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Standard-Setting in the Public Interest—IAASB Milestones

(Madrid, Spain)

During her introduction of Prof. Schilder, panel moderator and IFAC President Olivia Kirtley cited the following statement from his 2013 remarks given at the 8th Annual Auditing Conference in New York:

"Throughout history it is clear that there has been a strong call for professional accountants to act in the public interest and to take into account the expectations society places on them and to understand these expectations and to respond to them through meaningful interactions. Interactions therefore in my view are more than a concept. Rather, they are an essential and fundamental principle underpinning what we do."

Good morning ladies and gentlemen.

First of all, my warm congratulations to the PIOB on its 10th anniversary. The PIOB has had an impressive history, with great contribution to the work of the IAASB over the years. In that spirit, I have chosen to start my remarks with a bit of history of major IAASB standard-setting milestones. But I will also talk about what the future holds for the work of the Board. 

One of IAASB's key past accomplishments was the Clarified International Standards on Auditing (ISAs), released in 2009, a merit of my predecessor, John Kellas, and his team. The project was not only a clear public response to audit failures, such as Enron and WorldCom, but also a holistic response to heightening regulatory attention to audit quality, and challenges in implementing global standards. At the time of these developments a decade ago, the start-up of the Clarity Project was also a key backdrop to the robust 2003 reforms established in collaboration between the Monitoring Group and IFAC.

The objectives of the Clarity Project were clear: to improve understandability of the ISAs and eliminate ambiguity between requirements and guidance; to enhance quality of auditor performance; to improve relevance and applicability of the ISAs to audits of SMEs, and to facilitate global adoption. The result was a comprehensive revision and redrafting of all the ISAs.

A few years later, we carried out a post-implementation review and the results confirmed that the Clarity Project in essence achieved its objectives.

That work has led to today where 110 jurisdictions across all parts of the globe  are now using or committed to using the Clarified ISAs—and there certainly is more to come in Francophone Africa and Latin America, for example. As IASB Chairman Hans Hoogervorst mentioned earlier, there are 116 countries using IFRS—so, we are close!

That was IAASB's first major project to respond to public interest concerns, and its focus was on audit quality. The IAASB's second major initiative—its most recent flagship project—was Auditor Reporting and its focus was on responding to users' needs.

The Auditor Reporting Project is said by some to be a response to the financial crisis. That is not true. Research commissioned by IAASB started well before the crisis, asking: "What do users actually think of the auditor's report? What are your expectations of such reports? What should change?"

The new Auditor Reporting standards are, in my view, the future of global auditor reporting and stimulate improved auditor communications. They are essential to the continued relevance of the audit profession globally. Users have told us that the audit opinion is valued, but the auditor’s report can be more informative. And they were very clear that they want more relevant and decision-useful information about the entity and the financial statements audit.

So, we responded with new reporting features, including a major new section on Key Audit Matters, enhancements regarding the role of the auditor with respect to Going Concern and Other Information, and more information about auditor responsibilities and independence .

I am pleased to report that already adoption is progressing, even ahead of the required date, in Europe, South Africa, Australia, Singapore, and other jurisdictions. At first there were voices of reluctance, as can be expected with any new major change. But now: acceptance, positive feedback, and from some enthusiasm. Indeed, I am hearing now that more and more "the auditor is coming out of the 'black box'" - and that the audit is becoming "more observable," a phrase I noted in a recent IFIAR report.

Three years ago, much of this would not have been dreamed possible. But it is now reality.

Earlier in 2014, we also published the Framework for Audit Quality, describing the many factors that play a role in achieving audit quality.  The key message there, indeed, is the importance of interactions between auditor, users, TCWG, regulators, and others. Of course, the primary responsibility for performing quality audits rests with auditors, but each stakeholder plays an important role supporting high-quality financial reporting. Audit quality is best achieved in an environment where there is support from other participants in the financial reporting supply chain.

I recall my time as an auditor and how central a role an active and challenging audit committee could play to help stimulate good financial reporting quality and good audit quality. Interactions and ongoing dialogue are essential. 

I am pleased to see the Framework for Audit Quality being taken up more and more, because I believe the messages it delivers are very important.

