The winds of change are blowing across the world of audit once again. A Plus looks at how the international development of standards and regulations is strengthening the profession
Illustrations by Roberto Cigna
It seems like not a month goes by without the audit profession hitting the headlines, whether its news of financial irregularities missed by auditors, or companies collapsing under the pressure of debts after receiving a good bill of health from their auditors.
Recent scandals such as the Gupta case in South Africa and a number of reported failures in the United Kingdom, including the collapse of facilities management and construction outsourcing company Carillion, threaten the integrity of the audit profession.
Although different failings were reported, they all highlighted the same key concerns – that the audit profession is not doing enough to deliver independent and robust examination of financial statements, to reassure investors that the management of a company they are invested in are acting as effective stewards of their capital.
At the same time, questions have been raised about the robustness of scrutiny from audit regulators, and sanctions applied to auditors, and whether the regulators are independent enough to effectively regulate the profession.
The need for change is highlighted by a recent report from the International Forum of Independent Audit Regulators (IFIAR), an international body of 52 independent audit regulators dedicated to improving global audit quality.
In its 2017 Survey of Inspection Findings report, IFIAR found issues at 40 percent of the almost 1,000 audits of listed public interest entities inspected by its members. The IFIAR said that the “high rates of findings indicate [the] need for improvement.”
The most common issue identified by IFIAR was a failure to “assess the reasonableness of assumptions”, and the second biggest problem was a failure to “sufficiently test the accuracy and completeness of data or reports produced by management” – integral elements of an audit professional’s activities.
For the profession to remain relevant and retain its status as rational and reasoned arbiters of corporate financial well-being, it is vital that the audit profession changes and responds to these criticisms and issues raised. The global audit networks have agreed to reduce the percentage of listed public interest entity audit reports with identified issues.
The standard setting ecosystem
This is not the first time the profession has been challenged. After a number of corporate collapses and failures including Enron in 2001, and WorldCom in 2002, the reputation of the profession was dented. As a result, regulation of the profession increased in many countries in an attempt to restore public and investor confidence in financial reporting.
These corporate scandals also gave birth to the International Federation of Accountants (IFAC) Reforms in 2003, implemented by the IFAC Council and supported by global regulators. The IFAC Reforms aimed to: strengthen international standard setting processes; advocate for national convergence with international standards; enhance the performance of the profession; build investor confidence in financial reporting; and ensure the profession is responsive to public interest.
The reforms also led to the development of two of the tiers of the three-tier model of standard setting – the Monitoring Group and Public Interest Oversight Board (PIOB) both overseeing the work of standard setting boards.
The Monitoring Group
- Oversees PIOB funding
- Appoints PIOB members
- Monitors PIOB activities
The Public Interest Oversight Board
- Ensures due process of the standard setting boards
- Approves boards strategy plans
- Oversees the nominations process of board members
The four standard setting boards
- Setting standards
- Developing short- and medium-term strategy plans
- Organizing call for nominations of board members
For the profession to remain relevant and retain its status as rational and reasoned arbiters of corporate financial well-being, it is vital that the audit profession changes and responds to these criticisms and issues raised.
The Monitoring Group is a group of international public interest organizations. Its members are the Basel Committee on Banking Supervision, European Commission, Financial Stability Board, International Association of Insurance Supervisors, IFIAR, International Organization of Securities Commissions, and the World Bank.
The group was born out of the success in organizing together for the IFAC Reforms. Now its mission is to promote high-quality international auditing and assurance, ethical and education standards for accountants; monitor and assess the implementation and effectiveness of IFAC; appoint the members of the PIOB; monitor, consult and advise the PIOB; and convene regularly to discuss issues and developments related to international audit quality as well as to regulatory and market developments having an impact on auditing. The Monitoring Group meets at least twice a year and with the PIOB and IFAC at least once a year.
In recent years, the Monitoring Group has advocated for greater consideration of public interest in the creation of standards. Recently, it has criticized the high level of involvement by practitioners in the standard-developing process, and is one of the driving bodies behind change.
The standard setting boards are overseen by the PIOB, which comprises 10 members, nine of which are nominated by the Monitoring Group and one by IFAC.
Founded as part of the IFAC Reforms, the PIOB is a vital component of the international standard-setting environment, offering independent oversight throughout the entire standard setting process, and helping to ensure that standards are fully responsive to stakeholder needs, accountable and transparent.
By overseeing the establishment and adherence to high-quality professional standards, the PIOB seeks to further the international adoption and implementation of such standards and improve the comparability of financial statements across the globe.
Together, the Monitoring Group and PIOB provide the independent oversight necessary for developing standards which work for all participants in the global financial markets.
There are four boards supported by IFAC, of which two set auditing and ethical standards. The International Auditing and Assurance Standards Board (IAASB) develops and issues auditing and assurance standards and pronouncements for global use, which have been adopted by over 120 jurisdictions. Meanwhile, the International Ethics Standards Board for Accountants (IESBA) sets ethical standards.
The IESBA sets standards including auditor independence requirements, which seek to raise the bar for ethical conduct and practice for all professional accountants through a robust, globally operable Handbook of the International Code of Ethics for Professional Accountants. The code has been adopted or is utilized to some extent in over 80 jurisdictions.
The other two boards, International Accounting Education Standards Board and International Public Sector Accounting Standards Board, set educational and public sector accounting standards, respectively.
The boards have 18 members, appointed by the IFAC Board on recommendation by the Nominating Committee, with the PIOB providing oversight. Boards comprise nine practitioners (partners or staff of audit firms), six non-practitioner (a broad category of accountancy-related professions) accountants, and at least three public members, who are expected to reflect the wider public interest. Members are allowed to serve a maximum of two consecutive three-year terms and must make annual declarations that they will act in the public interest.
