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Recommendations of the Review Task Force

Comments from The Association of Chartered Certified Accountants
September 2001

Executive Summary

The Association of Chartered Certified Accountants (ACCA) welcomes the Review of the Operations of the IFAC International Auditing Practices Committee (the Review), which has come at an appropriate time. ACCA strongly supports the work of IFAC and of the International Auditing Practices Committee (IAPC). Our comments on the Review make the following points.

• The proposed changes to the objectives of IAPC are too narrowly focused on the audit of transnational listed companies. It will make more sense if the review of objectives is undertaken in conjunction with a review of the objectives of other IFAC committees.
• Although it correctly acknowledges the importance of the public interest, the Review's scope did not extend to related aspects of IFAC's operations, such as the new Public Oversight Board. Accordingly, the Review recommendations appear to ACCA to conflict at times with the main way in which IAPC needs to operate in the public interest.
• The selection and composition of IAPC is a key area of debate and ACCA is not convinced that the proposals go far enough to promote the country balance which is necessary for an international committee. There are also risks that public confidence may be damaged by a perception of undue influence from some quarters.
• ACCA supports the view that IAPC should co-operate fully with national standard-setting bodies during the transition to global use of International Standards on Auditing (ISAs).
• ACCA would like to see major improvements in the way in which IAPC engages with its stakeholders. This is particularly important in the way responses to exposure drafts are sought and concerning IAPC's future work programme. There is a danger that, in seeking endorsement of ISAs by regulators, IAPC may be neglecting vital work, such as that relating to environmental reporting.

General Matters

1. ACCA is very supportive of the work of IFAC and the development and promotion by IAPC of high quality auditing standards. ACCA has endorsed this with its examination stream based on International Accounting and Auditing Standards, which has currently been chosen by over 25,000 of our students.
   
   
2. As the adoption of its standards expands in response to the gathering pace of global harmonisation, IAPC's work is becoming of growing importance. There is a need to ensure that IAPC can address this and the increasing expectations being placed on it. ACCA, therefore, welcomes the Review of the Operations of the IFAC International Auditing Practices Committee (the Review), which is appropriate at this time. We note and endorse the view expressed in the Review that serving the public interest is paramount in developing appropriate recommendations.
   
   
3. The Review was entrusted to an international committee of individuals experienced in standard setting at both national and international levels. This committee composition has some disadvantage, which adds importance to the public exposure stage of the process. It is a pity, therefore, that IFAC has not sought to extend its consultation process beyond that which it traditionally uses. Without active engagement with its stakeholders, IFAC will not elicit sufficient comments on the proposals to give authority to the subsequent changes to the organisation and operations of the IAPC.
   
   
4. We comment below separately on the main aspects of the Review.

   IAPC’s objectives

5. The Review recommends changing the established objectives of IAPC. For ease of comparison we show the existing and proposed objectives below:

   Existing objectives	Proposed objectives
   Issuing International Standards on Auditing. Issuing guidance on the application of International Standards on Auditing.	Establish auditing standards and guidance for financial statement audits of such unquestionable high quality that they are acceptable to governments, securities regulators and other key stakeholders across the world, thereby strengthening public confidence in the global auditing profession.
   Promoting the adoption of the Committee’s pronouncements as the primary authority for the setting of National Standards and Guidance and for use internationally for cross border offerings.	Establish assurance standards and guidance on both financial and non-financial matters. Publish other papers on auditing and matters related to audit, thereby advancing the public understanding of the roles and responsibility of professional auditors.
   Promoting the endorsement of International Standards on Auditing by legislators and securities exchanges.
   Promoting debate with practitioners, users and regulators throughout the world to identify user needs for new standards and guidance.

   
   
   
6. The existing five objectives are accompanied by a note that 'International Standards on Auditing' is a generic term which includes assurance on non-financial information.
   
   
7. While we welcome the proposed inclusion of an objective to advance the public understanding of auditing, we are not convinced that the other objectives are properly stated. Although we appreciate the desire of the Review to be responsive to the needs of IOSCO, this has resulted in proposed wording which has several faults. The proposed objectives are too narrowly focused on the needs of transnational listed companies, ignoring the important current role of ISAs as a model set of standards to be used as the basis of national standards, especially in developing countries, and therefore applying to listed and non-listed companies alike. The detailed wording of the proposed objectives gives undue prominence to auditing. The objectives use words which are not defined in the IFAC Glossary (e.g. 'professional auditors'). They do not refer to International Standards on Auditing but to some generic 'auditing standards'. They highlight publishing papers without recognising that this is just one aspect of promoting debate, while ignoring the necessary research into the need for new standards.
   
   
8. We do not support, therefore, the proposed wording for the objectives of IAPC. Accordingly, we recommend that a review of the objectives of IAPC should be carried out ab initio in conjunction with a review of the objectives of all IFAC committees and that such a review should be wide ranging and thorough.

