Description
This paper explores how regulatory relationships in the global audit arena are being
affected by the current financial crisis. Key policy initiatives and debates are analyzed,
along with institutional interactions, in particular between the International Federation
of Accountants (IFAC), international regulators and the large audit firms. The events are
placed in the context of the new international financial architecture which has developed
over the last decade. Using the illustrative lens of bank auditing, questions are asked of the
nature and status of audit practice and the regulatory arrangements governing such practice.
The paper shows the active nature of the regulatory responses to the crisis and the
shifting and competing influences among key regulatory and professional participants in
the global audit arena. Emphasis is placed on the need for audit researchers to be sensitive
to the developing global financial architecture, and its potential implications for the study
of audit practice in different national and international contexts.
The global audit profession and the international ?nancial architecture:
Understanding regulatory relationships at a time of ?nancial crisis
Christopher Humphrey
a,
*
, Anne Loft
b
, Margaret Woods
c
a
Manchester Business School, University of Manchester, Booth Street West, Manchester M15 6PB, United Kingdom
b
School of Economics and Management, Lund University, Box 7080, SE-220 07 Lund, Sweden
c
Nottingham University Business School, Wollaton Road, Nottingham NG8 1BB, United Kingdom
a b s t r a c t
This paper explores how regulatory relationships in the global audit arena are being
affected by the current ?nancial crisis. Key policy initiatives and debates are analyzed,
along with institutional interactions, in particular between the International Federation
of Accountants (IFAC), international regulators and the large audit ?rms. The events are
placed in the context of the new international ?nancial architecture which has developed
over the last decade. Using the illustrative lens of bank auditing, questions are asked of the
nature and status of audit practice and the regulatory arrangements governing such prac-
tice. The paper shows the active nature of the regulatory responses to the crisis and the
shifting and competing in?uences among key regulatory and professional participants in
the global audit arena. Emphasis is placed on the need for audit researchers to be sensitive
to the developing global ?nancial architecture, and its potential implications for the study
of audit practice in different national and international contexts.
Ó 2009 Elsevier Ltd. All rights reserved.
‘‘(T)he auditing profession may face some very severe
challenges. The continued success of the profession
depends in part on its response to these challenges.
Research has a role in clarifying the nature of these
challenges and in exploring the possible responses. To
do this successfully, this research has to explore funda-
mental questions about why and where the auditor’s
authority and power in society reside and how this
location changes over time.”
(Bromwich & Hopwood, 1982, p. 21)
The current global ?nancial crisis has proved to be a
particularly interesting one from the perspective of audit-
ing. At one level, attention has been drawn to the limits
and limited capabilities of auditing, the need to reform as-
pects of practice and regulation – including placing further
constraints on the (non-audit) services provided by audi-
tors and the relative silence of the profession at such a fun-
damentally important time (see Sikka, in press). However,
at another level, the crisis has proved distinctive in that the
typical questioning in the aftermath of major banking col-
lapses as to ‘where were the auditors?’ has been less preva-
lent than in the past. The many regulatory and government
reports now published on the ?nancial crisis acknowledge
that its causes lie in the interaction of a range of complex
and global factors (e.g., see De Larosiere, 2009; Ricol,
2008; Treasury Committee, 2009). Criticism and blame
has focused primarily on individual banking institutions
and the strength of their management and business mod-
els, remuneration structures and incentive based cultures.
The ?nancial regulators and credit rating agenciesz have
also found themselves subject to serious questioning, but
auditors have largely escaped critical comment and the
apportionment of blame. Indeed, the profession has been
able to respond, insome jurisdictions, to criticismby relying
0361-3682/$ - see front matter Ó 2009 Elsevier Ltd. All rights reserved.
doi:10.1016/j.aos.2009.06.003
* Corresponding author.
E-mail address: [email protected] (C. Humphrey).
Accounting, Organizations and Society 34 (2009) 810–825
Contents lists available at ScienceDirect
Accounting, Organizations and Society
j our nal homepage: www. el sevi er. com/ l ocat e/ aos
on of?cial assurances by independent oversight bodies as
to the general quality of audit work (see AIU, 2008) and
declarations, by senior international regulators, that the
auditing profession appears to have had ‘a good crisis’.
1
This paper does not concentrate on the causes of the
current ?nancial crisis and where blame should or should
not be apportioned (for a discussion of the relative merits
of this, see Miller, 2008). Rather, it delves behind a claimed
‘silence’ by the profession to highlight the scale of ‘behind-
the-scenes’ activity and policy responses on the part of the
auditing profession. In this regard, the paper’s contribution
is threefold.
Firstly, the paper stresses the importance of studying
auditing within its context – and, how nowadays, this
increasingly means researching auditing within the con-
text of what is commonly known in the ?eld of global gov-
ernance, as the international ?nancial architecture.
2
In
particular, it is argued that audit researchers need to be
aware of (a) the wide range of institutions (and individual
key players within them) with whom the auditing profes-
sion interacts in the global sphere and (b) the ways in which
such bodies and interactions increasingly set the boundaries
for both audit practice and the ideas and thought processes
that shape practice.
Secondly, the paper takes a number of components of the
current global ?nancial crisis and the associated regulatory
response to highlight the potential challenges that it pro-
vides for the external audit function. Lastly, using the speci?c
example of bank auditing, the paper pinpoints key questions
that can be asked both of current practice and the path that
future developments in practice may take. Such questioning
is undertaken from the perspectives of audit practitioners,
researchers and regulators; encouraging more open and vis-
ible dialogue (and the establishment of the contextual cir-
cumstances that will permit such dialogue) on the nature,
capacities and achievements of audit practice.
The emergence of an international ?nancial
architecture
The need for an international ?nancial architecture
3
had
its roots in the discussions raised in the mid-1990s about how
to prevent the type of ?nancial chaos whichdevelopedas a re-
sult of Mexico’s devaluation of the peso in 1994. However, it
was not until the widespread ?nancial crisis in Asia in 1997/
8that actionwas taken(Wade, 2007a). ‘Financial stability’ be-
gan to be seen as a potential problem in a rapidly globalising
world. There were varying explanations of the Asiancrisis and
many different ideas as to how such a crisis could be pre-
vented in the future (see Muchhala, 2007; Rahman, 1998).
The G7 Finance Ministers took responsibility for ?nding a
solution. They rejected wide-ranging suggestions like the set-
ting up of a supranational authority to supervise global ?nan-
cial markets or a new World Financial Authority (Eatwell &
Taylor, 2000). These moves would have drastically reduced
national sovereignty which was unacceptable to the partici-
pants. While some blamed the IMF for having exacerbated
the crisis (Weisbrot, 2007), others pinpointed weaknesses in
the countries concerned, including poor supervision of banks,
weak corporate governance and misleading ?nancial reports.
The solution arrived at focused on dealing with such weak-
nesses, and was represented in a system of standards and
codes to ensure good ?nancial practice (IMF & World Bank,
2005). The theory was that the countries whose institutions
complied with these standards would gain better access to ?-
nance both from the IMF, and more widely from ?nancial
markets. This would further induce the use of the standards,
and boost ?nancial stability (Wade, 2007b). A new organisa-
tion, the Financial Stability Forum (FSF) was set up by the
G7 in 1999, its key mandate being to set up this system of
standards. By 2000, 12 key standards for achieving ?nancial
stability had been agreed; these included international
accounting standards (IFRS/IAS) and international auditing
standards (ISAs) (FSF, 2008a; Humphrey & Loft, 2009). Wade
identi?ed this new focus on standards as a move from a doc-
trine of ‘liberalize the market’ to one of ‘standardize the mar-
ket’ (Wade, 2007b, p. 74). However these two doctrines were
not incompatible, for although standardizing brings more
‘government’ it is carried out (in theory at least) with the
aim of establishing a framework of standards in which the
free market can operate.
The inclusion of ISAs in the FSFs recommended list of
standards (which also included the IMF’s ‘Code of Good
Practices on Fiscal Transparency’ and BCBS’s ‘Core Princi-
ples for Effective Banking Supervision’) was signi?cant.
The ISAs are set by the International Auditing and Assur-
ance Standards Board (IAASB)
4
under the International Fed-
eration of Accountants (IFAC). Public authority was
accordingly being placed behind private standards, giving
them a more important status not just in terms of processes
of corporate reporting but also to the larger project of ensur-
ing ?nancial stability.
5
It was also recognised that while setting standards was
important, the extent to which the standards were actually
used was crucial, and the IMF and World Bank developed a
program of ‘Reports on Standards and Codes’ (ROSC), with
one speci?c program dealing with accounting and audit-
ing. These focus on making detailed assessments of na-
tional institutional frameworks, and the observance and
enforcement of standards, using IFRS/IAS and ISA as the
benchmark. To date the World Bank has published
accounting and auditing ROSC’s on 72 developing or
emerging economies.
6
Developed countries like Japan and
1
A conclusion reached by Paul Boyle, the head of the UK’s Financial
Reporting Council and the International Forum of Independent Audit
Regulators (IFIAR) – see Comment made in his address to the Pan
Accountancy Profession Lunch, Mansion House, London, 23 October 2008.
ht t p: / / www. f r c . or g. uk/ i ma ge s / upl oa de d/ doc ume nt s / Ma n-
sion%20House%20Speech%20October%202008%20-%20published1.pdf.
2
Advice provided by G.E. Storey in the development of this paper is
gratefully acknowledged.
3
See Appendix A for a full list of the abbreviations used to identify
organizations in the regulatory architecture which are referred to in this
paper.
4
The IAASB was not operational until 2002 – prior to that the
International Auditing Practices Committee (IAPC) set the standards.
5
This added to the interest in ISAs as potential EU audit standards
already expressed by the European Commission and interest in the by
IOSCO, as the standard for cross-border audits.
6http://www.worldbank.org/ifa/rosc_aa.html (note that some countries
may not permit publication, so the number carried out is in fact greater).
C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825 811
the US, were not included in this program which is some-
what ironic given that the current global ?nancial crisis
emanated from USA.
This whole approach to ?nancial stability has been la-
belled by Wade as a ‘standards–surveillance–compliance’
system (2007a, p. 115). Transparency is a key concept here,
going hand in hand with the use of international standards.
Camdesseus (1999), then managing director of the IMF,
commented that this was the ‘golden rule’ of the new
international ?nancial system. Ultimately the use of all
these standards was expected to help to prevent ?nancial
instability, as any potential problems would be made
transparent early on, allowing quick action by the IMF or
other relevant parties. In ?nancial reporting the use of
IFRS/IAS and ISA for the preparation and audit of ?nancial
reports was expected to increase transparency for global
investors, creating a ‘level playing ?eld’ where previously
local standards might have served to mislead.
The ‘standards–surveillance–compliance’ is a very ambi-
tious system(Hale, 2008; Vestergaard, 2004, 2009), not least
in its reliance on new information technologies, and in par-
ticular the internet (Loft &Humphrey, 2006). However, while
it looks impressive on paper, the ‘standards–surveillance–
compliance’ system has not been as successful in its own
terms as was expected (see Schneider, 2005). According to
Hegarty, Gielen, and Hirata-Barros (2004), the impediments
tosuccessful implementationincludeda lackof globallycon-
sistent qualityof audit bythebigaudit ?rms, andthe lackof a
‘‘comprehensive framework of principles for the regulation
of accounting and auditing” (p. 15). In other words, in many
countries what was requiredwas aninstitutional framework
into which standards could ?t.
The current ?nancial crisis has brought a reconsidera-
tion of the international ?nancial architecture, including
calls (again) for a global ?nancial regulatory body (e.g.,
by Mattli and Woods (2008)) The solution emerging from
the powerful new G20 grouping is a stronger version of
the ‘standards–surveillance–compliance’ system estab-
lished a decade ago. The FSF has become the Financial Sta-
bility Board (FSB), and it has been placed on ‘‘stronger
institutional ground” so that it can be more effective, and
able to ‘‘. . . develop and implement strong regulatory,
supervisory and other policies in the interest of ?nancial
stability.
7
The ‘standards–surveillance–compliance’ regime
is to be seriously applied on a global basis, and not ‘just’
for emerging and developing economies. With the G20
now involved in the general governance of the global econ-
omy, the old dichotomy between emerging economies who
were ‘clients’ of the IMF and international standard setters,
and the developed industrial states like the USA who were
the ‘masters’ of the system, appears to be breaking down.
The international ?nancial architecture and the
auditing profession
Most of the organisations making the key standards and
codes are public in nature – in that they are set up and
funded by governmental bodies, either directly through
having national members of the organisation (like IOSCO
and BCBS) or indirectly through International Financial
Institutions (IFIs – i.e., IMF and the World Bank). The
bodies responsible for the setting of international account-
ing (IASB) and international auditing standards (IAASB) are
exceptions to this case as they are both private organisa-
tions – the former positioned under the umbrella body of
the International Accounting Standards Committee Foun-
dation (IASCF) and the latter within IFAC – which also
houses standard setting boards responsible for interna-
tional standards on auditing ethics, accounting education
and public sector accounting.
In recent work (Humphrey & Loft, 2009), we empha-
sised that the international ?nancial architecture has to
be viewed in dynamic terms. Adapting Germain’s (2007)
de?nition, we view global ?nancial regulatory processes
as ‘‘the contested interplay between market actors, private
authorities and public authorities (state and international)
that establishes the rules or boundaries within which glo-
bal ?nancial resources are mobilised and channelled to-
wards economic, social and political activity” (p. 73).
What has been of primary interest to us is the way in
which the global regulatory audit initiatives emerge from,
and are shaped by, the international ?nancial architecture.
When Hopwood (1994) highlighted the ‘‘very active poli-
tics” in the emergent international arena in accounting
and auditing, he spoke of the institutional interfaces be-
tween the international regulators and the international
accounting profession. Arguably, what has emerged in
the ?eld of global auditing regulation in the last ?fteen
years, is a more complex and more interlocking set of rela-
tionships and interests than the ‘interfaces’ and ‘lobbying
activities’ that Hopwood identi?ed as taking place between
regulators and the profession. In studying the establish-
ment of IFAC’s Public Interest Oversight Board (PIOB), we
sought to capture such interlocking relationships by sug-
gesting that the PIOB could be regarded, given its organiza-
tional make-up, as a form of embedded oversight (see Loft,
Humphrey, & Turley, 2006). In speaking more broadly
about auditing developments within the context of the
international ?nancial architecture, we drew on the term
‘coordinated network governance’ to re?ect a set of regula-
tory arrangements that are binding together international
regulators and the international profession in an ongoing
project pursuing global governance in the audit arena
(see Humphrey & Loft, 2009).
A useful way of illustrating the key development pat-
terns in global auditing regulation is to focus on three
in?uential entities/groupings: namely, (1) the Interna-
tional Federation of Accountants (IFAC); (2) a group of
‘international regulators’
8
comprising the World Bank, the
International Organisation of Securities Commissions (IOS-
CO), the International Association of Insurance Supervisors
(IAIS), the Basel Committee on Banking Supervision (BCBS)
7http://www.londonsummit.gov.uk/en/summit-aims/summit-commu-
nique/.
8
We use his term ‘international regulators’ in the sense it is used by IFAC
in discussing this group, the term ‘of?cial community’ has been used by one
of the members. Formally (after 2003) it became known as the ‘Monitoring
Group’, and in 2009 got its own charter.http://www.ipiob.org/downloads/
The_Monitoring_Group_Charter.pdf.
812 C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825
(also often referred to as the Basel Committee) and the Euro-
pean Commission (EC); and (3) the large multinational audit
?rms. These have been illustrated in Fig. 1 as three overlap-
ping circles to show that the three groups have interlocking
relationships with each other.
IFAC’s formal mission statement is to serve the public
interest, to be achieved by strengthening the worldwide
accountancy profession and contributing ‘‘to the develop-
ment of strong international economies by establishing
and promoting adherence to high-quality professional
standards, furthering the international convergence of
such standards and speaking out on public interest issues
where the profession’s expertise is most relevant” (seehttp://www.ifac.org/About/). IFAC’s members and associ-
ates are primarily national professional accountancy
bodies and cover 123 countries and jurisdictions (as at June
2009). Its most signi?cant activity in relation to the discus-
sion in this article is the setting and promotion of ISAs
through the work of the IAASB. ISAs are not only one of
the FSB’s core standards, but since the completion of the
IAASBs clarity project IOSCO endorsed ISAs for the audit
of cross-border in 2009
9
offerings and listing; and they
are also probably on their way to becoming compulsory
for audits in the EU.
10
The ‘international regulators’ became directly involved
with IFAC and with the then ?ve big audit ?rms when
the ‘International Forum on Accountancy Development’
(IFAD) was established in 1999 (Street & Needles, 2002).
IFAD came into being as a result of the critique which
was showered on the profession, and especially the big
?rms, in the wake of the Asian crisis. The international reg-
ulators began to insist that something had to be done to
enhance accounting capacity and capabilities in emerging
and developing economies. Although the IFAD initiative
was subsequently terminated, it stimulated contact be-
tween such organisations, and an agenda for future devel-
opment began to emerge in terms of advancing ISAs to be
world standards, improving audit quality, and furthering
the development of IFAC as an organisation serving the
global public interest. The international regulators became
IFAC’s Monitoring Group, a position formalised in the 2003
IFAC reforms and which in 2009 gained its own constitu-
tion.
11
The Monitoring Group played an important role in
introducing IFAC’s Public Interest Oversight Board (PIOB),
which was formally operationalised in 2005. René Ricol,
IFAC’s president at the time, spoke of these reforms as pro-
viding for: ‘‘. . . ongoing collaboration between regulators
and the profession” (2004, p. 3). The majority of the mem-
bers of the PIOB have held (or still hold) positions as regula-
tors, and bring this experience to bear in carrying out the
major role of the PIOB, which is to monitor the activities
of IFAC’s standards setting committees. IFAC’s Regulatory
Liaison Group (IRLG) provides a formal opportunity within
the IFAC framework for the Monitoring Group to meet with
the IFAC leadership and, through the Transnational Auditors
Committee (TAC), representatives of the transnational audit
?rms (in particular the Big Four).
