Convergence with the Code –
Canadian Rules of Professional Conduct
Colleen Dunning, CPA-CA
Partner, KPMG Canada
IESBA Meeting
London
January 12-14, 2015
Page 1 | Proprietary and Copyrighted Information
Convergence with the Code
Standard Setting – Canada
• Each of the 10 provinces and 2 territories have the
authority to establish, monitor and enforce ethical
standards in their jurisdiction – Rules of Professional
Conduct (RPC)
• The CPA’s Public Trust Committee establishes and
recommends standards for adoption by the provincial
institutes – generally harmonized throughout Canada
Page 2 | Proprietary and Copyrighted Information
Convergence with the Code
Standard Setting – Canada
• RPC apply to members of the Provincial Institute (PAIB
and PAIPP), students of the institute and firms, as
applicable
• Standards of practice are enforced by the Institute’s
bylaws (e.g. Chartered Professional Accountants Act 2010
and the bylaws of CPA Ontario)
– Enforceable by disciplinary sanctions
Page 3 | Proprietary and Copyrighted Information
Ethical Standard Setting
Canada – Historic Overview
1883
ICAO
incorporated
Bylaws do
not address
member
conduct
1934
First
Provincial
Rules of
Professional
Conduct
1961
Additional rules
added, including
those on
independence
AICPA influence
Concern shifts
to public interest
vs moral
character
1973
2003
Substantial
Changes
New
Independence
Standard
Establishment
of core ethical
principles
Introduction of
Council
Interpretations
Reflected the
updated IESBA
Code + SEC
requirements for
public
companies
T&S framework
+ specific
prohibitions
$10M threshold
for reporting
issuers
2010
Task Force reviews
potential changes to
the independence
standard
Recommends
changes in 2
phases:
- ED: Partner
rotation
provisions (7/2
vs 5/5)
- Convergence
with the Code in
other areas
(consultation
paper)
2011
2013
Revisions to
partner
rotation rules
– move to a
7/5 model for
LAEP and
EQCR
Other
proposed
changes to
converge to
2009 Code
exposed
(204)
No changes
for other audit
partners (7/2)
2014
Proposed
revisions
become
effective
Some
differences
remain,
including the
$10M
threshold and
SEC-like
prohibitions
for certain
NAS
Page 4 | Proprietary and Copyrighted Information
Convergence with the Code
Standard Setting – Canada
• RPC generally address the content of the Code:
– Fundamental Principles are the same
– RPC do not apply the T&S approach, except in relation to
independence (R 204)
– Separation of the “Rules” (requirements and prohibitions) from
“Interpretations” (guidance)
– No separation of Rules applicable to Public Accountants in
Business
Page 5 | Proprietary and Copyrighted Information
Convergence with the Code
Standard Setting – Canada
Independence
• The Independence Task Force of the Public Trust
Committee - empowered to recommend harmonized
independence standard for Chartered Accountants in
Canada
• Oversight by the Auditing and Assurance Standards
Oversight Council (AASOC) - similar to the PIOB
• Securities regulators/CPAB do not set independence
standards
Page 6 | Proprietary and Copyrighted Information
Convergence with the Code
Independence
Level of Convergence in Canada – 2003
• Convergence activities began in 2003 – adoption of the
systematic, principles-based framework for independence
contained in the Code
• Specific prohibitions – having regard to current
expectations of securities regulators and investor groups
– More restrictive than IESBA for listed entities (closer to SEC)
– Exception with respect to smaller reporting issuers (<$10M market
capitalization and total assets)
Page 7 | Proprietary and Copyrighted Information
Convergence with the Code
Level of Convergence in Canada – 2014
As against the 2009 Code - Independence:
• Maintained stricter rules for reporting issuers (regulators)
–
Non-audit services (SEC-like prohibitions)
–
Partner rotation
• Maintained the $10M market capitalization and asset thresholds (RI)
• Some additional restrictions on loans
Page 8 | Proprietary and Copyrighted Information
Convergence with the Code
Canadian Market Considerations – Reporting Issuer
• A large number of small reporting issuers
– Approximately 3,850 reporting issuers in Canada
– 48% have market capitalization of <$10M
– They represent 0.3% of total market capitalization
• Lack of qualified in-house expertise
• Service provider options may be limited
Source: TSX quoted market value report and TSX Venture quoted market value report December 31, 2009.
Reporting issuers are entities that are deemed to be a reporting issuer under the applicable Canadian provincial or territorial securities
legislation. The majority of mutual funds are reporting issuers.
