The International Auditing and Assurance Standards Board issues international standards on auditing that set the global benchmark for external auditing, and which are applicable in Malta through direct reference in our legislation. Meeting in Malta with a 50-strong team at the invitation of the Malta Institute of Accountants, MIA president Bernard Scicluna met up with IAASB chairman ARNOLD SCHILDER to discuss some current international developments.

Following the recent major corporate failures such as Enron and Worldcom, there was an international backlash against the profession which was criticised for not doing its work properly. On the other hand, in the case of the current global financial crisis it is often said that auditors have had a “good crisis”. As the chairman of the body that writes the standards which underpin the auditing requirements in around 125 countries, what is your perspective on these international perceptions of the profession?

It is important to acknowledge that after Enron and Worldcom the global profession has reacted through the International Federation of Accountants with the so-called “reforms” in 2003 which resulted in a complete review and restructuring of the international standard setting processes. The IAASB is now structured in a way that ensures representation by both practitioners and non-practitioners on a 50 / 50 basis in order to ensure that the broader public interest perspectives are properly identified and ad­dressed.

Secondly we benefit from the guidance of a consultative advisory group which comprises some 30 international organisations, which enables us to receive the views from a broad spectrum of stakeholders, including regulators of course.

Third we have the oversight of the Public Interest Oversight Board that has resulted in a number of changes and improvements to the selection of board members and to the standard setting process starting from the initial consultation paper to the issue of the final standard, including oversight on how we have responded to comments received. These developments have resulted in a much more robust standard setting process, with more accountability.

Furthermore, we have just completed our so-called Clarity Project, which was designed to ensure that the language in our standards is clear and devoid of ambiguity. It is important to note that the resultant 36 auditing standards have not only all been redrafted in the clarity style, but almost half of them have also been thoroughly revised and there is even one completely new standard.

But now to the other half of your question: I think we should be cautious in calling this a good crisis on the basis that auditors have largely been out of the firing line.

A different perspective has been explicitly raised, for example, by the UK Treasury Select Committee which is a parliamentary committee that studied in some detail whether the auditing profession played a role in the evolution of the financial crisis.

The Committee made precisely the point that you raised – that we have not seen much evidence of audit failures. But the Committee continued to ask another question: so what then has the auditing community been focussing on? If so much happened in the financial crisis that the whole financial system seemed to be at stake, why were the auditors’ duties not such as to also cover such matters?

So one can see a current shift in the international discussions towards questioning the relevance of the audit towards an entity’s business risk, within the context of broader systemic risk considerations; and towards how the role of auditors might possibly be adapted to assume such new responsibilities.

So, it may have been a good crisis for the international auditing profession, but the aftershock includes a hard look at the audit function and its scope and relevance in an international macro-economic context.

Recently there has been an international debate that the standard audit report, which is effectively the culmination of the audit engagement, perhaps does not provide as much detailed information as various stakeholders might find useful. There are certain calls, for example, for a shift to a long form audit report. I know that this is a topic on the IAASB agenda – how is the project progressing and what is the general feeling on the subject?

This is one of our current key projects. What we have done so far is that the IAASB, jointly with the American Institute of Certified Public Accountants, has commissioned independent academic research on users’ perceptions of the auditor’s report.

The conclusions, briefly summarised, are that there is positive value in the short form audit report, but equally, investors are also indicating that they want more information in particular on the so-called soft topics: such as information on management’s estimates and judgements. It is this latter perspective that leads to the important issue of who should be doing more: is it the board of directors, the auditor, or both, that should be responsible to disclose more information in these areas?

That is a question that we are currently studying.

In our audit quality project we are also addressing the fact that if you want better quality, this does not just involve the auditors but there is also an important role of an effective audit committee challenging the information produced by the entity as well as the auditor’s findings, and international regulators are also asking for more direct access to corporate and audit information such as in the area of financial institutions.

So the relationship appears to be triangular: companies on one end including audit committees, regulators on the second, and the auditors on the third end of the triangle. I think it is very important to examine where communication to stakeholders can be improved within the concept of this three-way relationship.

Any last comments on your Malta meeting?

Well, first of all we had a very productive meeting, demonstrated by the approval of two “Exposure Drafts”. Second, our meeting here in Malta is testimony to our commitment towards all our constituents around the world, whether big or small. Malta is an EU member state that contributes its fair share in international professional fora, and we look forward to continued interaction with Malta through the Malta Institute of Accountants.