12
The members of the Monitoring Group include IOSCO,
which has itself produced documents concerning auditor
independence and audit quality. Another is BCBS which
has been concerned, not surprisingly, with the audit of
banks, and at the regional level, the European Commission
which has produced Recommendations and Directives in
this area. Another body, not in the Monitoring Group, but
with international regulatory in?uence, is the US Public
Company Accounting Oversight Board (PCAOB) – an inde-
pendent board created by the Sarbanes–Oxley legislation.
Part of its mandate involves it carrying out inspections of
audit work, with powers of extraterritorial reach for for-
eign auditors of US listed companies.
The last of the three groups in Fig. 1 is the large ?rm
audit networks, the most important of which are the Big
Four ?rms: Ernst and Young, Deloitte, KPMG and Pricewa-
terhouseCoopers. These are large multinational service
?rms which dominate the global market for the audit of
listed companies. The vast majority of the world’s largest
companies are audited by one of these four ?rms: in
2008 the Big Four networks each had over 7200 partners
(US Treasury, 2008, p.10). Each ?rm has an of?ce in most
countries of the world – for example, PricewaterhouseCo-
opers, has of?ces in 150 countries, while the next two larg-
est ?rms outside of the Big Four, Grant Thornton and BDO
are substantially smaller. The ?rms are organised as net-
works of member bodies, each of which is a separate and
independent legal entity under the global ?rm, e.g., Price-
waterhouseCoopers International Limited. Despite this le-
gal structure, they are to an increasing extent acting
more and more like one entity – forcing members of the
?rm to closely follow the policies of the global ?rm. The
pressure to do this has increased during the last decade
Fig. 1. Interlocking relationships in global audit regulation.
9
IOSCO/MS/06/2009; Tel Aviv, 11 June 2009; ‘‘IOSCO Statement on
International Auditing Standards”http://www.iosco.org/library/state-
ments/pdf/statements-7.pdf.
10
Markt/2007/15/F – Study on International Standards on Auditing
Evaluation of the Possible Adoption of International Standards on Auditing
(ISAs) in the EU.http://ec.europa.eu/internal_market/auditing/docs/ias/
study2009/report_en.pdf.
11http://www.iosco.org/news/pdf/IOSCONEWS144.pdf.
12http://www.pwc.com/extweb/aboutus.nsf/docid/59573FF2E41FA
4CD852570130059050A.
C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825 813
with the advent of PCAOB inspections on an extraterritorial
basis and the need to be able to defend the ?rm’s policies
to regulators (Tokar, 2005). Although the members of staff
who are statutory auditors will almost certainly be mem-
bers of the local professional association of accountants,
with the increasing focus on international standards and
(for the ?rms auditing companies listed in the US) the
PCAOB’s requirements, the local/national professional
association becomes of less relevance to the partners of
the country member of the network ?rm(Suddaby, Cooper,
& Greenwood, 2007). Of note here is the recent establish-
ment of KMPG Europe, created out of the merger of KPMG
member ?rms in Belgium, Germany, Spain, Switzerland
and the UK
13
– and a similar move by Ernst and Young, fol-
lowing on from the integration of its national practices
across Europe, the Middle East, India and Africa under a sin-
gle management/organisational area structure.
14
While much summary information about the Big Four is
probably common knowledge, an area of which little is
known is the mode of association between the ?rms. This
began to make notable developments in the 1990s when
‘associational’ organisations were formed both in the Euro-
pean Union, and in the US. In Europe, the relevant body be-
came known as the European Contact Group – and it was
set up essentially to coordinate the opinions of the ?rms
so they presented a united opinion to the European Com-
mission on various proposed audit regulatory initiatives
(Manardo, 1996; Røder, 2001). Following the problems of
the ?rms in the wake of the Asian crisis, it was decided
by the (then) Big Five to follow the model set up by the
European Contact Group, and establish a ‘Global Steering
Committee’ to deal with their common concerns relating
to regulatory and professional issues on a global basis
(Morris, 2001). Among these issues was the strong criti-
cism the Big Five were facing from organisations such as
the World Bank, who were dissatis?ed with the lack of
consistent quality of audits around the globe. An important
project for the Global Steering Committee (GSC) was to
strengthen IFAC both as the self-regulatory body for the
international profession and as global audit standard setter
(ibid.). This was done through the ?rms making substantial
direct contributions to IFAC’s budget (not just indirectly
through their membership of professional associations),
and becoming involved with IFAC’s reforms, most notably
in 2001 with the establishment of a ‘Forum of Firms’
(FOF) (now comprising 22 of the world’s largest audit
?rms) and a Transnational Audit Committee (TAC) to rep-
resent the FOF in IFAC (for more information on these
developments, see Humphrey & Loft, 2009).
The GSC metamorphosed into the new ‘‘Global Public
Policy Committee” (GPPC) after the Enron scandal in
2002; its members are the six largest ?rms. It has two main
working groups, a regulatory working group and a stan-
dards working group. Since 2004, the GPPC has organised
annual meetings under the badge of the Global Public Pol-
icy Symposia (GPPS); however these have only had limited
public exposure, this via a minimalistic website (see http://
www.globalpublicpolicysymposium.com/).
15
The GPPS has
gradually opened up to a wider group of participants than
just the profession, the world’s top regulators in the ?eld be-
gan to get invited, and in 2007 and 2008 attendance was ex-
tended to a few academics working in the ?eld. The 2009
GPPS event, to have been held in China, was cancelled, of?-
cially due to the important tasks the profession had to do in
the light of the developing ?nancial crisis. The GPPC has
published a limited number of public policy reports (e.g.,
see GPPC, 2006, 2007).
The developing nature of the global audit regulatory
arena matches closely the outline analysis made by Cooper
and Robson (2006), although they do not mention the exis-
tence of the GPPC or the FOF/TAC. They argue that research
on professions and regulation has often neglected to see
the ?rms as the signi?cant agents that they really are
(p. 417), arguing that the Big Four are ‘‘. . . important sites
where accounting practices emerge, become standardized
and are regulated, where accounting rules and standards
are translated into practice, and where professional identi-
ties are mediated, formed and transformed” (p. 416). Look-
ing at such sites of regulation in terms of ‘‘production,
transmission and enactment” suggests not only bringing
the ?rms into the ‘‘centre of analyzes of accounting”, but
also the ‘‘myriad NGOs and IGOs that form links in the cir-
culation of accounting and auditing disciplines and prac-
tices” (ibid. p. 463).
The ?rms are certainly in?uential and capable of exer-
cising in?uence on regulation, as witnessed by the work,
lobbying efforts and formal reports of the GPPC and the
FOF/TAC, especially since the TAC provides a voice for the
large audit ?rms in IFAC, and nominees for the standards
setting boards. Following the formation of FOF/TAC in
2001, the ?rms were allocated a certain number of seats
on IFAC’s standard setting boards (although the large ?rm
members do today have to declare that they will act in the
public interest, and the PIOB is involved in approving the
selection of all members of these committees, including
those from the large ?rms).
Recent IFAC policy papers on issues of global regulation
and standard setting (e.g., see IFAC, 2007, 2008) speak of
the developing nature of a ‘shared (public–private) system’
of standard setting and regulation in the public interest.
This shared system is evident not just in terms of the shift-
ing regulatory involvement of accounting ?rms but also in
the actions of professional oversight bodies. Among the
independent regulators that comprise IFAC’s Monitoring
Group, there has been a push for coordinated systems of
national public oversight. In pursuit of such a goal, a new
organisation in the global audit regulatory arena was
formed in 2006 – the International Forum of Independent
Audit Regulators (IFIAR).
16
By June 2009, IFIAR’s member-
ship included national public oversight bodies from 31
countries including the PCAOB from the US and the Audit
Inspection Unit (AIU) from the UK. The presence of members
of IFAC’s Monitoring Group at IFAIR meetings, together with
13http://www.kpmg.eu/4854.htm.
14http://www.accountancymagazine.com/croner/jsp/Editorial.do?chan-
ne l I d = - 30 50 36&c o nt e nt I d= 120 685 8&F a i l e d_ Re a s o n= S e s -
sion+not+found&Failed_Page=/jsp/Editorial.do&BV_UseBVCookie=No.
15
Despite the positive ‘welcome’ on the webpage, and description of the
symposium, in fact it is strictly by invitation only.
16http://www.i?ar.org/aboutus/index.cfm.
814 C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825
of?cial observers from the new Financial Stability Board and
the PIOB, should help to reinforce the close connections that
exist between the international regulators.
It is important to recognise that the global audit regula-
tory arena is a dynamic one – with a variety of organisa-
tions, notably the IFAC member bodies, also competing
for in?uence and voice. Such competition can be re?ected
in a range of actions, from political lobbying processes
(see Thornburg & Roberts, 2008) to the publication of pol-
icy papers and submissions to of?cial committees. In this
current period of ?nancial crisis it is possible to ?nd perti-
nent papers on auditing authored by individual large ?rms,
professional bodies and national audit oversight boards
(e.g., see ‘‘The Day after Tomorrow: A PricewaterhouseCo-
opers Perspective on the Global Financial Crisis”
17
and the
ACCA’s ‘‘Climbing out of the Credit Crunch” (2008)
18
). The
ICAEW, for example, practices what it calls ‘‘thought leader-
ship”, where the idea is it ‘‘shapes government thinking on
regulatory policy and looks ahead at long-term issues for
the profession”. As part of this policy, it set up the ‘Audit
Quality Forum’ in 2004 at the request of the UK government,
with the aim of promoting ‘‘quality and con?dence in corpo-
rate reporting”. Among the recent publications of the Forum
is: ‘Evolution: Changes in Financial Reporting and Auditing
Practice (2009)’
19
where some of the challenges confronting
such practice are discussed. Both the ICAEW and the ACCA
made submissions to the recent, London-based G20 summit
and have prepared policy documents on how best to re-
spond to the credit crisis.
20
The AICPA is behind a recent
US initiative, the ‘Center for Audit Quality’ (CAQ). While of?-
cially af?liated with the AIPCA, it is stated as being ‘‘an
autonomous, nonpartisan, non-pro?t group” created with
the aim of ‘‘serving investors, public company auditors and
the market”. It is also evident that professional accountancy
bodies at the national level are forming new competitive
strategic groupings at the global level. A signi?cant example,
the Global Accounting Alliance (GAA) formed in 2005, is an
alliance of 11 ‘‘leading professional accountancy bodies in
signi?cant capital markets”. These include the ICAEW and
AICPA which were discussed above, but not the ACCA. The
members recognise each other’s professional quali?cations
through mutual recognition agreements and work together
in different ways, detailed on the GAA’s website under the
heading: ‘‘Areas of Endeavour in 2009”.
21
This organisation
also seems to compete not just with ACCA but with IFAC it-
self, in terms of the services it is providing to members and
representing the profession on the global stage, especially
when it makes claims that the GAA is ‘‘working together
to represent over 788,000 professional accountants in 140
different countries from around the globe”.
Managing crisis – the policy responses of the auditing
profession
Recognising the signi?cance of NIFA is of particular ana-
lytical value in the context of the current ?nancial crisis as
it serves to illustrate the importance of viewing the actions
of the auditing profession within the global regulatory con-
text in which it operates. While the auditing profession
may well be deemed to have had a good or even a quiet cri-
sis, this should not be taken to imply that it has been a dis-
tanced participant, observing reactions to the crisis from
the sidelines. Rather, the auditing profession has actively
responded to the ?nancial crisis, using a variety of
communication modes and interactions with regulators
and governmental bodies to clarify the speci?c role and
obligations of auditors, enhance the preparedness of indi-
vidual companies and their audit ?rms for dealing with
the onset of a ?nancial downturn and debating future pos-
sible developments of the auditing function. In the analysis
that follows, illustrative examples are drawn upon to cap-
ture some of the key trends in the profession’s global re-
sponse (for a more detailed presentation, see Woods,
Humphrey, Dowd, & Yu-Lin, 2009).
Audit regulators and oversight bodies have directly re-
sponded to calls or comments from key institutions such
as FSF or the Basel Committee on, for example, the perceived
need for improved/more detailed guidelines for auditors on
issues suchas the valuationof illiquidinstruments. Evenbe-
fore the ?nancial crisis broke, Mark Olson, the PCAOB chair-
man, was expressing a view that the expanding use of fair
value accounting could ‘‘put reliable auditing of ?nancial
reporting at risk” (Johnson, 2007). Later the same year at a
meeting in New York, the FSF called for the adoption of
‘‘common guidelines for valuation, particularly for complex
illiquid products” as a way of helping to restore market con-
?dence (BIS, 2007). In response, the standard setters and
accounting regulators have issued practice recommenda-
tions and new/revised standards (e.g., see IASB, 2008,
2009). The US based, Center for Audit Quality (CAQ), has
published three papers on issues arising under illiquid mar-
ket conditions (CAQ, 2007a, 2007b, 2007c).
A common theme in such papers is that they sought to
emphasise the existing rules within the framework of US
GAAP, but did not redraft or provide an interpretation of
such rules. This has been a pattern of response followed
in other communiqué. For instance, the PCAOB quickly
complemented the work of the Centre for Audit Quality
by publishing a staff audit practice alert (PCAOB, 2007)
on the audit of fair value under US GAAP. Once again, the
alert described, but did not interpret or establish US GAAP.
Instead it referenced SFAS No. 157 on Fair Value Measure-
ments and auditing standards on the use of specialists. This
form of response has also been mirrored in the UK, where
an Audit Practices Board bulletin (APB, 2008) provided
indicators of good practice rather than prescriptive guid-
ance on audit issues emerging from the crisis. These in-
cluded audit risk assessment, going concern issues, and
the audit of directors’ comments on the risks and uncer-
tainties facing an entity. Internationally, the major audit
?rms were proactive in producing guidelines via the
conduit of the Global Public Policy Committee, producing
17http://www.pwc.com/images/gx/eng/fs/day_after_tomorrow.pdf.
18http://www.accaglobal.com/pdfs/credit_crunch.pdf;http://www.
icaew.com/index.cfm/route/164863/icaew_ga/en/Home/Accountancy/Fea-
tures/G20_brave_new_world.
19http://www.icaew.com/index.cfm/route/166052/icaew_ga/Techni-
cal_and_Business_Topics/Thought_leadership/Audit_Quality_Forum/Evolu-
tion_changes_in_?nancial_reporting_and_audit_practice/pdf.
20http://www.icaew.com/index.cfm/route/164863/icaew_ga/en/Home/
Accountancy/Features/G20_brave_new_world;http://www.accaglob-
al.com/pdfs/credit_crunch.pdf.
21http://www.globalaccountingalliance.com/AboutUs.html.
C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825 815
a paper on determining fair value of ?nancial instruments
under IFRS in current market conditions (GPPC, 2007). This
also emphasised that it was merely clarifying/reiterating
the existing international position, not providing any fresh
interpretation on the implementation of standards.
Such responses re?ect two elements of strategic intent
on the part of the auditing profession. At one level is the
commitment to a sense of preparedness for events and
consequences that might follow from the crisis – attempt-
ing to anticipate problems ahead and to ensure that the
profession is best placed to deal with them. Thus, the
emphasis on staff ‘alerts’ and subtle emphasising of what
is most critical to observe and recognise in relation to stan-
dard, approved international auditing practice. This sense
of preparedness has been mirrored very much in press
communications which, in the UK, notably saw the chief
executives of the ?ve CCAB professional accounting bodies,
publish a letter in the Financial Times (2008) emphasising
the importance of companies being ready for the 2008 end
of year ?nancial reporting season – so as to ensure that
there was no, unanticipated, ?ood of going concern
amendments in audit reports and an avoidance of the neg-
ative consequences that could follow from this. Other re-
lated aspects here have been an insistent message on the
part of the profession that this is not an audit crisis – that
auditors, as with many other functional bodies, could not
have foreseen the sheer scale of the crisis and that audit
opinions issued on 2007 year end ?nancials were made
on the basis of widely accepted economic prognoses that
did not anticipate any sub-prime crisis. There have been
reported active efforts on the part of international repre-
sentatives of the profession to secure concessionary devel-
opments in the laws governing auditor liability, to help to
protect audit ?rms against any major law suits emanating
from banking failures and to ensure comparable legal pro-
visions across major trading nations (especially in relation
to the US legal position with respect to the capping of audi-
tor liability).
22
Concerted efforts have also been made to
emphasise that macro-systemic risk factors have historically
not been issues with which ?nancial statement auditors
have been directly engaged. This has led some of?cial gov-
ernment investigations of the audit profession (see Treasury
Committee, 2009) to conclude that the audit profession (as
with other parties) may well have performed their role ade-
quately but questioned whether it is a role that the investing
public particularly values and what could be done in terms
of developing the auditor’s contribution with respect to pru-
dential, as against, ?nancial regulation.
23
At another level, the global policy response of the pro-
fession re?ects a commitment to bolster/preserve the sta-
tus and reputation of the international audit standard
setting body – the IAASB. With the IASB under obvious
political pressure in light of concerns with the pro-cyclical
tendencies of fair value accounting and the fall-out over its
pursuit of convergence between US GAAP and IFRS, this is
clearly a delicate time for the IAASB. Accordingly, the pro-
fession globally can be seen to have been at pains to
emphasise that the right to revise standards has to remain
with the international audit standard setter. This claim is
evidenced most explicitly in the context of pressure to re-
form the standard audit reporting format, where the pur-
suit of reform at the national level has been seen to be
heavily restricted by the existence of an international stan-
dard on this matter (see APB, 2008). Accordingly, it has
been the IAASB that has issued a revised and redrafted ver-
sion of ISA 540 on the audit of accounting estimates
(IAASB, 2008) and established a Task Force to consider
how best to approach the development of possible further
fair value auditing guidance. The Task Force’s work is
ongoing, but it has been engaged in consultations with
staff from the Big Four audit ?rms, while the IAASB has
subsequently issued two staff audit practice alerts (see
IAASB, 2008, 2009). The IAASB is currently still debating
whether it also needs to revise International Auditing Prac-
tice Statement (IAPS) 1012, Auditing Derivative Financial
Instrument, in the light of recent developments.
