The Emergence of a Global Field of Audit Regulation:
The Case of the Qualification to Audit
Paper submitted to:
EIASM, Euroconference
FINANCIAL REPORTING AND REGULATORY PRACTICES IN EUROPE
May 20-23, 2001
Palermo, Italy
Ph.D. Cand. Caroline Aggestam
Copenhagen Business School
Department of Accounting and Auditing
Solbjerg Plads 3, C4
DK-2000 Fredriksberg
Denmark
E-mail:
Abstract
A rapid process of globalization in many spheres has characterized the last decade of the twentieth century; accounting and auditing are no exception. This paper introduces an analysis of the ongoing process of harmonizing the qualification to audit at an international level. More specifically the paper studies the involvement of the UN in the process of attempting to facilitate the construction of a global ‘model’ for audit qualifications. The audit profession and the process of granting a ‘qualification to audit’ is currently regulated on a national basis. However, international harmonization in this area is now being encouraged by supra-national organizations such as, the World Bank, International Organization of Securities Commissions (IOSCO) and the World Trade Organization (WTO). Their key underlying reasons for involvement in this area has been two-fold. Firstly, there has been strong requests from the developing world seeking help to strengthen the profession in their respective countries Secondly, as the evolution of a global financial market is rapidly progressing, the importance of financial statements that are reliable and transparent across borders is becoming increasingly important. The East Asian financial crisis in mid 1990’s demonstrated that this need is evident. This links the development and increasing use of internal accounting standards (IAS’s) with a growing need to educate and train auditors within an international framework.
From a theoretical point of view, this paper raises a discussion on how Pierre Bourdieu’s conceptual tools on the field, capital and symbolic power can be used to study the possible emergence of a global field for audit regulation and thereby capture the roles and positions of the actors involved as well as the relative distribution of capital between them.
INTRODUCTION
“While there are international standards for the provision of the service of accounting, there are no global standards for the service providers” (UNCTAD, 1999:iv).
The accountancy profession is today recognized as one of, if not the most, internationalized of the professions. This is a development that has been connected with the professions' role in serving business as auditors and consultants. As business has become increasingly global, so has the profession, and the activities of the largest firms, the 'Big 5'[1] encompass the world[2]. Globalization of economic activities is currently much debated, however, there is “little doubt that the large accounting firms contribute to the possibilities of globalization” (Cooper et al, 1998:531). However, unlike firms such as for example General Motors, the big accountancy firms are required to operate under restrictive legislation in most countries in which they operate. The restrictions imposed may logically be explained by the fact that the profession is legally regulated in each country on the basis of its role of carrying out the legally mandated audit of financial statements (Loft, 1996, Hopwood, 1994). The regulation of the audit profession is two-fold, (1) concerning the process of auditing and (2) concerning the individual auditor. Concerning the process of auditing, regulations span from establishing what organizations are to be audited, the way in which the audit is to be done to the form of report that is to be issued. Concerning the individual auditor, regulations span from those ensuring independence from the auditee to the education and practice requirements for being qualified as a statutory auditor (which is the term used by the EU for qualified auditors in each country).
Globalization of business has brought demands for harmonization in all of these areas. The profession itself, through the International Federation of Accountants (IFAC) who has developed international auditing standards (ISAs), an ethical code and also guidelines concerning the education and competence requirements for qualifying to be a member of the profession (IEGs). These attempts to encourage harmonization do not have legal backing unless they are implemented in individual countries, however this may change. Haronization in these areas is being encouraged by supra-national organizations such as, the World Bank, International Organization of Securities Commissions (IOSCO) and the World Trade Organization (WTO). One of the major reasons for their interest being the consideration that in order for the free market to operate then investors must be able to trust that the audit has been carried out in such a way that the financial reports coming from a company are reliable. This links to the harmonization of financial reporting through the development of international accounting standards (IASs). Thus, the potential challenges of harmonizing audit regulation on an international basis have become the subject of a good deal of debate.
In 1998 the World Trade Organization (WTO) noted that one of the most significant issues in respect to international trade in accountancy services is the widespread nature of local qualification and licensing requirements, both in regard to individual practitioners and as conditions for the ownership and management of firms (WTO, 1998). The international harmonization of the requirements to obtain qualification to audit is a very interesting and controversial area. Competence to do the audit, gained through relevant education and training and tested through examinations, is clearly crucial to establishing a reliable audit function. This competence is currently gained and tested locally in individual countries with their own procedures and requirements. Whilst globalization leads to a demand for auditors to be able to work internationally as more of business is carried out across international boundaries, then local legislation tends to restrict the possibilities, although there is now a level of regional harmonization in the European Union (EU). Recently, however, there have begun to be calls for a 'global qualification' set up as a bench-mark to check that the audit qualification from each country lives up to a minimum standard. The idea of a global qualification system stems from the desire to have a benchmark that can be applied on a worldwide basis (Aggestam, 1999). A global benchmark would seek to assure a common level of competence between ‘qualified’ auditors internationally. In 1999 the Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) issued a guideline on national requirements for the qualification of accountants, including a global curriculum for the professional education of professional accountants, which in this paper will be referred to as the ‘ISAR model’.
