Independence practicesEY Independence policies require Ernst & Young Accountants LLP and our people to comply with the independence standards applicable to specific engagements, including, for example, the independence standards of the International Ethics Standards Board for Accountants (IESBA) of the International Federation of Accountants (IFAC) and Dutch independence rules.
We consider and evaluate independence from several perspectives, including: our financial relationships and those of our people; employment relationships; business relationships; the permissibility of non-audit services we provide to audit clients; partner rotation; fee arrangements; audit committee preapproval, where applicable; and partner remuneration and compensation.
Failure to comply with applicable professional independence requirements will factor into a person’s promotion and compensation decisions and may lead to other disciplinary measures, including separation from Ernst & Young Accountants LLP.
We have implemented EY’s global applications, tools and processes to support us, our professionals and other employees in complying with independence policies.
EY Global Independence Policy
The EY Global Independence Policy contains the independence requirements for member firms, professionals and other personnel. It is a robust policy predicated on the IESBA Code of Ethics, supplemented with more stringent requirements where prescribed by a given regulator. The policy also contains guidance to help people apply the independence rules. The EY Global Independence Policy is readily accessible and easily searchable through EY’s intranet.
The Dutch Independence Supplement explains the Dutch statutory requirements regarding independence for all EY professionals. Various communications occurred with independence leaders throughout the world in order to foster compliance with these far reaching requirements. During fiscal year 2015/2016, our Independence Team again performed a large number of Public Company Independence Procedures. In most cases, we determined if EY would be free – from an independence point of view and under the applicable Dutch independence regulations – to accept a future audit engagement at a Dutch PIE that had issued a “request for proposal”.
Global Independence System
The Global Independence System (GIS) is an intranet-based tool that helps our professionals identify the listed entities from which independence is required and the independence restrictions that apply. Most often, these are listed audit clients and their affiliates, but they can be other types of attest or assurance clients too. The tool includes family-tree data relating to affiliates of listed audit clients and is updated by client-serving engagement teams. The entity data includes notations that indicate the independence rules that apply to each entity, helping our people determine the type of services that can be provided or other interests or relationships that can be entered into.
In the recent past, and in response to the mandatory rotation requirements in effect in the Netherlands since 1 January 2016, a large majority of OOB (PIE) entities issued a “request for proposal” for the audit engagement. We developed a screening and reporting protocol in order to assess our independence situation regarding a prospective client ahead of the start of the audit and engagement period. Once Ernst & Young Accountants LLP is appointed as the auditor, we keep tracking non-audit services continuously, both in the Netherlands and abroad, to ensure timely termination of prohibited non-audit services. At the start of the actual audit engagements we ascertain that all remaining non-audit services are closed.
Global Monitoring System
The Global Monitoring System (GMS) is another important global tool that assists in identifying proscribed securities and other impermissible financial interests. Professionals ranked as manager and above are required to enter any securities they hold, or those held by their immediate family, into the GMS. When a person enters a proscribed security or if a security they hold becomes proscribed, they receive a notice and are required to dispose of the security. Identified exceptions are reported through the Global Independence Incident Reporting System (GIIRS) for regulatory matters.
GMS also facilitates annual and quarterly confirmation of compliance with independence policies, as described below.
EY has established a number of processes and programs aimed at monitoring the compliance with independence requirements of EY member firms and their people. These include the following activities, programs and processes:
Timely and accurate completion of annual and quarterly independence confirmations is a high priority for the responsible leadership teams.
Annually, Ernst & Young Accountants LLP is included in an Area-wide process to confirm compliance with the Global Independence Policy and requirements and to report identified exceptions, if any.
All EY professionals, and certain others based on their role or function, are required to confirm compliance with independence policies and procedures at least once a year. All partners are required to confirm compliance quarterly.
Global independence compliance reviews
EY conducts member firm visits to assess compliance with independence matters. These reviews include aspects of compliance related to non-audit services, business relationships with the companies we audit and financial relationships of member firms.
Ernst & Young Accountants LLP confirms that the Global Internal Audit last occurred during June 2014.
