The Chair

							22 July 2009


The Chairperson
Accounting Professional & Ethical Standards Board Limited
Level 7, 600 Bourke Street
MELBOURNE VIC 3000

sub@apesb.org.au

Dear Ms Spargo

Re: Exposure Draft ED 02/09 Proposed Standard APES 350 Participation by Members in
Public Practice in Due Diligence Committees

CPA Australia, the Institute of Chartered Accountants in Australia (the Institute) and the National
Institute of Accountants (NIA) (the Joint Accounting Bodies) are pleased to respond to the request
for comments from the Accounting Professional and Ethical Standards Board (APESB) on Exposure
Draft 02/09.


General Comments

The Joint Accounting Bodies support the need for a standard directed to members’ involvement in
due diligence committees, and in particular note the benefits of providing an example form of a Due
Diligence Sign-Off as an appendix to this Standard.

We note that the scope of this proposed standard is limited to the provision of services involving
participation with a due diligence committee that is “in connection with a public document”. We are
mindful that there are other engagements involving due diligence committees which do not have a
connection with a public document, and understand that this proposed standard is not intended to
cover such engagements. However, the title of this standard does not recognise this scope
limitation, such that the casual observer may mistakenly form the view that the standard applies to
all engagements involving due diligence committees.

We therefore suggest that the title of the standard be amended to reflect this limitation – for example
“APES 350 Participation by Members in Public Practice in Due Diligence Committees, in connection
with a Public Document”.

The bodies consider that the undesirability of a lengthy title is outweighed by the greater clarity
achieved.

The APESB may also wish to consider whether additional guidance is required in a separate
pronouncement, in respect of members’ participation in those due diligence committees that are not
connected with a public document, or whether the scope of this standard could be extended to
involvement with due diligence committees generally.


Comments on specific paragraphs

Paragraph 3.5

The joint accounting bodies recognise that the practice has developed in Australia for an audit firm to
be involved in the due diligence committee of an audit client which is issuing a prospectus, and that
there are a number of views as to the appropriate role of an audit firm in this context.
We understand that the intention in the drafting of Paragraph 3.5 was to emphasise that the ultimate
determination of whether involvement in a DDC of an audit client was possible depended
significantly on the particular scope of work contemplated in the DDC engagement, and that this was
why the reference to the objectives of the audit engagement and the DDC engagement was
introduced into this paragraph.

Given the importance of this issue, the joint accounting bodies are of the view that the wording of
paragraph 3.5 could be reworked to highlight this issue, and to more specifically identify the threats
and safeguards applicable to this situation, to ensure that they are identified and considered in this
context. For example:

       3.5 A Member in Public Practice who is invited by an Audit Client to undertake Professional
       Services which comprise participating in and/or reporting to its Due Diligence Committee as a
       member, observer or Reporting Person in connection with a Public Document shall consider
       Section 290 Independence – Assurance Engagements of the Code to determine whether the
       proposed Professional Services create threats to the Member’s Independence. Where the
       Member determines that a reasonable and informed third party having knowledge of all the
       relevant information, including safeguards applied, would regard the proposed Professional
       Services as impairing the audit independence of the Member, the Member shall decline the
       Engagement or the relevant part thereof.

       [New paragraph 3.6] In assessing threats to independence the Member should ensure that
       the responsibilities of the Due Diligence Committee do not require the Member to perform
       management functions, or be seen as making management decisions. Also, the Member
       should ensure that self-review threats are not created, for which appropriate safeguards
       cannot be applied, by undertaking Professional Services which are subsequently the subject
       matter of an Assurance Engagement by the Member. In this context, particular regard should
       be had to the scope of work involved in the Professional Services which comprise
       participating in and/or reporting to the Due Diligence Committee.


Paragraph 3.6

Paragraph 3.6 as drafted contains a mandatory requirement for a member to consider a number of
issues. From the point of view of the joint accounting bodies, a mandatory requirement for a member
to “consider” presents a difficulty in terms of identifying a breach of this requirement and disciplining
a member for such a breach. This is because of the difficulty of measuring a member’s subjective
state of mind. In its concluding part (following the list of issues to be considered), Paragraph 3.6
goes on to require a member to decline the engagement where certain threats exist – this is a more
measurable requirement, as it would be possible to establish (a) that those particular threats exist
and (b) that a member had failed to decline an engagement in such circumstances.

