IFAC is committed to supporting the development, adoption, and implementation of high-quality international ethics and independence standards. Key to this is ensuring that professional accountants around the world follow the latest standards issued by the International Ethics Standards Board for Accountants (“IESBA”). This article is part of an ongoing series summarizing the key changes to the International Code of Ethics for Professional Accountants (including International Independence Standards) (“the Code”).

This article covers changes since our previous summary in December 2022 and focuses on changes included in the 2023 edition of the Code, as well as horizon scanning for future developments. It aims to provide only a high-level overview of changes; therefore, when implementing these updates, please refer to the Code for the full details of all the requirements.

Changes included in the 2023 Code:

Revisions effective for audits of financial statements for periods beginning on or after December 15, 2023 include:

  • Revisions relating to the definition of engagement team and group audits; and
  • The expiration of the “jurisdictional provision” addressing long association of personnel with an audit client

The 2023 Code also includes revisions which have been approved by IESBA, but will only become effective on December 15, 2024:

  • Revisions to the definition of a public interest entity (“PIE”), “audit client” and “group audit client”; and
  • Technology-related revisions

We explore each of the revisions below in greater detail.

Revisions relating to the definition of engagement team and group audits

Effective for audits of financial statements for periods beginning on or after December 15, 2023

In February 2023, IESBA published the revisions relating to the definition of engagement team and group audits to holistically address various independence considerations in an audit of group financial statements. The key updates include:

Changes to the engagement team definition:

  • IESBA updated the definition of an engagement team to align with the changes to the definition in the International Standards on Auditing (“ISAs”) and International Standards on Quality Management (“ISQMs”), promulgated by the International Auditing and Assurance Standards Board (“IAASB”). This updated definition acknowledges expanded service delivery models by including any individuals, regardless of employment status or location, who perform procedures on the engagement and whose work can be directed, supervised, and reviewed in accordance with the requirements of ISA 220 (Revised). Under this updated definition, all individuals who perform audit procedures on the engagement are part of the engagement team.
  • The revised audit team definition includes the members of the engagement team and any other individuals within or engaged by the firm, as well as individuals within a network firm, who can directly influence the outcome of the engagement, e.g., engagement quality reviewers (“EQR”). However, external experts and internal auditors are excluded.
  • Members of the engagement team and the audit team are required to comply with the relevant provisions of the International Independence Standards (“IIS”).

Implications for the group audit team definition:

  • The revised engagement team definition is also applied to a group audit team context. Within the group audit team, the group engagement team includes any partners and staff from the group auditor firm and any other individuals who perform procedures on the engagement, whether within or outside the firm. External experts and internal auditors are likewise excluded from the group engagement team.
  • The group audit team also includes individuals within or engaged by the group auditor firm who can directly influence the outcome of the group audit. Finally, the group audit team includes any individuals within the same network as the group auditor firm or a component auditor firm outside the group auditor firm’s network who can directly influence the outcome of the group audit.
  • Individuals who cannot directly influence the outcome of the group audit are excluded from the group audit team, even if they can influence the component audit.

Updates to group audit independence requirements:

  • New terms have been included for the purpose of independence provisions for group audits. These definitions are based on or in line with ISA 600 (Revised), Special Considerations–Audits of Group Financial Statements (Including the Work of Component Auditors).
  • Section 405 of the Code has been introduced to address group audit independence requirements. These cover specific independence requirements for group audit team members and component auditor firms (CAFs) that are within or outside of the group auditor firm’s (GAF) network. It also addresses the independence considerations when the group audit client is a PIE, but the component audit client is not.
  • The updates also include provisions for effective communication between the GAF and the CAF, how individual members of a group audit team should consider threats to independence, and procedures for when a breach has occurred at a CAF.

The IESBA aligned the effective date for these revisions (i.e., for audits of financial statements or group financial statements for periods beginning on or after December 15, 2023) with the updates to ISA 600 (Revised). IESBA produced a webinar which provides further detail on these revisions.

