IAASB
Press conference on Chinese Accounting and Auditing Standards
Development of International Standards on Auditing
Speech by John Kellas, Chairman IAASB
Beijing, 15 February, 2006
It is a great pleasure to be able to represent the International Auditing and Assurance Standards Board (IAASB) in Beijing today. I should like to express my appreciation of the confidence shown in the International Standards on Auditing (ISAs) by the decision ofChina to accelerate convergence with the ISAs; and my admiration for the way in which the CICPA has made progress in response to that decision.
A similar decision has been taken by the European Union, which will shortly be going through the process of endorsing the ISAs. And there are many other countries who have similar policies. At IAASB, we need to ensure that we write ISAs that can be adopted in jurisdictions with such different legal systems, histories and cultures. We do this, in part, by having a sound and transparent process for the development of the ISAs.
Our due processes are of a very high standard. They have recently been approved by the Public Interest Oversight Board, which required us to compare our processes with those of other comparable standard setters. We believe that ours stood up well to this comparison, and should give those who use our standards confidence that the ISAs will be of high quality.
An important part of our determination to create confidence in our due process is that our meetings are open to the public, and the agenda materials are freely available on our web site. Recordings of our meetings are also placed on the web site. In this way, people can see exactly what our discussions are based on, and hear, if they wish, the discussions themselves.
It is important to the authority of our standards that interested parties should be able to comment on our proposals. We therefore always expose any intended authoritative document for comment. Recognising the difficulties of doing this in the international context, we allow 120 days for responses to proposals – enough, we hope, to allow for translation and domestic consultation to take place, which we think are essential to encourage the depth of comment we are seeking.
A good range of comment from many jurisdictions is essential to help us to ensure that our ISAs will be acceptable and will work in most countries without amendment. If this were not the case, they would cease to be ‘international’ standards. So we try to make them ‘framework neutral’ – that is, the ability to use them does not depend on any assumption about legal or accounting frameworks. Of course, sometimes domestic considerations will require changes to the standards – either because of a conflict of law, or some other local circumstance. It is for national standard setters to ensure that such matters are appropriately dealt with at local level. But care is necessary, to ensure that the international standards are not undermined by country changes. We are working on a policy statement to help national standard setters to decide what type of variation might be permitted, while preserving the ability to deem the resulting standards compliant with international standards.
I hope that those in China with an interest in auditing will make comments on our proposals, perhaps through the CICPA. A further avenue through which I am looking for input from China is the annual meeting we hold with important national auditing standard setters. I hope that the CICPA’s auditing standards board can be represented at our next meeting of standard setters. These meetings help us to identify issues that we should be dealing with because there is sufficient international concern to achieve a common solution to common problems.
The composition of the IAASB is also important in the context of the development of acceptable standards. At present, amongst our 18 members, 12 countries are represented round the table. This broad membership has 2 advantages: first, it brings to the table a range of experiences of different environments, and this helps the IAASB to understand the differences between jurisdictions that need to be allowed for within the ISAs; secondly, it allows IAASB members to see that there may be different ways of doing things than they had at first understood – this can help us to be flexible when it is important to be so, but it also allows us to identify the best approach which, provided it will work, should be adopted even though it may require changes within certain countries that use the standards.
Looking at our agenda, and our potential agenda, we are not short of possible topics to be tackled. Our problem is to balance the need for action on our part, with our resources and the ever-present danger of ‘standards overload’, which can be counter-productive. At present, we are working hard to improve the clarity of our standards. We have a number of objectives in this project, but the principal one is to remove any ambiguity in our use of language that might affect the interpretation of the requirements. We are doing this by introducing objectives into each standard, followed by separate sections that include respectively requirements and guidance. We hope this will help people to understand clearly what the standards are requiring. It may also help national standard setters to adopt the ISAs locally. In China, for example, you separate requirements and guidance in different documents; other standard setters may do something similar. We think that for us to make that separation will assist national standard setters in the proper implementation of the ISAs. But we stress that both requirements and guidance are necessary to ensure that the requirements are properly understood by auditors.
We are also working on projects as diverse as the consideration of related parties; the audit of group financial statements; the use of experts on an audit; representation letters; and service organisations. Each of these projects responds to an identified need. For example, our work on related parties follows on from our work on fraud and the audit. That project updated our ISA on fraud to try to make the audit more effective in identifying when financial statements are misstated because of fraud. But we also recognise that there are some areas where fraud is more prevalent, or more likely – and one of these is in transactions and relationships between an entity and parties related to it. As another example, we are looking at the use of experts since developments in accounting, such as greater use of fair values, are tending to require greater use of specialist expertise.
These matters will keep us occupied for the next 2 years or so. But we also need to consider what we need to do after that time, as current projects mature. The process of clarifying our ISAs will give us an opportunity to consider whether any other standards require more extensive revision. But there are also other topics, such as reporting using XBRL, under which a set of data can be supplied to users in standard categories which allow users to manipulate the data readily for analysis. There may also be a need to deal with forecast information, and there are demands to consider whether we should issue a standard on assurance on non-financial information such as management or sustainability reports.
We may also find that the fast moving international environment requires us to find ways of responding to issues more quickly as they arise. For example, many jurisdictions are adopting International Financial Reporting Standards (IFRS), but not all find that they can do so completely. We may find that we need to consider how auditors can refer to financial reporting frameworks that are close to IFRS, but not wholly IFRS. There is often an understandable desire in these cases that the references should be to some form of modified IFRS. Whether, and how far, this should be allowed is a difficult question, involving the interplay of domestic legal requirements and professional standards in a complex international environment.
I am pleased to have had the opportunity to speak to you today about international standards and the work of the IAASB. Our work, I am sure, makes an important contribution to reliable financial reporting, and therefore to financial stability. But it is important to recognise that this contribution is only one among many others that have a part to play in achieving this: accountancy education, including an emphasis on ethical behaviour and values; legal, professional and regulatory requirements to follow high quality standards of reporting and auditing; internal and external monitoring of professional standards; enforcement of corporate reporting requirements; and disciplinary arrangements.
It has been a pleasure to be with you today; I wish China well in its endeavours to achieve convergence with international standards.
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