EM Designation Use and Inheritance

what is a designation? a designation indicates a type of relationship a firm has with an entity, such as a business relationship or a restricted audit relationship an entity can have one or more designations and designations can be applied in the following ways direct designation designation applied directly to an entity indirect designation indirect designation inherited from another via inheritance logic indirect designation manually applied to an entity derived designation derived designation inherited via inheritance logic what types of designations are supported? the system supports three different ways to apply designations direct, indirect, and derived direct designations can be applied directly to an entity and is the starting point for inheritance logic indirect designations are inherited from other entities in the tree hierarchy derived designations are generated by the system when an originating designation is directly applied, and the inheritance begins where the inheritance of the originating designation ends an “originating designation” is a direct designation that causes the creation of a derived designation direct designations direct designations are added to or updated on an entity through the entity details screens direct designations are the originating point for inheritance logic allowing designations to be inherited by other entities the entity management product default list of direct designation types are designation type description sec restricted indicates an entity that is subject to u s securities and exchange commission (sec) rules, which are enforced by the public company accounting oversight board (pcaob) iesba pie restricted indicates an audit client that is regulated by international ethics standards board for accountants (iesba) and must adhere to ethic standards set by the regulatory board in addition, the entity is classified as a public interest entity (pie) whose audits should be subject to additional independence requirements iesba has a definition of what qualifies an entity as pie eu pie restricted the european union has regulations that apply to pies and their affiliates as defined by each european union (eu) and european economic area (eea) member state it indicates that restrictions are placed on an audit firm for a pie, in addition to permissible non audit services an audit firm can provide to an audit client and its affiliates uk pie restricted the united kingdom and crown dependencies have regulations that apply to pies and their affiliates, as well as other entities of public interest (oepi) uk pie restricted is generally used for pie or oepi this designation indicates additional restrictions that are applied per uk regulations for an audit client and its affiliates by default, crown dependencies include guernsey (gg), jersey (je), and isle of man (im) iesba restricted indicates an audit client that is regulated by iesba and must adhere to ethics standards set by the regulatory board assurance restricted indicates an entity that is restricted based on the assurance engagements and services that are provided by the client reverse restricted indicates a non client entity that is restricted based on other business relationships by the client organization/firm sec watchlist indicates an entity that is proactively monitored under sec regulations and is expected to become sec restricted in the future eu pie watchlist indicates an entity that is proactively monitored under eu regulations that apply to pies and their affiliates, and is expected to become eu pie restricted in the future watchlist indicates an entity that is proactively monitored by the client organization as it will likely become an audit client in the future relationship indicates an entity that is designated as having a non audit relationship with the client none designated indicates that an entity has no designation and is assigned as the default value indirect designations an indirect designation is inherited from a direct designation on another entity in the tree via inheritance logic all designations that are inherited are considered indirect designations indirect designations can not be directly edited and are managed through the inheritance configuration for each designation type derived designations derived designations are separate designation types generated from an originating designation and applied to entities that extend past the inheritance of the originating designation derived designations contain their own inheritance logic and and can be inherited by other entities derived designations are directly applied by the system where an originating designation is directly applied, but the direct designations are hidden in the ui and cannot be directly edited indirect derived designations cannot be applied where the indirect originating designation is applied for this reason, the originating designation inheritance must be applied first before the derived designation inheritance is applied the entity management product default list of derived designation types are derived designation originating designation description loan rule restricted sec restricted indicates an entity that is restricted for loans it applies to legal entities and natural persons related to sec audit affiliates per sec regulations business relationship restricted sec restricted indicates an entity that is restricted for business relationships it applies to legal entities and natural persons related to sec audit affiliates per sec regulations sec monitored sec restricted used to monitor services to entities under common control in relation to an audit client, but without dual materiality since materiality is subject to change, services should be monitored to avoid regulatory violations in the event the entity becomes an affiliate due to a materiality change iesba pie monitored iesba pie restricted used to monitor services to entities that are upstream control