Expiration of the jurisdictional provision

The 2023 edition of the Code highlights the expiry of paragraph R540.20 addressing long association of personnel with an audit client (known as the “jurisdictional provision”). Paragraph R540.20 will no longer be effective for audits of financial statements for periods beginning on or after December 15, 2023.

Definition of PIE, audit client, and group audit client

Effective for audits of financial statements for periods beginning on or after December 15, 2024 – early adoption is permitted and encouraged

In April 2022, the IESBA released the PIE revisions which specify a broader list of mandatory PIE categories for entities whose audits should be subject to additional independence requirements. The revisions:

  • Provide guidance on factors to consider when determining the level of public interest in an entity.
  • Replace the term “listed entity” with a new term “publicly traded entity”, providing a definition of the latter term.
  • Acknowledge the essential role that local bodies who are responsible for setting ethics standards for professional accountants have in defining which types of entities should be scoped in as PIEs in their jurisdictions, encouraging them to refine the mandatory PIE categories appropriately and include any other categories which are relevant to their local economy.
  • Introduce a transparency requirement for firms to publicly disclose that they have applied the independence requirements for PIEs, if they have done so.
  • Update the Glossary definitions of “audit client” and “group audit client” to align with the new term “publicly traded entity”, which replaces the term “listed entity”.

The IESBA staff further developed a jurisdictional PIE database to assist regulators, national standard setters, and other relevant bodies in developing or revising their definitions of PIE at a local level.

Technology-related revisions

Effective for audits of financial statements for periods beginning on or after December 15, 2024 – early adoption is permitted and encouraged

In April 2023, the IESBA published its technology-related revisions to the Code. These aim to:

Guide the ethical mindset and behavior of professional accountants when using technology, including:

  • Setting an expectation for an ethical organizational culture, through guidance on exhibiting ethical behavior in professional or business relationships, and actions to promote and encourage an ethics-based culture in the firm.
  • Providing updated guidance on identifying and evaluating threats associated with the use of technology – including self-interest and self-review threats.
  • Providing guidance on exercising professional judgment when using the outputs of technology, including factors to consider.

Address threats to confidentiality, professional competence and due care, and circumstances of complexity, including:

  • Emphasizing the importance of interpersonal, communication and organizational skills as part of professional competence.
  • Updating requirements not only to set out limitations to services provided, but also to explain the implications of these limitations to clients.
  • Clarifying that the principle of confidentiality means taking appropriate actions to protect the confidentiality of information in its collection, use, transfer, storage or retention, dissemination and lawful destruction. Requirements have been augmented and clarified, and updated guidance is provided on aspects such as authorization for use or disclosure.
  • Providing guidance on exercising professional judgment in managing complexity.

Update the International Independence Standards in relation to the provision of technology-related non-assurance services, including:

  • Guidance on close business relationships related to technology, including licensing, and joint development of products and solutions with the client.
  • Setting out specific requirements and guidance on providing, selling, reselling or licensing technology to or from audit clients.
  • Providing guidance on potential threats that might be created by the provision of IT systems services. This includes examples of IT systems services that result in the assumption of management responsibilities, such as storing or managing data on behalf of an audit client.

Horizon scanning for future developments

Tax planning and related services

In April 2024, the IESBA released revisions to the Code to address tax planning and related services. These revisions will become effective on or after July 1, 2025, with early adoption permitted and encouraged.

In response to growing public  concerns about tax avoidance and the role played by consultants, the IESBA has developed a principles-based framework for tax planning services, which leverages the fundamental principles and conceptual framework of the Code.

These updates introduce two new sections: Section 280, which covers tax planning activities for professional accountants in business (PAIBs), and Section 380, which covers tax planning services for professional accountants in public practice (PAPPs). The provisions do not address tax evasion, which is unlawful.

