The corporate scandals at the turn of the 21th century, including the Enron and WorldCom episodes in the US, and the collapse of Parlamat in Europe, were widely perceived as audit failures. These audit failures brought about a lack of trust in the information underpinning the workings of stock exchanges around the world and contributed to the financial instability of the early 2000s. International regulators and other entities, including the International Organization of Securities Commissions, the World Bank, the Basel Committee on Banking Supervision, and the International Association of Insurance Supervisors, responded to the crisis by calling for measures that would effectively address concerns about the audit process and the conduct and competence of audit practitioners.
The accuracy, integrity, comparability and public interest focus of financial accounts were seen as key to reestablishing a stable international financial system.
The IFAC Reform
In response to the crisis, the international regulators and the International Federation of Accountants agreed in 2003 on a blueprint for reform of the IFAC’s standard-setting and compliance activities that was designed to eliminate the conflict of interest caused by the profession setting its own rules. The aim of the reform was to enhance the quality of the standards governing the audit profession, improve the process by which they were formulated and reinforce the IFAC’s commitment to serving the public interest, with a view to restoring the confidence of investors.
The architects of the IFAC reform believed these objectives could best be met by instilling greater rigor, transparency and accountability into the standard-setting process, while making the IFAC boards accountable to an independent body that ensured they served the public interest. The standards that emerged from this process would enhance the quality of the independent audit and improve the competence of audit practitioners. High-quality international standards developed on a collaborative basis and with a clear focus on the public interest were seen as having a greater likelihood of being accepted and implemented around the world.
Under the reform program, the IFAC’s standard-setting boards underwent sweeping changes in composition and due process, the Consultative Advisory Groups were strengthened and the IFAC enhanced its public interest agenda. The body of international standards of audit also underwent renovation; in February 2009, the IAASB completed the Clarity project for audit standards aimed at clarifying their intent, improving their comprehensibility, and facilitating their translation. The Code of Ethics for Professional Accountants, which includes rigorous independence requirements for auditors, also was revised and completed in June 2009.
But the real gain from successful standard setting comes from the application of the new standards --- an objective that the PIOB and the IFAC are currently working towards through the Compliance Advisory Panel. The aim of the PIOB’s oversight is to ensure that a proper public interest focus is maintained throughout the entire process of adoption and implementation of standards. See world map on adoption of ISAs.
Audit and the Current Financial Crisis
The current economic and financial crisis has highlighted the need for greater financial transparency, improved regulation of excessive risk-taking and closer supervision of the increasingly interdependent and global markets. The IFAC’s newly revised standards under the Clarity project were completed just in time to play a role in this new governance of financial markets.
Completed in December 2008 under the oversight of the PIOB, the Clarity project succeeded at clarifying the intent and increasing the comprehensibility of the International Standards on Auditing (ISAs), paving the way for their adoption by national jurisdictions around the world. Convergence among countries to an agreed set of credible international standards will contribute to the development of consistent and comparable audited financial statements and thus support the stability of the international financial system.