NOCLAR - ifac.org

NOCLAR - ifac.org

Technology Patricia Mulvaney Technology Working Group Chair IESBA Meeting New York, USA December 3-6, 2019 Page 1 | Proprietary and Copyrighted Information Working Group Members Members: Patricia Mulvaney, Chair, IESBA Member Gregory Driscoll, IESBA Technical Advisor Brian Friedrich, IESBA Member

Hironori Fukukawa, IESBA Member Myriam Madden, IESBA Member Robert Juenemann, IESBA Member IAASB Correspondent Member: Melissa Bonsall, IAASB Technical Advisor Page 2 | Proprietary and Copyrighted Information Objectives of the Session To present the TWGs Phase 1 Final

Report To receive input from IESBA members on the TWGs recommendations, including proposed way forward for IESBAs Technology Initiative Page 3 | Proprietary and Copyrighted Information Outreaches Activities in Q4 2019 Focus US Stakeholders Regulators and Public Sector Independence Stakeholders meetings in Q4:

Prof. Miklos Vasarhelyi at Rutgers Business School American Institute of Certified Public Accountants (AICPA) U.S. Public Company Accounting Oversight Board (PCAOB) U.S. Government Accountability Office (GAO) U.S. Securities and Exchange Commission (SEC) (via telecon)

A US firm with large public sector client portfolio Ordre des CPA du Qubec (CPA Qubec) Page 4 | Proprietary and Copyrighted Information Phase 1 Findings and Recommendations Key Findings & Recommendations 1 2 3 4 5

Critical role of ethics and professional judgment in the digital age Complexities of the professional environment Suitability of the Fundamental Principles for the digital age Enabling competencies and skills

Auditor independence Page 5 | Proprietary and Copyrighted Information Findings and Recommendations Critical Role of Ethics and Professional Judgment Promoting ethical behavior Recap of TWG findings: Whilst the PAOs should actively promote the profession and its members ability to create trust, individual PAs could also have a broader role to promote ethical behavior. Such a role should be highlighted in the Code in addition to what is already in Part 2 and the proposed changes under the Role and Mindset ED

No additional Code changes re: professional judgment Recommendation 1 Consider adding new application material in Part 1 of the Code to more clearly highlight a broader societal role for PAs in promoting ethical behavior as a critical, consistent foundation for businesses, firms and other organizations, particularly when developing and using technology. Page 6 | Proprietary and Copyrighted Information Findings and Findings Complexities of the Professional Environment Recap of TWG findings: PAs need to attain sufficient knowledge and skills in relation to new technology involved, which can often be complex and time-consuming.

PAs must also be aware of and comply with an expanding array of regulatory requirements and professional standards The Code should be revised to better capture the threats caused by this complex professional environment Page 7 | Proprietary and Copyrighted Information Findings and Recommendations Complexities of the Professional Environment TWG considered a

number of approaches (para 33 of the Final Report), including Add a new type or category of threats Revise definition of existing categories of threat Highlight complexity risk in s120 Modify lead-in paragraph in para. 120.6 A3 Add examples of complexity

threats in ss200 and 300 Expand references to individuals to include intelligent agents Recommendation 2 Consider revising the Code to more effectively deal with the threats caused by the complexity of the professional environment in which PAs perform their professional activities, giving consideration to options such as those described in paragraph 33 of the report. Page 8 | Proprietary and Copyrighted Information Ethical leadership and Complexity Questions and Comments? Page 9 | Proprietary and Copyrighted Information

Findings and Recommendations Suitability of the Fundamental Principles Conceptual Framework Fundamental Principles Recap of TWG findings: Important tor PAs to consider inter-related nature of the impact of technology on compliance with the FPs (eg. Machine bias) It is not necessary to revise the Code to highlight the pervasive and inter-connected nature of nature of the impact of technology Technology cuts across all FPs and CP in an inter-related way

Page 10 | Proprietary and Copyrighted Information Findings and Recommendations Suitability of the Fundamental Principles Key Principles in AI Ethics Framework The TWG want to draw the Boards attention to three of the principles because there are increasing discussions on these topics Fairness Transparency Explainability Accountability Privacy/Security

Page 11 | Proprietary and Copyrighted Information Common AI Ethics Principles Transparency Recap of TWG findings: Digital transformation has highlighted importance of trust, leading to push for more transparency, e.g. regarding dealings with customers and others protection of privacy organizational commitment to broader social and environmental considerations The TWG considered existing provisions in the Code that promote transparency including s114 (Confidentiality) ss 210 and 310 (Conflicts of Interest) and

s410 (Fees). Page 12 | Proprietary and Copyrighted Information Common AI Ethics Principles Transparency Both the NAS and Fees projects have referenced the importance of transparency from an independence perspective and have developed proposals accordingly. TWG believes more express language in the Code on PAs responsibility to be transparent may be necessary. Recommendation 3 Consider revising Subsection 113 (PC&DC) by expanding a PAs responsibility to be transparent which is not currently expressly stated in the Code. Circumstances that impact the extent of transparency that may be appropriate (e.g., in an audit, the type and timing of audit procedures) would need to be considered.

