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Why we need to go global with ethics

ETHICS is one of the buzz-words in the City at the moment, with all sorts of companies trying to convince customers, investors and policymakers that they have changed the way they do business. But the issue has been at the forefront of accountants’ minds ever since another E-word loomed into sight: Enron.

When the American energy company collapsed, it took its auditor Arthur Anderson with it. Even now, accountants and auditors shiver at the mention of that affair, and they know that another similar scandal could fatally damage the reputation of the profession. The desire to make accountancy and auditing practises transparent and straightforward is one of the drivers behind their increasing globalisation. This has also been given a boost by the recent downturn, which has reminded everybody just how interrelated the world has become.

It is for both of these reasons that “harmonisation” – the attempt to create a global framework for accounting, auditing and ethics – is one of the biggest issues in accountancy. The International Financial Reporting Standards (IFRS) framework and International Standards on Auditing (ISAs) are quickly becoming the global benchmarks for accountants.

And this is a good thing. While it might be going too far to say that accountants function as a sort of policeman in corporations, it is reassuring that people whose professional duties include objectivity and ethics are so central to corporate life. And they are: a recent survey by ACCA of 450 CFOs across the world found that 83 per felt they were playing a bigger role in their companies than a year ago, and 72 per cent said that they were now more involved in strategy than they were twelve months previously.

It can only be positive that finance professionals are playing a larger role in corporations. Furthermore, the harmonisation of standards across the profession can only help to raise standards throughout business, which is a boon for the global economy. But is harmonisation going far enough, or fast enough? While IFRS and ISAs are accepted by most, ethical standards, in particular auditor independence, are not so effectively harmonised.

The ethical standards for accountants are derived from International Federation of Accountants (IFAC) code of ethics, which covers 123 countries. All the UK professional bodies derive their codes of ethics from this. This makes perfect sense. In a global economy, it would be absurd that auditors should follow different standards in different countries. This would be expensive and inefficient, making the process more complicated for investors, the auditors themselves and other stakeholders.

But there is one area in which harmonisation is not taking place. If you are carrying out an audit in the UK, then you have to follow the Auditing Practices Board (APB) Ethical Standards, and not IFACs. Those in the industry who champion the harmonisation of regulation are becoming frustrated by the UK’s slowness.

“If we have an international code of ethics, with input from regulators across the world, why are they not doing more to follow the example of accounting and auditing standards and use it?”, asks Anne Davis, Integrity and Ethics Manager at ICAEW. While the APB and IFAC have similar approaches when it comes to independence, there are differences in responsibilities and the appropriate period of audit partner rotation. This situation can only be inefficient.

The argument is also being made in the US. There is a growing argument that varied auditing standards cost international firms money, and impede the free flow of money between markets. Mary Shapiro, the head of the Securities and Exchange Commission, recently said: “The banking crisis has shown the importance of implementing and enforcing high quality and consistent accounting standards around the world.”

Globalisation equates to efficiency, effectiveness and transparency. This has to be a good thing. The British authorities have to show their commitment to harmonisation – and remember the E-words.