from a iesba private client pie audit team restricted configured in reference data indicates restrictions that apply to the audit team for upstream controlling affiliates per iesba regulations in addition, it allows restricting the audit team that is working on a component audit as part of a group audit locally restricted configured in reference data this specialized designation is used to specify local audit restrictions that apply above and beyond the standard global restrictions and need to be applied based on an entity's jurisdiction loan rule watchlist sec watchlist indicates an entity that is proactively monitored for loans and is expected to become load rule restricted in the future when an sec restricted designation is applied (either directly or indirectly), any entity that is associated to an sec restricted entity via an upstream substantial stockholder association will receive a loan rule watchlist designation business relationship watchlist sec watchlist indicates an entity that is proactively monitored for business relationships and is expected to become business relationship restricted in the future when an sec restricted designation is applied (either directly or indirectly), any entity that is associated to an sec restricted entity via an upstream substantial stockholder association will receive a business relationship watchlist designation how and when should a direct designation be applied? designations are designed to be applied directly to the client entity and to leverage inheritance logic to cascade designations (indirectly) to other entities and affiliates in the tree based on their associations it is recommended to to apply the highest priority designation except in cases where multiple rules apply, such as iesba pie and eu pie correct direct designations an audit may include an entity and its subsidiaries apply the direct designation to the parent entity and allow the inheritance logic to apply indirect designations to the subsidiaries direct designations must go through a workflow when added to an entity the system will automatically apply derived designations and indirect designations to the applicable associated entities based on the configured inheritance logic of the particular type of direct designation incorrect direct designations applying direct designations to each subsidiary entity in the tree takes more time, increases the complexity of managing the data, and can lead to inconsistent values being applied the better approach is to maintain the hierarchy tree with accurate entities and associations and allow the inheritance logic to automatically apply indirect designations to affiliates based on the configuration for each designation removing designations also becomes significantly more cumbersome when directly assigned to affiliates, compared to letting the system automatically handle the removal of indirect designations when associations change how can indirect designations be manually managed? indirect designations can be set as manageable or not manageable by a system administrator in rules management when set as manageable, users have the ability to manually override/remove automatically applied indirect designations, as well as extend the indirect designation to other entities conversely, designations marked as not manageable prevent users from manually removing designations manually apply indirect designation inherited designations can be managed when a designation inheritance work item has been created in a workflow opening the designation inheritance view reveals the tree hierarchy, displaying entities with inherited designations applied if the designation is set to manageable, the inherited designations can be removed as a general rule, any designation can be manually extended to inherit further than the default inheritance in the example below, the user manually extends the indirect designation of "iesba restricted" to "company f," which lies outside the designation inheritance scope manual override enables users to manually update indirect designations instead of creating another direct designation this approach allows a user to have a designation inheritance rule that applies the indirect designation to the correct entities in 90%+ of cases and then using manual override in the small number of exception cases instead of trying to have a different designation type/inheritance rule for each type of scenario for example, iesba rules for public entities and aicpa rules for non public entities are very similar, so one designation type and inheritance rule can be used to cover restrictions applied to entities under either rule set, and users can manually override in the exception cases how are derived designations inherited? derived designations are inherited according to the inheritance logic configured for each designation as defined in the em designation inheritance logic document the inheritance logic governs how inheritance progresses upstream or downstream across associations the nature of the association and the details on the entity determines whether the inheritance continues or halts at specific points within the hierarchical tree structure correct derived designations in the example below, applying the direct designation of "sec restricted" to company e triggers the application of derived designations such as "loan rule restricted," "business relationship restricted," and "sec monitored" to entities that extend beyond the direct designation inheritance derived designations are not editable and are solely managed by the system based on the associations and inheritance logic incorrect derived designations applying direct designations to parent entities that would inherit the indirect designation can cause issues with how derived designations are generated and can impact the designations applied to entities within the tree hierarchy these differences are shown when comparing the correct example above and the incorrect example below