Universal Set of Auditing Standards a Possibility

As the U.S. capital markets continue their steady march toward international accounting standards, attention is turning to a related question: Shouldn’t audit firms around the world be working from a single set of standards as well?

Convergence of U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards has long been the stated goal of U.S. and overseas regulators. When it comes to auditing rules, however, no overt objective to move the United States toward the international platform exists—but it’s happening to some extent anyway.

Roper

Investor advocates don’t want any change at all, since it implies moving away from the rigorous auditing that has transpired since passage of the Sarbanes-Oxley Act. “We see absolutely no need for convergence of auditing standards,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “This is a solution in search of a problem.”

International standards on auditing are written by the International Auditing and Assurance Standards Board, which operates under the International Federation of Accountants. IFAC is a global professional accounting association much like the American Institute of Certified Public Accountants in the United States. According to Jim Sylph, executive director for professional standards at the IAASB, the ISAs are the basis for national auditing standards in about 100 countries throughout the world. “Nineteen of the major economics of the world now use ISAs,” he says.

Once upon a time, the AICPA governed both accounting and auditing standards alike. Now, however, the Securities and Exchange Commission runs the show: It oversees the Financial Accounting Standards Board, which writes accounting standards, and the Public Company Accounting Oversight Board, which writes auditing standards.

Landes

The AICPA, through its Auditing Standards Board, continues to write auditing standards for private and not-for-profit enterprises, and has operated under a convergence objective for about the past five years, says Chuck Landes, vice president at the AICPA in charge of overseeing the technical activities of the ASB. The board is in the midst of rewriting its standards to follow the format established by the IAASB.

“We believe it is in the public’s best interest that you have a high-quality set of auditing standards that are universal, used by auditors regardless of whether they’re in the United States or Europe or Japan,” Landes says. He would like the PCAOB to adopt a convergence objective as well.

Sylph

The IAASB feels the same way. “We’re anxious to work with the PCAOB to find a way to have adoption of a single set of standards globally,” Sylph says. “We have 19 of the 20 major economies of the world now using or adopting ISAs. That has to indicate that they are well-accepted by those countries, but the PCAOB is still hesitant to adopt them.”

Audit firms apparently would welcome a move to a single platform as well. Danita Ostling, a partner at Ernst & Young and leader of the firm’s movement to IFRS, calls convergence a “laudable, long-term goal. It’s a good way to go. The question is how to get there.”

Ostling says global audit firms establish their audit methods based on international auditing rules; that provides something of a baseline audit for all countries even where national auditing standards may be less rigorous. “Most users of financial statements expect the same level of work to have gone into the auditing, whether it was conducted in the United States, Europe, or Asia,” she explains.

Selling

Tom Selling, an independent financial reporting consultant and educator, says investors and preparers of financial statements certainly would benefit from an efficiency standpoint if all audit rules were the same. Still, that doesn’t necessarily mean investors would be well served by such a move, he adds.

“Global companies would only have one set of standards to work with, and investors would benefit because it would save money, which would be available to reinvest and pay dividends,” he says. But it’s not clear that a single set of audit standards would result in better information, nor does anyone know how the United States would enforce auditing standards under some kind of international regime.

“You’re always going to dilute enforcement domestically if people can point to cases internationally. You lose control over what standards you want and eventually you lose control over the ability to enforce them the way you want,” he says.

The PCAOB Weighs In

Tom Ray, chief auditor at the PCAOB, acknowledged the move to international accounting standards has raised discussion about whether auditing standards should follow suit. The PCAOB has not adopted a convergence objective, but has said it will take into account international standards when developing its own standards for use by U.S.-listed companies. “That’s contemplated in the Board’s strategic planning,” he says. “We want to work with other auditing standards to avoid unnecessary differences.”

Ray

In fact, he adds, the seven risk-assessment standards recently proposed by the PCAOB were heavily inspired by international standards. “If you look at that proposal, you’ll find a lot of similarities, particularly as it relates to the fundamental principles.”

CONVERGENCE QUESTIONS

The following excerpt is from a speech by Charles Niemeier, a board member with the New York State Society of CPAs, discusses the convergence of auditing and related professional practice standards to standards set by the International Federation of Accountants.

Convergence of auditing and related professional practice standards to standards set by the International Federation of Accountants is unlikely to Benefit, and may harm, investors in U.S. securities and other U.S. economic interests

At the same time that the PCAOB has been considering leaving inspections to local regulators, there has also been talk about whether to converge U.S. auditing requirements to standards set by a professional body of accountants called the International Federation of Accountants. IFAC is a federation of national professional bodies, like the American Institute of CPAs in the U.S., which provide member accountants and firms a range of services including accounting and auditing professional education, peer review and other professional oversight, accounting advice, and lobbying, among other things.