While the IAASB has been involved in considering how
to deal with these matters, so has the GPPC. Representa-
tives of the GPPC were reported to have met with of?cials
from the UK Financial Services Authority (FSA) in late 2007
to discuss the signi?cance of the ?nancial crisis and the
nature of the profession’s response.
24
Copies of a paper pro-
duced by the GPPC (2007), which summarised the valuation
and disclosure requirements for ?nancial instruments under
existing IFRS, were formally distributed to the IASB, the
Accounting Task Force of the Basel Committee on Banking
Supervision, FSF and IOSCO. There have also been a number
of invitation-only symposia for auditors to review experi-
ences of the crisis in the development and dissemination
of best-practice and to engage with ?nancial regulators.
For example, the Forum of Firms (FOF), comprising 21 trans-
national audit ?rms, including the Big Four held a private
meeting in New York with important global regulatory orga-
nizations. Additionally, the FOF arranged a subsequent sym-
posium in London on audit considerations in respect of
going concern in the current economic environment, at-
tended by over seventy partners from 24 international net-
works of accounting ?rms.
25
Of particular interest has been the developing relation-
ship between the large audit ?rms and audit public over-
sight bodies. Pre-crisis, the GPPC (2006) wrote in a
positive fashion about the achievements of oversight in
terms of encouraging an enhanced focus on audit quality
and strengthening auditor independence – and saw scope
for a body such as IFIAR in helping to deliver more globally
consistent and coordinated systems of oversight. This has
developed into an ongoing relationship, and in 2008 CEO’s
fromthe six largest global accounting ?rms which make up
22
Seehttp://www.accountancyage.com/accountancyage/news/2241784/
investors-wary-liability-plan-4653752.
23
The auditor’s report is addressed to shareholders and as such, the focus
of concern for the auditor differs from that of the banking regulator/
supervisor. IFAC’s statements of guidance on the relationship between
auditors and banking supervisors have long made it clear that the
supervisor’s primary concern is to ensure stability in order to protect the
depositor – and that there is no guarantee that a going concern assessment
from the perspective of shareholders will simultaneously and always
equate to depositor protection.
24http://www.accountancyage.com/accountancyage/news/2204275/big-
four-draw-tough-audit.
25http://www.ifac.org/MediaCenter/?q=node/view/640.
816 C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825
the GPPC attended IFIAR meetings to discuss global audit
quality monitoring arrangements and the adequacy of
audit evidence to support fair values and going concern
assessments and the reliance placed by auditors on spe-
cialists (Sukhraj, 2008). At its most recent, April 2009,
meeting, delegations led by the global CEOs of the 6 large
?rms were invited for discussions with IFIAR regarding
the issues raised for audit ?rms by the current economic
downturn and their response to them.
26
Representatives
from these audit ?rms also presented at a meeting of the
European Group of Auditors’ Oversight Bodies (EGAOB,
2008). There they reassured the regulators that, despite
the ?nancial crisis, there were no major differences in audit
practice between the US and the EU.
While there have been some evident disagreements be-
tween the big ?rms and the PCAOB over the validity of
inspection ?ndings – and like-minded concerns expressed
in other countries – it is evident that there is a form of alle-
giance developing between the large ?rms and oversight
bodies. For instance, intriguingly, inthecase of NewZealand,
where there is no independent audit oversight body, a joint
request to establish such a body was made to the Minister of
Commerce by the Securities Commission and representa-
tives of the Big Four accounting ?rms in New Zealand.
27
The existence of such developing alliances should not
be taken to mean that there are no signi?cant differences
of viewpoint among key players in the global audit regula-
tory arena. There are competing views both on the impact
and cost-effectiveness of public oversight regimes, and on
the extent to which they are enhancing or hindering inno-
vation in audit practice There also appear to be differences
of opinion among oversight bodies, with a recent report by
the PCAOB (2008) in the US presenting an overall view of
audit quality that could be deemed to be less favourable
than that provided by the AIU (2008) in the UK. Similarly,
IFIAR may have received varying levels of support from
certain national oversight bodies, with evidence that the
PCAOB had been relatively negative about the idea of IFIAR
serving as a global audit oversight body.
28
Nevertheless, there are evident signs that bodies like
IFAC are intent on bringing together different components
of the global accounting profession and ensuring that it has
a visible, collective voice on the international stage. This
was typi?ed by its recent endorsement of the recommen-
dations of the G20 for strengthening global ?nancial regu-
lation and enhancing the transparency of the ?nancial
system.
29
The current policy stances of IFAC on issues of glo-
bal regulation and standard setting (e.g., see IFAC, 2007,
2008) are interesting in that they provide a justi?cation
and associated set of principles for what it characterises as
a ‘shared (public–private) system’ of standard setting and
regulation in the public interest. IFAC emphasises the devel-
oping nature of such a system at both national and interna-
tional levels but talks openly about professional
accountancy bodies playing an important role in regulating
the profession and the need to get the right balance between
what it sees as the two contemporary alternatives of ‘self-
regulation with public oversight’ and ‘external regulation’.
In many respects the notion of regulatory balance is
something that can be seen to have characterised different
elements of the auditing profession’s response to crisis,
whether in terms of standpoints or stated positions regard-
ing standard setters, oversight bodies, legal liability, profes-
sional communications and expert witness testimonies.
Central to much of this has been the maintenance of what
the profession would regard as a suitable space or level of
discretion for the exercising of professional judgment –
which at times can be seen to be in con?ict with the prefer-
ences of banking and ?nancial regulators, who seem to re-
tain the view that further guidance is required (e.g., see
CEBS, 2008; FSF, 2008b). IFAC’s policy declarations on the
subject of global regulation recognise that this is something
of a moving feast – noting that ‘‘it must be recognised that
shared responsibility for international standard setting is
at a relatively early stage of development and the current
arrangements canbe expectedtofurther evolve anddevelop
with experience in their operation” (IFAC, 2008, p. 7). Inter-
estingly, in this regard, the G20s recent communiqué on the
global ?nancial crisis will see the FSF (nowFSB) being given
powers to oversee the work of the standard setting bodies
responsible for the 12 standards and codes deemed critical
to the maintenance of ?nancial stability. In relation to
bodies such as the IASB and the IAASB, this will of?cially
mean that the FSB ‘‘will undertake joint strategic reviews
of the policy development work of the international stan-
dard setting bodies to ensure their work is timely, coordi-
nated, focused on priorities and addressing gaps”.
30
According to the FSB, standard setting bodies will report to
it ‘‘on their work without prejudice to their existing reporting
arrangements or their independence. This process should not
undermine the independence of the standard setting process
but strengthen support for strong standard setting by provid-
ing a broader accountability framework” (para. 10).
The ?nancial crisis and the practice of bank audits
The level of activity reported in the previous section of
the paper and the relative lack of public visibility attached
to questions of audit practice is an interesting contrast. At
one level, it could be that the profession’s success at per-
suasive lobbying and strategic manoeuvring has quelled
much of this questioning. It could also be that the auditing
profession has been better prepared than others for the on-
set and aftermath of the ?nancial crisis and has been deliv-
ering to acceptably high standards of performance as
con?rmed by some national auditor oversight bodies.
31
26
ht t p : / / www. f r c . o r g . uk / i ma g e s / up l o a d e d / d o c u me n t s /
Basel%20Press%20Release%20?nal.pdf.
27http://www. sec-com. govt. nz/publications/documents/letter-
audit2.shtml.
28http://ec.europa.eu/internal_market/auditing/docs/committees/sum-
mary03-03-06_en.pdf.
29http://www.ifac.org/MediaCenter/?q=node/view/636.
30http://www.?nancialstabilityboard.org/press/pr_090402b.pdf, para. 9c.
31
Additionally, it could be argued that the auditing profession has been in
the process of transition and reformation from the last notable crisis period
of late 2001 and the demise of Enron – generating regulatory sentiment
that the reforms put in place then have to be given the opportunity to work
themselves through and be formally assessed for practical impact before
being dismissed as unworkable and/or inadequate (see Nelson, 2006).
C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825 817
Having other parties more immediately in the ?ring line in
terms of of?cial allocations of blame for the ?nancial crisis
may have encouraged auditors to keep quiet, avoiding ques-
tioning. Additionally, there are strong grounds for suggest-
ing that any concerns with auditing practice may well
have been overshadowed by more fundamental worries
with standards of ?nancial reporting – with greater atten-
tion devoted to increased inherent volatility in accounting
numbers than to the auditability of contemporary ?nancial
statements. This imbalance is well illustrated by the debate
over fair value, which has focused on whether it is partly to
blame for the crisis (e.g., see Cherry, 2009; Johnson, 2008;
Ryan, 2008; Véron, 2008) rather than on the problems of
auditing fair value, despite the issue of a number of audit
practice alerts.
That said, it is worth noting that there have been some
criticisms of the auditing profession from within, particu-
larly in relation to perceptions of its performance in pro-
viding positive assurance on banks that were soon in
?nancial dif?culty after their 2007 year end ?nancial re-
ports were issued (also see Essinger, 2009; Ricol, 2008). In-
deed, while the tone of argument may well vary
substantially from some of the profession’s most outspo-
ken critics, it is interesting to note how the major senti-
ments still collate around a wish that auditors were more
proactive in detecting major corporate frauds and fail-
ures.
32
As such, there are still worthy questions to be asked
of contemporary audit practice and important implications
for related audit research and regulatory policy.
This section of the paper re-focuses attention upon
audit practice and speci?cally the work of auditors in the
banking sector. The challenges we discuss cover interlink-
ing issues of valuation, the going concern judgement, cur-
rent ?nancial reporting practice, the limits of the audit and
the lack of transparency of audit procedures and bases for
judgements. These issues illustrate the depth of the practi-
cal challenges currently facing auditors and, in turn, poten-
tially help to explain the profession’s activeness in the
global regulatory arena.
Valuation
The de?nitions of fair value and the guidance provided
on valuation methods contained within both US GAAP (FAS
157) and international accounting standards such as IAS39
were drafted in a world of stable markets, but for many of
the assets currently held by banks the markets are now
volatile and highly illiquid, making pricing a dif?cult issue.
This is well illustrated by the announcement from BNP
Paribas in August 2007 that ‘‘the complete evaporation of
liquidity in certain market segments of the US securitisa-
tion market has made it impossible to value certain assets
fairly regardless of their quality or credit rating” (BNP Pari-
bas, 2007). It has been suggested that ‘‘for the duration of
the crisis, preparers will need to exercise considerably
more than the usual professional judgment to apply FAS
157’s language to their speci?c circumstances” (Ryan,
2008, p. 5). The auditors similarly need to apply extensive
professional judgement in relation to the fair values being
reported. The application of judgement is of particular sig-
ni?cance (and potentially problematic) in the absence of
orderly markets, or where the valuation applies to Level
3 assets where the key inputs to the model(s) used for val-
uation are internally generated and subjective.
In the case of illiquid assets where there exist markets
for similar asset types, a Level 2 valuation may be used.
There are a number of sources that can be used for price
references (such as Markit and Reuters Pricing Service)
but the depth of the market, number of dealers and the le-
vel of price transparency is variable across both different
providers and also product types. It is therefore not sur-
prising when the Head of Financial Services Audit at Ernst
and Young (London) observes ‘‘there is a real debate as to
whether we (auditors) should calibrate credit prices from
credit indices if there are no market prices. Some of these
indices are very thinly traded and can be manipulated
and they are only one indicator among many” (Hughes,
2008a). Another option in these semi-liquid markets is
for auditors to use ‘distress’ prices, but the de?nition is
open to interpretation. The IASB’s Expert Panel has recently
recommended a narrow de?nition in order to avoid a prob-
lem reported privately by auditors – that clients have at-
tempted to widen the de?nition in order to record higher
prices than the last traded ?re-sale price (Hughes, 2008b)
but there remains an underlying need for the exercise of
professional judgement.
For Level 3 assets, where prices are marked to model,
the audit of valuations is potentially even more daunting.
The assumptions used as inputs to the valuation models
are both unobservable and supplied by the preparer. Addi-
tionally, they are usually based on historic data, but that
data commonly relates back to periods when markets were
stable and hence may be unsuitable for deriving a current
fair value (Ryan, 2008). In such situations, prices are ob-
tained by making forecasts of variables such as interest
rates, credit spreads, house prices, default rates, etc. but
such forecasts are extremely dif?cult, subjective in nature
and hence dif?cult to audit. Model based valuations may
also be highly sensitive to changes in the underlying
assumptions. Recent calculations by the Bank of England,
for example, show that minute changes to the assumptions
underlying the models commonly used by banks to value
mortgage-linked debt can result in price changes of up to
35% (Tett & Davies, 2007). The dif?culty faced by auditors
in such situations is acknowledged by one of the major
banking regulators when noting that model-based prices
‘‘placed extensive demands on auditors’ ability to check
the robustness of managements’ processes for determining
fair value estimates. . . and on auditors’ use of professional
judgment in evaluating key assumptions and inputs that
bank management used in their valuations” (BIS, 2008,
p. 6). Another challenge for auditors relates to their techni-
cal expertise in valuation, illustrated by the PCAOB Chair-
man, Mark Olson, expressing concern that auditors ‘‘may
not have the extensive training in valuation techniques
necessary to verify companies made the right choices”
(Johnson, 2007). Under such circumstances, the audit
32
In a UK context, the of?cial magazine of the ICAEW, Accountancy,
contained a number of critical letters from ICAEW members in its
November and December 2008 issues (for more details and discussion,
see Humphrey, Woods, & Dowd, 2009).
818 C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825
partner needs to not only recognise the need to use ex-
perts, but also decide on how to make use of their inputs
in the audit. There is a problem, however, in understanding
audit practice when the judgments that permeate the
auditors’ work in relation to the veri?cation of valuations
and other matters such as the use of experts and material-
ity assessments are not readily visible. The issue of visibil-
ity is of fundamental importance not only to academic
researchers but also to regulators, because oversight re-
quires the ability to judge consistency of audit practice,
which must therefore be transparent. More fundamentally,
current ?nancial regulatory thinking is that transparency is
a core requirement for ?nancial stability. Indeed, the need
to improve transparency relating to the valuation of com-
plex ?nancial instruments has been recently highlighted
by a CEBS survey (CEBS, 2009) which commented on a
need for greater disclosure about valuation uncertainty,
modelling techniques and the underlying assumptions,
and sensitivity analyses for Level 3 fair values. Currently,
however, it is very dif?cult to comment on the detail of
practice due to lack of knowledge of exactly how auditors
verify valuations or test pricing models. This perhaps ex-
plains why the international regulators seek additional
guidance on valuation while the profession’s response is
focused on preserving space for the exercise of professional
judgement. How sustainable is it to have such a limited le-
vel of visibility at the operational end of audit practice?
Assessing going concern
When markets are volatile, the application of fair value
creates additional potential dif?culties for auditors in rela-
tion to subsequent events which may require changes to
the audit report. Ryan (2008) cites the example of Citi-
group’s November 5th third quarter 2008 SEC ?ling, which
included a subsequent event disclosure of an estimated
additional $8–11 billion loss on sub-prime positions for
events occurring after the end of the quarter on September
30th. When asset values can shift in such a dramatic and
unanticipated fashion in the space of less than six weeks,
it is easier to understand how companies could get an
unquali?ed audit report and yet still fail soon after. But
such a scenario still raises fundamental questions about
the signi?cance of the audit report and the issues to be
considered in relation to the potential issuing of a going-
concern opinion.
The going concern judgement is made in terms of a 12
month time frame, but in the context of illiquid and volatile
markets this is a long time. Furthermore, the judgement is
made at the level of a single entity, despite the fact that
in the banking sector, the collapse of a single large entity
could induce the subsequent systemic collapse of other
institutions. This systemic risk is illustrated by the impact
of substantial falls in the price of certain assets following
the forced sales that resulted from the failure of Lehman
Brothers. The falling prices led to increased write-offs by
other banks, most notably HBOS which had high exposure
in the relevant markets. The asset write-offs drove the
HBOS share price down, and HBOS agreed to a £12 billion
take-over by Lloyds TSB. Even then, the deal ultimately
had to be renegotiated as market prices continued to fall.
Regardless of the precise statutory responsibilities of
auditors, there are questions over the capacity of audit to
be an effective early warning system of impending major
corporate problems or even collapse – and whether, given
the sheer volatility of capital markets, a 12 month evalua-
tion period for the going concern judgement is just too
long. There are also related issues regarding the ability of
auditors in dif?cult and challenging times to stand up to
dominant chief executives who want to present their com-
pany’s accounts in unduly favourable terms. On the one
hand, the threat of a going concern quali?cation is such a
powerful one that it serves to commit the company to cor-
rective action. In other cases, there may be a stand-off,
with the incumbent auditor resigning and the company
seeking a more compliant, new auditor. The question as
to whether the audit is a function that works well in good
times but really struggles in more turbulent times when
companies are under real pressure to deliver favourable re-
sults remains a live empirical one (see Power, 2009).
Audit reporting and audit quality
A live problem for the visibility of the audit is the vast
length of corporate annual reports in the banking sector,
with annual reports in excess of 300 pages being common-
place. The reports are ?lled with a range of complex disclo-
sures, the bulk of which lie outside the formal ?nancial
statements and are audited only for their consistency with
those statements. The reader is given no substantive in-
sight as to how such consistency was evaluated or tested
by the external auditor. The standard external audit report
is not helpful in this regard, being full of general, standard-
ized statements on the role and limitations of the audit and
containing little about the speci?c work undertaken and
?ndings obtained by auditors.
