1. Global audit regulation – It’s not your grandfather’s audit report anymore
William Kinney
University of Texas at Austin
(member: IAASB)
Conference on Regulation and the Audit Industry
University of Oklahoma
Norman, Oklahoma
May 18, 2012

2. Outline
Background on audit regulation in the U.S. vs. rest of the world
2012 geo-political economy regulatory issue: Three approaches to change in a global market
Research Opportunities in Audit Regulation via Theory development, Archival Studies, Experiments – What you can add

3. 1. Questions about Accounting and Auditing standards
Would it be good to have information comparable in relevance and reliability for all public companies around the globe?
Is standardized world-wide financial reporting possible?
What about voluntary standards
set “in sun shine” by independent experts in the public interest with
global independent oversight, and
patchwork enforcement by stock exchanges, public interest groups, global network firms, and national governments?

4. Three uses of standardized audited financial information
by management – to better run the business
by investors and creditors – to make investment and lending decisions
by those charged with governance (including governments) – to make intervention decisions
Can national private partnerships be expected
to serve the global public interest?

5. Financial reporting laws, regulations, and standards across borders
EU law/ EC directives/ Sec. reg.??
US law/ Sec. reg.
UK law/ Sec. reg.?
FR law/ Sec. reg.?
G, Inc. H, Inc.
I Corp.
FR national
FRF&AudStds
Borse rules
FR private lit.
FR culture/
contracts/
governance
US national
FRF&AudStds
NYSE rules
US private lit.
UK national
FRF&AudStds
LSE rules
UK private lit.
Global Financial Reporting Framework and Auditing Standards
Who will interpret and enforce these
FRFs and AudStds? Will they differ?
US culture/
contracts/
governance
D, Inc. E, Inc.
F Corp.
UK culture/
contracts/
governance
A, Inc. B, Inc.
C Corp.

6. U.S. Financial Reporting Regulators post-2002
SEC
FASB
GAAP
PCAOB
Inspect/
Enforce
Aud.
Stds.
QuCtl.
Indep
Internal
Control
(COSO)
Measurement criteria Application of criteria

7. E.U. Financial Reporting Regulators (with member differences*) 2008
EU (none)
National?
IASB
IFRS
IAASB
ISAs
Qual
Ctl stds
Indep x x
Turnbull,
Venoit,…
Inspect/
enforce
ISAEs
Measurement criteria Application of criteria
* Red Italics means national regulations only (i.e., jurisdictional version)

8. International Federation of Accountants (IFAC)
Mission: to serve the public interest, IFAC will continue to strengthen the worldwide accountancy profession and contribute to the development of strong international economies by establishing and promoting adherence to high-quality professional standards, furthering the international convergence of such standards and speaking out on public interest issues where the profession’s expertise is most relevant.
Standards: IAASB (auditing), IESBA (ethics), IAESB (education), IPSASB (public sector accounting)

9. Top Ten differences in design and operation of IAASB and PCOAB
IAASB PCAOB
Some global influence via inspections of foreign filers
Statute-driven (domestic crisis politics as force)
Investor protection objective
Inspections drive Enforce-ment (but not Standards)
Mandated by U.S. law, no cost effectiveness test
May read summaries, but won’t assist independent research
Global by design
Market-driven services (e.g., no ICFR audits)
Public interest objective –
no ability to Inspect/ Enforce
Voluntary adoption (quality of standards is raison d'être)
Sponsors and commissions scholarly research

10. Top Ten differences in design and operation of IAASB and PCOAB (cont’d)
IAASB PCAOB
Developed in sunshine
Diversity (9 practice members, 9 not), 18 Tech Advisors, 8 IFAC staff, Task Forces, other experts, CAG, SME, SMP, NSS
Audit expertise on Board
Independent in selection, oversight, oath (only Ch. Is paid)
Independent oversight by PIOB (appointed by Monitoring Group: Basel Group, WorldBank, IOSCO, Int. Assoc. of Insurance Supervisors, observed by Financial Stability Forum and Int. Fed. of Independent Audit Regulators)
Unknown - not much sunshine
Three non-CPAs, two CPAs (no practice members) 24 standards staff, SAG?
No expertise necessary
Staff is hired/paid by Board
Oversight by SEC personnel
(but to date, no public reports)

11. Adoption of ISAs around the globe
100+ countries (CN, MX, BZ, UK, GR, FR, IT, AU, CH, JN, Pakistan, SA, Kenya . . .)
Global network firm/ gov. methodologies
European Commission?
PCAOB?
Statements of key players on U.S. adoption:
U.S. Government Accountability Office
IOSCO (U.S. SEC is a member, oversees PCAOB)
U.S. Chamber of Commerce
Known barriers to PCAOB adoption of ISAs?

