Should directors be regulated by legally backed governance standards?

article-body

The status of professions and their self-regulation is an issue that surfaces every time there is an allegation of malpractice or a proven instance of unethical conduct.

Accounting and auditing types are used to it. They are no doubt preparing for another bout of queries from politicians, bureaucrats and the media about the quality of work done on audits following the issues raised regarding the operations of the Silicon Valley Bank and Credit Suisse.

It happens every single time. Media coverage focuses on audit reports having been signed off as clean, but something happens in the new financial year that causes a downturn in fortunes.

It does not matter what the entity happens to be or the industry they are in as it is a matter of if — not when — the issues of professional conduct, audit quality and stringency of audit regulation and ethical standards emerge.

What are the possible policy responses?

Calling an inquiry into the conducts of audit and work of auditors is always possible after well-publicised corporate bellyflops, but in Australia, there seems to be a problem in responding to a report of an audit regulation inquiry that had been concluded in 2020.

It is March 2023, and a previous review of audit regulation is yet to receive any response.

This does not mean inquiries are pointless endeavours as there are lessons to be learned. It would just be nice if somebody of authority somewhere in a hidey hole in the public service hurried up and pushed a report out the door.

We can then clamour for another more extensive inquiry into the professions without feeling as if there is unfinished business to deal with from 2020.

It should be remembered that part of the reason for this call for an inquiry back in August 2019 by Labor senator Deborah O’Neill was the reportage related to the banking royal commission conducted by Kenneth Hayne, and allegations about the conduct of major accounting firm audits of financial institutions.

Aspects of the application of ethical standards in the running of consulting practices will be considered in the recently announced inquiry the senate is holding into consulting firms and the manner in which they conduct their relationship with the government.

Some matters related to quality control and self-regulation within the individual practices will inevitably get discussed because the management of ethical standards including issues of conflicts of interest are matters for a firm.

What findings could the committee come up with as it goes through the issues of how consulting firms engage with the government?

Wise heads know it is pointless and foolhardy to speculate on conclusions a committee might reach before it begins hearing evidence. But it can be noted with some certainty that one of the few areas of regulation in the profession that the federal government is yet to take over and fund is the setting of ethical standards.

These are cited in legally binding auditing standards. Through questioning witnesses at public hearings, a committee can assess if this process remains appropriate.

The argument against government takeover is that the profession is investing in a self-regulatory process. Snatching the responsibility from the accounting profession’s hands means the government would have to pay for an ethical standard setter on top of its funding of the accounting and auditing standards boards.

You would only take those over if it was the standards that were of concern rather than their interpretation, implementation and enforcement by individual practitioners and the accounting firms.

What else might be available for a government to do in the accounting and auditing space?

It is possible to consider an inquiry – royal commission or parliamentary inquiry – into the adequacy of corporate regulation where financial reporting and auditing frameworks are concerned.

The intent of such an inquiry would need to examine whether it’s necessary to revise laws dealing with financial reporting and auditing frameworks. It could also take a deep dive into laws dealing with the obligations of directors and other corporate officers that have the responsibility to prepare financial information for stakeholders.

One area that could be prime territory for a policy debate is the absence of a statutory body to set corporate governance principles and recommendations rather than having those principles set by a body that is not under the watchful eye of government.

The auditors have standard setters but the directors who bear responsibility for what is in the annual reports have standards or guidelines set by bodies that are not governed by statute.

Could it be time to create an entity related to governance disclosures to bring directors under a statutory board that sets standards for reporting?

Inquiries into consulting firms are important but those inquiries should always consider the bigger picture.