In the wake of the financial crisis, progress has been made in implementing reforms, but divergence on key areas threatens recovery, writes Fayezul Choudhury, Chief Executive Officer, International Federation of Accountants
Over the past 10 years, considerable progress has been made in strengthening global financial stability through stronger, more internationally harmonised regulation and supervision. In the early 2000s, the International Federation of Accountants (IFAC), a key group of regulators, and other public authorities created a ‘shared public-private sector’ standard-setting model for international audit and assurance, ethics and accounting education. This group recognised that high-quality international standards are the foundation of top-calibre, transparent and credible financial reporting. Such standards are essential for promoting investor confidence in financial markets, facilitating the comparison of financial information globally, attracting investment, fostering cross-border activity, and supporting economic growth and stability.
An improved model
The basis of the model’s effectiveness is that it balances technical inputs from the accountancy profession with an extensive due process that gathers inputs from a broad range of stakeholders. The overall process of developing standards is undertaken with independent public interest oversight. The model is transparent and protects the standard-setting process from undue influence by any party that may have vested interests.
The parties have continued to work together over the past decade to evolve and improve the model in order to enhance the public interest focus, further improve the credibility of the standards and the public’s confidence in them, and ensure that the highest-quality standards are developed and then adopted and implemented around the world.
The results have been extremely positive: more than 100 jurisdictions are using or in the process of adopting the clarified International Standards on Auditing, or using them as a basis for preparing national standards; more than 120 jurisdictions are using or in the process of adopting the Code of Ethics for Professional Accountants, or basing their national ethics standards on the code; and IFAC is helping to ensure that International Education Standards are used to train future generations of professional accountants.
In the aftermath of the recent financial crisis, steps were taken to create more effective and consistent global regulation. There was optimism – and an expectation – that new regulatory frameworks would mitigate the risks of future global financial crises.
However, as governments moved to take swift, decisive action in their own jurisdictions, optimism that an effective global regulatory framework would emerge quickly dissipated. Many governments acted under pressure of domestic politics and the ‘national interest’, and what is left now is a patchwork of diverging – and in many cases incompatible or inconsistent – sets of regulations.
Lack of consensus
For example, there is already rampant divergence on key reforms of capital, liquidity, derivatives and banking structures, despite those reforms being instigated globally by the G20 and the Basel Committee on Banking Supervision. Fundamental differences go as deep as how to define capital.
In another example, due to the lack of consensus among the members of the European Union, extensive ‘options’ have been built into the final package of audit reforms, creating fragmentation within the EU. Two of these options – relating to how long a company can retain an audit firm and the services an audit firm can provide – could create significant inefficiencies and force companies to reconcile multiple competing requirements in different countries. This, in turn, could negatively affect both the cost and quality of audits, make group audits more difficult to coordinate and lead to unnecessary additional audit procedures.
Meanwhile, many countries on other continents have considered and dropped mandatory firm rotation, concluding that it has not demonstrated the expected benefits – including the United States, which has sought to legislate against it.
These moves threaten fragmentation across the Atlantic, within the European Union itself, and between these regions and the rest of the world. And, despite the huge amount of legislation already passed, it is not over yet. In a recent speech, EU Commissioner for Financial Stability Jonathan Hill acknowledged that where the EU has “acted under great pressure in a short period of time” – referring to the 40-odd large pieces of legislation enacted since the crisis – there may just be a need to revisit some of them. Meanwhile, the G20 has acknowledged that, with so many new rules, the challenge now is to implement them.
This is hardly the remedy, as markets stretch for growth after a crisis recognised as global and in large part arising from a failure of collaboration and clear sight of cross-border risks. Surely a fundamental lesson from 2008 is that, in today’s highly integrated markets, good regulation must be compatible within and across jurisdictions. The basic principles underpinning good regulation, including clear objectives and a focus on the public interest, are often left behind by a fragmented political discourse.
And knee-jerk reactions – however well intentioned – often neglect the fact that good regulation should be proportionate, based on evidence, formulated with wide consultation (including among those who will implement the reforms, to ensure that they are actually achievable), and assessed for efficacy and impact. These principles and approaches have been espoused by the International Organization of Securities Commissions, the United Kingdom’s Financial Reporting Council, and others.
Of course, regulation should be tailored to the jurisdiction, and a range of approaches is very often appropriate. But, sometimes, a set of options just will not do and differences need to be thrashed out in order to reach meaningful outcomes.
These inefficiencies not only slow down businesses striving for a sustained recovery, but the complexity they present could actually obscure the sight line to the issues and risks that could be involved in the next crisis. Let us not wait until that next crisis arrives to discover once again the benefits of speaking the same language, and begin to undo the tangled web of regulation ensnaring global growth and stability.
The success of the standard-setting model for international standards for the accountancy profession is a good example of how such global initiatives can be implemented. It is a model – with buy-in from both public and private sectors, strong governance and a public interest focus – that should be expanded and emulated.