Voluntary Auditing Standards in the Public Interest William Kinney Auditing Section Doctoral Consortium Savannah, Georgia January 12, 2012 Auditing Research Components Accounting null? Auditing S-K KPS L-K K-S Professional Structure Laws, regs, governance Contracts/ incentives Professional standards Firm organization, mores External enforcement Culture, markets, traditions Financial reporting laws, regulations, and standards across borders EU law/ EC directives/ Sec. reg.?? US law/ Sec. reg. UK law/ Sec. reg.? FR law/ Sec. reg.? •UK national •FR national •US national FRF&AudStds FRF&AudStds Global Financial ReportingFRF&AudStds Framework and Auditing Standards •LSE rules •Borse rules •NYSE rules •UK private lit. •FR private lit. •US private lit. US culture/ contracts/ governance A, Inc. B, Inc. C Corp. UK culture/ contracts/ governance D, Inc. E, Inc. F Corp. Who will interpret and enforce these FRFs and AudStds? Will they differ? FR culture/ contracts/ governance G, Inc. H, Inc. I Corp. U.S. Financial Reporting Regulators post-2002 SEC FASB GAAP PCAOB Internal Control (COSO) Measurement criteria Aud. Stds. Ind. Stds. Q.C. Stds. Inspect/ Enforce Application of criteria E.U. Financial Reporting Regulators (with member differences*) EU (none) National? IASB IFRS x Turnbull, Venoit,… IAASB ISAs ISAEs Measurement criteria Indep. QCS Stds. x Inspect/ enforce Application of criteria * Red Italics means national regulations only (i.e., jurisdictional version) 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 IAASB PCAOB • Global by design • Some global influence via inspections of foreign filers • 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) • 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 Top Ten differences in design of IAASB and PCOAB (cont’d) IAASB • Developed in sunshine • Diversity (9 practice members, 9 not), 18 Tech Advisors, 8 IFAC staff, Task Forces, other experts, PCAOB • Unknown - but not sunshine • Three non-CPAs, two CPAs (no practice members) 14 standards staff, SAG? CAG, SME, SMP, NSS • Audit expertise on Board • Independent in selection, oversight, oath (only Ch. Is paid) • No expertise necessary • Staff is hired/paid by Board • Independent oversight by PIOB • Oversight by SEC personnel (but to date, no public reports) (appointed by Basel Group, World Bank, IOSCO, Int. Assoc. of Insurance Supervisors, observed by Financial Stability Forum and Int. Fed. of Independent Audit Regulators)