Bilancio del Libro – The Importance of Balance in Auditing and Standard-Setting

Arnold Schilder | Chairman, IAASB

Mar 04, 2015 | at a ceremony commemorating the official adoption of International Standards on Auditing (ISAs) in Italy | Rome, Italy | English

Ladies and gentlemen,

It is a great pleasure to be in Rome again, so soon after the successful World Congress of Accountants. It illustrates how active you have been in pursuing the public interest in accounting and auditing. When I say “you,” I note with pleasure the strong cooperation between the Ministry of Finance (and specifically Ragioneria Generale), the markets regulator CONSOB, the professional body CNDCEC, and the professional associations ASSIREVI and INRL.  But can one expect otherwise in the home country of Frà Luca Pacioli?

In preparing for this Conference, I read again about Pacioli. The title of his famous book is powerful:  “Summa de Arithmetica, Geometria, proportioni et proportionalita.” And a key principle in his double entry bookkeeping is the “bilancio del libro:” balance in the books. If you have a debit, there is also a corresponding credit. Aren’t these great principles for society at large: balance and proportionality?

You have worked hard to successfully achieve the translation and adoption of the Clarified ISAs in Italy. I had the pleasure of participating in some discussions regarding the way the ISAs should be adopted and applied here. Basically, this was precisely to achieve balance and proportionality. The ISAs are principles-based, leaving room for balancing them with specific national laws and regulations. You have carefully studied that, resulting in some specific additions on a national basis. The ISAs are also designed to be applied proportionately; that is – tailor-made to the specific circumstances. There is a well-known statement, ”An audit is an audit,” meaning that every individual audit is of high quality. But the practical application of that principle differs; an audit of a multinational group is quite different from an audit of a small sales company. One of the great merits of Luca Pacioli is that he made bookkeeping relevant to smaller trading companies. It will not be a coincidence that another Italian, Giancarlo Attolini, leads IFAC’s Small and Medium Practices Committee in producing helpful guidance for smaller practices.

The organizers of this Conference have asked me to specifically address three topics. The first is: an overview of the international situation of ISA adoption/adaptation.  Well, that is very positive. The ISAs were thoroughly reviewed, rewritten and enhanced in the so-called Clarity Project. This was finished in 2009. Since then, we have seen good progress in national adoption. We now count 104 jurisdictions that are using the Clarified ISAs already, or are committed to using them in the near future. This is well-spread all over the world: 40 jurisdictions in Europe, 17 in the Americas, 21 in Asia and Oceania, and 26 in Africa/Middle East. Russia was the latest addition in December 2014. And we expect more this year. Taking into account important matters such as translation and adaptation to national circumstances, that is great progress. If I say “adaptations,” I mean in particular additions and clarifications on a national basis. We respect that fully. We would not be happy, however, with deletions or carve-outs.

To our best knowledge, that takes place only occasionally for specific national reasons. This certainly is helped by our very thorough due process and full transparency during the development of standards. We listen carefully to concerns expressed to our exposure drafts, and the IAASB will only conclude after due consideration of all comments. At the end, our adherence to full due process has to be approved by the Public Interest Oversight Board (PIOB).

Adoption of the clarified ISAs is also greatly supported by all 27 international networks of firms, united in the Forum of Firms. They are committed to applying the ISAs in their firm-wide methodologies. So adoption takes place along two axes: the national adoption, and the firms’ adoption. Finally, I note the great support from many regulators like IOSCO, IFIAR, the Basel Committee on Banking Supervision, and international organizations as the World Bank, IMF, OECD, UNCTAD and INTOSAI.  Many of them are represented in our Consultative Advisory Group (CAG) that advises us twice a year with a fair level of detail.

That brings me to the second topic: endorsement of ISAs in Europe. The European Commission is an official observer with active speaking rights in our Board meetings and has fully participated in the discussions on the Clarified ISAs. The Commission is also represented in the CAG, the PIOB and the so-called Monitoring Group that oversees the PIOB. So the Commission is a well-respected voice in our process.

