Monitoring the Reform of Audit

Many members will be aware of the Monitoring Group (MG) consultation currently underway on setting international audit and ethics standards.

Such standards are fundamental to our profession and to the economy more widely, and this consultation seeks to restore confidence that they are relevant, and set in a way that is truly independent, and responsive to the public interest.

Ethics standards are what binds our profession together, and the underlying principles and the guidance that supports them cover everything that our members do. While audit standards may only address one aspect of our members’ work, that aspect is very visible and important to a lot of stakeholders.

Last week, ICAEW hosted the latest MG roundtable session, in conjunction with the FRC, and I wanted to share a few thoughts here that I offered at that meeting.

Setting the Scene

At the outset, this consultation raises a number of key issues.

We first need to understand the purpose of a standard-setting body. The consultation states this to be setting standards that serve, and appear to serve, the public interest. So we must ask what, in this context, the public interest actually is.

A few years ago we published a report that set out a framework for considering the public interest. We recognise that the public interest is very context-driven and involves balancing different objectives and priorities, with expert input on what works.

Then we must assess whether the current framework is successfully setting those standards, and if not, why not. If the actual standards are at fault, that is likely to need a different set of corrective measures than if the problem is one of perception of the objectivity of the process.

Options for Reform

We can then begin to look at the options for reform, and whether they result in an efficient and visibly effective balance of objectivity and expertise. A number of key questions must be asked, for example:

Would having one board set standards be a sensible consolidation of work in one highly complex area, or an unmanageable combination of technical and behavioural standards?

What should be the scope of the standards any new board takes on? Regulators and investors tend to focus on public interest entities as they can have a systemic effect on the economy individually, but in many countries, including the UK, a lot of other entities need to be, or choose to be, audited. Collectively they are also important, but audit needs for SMEs can be different than for larger organisations.

We must also consider the oversight arrangements. The current ones were set to ensure a proper balance between expert input and independence of process. There are currently three tiers: the Monitoring Group itself, the Public Interest Oversight Board and the Consultative Advisory Groups. Is that the best approach?

Sustaining for the Future

An issue that also matters enormously to me is the education of our members and others in the profession, for without that there is no sustainable future. We need to think through the impact of any reforms on maintaining an ongoing supply of the right people with the necessary competencies, to ensure high audit quality.

A variety of views were expressed at the roundtable, on these and other topics. We will be submitting a detailed response before the consultation closes on 9th February. I encourage other interested parties to do so too, and look forward to continuing engagement with other stakeholders.