Voluntary Auditing Standards in the Public Interest

January 12, 2012

William Kinney Auditing Section

Doctoral Consortium Savannah, Georgia

Auditing Research Components

Laws, regs, governanceContracts/ incentivesProfessional standardsFirm organization, moresExternal enforcementCulture, markets, traditions

Accounting Auditing

Professional Structure

K-S

KPS

L-K

S-K

null?

Financial reporting laws, regulations, and standards across borders

A, Inc. B, Inc. C Corp.

• US national FRF&AudStds• NYSE rules• US private lit.

• UK national FRF&AudStds• LSE rules• UK private lit.

US law/ Sec. reg.

UK law/ Sec. reg.?

US culture/ contracts/ governance

FR law/ Sec. reg.?

G, Inc. H, Inc. I Corp.

• FR national FRF&AudStds• Borse rules• FR private lit.

FR culture/ contracts/ governance

D, Inc. E, Inc. F Corp.

UK culture/ contracts/ governance

EU law/ EC directives/ Sec. reg.??

Who will interpret and enforce theseFRFs and AudStds? Will they differ?

Global Financial Reporting Framework and Auditing Standards

U.S. Financial Reporting Regulators post-2002

SEC

FASB

GAAP

Measurement criteria Application of criteria

PCAOB

Inspect/Enforce

Aud.Stds.

Ind.Stds.

Q.C.Stds.

Internal Control(COSO)

E.U. Financial Reporting Regulators (with member differences*)

EU (none)

National?

IASB

IFRS

IAASB

ISAs Indep.Stds. QCS

Measurement criteria Application of criteria

Inspect/ enforce

x

* Red Italics means national regulations only (i.e., jurisdictional version)

xTurnbull,Venoit,…

ISAEs

How best to set Global Standards:

• National government mandate (with convergence across nations)?

• Political group representation in global org.?• Independent experts, due process, in

sunshine, independent oversight, and voluntary adoption by nations?

• Any of the above “plus” national government approved additions?

• Something else?

International Federation of Accountants (IFAC)

• Mission: to serve the public interest, IFAC will continue to strengthen the worldwide accountancy profession and contribute to the development of strong international economies by establishing and promoting adherence to high-quality professional standards, furthering the international convergence of such standards and speaking out on public interest issues where the profession’s expertise is most relevant.

• Standards: IAASB (auditing), IESBA (ethics), IAESB (education), IPSASB (public sector accounting)

Enforcement: local, private groups, international cooperation?

• Web of national securities regulators (IOSCO)?• National government-approved Inspectors (PCAOB)?• Stock exchange rules (NYSE, Borse, LSE) ?• Voluntary web of public interest orgs (IASB, IAASB,

PIOB, IFIAR, World Bank, IMF) ?• Government agency cooperation (IOSCO, SEC, AMF,

FSA, INTOSAI) ?• G-20 self-monitoring, international treaties, agreement

to cede decision authority?• Global model private litigation statue?

Current issues/topics?

• Global politics of Auditing regulator/standards setter competition (EC, PCAOB, IAASB)?

• Auditing accounting estimates (e.g., Fair values):– ISA 540, CIFiR recommendation, PCOAB response

• Group audits:– ISA 600– Global cooperative inspections by PCAOB, FRC, etc.– Group-level ICFR (huge threat, huge potential, almost

zero theory, field studies, archival studies)

• PCAOB inspections practices and expectations:– Large firms/ small firms, no recognition of firm QC– global cooperation/access and “Lehman Brothers?”

Conclusion

• There are problems with and questions about standardized global financial reporting

• No single “silver bullet” solution, but • Apparent demand for

– market-driven mechanisms (broadly defined)– expertise of independent public interest groups– appropriate oversight at all levels with appropriate

national government enforcement

• What mechanism design do you like best . . . and why?

Top Ten differences in design and operation of IAASB and PCOAB

• Global by design

• Market-driven services (e.g., no ICFR audits)

• Public interest objective (investors, directors, workers, community)

• Comprehensive (all assurance services, all entities, all auditors)

• Voluntary adoption (quality of standards is raison d'être)

• Some global influence via inspections of foreign filers

• Statute-driven (domestic crisis politics as force)

• Investor protection objective

• Limited to financial and ICFR audits* of U.S. public companies

• Use mandated by U.S. law, no cost effectiveness test

IAASB PCAOB

Top Ten differences in design of IAASB and PCOAB (cont’d)

• Developed in sunshine • Diversity (9 practice members, 9

not), 18 Tech Advisors, 8 IFAC staff, Task Forces, other experts, CAG, SME, SMP, NSS

• Audit expertise on Board• Independent in selection,

oversight, oath (only Ch. Is paid)

• Independent oversight by PIOB (appointed by Basel Group, World Bank, IOSCO, Int. Assoc. of Insurance Supervisors, observed by Financial Stability Forum and Int. Fed. of Independent Audit Regulators)

• Unknown - but not sunshine • Three non-CPAs, two CPAs

(no practice members) 14 standards staff, SAG?

• No expertise necessary• Staff is hired/paid by Board

• Oversight by SEC personnel

(but to date, no public reports)

IAASB PCAOB