Auditing Self Regulation and Government Regulation

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Over the years the accounting profession has been subject to various forms of oversight with varying degrees of success. Nevertheless, it used to be self-regulating. But a series of financial scandals involving once prominent companies such as Enron, WorldCom and Parmalat lead the authorities to consider whether the accounting profession's self-regulatory oversight system was appropriate to meet the necessary objectives. These corporate failures had shown that the self-regulatory system did not produce credible results and "had the potential to undermine investor confidence in the integrity of the securities markets" (The Treasury, 2006). As a consequence a number of countries have reviewed their arrangements for independent oversight of the auditing profession. The United States, for example, has introduced tough external audit regulation under the Sarbanes-Oxley Act of 2002. Canada has also introduced a regulator with extensive powers, including a national inspections unit as independent monitor of major audits, while the British and Australian solutions are based mainly on oversight rather than on full regulatory control (Malthus and Scoble, 2005). However, all these oversight bodies are needed to protect the public and the credibility of financial information. Given the corporate scandals of recent years, the audit profession is now in the forefront of the minds of investors, businesses, regulators and others. Financial reporting, corporate governance and accounting and auditing practices must keep up with the needs of these groups. Effective regulation of the audit profession is one means of ensuring that the profession and the private sector keep pace with these challenges. The purpose of this essay is to discuss the need to strike a right balance between self-regulation and government regulation.

Broadly defined, regulation refers to the making and implementing of rules which direct or constrain the behaviour of a person or group of people being regulated. It is important to acknowledge the role of the profession in the evolution of its regulation. In most developed nations, the licensing and regulation of the accountancy profession was founded through the initiative of practicing professional accountants who often sponsored legislation to set minimum requirements to be designated as a professional public accountant. Historically, leading practitioners then established a code of professional conduct and, eventually, accounting, auditing and other practice standards.

Through much of the 20th century, the requisite knowledge of professional practice standards that protected the public resided nearly exclusively with professional practitioners who founded professional associations to promote their profession and its standards. This led many government regulators who had the legal authority to mandate compliance to choose to adopt the standards of the professional associations by reference or as acceptable interpretations. Over time and in many countries, such as the United States, this approach evolved into a sophisticated system of government-sanctioned self regulation that for many years was considered adequate, efficient and protected the public.

Regulation of the audit profession has typically been included as part of the overall regulation of the accountancy profession and has covered the following areas: •Education and admission standards;

Audit standards;
Ethical standards; and
Disciplinary action.
Where the regulation has been carried out primarily by the profession, it is often referred to as “self-regulation” and when it is carried out by the government, is often just “direct regulation”. There is no pure model of either self-regulation or direct regulation. The profession rarely regulates without some form of government mandate to do so, and similarly, the government rarely regulates without some form of interaction with the profession.

In general, the International Federation of...
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