Public and Private Sector Collaboration in Developing International Financial Audit Standards

In recent years, globalization has led to increased integration of the public and private sectors. This integration can be seen in the collaboration between INTOSAI and the International Auditing and Assurance Standards Board (IAASB) in developing international financial audit standards relevant to both sectors. As a result of their efforts, INTOSAI’s Governing Board recently approved 36 International Standards of Supreme Audit Institutions (ISSAI) for financial audit.

Claes Norgren, Auditor General of Sweden
Claes Norgren, Auditor General of Sweden
Arnold Schilder, Chair of the IAASB
Arnold Schilder, Chair of the IAASB

The Subcommittee on Financial Audit Guidelines (FAS) has coordinated INTOSAI’s collaboration with the IAASB. Since 2002, the Swedish National Audit Office has hosted the FAS Secretariat, which consists of eight full- and part-time staff working under the leadership of Jonas Hällström, Project Director. Recently, members of the FAS Secretariat interviewed Claes Norgren, Auditor General of Sweden, and Arnold Schilder, Chair of the IAASB, about lessons learned from their cooperation in today’s globalized world.

Question: In what ways has the collaboration between INTOSAI and the IAASB been unique, and what is your overall impression after your 6-year effort to develop financial audit standards?

Mr. Norgren: In the past, auditing in the public and private sectors belonged to two different worlds, but now these separate worlds have met in this unique way on a global basis. Of course, many organizations cooperate in different ways to develop standards—the International Monetary Fund, the Financial Stability Board, and the World Bank, to mention a few. But this has been a new and challenging step for INTOSAI.

Mr. Schilder: Our arrangement with INTOSAI underscores the importance of high quality public sector audits. Confidence in public sector financial reporting is pivotal to economic stability and, therefore, the public interest. For that reason, the Memorandum of Understanding IAASB has had with INTOSAI since 2004 has been designed to facilitate collaboration and constructive interaction, in particular toward high quality International Standards on Auditing (ISA).

Our arrangement also underscores the importance we attach to obtaining direct and meaningful input from the public sector on our standards. ISAs are relevant to engagements in both the public and private sectors, for entities of all sizes. In this regard, INTOSAI’s involvement with the IAASB’s work has helped to enhance the quality of our ISAs and should contribute to their widespread use in the public sector. For example, our recently completed Clarity Project involved introducing new material in the ISAs that provides guidance on addressing considerations specific to public sector audits. Our INTOSAI and other public sector representatives played a key role in the development of that important guidance.

Similarly, we are working to develop a process to assess the impact of new standards. This is an area where the public sector has typically been ahead of the private sector. Input from our public sector members has helped our deliberations a great deal, and we will continue to seek their feedback as supreme audit institutions (SAI) begin to implement the clarified ISAs and use the ISSAIs for financial audit. Overall, I believe that ongoing public sector input contributes to the depth and quality of IAASB’s debates. I am, therefore, pleased to have had Steen Bernt Jensen on the IAASB over the last year, providing a link to INTOSAI’s Professional Standards Committee, and to know that we will have the benefits of Gert Jönsson, chair of the INTOSAI FAS, joining the IAASB in 2010. Jonas Hällström, Director of the INTOSAI FAS, will continue to serve as a technical advisor for the IAASB, which further enhances our ongoing collaboration.

Mr Norgren: I am impressed by the cooperation we have had on all levels. The IAASB is a very professional organization to work with on the executive as well as the working level. Daily personal contacts have been important factors in achieving the positive outcomes of this cooperation. The input has always been relevant, generous, to the point, and timely. We are very happy to have enjoyed such excellent working relations.

Mr. Schilder: INTOSAI is an organization that takes its mandate seriously and recognizes the importance of consultation and due process in the development of quality standards. Its approach to interaction with the IAASB is open and constructive, and I believe it has a clear understanding of what needs to be done to introduce ISAs in the public sector in an efficient and effective manner.

Question: How might the public and private sectors apply the financial audit standards differently?

Mr. Norgren: Government and Parliament are not the same as—and do not operate or have the same function as—those charged with governance in the private sector. The government entity in the state has specific requirements, but the same audit approach as in the private sector can be used Thus, the specific characteristics of the public and private sectors remain in relation to auditing, but the two sectors have a common framework.

Mr. Schilder: While there are, of course, differences in application, the core principles reflected in the ISAs are equally applicable in the private and public sectors. Where the public sector’s application of these core principles differs from the private sector, the differences are principally reflected in the ISA guidance material. For example, because of the nature of the audit mandate in the public sector, auditors are ordinarily unable to decline acceptance of, or withdraw from, an engagement; this is addressed in the ISA guidance material.