There are various ways by which the substance and
quality of audit work could be more visibly pro?led and
demonstrated. For instance, a section within the corporate
annual report could focus on key audit ?ndings. Disclo-
sures could include operational levels of audit risk and
materiality, the signi?cant errors detected and adjusted,
and information about the scale, nature and results of tests
done to verify the value of assets marked to market or to
model. Such disclosures could conceivably go beyond the
technical remits of the true and fair assessment and in-
clude information about any assistance provided by the
auditor to the company in helping to ensure that a modi-
?ed opinion is avoided (e.g., by good planning and the
implementation of documentation processes to demon-
strate that the company is a credible, going concern) or
preventing the company from going into liquidation and
thereby preserving jobs.
We recognise that such suggestions invite debate on the
relative merits of short vs. long and/or free form reporting
but the primary purpose in mentioning them is to demon-
strate just how little of the work of the auditor is made vis-
ible in standard audit reporting processes. We have also
seen how judgment permeates the auditors’ work in rela-
tion to valuations, use of experts, materiality and going
concern issues, etc. Likewise, at the level of global
regulatory debate, we have shown how much of this is
C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825 819
constructed from the audit profession’s perspective on pre-
serving the space for the exercise of professional judge-
ment. Yet, strikingly, when it comes to the matter of
demonstrating the exercising and value of professional
judgement at the operational end of audit practice, very lit-
tle is visible.
There are various possible causes and dimensions to
such a contrasting position. The history of auditing is re-
plete with expressions of desire to know more about what
auditors do or exasperated auditors, in the context of the
audit expectations gap, complaining that people do not
understand exactly what they do. However, such wishes
and frustrations seldom seem to be met by any enhanced
visibility and/or understanding of audit practice, lending
credence to the view that of primary signi?cance to the
audit profession is to maintain a sense of professional mys-
tique as this is commercially valuable. A cursory review of
audit ?rm websites will reveal far more detailed
information on ?nancial reporting practices – including
revenue-generating ‘all you ever wanted to know’ guides
of IFRS – and just very sparse insights of the nature of their
auditing practices and the opportunities, achievements
and practical challenges confronting auditors in their
day-to-day work. Concerns with potential liability expo-
sures and the risk of inviting further inquiries by audit reg-
ulatory oversight bodies are put up by the ?rms as possible
reasons for the relative lack of visibility of auditing. But it
does not detract from the case that the current regulatory
context premised on the promotion of notions of public
oversight, transparency and accountability, can also have
quite constraining and limiting effects in terms of enhanc-
ing the visibility of audit work.
The latter observation has an ironic ?avour in that
oversight bodies are held-out, and classify themselves, as
key-drivers and promoters of audit quality. It remains an
interesting empirical issue as to what impact they are
having on general levels of audit quality. The insight value
provided by individual ?rm inspection reports is certainly
reduced by the fact that so much information is routinely
kept out of the public domain (see Khalifa, Sharma, Hum-
phrey, & Robson, 2007; Lennox & Pitman, in press) – while
the challenges to inspection ?ndings by audit ?rms (made
in letters from the ?rm at the end of the inspection reports)
does make it dif?cult to know which side to believe.
The recent PCAOB (2008) summary report of its annual
inspections makes a wide range of criticisms of standards
of audit practice
33
but emphasises at the outset that it ‘‘cau-
tions against using this report to draw broad conclusions
about the quality of audits performed by any (or all) of these
?rms”. If it is dif?cult to rely on both individual and sum-
mary inspection reports, what assurance and insight on
the quality of auditing services is provided by inspection
and oversight processes? What are the grounds and evi-
dence-bases for believing in the value of inspection?
It is interesting how much of the profession’s language
in promoting audit nowadays relates to its role in provid-
ing assurance on the credibility of ?nancial information,
whereas in the mid-1990s it was more focused on the
added-value attributes of the audit. In the latter state,
audit is portrayed as more of a primary function whereas
in the former it is a second-order function – dependent
in large parts on the pertinence of the information whose
credibility is being assessed. Worryingly for the audit pro-
fession, there is a poorly aligned set of incentive structures
on the part of audit clients to promote the visibility of audit
quality – what audit client is going to see value in inform-
ing corporate stakeholders that their annual ?nancial
statements only appear in the form they do because of a
whole host of adjustments enforced on them by their
external auditor?
Contemplating regulatory action
Such observations regarding the transparency of audit
have important messages for global regulatory bodies ac-
tive in the international arena. The profession may be hav-
ing a good crisis in the sense that relatively few people are
blaming auditors for the collapse of a whole range of ?nan-
cial institutions but could it be claimed that the signi?-
cance of audit to processes of corporate governance is
declining? For instance, while reports by the FSF
34
and
the BCBS (Basel Committee) have spoken in supportive fash-
ion about the signi?cance of the external audit function, as
Table 1 shows, a substantial number of recent reports and
policy proposals on the subject of ?nancial regulation and
responses to the ?nancial crisis make very little reference
to audit.
The Basel Committee sought to encourage dialogue
with audit ?rms on the best ways of preparing for and
addressing audit processes that should be conducted dur-
ing future times of ?nancial stress (BIS, 2008, p. 9). The
provision of direct support by auditors for prudential reg-
ulation, though, leads to important questions about the
nature of the interface between regulators and auditors
and a redrafting of the boundaries of the audit function.
Practice does vary across national jurisdictions but it is
set to be a matter for much wider debate within the inter-
national ?nancial architecture.
35
A fundamental issue for
the auditing profession, in any such debate, is to understand
the limits of the existing skill sets of auditors and to draw
33
The PCAOB criticised, among other things, the adequacy of auditing
procedures with respect to the assessment of fair values and accounting
estimates (including the testing of management models); the over-reliance
placed on third-party con?rmations, inadequate usage of analytical review
procedures and the application of professional scepticism – particularly in
areas that required management’s most complex judgments (http://
www.pcaobus.org/Inspections/Other/2008/12-05_Release_2008-008.pdf).
34
The FSF’s report on ‘‘Enhancing Market and Institutional Resilience”
(April, 2008) mentioned audit speci?cally in three of its principal recom-
mendations.http://www.?nancialstabilityboard.org/publications/
r_0804.pdf.
35
For example, in evidence to the UK Treasury Committee, the ICAEW
suggested a number of ways in which the role of auditors could be
extended (Treasury Committee, EV 450). These covered extending the audit
to material outside the ?nancial accounts, such as narrative information
and capital ratios; audit of Pillar 3 disclosures; review of regulatory returns
to the supervising authority; increased work on reports commissioned by
the supervisor and changes in the frequency/style of meetings with the
supervisor and bank management.
820 C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825
informatively on the lessons from prior discussions and
practice regarding the auditor–supervisory relationship.
Whatever role emerges for the audit profession, it is
also likely to be accompanied by a push for greater visibil-
ity and transparency in respect of the audit ?rms them-
selves. Article 40 of the EU’s Statutory Audit Directive
likewise now requires auditors of public-interest entities
to publish (within three months of the end of each ?nan-
cial year) transparency reports covering items including
the ?rm’s legal structure, ownership, governance structure,
the nature and effectiveness of its internal controls and
?nancial information showing the importance of audit to
the ?rm and the basis for partner remuneration. The Basel
Committee 2008 report (BIS, 2008) also explicitly recom-
mends greater transparency and dialogue between ?rms
about the challenges they face with respect to the quality
of bank auditing and the identi?cation of factors which
might hinder the global application of auditing standards.
One bene?t for the profession of such discussion is that it
could serve to steer legislators and audit regulators from
‘knee-jerk’ regulatory solutions, or a focus on ‘red herrings’
(Power, 2009) that hinder the more fundamental task of
developing greater understanding of the day-to-day provi-
sion of audit services and the key-drivers of audit quality.
Conclusions
This paper has explored the developing relationship be-
tween auditing and global ?nancial regulatory structures
in the context of the global ?nancial crisis. Like others
(e.g., Sikka, in press), we were intrigued by the apparent
lack of visible questioning of the audit function in the
midst of the current crisis, but it quickly became very evi-
dent that silence did not mean inactivity, nor an intent to
preserve the status-quo. The analysis of institutional inter-
actions, policy initiatives and debates made here, reveals
that there has been an active regulatory response to this
crisis. In considering the auditing profession’s response to
the current global crisis, we have given a ?avour of the
continuing signi?cance of negotiating and agenda framing
activities on the part of the profession – but also high-
lighted a number of important, new dimensions regarding
the global context within which the audit function
operates.
Tracing the rise of an international ?nancial architec-
ture and the position of audit within such structures is of
real value in opening up new lines of investigation in rela-
tion to audit regulatory systems. We would suggest that
the global ascendancy of the large multinational audit
?rms raises questions as to the extent to which self-regu-
lation is re-emerging in a modi?ed form of regulatory part-
nership between the ?rms, public oversight boards and the
larger national accountancy bodies. There are questions to
be asked of the status of auditing, the developing skill sets
of auditors and the extent to which their capacity to exer-
cise professional judgement is being enhanced and/or un-
duly constrained by global regulatory arrangements.
More generally, there are avenues to explore with respect
Table 1
Reports and policy proposals relating to the ?nancial crisis.
Date Issuer/title Geographic scope Discussion of
external audit
role
Number of times
external audit is
mentioned
April 2008 (update
issued April 2009)
FSF International Yes 31
Report of the ?nancial stability forum on enhancing market
and institutional resilience
June 2008 CEBS Europe No 0
Report on issues regarding the valuation of complex and
illiquid ?nancial instruments
July 2008 Institute of International Finance (IIF) International Yes 27
Final report of the IIF committee on market best practices:
principles of conduct and best practice recommendations
September 2008 Ricol report France + Europe Yes 55
Report on the ?nancial crisis
December 2008 Basel Committee International Yes 189
External audit quality and banking supervision
January 2009 ICMB/CEPR International No 0
Geneva report
The fundamental principles of ?nancial regulation
January 2009 G30 US + International No 0
Financial reform: a framework for ?nancial stability
February 2009 De Larosiere group EU Yes 1
The high level group on ?nancial supervision in the EU:
report
February 2009 OECD International Yes 7
The corporate governance lessons from the ?nancial crisis
March 2009 FSA turner review UK Yes 2
A regulatory response to the global banking crisis
April 2009 G20 resolutions International No 0
Declaration on strengthening the ?nancial system
C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825 821
to the precise ‘interests’ being served by the pursuit of glo-
bal audit standard setting in the ‘public interest’.
It is evident that regulatory outcomes will be the prod-
uct of shared and negotiated positions on the part of in?u-
ential national and international players. As Jane Diplock,
the current chair of IOSCO’s governing Executive Commit-
tee, recently observed:
‘‘It is my belief that a series of closely networked solu-
tions will be developed and these solutions will require
the cooperation of all major players in the global ?nan-
cial architecture as well as commitment at national
jurisdictional level. To be effective these solutions will
require high sets of robust global standards constantly
updated to re?ect market changes, effective enforce-
ment capacity across borders and watchful eyes and
actions across the world on stability issues.”
(seehttp://www.sec-com.govt.nz/speeches/2009/260
509.shtmls)
It is also clear that regulatory practice and accompany-
ing ‘solutions’ still have momentum. In November 2008,
Mario Draghi, chairman of the FSF/B, presented his: ‘‘Vision
of a more resilient global economy” in the Financial Times.
He discussed how many of the weaknesses currently seen
in the global economy came from ‘‘gaps and inconsisten-
cies in regulatory regimes” and that it was necessary to
‘‘review and extend the regulatory perimeter to ensure
that all ?nancial activities are subject to adequate trans-
parency standards and safeguards where they pose mate-
rial risk. . . A large number of national and international
bodies have reoriented and coordinated their work agen-
das to develop and implement necessary changes” (Draghi,
2008).
While the auditing profession may take some comfort
from such viewpoints and the relative lack of criticism of
auditors in relation to the current crisis, there are some
looming danger signs, with longer term signi?cance, for
the profession. Some regulatory reports suggest that audit
is losing its relevance and/or is something that functions
best in stable, ?nancial times. Others are proposing new
and potentially very challenging roles and responsibilities
for auditors and, in the case of the G20, looking for the
expansion of international accounting and auditing sys-
tems in countries where the supporting infrastructure is
not likely to be very strong (see Hegarty et al., 2004). Legal
cases against auditors are also starting to appear (with
accompanying fears for the viability of the big audit
?rms
36
) – most notably the $1billion lawsuit ?led by the liq-
uidators of the failed sub-prime lender New Century against
its auditors, KPMG for, allegedly, conducting ‘‘reckless and
grossly negligent audits” that failed to reveal the lender’s
?nancial problems.
It has often been said that a crisis is a good opportunity
for studying the particular signi?cance and impact of the
audit function, not least because it is a time when values
and the raw edges of practice are most apparent (see Coo-
per, Everett, & Neu, 2005). Signi?cantly, studies of auditing
at a time of crisis have revealed the negotiated nature of
auditor responsibilities and the sheer degree of effort
undertaken by the profession in responding to crisis (see
Fogarty, Heian, & Knutson, 1991). They have also cautioned
against assuming that crises routinely address distinctive
problems and propose new solutions, demonstrating the
longevity and relatively static nature of phenomena such
as the audit expectations gap (see Chandler & Edwards,
1996; Humphrey, Moizer, & Turley, 1992).
However, if we are looking at a global regulatory future
oriented around practice, then it is important to study not
only the institutions delivering that practice, but also those
monitoring and shaping its boundaries – including the
practice of audit oversight and associated corporate gover-
nance contexts. Above all, a consideration of the interna-
tional ?nancial architecture and developing nature of
audit regulation has a valuable sensitising effect – empha-
sising the importance of not relying on overly one-dimen-
sional perspectives of audit practice and its regulation. It
also demonstrates the inter-related and overlapping nat-
ure of questions of audit practice, research and public
policy.
The global audit regulatory arena is a complex, intricate
and shifting domain and one that is often absent or poorly
depicted in audit regulation papers. In this regard, we con-
cur strongly with the call by Cooper and Robson (2006) and
others (e.g., see Kerwer, 2005; Richardson, 2009) for more
studies of global regulatory sites and relationship net-
works. The capacity for debate in academic auditing circles
continues to demonstrate that the subject is a substantially
more interesting ?eld of inquiry than stereotypical images
of auditing would suggest. There exist quite contrasting
stances as to how much is known about audit quality
and the work processes, practices and cultures serving to
deliver and/or constrain the provision of quality audits
(e.g., see Francis, 2004; Humphrey, 2008; Power, 2003).
There are divergent views over the strength and achieve-
ments of audit regulation – including whether the faith
placed in auditor independence and supporting regulatory
provisions governing the services provided by auditors is
fundamentally ?awed; and whether public oversight re-
gimes are enhancing understanding of audit practice or
hindering practice innovation (e.g., see Bazerman, Moore,
Tetlock, & Tanlu, 2006; Lennox & Pitman, in press; Moore,
Tetlock, Tanlu, & Bazerman, 2006; Nelson, 2006; Robson,
Humphrey, Khalifa, & Jones, 2007). There are competing
claims as to whether the global promotion of Anglo-Amer-
ican audit methodologies is bringing much needed trans-
formations in processes of corporate governance or
undermining the capacity to learn from valuable, but less
visible, governance traditions. Similarly, there are wide-
ranging discussions as to whether the pursuit of greater
international convergence in audit practices is serving
the interests of global capital markets, more broadly de-
?ned notions of ‘public interest’ or, simply, the self-inter-
ests of the auditing profession.
In calling for the global audit regulatory arena to be gi-
ven more research consideration, it is crucial to recognise
that it is not a static phenomenon – but a world that shifts
and changes depending on active pressures and interests. A
number of the questions raised in this conclusion could
36http://business.timesonline.co.uk/tol/business/industry_sectors/bank-
ing_and_?nance/article6175052.ece.
822 C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825
well be answered differently depending if they were asked
in the context of a developed or developing nation, or
asked to an international or local ?rm, an audit practitioner
or regulator, an international standard setter or a national
professional body. Undoubtedly, there are bene?ts to pri-
vate and informal discussions behind closed doors. But at
the same time, we certainly need more publicly available
and accessible knowledge of the workings of international
audit practice, the regulatory networks, the forces driving
global regulatory policy and its impact at the level of prac-
tice. We also need to recognise practice, research and pol-
icy as integrated components of activity and thought. To do
otherwise runs the risk that practice development be-
comes unduly dependent on the exercising of sectional
interests, mythical beliefs and convenient ‘reinterpreta-
tions’ of history.
Appendix A. Abbreviations
ACCA Association of Chartered Certi?ed Accountants
AICPA American Institute of Certi?ed Public Accountants
AIU Audit Inspection Unit (UK)
APB Auditing Practices Board
BCBS Basle Committee on Banking Supervision
BIS Bank of International Settlements
CCAB Consultative Committee of Accountancy Bodies
EC European Commission
ECG European Contact Group
EGAOB European Group of Auditors’ Oversight Bodies
EU European Union
FOF Forum of Firms
CEBS Committee of European Banking Supervisors
FSF Financial Stability Forum
FSB Financial Stability Board
GAA Global Accounting Alliance
GPPC Global Public Policy Committee
GPPS Global Public Policy Symposium
GSC Global Steering Committee
IAASB International Auditing and Assurance Standards Board
IAIS International Association of Insurance Supervisors
IAPC International Auditing Practices Committee
IAS International Accounting Standard
IASB International Accounting Standards Board
ICAEW Institute of Chartered Accountants in England and
Wales
IFAC International Federation of Accountants
IFAD International Forum on Accountancy Development
IFI International Financial Institution
IFIAR International Forum of Independent Audit Regulators
IFRS International Financial Reporting Standard
IGO International Governmental Organisation
IMF International Monetary Fund
IOSCO International Organisation of Securities Commissions
IRLG IFAC‘s Regulatory Liaison Group
ISA International Standard on Auditing
NGO Non-Governmental Organisation
PCAOB Public Company Accounting Oversight Board
PIOB Public Interest Oversight Board
ROSC Reports on Standards and Codes
SEC Securities and Exchange Commission
TAC Transnational Audit Committee
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doc_193218044.pdf
This paper explores how regulatory relationships in the global audit arena are being
affected by the current financial crisis. Key policy initiatives and debates are analyzed,
along with institutional interactions, in particular between the International Federation
of Accountants (IFAC), international regulators and the large audit firms. The events are
placed in the context of the new international financial architecture which has developed
over the last decade. Using the illustrative lens of bank auditing, questions are asked of the
nature and status of audit practice and the regulatory arrangements governing such practice.
