The Right Regulation

Regulation plays an important role in calibrating incentives, driving good outcomes, and ensuring that reasonable expectations are met.  At the same time, there is the risk that the cost of regulation outweighs the benefits, that regulation can foster low-value defensive behaviors, or can result in unintended consequences such as impeding the ability of firms to attract and retain high quality individuals for their audit practices.  That’s why audit needs the right regulation.  Right regulation consists of the right supervisory framework, the right standards for auditing, the right business model for firms, and the right approach to auditor liability.      

• We believe that any supervisory framework for audit oversight should be designed to drive audit quality through an outcomes-focused approach, based on sound judgement throughout the audit review process, and incorporating a comprehensive understanding of the complexities of achieving high-quality audits—not a check-the-box, enforcement-focused exercise.  This requires a prudential approach to regulation—focused not only on holding the audit profession accountable, but also on its long-term viability and impact on economic stability. 
• IFAC believes that global audit quality has been enhanced by the development and adoption of standards set by independent, transparent, and publicly accountable boards with the relevant expertise—such as the International Auditing and Assurance Standards Board (IAASB) and the International Ethics Standards Board for Accountants (IESBA).  Fragmentation in standard setting would have a negative impact on audit quality.  Nevertheless, high-quality audit standards alone are not a sufficient condition for achieving high-quality audits—the standards must be widely adopted and effectively implemented by well-trained audit professionals.
• Historically, the global economy has been well served by high-quality audit standards that are applied to all entities in a manner proportionate to their size and complexity.  However,  IFAC believes there is now an urgent need to address emerging challenges inherent in applying the standards to entities whose nature and circumstances are less complex.  Likewise, entities in highly regulated sectors like financial services, who are subject to prudential regulation requirements, may need special-purpose assurance services that supplement the traditional financial statement audit.  IFAC acknowledges the need for careful consideration of potential implications and unintended consequences of different assurance options and the importance of maintaining robust standards and audit quality across all entities, large or small.
• We believe that multidisciplinary firms—offering both audit and other professional services—fill a valuable market need.  Specialists working within firms are best positioned to integrate needed commercial and subject matter expertise (e.g., tax, valuations, forensics, fraud, cyber security, etc.) into the audit process,—thereby supporting high-quality audits.  Quite simply, regulation that would result in audit-only firms will lead to a decrease in audit quality.  At the same time, auditor independence—both in fact and in appearance—is essential.  Measures to support independence should be robust and effective.  Adherence to the principles and standards of the IESBA Code, including the non-assurance services provisions currently under review, promote auditor independence and limit potential conflicts of interest related to providing certain non-audit services to audit clients.
• IFAC believes that the impact of policy tools such as audit firm rotation or joint audit—the appointment of two firms resulting in one audit opinion—are highly dependent on jurisdiction-specific legal, cultural, historical, and structural factors that must be carefully considered, including an evidence-based analysis of likely impacts.  These two policies increase the potential for conflicts of interest and can significantly disrupt relationships between reporting entities and their audit and non-audit service providers. The long-term impact of these two regulatory actions (on a stand-alone basis or in concert) could threaten the viability of the multidisciplinary firm model and ultimately harm audit quality.  IFAC does not believe that such policies are globally applicable tools for improving audit quality.
• IFAC supports approaches to auditor liability that are designed to support new, expanded assurance services and encourage competition in the audit market.  Auditors need to be held accountable for their actions but should not be held responsible for the actions of others like management or boards and oversight bodies.  Accordingly, joint and several liability regimes are out-of-date and regimes that employ features such as proportionate liability and liability caps need to be considered by jurisdictions worldwide.