We are more than halfway through year seven of the financial crisis. The massive G-20 effort, along with the Financial Stability Board (FSB) and global standard setters such as the International Organization of Securities Commissions (IOSCO), to reform global financial regulation and to ensure a safer and more sustainable financial system has made significant progress. But the job is far from finished, which is why Mark Carney, chairman of the FSB, is urging agreement from the leaders of the G-20 at their next summit in November in Brisbane, Australia, on four major issues:
- resolution frameworks, especially cross-border resolution;
- the over-the-counter (OTC) derivatives package;
- bank capital, liquidity, and leverage thresholds; and
- the shadow banking nexus.
There is also a recognition that the global regulatory political pendulum is gradually swinging from new policy development to implementation of the agreed upon standards that is an unambiguous FSB charter requirement for all FSB members. Standard setting is one thing but uneven, or "pick-and-choose", application by certain bodies could undermine completely the whole global regulatory effort.
Without a doubt, the four global regulatory priorities Mark Carney is urging action on are essential. But there is a fifth that I would describe loosely as behavior, reporting, ethics, corporate governance, etc. Over the last seven years of the financial crisis, we have witnessed an eerie correlation between those major firms that failed and their overpowering CEOs, incompetent Boards, weak audit and risk committees, and useless risk management. Auditors did not play an effective early warning role—and the overall result in this crisis, as we know, has been a 15% fall in global gross domestic product against trend. Worse still, we are observing a growing number of major scandals emerging—the IBORs, forex manipulation, hocus pocus in commodity markets. What next?
Global regulators are worrying more and more about global audit quality—in the FSB and IOSCO. There are also growing concerns about the governance of audit standard setting, largely by the profession itself (with public oversight by the Monitoring Group and the Public Interest Oversight Board) and the effectiveness and structure of the global audit oversight bodies. Global initiatives are also being considered to improve audit quality. They could cover:
- transparency reporting and ownership of audit firms;
- a set of audit quality principles issued by regulators;
- the development of a globally consistent system for measuring firm audit quality;
- guidance to audit committees on their role to enhance audit quality; and
- guidance on professional skepticism.
IOSCO and the International Forum of Independent Audit Regulators will need to work together in this area.
On the accountancy side, a plethora of high-level political statements at the G-20 and elsewhere over 15 years or so have not resulted in convergence of International Financial Reporting Standards (IFRS) and US GAAP. It does not look as though this will be fully achieved with the global standard setters, for example, which are currently unable to agree on impairment rules. This is disappointing. Life will go on for the foreseeable future with 100 or more countries signed up to IFRS and the continuance of US GAAP.
As the world begins a long shift toward a higher share of market-based financing, effective disclosure will become even more important. In the future, integrated reporting may well play a bigger role. Opacity and complexity destroy sound, sustainable financial markets, as this venomous crisis has shown. Accountants and auditors have a major role to facilitate change and break down these barriers—and by doing so, more investors will return to the market place. If, on the other hand, too many parts of financial markets remain off-limits and an impenetrable, overly complex and “black box” in nature, expect property markets to boom and long-term investment to fail. It is time for auditors and accountants to step up to the plate and play their part to make sure this does not happen.
Today is a good date to start.