Monitoring Group consults on major overhaul of global audit standard setting process
The Monitoring Group is consulting on a major overhaul of the global audit standard setting process to enhance governance, accountability and oversight which could see a change to the role of IFAC and creation of a single audit and ethical standards setting body to replace the current split structure
9 Nov 2017
The main thrust of the proposals is to improve and strengthen the independence of the standard setting process by removing the audit related standard setting activities from the profession following criticism of a lack of impartiality and independence. This could see an overhaul of the current standard setting structure with a different role for the International Federation of Accountants (IFAC).
The scope of the overhaul means that it would have to be introduced over a transitional period and is unlikely to be up and running before 2020, although plans will be outlined in 2018 following a three-month consultation period.
The current system of principles-based standards have been adopted in numerous jurisdictions, but there are concerns that the independence of the process from the accounting profession and its responsiveness to the public interest since the current standard setting process is done predominantly by auditors, for auditors, the Monitoring Group said.
One of the proposals is to establish a single independent board, to develop and adopt auditing and assurance standards and ethical standards for auditors to replace the current set-up. Effectively this would merge the current activities of the International Auditing and Assurance Standards Board (IAASB), International Ethics Standards Board for Accountants (IESBA) and International Accounting Education Standards Board (IAESB). These three bodies are currently under the overall oversight of the IFAC Council and Board while the Monitoring Group providing arms’ length oversight.
The alternative is to retain the status quo with the two separate boards for auditing and assurance, and ethics standards, with education remaining under IFAC’s remit.
If a single board for auditors is developed, this would not mean that there would be a single set of standards covering ethics and technical matters for auditors, but that the issues relevant to both audit and ethics are considered by a single board.
However, in the consultation document IOSCO states that the ‘risk with this option is that it might create too wide a remit for a single Board to deliver successfully, especially if the Board is reduced in size’.
The proposals set out in the consultation paper, Strengthening the Governance and Oversight of the International Audit-related Standard-setting Boards in the Public Interest, consider a number of options:
- setting up a single board, responsible for the development and adoption of international auditing and assurance standards and ethical standards for all types of audit engagement; or
- separate boards responsible for setting (i) auditing and assurance and (ii) ethical standards; and
- IFAC continuing to set ethical standards for professional accountants in business, and educational standards under both options.
Unless there is a strong desire for change, IOSCO envisages that responsibility for the development and adoption of educational standards and the IFAC compliance programme should remain a responsibility of IFAC.
The consultation also considers the future structure of a single board, and if this were to be adopted, sets out plans to reduce the number of board members from 18 to 12, and to look at a remuneration basis for the roles, which are currently unpaid and require up to 1,600 hours of unpaid work a year. Only the chair is currently remunerated.
The unpaid nature of the work means that there is potential for conflict in terms of who is funding the work and time commitments. IOSCO states: ‘The current lack of remuneration for board members effectively requires support from employing or sponsoring organisations, challenging the boards’ ability to attract high quality candidates from outside of the audit profession.’
But a smaller board would likely require the hiring of more technical support staff, IOSCO adds. Future funding arrangements would also have to be considered.
‘Removing the audit related standard setting activities from the profession and entering into a multi-stakeholder, geographically representative and independent governance structure to address concerns about the independence of standard setting would address concerns vis-à-vis the independence of standard setting.’
The Monitoring Group warns ‘that there is a legitimate concern among many stakeholders that the influence of the profession is at least perceived to be too strong and that addressing this issue could further strengthen public confidence, as well as encourage still-wider global adoption of the International Standards on Auditing (ISAs).
‘It also feels that a renewed focus is needed on whether the development of new standards is carried out in a sufficiently timely way.’
The Monitoring Group has considered the implications for IFAC, which is the owner of the intellectual property contained in the current ISAs and Code of Ethics, and an arrangement will be needed to allow any revised model to continue to use and enhance the ISAs and the Code.
During the consultation period, the Monitoring Group will work with IFAC to appoint the next chair of the IAASB, and to appoint or reappoint members of the existing boards. This will be done through an interim nominations process.
The adoption of any new framework would have to increase the confidence of users of financial statements and support the integrity of financial markets through the delivery of high-quality audit that:
(a) focuses on those risk areas which are most relevant to the financial statements of an audited entity;
(b) requires an audit approach which deploys adequate resources and applies appropriate procedures in response to those risks; and
(c) appropriately communicates the auditor’s key findings and conclusions to those charged with governance and where necessary regulatory authorities.
The proposals retain the overarching principles that standard setting should observe: public interest, independence, credibility, cost effectiveness, relevance, transparency and accountability.
The Monitoring Group is a group of international financial institutions and regulatory bodies responsible for the overall governance of the international audit-related standard-setting process.
The closing date for comment is 9 February 2018 and responses should be emailed to MG2017consultation@iosco.org
Report by Sara White