Tom Seidenstein Speech: The Future of International Standard Setting
Oct 21, 2019 | English
The Future of International Standard-Setting
Remarks by Tom Seidenstein
Chair, International Auditing and Assurance Standards Board
to the Institute of Chartered Accountants of England and Wales’s Audit Conference
“Reflect, Reform, Refocus”
London, United Kingdom
October 4, 2019
Good afternoon, I am honored to be invited to the ICAEW’s Audit Conference. I view it as an honor for two reasons. First, I am honored that the Institute has invited me to speak to you so early in my term as chair of the IAASB. Throughout its nearly 140 years of history, the ICAEW has played a critical role in promoting the accountancy profession and holding it to high standards here in the UK and now globally. The UK has been steadfast in its support for, and adoption of, international standards—which is much appreciated and required if IAASB’s standards are to remain the global standard for audit and assurance.
Second, I am honored that you have decided to spend your late Friday afternoon listening to me—a decision that I hope you will not come to regret. I must admit a level of uncertainty that the inventors of the term “happy hour” had a late Friday afternoon talk by me in mind when they coined the term, but I will do my best to send everyone off to a good weekend.
Chartered Accountants’ Hall is a building of historical importance from an architectural perspective and for being a critical hub of thought leadership and debate in the world of accountancy. This building also has some personal historical importance for me. It was here, nearly 19 years ago today, that I really leapt in deep to the world of standard-setting. Upstairs, we interviewed many of the candidates that became the original members of the International Accounting Standards Board (IASB).
Then, I would have never guessed that I would be back here nearly two decades later to discuss the “Future of International Standard-Setting,” the title of my talk. However, it was then the seeds of passion for this topic and essential value of accountancy and audit were planted. I strongly believe that setting standards at the international level is the most effective way to respond to the relentless globalization of business and avoid the economic costs and regulatory arbitrage that come with a fragmentation in rules.
Stating my commitment to international standard-setting in broader policy terms gives you a hint of my approach towards standard-setting. While at its heart, standard-setting is a technical process, we must be aware that its consequences have significant societal impact. I firmly believe that auditors must play a critical role in ensuring trust in markets. I worry that trust is eroding in our institutions and in the way the economy works. It is my belief that that the IAASB, in conjunction with our many stakeholders, can and must play a role in enhancing and possibly restoring trust where it has eroded. If we succeed in doing so, we should help inspire a new generation of auditors and convince stakeholders that audits and assurance, driven by high-quality standards, have real value.
My goal today is to explain how I believe the IAASB could play a helpful role in securing this reality. This is a vision where the IAASB is seen as a highly responsive independent standard-setter with three key characteristics: First, we will operate with a high degree of public accountability and responsiveness. Second, the IAASB will help to innovate the processes to make standard-setting much more agile than it is today. Third, we will play our part to increase the level of engagement among the various components in the financial reporting ecosystem.
DILBERT COMIC STRIP SHOWN DURING SPEECH
Recognizing I am only three months on the job, I state my lofty ambitions with humility. And unlike the text in the comic above, I state my ambitions and goals knowing that you are listening. Indeed, I hope that you are not just listening, but will voice your opinion and advise me when you disagree. The IAASB benefits from challenge and we will not be an ivory tower.
I am also conscious that achieving my aspiration will not be easy. One view of the IAASB is rosy. Our standards are adopted or in the process of being adopted in over 130 jurisdictions. In general, I believe that our standards command a high degree of respect and stakeholders, such as the ones gathered here, are willing to engage and support.
However, I do not want the IAASB to be complacent. My view is, to quote my economist friends, that the risks are on the downside. As we all know, the challenges facing the profession and the standards that govern them are real—and some go to the core of what a profession is and the type of standards that we want.
First and foremost, not surprisingly for reasons only partly related to audit, the consensus around global standards is at risk. I understand that countries will always need to reserve the right to account for local realities. However, I am concerned about the potential for fragmentation if too many countries decide that standards are not keeping up with the expectations. We must confront weaknesses in audit standards when identified, come to grips with the increasing complexity of our standards, modernize standards to account for the impact of technology, and carefully consider the demand for the audit of non-financial information.
Second, we need to balance the diversity of stakeholder views on a wide range of public interest issues. One of the hallmarks of standard-setting is the need to confront diverging views. For example, I take the issue of developing the right type of standards for lesser complex entities (LCEs). This is a hot button issue for many of our stakeholders. Many from the securities regulatory community do not see this project as an urgent priority, while others see it as one of the most pressing needs.
Third, the IAASB’s structure is under scrutiny. When asked about the governance review of our organization, I say the same thing: We will operate under the rule “control the controllable.” Other powers will have the final say—until they do, we need to move forward with our work at hand. What is important is that we have an independent, appropriately resourced standard-setting body capable of acting in the public interest. At the same time, we at the IAASB need to prove that we are worthy of those who place their confidence in us.
