International Regulatory Environment for the Auditing Profession - Essay Example

Number of the Module The Module Number The Of Ethics For Professional Accountants Issued By The International Ethics Standards Board For Accountants States That “A Distinguishing Mark Of The Accountancy Profession Is Its Acceptance Of The Responsibility To Act In The Public Interest” Word Count (1751) A Distinguishing Mark of the Accountancy Profession is its Acceptance of the Responsibility to Act in the Public Interest Introduction The idea of public interest must be considered by all the professional organizations that seek to enhance the professions’ interests they offer services to. International Federation of Accountants (IFAC) defines public interest as “the common benefit that all citizens share from the services provided by the accountancy profession” (International Federation of Accountants [IFAC] 2011a, 4). The public includes all the groups and individuals because the profession responsibilities affect every portion of the society (that is, the taxpayers, suppliers, and the consumers). The profession responsibilities are aimed at protecting particular public interests. These interests entail the financial reporting soundness, the comparison of the financial data across different borders, accountants’ contribution to the performance of the organization and corporate governance, and fiscal caution in public expenditures (IFAC 2011b, p4). There is a definitional framework of the public interest and it is composed of three criteria. These criteria include (1) the costs and benefits consideration for the entire society, (2) observance of the democratic processes and principles, and (3) the respect for ethical and cultural diversity. The framework offers criteria for benchmarking the new regulation appropriateness, assessing public interest issues, designing the professions’ public positions, and developing the professional standards. It is worth noting that the accounting profession must be aware of the extent of the political, cultural, and economic effect of the public interest. Any accountancy profession is considered to be serving the public interest by IFAC if it is assessed against the three criteria. This gives IFAC the ability to evaluate whether or not the action, condition, process, or policy serves the public interest (IFAC 2011b, p4). The three criteria have different functions; the first criterion entails the assessment of the public interest based on the costs and benefits (that is, the positive and negative outcomes) for the society in general. It should also recognize that the profession of accountancy through its procedures or actions has effect on governments, organizations, people, and capital markets. The second criterion entails the evaluation of an action or a decision performed in public interest as a process of democracy – that is, it is supposed to have particular qualities of governance, public accountability, and public participation. The third criterion entails the evaluation of the level to which the public interest policy or issue can be used properly and understood in a consistent manner from one jurisdiction to another or from one society to the next (IFAC 2003, p5). It is imperative to note that public interest cannot be served if not all the three criteria are met to some extent. Current International Regulatory Environment The background to the IFAC reforms suggestions are based on the decrease in confidence over the financial reporting, corporate collapses associated with the accounting profession, and the failures in auditing and financial reporting in various countries. The outcome has been a considerable regulation of the accounting profession in majority of the countries, an attempt to return the confidence of the investor and the public in financial reporting. The events have not happened in all the countries but they have considerably manipulated the international regulatory environment in a manner that necessitates a response. IFAC notes that a mixed regulation of the accounting profession needs to be adopted (IFAC 2003, p7). The proposals are based on various core beliefs and value and they include (a) the audit and accounting profession has the mandate of serving the public interest, (b) the public interest is the international concentration on high quality auditing, accounting and other professional standards, and (c) the transparency in setting the standards results in a widely accepted and high quality standards. The changes are intended to result in standards that are of high quality; thus, the outcome of such changes is improved performance by the auditing and accounting profession. Thus, it is expected that the outcome will lead to more confidence in the auditing and financial reporting quality (IFAC 7). Among the major reforms of the IFAC was the establishment of the Public Interest Oversight Board (PIOB). The main aim of the PIOB is to “increase the confidence of investors and others that the public interest activities of IFAC (including the setting of standards by IFAC boards and committees) are properly responsive to the public interest” (IFAC 9). PIOB is responsible for managing the IFAC public interest activities that are related to auditing; priority is given to the standard setting activities that are associated with audits and other related financial activities. It is also responsible for the IFAC standard setting activities in areas such as assurance standards and audit quality control, audit performance standards, auditors’ ethical standards and independence, and audit and other audit-associated standard setting activities (IFAC 9). Do Audit Reports Serve The Needs Of Owners And Investors? Auditing is the review of an agent or employee performance through an independent auditing agent. The independent auditing agent can be external or internal to the business or enterprise; the agent is not a component of the company’s operational management. Internal audit is the primary means through which managers and owners appraise and assess the company’s internal control structure (Abramov and Johnson 2011, p16). It is worth noting that the traditional practice of auditing focuses on the financial data. External auditors carry out financial statements formal audits in order to meet the needs or the requirements of the external