IFAC itself has no legal authority. But it does convene accountants and others to write best practice standards that may be used by firms and adopted, to varying degrees of modification, by national bodies that do have oversight authority, or even governments. Among its committees, IFAC has assembled the International Auditing and Assurance Standards Board to write auditing standards. All of the international audit firms serve on the IAASB, and each professes to have incorporated the IAASB’s standards in their respective global audit methodologies.

The accounting profession’s efforts to develop standards through the IAASB have been constructive. In particular, the initiative has provided firms an opportunity to share lessons learned. In addition, as IOSCO has recognized, it has provided developing countries a base of standards they would not likely have the resources to produce on their own.30 But they are by no means a substitute for enforceable standards for developed securities markets like the U.S. This is why I am troubled by the recent push to consider replacing U.S. auditing standards with IAASB standards in the U.S., or converging U.S. standards to the IAASB standards.

Unlike the IFRS debate, there are no beneficial policy objectives to be achieved by permitting auditors to establish their own requirements.31 In financial reporting, it may be worthwhile to pursue uniformity as a means of achieving comparability of financial statements across companies, but that doesn’t hold true in auditing. As I’ve explained, auditing is a key element of enforcement of applicable financial reporting requirements, and enforcement is our only tool of consequence to create economic benefits through improvements in financial reporting. There’s no analogous benefit in being able to compare audits, though. Rather, the only goal is to have the highest quality audit that is cost-effective.

Moreover, the IAASB’s standards are not appropriate for use in a regulatory context. By design, they are of limited enforceability. The standards themselves are drafted as rather vague principles; specifics are relegated to a section called Application and Other Explanatory Material. But the standards expressly provide that those materials are “not intended to impose a requirement.”32 And although some jurisdictions have pointed to ISAs as applicable to local audits, ISAs have no enforcement record in any country.

As in the case of the PCAOB’s proposal to confer “full reliance” on local oversight bodies’ inspections, in my view, relying primarily on the profession to set its own standards would weaken the effectiveness of audits at enforcing high quality financial reporting in our markets.

Source

Charles Niemeier on Convergence of Auditing Standards (Sept. 10, 2008).

Where differences do exist, they usually pertain to the audit of internal control over financial reporting required by the Sarbanes-Oxley Act—and which isn’t required at all under international rules. That represents a big difference in U.S. and international audit rules and probably won’t change anytime soon.

“The PCAOB needs to write auditing standards that reflect the circumstances of U.S. public companies and the environment where their securities are traded, so there are different objectives that have to be weighed and balanced,” Ray says.

Niemeier

Not everyone at the PCAOB is comfortable with the notion of convergence. Board member Charles Niemeier, in fact, has openly blasted the SEC for abandoning GAAP and moving toward IFRS, and he’s even less enthusiastic about moving toward international auditing rules. In a speech in September he said the audit profession’s work to develop best practices under the IAASB is “constructive,” but he sees no beneficial policy objective to move to common standards.

“In financial reporting, it may be worthwhile to pursue uniformity as a means of achieving comparability of financial statements, but that doesn’t hold true in auditing,” he said. “Auditing is a key element of enforcement of applicable financial reporting requirements, and enforcement is our only tool of consequence to create economic benefits through improvements in financial reporting. There’s no analogous benefit in being able to compare audits, though.”

Doug Carmichael, accounting professor at Baruch College and a former chief auditor at the PCAOB, says the U.S. markets don’t stand to gain much by moving to international audit rules. “I think the needs of U.S. investors are different enough that we need to have auditing standards that are more tailored to the U.S. environment,” he says.

Given that international auditing standards are set largely by the auditing profession, that clearly presents a hurdle to U.S. migration toward the international auditing rulebook, Carmichael says. “It’s still really controlled by the audit firms,” he says. “I don’t think that is acceptable as far as investor protection is concerned.”

Hansen

Gaylen Hansen, a partner at the regional audit firm of Ehrhardt Keefe Steiner & Hottman and a member of the PCAOB’s Standing Advisory Group, says the PCAOB’s enforcement and inspection authority is a key element to the U.S. regime that doesn’t exist under international rules. “When it comes to auditing standards, we have no way of knowing if [audits are comparable] unless you have inspection at the regulatory level,” he says. “And at IFAC, they don’t have enforcement capability. It’s a different animal all together.”