Personal independence compliance testing
Each year, EY’s global Independence team establishes a program for testing compliance with personal independence confirmation requirements and with reporting of information into GMS. For the 2016 testing cycle, Ernst & Young Accountants LLP tested more than 100 partners and other personnel.
We monitor compliance with professional standards governing the provision of non-audit services to audit clients through a variety of mechanisms. These include the use of tools (e.g., GTAC — see page 18 and Service Offering Reference Tool (SORT) — see below), training and required procedures completed during the performance of audits and internal inspection processes. With effect from the 2014 calendar year, and in response to the new Dutch independence rules, we have increased our monitoring of other services to Dutch PIEs (OOB) under the new Dutch independence rules. Various improved prevention controls embedded in GTAC processes, combined with robust detection controls using queries and exceptions reports, allow us to comply with the new Dutch regulations. As a result of our monitoring processes, three situations were noted in 2015 where (not allowed) audit services were provided to audit clients. Each of the cases was limited in size; two of the three cases were conducted by foreign EY offices. These cases were reported to the AFM which led to a disciplinary discussion (normoverdragend gesprek) with the AFM about one of the three cases reported. We have performed necessary remediation and corrective actions in all three cases. Also, measures have been implemented to enhance our engagement approval processes.
Global independence learning
EY develops and deploys a variety of independence learning programs. All professionals and certain other personnel are required to participate in annual independence learning to help maintain our independence from the companies we audit.
The goal is to help our people understand their responsibility and to enable each of them, and EY, to be free from interests that might be regarded as being incompatible with objectivity, integrity and impartiality in serving an audit client.
The annual independence learning program covers independence requirements focusing on recent changes to policy, as well as recurring themes and topics of importance. Timely completion of annual independence learning is required and is monitored closely.
In addition to the annual learning program, independence awareness is promoted through a number of events and materials, including the new-hire program, milestone programs and core service line curricula.
Service Offering Reference Tool
We assess and monitor our portfolio of services on an ongoing basis, confirming that they are permitted by law and professional standards, and to make sure that we have the right methodologies, procedures and processes in place as new service offerings are developed. We restrict services from being provided that could present undue independence or other risks. Service Offering Reference Tool (SORT) provides our people with information about our service offerings. SORT includes guidance around which services can be delivered to audit and non-audit clients, as well as independence and other risk management issues.
Business Relationship Evaluation Tool
The Business Relationship Evaluation Tool (BRET) process helps to support our business relationships’ compliance with independence requirements. Our people are required to use BRET in many circumstances to evaluate and obtain advance approval of potential business relationship with an audit client.
Audit committees and oversight of independence
We recognize the important role audit committees and similar corporate governance bodies undertake in the oversight of auditor independence. Empowered and independent audit committees perform a vital role on behalf of shareholders in protecting independence and preventing conflicts of interest. We are committed to robust and regular communication with audit committees or those charged with governance. Through our quality review programs, we monitor and test compliance with our standards for audit committee communications, as well as the pre-approval of non-audit services, where applicable.
Our Independence Desk in the Netherlands deals with cross-service line compliance with all independence requirements. Among other tasks, it monitors compliance with relevant independence requirements. The Desk is managed under the responsibility of the Netherlands Independence Leader Bernard Roeders.
This group comprises approximately 10 FTEs that serve all professionals and service lines. In addition to its various key control functions, the Desk handles all independence-related consultations. On average we receive some 1,500 independence-related email inquiries and about 1,000 independence confirmation requests annually in the Netherlands alone. The nature of the questions focuses on the independence rules applicable in the Netherlands, and is now also shifting towards the implications of the new EU Audit Reform. Questions that require consultation with subject matter experts are discussed with Area and Global resources. Questions relating to the new rotation requirements following the ViO are addressed by a consultation group made up of Independence staff and the PPG.
