Public Interest and the audit

 

The International Ethics Standards Board for Accountants (IESBA) has recently issued a consultation on the definition of a Public Interest Entity.

The debate around what should be regarded as a Public Interest Entity (or PIE) may sound esoteric but is hugely important as it defines what standards may be expected of businesses and, in the case of this paper, their auditors.   PIEs need to be held to higher standard of account purely because of that public interest element and the impact they have on all our lives.  Any advance in thought in this thorny area is welcome.

That said, on first read, the proposals in the IESBA paper seem not to have much effect on UK audits as UK standards incorporate a more stringent definition of a PIE than the proposed IESBA code.

The proposals will affect however audit firms who work overseas; could, if adopted in the UK, have some impact on UK legislation; and will probably influence the deliberations we expect from the UK review of audit now under way. 

More importantly, to my way of thinking, they seek to set a benchmark for other countries around the world.  We deal with those countries, their businesses are intimately tied up with our lives  – the establishment of a higher trust regime across the world is important to all of us.

Comments are due to IESBA by 3 May 2021 but please also feel free to send your comments to me in my role as chair of the ICAEW Ethics Standards Committee, even if you are not an ICAEW member.

The main proposals of the IESBA paper are to:

• introduce an overarching objective for additional independence requirements for entities that are PIEs;
• provide guidance on factors for consideration when determining the level of public interest in an entity;
• expand the extant definition of PIE to a list of categories of entities that should be treated as PIEs, subject to refinement by the relevant local bodies responsible for standard setting as part of the adoption and implementation process;
• replace the term “listed entity” with one of the new PIE categories, “publicly traded entity”;
• elevate the extant application material that encourages firms to determine whether to treat additional entities as PIEs to a requirement and include enhanced guidance on factors for consideration by firms; and to
• require firms to disclose if an audit client has been treated as a PIE.

The main categories proposed for PIEs are:

• a publicly traded entity;
• an entity one of whose main functions is to take deposits from the public;
• an entity one of whose main functions is to provide insurance to the public;
• an entity whose function is to provide post-employment benefits;
• an entity whose function is to act as a collective investment vehicle and which issues redeemable financial instruments to the public; and
• an entity specified as such by law or regulation as such where the purpose of the legislation is to enhance confidence in the audit of their financial statements.

The last category is intentionally broad and allows governments to decide whether, for example, large charities, should be scoped in.   The detailed rules also allow governments to scope out certain entities in the list “for reasons relating to, for example, size or particular or organisational structure”: which could mean anything from small banks to large partnerships or maybe the whole defence industry.

Finally, audit firms are required to consider, for the purpose of their auditing and ethical standards, whether other clients should be scoped in as PIEs on the basis that a “reasonable and informed third party would be likely to conclude such entities should be treated as public interest entities”.

I can’t help thinking that all the options for scoping in and out means that users will still remain confused over whether a particular entity in a particular country is treated, in that country as a PIE or not.  At the worse, a country could adopt IESBA standards, scope out almost everything, and still comply with this proposal.  And to that extent, the proposal will have some, but limited, use in increasing public confidence.  To make this work, I would see a requirement for every audit report,  whether of a PIE or not,  should state whether the entity has been treated as a PIE or not and whether or not this is through the standard, additional local legislative additions or, most importantly whether an entity which would have been in scope of the standard has been scope out of being a PIE by local laws.

But what do you think?

Malcolm Bacchus is chair of the Institute of Chartered Accountants in England and Wales (ICAEW) Ethics Standards Committee.  The views expressed here are his own and do not necessarily reflect the views of ICAEW.