Changing winds of accounting ethics

By Josephine Haste

There has been increasing interest in the accounting profession globally, resulting in investigations not only into what accountants do, but also into how they go about doing it and whether the outcomes take adequate account of the public interest and, as appropriate, the client’s and accountant’s interests.

Recently, ethics has come into greater focus, particularly with respect to auditor independence and professional integrity.

Managing multiple interests

Ethics has always been central to the work accountants do – after all, acting in the public interest is the cornerstone of our profession. Then why are governments and regulators now so interested in the professional practise and behaviour of accountants, particularly auditors?

There seems to be an increasing number of announcements of new inquiries, reviews or royal commissions into various professional accountancy services, whether they be financial advice, consulting or audit. You’d be forgiven for wondering if significant changes are afoot for the core principles by which we practise our profession.

Professional accountants are charged with the difficult responsibility of managing multiple interests: the interests of their clients, as well as those of regulators, while working in the public interest. However, when one considers that members of the accounting profession have an obligation to be aware of not just actual, but also perceived conflicts of interest, they are sometimes challenged to balance meeting client needs and complying with the independence and conflict of interest requirements of the Code of Ethics for Professional Accountants (the code).

Given that the winds of change appear to be blowing strongly with respect to independence, it’s timely to again consider how the profession might set sail on a different course of increased accountability and transparency. Yet in which direction, and will it really get us to where we need to go?

Reviews and regulation in the UK

Let’s chart a course to the UK, where a string of recent reviews has seen significant changes to the regulation and practise of audit, reporting and governance.

Firstly, the Kingman Review of the UK Financial Report Council (FRC) recommended that the FRC be replaced with an independent statutory regulator. Accordingly, work on establishing the Audit, Reporting and Governance Authority (ARGA) is underway. The ARGA is expected to be more interventionist than the FRC, and will take firm action in the event of non-compliance.

The Kingman Review coincided with the UK’s Competition and Markets Authority (CMA) Review into the market share of audits of listed entities, which is dominated by the Big Four accounting networks. Suggested reforms include splitting the audit and advisory businesses at network firms, scrutinising auditor appointments and relationships with management, and a joint audit regime that involves using more than one audit firm to conduct the audit for listed companies.

Given that the winds of change appear to be blowing strongly with respect to independence, it’s timely to again consider how the profession might set sail on a different course of increased accountability, transparency and independence.

The UK completed its suite of reviews with the Brydon Review, which issued its far-reaching recommendations in December 2019. Sir Donald Brydon, speaking publicly in November 2019 for the first time after the review commenced, said, “It is not auditors that cause companies to fail, that’s the result of the actions of directors. I’m a little troubled by the current mood that reaches for a shotgun aimed at auditors every time there’s a corporate problem.”

The focus of the Kingman and CMA Reviews was to examine regulation and market control, whereas the Brydon Review examined the quality and effectiveness of current auditing standards and the definition, scope and purpose of an audit. The Brydon Review’s comprehensive recommendations included concepts that aim to clearly articulate the role and purpose of an audit, while providing greater clarity about who an audit is for and the part it plays with respect to public interest considerations.

International influence

Keeping a steady hand on the tiller are the International Ethics Standards Board for Accountants (IESBA) and the International Auditing and Assurance Standards Board (IAASB). These boards have responded to market concerns of independence and quality with extensive changes to the code. These changes began with Non-Compliance with Laws and Regulations (NOCLAR), which became operative early in 2018. They are continuing with recent exposure drafts that address how firms and professional accountants can manage ethical issues relating to potential conflicts of interest arising with fees and non-assurance services (NAS) provided to audit clients.

The Fees and NAS projects were initiated by the IESBA in response to global concerns from regulatory stakeholders regarding the influence of fees and NAS on independence and audit quality.

There are perceptions that an unduly low level of audit fees, relative to fees received for other services, could create threats to compliance with the fundamental principles of the code and adversely impact audit quality, while fee dependence, particularly with respect to public interest entities (PIEs), may impact actual and perceived independence of the auditor.

The IESBA has noted the changing public perception about acceptable levels of threats to independence. This is largely in response to business collapses occurring even when no significant audit issues were identified. There is a greater focus on independence in appearance and less tolerance of potential conflicts of interest, where firms are providing increasing levels of NAS to audit clients. Many regions, particularly Europe, have prohibited an extensive range of NAS for statutory audits and PIEs.

Homeward bound

In Australia, the Parliamentary Joint Committee (PJC) inquiry into the regulation of auditing in Australia has considered many of the same issues raised in the UK. It will be interesting to see how the government responds to the findings of the inquiry, given the significant changes that have either been proposed or introduced in the UK and Europe.

While new regulations and standards may increase transparency and impose more onerous independence requirements for all professional accountants, will they fix the underlying problems policymakers are trying to address, and is there clarity about what those problems really are?

We might all have to navigate some rough waters ahead.

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