I am truly honoured to have the opportunity to give this address at the WFE’s Annual Meeting in Malta, one of the jewels of the Mediterranean.
I am here wearing my hat of chair of the International Ethics Standards Board for Accountants – IESBA – a position I have been proud to hold since January.
Let me briefly introduce you to the IESBA and demonstrate what may not be obvious: that it makes total sense to be speaking at the WFE Congress about sustainability from the perspective of a standard setter for professional accountants for an audience of stock exchanges’ representatives.
About the IESBA and the IESBA Code
The IESBA is an independent global standard-setting board at the forefront of ethics standard-setting for professional accountants. Its Code of Ethics provides a robust, comprehensive and dynamic set of ethics standards, including auditor independence requirements, aiming at a consistent alignment of values and approaches with respect to the preparation and assurance of corporate reporting.
The IESBA Code of Ethics, which has been adopted in over 120 jurisdictions, and translated into about 40 languages, is the ethical “north star” for professional accountants globally. Underpinned by five fundamental principles (integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour), the IESBA Code of Ethics plays an important role regarding accountants’ conduct, guiding them on how to ethically approach their day-to-day work, be it the rigour of their analyses, the inquiring mind they apply or their duty to challenge the information and explanations provided by management.
Crucially, the Code guides accountants when they face delicate ethical decisions in preparing or assuring corporate reporting. Balancing the professional duty of confidentiality versus their public interest duty to report suspected illegal acts by the company or the client; the perplexities faced in providing tax planning services against the public interest dimension of companies and clients paying their tax dues; dealing with pressures to sign or confirm the conformity of a financial or non-financial report that doesn’t reflect the fundamental reality of the company; or the independence dilemmas and conflicts of interest that auditors are so often confronted with, namely in providing non-assurance services to audit clients, are just a few examples of the ethical questions faced when performing corporate reporting.
Corporate Information, Capital Markets and Stock Exchanges
Before having been appointed as IESBA’s chair, I served as chair of the Portuguese Securities Commission, CMVM, and as a member of the IOSCO Board. I am therefore aware of the capital markets’ needs and conscious of the close links between high-quality, ethically prepared and presented corporate information, supported by robust standards, and well-functioning capital markets.
An efficient market is a market that is able to bring together buyers and sellers of financial instruments.
Stock exchanges and trading platforms, in turn, provide the meeting point and trading opportunities to those companies looking for funding and investors looking for companies in which to invest their money.
The link between the IESBA and the stock exchanges’ mission and purpose is therefore very clear: both aim at providing an appropriate framework and infrastructure for responsible and informed investment decisions, grounded on solid and reliable corporate information, prepared and assured against the strongest ethics standards in support to the efficient functioning of businesses, financial markets, economic development and social wellbeing.
The Essential Role of Ethics to Public Trust and a More Sustainable World
Over the last two decades, we have witnessed an unfortunate number of corporate scandals and collapses. Beyond their direct and severe impact on the viability of the companies, these events have had a dramatic impact on investors, workers, customers, the supply and credit chains, and the broader economic and social ecosystem. They have eroded the incentive of investors to fund public companies and the appetite of companies to go to the market, frustrating the goal of sound functioning of corporations, financial markets, and the whole economic system.
The dramatic global decrease of IPOs that stock exchanges have been painfully observing and the increasing number of delisting decisions in the last 15 years reflect that erosion of companies’ and investors’ trust in the market, with severe consequences for economic dynamics, value creation and value distribution, and financial stability.
Looking back, we easily conclude that most, if not all these events involved unethical behaviour by those acting within or on behalf of a corporation, where false or inappropriate accounting and reporting played an important role.
Many reasons have been identified as being causal to these scandals and collapses. The most frequent situations refer to widespread and persistent inadequate corporate practices and conduct. But, at the end of the day, all the cases reveal ethics and corporate culture failures as a root cause, from poor risk management and short-termism all the way to pure fraud.
It is, therefore, crucial to restore trust and set up the right incentives for capital markets to work well and be fit for purpose to provide companies and families with an alternative or complementary source of funding. It is imperative to advance an urgent process of changing business cultures towards more ethical, values-based, and sustainable models, preventing negative impacts on the integrity of the economic system and the social balance.
Professional Accountants and Corporate Culture
Accounting and corporate reporting, as well as audit and assurance to which they are subject, are the most essential pillars of stakeholders’ trust in companies. It is what allows them to see and understand how financially healthy a company is, how sustainably it performs, and how likely it is to generate quality for customers, returns for creditors and investors, profits for shareholders, and value for the economy and the citizens.
