By James Hamilton, J.D., LL.M.
The head of the European Federation of Accountants has endorsed principles-based international audit standards through the ultimate convergence of IAASB and PCAOB standards. The International Audit and Assurance Standards Board currently has a major project underway to complete its suite of audit standards, he noted, with about twenty six new exposure drafts expected over the next year or so. At a recent seminar on financial reporting, David Devlin, then federation president, also called for the rollback of the extraterritorial impact of auditor independence rules.
The IAASB standards aim to be principle-based and avoid what some have considered to be the PCAOB’s tendency to be overly prescriptive in its standards. An explicit drive towards IAASB-PCAOB convergence would in time force resolution on the point, Devlin believes. He emphasized that that auditing standards must be principle-based and give auditors the opportunity to exercise their professional judgment, without turning their work into primarily a box ticking, file building exercise which, whatever the intention, will have the inevitable effect of focusing on the clerical rather than the substantive when conducting audits.
He also observed that both the Sarbanes-Oxley Act and the Statutory Audit Directive provide for some extraterritorial inspection of audit work, which raises the specter of multiple regulatory and enforcement regimes and attendant increases in the costs of audits. It is thus critical, in his view, that auditor oversight be based on the home country principle and that regulators equip themselves with the means of ensuring equivalence in their work.
Turning to the issue of auditor independence, the FEE president urged regulators and legislators to roll back the extraterritorial impact of independence rules. Not only is it self-evidently appropriate to do this within the EU single market, he posited, but it would make sense if the SEC and the PCAOB were to do the same. This would then leave open the question of how to ensure the independence of auditors of foreign affiliates. In this regard, he commended the approach of the UK’s Auditing Practices Board, which regards as acceptable the application by auditors of foreign affiliates of UK companies the IFAC Code of Ethics, which is now under the aegis of the International Ethics Standards Board for Accountants. At the end of 2006, the IESBA proposed to strengthen its auditor independence rules. In support of his suggested position, Devlin took comfort in the fact that both the European Commission and IOSCO take part in the public oversight structures of IFAC.