In the revised European Audit Directive and the new Audit Regulation of 2014 the Commission is empowered to adopt the ISAs. Article 26.3 of the Directive specifies certain criteria for that adoption; e.g., that the ISAs have been developed with proper due process, public oversight and transparency, and that they are conducive to the European Union public good.  The appropriateness of the development process is obvious, as the Commission has been able to observe from nearby. But in all fairness, “conducive to the Union public good” can trigger all kinds of discussions. Article 48 of the Directive states that the Commission shall be assisted by a Committee for their assessment of the ISAs. We understand that this Committee will consist of national audit regulators and possibly others as well. The Commission’s staff has indicated to us that they will not hurry, that it may take years to go through this process, and that they cannot preempt on the outcome. And I have never seen a European Committee simply saying “ok, fine, done.” So this is a bit unpredictable.

We are pleased with the positive relationship with the Commission, and appreciate that there are complications that it needs to deal with. However, this should not delay progress in the public interest. So we have always strongly stimulated adoption at the national level, not without success. From the European member states, only a few are not yet on our adoption list, notably Germany and France as they are awaiting the European adoption process. But in practice they have largely implemented the requirements of the ISAs into their national standards, and many of their practitioners already apply them through their international firm methodologies. We also note the strong support from the Federation of European Accountants (FEE), working to further assist auditors using the ISAs.

So, as Chairman of the IAASB, I am most pleased with the adoption progress in so many European member states, and of course today in particular here in Italy – the fourth largest economy in Europe. But I must confess, as a European, that I am a bit disappointed that this takes so long in Brussels. In Pacioli’s terms: is this really balanced and proportionate?

Finally, you asked what is on our table now, and how you can anticipate what is to come. A very constructive question. The IAASB has entered a new phase. We have finalized a number of key projects: the Clarified ISAs, a completely new auditor reporting model, the revision of a number of other standards such as on review and compilation engagements, as well as new standards such as on the assurance to Greenhouse Gas statements. And now we have started work on various newer topics. To name some: quality control; group audits; financial institutions; integrated reporting. And soon data analytics; risk assessment; and professional skepticism.

This is partially in response to what we learned from our ISA implementation monitoring exercise, including feedback from regulators and practitioners. But much also after feedback on our consultation for the IAASB’s Strategy for 2015-2019 and Work Plan for 2015-2016. Further, we will be actively stimulating the implementation of the new auditor reporting standards – which, by the way, are very compatible and complementary with the new requirements in Europe, as FEE recently has concluded. And we hope to finalize soon a number of revisions to the ISAs with regard to the audit of disclosures in financial statements, emphasizing the importance of sufficient auditor attention for qualitative disclosures.

We will approach these topics with an open mind. Open to what we have to do – is it about revisions of standards, or more about education on the basis of current standards? How should we liaise with our various stakeholders – for example, we see our dialogues with regulators becoming more intense and at various levels. To which extent should we mirror that with regard to other stakeholders, such as investors, audit committees and practitioners? What would be useful output to facilitate dialogues and can we be more innovative therein? And how can we take into account Pacioli’s important notions of balance and proportionality?

So, how can you anticipate and be prepared proactively? Allow me to make three suggestions. First, nothing goes above observing our Board meetings. You have a nice opportunity to do so at our upcoming Board meeting from 16-20 March, as that will be held in Brussels. All agenda papers are on the IAASB website. Such observership provides for a thorough understanding of the issues at hand. Second, stimulate the implementation of the new auditor reporting standards. This is a huge change in the way auditors communicate with investors and other users. The preparation of these new style reports with so-called Key Audit Matters and other innovations will result in more intense communication with management and those charged with governance, such as audit committees. The public interest benefit hopefully will be better understanding of companies and their audits, and higher perceptions of the relevance of these audits. Finally, you may organize international conferences and roundtables to discuss the newer topics on our agenda. These may bring to the table a variety of stakeholders who can share many perspectives. This may assist the IAASB with achieving balance and proportionality in dealing with these important issues.

Ladies and gentlemen, let me close by congratulating you cordially with the official adoption of the ISAs. I recall that the profession’s title of “auditor” has originated in ancient Rome. An auditor is a listener first, and then shall speak where necessary and useful. Thank you for being my “auditors” today!


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