Comment – Ethical guidance stuck in a rut

About a year ago, I wrote about possible developments in the guidance of the accounting and auditing professions, on both sides of the Atlantic, in Europe, and at the International Federation of Accountants.

At that time there was the possibility that the European Commission would mandate FEE, the European umbrella accountancy body, to deliver new core principles on auditor independence, together with the commitment of FEE member bodies to implement the principles domestically.

There are at least three major initiatives for new guidance on independence and objectivity, one of which is categorised as risk-based, principle-based, or, in the vernacular of the Western accountancy world, ‘The Framework’.

The Framework approach focuses on real threats to objectivity rather than perceived ones. It acknowledges there are few, if any, situations where some threat or pressure to objectivity does not intrude on professional judgement. Accountancy regulators have to, so far as the Framework is concerned, assist members to identify five basic threats identified by research: self-interest, self-review, familiarity, advocacy, and intimidation.

Alongside those should be weighed the accepted safeguards intrinsic to the professional environment.

The final two elements of the approach involve deciding whether, on the balance of threats and safeguards, it is safe and proper to proceed, and, finally, recording the firm’s reasoning and conclusions.

So what has happened and is happening around the world which will add further lustre to this UK-developed approach?

In 1997, the Securities and Exchange Commission in New York joined with the the US public accountants body, in setting up the Independence Standards Board (ISB). AICPA, the US accountancy institute, produced a report with ideas for securing the independence of auditors of listed companies.

Unfortunately, no widespread consultation took place before the issue of this document – and the board gagged when it saw it! The paper called for an ‘in principle’ approach, not so unlike the Framework, but using ‘materiality’ jargon instead of ‘threats’ jargon. So far, so good. But the principles resulting were not regarded as an end in themselves; firms were then to evolve their own detailed guidance, calling on the principles.

AICPA promoted this DIY approach in a paper in the early 1990s, and was cut off at the knees by the SEC. Not surprisingly, the SEC reacted in the same way this time. The AICPA paper will not receive the benefit of a consultation exercise. Instead, the Board will publish its own ideas of guidance and consult on that.

Jack Maurice is the UK technical representative on the IFAC Ethics Committee and FEE Ethics Working Party. He is also head of ethics & legal services at the English ICA.

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