Is it time to rethink the way we regulate aspects of how our accounting, auditing and disclosure guidance is set?
This question should be on the minds of politicians, policy makers and other experts that deal with the areas of corporate reporting, accounting standard setting and audit standard setting because a system set up at one point in history may not necessarily suit current needs.
It is critical to examine because sustainability reporting is the new bright shiny piece of regulatory guidance that is on the radar of people domestically and globally. Not much else was reported by the Australian and New Zealand representative to the board of trustees of the IFRS Foundation, Joanna Perry, during the inaugural public meeting of the Financial Reporting Council held almost a month ago.
Restructuring the system is something that people should consider but whether they will is some else altogether.
Let’s take a brief trip in the time machine to remember why things are set up the way they are today before we look at what else is possible.
The professional accounting bodies known then in the 1960s as the Australian Society of Accountants and the Institute of Chartered Accountants in Australia started a self-regulatory institution that would the 1970s be known as the Australian Accounting Research Foundation.
AARF was known as the body that conducted research and developed accounting and auditing standards on behalf of the accounting profession and in the public interest.
It was a public interest activity that saw the professional bodies and the team they assembled get praise internationally because of the quality of the work that the AARF was doing.
Statutory backing of accounting standards started to kick in during the 1980s and this was done, rather curiously, with two boards in play.
One board – the profession’s board to be clear – developed and issued the standards and another body called the Accounting Standards Review Board, which was appointed by the government at the time, was created to review the accounting standards that were developed by the profession’s board.
Confused? Most people are when they first hear about it because it seems like double-handling and a recipe for political tension between the two bodies.
The 1990s were dominated by one accounting standard setter that did all of the standard setting work with the ASRB getting killed off because it was ultimately considered unwieldy.
What the 1990s were also notable for was the increasing focus on the adoption of international accounting standards. The domestic standard setter began examining the differences between Australian and international standards in the early 1990s and pressure to bring the domestic framework into line with something more global intensified.
Fast forward to the year 2000 when the federal government takes over what was originally a process started by the accounting world in the 1960s. The standard setter reported to a new body called the Financial Reporting Council.
The auditing standards board remained with the accounting profession for a few more years until companies like Enron began falling over and Arthur Andersen – remember them? – collapsed following a series of scandals.
Audit standard setting got snaffled by the government in what became a wholesale takeover of accounting and audit standard setting. The only real setting of self-regulation left for the profession to date in Australia relates to accounting body by-laws, disciplinary processes and the setting of ethical standards by the Accountants Professional and Ethical Standards Board.
What should be done with a set of sustainability standards as it flows through the global systems? There are a couple of perspectives to this worth considering and the first is that no institutional change is needed because the accounting standard setter can deal with the international output and the audit folks can set the assurance side of the deal.
This appears sensible at first, but can we do better?
A possible change is for there to be a separate standard setting board dealing with governance and sustainability disclosures. That board could take on the corporate governance council recommendations and principles issued under the auspices of the Australian Securities Exchange and make them legally binding.
It could also take on sustainability reporting standards as a part of its role, too, given that sustainability reporting focuses on a range of topics that include climate change but also numerous other issues.
Careful thought needs to be given to how we design our regulatory architecture. This could be a convenient time to rattle the cage and ensure some change that will set the process up better for the future happens.
Will politicians have the nerve to put an idea like this up? Have they got the ‘right stuff’?