Voluntary Auditing Standards in the Public Interest January 12, 2012 William Kinney Auditing Section Doctoral Consortium Savannah, Georgia

Auditing Research Components Laws, regs, governance Contracts/ incentives Professional standards Firm organization, mores External enforcement Culture, markets, traditions AccountingAuditing Professional Structure K-S KPS L-K S-K null?

Financial reporting laws, regulations, and standards across borders A, Inc. B, Inc. C Corp. US national FRF&AudStds NYSE rules US private lit. UK national FRF&AudStds LSE rules UK private lit. US law/ Sec. reg. UK law/ Sec. reg.? US culture/ contracts/ governance FR law/ Sec. reg.? G, Inc. H, Inc. I Corp. FR national FRF&AudStds Borse rules FR private lit. FR culture/ contracts/ governance D, Inc. E, Inc. F Corp. UK culture/ contracts/ governance EU law/ EC directives/ Sec. reg.?? Who will interpret and enforce these FRFs and AudStds? Will they differ? Global Financial Reporting Framework and Auditing Standards

U.S. Financial Reporting Regulators post-2002 SEC FASB GAAP Measurement criteria Application of criteria PCAOB Inspect/ Enforce Aud. Stds. Ind. Stds. Q.C. Stds. Internal Control (COSO)

E.U. Financial Reporting Regulators (with member differences*) EU (none) National? IASB IFRS IAASB ISAs Indep. Stds. QCS Measurement criteria Application of criteria Inspect/ enforce x * Red Italics means national regulations only (i.e., jurisdictional version) x Turnbull, Venoit,… ISAEs

How best to set Global Standards: National government mandate (with convergence across nations)? Political group representation in global org.? Independent experts, due process, in sunshine, independent oversight, and voluntary adoption by nations? Any of the above “plus” national government approved additions? Something else?

International Federation of Accountants (IFAC) Mission: to serve the public interest, IFAC will continue to strengthen the worldwide accountancy profession and contribute to the development of strong international economies by establishing and promoting adherence to high-quality professional standards, furthering the international convergence of such standards and speaking out on public interest issues where the profession’s expertise is most relevant. Standards: IAASB (auditing), IESBA (ethics), IAESB (education), IPSASB (public sector accounting)

Enforcement: local, private groups, international cooperation? Web of national securities regulators (IOSCO)? National government-approved Inspectors (PCAOB)? Stock exchange rules (NYSE, Borse, LSE) ? Voluntary web of public interest orgs (IASB, IAASB, PIOB, IFIAR, World Bank, IMF) ? Government agency cooperation (IOSCO, SEC, AMF, FSA, INTOSAI) ? G-20 self-monitoring, international treaties, agreement to cede decision authority? Global model private litigation statue?

Current issues/topics? Global politics of Auditing regulator/standards setter competition (EC, PCAOB, IAASB)? Auditing accounting estimates (e.g., Fair values): –ISA 540, CIFiR recommendation, PCOAB response Group audits: –ISA 600 –Global cooperative inspections by PCAOB, FRC, etc. –Group-level ICFR (huge threat, huge potential, almost zero theory, field studies, archival studies) PCAOB inspections practices and expectations: –Large firms/ small firms, no recognition of firm QC –global cooperation/access and “Lehman Brothers?”

Conclusion There are problems with and questions about standardized global financial reporting No single “silver bullet” solution, but Apparent demand for –market-driven mechanisms (broadly defined) –expertise of independent public interest groups –appropriate oversight at all levels with appropriate national government enforcement What mechanism design do you like best... and why?

Top Ten differences in design and operation of IAASB and PCOAB Global by design Market-driven services (e.g., no ICFR audits) Public interest objective (investors, directors, workers, community) Comprehensive (all assurance services, all entities, all auditors) Voluntary adoption (quality of standards is raison d'être) Some global influence via inspections of foreign filers Statute-driven (domestic crisis politics as force) Investor protection objective Limited to financial and ICFR audits * of U.S. public companies Use mandated by U.S. law, no cost effectiveness test IAASB PCAOB

Top Ten differences in design of IAASB and PCOAB (cont’d) Developed in sunshine Diversity (9 practice members, 9 not), 18 Tech Advisors, 8 IFAC staff, Task Forces, other experts, CAG, SME, SMP, NSS Audit expertise on Board Independent in selection, oversight, oath (only Ch. Is paid) Independent oversight by PIOB (appointed by Basel Group, World Bank, IOSCO, Int. Assoc. of Insurance Supervisors, observed by Financial Stability Forum and Int. Fed. of Independent Audit Regulators) Unknown - but not sunshine Three non-CPAs, two CPAs (no practice members) 14 standards staff, SAG? No expertise necessary Staff is hired/paid by Board Oversight by SEC personnel (but to date, no public reports) IAASB PCAOB