Risk & Economy » Regulation » If it ain’t broke

There are many reasons why Global Capital Markets and the Global Economy: A
vision from the CEOs of the International Audit Networks should be handled with
care. After all, why should the bosses of the world’s six largest audit firms
spend a year producing an essay on the role of the audit within the global
capital markets? Especially as they chose not to involve any professional
accountancy body, standard setter or regulator in their thinking.

The report received plentiful press play. The newspaper headlines were taken
up with the blue-sky element of the report, predicting a massive shake up in the
traditional corporate reporting models through advances in technology to enable
real-time, personalised reporting focusing on non-financial measures. The idea
of downgrading regular reporting in favour of constant real-time reporting has
met with mixed reactions. In the US, the Securities and Exchange Commission
warmed to the idea, saying that in a 24/7 society the idea of filing so
infrequently seemed quaint. But the UK’s Financial Reporting Council is more
sceptical. It rejected the assertion that the current reporting model is broken.
The current model may not be perfect and it may be in need of repair, but it is
not without merit.

The key suggestion of abandoning the supremacy of regular reporting in favour
of real-time reporting needs cautious progression. Financial reporting is
anchored in the concept of reporting company performance over a particular
period of time. Balance sheets report on a single point in time, providing an
important snapshot. This idea would be lost if financial and non-financial data
were being drip-fed on a daily basis. You can imagine the potential for
unwarranted share price volatility if corporate reporting amounted to daily
information and the subsequent market misinformation and misunderstanding.

A close read of what the big firms actually had to say about the role of
public company auditing, and strengthening financial reporting and the audit
function, undermines the headline that the model is broken. First, the top firms
have unequivocally come down on the side of the International Accounting
Standards Board in its plea for principle-based standards. They want the IASB
and FASB to finish harmonising differences. The report says: “Complex rules must
be resisted and withdrawn. Today’s rules can produce financial statements that
virtually no one understands. Standards need to be principle-based.”

The firms want a similar process for the convergence of national audit
standards making use of the ISA on auditing that has already been developed with
the oversight of the Public Interest Oversight Board of the IFAC. Similarly, the
firms are calling for minimal national differences in the oversight of auditors
and enforcement of relevant audit standards, including ethical rules. The
recently established Independent Forum of International Audit Regulators may be
the mechanism through which this is achieved.

The audit firms appear to be wanting to reassert their freedom to use
professional judgement to the full. But that cannot happen in an environment and
under a set of accounting rules that risk turning auditors and financial
management into ‘box tickers’. Yet, this is what has happened under US GAAP
where the US litigation environment has driven preparers and auditors to want to
shelter behind rules that attempt to spell out in great detail how information
should be accounted for. In contrast to the US experience, global firms believe
IFRS is based on allowing companies and their auditors to apply broad principles
in complex transactions rather than giving detailed instructions on how to do
so. And the tentative evidence seems to be suggesting that, far from the model
being broken, it is actually working. And while FDs and their colleagues may
still be slightly bemused by the switchover to IFRS, a majority of institutional
investors are finding that international standards have improved transparency.

It would be good to think that the contribution by the world’s senior
auditors was a genuinely objective contribution to the debate on how global
capital markets should be run in the 21st century.

Investor confidence is easily shaken, but hard to restore. This document is
an attempt to show that the audit profession is capable of joining the debate on
how to ensure an efficient global capital market and, at the same time, is an
assertion that the audit profession is confident enough to suggest that its
scandals and troubles are behind it.

Inevitably, it is impossible not to hear the sound of self-interest and
special pleading. This document is concerned with shifting the debate on global
regulation to an agenda which the firms want to pursue and with which they are
comfortable. In that sense, this is a remarkable document. Financial directors
would be well advised to spend time reading carefully this manifesto from a key
and powerful supplier group.

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