The US is playing catch-up with the rest of the world in what it amusingly considers a 'giant experiment' in auditor reporting. Will the model fit, asks Robert Bruce
This article was first published in the July/August 2017 UK edition of Accounting and Business magazine.
Auditors need to want to talk more. Their name says it all. On our behalf they go into a company, fulfil their duties in an exhaustive, comprehensive and highly documented way. And then they tell us what they have learned. We listen and understand. It is as simple as that. But in practice, of course, it is not. The odd thing about the history of auditing is how little auditors have tended to tell us.
You only have to look at the latest developments in the US. For some 70 years US auditors have simply told shareholders that in their view the numbers are ‘fairly presented’. The UK, by contrast, caught up with this problem some years ago. Audit reports are now being fleshed out. Important points are being highlighted.
The UK is on a trajectory that will open up the process even further. This has been helped by a more open culture. The Financial Reporting Council both promulgates and enforces the rules. And it made it clear from the outset that it wanted auditors to innovate, to do their best rather than sticking defensively to the letter of the law. It was about encouraging audit quality.
It is very different on the other side of the Atlantic. But, after a long struggle with lobbyists, the US body that oversees the auditors, the Public Company Accounting Oversight Board (PCAOB) announced at the beginning of June that change was on the way. But only very slowly, and there are still huge obstacles in the road.
It has been a bitter battle. But that is how it is in the US. You might have thought that a proposal for auditors to highlight the issues that they had believed important enough to mention to the audit committee, for example, would be obvious and useful. Not so. The US Chamber of Commerce, for example, weighed in. What seems a mundane and sensible change to anyone in the UK was, apparently, ‘a giant experiment’.
And there was uproar that auditors in the US will now have to say how many years they have been doing the audit. In the UK this sort of thing has been de rigueur for some time. The corporate heavens haven’t fallen in. But the idea that US auditors are having to declare the number of years in post was viewed as an assault on business practice. In the UK context that seems extraordinary.
In the US where the culture of rules and the constitution holds sway, change comes slowly. Even these changes will not be fully in place for about five years. And a category of companies, designated ‘emerging growth companies’, which you might have thought deserved more scrutiny than most, will be exempt.
It’s about the culture and the status of regulation in the US. There are signs it is changing, but regulators like the PCAOB are there more to bash than praise people – the opposite to the UK model. ‘It has got to be about encouraging the good rather than just weeding out the bad,’ said Andrew Gambier, ACCA’s head of audit and assurance.
But these are difficult times in the US. It is not a good time politically to be creating new regulations. The PCAOB operates under the oversight of the main US regulatory body, the Securities and Exchange Commission (SEC), and, as I write, there is no sign that it will give its blessing. The PCAOB chairman James Doty put in a plea. ‘This is not a partisan issue,’ he said. ‘We think we have done a good job of making this practical and rigorous.’
But that is the American way. The same goes for global financial reporting rules. In mid-May, after many years of work, the International Accounting Standards Board issued a new insurance standard. Previously, corporate disclosures around insurance contracts had been opaque. Now that will change. Comparability of insurance giants will be much improved. Except for those of one country. IFRS Standards are in force in all the large economies bar one. The US doesn’t really do international financial reporting standards. It sticks to its own. It’s the culture, stupid.
Robert Bruce is an accountancy commentator and journalist
"It's all about the culture and the status of regulation. There are signs that it is changing, but regulators are there more to bash than praise people"