Monitoring Group publishes recommendations to strengthen the international audit and ethics standard-setting system
The Monitoring Group (MG) has published its recommendations which are intended to strengthen the international audit-related standard-setting system, including the Public Interest Framework.
The members of the MG are the Basel Committee on Banking Supervision, European Commission, Financial Stability Board, International Association of Insurance Supervisors, International Forum of Independent Audit Regulators, International Organization of Securities Commissions and the World Bank Group.
The publication of these recommendations follows on from the MG public consultation on its earlier proposals that were published in November 2017. The MG’s recommendations take on board a number of comments that were made by various stakeholders during the consultation process.
The scope of the recommendations covers the responsibilities of the:
- International Auditing and Assurance Standards Board (IAASB);
- International Ethics Standards Board for Accountants (IESBA); and
- Public Interest Oversight Board (PIOB).
The MG’s recommendations focus on the following four areas:
(i) Accountability, public interest oversight and governance
The MG recommends retaining the three-tier model (standard-setting board; PIOB and MG), with the roles and responsibilities of each level clearly delineated and properly balanced, to demonstrate transparency and accountability. The aim of the MG is to provide a formal link between the PIOB and public authorities in order to protect the PIOB from undue influence while also enhancing its public accountability. The MG will periodically review the effectiveness of the system as a whole to address any public concerns and to safeguard the effectiveness of oversight.
The PIOB will provide oversight of the standard-setting process to ensure that international audit-related standards are responsive to the public interest, including that they are developed in accordance with the principles of the Public Interest Framework that has been developed (see below). The PIOB’s remit will retain the direct oversight of the public interest responsiveness of final standards, including through ongoing engagement with the standard-setting boards throughout the standard-setting development cycle. The PIOB’s governance responsibilities will include the nomination and appointment process for board members and overseeing the administration that supports standard setting, including the ethics and conduct criteria for the PIOB, boards and staff.
The PIOB will have ten gender diverse members drawn from a geographically and experientially diverse variety of stakeholder groups, with experience in the preparation, audit, oversight, delivery and use of financial statements. The PIOB Chair will demonstrate significant experience in identifying and understanding: interests of users of financial statements; the regulatory framework in which capital markets operate; and the importance of reliable financial information to transparent markets and thus contributing to promoting financial stability. The PIOB members, including the Chair, will be identified through an open call for nominations with clearly articulated guidelines. The method for appointment will be determined by the MG with consideration of a skills matrix that fosters leadership, expertise, and diversity of thought and geography. PIOB appointments will be made by the MG, consistent with currently established terms of three years, renewable once. The PIOB will assess each board’s effectiveness, including their respective Chairs.
(ii) Purpose, structure, and process of standard setting
International audit-related standard-setting activities will be undertaken in accordance with the Public Interest Framework. The PIOB will be responsible for the governance of the boards and public interest oversight of their agreed responsibilities. The recommendations are written with an over-arching objective that standard-setting activity would be independent from IFAC and that the associated governance and public interest oversight activities will reside within the PIOB Foundation legal entity. For future fundamental changes to the standard-setting structure, the PIOB, IFAC and the MG will sign a Memorandum of Understanding which will set out, among other things, the due process to accomplish any such fundamental future change.
The governance structure will include a separation between the source of funding and the management of the funds, including their allocation to oversight and standard-setting activities.
There will be two separate multi-stakeholder boards. One board would continue to be responsible for setting audit, review, assurance and quality control standards and the other board would continue to be responsible for setting international ethics standards for professional accountants, including auditor independence requirements. In this regard, the boards will retain the current mandates of the IAASB and IESBA, respectively, with continued enhanced coordination essential.
Each board will comprise 16 remunerated members (one full-time independent chair, one part-time vice chair and 14 part-time members), all appointed to act in the public interest. All members will be nominated through an open call and appointed using a skills matrix to be developed for each board that prioritises the public interest and fosters leadership, expertise, and diversity of thought and geography. The boards shall be comprised of a balanced group of individuals drawn from diverse stakeholder groups including for example: investors and other users of the financial statements, accountants, regulatory members, audit committee members, academics in the field of accounting or auditing, and audit practitioners. Each board will be limited to five audit practitioners (an individual who is or has been a member or employee of or otherwise affiliated with a public accounting firm within the last four years, determined at the time of appointment). Appointments will be for three years, renewable once. For each board, a two-thirds majority of all board members is required to vote in favour for the issuance of due process documents, such as an exposure draft, final standard or amendment.
The boards will be supported by an expanded and enhanced technical staff.
The boards will have the ultimate responsibility and accountability for the approval and withdrawal of standards. The PIOB will be responsible for issuing certifications on new or revised standards.
Board meetings will continue to be open and the boards will consider video streaming.
The boards will have access to stakeholder advisory councils reflecting diverse stakeholders including national standard setters.
The adoption and implementation of the standards will be fostered through multiple stakeholders, including IFAC and the PIOB. IFAC will maintain its role in promoting global adoption, convergence, education, implementation and compliance to ensure that professional accountancy organisations comply with their membership obligations, advocacy, non-authoritative guidance, sharing of best practices, surveying for implementation challenges and building capacity of professional accountancy organisations.
The MG will continue working for the development of an appropriate, long-term sustainable funding policy. It will seek, recognising that this will take time, to find a structure that encompasses:
- diversification of contributions from around the world received from investors and other users of financial statements, regulators and the accountancy profession;
- stability through medium and long-term commitment from contributors and adequate reserves built over time; and
- prudence and public accountability in the use of funds.
While IFAC continues to fund standard-setting activities and part of PIOB activities, there will be separation between the source of funding and the management of the funds, including their allocation to oversight and standard setting activities (PIOB and the standard-setting boards’ structure).
The MG will leverage the support of IFAC and the PIOB, along with input from the standard-setting boards, in developing a transition plan within nine months from the publication of these recommendations (by end of April 2021). The implementation period is not expected to extend beyond a period of three years after the development of the transition plan. It is envisaged that the new structure will enter into a service level agreement with IFAC for necessary support services (for example, nominations, staffing, communications and facilities) provided at fully transparent cost (subject to oversight of PIOB).
Public Interest Framework (PIF)
The PIF has been developed in the context of the MG recommendations (the MG also recognises it will need to evolve). It sets out the way development and oversight of international audit-related standards are responsive to the public interest and is structured around responses to the following questions:
- For whom are standards developed?
- What interests need to be served?
- How are the interests of users best served?
- What qualitative characteristics should the standards exhibit?
- How is the public interest responsiveness of a standard assessed?
- What special considerations are required for international audit-related standards, given their particular public interest relevance?
While the PIF recognises the importance of all of the above stakeholders, it focuses
primarily on the interests of users, and more specifically on the longer-term interests of creditors and investors and the protection of those interests.
IFAC has stated that it is pleased that the MG paper recognises the important and necessary role that IFAC and the accountancy profession will continue to play in the standard-setting process and that the recommendations are aligned with IFAC’s strategy. It highlights, however, that there are a number of important issues still to be addressed before moving forward with implementation. While IFAC does not underestimate the challenges this presents, it remains confident that the various parties will be able to work collaboratively with all key stakeholders involved to reach a satisfactory resolution during the transition planning phase.