ED Professional Independence - 15 December 1998

15 December 1998

Mr. Ken Spencer
Chairman
Australian Accounting Standards Board
211 Hawthorn Road
Caulfield Vic 3162

Dear Ken

ED Professional Independence

The Group of 100’s comments on the second draft of the Ethical Statement "Professional Independence", prepared from the perspective of members employed in the business sector, are set out below.

In the absence of reasons for changes made to the Exposure Draft we have found it necessary to restate our earlier views.

While we recognise that issues of professional independence often arise in the audit profession we do not believe that the Statement should emphasise these issues to the exclusion of others. The Group of 100 recommends that the professional bodies should either give due attention to the needs of members in other roles or rename The Statement to reflect that it relates only to members in practice.

General Comments

1. Independence

In relation to independence we expressed the view that independence embraces the fundamental requirement that members must be, and should be seen to be, free of any interest which might be regarded, whatever its actual effect, as being incompatible with integrity and objectivity.

While paragraphs 1 – 3 deal with integrity and objectivity, in paragraphs 4 – 5 the term "independent’ is used in a manner to mean something other than integrity and objectivity for example, simply independent of the entity.

Our previous comments relating to the drafting of paragraph 6 do not appear to be reflected in the revised draft. We believe that their inclusion would aid understanding of the requirements.

2. Issues not addressed by the ED

In our previous submission we commented on the responsibility of the Society/Institute to their members.

These comments have not been acknowledged and do not appear to be reflected in the revised draft. The Group of 100 believes that the proposed Statement will be deficient if it does not address these issues.

Issues on which specific comments were sought on the first draft.

a. Independence

We believe that the proposed Statement would be improved if it reflected comments made in our previous submission on independence (paragraphs 10 – 13).

b. "Disclosure, within a report, of any financial interest or circumstance which could be seen as impairing independence." (Paragraph 16)

This proposed requirement has been deleted from the revised draft. The Group of 100 does not support the removal of this requirement.

c. "Provision of other services must not impair or be seen to impair the auditor’s independence." (Old paragraphs 18 and 43).

Whilst some additional guidance has been provided in new paragraphs 58 and 59 the fundamental black letter requirements have not been enhanced.

d. "Requirement to prepare audit independence declarations, to be available for inspection at time of practice’s quality review". (Paragraph 22)

We previously recommended that the proposed Statement deal with the nature and conduct of a quality review, which may be conducted by the respective accounting bodies. The Group of 100 believes that this, together with the removal of paragraph 16 from the first draft, would leave clients unaware of potential conflicts.

e. "Adoption of a policy relating to audit personnel rotation". (Paragraph 35)

Whilst the new paragraph 36 strengthens the proposals made in the first draft, we believe that examples of the "exceptional circumstances" which would justify an exemption from rotation should be provided to assist understanding.

f. Comments arising from attached matrix :

We believe that additional provisions dealing with financial interests re paragraph 40 re opinion shopping should be included in the proposed Statement.

We suggest a new paragraph stating that :

"Members in business should ensure that they do not expose themselves to conflicts of interest (eg. beneficial interest or close relationship in a supplier of goods or services), in which case they should decline to be involved in their employer's selection process or, alternatively, clearly state their interest to all interested parties. If the member has any doubt as to whether such a conflict of interest exists, they should assume that such a relationship exists"

should be included in the proposed Statement.

Other Issues

Insider Trading

The Group of 100 believes that the proposed Statement should provide guidance relating to members trading in shares in companies in which they have confidential knowledge by virtue of their employment.

Internal Audit

Paragraph 47(a)(i). Delete the words "should not" and replace with "must not".

Yours sincerely,

Bryce JH Denison
National President