12. Primary technical differences between IAASB’s ISA’s and PCOAB’s AS’s
IAASB PCAOB
No IC audit – enhanced IC reporting?
Group audits – no reference to Component auditor
Confirmations – no special status
Fraud and FV audit guidance revised
Documentation to support audit conduct
IC audits – all major processes
Group audits – reference to Component auditor optional
Confirmations required – even if not deemed reliable
Fraud and FV audit guidance per AICPA, circa 2003
Documentation to support inspections – “didn’t document, then didn’t do it”

13. ISA Financial Audit for each important assertion
and identified process (with enhanced reporting)
Adj/Corr to
Aud. Com IR
CR < 1 DR
Adjustments/
corrections
Opinion
on MM
Choice
CR = 1
If due to IC Def.*
If due to IC Def*
Sig. Def. to
Aud. Com
Financial audit
Enhanced reporting
If due to MW
Report
on MW
+ analyze material and/or numerous year-end adjustments as to cause and
report to investors if due to MW in ICFR.
* % of MW firms identified via (per Audit Analytics coding of ICFR filings with SEC).

14. Bedard and Graham The Accounting Review 2010
Studied 144 audits under AS 2, multiple firms
Access to work papers and personnel
Found:
3,990 internal control deficiencies
15 firms had material weaknesses
11 associated with corrections/adj

15. 2. Auditor’s reports
Diagram 1: Illustration of the “information gap” (IAASB 2011)
Available to users
Financial
statements and
other public
information
Users
Information about
audit scope,
process and
findings
Entity information
relevant to the
audit
Private and
undisclosed
Auditor’s
report
For which of these three areas do user’s seem to want information???

16. IAG Survey on “Improving the Auditor’s Report” 3/16/11
Who is the IAG and can we trust them?
What are their complaints?
What are their suggestions for possible change?
Do their suggestions:
Extend the auditor’s audit procedures (and thus raise audit cost)?
Report something that is not already discussed with the Audit Committee?
Go beyond disclosures required by GAAP?
Harm the company with competitors?

17. IAG excerpts (3/16/11) Beyond GAAP? What is “FS Risk?” Beyond GAAP?
Criteria?

18. 2.a PCAOB proposals (Concepts Release 2011)
AD&A: views on “significant matters” including “audit risks identified, audit procedures and results, and auditor independence auditor’s views on the financial statements, estimates, policies, ‘close calls’”
Required “emphasis of matter” para. for AD&A in 1.
Auditor assurance on other information: MD&A, non-GAAP information in earnings releases (re: AU 550).
Clarification of language in standard auditor’s report: reasonable assurance, responsibility for fraud, management’s and auditor’s responsibilities for statements, and other information.

19. 2.b EC proposals: (Statutory Audits of Public-Interest Entities 11/11)
Article 22: The auditor’s report: 2. Shall, at least: (h) describe extent of direct verification vs. system testing; (j) detail the level of materiality applied; (k) identify key areas of risk of material misstatement; (l) describe “situation of entity” including ability to meet future obligations and thus going concern ability; (m) assess significant internal control deficiencies identified during the audit; (q) Identify each member of the audit engagement team. 4. Shall be < 4 pages in length (<10,000 characters). 5. Shall be signed and dated [by partner]

20. 2.c IAASB “bridging” solution (Invitation to Comment, June 2012)
Combines, refines, and synthesizes national regulators’ “wish lists” into an integrated whole acceptable on a global basis.
Expands auditor’s report to:
Maintain “report card grade”
Clarify “going concern”
Explain “risk-based” and terminology
Provide “auditor commentary” (EoM, OM)
Can it meet national regulators’ demands?

21. Independent Auditor’s Standard Report
(Proposed) (ISA 700 today)
Report on FS
Report on FS
Opinion
We have audited . . .
Basis for Opinion
Management responsibilities
Going Concern assumption valid . . .
Auditor responsibilities
Opinion
Auditor Commentary (2 – 10 items)
Respective responsibilities
Report on other req’d information:
Management, TCWG
Audit firm/ date
Auditor
Report on other req’d information:
Audit firm/ engagement partner/ date

22. 3. Ten Broad Research questions
Auditor Commentary:
Input: what criteria? not required by GAAP or law. confidentially applies. can auditors interpret FS “meaning?”
Output: Can users understand audit procedure implications? Does commentary imply “piecemeal opinion” on item?
Effect of a) explicit “going concern” assurance and b) explicit management statement per IFRS vs. US GAAP?
Limits imposed by: “issuer pays” model and auditor as “assurer” rather than “originator” of information
The auditor’s “true client” is: management, audit committee, investors, potential investors?
Is independent AC a suitable substitute for investors?

23. Ten broad research questions (cont’d)
Economics of control process information: what do individual users need? And at what cost?
PCAOB sets, inspects against, and enforces it own standards – incompatible? what are the perils?
Can Inspection Comments identify bad extant standards?
Mechanism design and theories for voluntary standards in global economy with national enforcement
International treaties and agreement for national governments to cede decision authority viable for global enforcement?

24. Conclusion
There are problems with and questions about standardized global financial reporting
No single “silver bullet” solution, but
Apparent demand for
market-driven mechanisms (broadly defined)
expertise of independent public interest groups
appropriate oversight at all levels with appropriate national government enforcement
What mechanism design do you like best and why?