Enhancing Confidence in the Accountancy Profession to Promote Economic Growth
By Graham Ward, CBE, MA, FCA
President, International Federation of Accountants
International Conference on “Role of Accountancy Profession in Anchoring Economic Growth”
Mumbai, India – January 20, 2006
Thank you very much for your kind introduction and for the privilege to speak with you today. This is my third visit to India in the past year, and I am always heartened by the warm welcome that I receive here. Each time, I am also impressed by the progress of the profession, the dedication of your volunteers and your receptivity to new ideas that can further strengthen India’s role in the world economy.
I would like to thank both your President, Shri Kamlesh Vikamsey, and your Chief Executive, Dr. Ashok Haldia, for organizing this important conference and for inviting me to speak at it.
There is no question that the international accountancy profession has a unique, critical and practical role to play in building stronger and more stable economies around the globe. In order to fully carry out this role, however, we need to continue to enhance confidence in the profession and to build trust. Investor confidence and public trust empowers our profession. Without it, the credibility of the information we produce, indeed the future of our profession itself, is put at risk. Whether we work in New York or New Delhi, we cannot afford this risk.
Since corporate fraud and misconduct in the U.S. and elsewhere shook investor confidence and raised questions about the integrity of capital markets and their participants, action has been taken around the globe by governments, regulators, and accountants themselves to strengthen the profession and enhance market integrity. The International Federation of Accountants, which represents over 160 member organizations in 120 countries, has also undertaken some major initiatives, consistent with its mission which is:
“To serve the public interest, IFAC will continue to strengthen the worldwide accountancy profession and contribute to the development of strong international economies by establishing and promoting adherence to high-quality professional standards, furthering the international convergence of such standards, and speaking out on public interest issues where the profession’s expertise is most relevant.”
Before I describe some of our initiatives, I would like to emphasize that when I speak about “IFAC” and the work that we do, I am not speaking about a handful of individuals. I am referring to the broad, global network of volunteers that serve on our eight technical committees and boards; to our Board, which is comprised of nominees of IFAC members; to all member bodies that so actively participate in IFAC, particularly through the IFAC Member Body Compliance Program; and of course, to the IFAC staff who support all of these groups.
I am especially grateful to the Institute of Chartered Accountants of India and to its leaders, who have made a very deep commitment to the profession and to the public interest which it serves.
As a founding member of the International Federation of Accountants, the Institute of Chartered Accountants of India has a long tradition of active involvement in and support of IFAC. I would like to thank those Indian representatives currently serving on our boards and committees, without whose support, IFAC could not achieve its objectives. Your President, Shri Kamlesh Vikamsey, represents India on the IFAC Board and is ably supported by Dr. Haldia, who serves as his technical advisor. I would also like to thank your immediate past president Shri Sunil Goyal, who is a member of our Small and Medium Practices Committee and previously served on the IFAC Board; Shri T.N. Manoharan, the Institute’s Vice President, who joined our International Accounting Education Standards Board last November; Shri Shanti Lal Daga, who joined our Developing Nations Committee last November; Shri Pankaj Jain, who serves on the International Public Sector Accounting Standards Board; and Shri Rajkumar Adukia, who serves on our Professional Accountants in Business Committee. These gentlemen exemplify the ICAI’s spirit of active participation in the international profession.
This spirit of international involvement has also had a positive effect on your economy. As a Board Member of the Indo-British Partnership Network, I am very aware that India, the world’s second fastest growing economy, is now the world’s second most preferred destination for foreign direct investment. It has posted an impressive growth rate of seven percent and has begun to reap the fruits of its steps towards both greater market openness and facilitating direct investment, such as rapid growth in the technology and communications sectors. I was encouraged to hear Indian Finance Minister Shri Palaniappan Chidambaram echo these sentiments at the Indian Economic Summit last November when he said, ”We must open the doors to foreign direct investment.” It is through greater international cooperation and investment that India’s impressive economic growth rate can be sustained, and it is through continued economic growth that challenges such as poverty and development can be addressed.
Let me turn back to my specific topic for today: enhancing confidence in the accountancy profession in order to achieve economic growth and stability. To meet this objective, IFAC’s activities in four specific areas are directly related to achieving this goal:
First, we have promoted, indeed required, adherence to high ethical standards by the 2.5 million accountants represented by our member bodies.
Secondly, we have sought to continue to enhance the quality of the audit process through the development of high quality international standards.
Thirdly, we have encouraged firms and our member bodies to monitor the quality of those processes.
Lastly, we have focused on encouraging strong corporate governance and management accountability.
The bedrock of our international commercial system is high quality financial information: information based on ethics and integrity, on high quality international accounting and auditing standards and on the work and sound judgment of both internal and external professional accountants. Credible and reliable financial information is fundamental to investment. It builds investor confidence which, in turn, facilitates business development, contributes to job growth and leads to individual financial prosperity.
Let me return to the first point – promoting high ethical standards.
Ethical conduct lies at the core of all business. We do business with those we trust; we get business from those who trust us. It is at the root of generating confidence in both individuals and entities. Ethics, therefore, is a driver of business growth which demands attention from boards and investors alike. As the world becomes more interconnected, it is the values that we share that unite us as a profession.
IFAC’s values of integrity, transparency and expertise are reflected in every facet of our work. To build credibility in financial systems and to contribute to sound economic systems, we must also promote these values to all professional accountants, both in practice and in business, as well as to all those in the financial reporting supply chain. And we must do so in a way that is relevant and meaningful.