Page 9 | Proprietary and Copyrighted Information
Independence
RPC vs Code (2014)
Canadian RPC
Evaluation
Stricter rules apply to Reporting
Issuers/Listed Entities (defined under
applicable securities legislation –
shares, debt, securities traded on public
exchange) – size exemption $10M
Code: PIE definition more broad than
Listed Entities – currently in Canada,
only Reporting Issuers/Listed Entities
captured – more restrictive since no
size exemption
Partner rotation – 7/5 for LAEP and
EQCR, 7/2 for other KAPs
Code : 7/2 for all KAPs
Related entity
Definitions aligned with the Code
Audit Committee pre-approval of
professional services
No requirement in Code
Page 10 | Proprietary and Copyrighted Information
Independence
RPC vs Code – Non-Audit Services
Canadian RPC – RI/LE
Evaluation
Exception available if reasonable to
conclude (RTC) not subject to audit –
rebuttable presumption that the results
will be subject to audit
• Only available for certain services
• Five categories, similar to SEC
Bookkeeping
• RTC exemption available
• No materiality carve out
• Similar emergency situations
exception
Page 11 | Proprietary and Copyrighted Information
Independence
RPC vs Code – Non-Audit Services
Canadian RPC – RI/LE
Evaluation
Valuation services
• RTC exemption available
• No materiality threshold
• Exception for tax only valuations
Actuarial services
• RTC exemption available
• Not specifically addressed in Code
Internal audit services
• RTC exemption available
• No significance/materiality carve out
IT systems
• RTC exemption available
• No carve out for “off-the-shelf”
accounting software or insignificance
Page 12 | Proprietary and Copyrighted Information
Independence
RPC vs Code – Non-Audit Services
Canadian RPC – RI/LE
Evaluation
Litigation support services
• Prohibited if purpose is to advance the
client’s interest in a civil, criminal,
regulatory, administrative or legislative
proceeding or investigation
• Code is T&S approach
Legal services
• Full prohibition, regardless of purpose of
service or materiality of matter
• Code prohibits if advocacy role in dispute
or litigation – if material
Page 13 | Proprietary and Copyrighted Information
Independence
RPC vs Code – Non-Audit Services
Canadian RPC – RI/LE
Evaluation
Human resource services
• Generally comparable
Corporate finance services
• Generally comparable, expanded list of
prohibited activities (management
functions)
Tax services
• Similar emergency situations exception
(tax calculations)
• No materiality carve out (tax provision
calculations)
• No materiality threshold for acting as an
advocate in public tribunal or court
Page 14 | Proprietary and Copyrighted Information
Independence
RPC vs Code
Canadian RPC
Evaluation
Management decisions/functions
• No carve out for routine and
administrative activities or those that
involve insignificant matters
• Slightly varied list of prohibited activities
(e.g. reporting in a management role to
AC)
Page 15 | Proprietary and Copyrighted Information
Independence
RPC vs Code – Safeguards
Canadian RPC
Evaluation
Safeguards
• Required when threats are other than
clearly insignificant
• Three categories:
i. Created by the profession, legislation or
regulation
ii. Within the client
iii. Within the firm’s own systems and
procedures
• Similar examples as Code
• Includes discussing with AC
Page 16 | Proprietary and Copyrighted Information
Independence
RPC vs Code – Breaches
Canadian RPC
Evaluation
Breaches
• 2013 version of the Code
• Inadvertent breaches do not impair
independence provided:
i. The firm had quality control policies and
procedures in place to promote
independence; and
ii. Once discovered, the breach was
corrected promptly and any necessary
safeguards were applied
Page 17 | Proprietary and Copyrighted Information
Convergence with the Code
Level of Convergence in Canada – 2014
As against the 2009 Code – Other Areas:
• Conflict of interest generally consistent as relates to Public
Accountants in Public Practice – does not address network firms
• Contingent fees are addressed outside of the independence section –
have not been converged with the Code (e.g. size test)
Page 18 | Proprietary and Copyrighted Information
Convergence with the Code
Level of Convergence in Canada – Current
Activities
• The ITF is considering the impact of the changes to the
Code related to breaches
• Rule 210 (Conflicts of interest) is currently being reviewed
to apply more specifically to PAIB as well as PAIPP
• Review is also underway to address contingent fees within
Rule 204 in addition to the existing Rule 215 and consider
whether to adopt PCAOB-type prohibitions on certain tax
services
Page 19 | Proprietary and Copyrighted Information
The Ethics Board
www.ethicsboard.org