The International Federation of Accountants (IFAC) has recently reiterated the importance of international standards in every aspect of the work of an accountant. The international business community agrees that there is a need for a single set of international standards which enhances the consistency and the quality of services provided by accountants, strengthens financial stability and public confidence, and reduces regulatory fragmentation across borders. Businesses, governments, and other organizations rely on and place confidence in the work of accountants work because of their commitment to act ethically and in the public interest. The International Code of Ethics for Professional Accountants (including International Independence Standards) (“the Code”) requires accountants to comply with five fundamental principles of ethics: (i) integrity; (ii) objectivity; (iii) professional competence and due care; (iv) confidentiality; and (v) professional behavior These principles promote the standard of behavior expected of individual accountants and firms and help orient their public interest mindset.
On January 29, 2021, the International Ethics Standards Board for Accountants (IESBA) released for public comment the Exposure Draft, Proposed Revisions to the Definitions of Listed Entity and Public Interest Entity in the Code. The Code sets out the fundamental principles of ethics for professional accountants mentioned above, reflecting the profession’s recognition of its public interest responsibility. The January 29, 2021, Exposure Draft
The international business community agrees that there is a need for a single set of international standards which enhances the consistency and the quality of services provided by accountants, strengthens financial stability and public confidence, and reduces regulatory fragmentation across borders.
Businesses, governments, and other organizations rely on and place confidence in the work of accountants work because of their commitment to act ethically and in the public interest.
was developed and approved by the IESBA. The proposals in the Exposure Draft may be modified in the light of comments received before being issued as a final pronouncement. Comments are requested by May 3, 2021. Respondents are asked to submit their comments electronically through the IESBA website, using the “Submit a Comment” link. Comments should be submitted in both PDF and Word files; first-time users must register to use this “Submit a Comment” link: all comments are considered a matter of public record and will ultimately
be posted on the website.
The reason why this exposure draft has been prepared is that in recent years, some regulatory stakeholders, such as the International Association of Insurance Supervisors (IAIS) and the Basel Committee on Banking Supervision, have suggested that the definition of a public interest entity (PIE) be re-examined from the perspective of financial institutions, including banks. Another regulatory stakeholder, the International Organization of Securities Commissions (IOSCO), has also commented that regulators in many jurisdictions do not have the power to set a definition of a PIE. Other stakeholders, particularly the small and medium-sized practices (SMP) audit community, have expressed concern that the independence requirements in the Code are increasingly disproportionate in those circumstances where firms provide audit and review services to small entities that fall within the PIE definition. Developments in capital markets around the world.
In considering if, and how, the definition of a PIE should be enhanced, the IESBA took the view
that it is important to have clarity about the objective of defining a class of entities for which the audits require additional independence requirements. Such an objective could then inform the approach and also provide a clear principle against which any proposals can be tested. The IESBA believes it is important to make clear that these additional independence requirements are not about having a different “level” of independence (as all firms must be independent when performing an audit engagement) but rather about enhancing confidence in that independence. There are types of entities for which there is significant public interest in their financial condition and hence their financial
statements; thus it is important that there is public confidence in those financial statements; a major
contributor to that confidence is in turn confidence in the audit of such financial statements; confidence in such audits will be enhanced by additional independence requirements. There may be significant public interest in other aspects of an entity, such as the quality of the
services it provides or the nature of the data it holds. However, given that the relevant part of the Code deals with audits and reviews of financial statements, the IESBA concluded that such other public
interests should not form part of the overarching objective for additional independence requirements for the auditors of PIEs.
Given that the Code is global in scope, the IESBA is not able to define any of the PIE categories by
reference to specific laws or regulations. Hence, the categories in its proposed PIE definition are broadly defined and are also described in such a way as to avoid the use of terms, e.g., “mutual funds”, that are jurisdiction-specific. In addition, the IESBA recognized that as the proposed definition does not have any size criteria, it will potentially scope in some very small
entities that would not objectively be considered to be PIEs as there would not be significant public
interest in their financial condition. However, the IESBA concluded that it was not practicable to define a size threshold that would be suitable for global application and that the
relevant local bodies are best placed to consider such thresholds as part of their local adoption and implementation process.
The IESBA states that a firm must treat an entity as a public interest entity when it falls within any of the following categories: (a) A publicly traded entity; (b) An entity one of whose main functions is to take deposits from the public; (c) An entity one of whose main functions is to provide insurance to the public; (d) An entity whose function is to provide post-employment benefits; or (e) An entity whose function is to act as a collective investment vehicle and which issues redeemable financial instruments to the public. The IESBA proposes a new term “publicly traded entity” to replace “listed entity” in the extant Code. The proposed new term is intended to bring in more entities as it is not confined to shares, stock or debt traded only in formal exchanges but also encompasses those in second-tier markets or over-the counter trading platforms. The new term also aims to remove the confusion created by the term “recognized stock exchange” in the extant definition of listed entity.
Developments in capital markets around the world and newer forms of capital raising such as crowd funding and how these are regulated have raised questions about the need to update the definition of a listed entity in the Code for clarity and continued relevance.
The IESBA also notes the following key elements of the proposed new term, the “publicly traded entity”:
whilst not restricted to trading on “exchanges,” the new term does assume there is a facilitated trading mechanism which aims to match buyers and sellers. The new term is not intended to capture entities for which the only way to trade their financial instruments is through privately negotiated agreements. In addition, the term “financial instruments” is intended to be broadly applied, covering “shares, stock or debt” (the term currently used in the extant definition of “listed entity”), securities, equity or debt instruments or other types of instruments such as warrants or hybrid securities. The term “publicly traded” is used instead of “publicly listed” as some financial
instruments might only be listed and are not intended to be traded: such situations can arise for example within groups where the relevant instruments are held entirely intra-group. The IESBA is
also aware of the issue of shares in small “start-up” or new venture entities which are subscribed for by the public because of the tax breaks provided and where any exit will be only through a disposal managed by the professional advisers promoting the entity. The IESBA is therefore of the view that entities whose financial instruments are only listed or issued to the public with no trading
do not necessarily attract significant public interest in their financial condition.