Atsushi Kato, a former partner at PwC Japan and a public member of the International Ethics Standards Board for Accountants, recently shared his insights on why ethics and accountability are crucial in the wake of recent accounting scandals and what it means to operate in the public interest today. Kato is a former member and vice-chair of the Accounting Standards Board of Japan.
What made you interested in serving on the Ethics Board?
I am very excited to have the opportunity to serve as a member of the IESBA for a number of reasons. First, the board has a very significant and important responsibility to serve the public interest, and I am excited to have the opportunity to contribute to that. Secondly, though I’ve been involved in setting accounting and auditing standards for 35 years or so, what I have done in the past was very detailed and precise, focusing on rules for specific standards such as financial instruments, inventories, taxes, revenue recognition, etc. The IESBA Code is different in that it is principles based, and therefore, more high level. So, for me, it feels fresh and new, and that excites me.
What particular perspectives or experiences do you bring to the board as a public member?
I have a pretty unique background with a broad variety of professional experience. I worked as a professional accountant in practice with PwC for 35 years. I also have experience as a professional accountant in business; before working for PwC I was a consultant for several years. As I mentioned already, I was deeply involved in setting accounting and auditing standards for a long period of time. Currently, I am in a very independent situation. I don’t belong to any organizations at all, which is what will enable me to contribute to the IESBA as a public board member and to serve the public interest from an independent standpoint.
Your term with the IESBA began in January 2014, and you have already attended several board meetings this year. What are your impressions of the board so far?
I’ve been very impressed by the liveliness of the discussions and the active level of participation from all of the board members. The discussions have been very constructive, and there is a very positive atmosphere at the meetings. I was also very impressed that on significant matters under consideration, the chairman of the board asked the board members to vote yes or no. It was very clear and very transparent. It was different from our process in Japan, where we don’t normally ask the members to vote yes or no. This allowed the chairman to be able to generally gauge whether the feeling in the room was positive or negative, and decisions could be made without 100 percent consensus. Not only was it clear, but it allowed for a very transparent and decisive decision-making process.
A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. What does this mean to you?
As members of the IESBA, each one of us must commit to act in the public interest, which means that we should not represent the views of our nominating organization—in my case, the Japanese Institute of CPAs—and also our jurisdiction—in my case, Japan. However, acting independently is easier said than done. In fact, our culture is probably ingrained in us in ways that we don’t even realize.
Not only that but in order to achieve convergence between the IESBA Code and the Japanese ethics standard, I have to consider the circumstances in Japan, in order to make sure it is possible, given local laws and customs, to apply the principles of the Code in Japan. I think that it’s about balance between the global and the local. I have to balance working independently of any organization or jurisdiction while representing Japan and its circumstances, so that I can raise any issues that would hinder or prevent convergence between the Japanese standard and the global one.
I think that all the board members probably struggle with this as we all come from different parts of the world and each has his or her own culture, business practices and mindset.
What pressures or challenges do accounting professionals face today in terms of acting ethically?
Unfortunately, major accounting and auditing scandals continue to occur in Japan and around the world, even after the Enron scandal. In some cases, the credibility of the auditor’s report has been called into question by the users of this information. These high-profile scandals may also cause some to question the ethics of accounting professionals.
However, many are taking steps to improve audit quality and that is a positive development. For example, earlier this year in April, the European Parliament approved a proposed directive mandating firm rotation, which is intended to improve the quality of the statutory audit in Europe. I think this shows that they recognize that there are some problems in accounting/auditing, and that there is room for improvement in terms of audit quality. It shows that concrete steps have been taken by Europe to introduce changes to address this.
Of course, at this point, it’s unclear whether firm rotation will improve audit quality as intended. I think that a parent company and its subsidiaries using different auditors could cause other problems. In my opinion, if mandatory firm rotation is systematically and successfully introduced in Europe, then the same system should be introduced in the U.S. and around the world. Otherwise, there will just be more confusion.
Right now the board has a somewhat related project on its agenda—and this is a project that looks at partner rotation as a way to safeguard against threats arising from long association with a client. At this point in time, it is difficult to predict whether the move by the European Parliament will influence our activities or not. It is an area that we are watching closely.
What do you see as the key factors influencing the development of global ethics standards in the future?
I think the most important thing in developing a global ethics code is recognizing that different ethical norms do exist—between organizations, industries and countries. Even though now everything is globalized, including economies and business practices, and so on, there are still differences among different organizations, industries and countries. So the way that a professional accountant operates in different environments should also be different. The important thing is—as I said before—to maintain a balance between local and global. We as board members should have a mutual understanding of different business practices and cultures around the world. By having that mutual understanding, we can develop a very strong global ethics standard, which can be implemented in all the jurisdictions of the world.
How widely is IESBA's ethics code being used by accountants in the United States?
There is no concrete number on how many accountants use the IESBA Code of Ethics for Professional Accountants, but because it is converged with the AICPA Code of Ethics, it is used widely by accountants across the country. However, for audits of listed entities, professional accountants are required to abide by the independence standards set by the U.S. SEC and PCAOB. These independence standards do not reference the IESBA Code, and so there could be some differences in those instances.
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