The paper shows the active nature of the regulatory responses to the crisis and the
shifting and competing influences among key regulatory and professional participants in
the global audit arena. Emphasis is placed on the need for audit researchers to be sensitive
to the developing global financial architecture, and its potential implications for the study
of audit practice in different national and international contexts.
The global audit profession and the international ?nancial architecture:
Understanding regulatory relationships at a time of ?nancial crisis
Christopher Humphrey
a,
*
, Anne Loft
b
, Margaret Woods
c
a
Manchester Business School, University of Manchester, Booth Street West, Manchester M15 6PB, United Kingdom
b
School of Economics and Management, Lund University, Box 7080, SE-220 07 Lund, Sweden
c
Nottingham University Business School, Wollaton Road, Nottingham NG8 1BB, United Kingdom
a b s t r a c t
This paper explores how regulatory relationships in the global audit arena are being
affected by the current ?nancial crisis. Key policy initiatives and debates are analyzed,
along with institutional interactions, in particular between the International Federation
of Accountants (IFAC), international regulators and the large audit ?rms. The events are
placed in the context of the new international ?nancial architecture which has developed
over the last decade. Using the illustrative lens of bank auditing, questions are asked of the
nature and status of audit practice and the regulatory arrangements governing such prac-
tice. The paper shows the active nature of the regulatory responses to the crisis and the
shifting and competing in?uences among key regulatory and professional participants in
the global audit arena. Emphasis is placed on the need for audit researchers to be sensitive
to the developing global ?nancial architecture, and its potential implications for the study
of audit practice in different national and international contexts.
Ó 2009 Elsevier Ltd. All rights reserved.
‘‘(T)he auditing profession may face some very severe
challenges. The continued success of the profession
depends in part on its response to these challenges.
Research has a role in clarifying the nature of these
challenges and in exploring the possible responses. To
do this successfully, this research has to explore funda-
mental questions about why and where the auditor’s
authority and power in society reside and how this
location changes over time.”
(Bromwich & Hopwood, 1982, p. 21)
The current global ?nancial crisis has proved to be a
particularly interesting one from the perspective of audit-
ing. At one level, attention has been drawn to the limits
and limited capabilities of auditing, the need to reform as-
pects of practice and regulation – including placing further
constraints on the (non-audit) services provided by audi-
tors and the relative silence of the profession at such a fun-
damentally important time (see Sikka, in press). However,
at another level, the crisis has proved distinctive in that the
typical questioning in the aftermath of major banking col-
lapses as to ‘where were the auditors?’ has been less preva-
lent than in the past. The many regulatory and government
reports now published on the ?nancial crisis acknowledge
that its causes lie in the interaction of a range of complex
and global factors (e.g., see De Larosiere, 2009; Ricol,
2008; Treasury Committee, 2009). Criticism and blame
has focused primarily on individual banking institutions
and the strength of their management and business mod-
els, remuneration structures and incentive based cultures.
The ?nancial regulators and credit rating agenciesz have
also found themselves subject to serious questioning, but
auditors have largely escaped critical comment and the
apportionment of blame. Indeed, the profession has been
able to respond, insome jurisdictions, to criticismby relying
0361-3682/$ - see front matter Ó 2009 Elsevier Ltd. All rights reserved.
doi:10.1016/j.aos.2009.06.003
* Corresponding author.
E-mail address: [email protected] (C. Humphrey).
Accounting, Organizations and Society 34 (2009) 810–825
Contents lists available at ScienceDirect
Accounting, Organizations and Society
j our nal homepage: www. el sevi er. com/ l ocat e/ aos
on of?cial assurances by independent oversight bodies as
to the general quality of audit work (see AIU, 2008) and
declarations, by senior international regulators, that the
auditing profession appears to have had ‘a good crisis’.
1
This paper does not concentrate on the causes of the
current ?nancial crisis and where blame should or should
not be apportioned (for a discussion of the relative merits
of this, see Miller, 2008). Rather, it delves behind a claimed
‘silence’ by the profession to highlight the scale of ‘behind-
the-scenes’ activity and policy responses on the part of the
auditing profession. In this regard, the paper’s contribution
is threefold.
Firstly, the paper stresses the importance of studying
auditing within its context – and, how nowadays, this
increasingly means researching auditing within the con-
text of what is commonly known in the ?eld of global gov-
ernance, as the international ?nancial architecture.
2
In
particular, it is argued that audit researchers need to be
aware of (a) the wide range of institutions (and individual
key players within them) with whom the auditing profes-
sion interacts in the global sphere and (b) the ways in which
such bodies and interactions increasingly set the boundaries
for both audit practice and the ideas and thought processes
that shape practice.
Secondly, the paper takes a number of components of the
current global ?nancial crisis and the associated regulatory
response to highlight the potential challenges that it pro-
vides for the external audit function. Lastly, using the speci?c
example of bank auditing, the paper pinpoints key questions
that can be asked both of current practice and the path that
future developments in practice may take. Such questioning
is undertaken from the perspectives of audit practitioners,
researchers and regulators; encouraging more open and vis-
ible dialogue (and the establishment of the contextual cir-
cumstances that will permit such dialogue) on the nature,
capacities and achievements of audit practice.
The emergence of an international ?nancial
architecture
The need for an international ?nancial architecture
3
had
its roots in the discussions raised in the mid-1990s about how
to prevent the type of ?nancial chaos whichdevelopedas a re-
sult of Mexico’s devaluation of the peso in 1994. However, it
was not until the widespread ?nancial crisis in Asia in 1997/
8that actionwas taken(Wade, 2007a). ‘Financial stability’ be-
gan to be seen as a potential problem in a rapidly globalising
world. There were varying explanations of the Asiancrisis and
many different ideas as to how such a crisis could be pre-
vented in the future (see Muchhala, 2007; Rahman, 1998).
The G7 Finance Ministers took responsibility for ?nding a
solution. They rejected wide-ranging suggestions like the set-
ting up of a supranational authority to supervise global ?nan-
cial markets or a new World Financial Authority (Eatwell &
Taylor, 2000). These moves would have drastically reduced
national sovereignty which was unacceptable to the partici-
pants. While some blamed the IMF for having exacerbated
the crisis (Weisbrot, 2007), others pinpointed weaknesses in
the countries concerned, including poor supervision of banks,
weak corporate governance and misleading ?nancial reports.
The solution arrived at focused on dealing with such weak-
nesses, and was represented in a system of standards and
codes to ensure good ?nancial practice (IMF & World Bank,
2005). The theory was that the countries whose institutions
complied with these standards would gain better access to ?-
nance both from the IMF, and more widely from ?nancial
markets. This would further induce the use of the standards,
and boost ?nancial stability (Wade, 2007b). A new organisa-
tion, the Financial Stability Forum (FSF) was set up by the
G7 in 1999, its key mandate being to set up this system of
standards. By 2000, 12 key standards for achieving ?nancial
stability had been agreed; these included international
accounting standards (IFRS/IAS) and international auditing
standards (ISAs) (FSF, 2008a; Humphrey & Loft, 2009). Wade
identi?ed this new focus on standards as a move from a doc-
trine of ‘liberalize the market’ to one of ‘standardize the mar-
ket’ (Wade, 2007b, p. 74). However these two doctrines were
not incompatible, for although standardizing brings more
‘government’ it is carried out (in theory at least) with the
aim of establishing a framework of standards in which the
free market can operate.
The inclusion of ISAs in the FSFs recommended list of
standards (which also included the IMF’s ‘Code of Good
Practices on Fiscal Transparency’ and BCBS’s ‘Core Princi-
ples for Effective Banking Supervision’) was signi?cant.
The ISAs are set by the International Auditing and Assur-
ance Standards Board (IAASB)
4
under the International Fed-
eration of Accountants (IFAC). Public authority was
accordingly being placed behind private standards, giving
them a more important status not just in terms of processes
of corporate reporting but also to the larger project of ensur-
ing ?nancial stability.
5
It was also recognised that while setting standards was
important, the extent to which the standards were actually
used was crucial, and the IMF and World Bank developed a
program of ‘Reports on Standards and Codes’ (ROSC), with
one speci?c program dealing with accounting and audit-
ing. These focus on making detailed assessments of na-
tional institutional frameworks, and the observance and
enforcement of standards, using IFRS/IAS and ISA as the
benchmark. To date the World Bank has published
accounting and auditing ROSC’s on 72 developing or
emerging economies.
6
Developed countries like Japan and
1
A conclusion reached by Paul Boyle, the head of the UK’s Financial
Reporting Council and the International Forum of Independent Audit
Regulators (IFIAR) – see Comment made in his address to the Pan
Accountancy Profession Lunch, Mansion House, London, 23 October 2008.
ht t p: / / www. f r c . or g. uk/ i ma ge s / upl oa de d/ doc ume nt s / Ma n-
sion%20House%20Speech%20October%202008%20-%20published1.pdf.
2
Advice provided by G.E. Storey in the development of this paper is
gratefully acknowledged.
3
See Appendix A for a full list of the abbreviations used to identify
organizations in the regulatory architecture which are referred to in this
paper.
4
The IAASB was not operational until 2002 – prior to that the
International Auditing Practices Committee (IAPC) set the standards.
5
This added to the interest in ISAs as potential EU audit standards
already expressed by the European Commission and interest in the by
IOSCO, as the standard for cross-border audits.
6http://www.worldbank.org/ifa/rosc_aa.html (note that some countries
may not permit publication, so the number carried out is in fact greater).
C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825 811
the US, were not included in this program which is some-
what ironic given that the current global ?nancial crisis
emanated from USA.
This whole approach to ?nancial stability has been la-
belled by Wade as a ‘standards–surveillance–compliance’
system (2007a, p. 115). Transparency is a key concept here,
going hand in hand with the use of international standards.
Camdesseus (1999), then managing director of the IMF,
commented that this was the ‘golden rule’ of the new
international ?nancial system. Ultimately the use of all
these standards was expected to help to prevent ?nancial
instability, as any potential problems would be made
transparent early on, allowing quick action by the IMF or
other relevant parties. In ?nancial reporting the use of
IFRS/IAS and ISA for the preparation and audit of ?nancial
reports was expected to increase transparency for global
investors, creating a ‘level playing ?eld’ where previously
local standards might have served to mislead.
The ‘standards–surveillance–compliance’ is a very ambi-
tious system(Hale, 2008; Vestergaard, 2004, 2009), not least
in its reliance on new information technologies, and in par-
ticular the internet (Loft &Humphrey, 2006). However, while
it looks impressive on paper, the ‘standards–surveillance–
compliance’ system has not been as successful in its own
terms as was expected (see Schneider, 2005). According to
Hegarty, Gielen, and Hirata-Barros (2004), the impediments
tosuccessful implementationincludeda lackof globallycon-
sistent qualityof audit bythebigaudit ?rms, andthe lackof a
‘‘comprehensive framework of principles for the regulation
of accounting and auditing” (p. 15). In other words, in many
countries what was requiredwas aninstitutional framework
into which standards could ?t.
The current ?nancial crisis has brought a reconsidera-
tion of the international ?nancial architecture, including
calls (again) for a global ?nancial regulatory body (e.g.,
by Mattli and Woods (2008)) The solution emerging from
the powerful new G20 grouping is a stronger version of
the ‘standards–surveillance–compliance’ system estab-
lished a decade ago. The FSF has become the Financial Sta-
bility Board (FSB), and it has been placed on ‘‘stronger
institutional ground” so that it can be more effective, and
able to ‘‘. . . develop and implement strong regulatory,
supervisory and other policies in the interest of ?nancial
stability.
7
The ‘standards–surveillance–compliance’ regime
is to be seriously applied on a global basis, and not ‘just’
for emerging and developing economies. With the G20
now involved in the general governance of the global econ-
omy, the old dichotomy between emerging economies who
were ‘clients’ of the IMF and international standard setters,
and the developed industrial states like the USA who were
the ‘masters’ of the system, appears to be breaking down.
The international ?nancial architecture and the
auditing profession
Most of the organisations making the key standards and
codes are public in nature – in that they are set up and
funded by governmental bodies, either directly through
having national members of the organisation (like IOSCO
and BCBS) or indirectly through International Financial
Institutions (IFIs – i.e., IMF and the World Bank). The
bodies responsible for the setting of international account-
ing (IASB) and international auditing standards (IAASB) are
exceptions to this case as they are both private organisa-
tions – the former positioned under the umbrella body of
the International Accounting Standards Committee Foun-
dation (IASCF) and the latter within IFAC – which also
houses standard setting boards responsible for interna-
tional standards on auditing ethics, accounting education
and public sector accounting.
In recent work (Humphrey & Loft, 2009), we empha-
sised that the international ?nancial architecture has to
be viewed in dynamic terms. Adapting Germain’s (2007)
de?nition, we view global ?nancial regulatory processes
as ‘‘the contested interplay between market actors, private
authorities and public authorities (state and international)
that establishes the rules or boundaries within which glo-
bal ?nancial resources are mobilised and channelled to-
wards economic, social and political activity” (p. 73).
What has been of primary interest to us is the way in
which the global regulatory audit initiatives emerge from,
and are shaped by, the international ?nancial architecture.
When Hopwood (1994) highlighted the ‘‘very active poli-
tics” in the emergent international arena in accounting
and auditing, he spoke of the institutional interfaces be-
tween the international regulators and the international
accounting profession. Arguably, what has emerged in
the ?eld of global auditing regulation in the last ?fteen
years, is a more complex and more interlocking set of rela-
tionships and interests than the ‘interfaces’ and ‘lobbying
activities’ that Hopwood identi?ed as taking place between
regulators and the profession. In studying the establish-
ment of IFAC’s Public Interest Oversight Board (PIOB), we
sought to capture such interlocking relationships by sug-
gesting that the PIOB could be regarded, given its organiza-
tional make-up, as a form of embedded oversight (see Loft,
Humphrey, & Turley, 2006). In speaking more broadly
about auditing developments within the context of the
international ?nancial architecture, we drew on the term
‘coordinated network governance’ to re?ect a set of regula-
tory arrangements that are binding together international
regulators and the international profession in an ongoing
project pursuing global governance in the audit arena
(see Humphrey & Loft, 2009).
A useful way of illustrating the key development pat-
terns in global auditing regulation is to focus on three
in?uential entities/groupings: namely, (1) the Interna-
tional Federation of Accountants (IFAC); (2) a group of
‘international regulators’
8
comprising the World Bank, the
International Organisation of Securities Commissions (IOS-
CO), the International Association of Insurance Supervisors
(IAIS), the Basel Committee on Banking Supervision (BCBS)
7http://www.londonsummit.gov.uk/en/summit-aims/summit-commu-
nique/.
8
We use his term ‘international regulators’ in the sense it is used by IFAC
in discussing this group, the term ‘of?cial community’ has been used by one
of the members. Formally (after 2003) it became known as the ‘Monitoring
Group’, and in 2009 got its own charter.http://www.ipiob.org/downloads/
The_Monitoring_Group_Charter.pdf.
812 C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825
(also often referred to as the Basel Committee) and the Euro-
pean Commission (EC); and (3) the large multinational audit
?rms. These have been illustrated in Fig. 1 as three overlap-
ping circles to show that the three groups have interlocking
relationships with each other.
IFAC’s formal mission statement is to serve the public
interest, to be achieved by strengthening the worldwide
accountancy profession and contributing ‘‘to the develop-
ment of strong international economies by establishing
and promoting adherence to high-quality professional
standards, furthering the international convergence of
such standards and speaking out on public interest issues
where the profession’s expertise is most relevant” (seehttp://www.ifac.org/About/). IFAC’s members and associ-
ates are primarily national professional accountancy
bodies and cover 123 countries and jurisdictions (as at June
2009). Its most signi?cant activity in relation to the discus-
sion in this article is the setting and promotion of ISAs
through the work of the IAASB. ISAs are not only one of
the FSB’s core standards, but since the completion of the
IAASBs clarity project IOSCO endorsed ISAs for the audit
of cross-border in 2009
9
offerings and listing; and they
are also probably on their way to becoming compulsory
for audits in the EU.
10
The ‘international regulators’ became directly involved
with IFAC and with the then ?ve big audit ?rms when
the ‘International Forum on Accountancy Development’
(IFAD) was established in 1999 (Street & Needles, 2002).
IFAD came into being as a result of the critique which
was showered on the profession, and especially the big
?rms, in the wake of the Asian crisis. The international reg-
ulators began to insist that something had to be done to
enhance accounting capacity and capabilities in emerging
and developing economies. Although the IFAD initiative
was subsequently terminated, it stimulated contact be-
tween such organisations, and an agenda for future devel-
opment began to emerge in terms of advancing ISAs to be
world standards, improving audit quality, and furthering
the development of IFAC as an organisation serving the
global public interest. The international regulators became
IFAC’s Monitoring Group, a position formalised in the 2003
IFAC reforms and which in 2009 gained its own constitu-
tion.
11
The Monitoring Group played an important role in
introducing IFAC’s Public Interest Oversight Board (PIOB),
which was formally operationalised in 2005. René Ricol,
IFAC’s president at the time, spoke of these reforms as pro-
viding for: ‘‘. . . ongoing collaboration between regulators
and the profession” (2004, p. 3). The majority of the mem-
bers of the PIOB have held (or still hold) positions as regula-
tors, and bring this experience to bear in carrying out the
major role of the PIOB, which is to monitor the activities
of IFAC’s standards setting committees. IFAC’s Regulatory
Liaison Group (IRLG) provides a formal opportunity within
the IFAC framework for the Monitoring Group to meet with
the IFAC leadership and, through the Transnational Auditors
Committee (TAC), representatives of the transnational audit
?rms (in particular the Big Four).
