The economic crisis sweeping over the world underlines the need for international coordination and cooperation. It has brought into focus the fact that globalization is a reality, that no country is an island, that capital can flow – or flee – from country to country with a key stroke. Investors increasingly search the globe for opportunities and look to independent professionals – accountants and auditors – to provide them with financial statements they can believe in: not good news or bad news – just the facts. Dozens of countries are creating independent audit oversight bodies with the same objective which led the Congress in 2002 to create the Public Company Accounting Oversight Board: to protect investors by improving the accuracy and reliability of the financial statements of public companies.
One clear lesson from the unfolding international financial meltdown is the necessity for coordinated action, especially with respect to reducing interest rates, strengthening the banking sector, and taking strong steps – fiscal and monetary – which would have been unthinkable even a year ago.
The need for coordinated action is no less in accounting and auditing. Included in the Declaration of the Summit on Financial Markets and the World Economy was the following statement issued by the so-called Group of Twenty on November 15: “Authorities, drawing especially on the work of regulators, should collect information on areas where convergence in regulatory practices such as accounting standards, auditing, and deposit insurance is making progress, is in need of accelerated progress, or where there may be potential for progress.”
More specifically, the recent focus on fair value accounting has demonstrated that standard setters on both sides of the Atlantic are well aware of the necessity of speaking with a single voice. And the SEC’s IFRS roadmap will confront future SECs with a series of milestones as they consider what next steps – if any – should be taken towards convergence of GAAP and IFRS or, to put it more generally, towards the adoption of a single high-quality international accounting standard.
The PCAOB, of course, does not write accounting standards, the FASB does. But we are directly affected by the move towards IFRS. In a matter of months our inspectors will begin to examine audits of foreign private issuers who, for the first time, will not have to reconcile their IFRS statements to GAAP. And it is possible that inspecting audits of some larger U.S. issuers may not be far behind.
But the PCAOB does write auditing standards (subject to SEC approval). And in auditing the scene is even more confused, for in accounting there are two main standards – IFRS and GAAP – while in auditing there are three: the International Standards on Auditing (or ISAs), which are being used (with some variations) increasingly outside the United States, and two in the United States: the AICPA standards being updated by the Auditing Standards Board (for non-issuers) and the PCAOB standards (for issuers).
The Auditing Standards Board committed to basing its standards on ISAs starting in 1998 and has an ongoing commitment to using the ISAs as a base, an approach sometimes referred to as “ISAs plus”. In October, the PCAOB for the first time included an extensive comparison of proposed new standards – in this case risk standards – with the relevant ISAs.
Put me down as skeptical that in the long run it will be practical to educate, test, and supervise auditors in three different complex sets of auditing standards. I do not advocate PCAOB adopting the ISAs or the ASB standards any more than I advocate the IAASB or the ASB replacing their standards with ours.
But, if one sees merit in the quest for a single high-quality set of auditing standards (as I do), or if one sees this as inevitable for the protection of investors in our interconnected world (as I also do), then the challenge is for the three standards setters to develop a road map – a systematic, joint, comprehensive standard-by-standard review, identifying and merging the highest quality aspects of each standard. There are differences in the present three sets of standards. Some are substantial and not easy to resolve, such as the absence of a standard on auditing internal controls over financial reporting in the ISA and the ASB standards, but many are of a subtlety that would challenge a Talmudic scholar.
None of the three can fairly be described as superior to the other two in all respects. There is much we can learn from each. Some assume that reaching agreement on a single, high-quality auditing standard will prove impossible, in part as a result of differing cultural and legal environments. To accept that is to admit defeat before even trying. Others argue that there is a conflict between globalization (a single internationally accepted auditing standard) and investor protection. So long as standards writers stay focused on investor protection – as we at the PCAOB are commanded to do by Sarbanes-Oxley – investors will only be gainers from closer international cooperation.
Changing accounting or auditing standards both require new curricula, new text books, new lecture material, and revising the CPA exams. But there is a big, big difference in the costs of converging accounting compared with auditing. Implementation of IFRS in the U.S. would require retraining not only of auditors but, even more challenging, retraining of the preparer community as well as rating services, analysts, lenders and investors, among others. Such burdens as are imposed by changes in auditing standards are mostly imposed on auditors, not preparers. Indeed auditors might achieve some efficiencies from training and supervising to a single rather than to multiple standards. In fact, the largest audit firms currently use the ISAs as the base for developing their own audit methodologies with variations to meet various national requirements. And since most auditing education is done on the job (in contrast with accounting), new auditing standards could be far more easily introduced on the campus than new accounting standards.
My hope is that out of PCAOB’s strategic planning process will come a commitment to engage the other auditing standards writers with the goal of agreeing to a timetable and a roadmap seeking at least to eliminate unneeded differences among the present standards and in addition exploring in the interest of investors the adoption of a single set of high-quality internationally accepted auditing standards.