   The Public Interest

9. The work of other IFAC committees also affects auditors and it is important to achieve co-ordination in their work and outputs. Accordingly, we strongly support the continued inclusion of IAPC within IFAC.
   
   
10. We agree with the statement in the Review that 'auditing is a public interest activity.' It is by providing high quality auditing standards that IAPC may best promote the public interest.
    
    
11. The Review pinpoints some aspects which are considered relevant to IAPC, namely that 'Serving the public interest requires the confidence of regulators in the process for establishing auditing standards, in their quality and in the way they are applied in practice'. Regulators are, however, neither auditors nor experts in setting auditing standards. Accordingly, regulators are not fully capable of directly determining the quality of auditing standards. They necessarily have regard to the process by which auditing standards are established, the degree of their acceptance by practising auditors and the outcomes of audits carried out in accordance with them. These are not simple matters to consider. The degree of acceptance by practising auditors itself depends on whether their use will be sanctioned by legislators, national standard setters, professional bodies and regulators. The outcomes of audits are affected by many factors in addition to auditing standards. These include the independence of auditors and the honesty of financial reporting, which itself may be dependent on economic conditions. It is natural, therefore, for regulators to look to the process as a major source of comfort on the quality of auditing standards.
    
    
12. We are concerned that certain Review proposals appear to be no more than cosmetic attempts to inspire the confidence of regulators, whereas other proposals are to the detriment of the technical capability of IAPC and hence its primary public interest role. Our concerns are dealt with in the sections below.

    Selection and Composition of IAPC

    Number of committee members
    
    
13. The Review proposes an increase in the number of IAPC members to 15. This is linked to the inclusion of three non-auditor members and a restriction on technical advisers (to one per member). We comment elsewhere on the inclusion of non-auditor members. We recognise that it is impossible to achieve a fully representative committee with such small numbers. IAPC operates as a full committee and through working groups and we see advantages, therefore, in increasing the membership to provide greater resources for working groups and to allow for non-attendance by members at some meetings.
    
    Non-auditor membership
    
    
14. The proposal to change the composition of the IAPC to include three non-auditor members while restricting the number of technical advisors to one per member will reduce the technical capability of the Committee.
    
    
15. We do not believe that the recommendation is sound as it does not consider the overall question of how IFAC demonstrates that the interests of the wider public are being served. IAPC is a committee of IFAC. Accordingly it will benefit from the involvement of the Public Oversight Board (POB). It is not logical to consider lay membership of IAPC at this time unless similar arrangements are put in place for other committees, such as the Ethics Committee. In the absence of an overall review, and given the overarching need for IAPC to provide standards of the utmost quality, we cannot currently support the inclusion of non-auditor members on the committee.
    
    Auditor membership
    
    
16. We have commented above on the proposal for inclusion of non-auditor members. The Review also makes proposals on the criteria for selection of auditor members and the sources of nominations of individuals. We agree that 'best person' should be the overriding factor in selection. However, we note the comment in the Review that: 'Experience shows that candidates nominated for IFAC work . . . invariably tend to be very able and experienced professionals.' As IFAC has such a pool of very able and experiences nominees on which to draw, the conclusions of the Review regarding the source of nominations is cast into doubt. The secondary criteria for selection of auditor members are: country balance, firm balance and (although this is not explicitly stated in the document) fluency in English.
    
    
17. We consider that country balance is a very important criterion for an international committee as it allows the incorporation of diverse views and perspectives which are not necessarily obtained from responses to consultation documents. We recognise that the working of the Committee may be simplified if every member has mastery of the technical English vocabulary but that consideration should not preclude the membership of individuals making use of translators.
    
    
18. There is a proposal that, among the twelve auditor members, five should come from major audit firms and be proposed by a committee of such firms and a majority of the other seven should come from countries where member bodies have experience of particularly well-developed national standard-setting procedures. It is explained that: 'This membership composition would continue to permit, where practicable, some representation by auditors from countries where member bodies do not benefit from well-established national standard-setting procedures, and auditors from smaller audit firms'.
    
    
19. This approach is not, in our view, appropriate. It suggests that the concept of 'firm balance' has leant more towards achieving sufficient direct membership for the global accountancy firms than towards achieving an appropriate balance between small, medium and large firms operating on a national, regional or local basis. We are concerned that direct nomination by a committee of the major firms could be viewed unfavourably by stakeholders, as such firms do not have an obligation to act in the public interest. In addition, the standing of IAPC could be damaged by a perception that the firms involved are exerting undue economic or other influence.
    
    
20. Given that the Review acknowledges the quality of individuals proposed by member bodies, there seems to be no particular reason to place special emphasis on countries with well-developed national standard-setting processes. We consider that it is more important to maintain country balance.

    Role of National Standard Setters

21. We fully support increased co-operation between IAPC and national standard-setting bodies, particularly in the years immediately ahead during the transition to global use of International Standards on Auditing. It is appropriate for IAPC to instigate both formal and informal joint working and co-operation with this important stakeholder group.
    