International standard-setting is challenging, precisely for those reasons that I describe. However, I am not throwing my hands up in despair. It is our job to navigate this complexity. Our ongoing strategy review at the IAASB provides us a good opportunity to reflect. To earn that continued confidence that I describe, I see that we need to do three things: We need to get the right balance in our technical work program to be more responsive to the challenges that I described. We need to be more willing to innovate in the standard setting process. And finally, we must tighten our engagement with audit and accounting standard-setters, regulators, and others charged with serving the public interest. Let me turn to the innovation and engagements points first, before I get to our technical work program.
I ask, “What could a more innovative way of standard-setting look like?” Let me begin by saying I believe in formal due process as it exists today. However, the due process of standard-setting has not evolved much in the last several decades. In my mind, standard-setting is marked by long duration projects and highly formalized procedures. This formality favors those with the time and resources to participate in the process—and likely means the barriers for entry for participation are high. What I envision, to borrow a term from the technology world, is a much more agile standards-development process.
Standard-setters should be adopting new technology collaboration tools to engage stakeholders through all parts of the process. We need to meet people where they want to meet us—not where we want them to meet. In a more innovative world, we should move from paper and .pdf-based standards, to digital forms where we could track how practitioners are using them. At the IAASB, we should be willing to adopt more quick response mechanisms to address practice issues in shorter time periods. Our proposed Framework of Activities is meant to do this. This agile approach will require experimentation and a willingness to fail. However, success could be measured in greater participation and trust in the process and more rapid standards development.
Turning to engagement, this is also closely connected to our agility as standard-setters. We are part of a broader ecosystem—including securities regulators, independent audit inspection regimes, accounting standard-setters, and national audit standard-setters. Our reporting system will work better when the different parts of the system speak together. I recognize that this occurs today, but particularly when it comes to taking feedback from inspection regimes and partnership with national standard-setters, I want the IAASB to enhance our activity in this area.
Finally, let me turn to the IAASB’s work program and our strategy going forward. As many of you know, the IAASB is in the process of completing a significant phase in its technical work. Our current and most recent work comprise major standard-setting projects, aimed at improving the fundamentals of audit quality. I am committed to completing this work program. These projects will provide the foundation for future efforts. However, we also need to allow these projects to settle in and be prepared to support their effective implementation. Therefore, I do not see the IAASB replacing the completed projects one-for-one with projects aimed at major rewrites of existing standards.
Instead, the IAASB will dedicate more capacity to support more rapid improvements and potentially interpretative activities, as we see the standards put to practice. We also need to turn more of our energies to deal with the challenges facing audit and assurance standards, including the complexity of our standards, the impact of technology, and emerging issues of public interest, such as fraud and going concern.
Let me state the obvious: We cannot tackle these problems alone with the limited resources at hand. We will necessarily need the help of national standard-setters and all stakeholders alike to make efficient progress.
I was asked today to comment on two specific projects—ISA 315, our risk assessment standard, and our consideration of lesser complex entities. Let me do that briefly.
At our September meeting, the Board approved a revised ISA 315. Pending approval by the Public Interest Oversight Board, the standard will become effective for periods commencing on or after December 15, 2021. We believe that the standard is a significant step forward from the pre-existing standard. It clarifies nature and extent of work effort in relation to understanding controls, including more consistent use of language and more guidance on what needs to be done for each component of the system of internal control. The revised standard Introduces new concepts (including inherent risk factors; spectrum of risk; and relevant assertions and significant classes of transactions, account balances and disclosures) to help auditors in identification and assessment of risk. The revised 315 should drive a more focused response in ISA 330. In completing the standard, the IAASB addressed concerns raised in the comment letter process regarding complexity, scalability, and the length of the standards. Our focus now is to support the effective implementation of the standard.
The question of LCEs is the one topic that gets raised in every conversation with an external stakeholder since I joined the IAASB. Specifically, I am asked, “What are we going to do with our standards as they apply to Less Complex Entities?” I need to be careful what I say so as not to preempt our due process. We are in the process of analyzing the comment letters to our consultation document right now. The Board will deliberate on this topic for the first time after our consultation in December.
Let me say a few things about my personal viewpoint on LCE. We must set a clear course of action in the first half of 2020. There are a few possible paths forward, but I personally see similarities in what the IASB did for the “IFRS for SMEs” project. When I was at the IFRS Foundation, I was in strong support of the IFRS for SMEs project.
I am keenly aware of the consequences of any perceived inaction on our behalf. If we do not take a targeted approach in a reasonable timeframe, the IAASB should expect that countries will develop their own standards for LCEs. They already are. I would view that as an unfortunate outcome. We shall see where the Board lands, but I believe addressing the question of LCEs is a top priority.
I will conclude my remarks by saying that the IAASB can’t achieve our strategy on our own. We depend upon your support and your insight during all of our work. Together, we can enhance trust in this essential profession.