The debate on an international harmonization of the audit qualification has become intertwined with that on mutual recognition; which involves the possibility of qualified auditors practicing in countries other than that where they are registered as auditors. Recognizing the qualifications of auditors from other countries is clearly crucial to establishing a free market for audit services, which has also been raised as an issue in this context (cf. the argument for harmonizing auditing which is to aid the free market by making financial reports more reliable). Work on international provisions for mutual recognition of professional qualifications has been introduced through the Uruguay round of GATT talks[3].
The aim of this paper is to introduce and explore some sociological premises of how, or if, a global field for audit regulation is emerging. More specifically it is concerned with a possible global harmonization of the regulation of the audit profession, in particular the regulation of the process to become a qualified professional accountant. By doing so, the paper will hopefully throw light on the processes of harmonizing auditing on a global basis. This paper will present a discussion of how one can study the emergence of global norms, or more broadly a global regulation of economic life, within the current fields of (national) audit regulation and the audit profession (increasingly global) and capture the rules of the regulatory game and the institutional dynamics by using the conceptual tools of the French sociologist Pierre Bourdieu. It is known that regulation involves competition for power and problems of regulation is dominated by questions concerning the control of it and by whom it is controlled by (Hancher and Moran, 1989). The discussion in this paper will be focused on how the UN became involved in issues regarding global accounting education. More specifically, the priority of the paper is to study the processes of how the ISAR model was developed and describe some of the institutional dynamics involved.
It should be pointed out that this paper represents a part of my Ph.D. project which entails understanding why, how, when and by whom (i.e. there are several international actors who are involved in this process, se appendix 1) initiatives for harmonizing the qualification to audit at an international level are pursued. This paper is however limited to exploring the role of the UN in the process of attempting to achieve international harmonization for the qualifications to audit.
The paper is organized as follows. The next section will introduce some key issues relating to international harmonization of the qualification to audit, namely international trade in professional services and the regulation of the audit profession. Subsequently the theoretical framework will be presented. Following this the history of the development of the ISAR model and the institutional dynamics involved is described. The final section is discussion and conclusions on the ISAR model, the process of constructing it and its future, in the context of regulation of professional accountants and the sociology of the profession.
SETTING THE SCENE
International Trade in Professional Services
The world of professional services is no longer a mere spectator on the sidelines of the emergence of a new international trade order, but rather the oposit (Dezalay, 1995). A market where international expertise in accounting and auditing is becoming increasingly demanded is arising and processes of globalization is gradually requiring that professional accounting services are transportable across national borders. Globalization is potentially driving social transformation and creating a new international order. It is foreseeable that professions may form new global rules of conduct and standards to organize and regulate the profession in a new international order. It is now evident that questions regarding barriers of trade in professional accountancy services, on an international level, have become a growing concern of international agencies, semi-governmental actors, professional accountancy bodies and the Big 5. Issues concerning the emergence of a new global trade order for services, has been touched upon by the Uruguay Round negotiations. During these negotiations the Secretariat released a note entitled “Trade in Professional Services[4]”. The document raises issues such as; activities comprising professional services, forms of trade, the motivations and objectives for rules and regulations, descriptions of typical regulations and measures, and finally considerations related to the application of major GATS related concepts and principles. Furthermore, the document focuses on the licensed professions, notably accounting, law, architecture and medicine, with the objective of identifying the core issues of relevance to these sectors. The increasing use of international accounting standards, issued by the International Accounting Standards Committee (IASC) (who has become a global standard setter), is placing new demands on the service providers, namely the professional accountants. The need for a harmonized framework for auditors to work internationally has furthermore been accenturated by the World Bank who requested the ‘Big 5’ to stop putting their names to accounts published in the Asian economies, unless such accounts are prepared using international financial reporting standards[5] (see WTO, 1998, Financial Times, 1998). This highlights a need for coordination between the emergence and use of international accounting with that of international auditing standards. Furthermore, this raises a critical need for auditors who are educated, trained and qualified within an international framework, i.e. were for example the use of international accounting standards is an essential element. It is known that the general function of the auditor in society is embedded in the trust that society places in the effectivness of the audit and in the opinion of the accountant, thus this trust serves as a condition for the existence of the audit function (Flint, 1988). Hence, the auditing profession institutionally has a social duty as well as a ‘self’ interest in the standards on competence requirements for entering the profession and with the capabilities of the profession to succeed in satisfying the social need and fulfill its responsibilities in the public interest (Flint, 1988).
