Revising Canada’s independence standards: Is now the time to drop the $10 million independence threshold?

A recent Exposure Draft (ED) proposes to eliminate the threshold exemption from restrictive independence requirements for audits of smaller reporting issuers and bring Canada in line with international independence standards.

A recent Exposure Draft (ED) proposes to eliminate the threshold exemption from restrictive independence requirements for audits of smaller reporting issuers and bring Canada in line with international independence standards.

The CA profession is a member of the International Federation of Accountants (IFAC) and must adopt Rules of Professional Conduct (RPC) that are no less stringent than the requirements in the Code of Ethics for Professional Accountants (Code) issued by the International Ethics Standards Board for Accountants (IESBA).The Independence Task Force (ITF) of the Public Trust Committee of the profession is charged with reviewing the RPC independence provisions issued in 2003 to determine what changes may be appropriate to protect the public interest in light of recent revisions to the Code independence provisions.

Based on feedback from an earlier Consultation Paper, the ITF concluded that the Code is not yet sufficiently rigorous to be adopted as the standard for Canada. A more robust approach would be to review the existing RPC and determine what changes were needed to conform to the Code where the Code is considered more rigorous. The ED is the output of that process.

One of the key changes relates to the threshold exemption for reporting issuers with a market capitalization and total assets under $10 million. The ED states that the reporting issuer threshold approach “was adopted to allow smaller entities to obtain more accounting assistance from their auditors rather than engage a third party.” But the ITF believes that the Canadian market circumstances are no longer such that there should be a less stringent standard than the international standard. “Over half of the entities that fall below the threshold exemption cannot currently obtain additional assistance from their audit firms. These entities are audited by audit firms that belong to networks that are members of the Forum of Firms of IFAC.” These firms must comply with the Code independence requirements that apply to all audits of listed entities.

To soften this change, the ED proposes eliminating the threshold exemption for fiscal years commencing after December 15, 2018. During the transitional period, the proposals would require the firm to inform the audit committee of any relationships and conditions that exist that would not be permitted if the more stringent independence requirements were to apply.

The ITF seeks comments on this and a number of other proposed revisions by May 31, 2013.

Keep the conversation going….do you agree with the proposal to remove the threshold exemption for audits of smaller reporting issuers? Are the transitional provisions complete and appropriate?

Post a comment below; or email me directly.

Eric

Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.

About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada

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