Speech by SEC Staff:
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Good morning. Today I wanted to take this opportunity to discuss with you my thoughts on the international auditing standards frontier.
Auditing standards play a critical role in the protection of investors within each country's securities market and are an important part of supporting investor confidence in financial reporting. My sense is that there is broad agreement among securities regulators, as well as among capital market participants, on the benefits of high quality international standards utilized for financial reporting.
The development of international standards and pursuit of convergence of these standards, whether of accounting or auditing, is a trend that is given momentum by the globalization of business activity, including cross border investing. Given the ever increasing globalization of our markets, international accounting and auditing standards are evolving at a rapid pace.
Given the pace of progress and the momentum for international convergence I hope to convey the importance of your awareness and active participation in not only international accounting but the international auditing arena as well. Today I will provide a timeline of some of the major developments in international auditing standards, followed by a discussion of a couple of the more significant parallel developments in International Financial Reporting Standards (IFRS) and finally I will discuss some of the early signs that securities regulators and other relevant authorities are already engaging in the international auditing world.
Let me begin with a brief overview of some of the major developments in the evolution of international auditing standards.
The International Auditing and Assurance Standards Board (IAASB), under the auspices of the International Federation of Accountants (IFAC), have taken the lead in developing a set of international standards on auditing (ISAs). The International Organization of Securities Commissions (IOSCO), as the global body of securities regulators who work together to protect investors and enhance the integrity and orderly operation of the global capital markets, has long supported these efforts. The SEC has had an active involvement with IOSCO since its inception in 1983.
In the late 1990's and early 2000's, IOSCO expressed concerns about the quality of these standards, as well as the process for setting them, including the need for public interest oversight of the process. IFAC and the IAASB continued to work to try to address these and other concerns.
In 2003, after seeking input from IOSCO and other regulatory and international financial organizations IFAC instituted a set of reforms for standard setting and other public interest activities of IFAC intended to improve the governance structure and perceived public interest concerns (the "2003 IFAC Reforms"1). These reforms included among others the establishment of the international Public Interest Oversight Board to carry out independent oversight of the IAASB's standard setting activities and other IFAC public interest activities, as well as a number of other process changes.
In 2004 the IAASB undertook a multi-year project, later renamed the "Clarity Project", designed to improve the ISAs. Throughout the project IOSCO continued to monitor the developments and provide comment letters on many of the proposed standards. The IAASB completed this project in February 2009.
Shortly thereafter IOSCO issued a statement on the clarified ISAs. For cross-border purposes IOSCO "encourage[d] securities regulators to accept audits performed and reported in accordance with the clarified ISAs recognizing that the decision whether to do so will depend on a number of factors and circumstances in their jurisdiction". For national purposes, IOSCO "encourage[d] securities regulators and relevant authorities to consider the clarified ISAs when setting auditing standards for national purposes, recognizing that factors at the national and regional level will be relevant to their considerations."2
In late spring the European Commission (EC) issued a consultation paper to consider the adoption of the ISAs for the statutory audits of EU private entities.3
And most recently, in July 2009 the Monitoring Group, which is comprised of the regulatory and international organizations responsible for monitoring the implementation of the 2003 IFAC reforms, announced the commencement of its evaluation of these reforms. This assessment will include public consultations and is projected to be completed by the end of 2010.
Taking a step back, what I hope this timeline demonstrates is the rapid pace of progress over just six years.
Next I wanted to touch on the parallels between what we have witnessed with IFRS and what is now emerging and occurring with ISAs. Although there are arguably many parallels, I believe two of the more significant developments in the evolution of IFRS include:
In 2001, after thoughtful consideration the European Commission announced its intention to require all EU companies listed on a regulated market, including banks and insurance companies, to prepare consolidated accounts in accordance with IFRS4, by 2005.
IOSCO has long supported the development of IFRS. The organization carefully monitored the development of the standards, which included providing comment letters on many of the IASB's proposals as well as a substantive review of the standards in 19945 and 20006. However, in 2005, after careful consideration, IOSCO issued a statement which encouraged its members to accept financial statements in filings for cross-border offerings prepared under IFRS, with additional reconciliation or disclosure as necessary to meet national standards.7
Given the significance of the parallels, I can only wonder if the evolution of IFRS is any indication of the future of ISAs.
But before we get to the future, what is the role of ISAs in our global markets today?
Many securities regulators and national authorities around the world are currently considering whether and how ISAs should be used in their relevant markets. IFAC has recently released a chart which gives an overview of ISA adoption by jurisdiction, as well as other information about how the adoption process has varied among them.8 Based on the chart, 43 countries use or intend to use the Clarified ISAs as their national standards. Another 23 countries use or intend to use the Clarified ISAs as a base for their national standards, with modifications as necessary to address legal or regulatory requirements.
The SEC staff's long involvement in IOSCO in encouraging the development of high quality international standards, coupled with the Commission's role in protecting investors, also makes considering how the ISAs can contribute to audit quality in our markets relevant. In fact, this consideration is already underway by the Public Company Accounting Oversight Board (PCAOB).
The PCAOB has noted in their proposals that they consider the relevant aspects of ISAs when developing new standards. Further, the PCAOB monitors the developments of the IAASB through its membership in their IAASB's Consultative Advisory Group and through serving as a nonvoting observer with speaking rights at the IAASBs board meetings. The PCAOB also demonstrates its interest in understanding the international perspective by inviting the IAASB to be an observer at the PCAOB's Standing Advisory Group meetings.
So what's next for ISAs? Although I cannot predict the future, my sense is that the momentum for international convergence in auditing is building and market forces continue to support the collaborative development of national and international standards. As such, I encourage you to get involved and actively participate in these international discussions and debates.
Thank you for your attention.
1 IFAC Reform Proposals, September 2003.
2 IOSCO Statement on International Auditing Standards, June 11, 2009.
3 Consultation on the Adoption of International Standards on Auditing, June 2009.
4 In 2001 the International Accounting Standards Committee was renamed the IASB and the International Accounting Standards were renamed IFRS. At its first meeting in 2001, IASB adopted all outstanding IAS issued by the IASC as its own Standards. Those IAS continue to be in force to the extent they are not amended or withdrawn by the IASB. New Standards issued by IASB are known as IFRS. When referring collectively to IFRS, that term includes both IAS and IFRS.
5 In 1994, IOSCO completed a review of the standards and identified improvements that would be needed prior to considering such an endorsement. In subsequent years, the SEC staff and the staff of other IOSCO members continued to monitor the development of the standards and provide comment letters.
6 After a lengthy review of a core set of standards, in May 2000 IOSCO recommended that "members permit incoming multinational issuers to use the 30 IASC 2000 standards to prepare their financial statements for cross-border offerings and listings, as supplemented . . . where necessary to address outstanding substantive issues at a national or regional level." IOSCO's review also identified additional areas for improvement in the future. IOSOC agreed to continue to monitor the developments of the IASC in order to determine the extent to which their outstanding substantive issues, including proposals for future projects, were addressed appropriately. "A Resolution on IASC Standards Passed by the Presidents' Committee", May 2000.
7 Final Communiqué of the XXXth Annual Conference of the International Organization of Securities Commissions (IOSCO), April 7, 2005.
8 Basis of ISA Adoption (http://web.ifac.org/isa-adoption/chart).
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