12
The members of the Monitoring Group include IOSCO,
which has itself produced documents concerning auditor
independence and audit quality. Another is BCBS which
has been concerned, not surprisingly, with the audit of
banks, and at the regional level, the European Commission
which has produced Recommendations and Directives in
this area. Another body, not in the Monitoring Group, but
with international regulatory in?uence, is the US Public
Company Accounting Oversight Board (PCAOB) – an inde-
pendent board created by the Sarbanes–Oxley legislation.
Part of its mandate involves it carrying out inspections of
audit work, with powers of extraterritorial reach for for-
eign auditors of US listed companies.
The last of the three groups in Fig. 1 is the large ?rm
audit networks, the most important of which are the Big
Four ?rms: Ernst and Young, Deloitte, KPMG and Pricewa-
terhouseCoopers. These are large multinational service
?rms which dominate the global market for the audit of
listed companies. The vast majority of the world’s largest
companies are audited by one of these four ?rms: in
2008 the Big Four networks each had over 7200 partners
(US Treasury, 2008, p.10). Each ?rm has an of?ce in most
countries of the world – for example, PricewaterhouseCo-
opers, has of?ces in 150 countries, while the next two larg-
est ?rms outside of the Big Four, Grant Thornton and BDO
are substantially smaller. The ?rms are organised as net-
works of member bodies, each of which is a separate and
independent legal entity under the global ?rm, e.g., Price-
waterhouseCoopers International Limited. Despite this le-
gal structure, they are to an increasing extent acting
more and more like one entity – forcing members of the
?rm to closely follow the policies of the global ?rm. The
pressure to do this has increased during the last decade
Fig. 1. Interlocking relationships in global audit regulation.
9
IOSCO/MS/06/2009; Tel Aviv, 11 June 2009; ‘‘IOSCO Statement on
International Auditing Standards”http://www.iosco.org/library/state-
ments/pdf/statements-7.pdf.
10
Markt/2007/15/F – Study on International Standards on Auditing
Evaluation of the Possible Adoption of International Standards on Auditing
(ISAs) in the EU.http://ec.europa.eu/internal_market/auditing/docs/ias/
study2009/report_en.pdf.
11http://www.iosco.org/news/pdf/IOSCONEWS144.pdf.
12http://www.pwc.com/extweb/aboutus.nsf/docid/59573FF2E41FA
4CD852570130059050A.
C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825 813
with the advent of PCAOB inspections on an extraterritorial
basis and the need to be able to defend the ?rm’s policies
to regulators (Tokar, 2005). Although the members of staff
who are statutory auditors will almost certainly be mem-
bers of the local professional association of accountants,
with the increasing focus on international standards and
(for the ?rms auditing companies listed in the US) the
PCAOB’s requirements, the local/national professional
association becomes of less relevance to the partners of
the country member of the network ?rm(Suddaby, Cooper,
& Greenwood, 2007). Of note here is the recent establish-
ment of KMPG Europe, created out of the merger of KPMG
member ?rms in Belgium, Germany, Spain, Switzerland
and the UK
13
– and a similar move by Ernst and Young, fol-
lowing on from the integration of its national practices
across Europe, the Middle East, India and Africa under a sin-
gle management/organisational area structure.
14
While much summary information about the Big Four is
probably common knowledge, an area of which little is
known is the mode of association between the ?rms. This
began to make notable developments in the 1990s when
‘associational’ organisations were formed both in the Euro-
pean Union, and in the US. In Europe, the relevant body be-
came known as the European Contact Group – and it was
set up essentially to coordinate the opinions of the ?rms
so they presented a united opinion to the European Com-
mission on various proposed audit regulatory initiatives
(Manardo, 1996; Røder, 2001). Following the problems of
the ?rms in the wake of the Asian crisis, it was decided
by the (then) Big Five to follow the model set up by the
European Contact Group, and establish a ‘Global Steering
Committee’ to deal with their common concerns relating
to regulatory and professional issues on a global basis
(Morris, 2001). Among these issues was the strong criti-
cism the Big Five were facing from organisations such as
the World Bank, who were dissatis?ed with the lack of
consistent quality of audits around the globe. An important
project for the Global Steering Committee (GSC) was to
strengthen IFAC both as the self-regulatory body for the
international profession and as global audit standard setter
(ibid.). This was done through the ?rms making substantial
direct contributions to IFAC’s budget (not just indirectly
through their membership of professional associations),
and becoming involved with IFAC’s reforms, most notably
in 2001 with the establishment of a ‘Forum of Firms’
(FOF) (now comprising 22 of the world’s largest audit
?rms) and a Transnational Audit Committee (TAC) to rep-
resent the FOF in IFAC (for more information on these
developments, see Humphrey & Loft, 2009).
The GSC metamorphosed into the new ‘‘Global Public
Policy Committee” (GPPC) after the Enron scandal in
2002; its members are the six largest ?rms. It has two main
working groups, a regulatory working group and a stan-
dards working group. Since 2004, the GPPC has organised
annual meetings under the badge of the Global Public Pol-
icy Symposia (GPPS); however these have only had limited
public exposure, this via a minimalistic website (see http://
www.globalpublicpolicysymposium.com/).
15
The GPPS has
gradually opened up to a wider group of participants than
just the profession, the world’s top regulators in the ?eld be-
gan to get invited, and in 2007 and 2008 attendance was ex-
tended to a few academics working in the ?eld. The 2009
GPPS event, to have been held in China, was cancelled, of?-
cially due to the important tasks the profession had to do in
the light of the developing ?nancial crisis. The GPPC has
published a limited number of public policy reports (e.g.,
see GPPC, 2006, 2007).
The developing nature of the global audit regulatory
arena matches closely the outline analysis made by Cooper
and Robson (2006), although they do not mention the exis-
tence of the GPPC or the FOF/TAC. They argue that research
on professions and regulation has often neglected to see
the ?rms as the signi?cant agents that they really are
(p. 417), arguing that the Big Four are ‘‘. . . important sites
where accounting practices emerge, become standardized
and are regulated, where accounting rules and standards
are translated into practice, and where professional identi-
ties are mediated, formed and transformed” (p. 416). Look-
ing at such sites of regulation in terms of ‘‘production,
transmission and enactment” suggests not only bringing
the ?rms into the ‘‘centre of analyzes of accounting”, but
also the ‘‘myriad NGOs and IGOs that form links in the cir-
culation of accounting and auditing disciplines and prac-
tices” (ibid. p. 463).
The ?rms are certainly in?uential and capable of exer-
cising in?uence on regulation, as witnessed by the work,
lobbying efforts and formal reports of the GPPC and the
FOF/TAC, especially since the TAC provides a voice for the
large audit ?rms in IFAC, and nominees for the standards
setting boards. Following the formation of FOF/TAC in
2001, the ?rms were allocated a certain number of seats
on IFAC’s standard setting boards (although the large ?rm
members do today have to declare that they will act in the
public interest, and the PIOB is involved in approving the
selection of all members of these committees, including
those from the large ?rms).
Recent IFAC policy papers on issues of global regulation
and standard setting (e.g., see IFAC, 2007, 2008) speak of
the developing nature of a ‘shared (public–private) system’
of standard setting and regulation in the public interest.
This shared system is evident not just in terms of the shift-
ing regulatory involvement of accounting ?rms but also in
the actions of professional oversight bodies. Among the
independent regulators that comprise IFAC’s Monitoring
Group, there has been a push for coordinated systems of
national public oversight. In pursuit of such a goal, a new
organisation in the global audit regulatory arena was
formed in 2006 – the International Forum of Independent
Audit Regulators (IFIAR).
16
By June 2009, IFIAR’s member-
ship included national public oversight bodies from 31
countries including the PCAOB from the US and the Audit
Inspection Unit (AIU) from the UK. The presence of members
of IFAC’s Monitoring Group at IFAIR meetings, together with
13http://www.kpmg.eu/4854.htm.
14http://www.accountancymagazine.com/croner/jsp/Editorial.do?chan-
ne l I d = - 30 50 36&c o nt e nt I d= 120 685 8&F a i l e d_ Re a s o n= S e s -
sion+not+found&Failed_Page=/jsp/Editorial.do&BV_UseBVCookie=No.
15
Despite the positive ‘welcome’ on the webpage, and description of the
symposium, in fact it is strictly by invitation only.
16http://www.i?ar.org/aboutus/index.cfm.
814 C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825
of?cial observers from the new Financial Stability Board and
the PIOB, should help to reinforce the close connections that
exist between the international regulators.
It is important to recognise that the global audit regula-
tory arena is a dynamic one – with a variety of organisa-
tions, notably the IFAC member bodies, also competing
for in?uence and voice. Such competition can be re?ected
in a range of actions, from political lobbying processes
(see Thornburg & Roberts, 2008) to the publication of pol-
icy papers and submissions to of?cial committees. In this
current period of ?nancial crisis it is possible to ?nd perti-
nent papers on auditing authored by individual large ?rms,
professional bodies and national audit oversight boards
(e.g., see ‘‘The Day after Tomorrow: A PricewaterhouseCo-
opers Perspective on the Global Financial Crisis”
17
and the
ACCA’s ‘‘Climbing out of the Credit Crunch” (2008)
18
). The
ICAEW, for example, practices what it calls ‘‘thought leader-
ship”, where the idea is it ‘‘shapes government thinking on
regulatory policy and looks ahead at long-term issues for
the profession”. As part of this policy, it set up the ‘Audit
Quality Forum’ in 2004 at the request of the UK government,
with the aim of promoting ‘‘quality and con?dence in corpo-
rate reporting”. Among the recent publications of the Forum
is: ‘Evolution: Changes in Financial Reporting and Auditing
Practice (2009)’
19
where some of the challenges confronting
such practice are discussed. Both the ICAEW and the ACCA
made submissions to the recent, London-based G20 summit
and have prepared policy documents on how best to re-
spond to the credit crisis.
20
The AICPA is behind a recent
US initiative, the ‘Center for Audit Quality’ (CAQ). While of?-
cially af?liated with the AIPCA, it is stated as being ‘‘an
autonomous, nonpartisan, non-pro?t group” created with
the aim of ‘‘serving investors, public company auditors and
the market”. It is also evident that professional accountancy
bodies at the national level are forming new competitive
strategic groupings at the global level. A signi?cant example,
the Global Accounting Alliance (GAA) formed in 2005, is an
alliance of 11 ‘‘leading professional accountancy bodies in
signi?cant capital markets”. These include the ICAEW and
AICPA which were discussed above, but not the ACCA. The
members recognise each other’s professional quali?cations
through mutual recognition agreements and work together
in different ways, detailed on the GAA’s website under the
heading: ‘‘Areas of Endeavour in 2009”.
21
This organisation
also seems to compete not just with ACCA but with IFAC it-
self, in terms of the services it is providing to members and
representing the profession on the global stage, especially
when it makes claims that the GAA is ‘‘working together
to represent over 788,000 professional accountants in 140
different countries from around the globe”.
Managing crisis – the policy responses of the auditing
profession
Recognising the signi?cance of NIFA is of particular ana-
lytical value in the context of the current ?nancial crisis as
it serves to illustrate the importance of viewing the actions
of the auditing profession within the global regulatory con-
text in which it operates. While the auditing profession
may well be deemed to have had a good or even a quiet cri-
sis, this should not be taken to imply that it has been a dis-
tanced participant, observing reactions to the crisis from
the sidelines. Rather, the auditing profession has actively
responded to the ?nancial crisis, using a variety of
communication modes and interactions with regulators
and governmental bodies to clarify the speci?c role and
obligations of auditors, enhance the preparedness of indi-
vidual companies and their audit ?rms for dealing with
the onset of a ?nancial downturn and debating future pos-
sible developments of the auditing function. In the analysis
that follows, illustrative examples are drawn upon to cap-
ture some of the key trends in the profession’s global re-
sponse (for a more detailed presentation, see Woods,
Humphrey, Dowd, & Yu-Lin, 2009).
Audit regulators and oversight bodies have directly re-
sponded to calls or comments from key institutions such
as FSF or the Basel Committee on, for example, the perceived
need for improved/more detailed guidelines for auditors on
issues suchas the valuationof illiquidinstruments. Evenbe-
fore the ?nancial crisis broke, Mark Olson, the PCAOB chair-
man, was expressing a view that the expanding use of fair
value accounting could ‘‘put reliable auditing of ?nancial
reporting at risk” (Johnson, 2007). Later the same year at a
meeting in New York, the FSF called for the adoption of
‘‘common guidelines for valuation, particularly for complex
illiquid products” as a way of helping to restore market con-
?dence (BIS, 2007). In response, the standard setters and
accounting regulators have issued practice recommenda-
tions and new/revised standards (e.g., see IASB, 2008,
2009). The US based, Center for Audit Quality (CAQ), has
published three papers on issues arising under illiquid mar-
ket conditions (CAQ, 2007a, 2007b, 2007c).
A common theme in such papers is that they sought to
emphasise the existing rules within the framework of US
GAAP, but did not redraft or provide an interpretation of
such rules. This has been a pattern of response followed
in other communiqué. For instance, the PCAOB quickly
complemented the work of the Centre for Audit Quality
by publishing a staff audit practice alert (PCAOB, 2007)
on the audit of fair value under US GAAP. Once again, the
alert described, but did not interpret or establish US GAAP.
Instead it referenced SFAS No. 157 on Fair Value Measure-
ments and auditing standards on the use of specialists. This
form of response has also been mirrored in the UK, where
an Audit Practices Board bulletin (APB, 2008) provided
indicators of good practice rather than prescriptive guid-
ance on audit issues emerging from the crisis. These in-
cluded audit risk assessment, going concern issues, and
the audit of directors’ comments on the risks and uncer-
tainties facing an entity. Internationally, the major audit
?rms were proactive in producing guidelines via the
conduit of the Global Public Policy Committee, producing
17http://www.pwc.com/images/gx/eng/fs/day_after_tomorrow.pdf.
18http://www.accaglobal.com/pdfs/credit_crunch.pdf;http://www.
icaew.com/index.cfm/route/164863/icaew_ga/en/Home/Accountancy/Fea-
tures/G20_brave_new_world.
19http://www.icaew.com/index.cfm/route/166052/icaew_ga/Techni-
cal_and_Business_Topics/Thought_leadership/Audit_Quality_Forum/Evolu-
tion_changes_in_?nancial_reporting_and_audit_practice/pdf.
20http://www.icaew.com/index.cfm/route/164863/icaew_ga/en/Home/
Accountancy/Features/G20_brave_new_world;http://www.accaglob-
al.com/pdfs/credit_crunch.pdf.
21http://www.globalaccountingalliance.com/AboutUs.html.
C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825 815
a paper on determining fair value of ?nancial instruments
under IFRS in current market conditions (GPPC, 2007). This
also emphasised that it was merely clarifying/reiterating
the existing international position, not providing any fresh
interpretation on the implementation of standards.
Such responses re?ect two elements of strategic intent
on the part of the auditing profession. At one level is the
commitment to a sense of preparedness for events and
consequences that might follow from the crisis – attempt-
ing to anticipate problems ahead and to ensure that the
profession is best placed to deal with them. Thus, the
emphasis on staff ‘alerts’ and subtle emphasising of what
is most critical to observe and recognise in relation to stan-
dard, approved international auditing practice. This sense
of preparedness has been mirrored very much in press
communications which, in the UK, notably saw the chief
executives of the ?ve CCAB professional accounting bodies,
publish a letter in the Financial Times (2008) emphasising
the importance of companies being ready for the 2008 end
of year ?nancial reporting season – so as to ensure that
there was no, unanticipated, ?ood of going concern
amendments in audit reports and an avoidance of the neg-
ative consequences that could follow from this. Other re-
lated aspects here have been an insistent message on the
part of the profession that this is not an audit crisis – that
auditors, as with many other functional bodies, could not
have foreseen the sheer scale of the crisis and that audit
opinions issued on 2007 year end ?nancials were made
on the basis of widely accepted economic prognoses that
did not anticipate any sub-prime crisis. There have been
reported active efforts on the part of international repre-
sentatives of the profession to secure concessionary devel-
opments in the laws governing auditor liability, to help to
protect audit ?rms against any major law suits emanating
from banking failures and to ensure comparable legal pro-
visions across major trading nations (especially in relation
to the US legal position with respect to the capping of audi-
tor liability).
22
Concerted efforts have also been made to
emphasise that macro-systemic risk factors have historically
not been issues with which ?nancial statement auditors
have been directly engaged. This has led some of?cial gov-
ernment investigations of the audit profession (see Treasury
Committee, 2009) to conclude that the audit profession (as
with other parties) may well have performed their role ade-
quately but questioned whether it is a role that the investing
public particularly values and what could be done in terms
of developing the auditor’s contribution with respect to pru-
dential, as against, ?nancial regulation.
23
At another level, the global policy response of the pro-
fession re?ects a commitment to bolster/preserve the sta-
tus and reputation of the international audit standard
setting body – the IAASB. With the IASB under obvious
political pressure in light of concerns with the pro-cyclical
tendencies of fair value accounting and the fall-out over its
pursuit of convergence between US GAAP and IFRS, this is
clearly a delicate time for the IAASB. Accordingly, the pro-
fession globally can be seen to have been at pains to
emphasise that the right to revise standards has to remain
with the international audit standard setter. This claim is
evidenced most explicitly in the context of pressure to re-
form the standard audit reporting format, where the pur-
suit of reform at the national level has been seen to be
heavily restricted by the existence of an international stan-
dard on this matter (see APB, 2008). Accordingly, it has
been the IAASB that has issued a revised and redrafted ver-
sion of ISA 540 on the audit of accounting estimates
(IAASB, 2008) and established a Task Force to consider
how best to approach the development of possible further
fair value auditing guidance. The Task Force’s work is
ongoing, but it has been engaged in consultations with
staff from the Big Four audit ?rms, while the IAASB has
subsequently issued two staff audit practice alerts (see
IAASB, 2008, 2009). The IAASB is currently still debating
whether it also needs to revise International Auditing Prac-
tice Statement (IAPS) 1012, Auditing Derivative Financial
Instrument, in the light of recent developments.
