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Audit and Society

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Grant Thornton partner Steve Maslin explains how a collaborative initiative by the six large international audit networks is drawing lessons from the financial crisis

The six large international audit networks – BDO International, Deloitte, Ernst & Young, Grant Thornton International, KPMG and PwC – have been working together for more than a decade on key policy issues that impact accounting, auditing and corporate governance around the world. The main vehicle of collaboration is the Global Public Policy Committee (GPPC), which comes together regularly to discuss key policy developments, both among ourselves and with key stakeholders. I hasten to add that we always do so with a competition lawyer present to keep us on the straight and narrow!

That we are able to collaborate while still being competitors is a testament, I think, to the global audit profession in general and its desire to ensure that the way in which public interest entities report, govern themselves and are audited continually evolves to meet the needs of users.

On becoming chair of the GPPC last July, I was not short of material for setting our priorities for the next two years. The main areas we are currently looking at are:

·         accounting for the sovereign debt issued by key European financial institutions and the related reporting issues;

·         working with independent audit regulators to continue to build audit quality and maintain confidence in audit reports;

·         the evolving role of audit.

Banks and sovereign debt

The first and most urgent priority continues to centre on corporate reporting by banks and financial institutions. On a national level much has been achieved since the financial crisis burst upon the world. For example, in the UK, audit firms worked closely with the Bank of England, the Financial Services Authority and the Financial Reporting Council to form a code of dialogue. This code ensures that for systemic banks there is a regular dialogue between the prudential supervisor, bank and auditor, allowing views on key issues and pressure points to be shared and discussed in advance of each new reporting cycle. The audit networks have an important role in making such national initiatives more widely known to benefit other capital markets.

On the international front, the firms and audit regulators are working with the Financial Stability Board to enhance the quality and relevance of disclosures in banks’ accounts. The next task is to embed these ideas into practice.

The networks have also been engaging each other in far greater regular dialogue on bank accounting since the crisis emerged. For example, a working group of senior-level professionals meets regularly to discuss the impairment of sovereign debt and related reporting issues by European banks. Debating these issues in advance minimises the risks of substantial differences in the way that key institutions report such instruments.

These are important initiatives and for me closer two-way (and three-way) dialogue between auditors and prudential supervisors (and bank management) is the number one lesson from the crisis. However, much still remains to be done.

Good practice

The second priority concerns sharing good practices between the networks and with regulators to reinforce the effectiveness of our international quality assurance programmes. Again, cooperation with other stakeholders is an important lesson from the crisis and work is under way between the International Forum of Independent Audit Regulators and the networks.

A key strand of this work is to try to capture recurring themes from independent inspections and the networks’ own inspections around the world. The aim is to see whether there are lessons that the networks and regulators can take at the global level to increase the speed with which actions are taken in particular countries to maintain and continue to build audit quality and ensure consistent high-quality execution.

The views of stakeholders

Third, the networks have been listening to the views of other stakeholders – in particular, investors – on the role of auditors in maintaining and building market confidence. We are looking to learn lessons from the financial crisis for audit and how it needs to evolve to meet current and future user needs.

The overwhelming reaction from nearly all stakeholder groups is that the large audit firms play a crucial role in sustaining capital markets and on the whole do a pretty good job. A common theme from investors and other stakeholders is that auditors have vast quantities of information on the strength of individual companies and industry sectors; could this information be shared with investors and regulators to increase market confidence?

It is easy to answer yes, but obstacles such as trust, confidentiality and cost cannot be dismissed out of hand. However, effective leaders see obstacles as challenges to be overcome, and there is a huge desire among audit network leaders to continue this debate and find solutions. We must look for ways to move the audit role forward to deal confidently with a world of ever more volatile valuations, business models and financial confidence.

There are other issues we must bear in mind. The work by the International Federation of Accountants (IFAC) on public sector accounting standards here seems vital to me. I also believe the fairly routine sharing of good practice, such as making it unlawful to mislead an auditor, would bring improvements in many countries far more quickly than further changes to reporting and audit. Nor should we close our minds to embracing new customs and practices from emerging economies.

Enron and all the other scandals of the last decade were a wake-up call and I believe that audit is in a strong state now, the more so for strengthening dialogue with other stakeholders. However, life moves quickly and we cannot rest on our laurels and feel that an audit model that has its roots in the mercantile trade of Europe centuries ago is automatically doing all it can to meet the needs of the future. The financial crisis showed that business is vital to the well-being of everyone in society. As we move forward the debate on evolving our role as auditors, the question ‘what are we doing to benefit society?’ is a useful one to have at front of mind.

 

Steve Maslin is head of external professional affairs at Grant Thornton and chair of its Partnership Oversight Board in the UK. He was the firm’s head of assurance services for seven years and a member of the Audit and Assurance Advisory Panel of Grant Thornton International. He is also a member of the ACCA/IMA Accountants for Business Global Forum. The views expressed here are his own and not necessarily those of Grant Thornton or the GPPC.

This article first appeared in Accountancy Futures, Edition 6, 2013

Published: 23 Apr 2013