1. Public Oversight of the Audit Profession David DEVLIN President
ROAD TO EUROPE – PROGRAM OF ACCOUNTING REPORTING AND INSTITUTIONAL STRENGTHENING
Public Oversight
of the Audit Profession
David DEVLIN
President 1

2. Why Is Public Oversight on the Agenda ?
Two main reasons for having public oversight on the agenda:
Public Interest
Can a self regulated private body alone be in charge of public interest responsibilities such as approving standards on financial reporting or audit ?
Credibility and Trust
How can the audit profession demonstrate that the appropriate structures are in place to prevent accidents ?
Can a self regulated body be a credible and effective disciplinary body without any public involvement ? 2

3. Public Oversight - What is it ?
An organisation or system to supervise or oversee the application of government regulations and professional standards by the statutory audit profession.
It is separate from government or other (say, securities) regulators and its role is to oversee, not control
“ …. regulators may be a proxy for representation of the public interest, but … public oversight should take into account also the potential role of other stakeholders. No single supervisor or stakeholder has a sufficiently broad scope to adequately reflect these diverse interests … “ (EC Communication, 21 May 2003) 8

4. Profession and Public Interest
Potential for conflicts between free competition and consumer protection
Some argue that technical standards and ethical rules might have anti-competitive effects
Maintaining confidence in the services provided requires measures to ensure quality of services and understanding by users
The audit function has specific characteristics; it is an essential element of credibility in the financial reporting chain, which implies a high degree of public interest 4

5. Profession and Public Interest
A proper balance must be found between:
self-regulation by professionals who are best placed to properly understand the technicalities of accounting and auditing, and
Government regulation, which intends to arbitrate imbalances in the market place and achieve wider social and economic objectives
Two aspects must be distinguished and kept separate:
Standard setting
Enforcement of standards 5

6. Profession and Public Interest
The discussion on public oversight is not new (1985 OECD Report) but it was stimulated by corporate scandals in 2000 and the US Sarbanes-Oxley Act
In 2000, the European Union approved a Recommendation on quality assurance for statutory audit - minimum requirements
In 2002, IOSCO published its principles for auditors oversight
In 2005, the European Union approved the 8th Directive on statutory audit, including a specific chapter on public oversight
This presentation compares the latter two statements 6

7. IOSCO PRINCIPLES
Effective oversight of the accounting profession and of independent audits is critical to the reliability and integrity of the financial reporting process.
In 2002, the Technical Committee of the International Organization of Securities Regulators (“IOSCO”) developed six general principles for oversight of audit firms and auditors that audit financial statements of companies whose securities are publicly traded in the capital markets. 7

8. IOSCO PRINCIPLES
A mechanism to require that auditors have proper qualifications and competency before being licensed to perform audits, and maintain professional competence. A mechanism also should exist to withdraw authorization to perform audits of publicly traded companies if proper qualifications and competency are not maintained.
A mechanism to require that auditors are independent of the enterprises that they audit, both in fact and in appearance. Effective standards, regular assessments, and regulatory oversight generally increase the likelihood that independence is maintained. 9

9. IOSCO PRINCIPLES
A mechanism should exist to provide that a body, acting in the public interest, provides oversight over the quality and implementation of auditing, independence, and ethical standards used in the jurisdiction, as well as audit quality control environments.
A mechanism should exist to require auditors to be subject to the discipline of an auditor oversight body that is independent of the audit profession, or, if a professional body acts as the oversight body, is overseen by an independent body. 10

10. IOSCO PRINCIPLES (4 continued) Such an auditor oversight body must
Operate in the public interest, and
Have an appropriate membership,
Have an adequate charter of responsibilities and powers,
Have adequate funding that is not under the control of the auditing profession, to carry out those responsibilities. 11

