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KPMG LLP 15 Canada Square Canary Wharf London E14 5GL United Kingdom Tel +44 (0) 20 7311 8281 Fax +44 (0) 20 7311 3311 DX 157460 Canary Wharf 5 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. 5