AdSlot 1 (Leaderboard)

ACCOUNTING – Problems with standardising auditing standards in our

First it was accounting standards. Now it looks like auditing standards are destined to come under the scrutiny of international harmonisers, and the past few months have seen a sudden burst of information telling us what a good idea it would be to harmonise auditing, certainly across Europe, and maybe even further afield. In theory at least, global auditing standards should help both finance directors of multinational companies and investors in those organisations. At the moment, the audit reports emanating from different jurisdictions can use the same form of words, but there is no guarantee that the same amount – or even the same sort – of audit work has been performed. If auditing standards were harmonised, then the finance director and the investor would know that not only were the words the same, but that they meant the same. One benefit would be greater assurance for FDs that controls in far flung subsidiaries were working as they should. However, there could be a downside for FDs in the practical implications of harmonising auditing standards. As this magazine has demonstrated (see the March 1999 cover story), FDs are not exactly queueing up to hand out plaudits to auditors, even though the audit industry in the UK is busy trying to prove it can add value. But at least in the UK added value is a possibility, because although there are rules and regulations, the audit can be a matter for judgement. One fear expressed privately by some UK auditors is that if auditing standards are harmonised, then FDs will witness the re-emergence of auditors who want to tick one in ten transactions instead of looking at business risks. No FD with knowledge of operating in different territories would expect audits to be the same across the globe, and one of the genuine stumbling blocks that auditors point out to regulators is that international companies cannot report using international accounting and auditing standards if those standards do not fit with the legal and business frameworks of some of the countries they operate in. And the frameworks do differ. A good example of this is banking: in the US it is still largely cheque-driven; in some areas of Europe, in contrast, the cheque has virtually disappeared in favour of direct debit. So while US auditors can follow an auditing standard that tells them to look at returned cheques and ensure bank reconciliations have been performed properly, Dutch auditors know that returned cheques do not exist in their country and cannot be ticked and bashed. The way that these international differences are overcome by the International Auditing Practices Committee (IPAC) is to publish standards in two colours – black type and grey type. Black type is the standard – the part which is applicable to every country – while the grey type is the supporting material, the “either/or” that allows for the many differences in business practices across the globe. This two colour system is disliked by regulators. For instance, when the European Commission first began taking an interest in auditing standards, its first thought was that the grey should be the standard as well, although it has already been persuaded to drop the idea. However, persuading IOSCO, the umbrella body of stock exchanges, that standards can be “harmonised but different” may be more problematic. Even if it can be convinced, we are rapidly finding out with the emerging problems in the plan to endorse international accounting standards that it cannot compel its members to follow any guidelines it does set. The task of harmonising accounting standards seemed achievable a couple of years ago; yet the wheels are falling off that project as the US starts to attach conditions to its approval. The experience should stand as a warning for audit harmonisation. While all this is happening, it should be remembered that UK auditing regulation is still in the process of being revamped. One of the reasons for the overhaul is the discovery that poor financial reporting practices – with the attendant risks of fraud and corporate collapse – will not be stopped by strong accounting standard-setting alone; the auditing process needs some backbone as well. That is the pressing reason for auditing standards to be tightened up and improved. Accounting standards are inextricably linked with auditing standards, and while the European Commission may have jumped on the auditing harmonisation bandwagon, the main call for action comes from elsewhere. This interest in harmonising auditing springs from the doubts raised by the World Bank and the US Securities and Exchange Commission (SEC) over the way that companies that were claiming to follow International Accounting Standards (IASs) were actually executing them in practice. In simple terms, companies were not following the accounting practices they claimed and the auditors appeared to be letting them get away with it. This is important because of the globalisation of business and securities markets. The number of corporate transactions across borders is rising sharply. And although sensible FDs looking to make acquisitions in foreign territories ensure due diligence is performed, they also rely on the audited accounts of their targets. The SEC, for one, thinks that for many countries such audit reports should be treated with some scepticism. International regulators are just starting to grapple with the idea that auditing and accounting standards need to be properly implemented to be effective, and, so far, little or no consideration has been given to the monitoring processes that would provide confidence that the standards were applied consistently worldwide. It is tempting to argue that FDs should not be bothered about this if audit standards are not harmonised, but without investor confidence in the assurance process, finance directors must expect overseas – especially all-important American – investors to remain wary about the figures they place in the public domain. Peter Williams is a freelance journalist.

Related reading