Views on the integrity of global capital markets
21 February 2018

Concerns About International Audit Standard-Setting and Audit Quality

Posted In: Financial Reporting

Following a number of corporate financial reporting failures in the early to mid-2000s, the International Organization of Securities Commissions, the Basel Committee on Banking Supervision, the European Commission, the Financial Stability Board, the International Association of Insurance Supervisors, and the World Bank Group joined together to form the Monitoring Group. The purpose of the Monitoring Group is to advance the public interest in international audit standard setting and quality.

On 9 November 2017, the Monitoring Group released a consultation paper, Strengthening the Governance and Oversight of the International Audit-Related Standard-Setting Boards in the Public Interest, that lists concerns about the current standard-setting model. The consultation paper notes that there may be an “adverse effect on stakeholder confidence in the standards as a result of a perception” of undue influence on the standard-setting process by the accounting and auditing professions.

At the 2017 International Institute on Audit Regulation, Public Company Accounting Oversight board member Steven B. Harris noted:

I share these concerns about the independence of the international audit and ethics standard setters. Today, a majority of the governing boards of both of the audit and ethics standard setters is not independent of the profession, nor are their funding sources. As a result, the standards remain open to what I consider to be legitimate concerns that they may be susceptible to a standard setter’s form of regulatory capture.

CFA Institute believes this matter needs to be addressed, as financial accounting and reporting and the quality of auditing are public goods, necessary to maintain investor confidence in individual enterprises and the global capital markets as a whole.

We note, however, that the Monitoring Group consultation paper presented a vision of how audit standard setting and related activities should be restructured without presenting a strategy of how to attain that vision. As a result, we have reservations about making large-scale changes before the Monitoring Group addresses exactly how the funding model and governance structure would work.

All of the proposed changes are predicated on a new funding model and the reforms cannot be undertaken without that model being firmly in place. The proposed changes would create a standard-setting model that is potentially significantly more costly than current arrangements. The changes would require a significant increase in funding, with (1) all board members being remunerated; and (2) a significant increase in the number of permanent technical staff. They would also require that a new legal entity be established in a different location. As well, there appears to be no authoritative basis on which to collect a levy from stakeholders (e.g., audit firms, investors, regulators, etc.) to fund the model.

Further, should the proposed model be implemented, CFA Institute urges the Monitoring Group to consider ways to ensure that the new model is not viewed as a pay-to-play model. If funding is seen as coming from the audit profession, the proposed model will not be perceived as independent. It is also unclear as to how many firms will be charged a levy, and how such a levy would be administered in the different countries that would benefit from high-quality standards.

CFA Institute agrees with the Management Group when it states: “Standard setting must also be sustainable in the long term (e.g., with long-term secure funding, a clear long-term strategy, and the technical competence necessary to support a demanding and growing workload).” Thus, we urge the Monitoring Group to be more specific on how the vision might be implemented, beginning with a funding mechanism.

For further details please read our comment letter.

 

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Photo Credit: ©Getty Images/Avosb

About the Author(s)
Mohini Singh, ACA

Mohini Singh is director of financial reporting policy at CFA Institute. She represents membership interests regarding financial reporting and disclosure proposals issued by the FASB, the IASB, and others. Singh holds the Associate Chartered Accountant (ACA) designation.

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