Title: Reforming the Regulation of Accounting and Auditing New Responses to New Challenges
1Reforming the Regulation of Accounting and
Auditing New Responses to New Challenges
- John Hegarty
- World Bank Group
2Regulatory Reform Our Common Challenge
- From the Asian Crisis (1997) to the Enron
Collapse (2002) - Regulatory reform not only an emerging market
concern - Widespread international pressure for change
3Enron Symbol of Systemic Weaknesses
- Problems relate to
- More than one company
- More than one audit firm
- More than one country
4Enron - What went wrong?Financial Reporting
- Aggressive application of accounting rules
- Inadequate disclosures of risk exposures and
related party transactions - Incomplete consolidation of all group entities
- Exaggerated reporting of revenues
- Innovative use of fair value measurements
- Non-accounting for stock options
5Enron - What went wrong?Auditing
- Combination of audit and advice
- Tensions between objectivity and advocacy
- Combination of internal and external audit
- High reliance of one office / partner / audit
team on one client - Incentives within the audit firm
- Checks and balances within the audit firm
- Competence seems not to be an issue
6Enron - What went wrong?Corporate Governance
- Weaknesses in management and organizational
culture - Perverse / misaligned incentives
- (stock options, related party transactions)
- Ineffective Board oversight
- Ineffective Audit Committee oversight
- Absence of shareholder challenge
- Absence of reputational agent challenge
7Enron - What went wrong?Other Parties
- Aggressive investment bankers
- Non-objective financial analysts
- Supportive legal advisors
- Relaxed debt rating agencies
- Optimistic investors and commentators
- Non-interventionist regulators
8What are the drivers of quality accounting and
auditing?
- High quality standards
- Education and training
- Robust regulatory frameworks
- Effective monitoring and enforcement
- Adequate incentives and sanctions
9Filling the gap
- Reaching international consensus on a common
framework of principles for the regulation of
accounting and auditing - IAS and ISA are not enough
- Contrast with the OECD, IOSCO, Basel and IAIS
principles - No country has a perfect system
10The Joint Forum Core Principles Cross-Sectoral
Comparison
- Scope of regulatory principles
- Attributes of supervisory systems
- The supervised entity
- Ongoing supervision
- Prudential standards
- Markets and customers
11Getting the Standards Right
- Acceptability of the standard-setting process
- Balancing rules and principles
- IAS/IFRS are not an appropriate framework for all
enterprises - There is also a need for Little GAAP, but
preferably international - ISA can be applied to all audits
- The audit requirement should not be too extensive
- Clarifying the role of national standards
12Regulatory Framework
- Recognizing the primacy of the State
- Accepting the limits of self-regulation and the
need for effective public oversight - Focus on the audit function
- Acknowledging the role of the audit firm and of
the international audit firm networks - Ensuring integration with corporate governance
and market regulation - Incorporating the international dimension
13Linkages with Corporate Governance and Market
Regulation
- Effective monitoring and enforcement
- Adequate incentives and sanctions
14The EU Approach
- Enhancing the quality of accounting, auditing and
corporate governance - Creating a single market for accountancy services
- Supporting the development and integration of a
single Eurozone capital and financial market
15The EU Approach
- Delegated regulation, not self-regulation
- Explicit State oversight of financial reporting
and auditing - Independent monitoring, not peer review
- Growing involvement of market regulators
- Pure IAS for all EU listed companies (2005)
- National Little GAAP for non-listed companies
- ISA-plus for all audits (2005)
- Principles-based approach to auditor independence
16Outstanding Global Issues
- Acceptance of IAS/IFRS and ISA
- International Little GAAP
- Development of a comprehensive framework of
principles for the regulation of accounting and
audit - International external oversight of the
accountancy profession and audit firm networks - Supporting the post-Doha WTO negotiations
17The International Dimension
- Lowering of barriers to international trade and
investment in audit services - Reducing regulatory divergence
- Creating the confidence for mutual recognition
- Governance of international firm networks
- From private contract to public interest
- Governance of IFAC
- International standards as public goods
- The death of pure self-regulation
18Development of a Comprehensive Framework of
Regulatory Principles
- Beyond accounting and auditing standards
- Regulatory oversight enforcement discipline
independence and ethics governance of audit
firms and international networks etc. - Linkages with Basel, IOSCO and IAIS principles
- Integration with the OECD Corporate Governance
principles - Reliance on corporate governance to improve
audit? - Implications of/for trade and competition policy
19International Developments
- International Accounting Standards Board (IASB)
- International Federation of Accountants (IFAC)
IAASB, Ethics Committee, Compliance Committee,
Forum of Firms / Transnational Auditors Committee - Financial Stability Forum
- Organization for Economic Cooperation and
Development (OECD) - IOSCO, Basel Committee
- International Forum on Accountancy Development
(IFAD)
20Unresolved Issues
- Are we expecting too much from audit?
- Protection from liability -v- relevance
- How will the US post-Enron debate conclude?
- Aligning auditor incentives with the public
interest - Impact of non-audit activities on audit
incentives - Governance of professional bodies
- Governance of audit firms (Volcker proposals)
- Scope of the profession, scope of practice
- Competition policy considerations
- Linkages with corporate governance and market
regulation
21The Role of the World Bank
- ROSC accounting and auditing assessments
- Support for international standards
- Support for the development of an International
Little GAAP and principles for the regulation of
accounting and audit - Partnerships with other international
organizations - Policy advice and development assistance to
client countries
22Lessons for Slovenia?