The responsibilities of the public sector auditor may be affected by the audit mandate or by obligations of public sector entities arising from law, regulation, or other authorities, such as ministerial directives or government policy requirements, which may encompass a broader scope than an audit of financial statements in accordance with the ISAs. These additional responsibilities are not dealt with in the ISAs; however, they are usefully dealt with in the practice notes within INTOSAI’s ISSAIs for financial audit.

Question: One major challenge for both INTOSAI and the IAASB is increasing the international dissemination and use of the standards. To what extent will the cooperation between the two organizations help achieve this goal?

Mr. Schilder: The quality of the ISAs makes them acceptable internationally. I believe the cooperation between INTOSAI and the IAASB has helped to improve the overall quality of the ISAs. In my view, both the IAASB’s inclusion of public sector considerations in the ISAs themselves and INTOSAI’s substantial investment in developing the new ISSAIs for financial audit illustrate that the ISAs can be adopted for use by public sector auditors. I am hopeful that as the individual SAIs become more familiar with the guidance offered in the ISSAIs for financial audit, more audits in the public sector will be conducted in accordance with the ISAs.

Mr. Norgren: The use of the ISSAIs for financial audit clearly contributes to transparency and openness. It contributes to a certain level of conformity that makes it easier to compare the state’s financial information from year to year and also to compare it to information from other states, as that information will be compiled in an open and uniform way. The ISSAIs for financial audit are valuable for citizens of countries that aim for democracy and development. While they are not a universal remedy, they are part of the arsenal of governmental actions that lead to accountability and better functioning in the public sector around the world.

Question: What do you see as the advantages and challenges of implementing the ISSAIs for financial audit?

Mr. Norgren: Implementation will give us better methods for auditing and enhance the quality of our work. There is great value in being able to compare your work to that of others knowing that the audits have been carried out using the same standards. Improved auditing will increase confidence in the public sector. In some countries, the public sector’s credibility has implications for the national debt. In these times os financial crisis donors might demand that countries receiving funding to relieve their national debts require their SAIs to follow international standards. Thus, there are fiscal implications to having a public audit that meets those standards.

Different countries have different institutional arrangements and levels of development. One obvious advantage to implementing the standards is that they are structured in a way that allows them to be applied to various extents and in different ways. While there is flexibility in implementing the standards, the process will still be a great challenge to many SAIs. It may involve changing the way in which audits are conducted, and it may also require investments in training for SAI staff.

Question: As you look to the future, how would you evaluate the importance of globally accepted international standards?

Mr Schilder: In today’s increasingly global economy, it is vital that the auditing profession and those responsible for oversight and regulation work toward a common set of high quality international standards. The International Federation of Accountants (IFAC) stressed this idea in its recommendations to the G20 leaders in advance of their April and September 2009 meetings. IFAC encouraged the adoption and implementation of global accounting, auditing, and auditor independence standards to improve the ability of capital markets to work globally. The benefits to the public interest far outweigh the efforts needed to overcome domestic barriers to achieving this goal. In this regard, I commend INTOSAI on its efforts to develop the new ISSAIs for financial audit, which provide further guidance to, and include, the IAASB’s ISAs.

Mr Norgren: We live in an era in which globalization has become a reality. It influences private trade and industry, which have driven a far-reaching harmonization and removed trade barriers. However, it has also led to increased integration between the public and private sectors and between different states. Therefore, we need a comprehensive way for different countries to approach common bookkeeping solutions and a framework for accounting and financial reporting. A global standard of auditing has been developed to meet this need.

In a globalized world, we need globalized standards. So it is very significant that an organization like INTOSAI has developed a framework of rules to assist in this effort. We have a set of joint standards with the IAASB that include further guidance in the practice notes for the public sector. This underlines the important role of INTOSAI and the impact the organization has had through its cooperation with the IAASB.

This, of course, places higher demands on INTOSAI related not only to implementation but also to support, continuous development, revision, maintenance, and adoption/adaptation. The freedom SAIs have to implement the standards to different extents is a perfect incentive to choose to follow international standards more ambitiously over time.

I strongly believe that there is an inherent driving force for SAIs to adopt the ISSAIs for financial audit. Still, SAIs will need substantial technical support to implement the ISSAIs to their full extent. INTOSAI and the IAASB have to continue to support each other in this new challenge. If we stay committed, I am convinced that we can reach our common goal.

For additional information, contact the FAS Secretariat, Projectsecretariat@riksrevisionen.se.