International Accounting and Corporate Governance: Common Themes

My undergraduate auditing classes this semester had as their first assignment a brief search of what information they could find (via, say Google) when they plugged the words “auditor liability” into a search engine.

Most of their findings dealt with issues in Europe.

While Europe seems to be more active in trying to restrain legal liability for auditors, recent headlines in the US proclaim “Consumer anger, lawsuits, push (industry) to change, as Congress considers legislation to crack down…”  Banks are the current bad boys, but it’s easy to recall numerous other industries that have filled the same role, including sports, automakers, and alas, accountants.

The spectacle of scandals in the US and Europe turned up the heat on the growing reform movement, both in trying to harmonize accounting standards and corporate governance. (For an in depth article on the history of reform of accounting standards and corporate governance in Europe, see “Limits of Supranationalism: Corporate Corporate Governance Regulation” by Susanne Luetz and Dagmer Eberle at http://www.allacademic.com)

National reform agendas in Europe have focused on codes rather than standards. For all the differences in both regions and regimes, a broad agreement or consensus surfaced for governance reforms including a larger number of independent, non-executive directors, and the need for more board committees especially in the areas of audit and compensation. But even these code-based reform plans were met with cries of being overly prescriptive and of not allowing enough flexibility for differences between various members of the European Union.

The changes in corporate governance have been spurred by both a bottom up and top down push, with some reporting the Anglo-Saxon ‘outsider’ model helping produce more shareholder-friendly changes.

At the same time, with a change in US administrations and a new head of the SEC, the shareholder or investor focus and point of view is more explicitly part of Mary Shapiro’s philosophy for the SEC. The push by the Obama administration for more regulation is being met with resistance due to concerns of power change or loss between and among regulators, so more remains to be seen in how reform proceeds.

Compliance, controls, and consequences (read: liabilities) are all indicative of some external force used to “keep honest people honest,” and a need that seems to be important to police the larceny of the human psyche. But a sustainable system of governance, a system that will last after the checks for compliance or after the consultants and trainers leave, requires an internal force that accepts the guiding principles and buys into to the necessary steps that such internal governance requires.

Do we ask ourselves and each other, Is this conduct becoming of who we are (or, to paraphrase a US military phrase ”conduct becoming an officer”)? And while we may wince at recent pictures of conduct unbecoming, that does not overturn the principle as a goal. It only shows how short we fall of the mark at times.

Back at my undergraduate auditing classes, our first chapters introduce the auditor’s report , where we read and discuss both the PCAOB report and the IAASB report. We noted many similarities and some key differences in the IAASB report, such as a larger description of management’s responsibilities, both for the numbers and the controls, a larger description of the audit process and the use of the phrase ” give a true and fair view” compared to “present fairly in all materials respects,” when summarizing the audit assurance.  I told my students I think our European counterparts have developed a better report, in their efforts to give a better explanation of key accountability aspects of the audit.

Over the semester, my students and I will work to learn together what constitutes “due professional care.”  I find the name change by the US Government Accounting Office (GAO) to the Government Accountability Office (GAO) captures the spirit of both reform and professional care for the public interest, concepts which are at the heart of governance and standards in any country.

The word accountability best sums up the ideas of governance, due professional care, corporate responsibility.  I have identified what I call the “4 C’s” or four aspects of the accountability concept: Counting (measurement); character (values, ethics, decision making); communication (clarity, transparency, timeliness); and caring (heart, motive, connectedness). We use these concepts to help give meaning to the idea of self-governance, which is the foundation to a progressive society.

The hard work or “heavy lifting” of reform in governance is on–going. It cannot be effectively outsourced or checked off a list. It’s a culture, a capacity, and almost daily consent by members of the organization, or the organization. It must be breathed as well as talked, both top down and bottom up.

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About the Author

Martha Doran is an associate professor in the School of Accountancy who joined the SDSU faculty in 1996.

Prior to her academic career, Martha served as a Controller and later CFO for three closely held businesses, and was a Partner in the firm of Acosta, Strassels and Company. Martha teaches a variety of accounting and small business management courses, and teaches Financial Accounting in the EMBA program.

She has written many journal articles and has written three books: Keys to Business Success, Activities in Managerial Accounting, and Activities in Financial Accounting. Ph.D., Arizona State University.

Ms. Doran can be contacted via email at the following address: doran1 [at] mail [dot] sdsu [dot] edu

Tags: Accounting, corporate governance, GAO, sec