    
22. However, as explained above, we do not believe that it is appropriate to allocate a certain number of 'seats' at IAPC to representatives of countries with particularly well-developed national auditing standard setting procedures.

    Work Programme

23. We welcome the recommendation that the long-term work of the IAPC should be described in a formal strategic plan. It is important that this plan is exposed for public comment and that IAPC responds to such comment. IAPC must be seen to take account of the views of its global constituency in this important matter.
    
    
24. We recognise that IAPC is committed to achieving recognition of ISAs by IOSCO. However, that is only one part of its mission. In order to gain endorsement by legislators, its standards must be appropriate for entities which are not listed on securities exchanges. We are concerned that IAPC is currently devoting significant resources to the revision of core standards explicitly to accommodate the 'business risk' approach to auditing of the major international firms when such an approach is already implicit within existing standards. ACCA believes that the public interest would be better served by IAPC providing standards in emerging areas. We are particularly concerned that, as a consequence of this influence on the work program of IAPC, work has been stopped on a much-needed proposed standard on assurance on environmental reports.

    Transparency and Due Process

25. The Review summarises the existing consultative process of IAPC and suggests that IAPC will be addressing certain possibilities for improvement in the near future.
    
    
26. We are disappointed that the Review has not made clear recommendations for improvement. As well as the lack of publicly visible input to setting its work programme, IAPC has failed to engage adequately with its stakeholders in determining the content of new or revised pronouncements. As the Review note 'the majority of the exposure draft recipients never respond'. This is the 'tip of the iceberg' as the vast majority of potential respondents are not even aware of the exposure draft. The process of issuing a written exposure draft and relying on a small list of 'those who always respond' is no longer appropriate.
    
    
27. We quote below from a recent Australian response to an IFAC exposure draft dealing with independence.
    
    
28. 'The exposure draft commences with the statement that independence (in the context of an assurance engagement) is in the public interest. We suggest that it is sensible, therefore, to actively seek the views of all the main external stakeholder groups beyond the accounting profession itself; for example corporate and business regulators, the stock exchange, institutional investors' groups, shareholders' groups, etc. Of the Australian stakeholder groups with whom we have had contact all have definite views on a broad range of auditor independence matters, all are willing to share those views with the profession if asked, but most are reluctant to respond to an exposure draft written by the accounting profession for its own members. One suggestion was that the review of professional independence should take place as part of a publicly-debated review and, to generate this debate, a further more specific discussion paper could be written for a broader audience.
    
    
29. We are concerned that, unless the external stakeholder groups are effectively engaged in the debate, the proposed statement will fail to achieve its intended purpose'.
    
    
30. We do not believe that the proposal to obtain a summary and analysis of stakeholder views from IFAC’s member bodies is sufficient. As a minimum, the current Consultative Advisory Group closed meetings involving only representatives of major organisations should be replaced by regular public forums in each continent
    
    
31. We fully support the opening of meetings and agenda papers to the public and the external reporting envisaged by section 6 of the Review.

    Other matters

    Form of pronouncements
    
    
32. We agree with the statement made by the Review that 'The authority of IAPC’s standards should be clear and unequivocal, thereby properly serving as benchmarks for compliance by auditors in performing and reporting on their work'.
    
    
33. We are concerned that the bland discussion following this statement about bold type black lettering and ambiguities is masking a known problem with the perceptions of some regulators. ACCA fully supports the issue of Standards on Auditing in the form of basic principles and essential procedures in bold type black lettering, together with related guidance in the form of explanatory and other material in normal lettering. Such a format allows appropriate flexibility in implementation and avoids an unwieldy procedural rule book approach to standard setting. We would not favour any change towards making all aspects of the text of a standard equivalent in authority (eliminating the black lettering). Instead, IAPC should devote resources to communicating the advantages of its existing approach to regulators.
    
    
34. IAPC has traditionally issued pronouncements in the form of individual documents making up its handbook(s). We believe that electronic publication of all pronouncements is now necessary. As a consequence, holistic updating rather than piecemeal updating becomes not only feasible but desirable in order to avoid the problems associated with inconsistencies caused by timing differences in updating. We recommend that IAPC moves to such a basis at the earliest appropriate time.
    
    Staff support
    
    
35. We note the proposal of the Review that IAPC should have a full-time Technical Director, with a permanent staff of six full-time managers, as well as loaned staff as appropriate. On the assumption that the workload requires this level of support staff, we believe that it may be appropriate to have a full-time Technical Director, but this should be determined in the light of IFAC's overall staffing needs.
    
    
36. We accept that, for budgetary reasons, IAPC will need to make use of 'loaned staff'. As 'loans' of this nature could give rise to public concern that the firms or bodies involved are exerting undue economic or other influence on the operations of IAPC, such arrangements should be fully disclosed.
    
    
37. We understand that managers are currently being recruited on the basis of two-year contracts, with the possibility of one year extensions. This does not allow IAPC to attract the best candidates, many of whom will be deterred by such a short-term approach.

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