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Home > Auditing Best Practice > The Complex World of International Auditing Regulation

Auditing Best Practice

The Complex World of International Auditing Regulation

by Christopher Humphrey and Anne Loft

The Global Regulatory Involvement of Audit Firms

A recent interesting development with respect to public oversight was the presentation by the CEOs of the six largest global auditing firms at IFIAR meetings in Norway (April 2008) and South Africa (September 2008) to consider global quality monitoring arrangements. This section considers the growing involvement of the large audit firms in international audit regulation.

During the last two decades, there has been a continued increasing concentration in the international auditing profession, with the large firms getting a greater share of the audit market. The “big eight” firms of the past are now reduced to today’s “big four” of PwC, KPMG, E&Y and Deloitte—with the next two largest firms, BDO International and Grant Thornton International, being quite a lot smaller. Gradually, through a variety of pressures, often driven by major corporate collapses and financial crises, such firms have sought to ensure greater global consistency in auditing practice, such that an audit, for example, in China by PwC is equivalent to one conducted by the same firm in, say, Sweden. Through internal processes of regulation, they place pressure on parts of their network where audit quality and associated quality control procedures are apparently insufficient, and thus act as an “internal” or “self” regulatory pressure towards harmonizing standards.

The audits undertaken by the “big five” in Asia at the time of the crisis (1997–98) were sharply criticized by the World Bank, and it was this that stimulated the big five to set up a global steering committee. One of the aims was to provide a body to deal, on a collective, global basis, with the common professional and regulatory issues they were facing. Another aim was to strengthen IFAC as the global audit standard-setter. Under this initiative, the large firms supported IFAC financially, and were allocated seats on each of IFAC’s standard-setting boards. In the case of the newly established IAASB (previously the International Auditing Practices Committee), they had five seats out of a total of 18. This greater engagement of the big firms with IFAC continued to grow, especially in the wake of the Enron scandal and its aftermath, with the establishment of a new organization, the Global Public Policy Committee (GPPC).

The GPPC comprises the six largest international accounting networks, and focuses on “public policy” issues for the profession. The GPPC has a Regulatory Working Group and a Standards Working Group, and, while much of its work is undertaken in private, it does issue policy papers where it expresses its commitment to working in the public interest, and facilitating the functioning of global capital markets (see GPPS, 2006). The global firms’ involvement in international regulatory affairs has also seen them expand the scale of financial support that they provide to IFAC, which now receives approximately one-third of its funding from the large firms. The firms can also be seen to be making substantial efforts to further strengthen their own global organization, with a number announcing restructuring plans to align member firms more tightly within global structures/networks and introduce “enhanced” audit practice standards (see The Financial Times, August 20, 2008).12 The current financial crisis has witnessed a continuing major involvement with global regulatory matters, driven by the direct consequences that auditing work could have for global financial stability through decisions relating to the valuation of “toxic” assets and the auditor’s determination as to whether audited enterprises are “going concerns”.

Maintaining Public Interest in Global Regulation

While the global audit regulatory arena is complex, it is possible to draw out a number of important characteristics. While contemporary audit regulation engages directly with audit practice at the national level, it is being driven primarily by events and strategic action at the global level. The development in this global regulation of audit has been rapid during the current decade, and, associated with the identification of reliable financial reporting, is becoming an essential part of a wider international financial architecture. Significant strategic actions have been made by international organizations such as the EU, IOSCO, FSF/FSB, and the World Bank to aid, support, and increasingly mandate the usage of international standards on auditing. While these organizations are primarily governmental in character, the main international audit standard-setter, the IAASB under the auspices of IFAC, is classified as private in nature, as are the large audit firms who are also closely involved, albeit in a less public way. This has placed particular emphasis and significance on the development of public oversight regimes as a way of ensuring that international audit standard-setting processes are seen to be globally credible and sufficiently responsive to public interest demands (see IFAC, 2008; PIOB, 2008). The policy recommendations emerging from the November 2008 meeting of the G20 likewise highlighted the importance of regulators serving the public interest, and the global importance of making sure that financial markets operate in the most transparent of fashions. The current financial crisis is testing global regulatory structures to their limit, and it is pretty certain that auditing will remain a fascinating field—both to observe and to debate in an open and constructive fashion. It could be argued that serving the public interest deserves no less.

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