stakeholders. These external shareholders include regulators, creditors, and investors. In the past years, there has been expansion of the traditional focus to entail review of the systems established to make sure they are in compliance with the company’s expectations, procedures, and standards. Internal auditors also perform operational audits to establish whether the company adheres to its procedures and standards (Abramov and Johnson, 2011, p167). The audit industry began gaining respect and prospered in the 20th century. However, the audit industry respect and prosperity have been hampered. Cases of management corruption and fraud are some of the weaknesses displayed in the auditing standards. These problems have improved the professional auditing standards thus restoring the image of the audit industry (Imhoff 2003, p118). Questions regarding the level of the accounting quality usually arise and auditing and accounting have been criticized for failing to avert some of the problems faced in the audit industry. In the late 1970s, auditing and accounting were criticized for their failure to meet the needs of the creditors and investors (Imhoff 2003, p119). Thus, to a large extent, the audit reports serve the needs of the owners and the investors. This is because over the years the accounting standards have been improved to cater for the needs of the investors and owners. Current Thoughts on Issues The global business environment is becoming complex and the devastating “events of the global financial crisis have highlighted the critical importance of credible, high-quality financial reporting” (IFAC 2003, p5). The present events and environment have motivated the need for more relevant information concerning processes and entities that support the financial reporting quality. Potential investors and existing shareholders, and other relevant bodies seek to minimize the degree of uncertainty when making decisions; this is done by looking into information they think to be reliable and relevant. Attaining a high quality financial reporting is based on the financial reporting infrastructure jurisdiction that has been established for that purpose (IFAC 2011b, p5). The decisions made by the individual bodies (the management and individuals in governance) responsible for financial reporting determine the level of quality of the financial reporting. The financial reporting information is then made available to the users. The basis of the decisions is on the financial reporting infrastructure jurisdiction and there is input from the independent auditor and those responsible with the governance. Constant improvement in the financial reporting necessitates a consistent commitment from the investors, regulators (and other users), policy makers, and standard setters to evaluate and support the financial reporting infrastructure procedure components that they influence (IFAC 2011a, 6). Financial reporting quality is supported by the external audit and this is regardless of whether the audit is performed on the non-public sector, private sector, public sector, or the capital markets. External audit is an important part of the supervisory and regulatory infrastructure. Various factors influence what is expected of the audit and the things that the auditor is supposed to communicate to the financial statements users. These factors include “the nature of financial reporting, the practical and legal limitations on the auditor’s ability to obtain and disseminate information, and the need for the audit to be conducted within a reasonable period of time and at a reasonable cost” (IFAC 2003, p6). Conclusion Current international regulatory environment for the auditing profession is sufficiently robust to make sure that the external auditors of listed companies provide reports to owners and investors, which serve the public interest. The purpose of the establishment of international bodies such as Public Interest Oversight Board (PIOB) is to elevate the investors and owners confidence in IFAC activities; that is, IFAC is responsive to the public interest. The international regulatory environment believes that the audit and accounting profession is charged with the responsibility of serving the public interest. The public interest in this case is high quality accounting, auditing, and other related professional standards. Transparency is an important element when setting the standards since it results in standards that are of high quality and are widely accepted. The resultant effect is enhanced performance in the auditing and accounting profession. Thus, the current international regulatory environment for the auditing profession has played a significant role in ensuring that external auditors companies offer reports to investors and owners, which serve the public interest. As stated earlier, the regulatory environment (such as that of Public Interest Oversight Board) is supposed to elevate the confidence of the owners and investors that the IFAC public interest activities are appropriately receptive to the public interest. Regulatory environment such as that of PIOB is also concerned with IFAC standard setting activities in areas like assurance standards and audit quality control. The aim of such a regulatory environment is to ensure that the public interest is served through the delivery of quality financial reporting. Involvement in the standard setting activities is one way through which the regulatory environment functions. It is imperative to note that these standards control the type of financial reporting given by the auditors and accountants. Reference List Abramov, I. Y.. & Johnson, K. W., 2011, Business Ethics: A Manual for Managing a Responsible Business Enterprise in Emerging Market Economies, U.S. Department of Commerce Imhoff, E. A., 2003, “Accounting Quality, Auditing, And Corporate Governance”, Accounting Horizons (2003): 117-128 International Federation of Accountants, 2011a, A Public Interest Framework for the Accountancy Profession, New York: International Federation of Accountants International Federation of Accountants, 2011b, Enhancing the Value of Auditor Reporting: Exploring Options for Change, New York: International Federation of Accountants International Federation of Accountants, 2003, Reform proposals, New York: International Federation of Accountants Read More