Key elements of these new sections include:

  • Setting out the professional accountant’s public interest role in relation to tax planning, including clarifying that certain tax minimization arrangements, while not prohibited by laws and regulation, might create threats to compliance with the fundamental principles.
  • Providing a description of tax planning activities, including examples of tax planning and related activities, and clarifying the differences between tax planning and tax compliance or tax preparation.
  • Specifying that where laws and regulations set out anti-avoidance rules which limit or prohibit certain tax planning arrangements, professional accountants are required to understand those laws and regulations and advise their employing organization or client to comply.
  • Providing clarity on which section of the Code to follow should professional accountants become aware of or suspect tax evasion.
  • Setting out the responsibilities of management and those charged with governance, as well as the professional accountant, with regards to tax planning.
  • Requiring professional accountants to recommend or otherwise advise on a tax planning arrangement only if they have determined that there is a credible basis in laws and regulations for the arrangement. Guidance is included for how professional accountants apply professional judgment in determining that there is a credible basis, including examples of actions they can take. Where there is uncertainty whether an arrangement is or will be in compliance, the Code requires the professional accountant to discuss this with the client or management and, if appropriate, those charged with governance, depending on whether the accountant is in business or public practice. Sections 280 and 380 also provide requirements and guidance for how to address disagreements with the client or with the accountant’s immediate superior or other responsible individual within the employing organization on a tax planning arrangement.
  • Requiring professional accountants to consider the reputational, commercial, and wider economic consequences that could arise from the way stakeholders might view the arrangement.
  • For those in practice, additional requirements and guidance are included for advising on arrangements developed by a third party.
  • Guidance is also provided on considerations for tax planning involving multiple jurisdictions, addressing circumstances of uncertainty, addressing potential threats from providing a tax planning service or performing a tax planning activity, and documentation.

Conclusion

It is crucial that stakeholders, and in particular firms, keep up to date with all the above upcoming changes to the Code. The IESBA also has a number of current projects covering firm culture and governance, sustainability, use of experts, and collective investment vehicles, pension funds and investment company complexes. In April 2024, IESBA issued a 4-year strategic roadmap, covering its Strategy and Workplan for 2024-2027.

IFAC will continue to support the adoption and implementation of international ethics and independence standards, and develop and facilitate the sharing of resources to assist stakeholders as they navigate these changes. Please see:

For all of IFAC’s International Standards support materials, please see here.

Christopher Arnold

Director

Christopher Arnold is a Director at the International Federation of Accountants (IFAC). He leads activities on contributing to and promoting the development, adoption and implementation of high-quality international standards, including the Member Compliance Program, Intellectual Property and Translations. Christopher is also responsible for IFAC’s SME (small- and medium-sized entities), SMP (small- and medium-sized practices) and research initiatives, which include developing thought leadership, public policy and advocacy. He was previously an Audit Manager for Deloitte and qualified as a professional accountant in a mid-tier accountancy practice in London (now called PKF-Littlejohn LLP). Christopher started his career as a Small Business Policy Adviser at the Association of Chartered Certified Accountants (ACCA).

 

Michelle Cardwell
Michelle Cardwell

Principal

Michelle joined IFAC at the start of 2024, focusing on accountancy education, thought leadership, and international standards. In this role, she is part of the team responsible for IFAC’s International Education Standards, and works with the International Panel on Accountancy Education on revisions and supporting guidance. Michelle also supports IFAC’s work to promote the development, adoption, and implementation of high-quality international standards.

Michelle began her career at Deloitte, where she spent over eight years in their risk advisory practice, specializing in providing financial reporting and financial management advice on a range of complex central government and transport projects. After leaving Deloitte, Michelle spent time at the Institute of Chartered Accountants of England and Wales (ICAEW), as well as the UK Financial Reporting Council’s Lab. In both roles, she was responsible for developing guidance, thought leadership, and policy pieces on a range of financial reporting, assurance, and sustainability topics.

Michelle is a chartered accountant (ICAEW). She holds a MSc in Public Policy and Administration from the London School of Economics, and a BS in Political Science and a BA in American Studies, both from Arizona State University.