IESBA’s amendments: what finance professionals need to know

Garreth Hanley:
This is With Interest, a business, finance, and accounting news podcast brought to you by CPA Australia.

Patrick Viljoen:
Welcome to With Interest. I'm Patrick Viljoen. And in today's show, we're talking with Mark Babington about the international ethics standards and their particular role in sustainability assurance. Mark is a member of the International Ethics Standards Board, or IESBA, and an executive director of regulatory standards at the Financial Reporting Council.

Welcome to With Interest, Mark.

Mark Babington:
Thank you, Patrick.

Patrick Viljoen:
So maybe just by way of an introduction, we know that the new IESSA amendments have come through and are ready for adoption globally. But maybe just can you explain what the IESSA standard amendments are wanting to get across to the market and where it fits within the broader reporting and assurance space? And then also thinking about within Australia, we've obviously got AASB-S2, which is the climate-related disclosure requirement, and also our adoption of ISSA 5000.

Mark Babington:
So where would I begin? You start with the Holy Trinity. You've got the reporting standards. So for many jurisdictions, the focus is on ISSB reporting standards because they bounced out of COP26. Reported information needs to be assured. So you've got a global assurance standard issued by the IAASB, and of course, measures underway to have that standard available for use in Australia. That requires ethics and independence standards, mainly to underpin confidence in the trustworthiness of that information and the fact that it's been properly prepared and properly assured.

So with that in mind, IESSA was asked by IOSCO to look to develop a new part of the code, which would be tailored for dealing with sustainability assurance engagements. And effectively what it does is it leverages the approach in the code. It sets a high standard of independence and ethics based on an audit of financial statements. But it reflects the fact that there are slightly different things about a sustainability assurance engagement. And although it won't be an issue for your members here in Australia, in many jurisdictions, the work isn't just carried out by accountants and auditors. It's carried out by a much more diverse group of providers. And therefore, we had to ensure that the IESSA was going to be fit for purpose, regardless of who did the work.

Patrick Viljoen:
So I like that reference to the Holy Trinity, because I've made something of a similar comment recently about this completes the puzzle, right? So we've got the reporting components, which is the adoption of the ISSB standards. Then we have the assurance components, which is ISSA 5000. And this just rounds it off in terms of that level of ethics and independence that we need to evidence.

Now, Mark, obviously you're based in the UK. Have you got any feedback or information for us and for our listeners about the rollout that you see across the UK? Maybe looking at the EU more broadly, we're very much aware that at the moment or at the time of this particular recording, the EU is mulling over the publishing of the EU omnibus. So we'll wait for information coming from that. But what do you see globally happening in terms of the adoption of the new amended IESSA?

Mark Babington:
So, I think there's a lot of work for us now, Patrick, to make sure that those countries that already use the code to support audit and other assurance work also use the IESSA to support sustainability assurance engagements. And it's a bit difficult to say how it works globally at the moment because you're in quite a fortunate position here. Australia is a bit of a front runner. You know, government has set legislation which has provided a clear framework for sustainability reporting and its assurance. So you've got clarity over who's going to report and when and what's going to be assured and the level of assurance. A lot of other jurisdictions are behind you.

So, therefore, I think what we're doing is really raising awareness of the IESSA as a tool to help that high-quality reporting and assurance. But we are already getting a lot of interest from different jurisdictions. And, you know, the conversation is already taking place where people are thinking, how do they bring it in? What, you know, what does it mean for the work they do? And, of course, one of the things that we've given a lot of attention to at IESBA is thinking about implementation support measures, because this is new. It's slightly different. It leverages a familiar model, but some people will need more help than others to embrace what it offers and why. And that's because of just some new things in sustainability-related engagements compared to an audit.

Patrick Viljoen:
Maybe just on that, I know that in Australia we've basically hemmed it in to say that it's our members, well, not only CPA Australia, but also members from CAANZ and the IPA that can express or engage in that particular assurance engagement. But that's not necessarily true of everyone. So if we think about the New Zealand example, they're halfway through a process of migrating into ISSA 5000, and therefore people that have applied other standards up to this point in time will need to step into that particular kind of space.

The concern I sometimes have with that is the language that's being used. So ISSA 5000 is written in a very specific kind of fashion using language that for our members would be very familiar. For those falling outside of the profession, maybe less so.

My question to you with that would be from an IESSA perspective, for those people that are being brought online in terms of their engagements and, you know, adopting ISSA 5000, do you think that the standard in and of itself would be written in such a way or is written in such a way that they would be able to understand what we're trying to get to in terms of both language, so their own understanding of what we're trying to get as an output from all of this?

Mark Babington:
So the IESSA has been written in a way that reflects, as you say, different models apply in different countries. And you've explained the situation in Australia and the one in New Zealand. If I think what's happening at home in the UK, the sustainability assurance market splits roughly 50/50 between accountants and other providers.

If you go to South Korea, it's virtually all done by people other than accountants and auditors. So, you know, you have a very diverse range of different practices. The IESSA was developed to be profession agnostic, so it can be used by anyone. And it's also intended to be framework neutral. So a lot of jurisdictions are using ISSA 5000, including you. However, it can also be used with other assurance frameworks.

And, you know, talking about non-accountants, throughout the process of setting the IESSA and engaging with stakeholders globally, we've been supported by a sustainability reference group, which has included a contingent of non-accountant providers. So we've sought to test the language in the IESSA and what we're asking for against their expectations. Can they use it? And there's also been really close working with the International Accreditation Forum. And that is an umbrella body of national organisations that provide things like conformity assessments. And they have exchanged letters with us about their intention to use the IESSA as an ethical and independence framework to support their members working in this space.

