Revised Non-Assurance Services Provisions of the Code

A firm or a network firm is prohibited from assuming a management responsibility for an audit client (paragraph

R400.13). The Code specifies that management responsibilities involve controlling, leading and directing an entity, including making decisions regarding the acquisition, deployment and control of human, financial, technological, physical and intangible resources (paragraph 400.13 A1).

The IESBA moved the prohibition from Section 600 to Section 400 so that it is clear that the prohibition on assuming management responsibilities applies to all aspects of the relationship between a firm or a network firm and an audit client, and not only in the case of the provision of a NAS.

Firms and network firms should be especially alert when assisting and advising audit clients to avoid situations that involve assuming a management responsibility. To assist firms, the Code identifies:

• General activities that would be considered a management responsibility and prohibited for all audit clients (see paragraph 400.13 A3).
• Specific types of NAS that involve or might result in assuming a management responsibility (see, for example, paragraphs 605.3 A2 and 608.5 A3 respectively).
• Specific types of NAS that do not usually create a threat to independence as long as individuals within the firm or network firm do not assume a management responsibility (see paragraphs 602.3 A1, 604.6 A1, 606.4 A2 and 609.4 A2).

Question:

Section 400, paragraph 400.13 A4, notes that, subject to compliance with paragraph R400.14, providing advice and recommendations to assist the management of an audit client in discharging its responsibilities is not assuming a management responsibility. Section 600 indicates that the self-review threat prohibition applies in the case of PIE audit clients, except in limited circumstances. Does the provision of advice and recommendations to a PIE audit client always give rise to a risk of self-review threat with the consequence that advice and recommendations may not be provided to PIE audit clients?

No. Paragraph 600.11 A1 establishes that the provision of advice and recommendations to audit clients might create a self-review threat. However, as advice and recommendations can take many different forms, this does not mean that the provision of advice and recommendations to PIE audit clients is prohibited in all circumstances.

In finalizing the revised NAS provisions, the IESBA acknowledged that advice and recommendations might involve:

• Participating in discussions with management or those charged with governance about possible approaches to resolve a particular issue.
• Recommending a specific course of action based on a review or analysis of a particular set of circumstances.
• Benchmarking or confirming that a number of different approaches would meet a particular objective (e.g., compliance with a financial reporting or regulatory requirement).

Whether the provision of advice and recommendations might create a self-review threat will depend on the application of the “two-prong test” in paragraph R600.14. This will involve a consideration of (a) whether there is a risk that the outcome of the advice and recommendations will form part of or affect the accounting records, internal controls over financial reporting, or the financial statements on which the firm will express an opinion, and (b) whether there is a risk that the audit team will evaluate or rely on any judgments or activities performed by the firm or network firm when providing the advice and recommendations. Advising management on general or high-level matters that require management to develop their own implementation plans and accounting for such implementation is less likely to give rise to a self-review threat. In contrast, the more detailed the advice given, including for example recommendations on how that advice should be implemented, the greater the risk of the firm assuming management responsibility or a self-review threat being created.

The following examples illustrate these concepts:

• Advising management on how cost savings can be achieved by closing a factory or reducing personnel would generally not create a self-review threat. However, if such advice also includes estimated provisions to be accounted for, a self-review threat would be created; or
• Advising management on how to achieve compliance with an applicable law or regulation would generally not create a self-review threat. However, providing detailed advice on designing and implementing processes to ensure compliance with laws and regulations might give rise to a self-review threat if there is a possibility that such advice will be reviewed in the course of the audit.

If a firm or network firm determines that a proposed advice or recommendation might create a self-review threat (having applied paragraph R600.14), the provision of that advice or recommendation is prohibited unless expressly permitted by the Code.

Question

The Code prohibits the provision of tax advisory and tax planning services to audit clients that are PIEs if the provision of such services might create a self-review threat (paragraph R604.15). It also specifies circumstances when a self-review threat might be created (paragraph 604.12 A1) and when a self-review threat will not be created (paragraph 604.12 A2). What is the rationale for the approach taken in the Code in relation to the provision of tax advisory and tax planning services to audit clients that are PIEs?

The IESBA recognizes that the provision of tax advisory and tax planning services by professional accountants to clients, including audit clients, is regarded as in the public interest in many jurisdictions.

However, the approach taken when providing tax advisory and tax planning services can range from established and accepted application of tax law and practice to innovative, and potentially unproven, interpretations of tax law and practice.

The Code establishes those tax advisory and tax planning services that are prohibited (paragraph R604.4) and those that are permitted (paragraphs 604.12 A2 and 604.17 A3). In particular:

• A firm or a network firm is prohibited from providing a tax service or recommending a tax transaction to an audit client if that service or transaction relates to marketing, planning or opining in favor of a tax treatment that was initially recommended, directly or indirectly, by the firm or network firm, and a significant purpose of the tax treatment or transaction is tax avoidance, unless the firm is confident that the proposed treatment has a basis in applicable tax law or regulation that is likely to prevail (paragraph R604.4)¹.
• The Code recognizes that, in many instances, the provision of tax advisory and tax planning services to audit clients involves the application of established and accepted tax law and practice. As such, the advisory elements of the services provided do not focus on the interpretation or construction of the relevant tax provisions – but consider the application of those provisions to the audit client’s particular circumstances.

On that basis, the IESBA determined that a self-review threat to independence will not be created when a firm or a network firm provides tax advisory or tax planning services to an audit client (including PIE audit clients) if such services: (paragraph 604.12 A2):

a) Are supported by a tax authority or other precedent;

b) Are based on an established practice (being a practice that has been commonly used and has not been challenged by the relevant tax authority); or

c) Have a basis in tax law that the firm is confident is likely to prevail.

• The IESBA determined that, for subparagraph 604.12 A2 (c) to apply, the firm should have a high level of confidence that the basis in tax law is “likely to prevail.” The IESBA, therefore, added the phrase “the firm is confident” to make it clear that the firm must have a robust rationale to support the proposed tax treatment.
• The Code adopts a similar approach for tax valuations (i.e., a self-review threat will not be created) if: (paragraph 604.17 A3)

¹The IESBA considers that specific guidance on “tax avoidance” is best provided by local tax authorities, professional accountancy organizations, and national standard setters based on local tax laws and regulations.

a) The underlying assumptions are either established by law or regulation, or are widely accepted; or

b) The techniques and methodologies to be used are based on generally accepted standards or prescribed by law or regulation, and the valuation is subject to external review by a tax authority or similar regulatory authority.

Based on the Questions and Answers publication issued by the Staff of the IESBA.

06 December 2022