Former Executive Director, Professional Standards, Jim Sylph addresses Ethics Forum participants at the Singapore Accountancy Convention 2014. He the discusses the public's expectations of the profession, recent fraud and regulatory activity, and the how the profession is responding. He also gives an update on the work of the International Ethics Standards Board for Accountants (IESBA) in developing and maintaining the Code of Ethics for Professional Accountants, designed for worldwide application.
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Public Expectations
Following a series of scandals, fundamental changes in organizational culture are being called for across sectors including media, food, retail, health, and banking. A series of inquiries into culture and ethics all point to the need to change culture in order to restore trust across the private and public sectors and new standards bodies have been set up to improve behaviors.
Boards and senior management have the prime responsibility for defining and analyzing organizational culture by promoting their ethics and values and the behaviors these require across their organizations. As organizations come under increasing pressure to demonstrate their commitment to improving standards of behavior, the accounting profession can be a key player in giving confidence to boards that measures put in place to change culture and thus behavior are actually working, and that the tone at the top is reflected at all levels.
We are dealing with human nature: greed and personal interest v. public interest. Following the financial downturn, consumers and investors have become more aware and increasingly intolerant of corporate conduct they perceive as unethical. As a result, regulators are expected to broaden their remit to enforce good corporate conduct. Businesses appear more likely now to be challenged on any activities that are considered to have been detrimental to consumers or the effective operation of the financial markets. Recent examples include the large number of mis-selling reviews in the financial services sector.
Additionally, regulators can be expected to increase their focus on financial statement fraud as the risk of such behavior is perceived to increase as businesses struggle to fulfill the resurgent growth expectations placed on them by the markets.
Governments across a wide range of markets are also introducing new tools for regulators to use such as deferred prosecution agreements, forensic data analytics tools, and aggressive investigative techniques. Wiretaps, for example, were used in the high-profile insider trading prosecutions led by the US Attorney for the Southern District of New York, and the SEC has widely publicized its new forensic data analytics capabilities.
International cooperation among regulators continues to strengthen. The multi-jurisdictional investigations of LIBOR manipulation have exemplified this.
The Ernst & Young 13th Global Fraud Survey of 2,700 executives published earlier in 2014 makes depressing reading:
- More than 1 in 10 executives surveyed reported their company as having experienced a significant fraud in the past two years.
- Unethical behavior persists with 42% of respondents saying that their entities offer entertainment to retain/gain business; give personal gifts to retain/win business; make cash payments to win business or misstate the company’s financial performance.
- On the last point, 11% of the CEOs surveyed (out of 155) thought misstating financial results was justifiable to survive an economic downturn. And Singapore respondents (whom I would have thought had ethical standards as high as anywhere in the world) showed a 28% response rate accepting that misstating financial performance is justifiable.
In the light of results like this and the information now trickling out about the very senior level business leaders involved in some of the major financial failures and corporate malfeasance, the question this Forum must ask itself is, what must accountants do?
As IAASB® Chair Professor Arnold Schilder was quoted in his article in the May 2014 edition of ISCA’s magazine [IS Chartered Accountant]:
The global financial crisis came as a shock and a surprise to many parties, including politicians, central banks, regulators, financial institutions and auditors. Every party has to ask itself the question: What can be done better to enhance financial stability and audit quality, and increase public confidence? It appears from various inquiries and investigations (for example, European Commission Green Paper) that there continues to be high expectations regarding the value of an audit.
After each crisis, regulators set the bar higher to prevent wrong-doing. There is much action underway. The OECD is strengthening its recommendations on corporate governance and the Financial Activities Task Force is doing the same on anti-money laundering. The G20 has called for greater transparency in governmental financial reporting, as well as agreeing to share tax records by 2015 as part of a pledge to crack down on individual tax cheats and global corporations that use complicated arrangements aimed at paying as little tax as possible. The topic of taxation in a global economy has become a key political issue as multinational firms, such as Apple and Starbucks, face scrutiny about their low tax bills from the countries in which they make most of their money. Investigative reports into the use of offshore tax havens by the world’s wealthiest individuals have added weight to the view that governments are missing out on much-needed revenue.
Let me suggest we have to raise our game. Complacency is not an option.
We must make the audit more recognized as a valuable service. Not a low-priced service with a boilerplate report, but a highly priced service with a focused and meaningful report tailored to the specifics of an engagement. You will all be aware that this idea is being considered by the IAASB, and I expect we will see a final standard issued by the end of the year.
We should consider making the audit report more personal by identifying the name of the engagement partner. In some jurisdictions this is already common practice; in others it is highly contentious. But from an audit perspective I think we need to do as much as we can to personalize the audit work and remove the perceived barrier that auditors are hiding behind a cloak of partnership secrecy.
But audit issues are the subject of another session at the Convention, so let me turn to ethical matters.
Reputations, whether collective or individual, are built up over long periods of time and can be lost in an instant. And unfortunately, in the context of the global accountancy profession, actions in one continent can have a domino effect on its reputation on the other side of the world. We all need to remember that the actions of one professional accountant impact the credibility of all 2.5 million of us. And, therefore, we each personally and individually have a responsibility to ensure that the high expectations that the world holds us to are upheld. That applies equally to professional accountants in business, auditors, and management consultants.
One hundred years ago, the profession would have argued that it could manage and police its own ethical behavior. But there have been too many examples of individual professional accountants failing this self-assessment and self-management. And so regulation has increased to impose rules on the performance of accountants—particularly auditors. The regulation comes from two main sources—the IESBA® as the drafters and promoters of a global Code of Ethics and national regulators responding to local issues.
How Are Accountants Responding?
Let me turn to my slides [see below] to focus on how IESBA is responding to this increased expectation of regulators and stakeholders from the accounting profession. First, it is most satisfactory to see the number of countries that have adopted the IESBA Code in their own jurisdiction….