While the IAASB has been involved in considering how
to deal with these matters, so has the GPPC. Representa-
tives of the GPPC were reported to have met with of?cials
from the UK Financial Services Authority (FSA) in late 2007
to discuss the signi?cance of the ?nancial crisis and the
nature of the profession’s response.
24
Copies of a paper pro-
duced by the GPPC (2007), which summarised the valuation
and disclosure requirements for ?nancial instruments under
existing IFRS, were formally distributed to the IASB, the
Accounting Task Force of the Basel Committee on Banking
Supervision, FSF and IOSCO. There have also been a number
of invitation-only symposia for auditors to review experi-
ences of the crisis in the development and dissemination
of best-practice and to engage with ?nancial regulators.
For example, the Forum of Firms (FOF), comprising 21 trans-
national audit ?rms, including the Big Four held a private
meeting in New York with important global regulatory orga-
nizations. Additionally, the FOF arranged a subsequent sym-
posium in London on audit considerations in respect of
going concern in the current economic environment, at-
tended by over seventy partners from 24 international net-
works of accounting ?rms.
25
Of particular interest has been the developing relation-
ship between the large audit ?rms and audit public over-
sight bodies. Pre-crisis, the GPPC (2006) wrote in a
positive fashion about the achievements of oversight in
terms of encouraging an enhanced focus on audit quality
and strengthening auditor independence – and saw scope
for a body such as IFIAR in helping to deliver more globally
consistent and coordinated systems of oversight. This has
developed into an ongoing relationship, and in 2008 CEO’s
fromthe six largest global accounting ?rms which make up
22
Seehttp://www.accountancyage.com/accountancyage/news/2241784/
investors-wary-liability-plan-4653752.
23
The auditor’s report is addressed to shareholders and as such, the focus
of concern for the auditor differs from that of the banking regulator/
supervisor. IFAC’s statements of guidance on the relationship between
auditors and banking supervisors have long made it clear that the
supervisor’s primary concern is to ensure stability in order to protect the
depositor – and that there is no guarantee that a going concern assessment
from the perspective of shareholders will simultaneously and always
equate to depositor protection.
24http://www.accountancyage.com/accountancyage/news/2204275/big-
four-draw-tough-audit.
25http://www.ifac.org/MediaCenter/?q=node/view/640.
816 C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825
the GPPC attended IFIAR meetings to discuss global audit
quality monitoring arrangements and the adequacy of
audit evidence to support fair values and going concern
assessments and the reliance placed by auditors on spe-
cialists (Sukhraj, 2008). At its most recent, April 2009,
meeting, delegations led by the global CEOs of the 6 large
?rms were invited for discussions with IFIAR regarding
the issues raised for audit ?rms by the current economic
downturn and their response to them.
26
Representatives
from these audit ?rms also presented at a meeting of the
European Group of Auditors’ Oversight Bodies (EGAOB,
2008). There they reassured the regulators that, despite
the ?nancial crisis, there were no major differences in audit
practice between the US and the EU.
While there have been some evident disagreements be-
tween the big ?rms and the PCAOB over the validity of
inspection ?ndings – and like-minded concerns expressed
in other countries – it is evident that there is a form of alle-
giance developing between the large ?rms and oversight
bodies. For instance, intriguingly, inthecase of NewZealand,
where there is no independent audit oversight body, a joint
request to establish such a body was made to the Minister of
Commerce by the Securities Commission and representa-
tives of the Big Four accounting ?rms in New Zealand.
27
The existence of such developing alliances should not
be taken to mean that there are no signi?cant differences
of viewpoint among key players in the global audit regula-
tory arena. There are competing views both on the impact
and cost-effectiveness of public oversight regimes, and on
the extent to which they are enhancing or hindering inno-
vation in audit practice There also appear to be differences
of opinion among oversight bodies, with a recent report by
the PCAOB (2008) in the US presenting an overall view of
audit quality that could be deemed to be less favourable
than that provided by the AIU (2008) in the UK. Similarly,
IFIAR may have received varying levels of support from
certain national oversight bodies, with evidence that the
PCAOB had been relatively negative about the idea of IFIAR
serving as a global audit oversight body.
28
Nevertheless, there are evident signs that bodies like
IFAC are intent on bringing together different components
of the global accounting profession and ensuring that it has
a visible, collective voice on the international stage. This
was typi?ed by its recent endorsement of the recommen-
dations of the G20 for strengthening global ?nancial regu-
lation and enhancing the transparency of the ?nancial
system.
29
The current policy stances of IFAC on issues of glo-
bal regulation and standard setting (e.g., see IFAC, 2007,
2008) are interesting in that they provide a justi?cation
and associated set of principles for what it characterises as
a ‘shared (public–private) system’ of standard setting and
regulation in the public interest. IFAC emphasises the devel-
oping nature of such a system at both national and interna-
tional levels but talks openly about professional
accountancy bodies playing an important role in regulating
the profession and the need to get the right balance between
what it sees as the two contemporary alternatives of ‘self-
regulation with public oversight’ and ‘external regulation’.
In many respects the notion of regulatory balance is
something that can be seen to have characterised different
elements of the auditing profession’s response to crisis,
whether in terms of standpoints or stated positions regard-
ing standard setters, oversight bodies, legal liability, profes-
sional communications and expert witness testimonies.
Central to much of this has been the maintenance of what
the profession would regard as a suitable space or level of
discretion for the exercising of professional judgment –
which at times can be seen to be in con?ict with the prefer-
ences of banking and ?nancial regulators, who seem to re-
tain the view that further guidance is required (e.g., see
CEBS, 2008; FSF, 2008b). IFAC’s policy declarations on the
subject of global regulation recognise that this is something
of a moving feast – noting that ‘‘it must be recognised that
shared responsibility for international standard setting is
at a relatively early stage of development and the current
arrangements canbe expectedtofurther evolve anddevelop
with experience in their operation” (IFAC, 2008, p. 7). Inter-
estingly, in this regard, the G20s recent communiqué on the
global ?nancial crisis will see the FSF (nowFSB) being given
powers to oversee the work of the standard setting bodies
responsible for the 12 standards and codes deemed critical
to the maintenance of ?nancial stability. In relation to
bodies such as the IASB and the IAASB, this will of?cially
mean that the FSB ‘‘will undertake joint strategic reviews
of the policy development work of the international stan-
dard setting bodies to ensure their work is timely, coordi-
nated, focused on priorities and addressing gaps”.
30
According to the FSB, standard setting bodies will report to
it ‘‘on their work without prejudice to their existing reporting
arrangements or their independence. This process should not
undermine the independence of the standard setting process
but strengthen support for strong standard setting by provid-
ing a broader accountability framework” (para. 10).
The ?nancial crisis and the practice of bank audits
The level of activity reported in the previous section of
the paper and the relative lack of public visibility attached
to questions of audit practice is an interesting contrast. At
one level, it could be that the profession’s success at per-
suasive lobbying and strategic manoeuvring has quelled
much of this questioning. It could also be that the auditing
profession has been better prepared than others for the on-
set and aftermath of the ?nancial crisis and has been deliv-
ering to acceptably high standards of performance as
con?rmed by some national auditor oversight bodies.
31
26
ht t p : / / www. f r c . o r g . uk / i ma g e s / up l o a d e d / d o c u me n t s /
Basel%20Press%20Release%20?nal.pdf.
27http://www. sec-com. govt. nz/publications/documents/letter-
audit2.shtml.
28http://ec.europa.eu/internal_market/auditing/docs/committees/sum-
mary03-03-06_en.pdf.
29http://www.ifac.org/MediaCenter/?q=node/view/636.
30http://www.?nancialstabilityboard.org/press/pr_090402b.pdf, para. 9c.
31
Additionally, it could be argued that the auditing profession has been in
the process of transition and reformation from the last notable crisis period
of late 2001 and the demise of Enron – generating regulatory sentiment
that the reforms put in place then have to be given the opportunity to work
themselves through and be formally assessed for practical impact before
being dismissed as unworkable and/or inadequate (see Nelson, 2006).
C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825 817
Having other parties more immediately in the ?ring line in
terms of of?cial allocations of blame for the ?nancial crisis
may have encouraged auditors to keep quiet, avoiding ques-
tioning. Additionally, there are strong grounds for suggest-
ing that any concerns with auditing practice may well
have been overshadowed by more fundamental worries
with standards of ?nancial reporting – with greater atten-
tion devoted to increased inherent volatility in accounting
numbers than to the auditability of contemporary ?nancial
statements. This imbalance is well illustrated by the debate
over fair value, which has focused on whether it is partly to
blame for the crisis (e.g., see Cherry, 2009; Johnson, 2008;
Ryan, 2008; Véron, 2008) rather than on the problems of
auditing fair value, despite the issue of a number of audit
practice alerts.
That said, it is worth noting that there have been some
criticisms of the auditing profession from within, particu-
larly in relation to perceptions of its performance in pro-
viding positive assurance on banks that were soon in
?nancial dif?culty after their 2007 year end ?nancial re-
ports were issued (also see Essinger, 2009; Ricol, 2008). In-
deed, while the tone of argument may well vary
substantially from some of the profession’s most outspo-
ken critics, it is interesting to note how the major senti-
ments still collate around a wish that auditors were more
proactive in detecting major corporate frauds and fail-
ures.
32
As such, there are still worthy questions to be asked
of contemporary audit practice and important implications
for related audit research and regulatory policy.
This section of the paper re-focuses attention upon
audit practice and speci?cally the work of auditors in the
banking sector. The challenges we discuss cover interlink-
ing issues of valuation, the going concern judgement, cur-
rent ?nancial reporting practice, the limits of the audit and
the lack of transparency of audit procedures and bases for
judgements. These issues illustrate the depth of the practi-
cal challenges currently facing auditors and, in turn, poten-
tially help to explain the profession’s activeness in the
global regulatory arena.
Valuation
The de?nitions of fair value and the guidance provided
on valuation methods contained within both US GAAP (FAS
157) and international accounting standards such as IAS39
were drafted in a world of stable markets, but for many of
the assets currently held by banks the markets are now
volatile and highly illiquid, making pricing a dif?cult issue.
This is well illustrated by the announcement from BNP
Paribas in August 2007 that ‘‘the complete evaporation of
liquidity in certain market segments of the US securitisa-
tion market has made it impossible to value certain assets
fairly regardless of their quality or credit rating” (BNP Pari-
bas, 2007). It has been suggested that ‘‘for the duration of
the crisis, preparers will need to exercise considerably
more than the usual professional judgment to apply FAS
157’s language to their speci?c circumstances” (Ryan,
2008, p. 5). The auditors similarly need to apply extensive
professional judgement in relation to the fair values being
reported. The application of judgement is of particular sig-
ni?cance (and potentially problematic) in the absence of
orderly markets, or where the valuation applies to Level
3 assets where the key inputs to the model(s) used for val-
uation are internally generated and subjective.
In the case of illiquid assets where there exist markets
for similar asset types, a Level 2 valuation may be used.
There are a number of sources that can be used for price
references (such as Markit and Reuters Pricing Service)
but the depth of the market, number of dealers and the le-
vel of price transparency is variable across both different
providers and also product types. It is therefore not sur-
prising when the Head of Financial Services Audit at Ernst
and Young (London) observes ‘‘there is a real debate as to
whether we (auditors) should calibrate credit prices from
credit indices if there are no market prices. Some of these
indices are very thinly traded and can be manipulated
and they are only one indicator among many” (Hughes,
2008a). Another option in these semi-liquid markets is
for auditors to use ‘distress’ prices, but the de?nition is
open to interpretation. The IASB’s Expert Panel has recently
recommended a narrow de?nition in order to avoid a prob-
lem reported privately by auditors – that clients have at-
tempted to widen the de?nition in order to record higher
prices than the last traded ?re-sale price (Hughes, 2008b)
but there remains an underlying need for the exercise of
professional judgement.
For Level 3 assets, where prices are marked to model,
the audit of valuations is potentially even more daunting.
The assumptions used as inputs to the valuation models
are both unobservable and supplied by the preparer. Addi-
tionally, they are usually based on historic data, but that
data commonly relates back to periods when markets were
stable and hence may be unsuitable for deriving a current
fair value (Ryan, 2008). In such situations, prices are ob-
tained by making forecasts of variables such as interest
rates, credit spreads, house prices, default rates, etc. but
such forecasts are extremely dif?cult, subjective in nature
and hence dif?cult to audit. Model based valuations may
also be highly sensitive to changes in the underlying
assumptions. Recent calculations by the Bank of England,
for example, show that minute changes to the assumptions
underlying the models commonly used by banks to value
mortgage-linked debt can result in price changes of up to
35% (Tett & Davies, 2007). The dif?culty faced by auditors
in such situations is acknowledged by one of the major
banking regulators when noting that model-based prices
‘‘placed extensive demands on auditors’ ability to check
the robustness of managements’ processes for determining
fair value estimates. . . and on auditors’ use of professional
judgment in evaluating key assumptions and inputs that
bank management used in their valuations” (BIS, 2008,
p. 6). Another challenge for auditors relates to their techni-
cal expertise in valuation, illustrated by the PCAOB Chair-
man, Mark Olson, expressing concern that auditors ‘‘may
not have the extensive training in valuation techniques
necessary to verify companies made the right choices”
(Johnson, 2007). Under such circumstances, the audit
32
In a UK context, the of?cial magazine of the ICAEW, Accountancy,
contained a number of critical letters from ICAEW members in its
November and December 2008 issues (for more details and discussion,
see Humphrey, Woods, & Dowd, 2009).
818 C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825
partner needs to not only recognise the need to use ex-
perts, but also decide on how to make use of their inputs
in the audit. There is a problem, however, in understanding
audit practice when the judgments that permeate the
auditors’ work in relation to the veri?cation of valuations
and other matters such as the use of experts and material-
ity assessments are not readily visible. The issue of visibil-
ity is of fundamental importance not only to academic
researchers but also to regulators, because oversight re-
quires the ability to judge consistency of audit practice,
which must therefore be transparent. More fundamentally,
current ?nancial regulatory thinking is that transparency is
a core requirement for ?nancial stability. Indeed, the need
to improve transparency relating to the valuation of com-
plex ?nancial instruments has been recently highlighted
by a CEBS survey (CEBS, 2009) which commented on a
need for greater disclosure about valuation uncertainty,
modelling techniques and the underlying assumptions,
and sensitivity analyses for Level 3 fair values. Currently,
however, it is very dif?cult to comment on the detail of
practice due to lack of knowledge of exactly how auditors
verify valuations or test pricing models. This perhaps ex-
plains why the international regulators seek additional
guidance on valuation while the profession’s response is
focused on preserving space for the exercise of professional
judgement. How sustainable is it to have such a limited le-
vel of visibility at the operational end of audit practice?
Assessing going concern
When markets are volatile, the application of fair value
creates additional potential dif?culties for auditors in rela-
tion to subsequent events which may require changes to
the audit report. Ryan (2008) cites the example of Citi-
group’s November 5th third quarter 2008 SEC ?ling, which
included a subsequent event disclosure of an estimated
additional $8–11 billion loss on sub-prime positions for
events occurring after the end of the quarter on September
30th. When asset values can shift in such a dramatic and
unanticipated fashion in the space of less than six weeks,
it is easier to understand how companies could get an
unquali?ed audit report and yet still fail soon after. But
such a scenario still raises fundamental questions about
the signi?cance of the audit report and the issues to be
considered in relation to the potential issuing of a going-
concern opinion.
The going concern judgement is made in terms of a 12
month time frame, but in the context of illiquid and volatile
markets this is a long time. Furthermore, the judgement is
made at the level of a single entity, despite the fact that
in the banking sector, the collapse of a single large entity
could induce the subsequent systemic collapse of other
institutions. This systemic risk is illustrated by the impact
of substantial falls in the price of certain assets following
the forced sales that resulted from the failure of Lehman
Brothers. The falling prices led to increased write-offs by
other banks, most notably HBOS which had high exposure
in the relevant markets. The asset write-offs drove the
HBOS share price down, and HBOS agreed to a £12 billion
take-over by Lloyds TSB. Even then, the deal ultimately
had to be renegotiated as market prices continued to fall.
Regardless of the precise statutory responsibilities of
auditors, there are questions over the capacity of audit to
be an effective early warning system of impending major
corporate problems or even collapse – and whether, given
the sheer volatility of capital markets, a 12 month evalua-
tion period for the going concern judgement is just too
long. There are also related issues regarding the ability of
auditors in dif?cult and challenging times to stand up to
dominant chief executives who want to present their com-
pany’s accounts in unduly favourable terms. On the one
hand, the threat of a going concern quali?cation is such a
powerful one that it serves to commit the company to cor-
rective action. In other cases, there may be a stand-off,
with the incumbent auditor resigning and the company
seeking a more compliant, new auditor. The question as
to whether the audit is a function that works well in good
times but really struggles in more turbulent times when
companies are under real pressure to deliver favourable re-
sults remains a live empirical one (see Power, 2009).
Audit reporting and audit quality
A live problem for the visibility of the audit is the vast
length of corporate annual reports in the banking sector,
with annual reports in excess of 300 pages being common-
place. The reports are ?lled with a range of complex disclo-
sures, the bulk of which lie outside the formal ?nancial
statements and are audited only for their consistency with
those statements. The reader is given no substantive in-
sight as to how such consistency was evaluated or tested
by the external auditor. The standard external audit report
is not helpful in this regard, being full of general, standard-
ized statements on the role and limitations of the audit and
containing little about the speci?c work undertaken and
?ndings obtained by auditors.