Professional accountants play a critical role in changing the corporate culture, avoiding reputational issues, and restoring trust.
Likewise, ethics standard setters contribute decisively to those goals by setting up a standard-setting approach focused on the conduct, behaviour, and culture of accountants and of the companies in which they work or to which they provide services. This represents the greater contribution from international standard setters to economic growth, social balance, and value creation.
The call for companies to adopt ethical behaviours and sustainable business models has increased dramatically, became irrefutable. The rapid and pervasive growth of sustainability goals, framed by the United Nations Sustainable Development Goals (SDG), has been pushing this trend.
More widely, though, there is increasing scrutiny by stakeholders regarding non-sustainable management approaches: self-interested management, biased and short-term-focused results, corruption, bribery, and fraud in the business and financial sector are increasingly subject to strong criticism. The community became more aware of the high costs of wrongdoing in the corporate sector, for the individual citizen, and the entire economic system.
The Role of the IESBA in Sustainability Reporting and Assurance
In response to this call, financial markets have seen accelerated growth in the disclosure of sustainability information – including environmental, social and governance matters. As this information is progressively used in investors’ capital allocation decisions, as well as other decisions by customers, workers, government agencies and other stakeholders, it is important that it is as reliable as financial information, so that there can be justifiable public confidence in what is reported.
The UN Sustainable Exchanges Initiative, aiming at integrating the positive action of all the responsible regulators, standard setters, professionals and market players in advancing the sustainable finance project, is a paradigm of how necessary it is that the financial ecosystem works consistently in favour of citizens and the planet.
Accountancy is a critical element of this ecosystem, playing a major role in sustainability reporting as the bedrock of informed sustainability investment decisions. That is why it is so important that it is guided by the ethical guardrails of the IESBA Code in preparing, presenting, and assuring financial information and helping to fight greenwashing.
In this regard, the international regulatory community has recognised the IESBA’s key role in developing those standards. Specifically, in June the Financial Stability Board acknowledged the IESBA as the appropriate standard setter for the development of the ethics standards necessary to create an infrastructure for sustainability reporting and assurance; two weeks ago, IOSCO issued a statement welcoming the IESBA’s plans to develop global assurance, ethics and independence standards that are profession-agnostic and can support the assurance of sustainability-related information irrespective of who is performing it.
IESBA’s Sustainability Project Plan
The IESBA is responding to these developments. It has committed to develop timely, fit-for-purpose ethics and independence standards for sustainability reporting and assurance, in close coordination with those of the International Sustainability Standards Board (ISSB) and the IAASB.
A strategic matter that the IESBA is intensely considering is how best to respond to the call for profession-agnostic standards with respect to sustainability assurance.
In fact, in some major jurisdictions, such as the EU under its Corporate Sustainability Reporting Directive, or in the US, the market for sustainability assurance has now been or is being open to all assurance providers, allowing sustainability assurance to be provided by an audit firm or any other entity.
Establishing a level playing field in this regard is a crucial matter of the public interest. Without it, there is a clear danger that markets will pivot to lower-cost but lower-quality providers, potentially harming investors and other stakeholders, and ultimately undermining public trust in sustainability assurance. It is in the public interest that all assurance providers, whether or not from the accountancy profession, be subject to the same high bar of ethical behaviour and independence.
While it is for regulators to decide who must comply with the IESBA’s standards and enforce those standards, the IESBA is ready to make available high-quality ethics and independence standards that are usable by any assurance providers.
The IESBA has set a December 2022 target to approve a project plan addressing sustainability reporting and assurance. In the meantime, IESBA will soon issue a “greenwashing” staff document to provide guidance to professional accountants in navigating ethics situations or challenges that might give rise to greenwashing.
There is a unique window of opportunity to put in place a robust, sound and globally inter-operable standards infrastructure to support trustworthy sustainability reporting and assurance and hence, the wider project of the business and financial sectors funding the transition.
While the IESBA will be proactively engaging with key stakeholders in this process, I invite all other players in the ecosystem, including WFE members, to keep on playing their parts and recognise the crucial importance of global ethics standards for sustainability reporting and assurance and the seamless functioning of sustainable stock exchanges and markets.
The keynote speech was delivered at the WFE’s Annual Meeting in Malta, Sept 27-29.
The views, thoughts and opinions contained in this Focus article belong solely to the author and do not necessarily reflect the WFE’s policy position on the issue, or the WFE’s views or opinions.