It is more than seven years since the GFC first impacted economies around the world. The fallout has seen the likes of the G20, the Financial Stability Board (FSB) and global standard setters such as the International Organization of Securities Commissions (IOSCO) make significant progress in reforming global financial regulation and ensure a safer and more sustainable financial system.
But the job is far from finished, which is why Mark Carney, chairman of the FSB, has the coming G20 summit in November in Brisbane in his sights. Carney is urging action and agreement from the G20 leaders in regard to four major issues:
. resolution frameworks, especially cross-border resolution;
. the over-the-counter (OTC) derivatives package;
. bank capital, liquidity and leverage thresholds; and
. the shadow banking nexus.
There is also a recognition that the global regulatory political pendulum is gradually swinging from new policy development to implementation of the agreed-upon standards that are an unambiguous FSB charter requirement for all its members.
Standard setting is one thing, but uneven or pick-and-choose’ application by certain bodies could undermine the whole global regulatory effort. Without a doubt, the four global regulatory priorities Carney is urging action on are essential. But there is a fifth that could loosely be described as behaviour, reporting, ethics and corporate governance. Over the past seven years, we have witnessed an eerie correlation between those major firms that failed and their overpowering CEOs, incompetent boards, weak audit and risk committees, and useless risk management.
Auditors did not play an effective early warning role and the overall result in this financial crisis, as we know, has been a 15 per cent fall in global gross domestic product against trend. Worse still, we are observing a growing number of major scandals emerging – the LIBOR scandals, forex manipulation, hocus-pocus in commodity markets. What next?
Global regulators are worrying more and more about global audit quality. There are also growing concerns about the governance of audit standard setting, largely by the profession itself (with public oversight by the Monitoring Group and the Public Interest Oversight Board) and the effectiveness and structure of the global audit oversight bodies.
Global initiatives are also being considered to improve audit quality. They could cover:
. transparency reporting and ownership of audit firms;
. a set of audit quality principles issued by regulators;
. the development of a globally consistent system for measuring firm audit quality;
. guidance on professional scepticism; and
. guidance to audit committees on their role to enhance audit quality.
IOSCO and the International Forum of Independent Audit Regulators will need to work together in this area. On the accountancy side, a plethora of high-level political statements at the G20 and elsewhere over 15 years or so have not resulted in convergence of the International Financial Reporting Standards (IFRSs) and US Generally Accepted Accountancy Principles (GAAPs),
It does not look as though this will be fully achieved with the global standard setters, which are currently unable to agree on impairment rules, This is disappointing. Life will go on for the foreseeable future, with 100 or more countries signed up to IFRS and the continuance of US GAAP.
As the world begins a long shift toward a higher share of market based financing, effective disclosure will become even more important. In the future, integrated reporting may well play a bigger role.
Opacity and complexity destroy sound, sustainable financial markets, as the GFC has shown. Accountants and auditors can play a major role in the process of facilitating change and breaking down these barriers. And if this process works, they will have helped to ensure that more investors return to the marketplace.
lf, on the other hand, too many parts of financial markets remain off limits and are impenetrable, overly complex and black box’ in nature, expect property markets to boom and long-term investment to fail.
It is time for auditors and accountants to step up to the plate and play their part to make sure this does not happen. Today is a good date to start.
