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Auditing Self Regulation and Government Regulation

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    Over the years the accounting profession has been subject to various forms of oversight with varying degrees of success. Nevertheless, it used to be self-regulating. But a series of financial scandals involving once prominent companies such as Enron, WorldCom and Parmalat lead the authorities to consider whether the accounting profession’s self-regulatory oversight system was appropriate to meet the necessary objectives. These corporate failures had shown that the self-regulatory system did not produce credible results and “had the potential to undermine investor confidence in the integrity of the securities markets” (The Treasury, 2006).

    As a consequence a number of countries have reviewed their arrangements for independent oversight of the auditing profession. The United States, for example, has introduced tough external audit regulation under the Sarbanes-Oxley Act of 2002. Canada has also introduced a regulator with extensive powers, including a national inspections unit as independent monitor of major audits, while the British and Australian solutions are based mainly on oversight rather than on full regulatory control (Malthus and Scoble, 2005). However, all these oversight bodies are needed to protect the public and the credibility of financial information.

    Given the corporate scandals of recent years, the audit profession is now in the forefront of the minds of investors, businesses, regulators and others. Financial reporting, corporate governance and accounting and auditing practices must keep up with the needs of these groups. Effective regulation of the audit profession is one means of ensuring that the profession and the private sector keep pace with these challenges. The purpose of this essay is to discuss the need to strike a right balance between self-regulation and government regulation.

    Broadly defined, regulation refers to the making and implementing of rules which direct or constrain the behaviour of a person or group of people being regulated. It is important to acknowledge the role of the profession in the evolution of its regulation. In most developed nations, the licensing and regulation of the accountancy profession was founded through the initiative of practicing professional accountants who often sponsored legislation to set minimum requirements to be designated as a professional public accountant.

    Historically, leading practitioners then established a code of professional conduct and, eventually, accounting, auditing and other practice standards. Through much of the 20th century, the requisite knowledge of professional practice standards that protected the public resided nearly exclusively with professional practitioners who founded professional associations to promote their profession and its standards. This led many government regulators who had the legal authority to mandate compliance to choose to adopt the standards of the professional associations by reference or as acceptable interpretations.

    Over time and in many countries, such as the United States, this approach evolved into a sophisticated system of government-sanctioned self regulation that for many years was considered adequate, efficient and protected the public. Regulation of the audit profession has typically been included as part of the overall regulation of the accountancy profession and has covered the following areas: •Education and admission standards; •Audit standards; •Ethical standards; and Disciplinary action. Where the regulation has been carried out primarily by the profession, it is often referred to as “self-regulation” and when it is carried out by the government, is often just “direct regulation”. There is no pure model of either self-regulation or direct regulation. The profession rarely regulates without some form of government mandate to do so, and similarly, the government rarely regulates without some form of interaction with the profession.

    In general, the International Federation of Accountants (IFAC) member bodies, the professional institutes, act under a delegation from their respective governments. The government has given legal recognition to the profession and has given the professional institute a set of roles and responsibilities and some form of reporting requirement. These responsibilities can include admission criteria, continuing education requirements, disciplinary provisions, standard setting and so on. Reporting requirements often take he form of annual reports by the professional body. Under self-regulation then, the government has delegated the responsibility for regulation to the profession and the profession regulates itself within that framework and then reports on its activities. There can be a greater or a lesser degree of government monitoring and oversight. Direct regulation, for example, through the establishment of an audit oversight body, simply means that the government itself has assumed responsibility to regulate part, or, rarely, all of the profession.

    However, like self-regulation, this regulation is taking place within a set of roles, responsibilities and reporting arrangements that have been set by government and established in legislation. To be successful, the regulator needs to have an effective working relationship with the profession. In discussing methods of regulation, it is important to remember that accountancy is a profession. That means that professional accountants have an overriding responsibility to the community in which they live, not just to their current clients or to themselves.

    So even in circumstances where there is total direct regulation, there is still a need for the profession to regulate the activities and conduct of its members to ensure that this responsibility to the community is fulfilled. The only caveat is that this regulation needs to be efficient and effective. Whatever regulatory framework is used, be it administered by the profession or government, it must give the regulator appropriate incentives to act in the public interest.

    Regulators must have a clear, overarching purpose and the ability to resist any moves towards regulation that are self-interested or motivated by special interest groups. Serving the public interest means having regulations that achieve their aim of being effective and efficient without imposing unnecessary costs. The benefits of the regulation – that is, its effectiveness in protecting the public interest – must exceed its costs. The International Organization of Securities Commissions (IOSCO) has undertaken work in this area and has developed a series of principles for regulators.

    These principles hold that: •The responsibilities of the regulator should be clear and objectively stated; •The regulator should be operationally independent and accountable in the exercise of its functions and powers; •The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers; •The regulator should adopt clear and consistent regulatory processes; and •The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

    The choice between self-regulation and direct regulation primarily depends on who can meet the IOSCO principles and carry out the required functions most efficiently. For example, a professional body often has considerable expertise regarding the profession so it may be better placed to regulate where this expertise is needed. As well, the professional body’s separation from government can mean that it can react faster and more flexibly than a comparable government agency. In those countries where the profession needs to be strengthened, granting the profession self-regulatory powers can assist it in gaining the necessary expertise.

    Direct regulation can be the most appropriate solution if there is a need for the regulator to be completely independent of the profession, or if it is considered inappropriate for the profession to carry out certain functions. Taking into account these factors and differences in history, culture, commercial law and varying stages of economic development, we see at a national level a huge diversity of regulatory approaches. In IFAC’s view there is no “one size fits all” answer to the issue of how to regulate the audit profession at the national level. A cornerstone of our free enterprise system is “freedom of choice. Consumers are free to choose what they wish to purchase and from whom. This simple concept is the powerful engine that drives economies in free markets. At the same time, there is an appropriate role for government oversight in the free market process to ensure that the consuming public is not being misled or defrauded by unethical business practices. IFAC recognises that the role of governments, as well as the role of the profession, will vary, but they should be guided by the principle of striking the right balance – to protect consumers without comprising free enterprise and without inflicting undue costs on the profession or the public.

    It is critical that, regardless of whether there is self-regulation, direct regulation or some combination, that both the profession and the regulator act in the public interest and that the benefits of regulation outweigh the costs.

    References www. ifac. org/uploads/… and-audit… /jsylph-fcm-audit-regulation-dec-05 www. deti. ie/publications/commerce/2004/auditing/chapter7. pdf www. content. grin. com/document/v116910. pdf

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    Auditing Self Regulation and Government Regulation. (2017, Feb 23). Retrieved from https://graduateway.com/auditing-self-regulation-and-government-regulation/

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