NZAuASB Meeting 10 February 2021

Quality Management

The Board considered and provided feedback on the New Zealand exposure drafts and Invitation to Comment on the recently approved IAASB quality management standards.

While acknowledging that the standards would be challenging to implement, the Board is proposing to adopt the standards in New Zealand with no amendments, other than changing the reference from “listed entities” to FMC reporting entities with a higher level of public accountability and restricting the scope to the XRB’s mandate.

The Board noted that the new standards contain frequent application guidance in relation to the public sector. This may remove the need for the extant paragraphs to be continued. It requested staff to consult with the Office of the Auditor-General to determine how these matters should be addressed. The Board otherwise did not identify any compelling reason to retain extant NZ paragraphs. The ITC will clearly list the extant NZ paragraphs that have not been included in the exposure drafts.

Subject to these matters being addressed, the Board approved the exposure drafts and ITC for an exposure period of 60 days.

Following approval, the focus will shift to the question of implementation. The IAASB itself has acknowledged that implementation will be challenging for the SMP community. The process of finalising ISQM-1 included the addition of extensive guidance and examples on scalability. Our ITC will highlight the challenges and seek feedback from firms on the utility of that guidance.

The IAASB has also committed to provide implementation guidance to further address scalability, which is expected to be available soon. Once we have assessed the IAASB guidance we will liaise further with the professional bodies (and in collaboration with the AUASB and other national standard setters) about whether further guidance is needed to address scalability and other implementation challenges.

IESBA consultation on amendments to the PIE definition

The Board discussed issues in response to the IESBA’s exposure draft to amend the definition of a public interest entity (PIE).

This is an important exposure draft internationally given the implications for the NAS and fees changes. The proposal to significantly broaden the definition is also significant for New Zealand given the breadth of our own definition. 

The proposed new IESBA approach is to include many of the types of entities which are currently caught by the NZAuASB’s definition, but there are some differences, with the current New Zealand approach to capture all Tier 1 reporting entities remaining broader than the international proposals.

The Board agreed to seek broader stakeholder views to inform the development of a submission in response to the international ED. However, the Board stressed the importance of making it clear to stakeholders that the NZAuASB does not intend to adopt the IESBA list of entities as proposed, but to use the opportunity to explore any issues with the current New Zealand definition to determine if any change is needed. 

The NZAuASB will develop a New Zealand exposure draft once the IESBA has finalised the international definition.

Objectivity of the engagement quality reviewer

At its September 2020 meeting, the IESBA approved a new section to the Code of Ethics providing guidance to firms on addressing the objectivity of an engagement quality reviewer based on the conceptual framework.

The final pronouncement was issued in early January. This is linked to the requirement in ISQM-2 (proposed PES-4 in New Zealand) that an engagement partner cannot become the EQCR on the audit without cooling off for a period of 2 years.

In developing this amendment to the Code the IESBA coordinated closely with the IAASB’s project on ISQM-2. The final version of the changes acknowledged that the need for a cooling-off period may arise from either quality management or independence considerations (or both) and included cross-references both to the ISQM-2 requirement and the Code’s other requirements in relation to long association (which are unaffected).

The Board has some concerns about how the interactions between the new requirements and the long association rotation requirements will work in practice in New Zealand. However, it has not identified any compelling reasons to amend the changes to the international Code and is proposing to adopt the changes as issued by the IESBA, subject to the necessary New Zealand contextual changes.

The Board intends to approve the amendment to PES-1 with the objectivity changes to the Code following the consultation on the quality management standards.

Non-Assurance Services and Fees

The IESBA approved the amendments to the provision of non- assurance services (NAS) and Fees provisions to the Code in December, which is now subject to PIOB approval.

At its February meeting the Board received an update of where the IESBA has landed, including how the IESBA has dealt with the key matters we raised in our submissions.

The amendments to the provision of NAS the IESBA approved included the following:

• For audit clients that are PIEs, self-review threats cannot be eliminated and safeguards are not capable of being applied to reduce them to an acceptable level. NAS that might create a self-review threat are prohibited.  
• For audit clients that are not PIEs, firms may continue to provide NAS that create a self-review threat provided that the identified self-review threat can be reduced to an acceptable level in accordance with the conceptual framework.  

A key question the Board considered is whether the IESBA has gone far enough in addressing the concerns the Board raised in its submission, and if there is a compelling reason to go further in New Zealand. The key matters the Board raised in the submission to the IESBA included:

• whether limiting the prohibition to the self-review threat goes far enough, i.e., will it change the perception that providing NAS impairs the auditor’s independence; 
• concern that singling out the self-review threat, among all the threats to independence, creates, in effect, a hierarchy of threats, i.e., the self-review threat is more important that the other threats to independence;  
• suggesting further thought could be given to independence in appearance, i.e., how a situation looks from the perspective of a reasonable and informed third party.

While anecdotal evidence suggests there has been a decline in the level of NAS provided to FMC entities, it was agreed that independence in appearance may be an issue and that further research/information is needed about how the provision of NAS impacts users’ perception of independence in appearance in New Zealand.

One option to further strengthen the provisions in New Zealand is to align with the Auditor-General’s approach of requiring appointed auditors and firms to apply a more stringent test when assessing independence in appearance with regard to non-assurance work, and additional work of an assurance nature, for public sector entities (many of which are also public interest entities under the New Zealand definition).

The NZAuASB’s initial discussion of the issues in February acknowledged that there are a range of options for proceeding and did not identify a clear way forward at this point.

Staff will undertake further work to identify options and perform targeted outreach with users of the financial statements, including trying to get a better understanding of the impact of the provision of NAS on the perception of independence in appearance.

Staff will also continue liaising with the Accounting Professional and Ethical Standards Board on the Australian approach, taking account of the developing position in respect of the Joint Parliamentary Committee recommendations.

The Board will consider the results of the outreach at the April meeting and further deliberate about which direction to take in consultation with the XRB board. The aim is to approve the NZ EDs at the June meeting. 

In relation to the Fees provisions, the NZAuASB has not identified any compelling reason to change the final IESBA provisions in New Zealand but will be working closely with the NZASB on its fee disclosure project to ensure the various provisions are aligned across the XRB’s standards.

Next NZAuASB Meeting

Thursday 8 April 2021 by video conference