So, you know, there will be a period of people getting up to speed, understanding what it means and working with it. But that's why we've got this implementation period now. And we're developing a lot of material to ensure that we can support people, be they members of the profession or be they other people.

Patrick Viljoen:
And I think that's a pretty important point about the adoption and that kind of phased in approach, because we see that from a reporting perspective, as well as from an assurance perspective. All these things need to run hand in hand. Assurance, you know, a year behind. But it doesn't mean that, you know, the work is a year behind. It's just because you have to do the reporting first and then get the assurance engagement in.

But also bearing in mind that our members are not only based in Australia; we've got large member populations in places like Malaysia, Hong Kong, Singapore. My question to you would be our members in Australia might not be as heavily impacted, but other members might, depending on jurisdiction.

So what would be your advice for our members in terms of how they can upskill themselves as quickly as possible, get across the changes? And what are the kind of key things that they need to focus on to ensure that they're across all of this information?

Mark Babington:
So I would say to your members, concentrate on what's new. So for the IESSA, for part five of the code, if you're an auditor, we have leveraged part 4A. So when you read it, there will be an enormous amount in there that's very familiar to you. Long association provisions, fees provisions, you know, all of the useful things that are in the code. And we've leveraged the existing fundamental principles and conceptual framework. So that is a really important jumping-off point. It's not completely new.

What is new and what I would encourage your members to focus on is, of course, a sustainability assurance engagement is different because sustainability reporting includes value chain reporting. And that's new. And the assurance of the value chain is something that perhaps hasn't been done before. So therefore, what we have done – and if I talk from an independence perspective – in the IESSA or the sustainability assurance engagement, we've leveraged what applies in an audit. So, a high bar. However, for the value chain, if you impose that high bar, you probably end up with a situation where no one could do the work.

So therefore, we have a bespoke set of independence requirements for value chain components where the person doing the work needs to be independent from the value chain component and nothing else. So therefore, we're not saying that if you're doing a piece of work in the value chain, you need to understand whether you're independent from the other 1,200 components in the value chain. So look at that. The other thing that's different is in sustainability assurance engagements, we may see far more examples where people are using the work of another practitioner. And so therefore, there's specific material that's been developed in the IESSA for that. And I'd recommend that members look at that.

And I think beyond that, the independence requirements – some people say they're challenging. There's actually a really good table in the back of the basis for conclusions. I think it's page 40. And it shows the independence requirements in a really simple tabular format. And I think if people look at it, they'll be quite surprised how simple and straightforward they are.

So my starting point would be, you know, look at the things that you're not familiar with as an auditor and make sure that you understand those. But remember not to overcomplicate things. So sometimes people talk about the value chain and they say, well, my client's a big company. They've got thousands of entities in their value chain. What do I do? Well, remember that many reporting frameworks only require you to focus on material components in the value chain. So you might have 2,000, but only 20 of them might be material. So ask those difficult questions and, you know, play with the IESSA to see how it would work in some of the scenarios that are familiar to you now.

Patrick Viljoen:
And I think that's an extremely important point you raise about materiality. And within the sustainability field, materiality is not always exactly the same as it is from a financial perspective. But then you've also got the cascaded kind of impacts of saying, well, if you're engaging with your value chain, there's no need for you to engage with everyone.

It's basically that Pareto rule of 80/20. So, you know, as long as you can get the largest bulk of it or the largest component of it assessed, that's perfectly fine. Nobody's expecting you to poll everyone about all of their information.

Just thinking about assurance engagements, one of the big components in there is the use of experts. And there's a project behind that piece as well. Would you care to elaborate on that particular piece of work for us as well?

Mark Babington:
Yeah, very happy to. So, when we started the work on the IESSA, we realised that there was a need to fill a gap in the code, dealing with the use of experts. And in part, that reflects the fact that as audits have become more complicated, there's a need for audit teams to be supplemented by greater external expertise. And so, therefore, what you now have is a framework to make those assessments in the code. But I think this is particularly relevant for sustainability assurance engagements because you may be drawing on a very different type of expert.

You know, it brings in new and different types of reporting. And you'll be calling on skills and capabilities that perhaps your members who are auditors may not be as familiar with. And therefore, what we've got now is a simple, consistent, single framework to allow them to make an evaluation and determine whether or not they can use that expert's work to support their engagement.

Patrick Viljoen:
And I've got vivid recollections of accounting for defined benefit and defined contribution schemes, and how that needed to segue with the use of actuaries. So you might not understand the number, but you know what to do with the number once you have it. So it's very similar to that, I would take it. It's just a new field and a new bunch of people we need to speak to. There's so much we could talk about on this topic, Mark, but thank you so much for joining us today. And it's been absolutely fantastic talking to you. Thank you very much for your time.

Mark Babington:
Very pleased to be able to join you.

Patrick Viljoen:
And thank you for listening to With Interest. Don't forget to check the show notes for links and resources from CPA Australia and Mark's Insights. If you like the show, please share it with your friends and colleagues, and hit the subscribe button so you don't miss future episodes. And until next time, thanks for listening.

You've been listening to With Interest, a CPA Australia podcast. If you've enjoyed this episode, help others discover With Interest by leaving us a review and sharing this episode with colleagues, clients, or anyone else interested in the latest finance, business, and accounting news. To find out more about our other podcasts and CPA Australia, check the show notes for this episode. And we hope you can join us again for another episode of With Interest.

Garreth Hanley:
You've been listening to With Interest, a CPA Australia podcast. If you've enjoyed this episode, help others discover With Interest by leaving us a review and sharing this episode with colleagues, clients, or anyone else interested in the latest finance, business, and accounting news. To find out more about our other podcasts and CPA Australia, check the show notes for this episode, and we hope you can join us again for another episode of With Interest.