, including the proposal that the firm may continue with the audit
engagement only if those charged with governance agree that action can be taken to
satisfactorily address the consequences of the breach and such action is taken?
While we agree that breaches of independence should be evaluated and remedial action taken
to address them, we believe that the drafting should make it clear that reporting to those
charged with governance should take place only once the significance of the breach has been
evaluated and its impact on the firm’s objectivity has been established such that a
meaningful discussion can take place. The reference to communicating with those charged
with governance in paragraph 290.40 of the draft might suggest that that this communication
should take place as soon as a breach has been identified. This might also have an adverse
effect on the timeliness of addressing the independence breach. For example, if a member of
an audit team were to discover that a member of their immediate family held a financial
interest in the audit client, the firm should act immediately to address the breach, e.g. by
removing that individual from the audit team. The firm could then discuss the matter with
those charged with governance who, if they are satisfied that the action (together with further
action as considered necessary) addresses the consequences of the breach, may confirm that
the audit engagement should continue.
We believe that the views of audit committees will be particularly relevant to the IESBA’s
further consideration of the proposal to require the firm to obtain the agreement of those
charged with governance before the firm may continue with the audit.
We imagine that in some cases those charged with governance, particularly in smaller
entities where there is no formal audit committee, may require guidance as to the steps that
they might take to determine whether they agree that the action proposed to be taken by the
firm satisfactorily addresses the consequences of the breach.
3 Do respondents agree that a firm should be required to communicate all breaches of an
independence requirement to those charged with governance? If not, why not and what
should be the threshold for reporting?
3
ABCD
KPMG LLP
Exposure Draft: Proposed Changes to the Code of Ethics for Professional Accountants Related to
Provisions Addressing a Breach of a Requirement of the Code
23 January 2012
While we are broadly supportive of the overall approach, we are concerned that the Exposure
Draft requires all breaches, whatever their significance, to be communicated to those charged
with governance as soon as possible. We note that the IESBA considered whether,
consistent with the reporting requirements or practice in some jurisdictions, there should be a
de minimis test whereby insignificant breaches are not disclosed to those charged with
governance, but that it concluded that such an approach would entail too much subjectivity.
We believe that the firm should be permitted to exercise judgment as to whether a breach is
of such significance that it should be disclosed to the audit committee as soon as possible.
Compliance with the Code of Ethics and, in particular, its conceptual framework requires the
exercise of professional judgment at every stage and the requirement of ISA 260, in the case
of listed entities, is to report to those charged with governance all relationships and other
matters that, in the auditor’s professional judgment, may reasonably be thought to bear on
independence. While we do not agree, therefore, that the perceived self-interest that a firm
has not to report a breach is too great to permit the firm to exercise such judgment, we would
support an approach which permits those charged with governance to determine on what
basis breaches should be communicated by the firm. We would consider that an appropriate
policy, for example, might be that those breaches that the firm considers may reasonably
bear on independence are reported to those charged with governance as soon as possible in
line with the requirements of the Exposure Draft whilst other matters (which might include,
for example, breaches of a trivial nature involving the personal independence of individuals
who are not members of the audit team) are reported on a timely basis, at the time of the
audit or periodically during the year (for example quarterly or semi-annually) together with
the action taken. This would allow those charged with governance to consider the less
significant breaches and the remedial action taken together in accordance with their normal
schedule of meetings and make further enquiries of the auditor as they consider necessary.
Such enquiries could include requests for additional remedial actions or clarification of
matters which those charged with governance would expect to be communicated to them
immediately. We also consider that provision should be made for communication with a
representative of those charged with governance (such as the chairman of the board of
directors or of the audit committee where applicable), in order to facilitate timely
communication.
4 Do respondents agree that the reasonable and informed third party test should be used in
determining whether an action satisfactorily addresses the consequences of a breach of an
independence requirement? If not, why not and what should the test be?
Yes, we agree that this is an appropriate test.
5 Do respondents agree that the matters that should be discussed with those charged with
governance as proposed in section 290.46 are appropriate? If not, why not? Are there other
matters that should be included, or matters that should be excluded?
Yes, we agree that the matters set out in section 290.46 for discussion with those charged
with governance are appropriate.
4
ABCD
KPMG LLP
Exposure Draft: Proposed Changes to the Code of Ethics for Professional Accountants Related to
Provisions Addressing a Breach of a Requirement of the Code
23 January 2012
6 Do respondents agree with the impact analysis as presented? Are there any other
stakeholders, or other impacts on stakeholders, that should be considered and addressed by
the IESBA?
Yes, we agree with the impact analysis as presented.
7 Would the proposal require firms to make significant changes to their systems or processes
to enable them to properly implement the requirements? If so, does the proposed effective
date provide sufficient time to make such changes?
While audit firms should already have systems and processes in place to allow for the
identification and analysis of breaches and the timely reporting to audit committees of those
breaches that might reasonably bear on independence, we believe that the Exposure Draft
would frequently require firms to enhance their tracking and reporting procedures to enable
all breaches to be identified and reported to the audit committee as soon as possible and
without regard to significance. Although we would not anticipate that there would typically
be numerous matters to report, we believe that the requirements could nevertheless be quite
onerous in the case of a large group audit merely from a process perspective.
8 Is the abbreviated version of the framework described in Section 290 for dealing with a
breach of an independence requirement suitable for Section 291? If not, what do
respondents believe Section 291 should contain?
We consider that the proposed paragraphs 291.33-37 are suitable for dealing with a breach of
an independence requirement within the scope of Section 291.
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