Overseeing the World’s Audit Profession
Reliable financial information is to financial services what clean water is to life.
In the first half of my career, the 1980s and 1990s, financial information policy debates were focused on accounting standards, how to prepare statements in a world that was increasingly immaterial and hard to put numbers to in uniform, understandable ways.
It was the time when the International Financial Reporting Standards Board was established in London as a force. Over the next years, its work was progressively adopted by a large majority of the world’s governments; and it was also a time when other governments continued to support their national generally accepted accounting standards. Such standards are so completely entwined in tax policy that there are understandable reasons for wanting national determination of how a financial statement is presented. The problem is that when individual countries stick to their own standards, preparation of consolidated statements for multinational companies becomes expensive and the result makes for a hard read, and like-for-like comparisons of single corporations are not achievable.
Yet whatever the accounting rules and principles applied by audit firms, these decades also saw spectacular audit failures. The Bank of Credit and Commerce International collapsed in 1991, followed by the Maxwell pension fraud in 1992. Both frauds led to national corporate governance commissions in the UK.
The US saw the Waste Management Scandal in 1998, and in 2001 went on to suffer from the massive Enron fraud and the resulting collapse of the accounting firm of Arthur Anderson – and, in the years that followed, the progressive merging of the “Big 8” global accounting firms into four. The World Com failure came to light in 2002, the same year as Tyco. HealthSouth and Freddie Mac in 2003, American International Group in 2005, and the Lehman Brothers scandal exacerbating the Great Recession in 2008-2009.
Audit failures were not only an Anglo-American affair: In France, the Credit Lyonnais series of “events” rumbled on through the 1990s, resulting in write-downs over several years of $ 35 bn. The French courts still hear cases descended from the Credit Lyonnais fall-out, underscoring how long-lasting the damage of fraud is. In Italy, Parmalat’s € 14 bn hole came to light at the end of 2003. In Japan, the Olympus accounting failure became known in 2011.
Audited financial statements are a basic information building block for economies. Multiple actors in society rely on them. And yet these big failures continue. The Wirecard scandal in Germany unfolded in late summer 2020, though for five full years before the Financial Times  was publishing worrisome articles and having to push back against all the chilling threats a large corporation can make.
Well, who is in charge of the auditors? In most cases, it is the capital markets authorities in each country who are responsible for accounting principles and the accounting profession’s qualifications. Too much was going wrong for these authorities not to react.
The International Federation of Accountants (IFAC) is the global body representing the interests of this private sector profession. The overarching standards for IFAC member firm auditors were set by its International Auditing Committee, founded in 1978. The idea was that whatever the accounting principles applied in a country, the auditors would have similar approaches in verifying accounts and preparing the statements. The contradiction, however, was having a private sector body develop principles for its most basic public service work without public oversight – it was not credible to many, and the failures were repetitive and resounding.
The International Auditing Committee was reformulated and significantly reinforced in its more public form in 2004 when it became the International Audit and Assurances Standards Board (IAASB). In anticipation of the reform, in late 2002 a very broadly based group of non-auditors was created for input to the IAASB, its Consultative Advisory Group. A few years later a parallel global body for auditor professional ethics was constituted, with its own advisory group.
On the authorities’ side, the battle to force public oversight on the accounting profession was joined. In the early 2000s, IOSCO responded by forming the Monitoring Group  in conjunction with the forerunner of today’s Financial Stability Board. In turn, the Monitoring Group established the Public Interest Oversight Board (PIOB) in February 2005 as part of the IFAC Reform Proposals put forward by the Monitoring Group, with the goal of increasing investor and other stakeholder confidence that IFAC's public interest activities, including standard-setting by IFAC's boards, were properly responsive to those interests.
The IAASB and its advisors went on to gain the authorities’ approval of their greatly clarified audit and assurance standards by the end of the 2000s, and these publicly-reviewed texts became part of the Financial Stability Board’s compendium of standards for the world’s financial system. The fact that this private professional association continued to control the nomination of IAASB members – well, that did not sit easily for many. The push-and-pull between a private profession setting its own public standards and its overseers continued to play out.
In July 2020, the Monitoring Group responded to the public consultation it held in 2017. In financial policy circles, the announcement  resounded: as the overseer of the PIOB, it chose to upgrade the responsibilities of this independent body. By 2023, the PIOB will provide oversight of the standard-setting process to ensure that international audit-related standards are responsive to the public interest, including that they are developed in accordance with the principles of the Public Interest Framework used by other global policy-setters. The PIOB must oversee that the standard-setting activities follow due process throughout the development cycle, including that the audit and professional ethics Boards appropriately consider and balance input from stakeholders.
The PIOB’s remit will retain the direct oversight of the public interest responsiveness of final standards, including through ongoing engagement with the standard-setting Boards throughout the development cycle.
The PIOB’s governance responsibilities will include the nomination and appointment process for Board members, protecting the Boards from undue influence, such as commercial, political, and economic influence, in the public interest, and overseeing the administration that supports standard-setting, including the ethics and conducts criteria for the PIOB, Boards, and staff.
But what does this mean for WAIFC, and those who work in these financial centers? It is to be hoped that the resulting accounting and audit work will reduce the frequency and scope of fraud, scandal, and losses. More generally, the many stakeholders who rely on audited financial statements should be able to approach them with greater confidence in their information value. Also for WAIFC financial centers, those who enter the accounting and audit profession should find the work environment more rewarding – and these professionals are greatly needed at the heart of financial center ecosystems as the world economy continues to evolve.
In a separate opinion, WAIFC readers will have a closer look at auditor assurance statements – as differentiated from audited statements. This less well-known public service of audit firms will have an especially important role to play in advancing the understanding of sustainability matters.
 “Wirecard and me: Dan McCrum exposing a criminal enterprise,” Financial Times, London, 3 September 2020.
 In 2021, the Monitoring Group is composed of the Basel Committee on Banking Supervision, European Commission, Financial Stability Board, International Association of Insurance Supervisors, International Forum of Independent Audit Regulators, International Organization of Securities Commissions, and the World Bank.