Regulating the Audit Profession: Entering the Profession
The recognition of a professional group becomes increasingly indispensable as the complexity of their services and their significance in the public interest increases (Flint, 1988). In the case of professional accountants it is know that they carry a critical responsibility in developing and regulating modern economies (Willmott, 1986). Hence, the accountancy profession, like every profession, is characterized by specific requirements for entry. These requirements represent a form of permission as well as barrier to enter a profession. With the audit profession there are in many cases[6] a rather rigid ‘barrier’ to enter the profession consisting of academic education, professional training and a qualifying exam. The permission to enter a profession and the recognition for being ‘qualified’ within a profession are often one and the same, which serves as a protection for the public by providing a standard that outlines the conditions under which a person can obtain a specific professional status (Flint, 1988). The WTO (1998) has pointed out that many service industries, and particularly the professions, will always be subject to regulation since the protection of the public interest requires maintenance of adequate standards of competence and integrity. Being a ‘qualified’ auditor has many different names around the globe, for example, certified professional accountant (CPA) in the US, chartered accountant in the UK, state-certified auditor in Denmark, however a regionally harmonized title for being a ‘qualified’ auditor has been adopted through the 8th Directive of the European Union namely a ‘Statutory Auditor’. Throughout this paper the either the EU title, statutory auditor, or the UN title, ‘professional accountant’, will be used. In this context it is interesting to note that due to the national organization and regulation of the audit profession one cannot find an internationally harmonized definition of what a professional accountant is. This means that, for example, in some countries the profession defines all those who have received a specified level of training, regardless of whether they are in public practice, or employed within the accounting division of a company, etc, as ‘professional accountants’, while other countries have more rigid definitions for those who wish to call them selves ‘professional accountants’. The UN adopted a definition based on IFAC’s definition of what a professional accountant is;
“A ‘professional accountant’ is a person who is qualified to be, or who is, a member of a recognized professional body of accountants or of auditors, or who is recognized as such by a regulatory body.” (UNCTAD, 1999)
Regulation is virtually a defining element of any system of social organization (Hancher and Moran, 1989).The audit profession who carries out the legally mandated audit of financial statements shall assure that audited financial accounts enhance the confidence of all parties who are concerned with the financial state of companies (see for example the Green Paper, EU, 1996) or as expressed by Flint (1988:5) that “the auditor’s opinion helps to establish the credibility of the financial statements. Accounting and auditing plays a critical role in the field of economic regulation. The public responsibilities naturally places demands on the process of entering the profession and measures for the regulation of the professional group has been made. The first prerequisite for the authority of the auditor is competence (Flint, 1988) and in order to ensure that a profession possess’ “a systematic body of knowledge” the structure of the entry regulation to a profession is critical (Fogarty, 1997).
The authority of the audit is sustained by the competence and independence of the auditor, and “by the status of auditing as a profession” as well as the ethical standards that guide the work of auditors (Flint, 1988:87). The process of becoming a statutory auditor and thus the entry to the audit profession is currently legally regulated on national basis. This may be done through a prescribed curricula, educational standards, required practical experience (with an already ‘qualified ‘auditor) for a defined time period and a ‘final’ test. The regulating institute in each country defines the requirements needed in order to be allowed to qualify as a statutory auditor. This regulation can be carried out either by the State or by the profession, the latter is commonly referred to as ‘self-regulation’[7]. In most countries regulatory powers are shared between governmental and private authorities (i.e. typically professional accountancy bodies), one can say that the state “franchises elements of its power” to private authorities (Willmott, 1986). The structure and level of ‘franchising’ from the government to private authorities vary from country to country. Additionally, it should be mentioned that in most countries the profession is regulated on a national basis, but there are cases of ‘sub-national’ regulation, such as for example the US. The relationship between the state and the profession is complex in a few aspects, what is regulated, who creates the regulation and who is the regulator (Loft and Kirkham, 1999), this complexity might increase when considering a global field for audit regulation.
The organization activities involved in regulating of the profession, which includes activities such as education, training, establishing professional standards and disciplanary measures, managing qualifying examinations etc., is distributed between the government and the private authorities, depending on the organization of the regulation of the audit profession in the specific national setting. In addition to the existence of professional accountancy bodies on the national level, there are several professional accountancy bodies that are active in a regional, or more recently, an international field of auditing[8]. There are two international accountancy organizations that seem to emerge within the international field of the audit profession, namely the International Federation of Accountants and the Association of Chartered Certified Accountants (ACCA). The profession has realized that accountants are no longer limited to national services but have expanded to providing global services, and in the light of this standards that guide the profession internationally have to be developed and a need for international standard setter(s) within the field of audit is emerging.