The International Federation of Accountants is expressing alarm about recent proposals from a group of global financial regulators to separate its standard-setting boards for auditing and ethics.
The Monitoring Group, which includes securities and auditing regulators such as the Basel Committee on Banking Supervision, the European Commission, the Financial Stability Board, the International Association of Insurance Supervisors, the International Forum of Independent Audit Regulators, the International Organization of Securities Commissions, and the World Bank, recently proposed changes to the entire system of international standard-setting for auditors to make them more independent of the auditing profession. IFAC has long supported a number of standard-setting boards, including the International Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants, and it’s worried the proposed changes could force far-reaching changes in those boards.
IFAC said it agrees with some aspects of the Monitoring Group’s recent consultation paper, including the introduction of a multi-stakeholder model, broad geographical representation, sufficient checks and balances, and a review of the nominations process. But it also outlined concerns about some of the other proposals that it fears would fundamentally dismantle the current standard-setting model provided by the IAASB and IESBA.
“IFAC has played a big role in supporting those independent standard-setting boards,” said IFAC CFO Russell Guthrie. “We don’t get involved in the writing of the standards or what the outcomes are. We simply provide institutional support for the boards, but always there’s been a tension or conversation around how deeply the profession was involved in standard setting: did we have too much influence and so forth. This has now erupted again on the international scene, but not really in a collaborative way. It’s much more of a unilateral way from the Monitoring Group to basically propose that those two standard-setting boards for audit and ethics should essentially be made physically independent of IFAC, should be merged into a single board to set both audit and ethics standards for auditors and essentially, although it’s not expressly stated, but it should be solely for listed entities. The big drivers of this are the securities regulators and the audit regulators and so implicit in these proposals is to move to a set of standards that are more written for listed entities, and more prescriptive so that they can be more easily enforced by the audit regulators.”
IFAC expressed concern that the consultation paper offers no evidence for such a drastic change and that fundamental key issues are omitted from the consultation or deferred. Those issues include funding, oversight, governance, the transition process, and an impact and risk assessment. In addition, some aspects of the consultation paper don’t accurately reflect the current standard-setting arrangements, according to IFAC, and offer proposals that contradict the Monitoring Group’s stated aims. Guthrie insisted that IFAC doesn’t simply want to maintain control of the IAASB and IESBA.
“It’s not so much about maintaining control because we assert that we don’t have control right now,” said Guthrie. “It is a fact that they are supported by IFAC financially and with corporate functions like communications and so forth, but the whole design of the current model is to ensure that the boards operate independently, not only of the profession, and without undue influence from any particular stakeholder group. We believe that the proposals are setting up quite a radical disruptive set of changes that frankly are unnecessary to address what concerns there are. What we’re focused on is really making sure that the public interest is best served by whatever changes are made.”
As an alternative to the proposals in the Monitoring Group’s consultation paper, IFAC is proposing some changes that it argues would improve the independence of international standard-setting while preserving separate audit and ethics boards and enabling ethics standards to remain applicable to all professional accountants, including auditors. It wants to reinforce a multi-stakeholder approach across all aspects of standard setting, including the Public Interest Oversight Board and Nominating Committee; clarify the role of the PIOB and enhance transparent, independent public interest oversight; and advocate for a funding model with contributions from all stakeholders.
“We do agree that there can be some reforms and some enhancements to the current model,” said Guthrie. “We think the composition of the boards could be more explicitly multi-stakeholder than they are as currently constructed, with more designated positions for regulators, for preparers, for investors, for the profession. We also believe there are reforms that can be made to the nominating process that is used to select the individuals that go onto the boards to make that more explicitly multi-stakeholder, but there are a number of elements of their proposals that we don’t agree with. For one, the evidence base on which they are making a proposal is relatively thin. They’ve basically spoken to a handful of individuals and not really consulted widely. Of course, it’s out for consultation now. We’re in the middle of that process, but we think what they’re suggesting is really not based on much evidence. They’ve not done a proper impact assessment in terms of where the cost benefit of what they’re actually proposing actually lands and also laying out some other specific elements that they’re basing their proposal on.”
He pointed to the success that IFAC has had in developing and propagating international standards for auditing and ethics, and their acceptance in many countries, even though they haven’t been officially adopted in the U.S.
“One of the things we are particularly concerned about is there’s been an enormous amount of progress over the past 15 years in terms of getting the audit and ethics standards adopted globally,” said Guthrie. “The International Standards of Audit and the Code of Ethics have been adopted in more than 120 jurisdictions around the world, and in many cases have been enshrined in legislation. They’re also very influential in the United States, even though the PCAOB has its own standard-setting mandate and the AICPA sets standards for private companies, the work of the IAASB is hugely influential in both of those settings in the U.S. Even though they haven’t been directly adopted in the U.S., like they have in many other countries, they’re an essential reference point.”
IFAC is concerned the Monitoring Group’s standard-setters would be heavily influenced by securities regulators and geared more toward public companies rather than private company audits.
“Obviously, the capital markets are important, and we wouldn’t argue with that, but in most countries more than 90 percent of the audits that are conducted are not for publicly listed companies,” said Guthrie. “We’re concerned that all the progress that has been made in terms of having a universal set of auditing standards that are widely accepted could come unraveled and countries could revert to their own national standard-setting systems, which is where we were 30 years ago when the profession first set out to get international standards adopted across borders.”
The Monitoring Group is still looking for feedback from stakeholders and asking for comments to be submitted by Feb. 9, 2018 to MG2017consultation@iosco.org.
“It’s important that the world accepts the model and believes in the standards being set,” said Guthrie. “The key thing now, notwithstanding our concerns, is just to encourage people to become aware of what’s being proposed and to think about the impacts and to get as many different stakeholder groups to speak into this consultation. The whole international model is premised on consensus and stakeholder buy-in, so while the profession has a point of view and the regulators have a point of view, we think it’s critical that CFOs and audit committees and other stakeholders and investors and analysts also pay attention to what’s happening in this space, and also speak into the consultation. Their views will be quite influential, so our efforts are around getting different stakeholder groups to actually speak to this.”
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