Financial Information and its Integrity

Of all the elements required to make a marketplace function, financial information is the most valuable. Since the dawn of time, an information advantage – and the time to make use of it ahead of others - has been the source of greatest gain to anyone who had it. Examples range from the return of special couriers who raced back to London after the Battle of Waterloo in 1815 to today’s high-speed algorithm trading shops paying additional fees to ‘co-locate’ their computer servers immediately next to those of the exchanges themselves. Having that edge is clearly critical, whatever the technology, or these presumably intelligent individuals would not strive so hard to get and keep it.

On behalf of those who cannot get this edge, the public authorities constantly attempt to level the playing field and offer as much equal access as they can in order to maintain some semblance of fairness of the public market. And because public market pricing goes a long way to establish benchmarks for private assets, this effort to attain and maintain fair pricing matters for the entire economy.

Public interest oversight of audit standards

Following the corporate financial reporting failures at the start of this century, IOSCO, the Basel Committee, the European Commission, the Financial Stability Board, the International Association of Insurance Supervisors, and the World Bank joined together in 2005 to advance the public interest in international audit standard-setting and audit quality. The combined effort has been known as the Monitoring Group.

This past November, the Monitoring Group launched a global public consultation,[1] which closed on 9th February, on the governance of audit standards. The overarching concern is that the bodies establishing global audit and assurance standards are not sufficiently independent of the accounting and audit professions, and therefore – perhaps – not responsive enough to the public good.

The two key questions raised in this consultation are whether there is an adverse effect on stakeholder confidence in these global standards, which form one of the building blocks of the G20 compendium of standards covering all aspects of banking, insurance, and capital markets:

‘…is there a perception of undue influence by the profession on two grounds:

  1. IFAC, representing the global accountancy profession, manages the nomination process of the standards-setting boards, and directly funds, accommodates, and provides support and staffing for the standards-setting boards – IFAC itself is funded by member organizations and the global accountancy profession; and
  2. Audit firms and professional accountancy bodies provide a majority of board members and their technical advisors.’

From this perception of possible undue influence by the audit profession that might undermine the public interest element of this work, the Monitoring Group is soliciting comments on whether the standards are somehow unbalanced given the breadth of audiences and their diverse needs from audited statements, as well as the risk that the standards produced are possibly less relevant and slower to adapt to the changing audit and business environment.

The public comment asks if one agrees that these risks to independence and neutrality are real and significant, and goes on to propose several options for reform, as well as to invite other possible solutions.

The key principles the Monitoring Group wants audit standards-setting bodies to support and exemplify are:

  • Independence
  • Credibility
  • Cost effectiveness
  • Relevance
  • Transparency
  • Accountability

What is the problem?

The problem is simple enough to state; the answer, too, in theory: financial reporting standards are devilishly complex, full of jargon, intertwined with national tax codes, hard to agree globally and then apply uniformly across jurisdictions, and understood in their minutiae by very few experts. And yet they are supposed to uphold the public good in this critical area of our national economies, with enough comparability to ease the reading of these statements across borders.

Ideally, the public interest would be better represented by having more diverse groups of persons setting these standards, in order to balance out the potential for over-reliance on the insiders, the accounting firms and their senior managers, in the standard setting process. That ideal runs into the very real problem that persons outside the accounting world are ill equipped to wade through the jargon and get into the meaning and effect of each of these standards. They simply do not have enough experience of audit without considerable assistance.

In the mid-2000s, the International Federation of Accountants (‘IFAC’) embarked on a multi-year project to clarify the international audit standards (‘ISAs’). That surely helped. But the governance of the standards-setting process remains tilted towards the insiders for reasons of providing sufficient expertise. Clarity was not necessarily enough simplicity in what remains stubbornly detailed, complex material.

What does the Monitoring Group suggest?

Currently, there are separate standards-setting oversight boards for the audit and assurance standards as well as the ethical standards underpinning the profession. Should these be merged? Should the separation be maintained? Or should the profession’s global coordinating body, IFAC, be in charge only of education and ethics standards, but not audit?

Another question concerns the composition of these standards-setting bodies. Should quotas be set to assure that different stakeholder constituencies have a minimum of representation, supposing that the whole would more transparently assure the defense of the public good? How should candidates be identified? Should there be an open call? Should the candidates be vetted solely by the Public Interest Oversight Board in Madrid, as is proposed by the Monitoring Group? Given its mandate and the concern by the Monitoring Group, that might be the neatest solution to this knotty problem.


In our increasingly technical world, the insiders in every sector of the economy are regularly gaining an advantage over outsiders, mostly unwittingly so and without attributing anything wrong. There is no sense that the audit standards-setting was in any way adversely affected by the domination of accountants on those bodies; there is every sense that the Monitoring Group wishes to maintain absolute integrity in order to maintain the public’s confidence in its work.

Albert Einstein, who managed to simplify physics into general relativity, once said the following about how to conduct science: “Everything should be made as simple as possible, but not simpler.” The same could be said of the content of audit standards as well as the governance of the standards-setting oversight. We may have to wait for another Einstein to tell us how to sort that out in practice.

[1] Monitoring Group Consultation: ‘Strengthening the Governance and Oversight of the International Audit-Related Standard-Setting Boards in the Public Interest,’ posted by IOSCO and the other member agencies in November 2017.


The author, Thomas Krantz, is Senior Advisor, Capital markets, in the firm of Thomas Murray; and served as Secretary General of the World Federation of Exchanges (2000-2012). The views expressed are his own, and not necessarily those of the firm.

Tags: The Monitoring GroupIOSCOgovernanceglobal standardsfinancial reporting standardsG20International Federation of AccountantsIFACglobal audit and assurance standardsBaselEuropean CommissionFinancial Stability BoardWorld BankAccountabilityInternational Audit StandardsISAsaudit and assurance standards