The key controls and monitoring procedures cover the following areas: monitoring independence training and independence confirmations, recording personal financial interests in the Global Monitoring System (GMS) held by professionals at the level of manager and above, testing compliance with Independence policies, assessment of non-audit services, business relationships and gifts and hospitality and data. Our GMS systems, for example, currently monitors in excess of 6,000 securities held by our Dutch professionals. Our independence monitoring activities enabled all of our partners and other professionals to complete mandatory training on the new independence regulations and confirm their independence through our annual (for partners, quarterly) confirmation process.
Compliance with the GMS requirements is monitored through our Personal Independence Compliance Testing (PICT) program, which is designed to cover both partners and other executives (directors and (senior) managers). Our sample sizes vary from year to year and aim to ensure that all partners are tested at least once every five years with certain partners in managerial roles selected more frequently. Approximately 30 partners were tested in the period covered. Last year’s test results at the partner level were positive overall. Although PICT testing for partners revealed a higher number of formal violations of internal policies, such as late entry in our monitoring system of non-prohibited listed investments and the use of incorrect ISIN codes, no independence breaches were noted during our reviews. Our testing program for other executives resulted in similar findings with a higher number of formal violations but no independence breaches. Over 70 persons were tested. All instances of securities that had not been recorded in time concerned securities held by professionals who were not involved in audits for clients of which they held securities.
This year our engagement acceptance processes have been further augmented to ensure no non-audit services are provided to PIE WeCo clients. In addition, our Independence Desk conducted a detailed review of all clients for any prohibited services. Such monitoring will be continued going forward. The Independence Desk also reviews business relationships entered into by Ernst & Young Accountants LLP. We generally track, on average, some 300 active business relationships. All of them have been subject to a documented review by the Independence team. Directorships of all Dutch professionals are monitored through a dedicated database. All confirmations provided by Dutch professionals are reviewed and approved if authorized by our policies. Additional monitoring through public records exists for all partners and executive directors. Indeed, on a regular basis public records are searched to assess whether any partner or Assurance executive director holds a position that was potentially not disclosed.
Gifts and hospitality arrangements are reviewed by our Independence team. Following the rules under the ViO, we actively communicated the €100 limit for activities with Assurance clients. In accordance with the ViO, our policy in the Netherlands stipulates that Assurance clients’ representatives cannot be invited to social events and entertainment representing a value over €100. Neither will our professionals accept such invitations from Assurance clients.
Implementation of EU Audit Reform
The new EU rules governing the audit profession entered into force on 17 June 2016. Those rules are the product of the ambition of the European Commission to reform the audit market (“the EU Audit Reform”). The rules are transformed into Dutch law by EU Regulation No 537/2014 and amended Directive 2006/43/EC and affect the Dutch Audit Firm Supervision Act (Wet toezicht accountantsorganisaties, Wta), the Dutch Audit Firm Supervision Decree (Besluit toezicht accountantsorganisaties, Bta) and the Regulation the Independence of Accountants in the case of Assurance Engagements on the Independence of Accountants (Verordening inzake de onafhankelijkheid van accountants bij assurance-opdrachten, ViO).
In addition to the earlier amendments to Dutch law regarding the audit profession, the EU rules regulate audit services, client independence and our professional practice. This primarily pertains to the services we provide to Public Interest Entities (PIEs). However, non-PIEs are also being impacted. In most cases, the amendments apply with effect from the audit of the 2017 financial statements.
To prepare for the introduction of the new rules, we started a project last year where Assurance PPG, Independence, Enablement, Markets and Services Lines’ Quality functions work closely together. This project group assists with the implementation of the rules, as well as providing information to the professional practice through newsletters, bespoke training sessions, webcasts and FAQs. The group closely coordinates with the respective EY European networks on regulatory, independence and assurance matters.
The impact of the EU Audit Reform is important for us on topics as:
- Specific cooling in restrictions for certain services before accepting a new audit client;
- Extraterritorial ramifications of parent company PIE’s located elsewhere in the EU;
- Increased role and responsibilities for Audit Committees and enhanced communication protocols on services and audit findings;
- Mandatory firm rotation after a maximum audit period of ten years with a cooling-off period of four years;
- Additional steps on engagement acceptance and continuance procedures.