The Framework has set the scene, and the IAASB is now moving forward to the future. We have embarked on four major new projects.

These projects address the review of:

  • Our over-arching Quality Control standards at both the firm-wide and engagement levels;
  • The ISA addressing Group Audits;
  • The auditing of Fair Value Estimates, with a view to re-assessing the ISA 540 on that subject in light of accounting developments, as well the need for additional guidance when auditing Financial Institutions; and
  • Professional Skepticism.
If you ask "why is it that these topics are on the agenda?" one simply has to have regard to the external environment. Globalization and complexity are changing the way business are structured and operate, as is technology. These affect how audits are being carried out, and there are also developments and innovation with the audit firms themselves. Each of our project topics have the potential to further enhance audit quality in light of these global trends.

These topics are also on the agenda because we have learned from our post-implementation review of the Clarified ISAs, and we have ongoing input from the International Forum of Independent Audit Regulators (IFIAR) and others. We have given serious consideration to these inputs, among other.

They are seemingly four different topics, but when we began discussing them in March this year it became clear there is a lot of commonality between the four topics, in particular certain issues that cross-over each of the areas. Take for example professional skepticism: it has relevance to our thinking on the way forward not only as an issue in and of itself but also to each of the other three topics.

What the IAASB decided, therefore, was to pull all these topics into a single consultation -- our so-called "Invitation to Comment"—similar to what was done for purposes of our Auditor Reporting Project. We plan to publish this Invitation to Comment in December.

We will make the Invitation to Comment readable for non-technical audiences, through a separate special section highlighting key areas of attention. That is important as we need to hear from all varieties of stakeholders. Naturally, there is a need also to consult on matters at a more detailed technical level. We will therefore use a separate second section of the Invitation to Comment to address that. An early warning: that section may be fairly comprehensive.

Once we have the benefit of multi-stakeholder input on the Invitation to Comment, we will from that vantage point then determine appropriate standard setting. However, there is progressive discussions within the Board and with our Consultative Advisory Group that are shaping our actions. One recent outcome from those discussions is that already a project proposal on work on enhancing the ISA addressing auditing fair values and considering issues relating to auditing financial institutions will be developed for discussion by the Board this December. 

So, in the end: What is this new work all about? What are we trying to achieve? In brief:

The ISAs need to better address increasing complexity and new technologies in the business and audit environment, and deliver against the public’s heightening expectations of quality. And the profile of tomorrow’s auditor has to be one of a critical challenger, supported by a regime focused on public interest and quality management, and better observable for stakeholders.

This Invitation to Comment will be a strong call for ongoing and active dialogue with and input from all kinds of stakeholders on these topics and our public interest aims. I am confident that that call will be answered. 

I also want to mention Integrated Reporting and Data Analytics, which are topics that were featured in the Board's latest meetings. These are developing areas, yet are likely to become a increasingly prominent feature of the landscape and are therefore relevant and important. The IAASB is actively informing and preparing itself for the future in regard to these topics. Such preparation is an essential first step.  

In closing, I want to come back to the point of interactions, in the context of our consultation process for the upcoming Invitation to Comment and the public interest lens we must always keep at the forefront of our minds.  For this, let me share a moment from our discussions at our last Board meeting.

We were encouraged by the PIOB Observer at our meeting to be inclusive in outreach when soliciting feedback on the Invitation to Comment, including reaching out to stakeholder communities, for example, employee groups, who may not otherwise typically engage on such consultations.

From that very broad challenge, the question arose - who else then should we ask? And he said: "your mother-in-law maybe?"

That brought out some smiles; but I thought about it.  And I knew what she would have said to the question of what is the right course of action. She would say: "Do what is right for the children." For me, "the children" represent society at large—all those that rely on the work of the auditor, the current generations, and the next—whose trust in the profession will be shaped by the success and failures of tomorrow’s auditors. But also these auditors themselves are entitled to have fit-for-purpose audit standards.

For that, we must engage and interact, with the public interest in mind, so that we are fully informed before deciding on our path. 

Prepared by IFAC's Communications Department. Contact communications@ifac.org for further information.

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