11. IOSCO PRINCIPLES
An auditor oversight body should have the authority to stipulate remedial measures for problems detected, and to initiate and/or carry out disciplinary proceedings to impose sanctions on auditors and audit firms, as appropriate.
In relation to companies operating or listing on a cross-border basis, IOSCO members are encouraged to provide each other, whether directly or through coordinating with the auditor oversight body in their jurisdiction, with the fullest assistance permissible in efforts to examine or investigate matters. 12

12. IOSCO PRINCIPLES
IOSCO conducted a survey in 2004 concluding as follows:
Most jurisdictions have a formal body that exists to provide direct oversight of auditors but the characteristics of these bodies differ widely in regard to powers, responsibilities, source of funding, level of activity, degree of independence from the profession and amount of governmental involvement.
In most countries, investigations of audit performance and professional ethics and disciplinary actions are carried out by the oversight body without being subject to consultation with or approval by organizations or individuals within the audit profession. 13

13. European Directive on Statutory Audit
The European Union approved recently a new Directive on Statutory Audit. EU Member States have to transpose the new rules in their own legislation before 2008 (24 months after publication in the Official Journal).
This Directive organises a comprehensive system of regulation of statutory audit, including public oversight. 14

14. European Directive on Statutory Audit
The Directive on Statutory Audit includes following provisions on public oversight:
Principles (Art. 31)
Cooperation between public oversight systems at Community level (Art. 32)
Mutual recognition of regulatory arrangements between Member States (Art. 33)
Cooperation with competent authorities from third countries (Art. 47) 15

15. European Directive on Statutory Audit
An effective system of public oversight for statutory auditors and audit firms must be in place in all EU member states
All auditors must be covered, not only auditors that audit financial statements of companies whose securities are publicly traded
The system might introduce variations between public interest entities audits and others 16

16. European Directive on Statutory Audit
The Directive uses the expression “The system of public oversight”
It does not require a single body or a board: the system can have different forms or different levels
Public oversight can have a different level of public involvement for different types of responsibilities (e.g registration / standard setting / quality assurance / investigation and discipline) 17

17. European Directive on Statutory Audit
The system of public oversight must be governed by non-practitioners
Non-practitioners must be knowledgeable in areas relevant to audit
A minority of practitioners is accepted
Persons involved must be selected under an independent and transparent nomination procedure
Funding must be adequate and free from undue influence of auditors 18

18. European Directive on Statutory Audit
The system of public oversight must have the ultimate responsibility for the oversight of :
Approval and registration of statutory auditors and audit firms, and
Adoption of standards on ethics, internal quality control of audit firms and auditing, and
Continuous education, quality assurance and
Investigative and disciplinary systems. 19

19. European Directive on Statutory Audit
The system of public oversight must have the right, where necessary, to conduct investigations on statutory auditors and audit firms and must have the right to take appropriate action.
The system of public oversight must be transparent. This shall include the publication of annual work programmes and activity reports. 20

20. European Directive on Statutory Audit
Mutual recognition of regulatory arrangements
On the condition of reciprocity, the competent authorities of a Member State may approve and register a third country auditor as statutory auditor
Registered third country auditors and audit entities are subject to the local system of oversight, quality assurance system and investigations and sanctions.
On the basis of reciprocity EU Member States may disapply or modify this requirement if third country auditors are subject to systems of public oversight, quality assurance and investigations and sanctions in the third country that meet equivalent requirements 21

21. European Directive on Statutory Audit
Cooperation between public oversight systems
In the EU, Member States ensure that regulatory arrangements enable effective cooperation at Community level between oversight systems
Cooperation is also possible with competent authorities of third countries.
The objective is to make investigations possible and to allow, when equivalence of systems is recognised and under strict conditions, the transfer to them of audit working papers or other documents held by statutory auditors or audit firms 22

22. Conclusions
Public oversight of the audit entities improves the credibility of financial reporting
In the EU public oversight covers all auditors; in the US only larger audits are covered
Different systems apply to different oversight activities but (a) oversight is separate from government, and (b) the ultimate responsibility remains with a majority of non-practitioners
Coordination of oversight systems is necessary in particular to evaluate equivalence of these systems and to investigate cross-border cases 23