Board positions are voluntary and non-remunerated (except for the positions of chair of the IAASB and IESBA), meaning that members need to be supported or financially independent, although, for self-nominated public members financial support is offered through a travel support programme.
The boards set their priorities through publicly consulted medium-term strategy plans and shorter-term work plans, which set the development agendas.
Each of the boards is supported by a Consultative Advisory Group (CAG) that offers input and contributes to the development of new standards. The CAGs are an integral and important part of the formal process of consultation.
This globally-engaged and representative process aims to ensure that the boards develop high quality and relevant standards, which are useful for the profession, regulators and the investor community.
Steps to standard setting
The boards develop standards through a rigorous and publicly transparent due process. Prospective standards go through a number of revisions and consultations where bodies such as the Hong Kong Institute of CPAs, the profession, academics and other relevant stakeholders can all make their views known. This globally-engaged and representative process aims to ensure that the boards develop high quality and relevant standards, which are useful for the profession, regulators and the investor community.
Projects begin with the setting up of a task force responsible for developing the standards. The task force then begins information gathering which leads to the issuance of invitations to comment. Comments are sought from a wide variety of stakeholders including the related CAG of the board, national standard-setters like the Institute; accounting bodies; and accounting firms.
After comments are received, projects are revised, and debated by the boards, before the issuance of an exposure draft for further comments.
The boards then meet to consider comments received on the exposure draft, at a meeting which is open to the public. After the debate the exposure draft is revised as appropriate. If the changes made after exposure are viewed by the board to be substantive enough to require re-exposure, the revised document will be reissued for further comment.
The final step is the approval stage. Affirmative approval of the final international standards is made by the vote of at least two-thirds of the board members.
Once these standards and ethics codes have been developed, they are adopted by national regulators and professional bodies, such as the Institute for Hong Kong.
Post-implementation reviews of the new standards are undertaken by the boards with the assistance of national standard setters and feedback collected from practitioners and users of financial statements. These reviews see whether the standards are effective and implementable, with revision a possibility if this is found not to be the case.
Public interest concerns
While the boards and the profession maintain this system is independent and operating in the public interest, the Monitoring Group sees room for improvement. With this goal, the Monitoring Group released its latest consultation in late 2017, Strengthening the governance and oversight of the international audit-related standard-setting boards in the public interest, focused on strengthening the governance and oversight of the international audit-related standard-setting boards in the public interest. The consultation focused on three key areas of concern, namely:
- The adverse effect on stakeholder confidence in standards as a result of a perception of undue influence by the profession on the standard setting boards.
- The risk that standards are not being developed fully in the public interest, and
- The relevance and timeliness of standards.
In their consultation, the Monitoring Group also set out the guiding principles for analysing these key concerns with the overarching principle of the public interest.
The proposals asked for responses to 27 questions covering a range of issues in relation to the three areas of concern and the Monitoring Group’s recommendations. These included: the number and composition of standard setting boards, the remits of the standard setting boards and the Monitoring Group, the funding of the standard setting boards and the PIOB, and the staffing of the standard setting boards.
The consultation received almost 180 responses from across the globe, including from firms, national standard setters including the Institute, and professional bodies. Many of the respondents were critical of the assumptions and insinuations made in the paper regarding the current system, and questioned whether the current system is as flawed as indicated by the paper – which deems it necessary for root and branch overhaul, rather than amendment and piecemeal improvements. Comments were also made about the consultation not providing a clear explanation of the current process, including checks and balances, recognition of public interest and the roles of the Monitoring Group and PIOB.
Respondents, while in almost universal agreement that any changes must be in the public interest, still criticized the consultation for not including details of the proposal. A key response was that as the Public Interest Framework, is to be agreed by stakeholders, it should include multi-stakeholder composition of both the standards boards and their oversight bodies, and should provide the umbrella within which all significant proposals can be evaluated and agreed.
The Monitoring Group is assessing the feedback from respondents and developing a whitepaper for release later in the year.
As well as preparing the whitepaper, the Monitoring Group has undertaken a number of roundtable discussions across the world to collect further feedback on their proposals from a wide variety of stakeholders. In June, the Institute hosted two roundtables in Hong Kong with representatives from the Monitoring Group, IFAC and a number of stakeholders from Hong Kong and the wider Asia region including professional bodies, standard setters and regulators.
IFAC issued a paper on strengthening the oversight and operation of the IAASB and IESBA. This demonstrates the willingness of IFAC and the profession to strengthen the current system.
Since the Monitoring Group published the responses to its consultation, and in advance of the whitepaper, IFAC issued a paper on strengthening the oversight and operation of the IAASB and IESBA. This demonstrates the willingness of IFAC and the profession to strengthen the current system.
The IFAC paper, noted five areas where improvements should be made. These are:
- Clarifying the distinct roles of oversight and standard development;
- Enhancing multi-stakeholder representation on both the oversight body and the standards boards;
- Improving the timeliness of standards development, while retaining quality and relevance;
- Addressing the perception that the accountancy profession exerts undue influence on the development of standards; and
- Increasing the funding sources in support of these proposed improvements.
The IFAC proposals have been produced as a timely response to those of the Monitoring Group, designed to improve the setting of standards and create an integrated, multi-stakeholder body. The proposals also include a three year timeframe, which will manage the disruptive risk to the development of standards.
IFAC are now undertaking targeted consultation on the key elements of the proposals, with the goal of agreement-in-principle with key stakeholders by February 2019, and implementation from June 2019.
Whatever the outcome of these two consultations, it is clear that the standards setting regime will change and there will likely be enhanced multi-stakeholder involvement in the development of standards.