There are various ways by which the substance and
quality of audit work could be more visibly pro?led and
demonstrated. For instance, a section within the corporate
annual report could focus on key audit ?ndings. Disclo-
sures could include operational levels of audit risk and
materiality, the signi?cant errors detected and adjusted,
and information about the scale, nature and results of tests
done to verify the value of assets marked to market or to
model. Such disclosures could conceivably go beyond the
technical remits of the true and fair assessment and in-
clude information about any assistance provided by the
auditor to the company in helping to ensure that a modi-
?ed opinion is avoided (e.g., by good planning and the
implementation of documentation processes to demon-
strate that the company is a credible, going concern) or
preventing the company from going into liquidation and
thereby preserving jobs.
We recognise that such suggestions invite debate on the
relative merits of short vs. long and/or free form reporting
but the primary purpose in mentioning them is to demon-
strate just how little of the work of the auditor is made vis-
ible in standard audit reporting processes. We have also
seen how judgment permeates the auditors’ work in rela-
tion to valuations, use of experts, materiality and going
concern issues, etc. Likewise, at the level of global
regulatory debate, we have shown how much of this is
C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825 819
constructed from the audit profession’s perspective on pre-
serving the space for the exercise of professional judge-
ment. Yet, strikingly, when it comes to the matter of
demonstrating the exercising and value of professional
judgement at the operational end of audit practice, very lit-
tle is visible.
There are various possible causes and dimensions to
such a contrasting position. The history of auditing is re-
plete with expressions of desire to know more about what
auditors do or exasperated auditors, in the context of the
audit expectations gap, complaining that people do not
understand exactly what they do. However, such wishes
and frustrations seldom seem to be met by any enhanced
visibility and/or understanding of audit practice, lending
credence to the view that of primary signi?cance to the
audit profession is to maintain a sense of professional mys-
tique as this is commercially valuable. A cursory review of
audit ?rm websites will reveal far more detailed
information on ?nancial reporting practices – including
revenue-generating ‘all you ever wanted to know’ guides
of IFRS – and just very sparse insights of the nature of their
auditing practices and the opportunities, achievements
and practical challenges confronting auditors in their
day-to-day work. Concerns with potential liability expo-
sures and the risk of inviting further inquiries by audit reg-
ulatory oversight bodies are put up by the ?rms as possible
reasons for the relative lack of visibility of auditing. But it
does not detract from the case that the current regulatory
context premised on the promotion of notions of public
oversight, transparency and accountability, can also have
quite constraining and limiting effects in terms of enhanc-
ing the visibility of audit work.
The latter observation has an ironic ?avour in that
oversight bodies are held-out, and classify themselves, as
key-drivers and promoters of audit quality. It remains an
interesting empirical issue as to what impact they are
having on general levels of audit quality. The insight value
provided by individual ?rm inspection reports is certainly
reduced by the fact that so much information is routinely
kept out of the public domain (see Khalifa, Sharma, Hum-
phrey, & Robson, 2007; Lennox & Pitman, in press) – while
the challenges to inspection ?ndings by audit ?rms (made
in letters from the ?rm at the end of the inspection reports)
does make it dif?cult to know which side to believe.
The recent PCAOB (2008) summary report of its annual
inspections makes a wide range of criticisms of standards
of audit practice
33
but emphasises at the outset that it ‘‘cau-
tions against using this report to draw broad conclusions
about the quality of audits performed by any (or all) of these
?rms”. If it is dif?cult to rely on both individual and sum-
mary inspection reports, what assurance and insight on
the quality of auditing services is provided by inspection
and oversight processes? What are the grounds and evi-
dence-bases for believing in the value of inspection?
It is interesting how much of the profession’s language
in promoting audit nowadays relates to its role in provid-
ing assurance on the credibility of ?nancial information,
whereas in the mid-1990s it was more focused on the
added-value attributes of the audit. In the latter state,
audit is portrayed as more of a primary function whereas
in the former it is a second-order function – dependent
in large parts on the pertinence of the information whose
credibility is being assessed. Worryingly for the audit pro-
fession, there is a poorly aligned set of incentive structures
on the part of audit clients to promote the visibility of audit
quality – what audit client is going to see value in inform-
ing corporate stakeholders that their annual ?nancial
statements only appear in the form they do because of a
whole host of adjustments enforced on them by their
external auditor?
Contemplating regulatory action
Such observations regarding the transparency of audit
have important messages for global regulatory bodies ac-
tive in the international arena. The profession may be hav-
ing a good crisis in the sense that relatively few people are
blaming auditors for the collapse of a whole range of ?nan-
cial institutions but could it be claimed that the signi?-
cance of audit to processes of corporate governance is
declining? For instance, while reports by the FSF
34
and
the BCBS (Basel Committee) have spoken in supportive fash-
ion about the signi?cance of the external audit function, as
Table 1 shows, a substantial number of recent reports and
policy proposals on the subject of ?nancial regulation and
responses to the ?nancial crisis make very little reference
to audit.
The Basel Committee sought to encourage dialogue
with audit ?rms on the best ways of preparing for and
addressing audit processes that should be conducted dur-
ing future times of ?nancial stress (BIS, 2008, p. 9). The
provision of direct support by auditors for prudential reg-
ulation, though, leads to important questions about the
nature of the interface between regulators and auditors
and a redrafting of the boundaries of the audit function.
Practice does vary across national jurisdictions but it is
set to be a matter for much wider debate within the inter-
national ?nancial architecture.
35
A fundamental issue for
the auditing profession, in any such debate, is to understand
the limits of the existing skill sets of auditors and to draw
33
The PCAOB criticised, among other things, the adequacy of auditing
procedures with respect to the assessment of fair values and accounting
estimates (including the testing of management models); the over-reliance
placed on third-party con?rmations, inadequate usage of analytical review
procedures and the application of professional scepticism – particularly in
areas that required management’s most complex judgments (http://
www.pcaobus.org/Inspections/Other/2008/12-05_Release_2008-008.pdf).
34
The FSF’s report on ‘‘Enhancing Market and Institutional Resilience”
(April, 2008) mentioned audit speci?cally in three of its principal recom-
mendations.http://www.?nancialstabilityboard.org/publications/
r_0804.pdf.
35
For example, in evidence to the UK Treasury Committee, the ICAEW
suggested a number of ways in which the role of auditors could be
extended (Treasury Committee, EV 450). These covered extending the audit
to material outside the ?nancial accounts, such as narrative information
and capital ratios; audit of Pillar 3 disclosures; review of regulatory returns
to the supervising authority; increased work on reports commissioned by
the supervisor and changes in the frequency/style of meetings with the
supervisor and bank management.
820 C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825
informatively on the lessons from prior discussions and
practice regarding the auditor–supervisory relationship.
Whatever role emerges for the audit profession, it is
also likely to be accompanied by a push for greater visibil-
ity and transparency in respect of the audit ?rms them-
selves. Article 40 of the EU’s Statutory Audit Directive
likewise now requires auditors of public-interest entities
to publish (within three months of the end of each ?nan-
cial year) transparency reports covering items including
the ?rm’s legal structure, ownership, governance structure,
the nature and effectiveness of its internal controls and
?nancial information showing the importance of audit to
the ?rm and the basis for partner remuneration. The Basel
Committee 2008 report (BIS, 2008) also explicitly recom-
mends greater transparency and dialogue between ?rms
about the challenges they face with respect to the quality
of bank auditing and the identi?cation of factors which
might hinder the global application of auditing standards.
One bene?t for the profession of such discussion is that it
could serve to steer legislators and audit regulators from
‘knee-jerk’ regulatory solutions, or a focus on ‘red herrings’
(Power, 2009) that hinder the more fundamental task of
developing greater understanding of the day-to-day provi-
sion of audit services and the key-drivers of audit quality.
Conclusions
This paper has explored the developing relationship be-
tween auditing and global ?nancial regulatory structures
in the context of the global ?nancial crisis. Like others
(e.g., Sikka, in press), we were intrigued by the apparent
lack of visible questioning of the audit function in the
midst of the current crisis, but it quickly became very evi-
dent that silence did not mean inactivity, nor an intent to
preserve the status-quo. The analysis of institutional inter-
actions, policy initiatives and debates made here, reveals
that there has been an active regulatory response to this
crisis. In considering the auditing profession’s response to
the current global crisis, we have given a ?avour of the
continuing signi?cance of negotiating and agenda framing
activities on the part of the profession – but also high-
lighted a number of important, new dimensions regarding
the global context within which the audit function
operates.
Tracing the rise of an international ?nancial architec-
ture and the position of audit within such structures is of
real value in opening up new lines of investigation in rela-
tion to audit regulatory systems. We would suggest that
the global ascendancy of the large multinational audit
?rms raises questions as to the extent to which self-regu-
lation is re-emerging in a modi?ed form of regulatory part-
nership between the ?rms, public oversight boards and the
larger national accountancy bodies. There are questions to
be asked of the status of auditing, the developing skill sets
of auditors and the extent to which their capacity to exer-
cise professional judgement is being enhanced and/or un-
duly constrained by global regulatory arrangements.
More generally, there are avenues to explore with respect
Table 1
Reports and policy proposals relating to the ?nancial crisis.
Date Issuer/title Geographic scope Discussion of
external audit
role
Number of times
external audit is
mentioned
April 2008 (update
issued April 2009)
FSF International Yes 31
Report of the ?nancial stability forum on enhancing market
and institutional resilience
June 2008 CEBS Europe No 0
Report on issues regarding the valuation of complex and
illiquid ?nancial instruments
July 2008 Institute of International Finance (IIF) International Yes 27
Final report of the IIF committee on market best practices:
principles of conduct and best practice recommendations
September 2008 Ricol report France + Europe Yes 55
Report on the ?nancial crisis
December 2008 Basel Committee International Yes 189
External audit quality and banking supervision
January 2009 ICMB/CEPR International No 0
Geneva report
The fundamental principles of ?nancial regulation
January 2009 G30 US + International No 0
Financial reform: a framework for ?nancial stability
February 2009 De Larosiere group EU Yes 1
The high level group on ?nancial supervision in the EU:
report
February 2009 OECD International Yes 7
The corporate governance lessons from the ?nancial crisis
March 2009 FSA turner review UK Yes 2
A regulatory response to the global banking crisis
April 2009 G20 resolutions International No 0
Declaration on strengthening the ?nancial system
C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825 821
to the precise ‘interests’ being served by the pursuit of glo-
bal audit standard setting in the ‘public interest’.
It is evident that regulatory outcomes will be the prod-
uct of shared and negotiated positions on the part of in?u-
ential national and international players. As Jane Diplock,
the current chair of IOSCO’s governing Executive Commit-
tee, recently observed:
‘‘It is my belief that a series of closely networked solu-
tions will be developed and these solutions will require
the cooperation of all major players in the global ?nan-
cial architecture as well as commitment at national
jurisdictional level. To be effective these solutions will
require high sets of robust global standards constantly
updated to re?ect market changes, effective enforce-
ment capacity across borders and watchful eyes and
actions across the world on stability issues.”
(seehttp://www.sec-com.govt.nz/speeches/2009/260
509.shtmls)
It is also clear that regulatory practice and accompany-
ing ‘solutions’ still have momentum. In November 2008,
Mario Draghi, chairman of the FSF/B, presented his: ‘‘Vision
of a more resilient global economy” in the Financial Times.
He discussed how many of the weaknesses currently seen
in the global economy came from ‘‘gaps and inconsisten-
cies in regulatory regimes” and that it was necessary to
‘‘review and extend the regulatory perimeter to ensure
that all ?nancial activities are subject to adequate trans-
parency standards and safeguards where they pose mate-
rial risk. . . A large number of national and international
bodies have reoriented and coordinated their work agen-
das to develop and implement necessary changes” (Draghi,
2008).
While the auditing profession may take some comfort
from such viewpoints and the relative lack of criticism of
auditors in relation to the current crisis, there are some
looming danger signs, with longer term signi?cance, for
the profession. Some regulatory reports suggest that audit
is losing its relevance and/or is something that functions
best in stable, ?nancial times. Others are proposing new
and potentially very challenging roles and responsibilities
for auditors and, in the case of the G20, looking for the
expansion of international accounting and auditing sys-
tems in countries where the supporting infrastructure is
not likely to be very strong (see Hegarty et al., 2004). Legal
cases against auditors are also starting to appear (with
accompanying fears for the viability of the big audit
?rms
36
) – most notably the $1billion lawsuit ?led by the liq-
uidators of the failed sub-prime lender New Century against
its auditors, KPMG for, allegedly, conducting ‘‘reckless and
grossly negligent audits” that failed to reveal the lender’s
?nancial problems.
It has often been said that a crisis is a good opportunity
for studying the particular signi?cance and impact of the
audit function, not least because it is a time when values
and the raw edges of practice are most apparent (see Coo-
per, Everett, & Neu, 2005). Signi?cantly, studies of auditing
at a time of crisis have revealed the negotiated nature of
auditor responsibilities and the sheer degree of effort
undertaken by the profession in responding to crisis (see
Fogarty, Heian, & Knutson, 1991). They have also cautioned
against assuming that crises routinely address distinctive
problems and propose new solutions, demonstrating the
longevity and relatively static nature of phenomena such
as the audit expectations gap (see Chandler & Edwards,
1996; Humphrey, Moizer, & Turley, 1992).
However, if we are looking at a global regulatory future
oriented around practice, then it is important to study not
only the institutions delivering that practice, but also those
monitoring and shaping its boundaries – including the
practice of audit oversight and associated corporate gover-
nance contexts. Above all, a consideration of the interna-
tional ?nancial architecture and developing nature of
audit regulation has a valuable sensitising effect – empha-
sising the importance of not relying on overly one-dimen-
sional perspectives of audit practice and its regulation. It
also demonstrates the inter-related and overlapping nat-
ure of questions of audit practice, research and public
policy.
The global audit regulatory arena is a complex, intricate
and shifting domain and one that is often absent or poorly
depicted in audit regulation papers. In this regard, we con-
cur strongly with the call by Cooper and Robson (2006) and
others (e.g., see Kerwer, 2005; Richardson, 2009) for more
studies of global regulatory sites and relationship net-
works. The capacity for debate in academic auditing circles
continues to demonstrate that the subject is a substantially
more interesting ?eld of inquiry than stereotypical images
of auditing would suggest. There exist quite contrasting
stances as to how much is known about audit quality
and the work processes, practices and cultures serving to
deliver and/or constrain the provision of quality audits
(e.g., see Francis, 2004; Humphrey, 2008; Power, 2003).
There are divergent views over the strength and achieve-
ments of audit regulation – including whether the faith
placed in auditor independence and supporting regulatory
provisions governing the services provided by auditors is
fundamentally ?awed; and whether public oversight re-
gimes are enhancing understanding of audit practice or
hindering practice innovation (e.g., see Bazerman, Moore,
Tetlock, & Tanlu, 2006; Lennox & Pitman, in press; Moore,
Tetlock, Tanlu, & Bazerman, 2006; Nelson, 2006; Robson,
Humphrey, Khalifa, & Jones, 2007). There are competing
claims as to whether the global promotion of Anglo-Amer-
ican audit methodologies is bringing much needed trans-
formations in processes of corporate governance or
undermining the capacity to learn from valuable, but less
visible, governance traditions. Similarly, there are wide-
ranging discussions as to whether the pursuit of greater
international convergence in audit practices is serving
the interests of global capital markets, more broadly de-
?ned notions of ‘public interest’ or, simply, the self-inter-
ests of the auditing profession.
In calling for the global audit regulatory arena to be gi-
ven more research consideration, it is crucial to recognise
that it is not a static phenomenon – but a world that shifts
and changes depending on active pressures and interests. A
number of the questions raised in this conclusion could
36http://business.timesonline.co.uk/tol/business/industry_sectors/bank-
ing_and_?nance/article6175052.ece.
822 C. Humphrey et al. / Accounting, Organizations and Society 34 (2009) 810–825
well be answered differently depending if they were asked
in the context of a developed or developing nation, or
asked to an international or local ?rm, an audit practitioner
or regulator, an international standard setter or a national
professional body. Undoubtedly, there are bene?ts to pri-
vate and informal discussions behind closed doors. But at
the same time, we certainly need more publicly available
and accessible knowledge of the workings of international
audit practice, the regulatory networks, the forces driving
global regulatory policy and its impact at the level of prac-
tice. We also need to recognise practice, research and pol-
icy as integrated components of activity and thought. To do
otherwise runs the risk that practice development be-
comes unduly dependent on the exercising of sectional
interests, mythical beliefs and convenient ‘reinterpreta-
tions’ of history.
Appendix A. Abbreviations
ACCA Association of Chartered Certi?ed Accountants
AICPA American Institute of Certi?ed Public Accountants
AIU Audit Inspection Unit (UK)
APB Auditing Practices Board
BCBS Basle Committee on Banking Supervision
BIS Bank of International Settlements
CCAB Consultative Committee of Accountancy Bodies
EC European Commission
ECG European Contact Group
EGAOB European Group of Auditors’ Oversight Bodies
EU European Union
FOF Forum of Firms
CEBS Committee of European Banking Supervisors
FSF Financial Stability Forum
FSB Financial Stability Board
GAA Global Accounting Alliance
GPPC Global Public Policy Committee
GPPS Global Public Policy Symposium
GSC Global Steering Committee
IAASB International Auditing and Assurance Standards Board
IAIS International Association of Insurance Supervisors
IAPC International Auditing Practices Committee
IAS International Accounting Standard
IASB International Accounting Standards Board
ICAEW Institute of Chartered Accountants in England and
Wales
IFAC International Federation of Accountants
IFAD International Forum on Accountancy Development
IFI International Financial Institution
IFIAR International Forum of Independent Audit Regulators
IFRS International Financial Reporting Standard
IGO International Governmental Organisation
IMF International Monetary Fund
IOSCO International Organisation of Securities Commissions
IRLG IFAC‘s Regulatory Liaison Group
ISA International Standard on Auditing
NGO Non-Governmental Organisation
PCAOB Public Company Accounting Oversight Board
PIOB Public Interest Oversight Board
ROSC Reports on Standards and Codes
SEC Securities and Exchange Commission
TAC Transnational Audit Committee
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