Page 13 | Proprietary and Copyrighted Information Common AI Ethics Principles Accountability Recap of TWG findings: When technology is used to assist or augment decision making, questions might arise as to what comprises a PAs individual accountability for his/her work o Additional considerations might also include accountability of others involved (eg technology developers) The TWG believes PAs must be willing to be held accountable for their work and take the necessary steps to ensure they properly discharge their duties Page 14 | Proprietary and Copyrighted Information

Common AI Ethics Principles Accountability Recommendation 4 Consider strengthening the concept of accountability in the Code by: Including new material in Subsection 111 (Integrity) on a PAs willingness to accept responsibility taking into account the proposed new material in Subsection 111 under the Role and Mindset ED. More clearly explaining the concept of accountability in Subsection 113 (PC&DC) in light of the increasing use of external experts and intelligent agents. Including appropriate reference to technology in the provisions relating to reliance on the work of others in Section 220 (Preparation and Presentation of Information) Additionally: Consider as part of the implementation review of the revised and restructured Code, the effectiveness of the applicability provisions set out in paragraphs 200.4(b) and R300.5 to 300.5 A1 with regards to Section 220.

Page 15 | Proprietary and Copyrighted Information Common AI Ethics Principles Privacy/Security Summary of TWG findings: Need for proactive protection of confidential, personal and other sensitive information is apparent given growth in cyberattacks, headline grabbing data leaks and breaches, and interest in comprehensive data governance frameworks The TWG believes Subsection 114 (Confidentiality) is not as inclusive of data protection and governance principles as might be appropriate for the digital age o Such review might also consider whether, and if so how, the concept of transparency plays into a PAs responsibility to maintain confidentiality at a time of increased public expectation for transparency as previously noted Recommendation 5

Consider revising, as a priority, Subsection 114 in light of the increased availability and use of personal and other sensitive data to give appropriate consideration to privacy related matters and the need to actively protect information. Page 16 | Proprietary and Copyrighted Information Transparency, Accountability, Privacy/Security Questions and Comments? Page 17 | Proprietary and Copyrighted Information Findings and Recommendations Enabling Competencies and Skills Recap of TWG findings: Importance of new knowledge and skills and the capacity for continuous learning consistently cited across all stakeholders

Upon further deliberation, TWG determined including a specific reference to IES in the Code is not the most suitable approach. Rather: o suggest including new material on professional skills in Subsection 113 (PC&DC) o consider if the Code should include examples of emergent examples of technical skills in Subsection 113 Recommendation 6 Consider adding new application material to Subsection 113 to highlight the importance of professional or soft skills and provide examples of the emergent technical skills needed in the digital age. Page 18 | Proprietary and Copyrighted Information Findings and Observations Auditor Independence TWG analysis grouped into 4 areas Technology tools used in an audit

Technology applications sold to audit clients Provision of technology related NAS Modernizatio n of Codes terms and concepts Page 19 | Proprietary and Copyrighted Information Auditor Independence Technology Tools Used in Audits Recap of TWG Findings:

Firms are using technology tools/applications to assist with performing audits and to improve efficiency and audit quality o For example, audit sampling tools No independence threats per se arise when technology tools are used during an audit o Comments on FPs addressed separately (e.g., over-reliance on technology outputs) Page 20 | Proprietary and Copyrighted Information Auditor Independence Technology Applications Sold to Audit Clients Recap of TWG Findings:

The sale or licensing of technology applications creates a business relationship and therefore might create threats to independence o Such transactions could be in the form of a standalone products or in combination with a NAS Independence issues arising could be dealt with under s520 (Business Relationships). o s520 currently provides guidance on goods and services purchased from an audit client only Page 21 | Proprietary and Copyrighted Information Auditor Independence Technology Applications Sold to Audit Clients Recap of TWG Findings: The TWG believes the provision of ancillary services such as software implementation or maintenance/

support could be dealt with under s600 (Provision of Non-Assurance Services to Audit Clients), specifically extant ss606 As agreed with NAS TF Chair, revisions to extant ss606 will be addressed under IESBAs Technology Initiative TWG proposes this work be treated with priority in 2020 Page 22 | Proprietary and Copyrighted Information Auditor Independence Provision of Technology-Related NAS Recap of TWG Findings: Initial thoughts on evaluating potential revisions to s600/s606: Factors for evaluating level of threats Assumption of management responsibilities