The bodies therefore recommend that the mandatory requirement of paragraph 3.6 be restricted to
the concluding part of the current paragraph, viz.:

       Where the Member determines that there is a threat to the Member’s ability to comply with the
       fundamental principles of the Code and/or the circumstances of the proposed Engagement
       create an unacceptable level of risk for which appropriate safeguards are not available, the
       Member shall decline the Engagement or the relevant part thereof.

This requirement could then be followed by guidance indicating that, in considering whether there
are threats requiring that an engagement be declined, a member should consider (not shall
consider) the range of matters currently set out in sub-paragraphs (a) to (e).

Paragraph 3.6 (f)

Sub-paragraph (f) of paragraph 3.6 refers to “other independence obligations”. It is not clear what is
intended to be referenced by this sub-paragraph. If it was intended to address engagements with
SEC registrants, then arguably the provisions of paragraph 1.4 would apply. In the absence of any
identifiable independence obligations not adequately dealt with by paragraph 1.4, we would
recommend that sub-paragraph (f) be removed.




                                                                                              Page 2 of 3
Paragraph 5.4

The intent of paragraph 5.4 is to identify matters which require the consideration of all of the
members of the DDC, and are reported on in the DDC’s report, and to emphasise that such matters
should not therefore be advised on or reported by the member in isolation.

It is submitted that the construction of this paragraph does not convey the correct emphasis. As
written, there is a sense in which it discourages members from consideration of misleading or
deceptive disclosures, which is clearly not the intent.

We therefore submit that this paragraph could be reworded to achieve the correct emphasis. For
example:

Matters of a legal nature, or which are subject to legal interpretation, that are commonly encountered
by Due Diligence Committees, include whether certain proposed disclosures or non-disclosures may
be considered misleading or deceptive, by inclusion or omission, or are clear, concise and effective
within the meaning of the relevant sections of the Corporations Act 2001. These are matters
requiring the consideration of all of the members of the Due Diligence Committee, and are reported
on in the Due Diligence Committee’s report. A Member in Public Practice should not advise or report
on such matters in their Due-Diligence Sign-Off.

Paragraph 5.7

From the point of view of the joint accounting bodies, a mandatory requirement for a member to
“apply an objective and enquiring mind” presents a difficulty in terms of identifying a breach of this
requirement and disciplining a member for such a breach. In the same vein as our earlier comments
about paragraph 3.6, this is because of the difficulty of measuring a member’s subjective state of
mind. Paragraph 5.7 goes on to require a member to “raise any concerns which come to the
attention of the Member with the Client and its Due Diligence Committee”. This is a much more
measurable requirement, as it would be possible to establish (a) that concerns had come to the
attention of the member (by reference to file notes and correspondence) and (b) that those concerns
had not been raised with the client and the DDC.

The bodies therefore recommend that the mandatory requirement of paragraph 5.7 be restricted to a
requirement to raise any concerns which come to the attention of the Member with the Client and its
Due Diligence Committee. This requirement could then be followed by guidance indicating that, in
considering whether matters raise any concerns, a member should (not shall) apply an objective and
enquiring mind.

The joint accounting bodies appreciate the opportunity to comment and would be able to provide
more detail on these issues if required. In this regard please contact Paul Meredith, the Institute’s
Manager Professional Standards on 02 9290 5535, Gary Pflugrath, Policy Adviser Professional
Standards at CPA Australia on 02 9375 6244, or Peter Goujon, Manager Member Integrity at the
NIA on 03 8665 3100.

Yours sincerely




 Geoff Rankin                      Graham Meyer                              Andrew Conway
 Chief Executive Officer           Chief Executive Officer                   Chief Executive Officer
 CPA Australia Ltd                 Institute of Chartered Accountants        National Institute of Accountants




                                                                                              Page 3 of 3