Evaluating potential conflicts of interest and mutual interest arising from business relationships The provision of technology solutions (both products and services in combination) Page 23 | Proprietary and Copyrighted Information Auditor Independence Modernization of Terms and Concepts Office Defined as a distinct sub-group, whether organized on geographical or practice lines o TWG view: extant definition sufficiently covers virtual and remote office o TWG view: use of office in context of fee dependency in s410 (Fees) is appropriate

In s510 (Financial Interests), use of the term seems to focus on physical location of a partner with financial interest TWG view: consider whether notion of physical presence influence continues to be appropriate in light of advancements in communication technologies Page 24 | Proprietary and Copyrighted Information Auditor Independence Modernization of Terms and Concepts Financial Interest, Bank and similar institution TWG briefly considered concepts of: o financial interests in s510 (Financial Interests) o bank and similar institution in s511 (Loans and Guarantees) TWG recommendation:

o Undertake further information gathering and analysis on cryptocurrencies and blockchain post Phase 1 to evaluate the terms financial interests and bank and similar institution are fit for purpose into the future Page 25 | Proprietary and Copyrighted Information Auditor Independence Modernization of Terms and Concepts Data as an Asset TWG discussed: o whether holding assets in a fiduciary nature for a large number of stakeholders would (or should) include the holding of data or intellectual assets o whether an entity that holds significant amounts of data should be considered a PIE

TWG recommendations: o Consider whether s350 (Custody of Assets) should be revised or a new Section be developed to include custody of data o Consider whether holding data for a large number of stakeholders warrants inclusion in the new definition of PIE Page 26 | Proprietary and Copyrighted Information Auditor Independence Modernization of Terms and Concepts Routine and Mechanical Tasks TWG considered the use of the term routine and mechanical in ss601 and 602 in light of machine automating tasks so they appear routine and mechanical in execution apparent routine and mechanical processing of a task through automation may obscure the level of professional judgment

inherent in the task applied via the technology and/or by the PA. The TWG believes it is the level of professional judgment applied that is the litmus test to be considered in evaluating a task under ss601 and s602 Consideration should be given to removing the phrase routine and mechanical s601 and s602 to prevent confusion as more complex and subjective tasks become automated Page 27 | Proprietary and Copyrighted Information Auditor Independence Modernization of Terms and Concepts Long Association TWG considered whether the list of factors in para. 540.3 A3 (b) should be expanded to include a reference to technology TWG of the view that this may be best addressed as part

of the IESBAs long association implementation review Page 28 | Proprietary and Copyrighted Information Auditor Independence Recommendations for Part 4A Recommendation 7 Strengthen the provisions in Part 4A of the Code relating to auditor independence by: Considering whether Section 520 or other provisions in Part 4A should be revised to address the threats to independence created by the sale or licensing of technology applications to audit clients, and the use of an audit clients technology tool at arms length in the delivery of NAS. Revising Section 600, particularly Subsection 606, with respect to the provision of technologyrelated NAS

In relation to the concept of an office, considering whether Section 510 should be revised to better capture the threats to independence created by a partner with a financial interest in an audit client when that partner practices in the same office as the engagement partner, in light of the use of modern communication technologies by firms. Considering, as part of the LA post-implementation review, whether the list of factors in paragraph 540.3 A3 (b) of the Code should be expanded to include a reference to technology Page 29 | Proprietary and Copyrighted Information Auditor Independence Part 4B of the Code TWG conducted a review of Part 4B of the Code No additional matters identified for

consideration by the IESBA beyond those noted in Part A Page 30 | Proprietary and Copyrighted Information Competencies and Skills, Auditor Independence Questions and Comments? Page 31 | Proprietary and Copyrighted Information Findings and Recommendations Non-Authoritative Guidance Material Impact of technology Potential topics for nonCode guidance Leadership in promoting ethical behavior material in the next 12-18 Professional competence

months Confidentiality No change in the topics recommended Development of recommended guidance material should progress in light of IFAC-SSB discussions on collaborating in promoting adoption and implementation Page 32 | Proprietary and Copyrighted Information Recommendations for next steps IESBA Technolog y Initiative Phase 2 Establish a project and Task Force to consider Recommendations 1-7 in the Final Report

Extend the TWG, which would be responsible for: o Information gathering and analysis on topics such as blockchain, crypto, ICOs, cybercrime and cyberattack and data governance o Identifying opportunity and need academic research o Contributing to development of guidance material o IAASB Coordination Page 33 | Proprietary and Copyrighted Information Recommendations for next steps Questions and Comments? Page 34 | Proprietary and Copyrighted Information The Ethics Board www.ethicsboard.org

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