IFAC’s International Ethics Standards Board for Accountants, which develops the international Code of Ethics for Professional Accountants, does just this. The Ethics Standards Board recently released an updated Code of Ethics which establishes a conceptual framework for all professional accountants to ensure compliance with the five fundamental principles of professional ethics. These principles are integrity, objectivity, professional competence and due care, confidentiality and professional behavior. Under the framework, professional accountants are required to identify threats to these fundamental principles and, if there are threats, to apply safeguards to ensure that the principles are not compromised. The framework applies to all professional accountants, those in public practice as well as those in business and government. The Ethics Standards Board, recognizing that both governmental and business accountants play significant roles in safeguarding the public trust, plans to provide further guidance for these accountants in particular.
The Ethics Standards Board is also focused on an issue that is perhaps most central to public trust and one that has received widespread attention by the media and regulators: independence. A forum on the topic was held in Brussels in October and attended by regulators, standard setters, corporate management, and representatives of IFAC member bodies. This input is part of an extensive Ethics Standards Board consultative process that will help to determine how the independence rules should be modified better to address the public interest.
The second way in which IFAC is working to build confidence in the profession and contribute to economic growth, is through one of its most core activities: developing international auditing and assurance standards. These standards are developed by the independent International Auditing and Assurance Standards Board and, like IFAC’s ethics code, are subject to a rigorous due process that includes extensive public interest input.
One of the IAASB’s most significant projects is improving the clarity and structure of its standards. Based on input it received at a forum in July and through responses to its 2004 Proposed Policy Statement and Consultation Paper on Clarity, in late October 2005 the IAASB released exposure drafts of four proposed standards developed using a new drafting style. These standards are the first to be issued as part of an ambitious 18-month program to make IAASB standards more understandable and capable of being translated, and to facilitate international convergence. The exposure drafts are posted on the IFAC website and I encourage you to review them and to provide comment.
In addition to focusing on clarity, the IAASB has issued a new international standard on audit documentation, designed to enhance auditor performance and audit quality by establishing stricter requirements for audit documentation. Beginning with this standard, the IAASB staff is preparing a “Basis for Conclusions” for each new international standard to increase understanding about the development of the standard – in particular, how the IAASB has responded to input received. We hope that you find this to be helpful.
Earlier this month, the IAASB issued an exposure draft on another significant public interest issue – related party transactions. The proposed revised International Standard on Auditing would require the auditor to perform a minimum set of procedures to identify related party transactions and transactions not identified or disclosed by management.
Other current IAASB projects are the development of standards on auditing accounting estimates and on materiality in the identification and evaluation of misstatements.
In addition to International Standards on Auditing, the IAASB also issues International Standards on Quality Control, to be applied by accounting firms for all services falling under the IAASB’s international standards. While its current agenda is clearly focused on ISA-related matters, to address expanding and changing business needs, the IAASB also has a mandate to issue International Standards on Assurance Engagements (ISAEs), which are to be applied by practitioners in assurance engagements dealing with information other than historical financial information, and International Standards on Related Services. To promote good practice, the IAASB issues Practice Statements to provide interpretive guidance and practical assistance in implementing its standards.
To assist professional accountants in meeting the demands of a changing business environment and also to build further credibility in financial information provided by accountants globally, IFAC has placed increased effort on improving the transparency of the IAASB standard setting processes and on devoting more resources to them. The same focus has been placed on the standard setting work of the International Ethics Standards Board for Accountants and the International Accounting Education Board.
A significant event that, I believe, will boost confidence in the profession and trust in our work is the establishment of the international Public Interest Oversight Board (PIOB). Formed in February of last year and chaired by Professor Stavros Thomadakis (a former Chairman of the Hellenic Securities Commission), the PIOB has eight members and two observers, all very senior people, appointed by international bodies of regulators and institutions. It also is strongly supported by the Financial Stability Forum. The appointing bodies are: IOSCO, the International Association of Insurance Supervisors, the Basel Committee, the World Bank and the European Commission. The PIOB oversees the work of the IAASB and of IFAC’s Ethics and Education Committees and endorses appointments to them. In September 2005, it approved the due process and working procedures that they should follow and in December approved new appointments. This oversight will, I believe, contribute to increased credibility in all the standards that IFAC develops through its independent boards.
Before I move off the topic of standard setting, I want to comment on one of IFAC’s most important objectives: convergence with national standards. Convergence is, I believe, at the core of building an investment climate of trust. Here’s why. Globalization demands high-quality standards that can be applied from Sydney to Stockholm, from Morocco to Mumbai. This puts everyone on a level playing field.
Second, global standards will result in increased transparency and accountability. Investors will be better able to compare company financial statements across borders. I also believe that developing countries that adopt international standards will see increased outside investment in their economies, by institutional and retail investors who are familiar with, and confident in, the standards, regardless of geography.
There’s another consideration as well. Having a multiplicity of accounting, auditing and other standards around the world is against the public interest. It creates confusion, encourages error and facilitates fraud. The cure for those ills is to have a single set of international standards, of the highest quality, set in the public interest by an international expert body which transparently consults with, and recognizes the legitimate interests of, the international community.
In consultation with IFAC boards and committees, and other relevant interested parties, IFAC staff is further developing the concept of “international convergence.” The objective is to develop guidance to accompany IFAC’s Statements of Membership Obligations (SMOs), which form the basis of the IFAC Member Body Compliance Program.
The IFAC Member Body Compliance Program, in which the ICAI is an active participant, is directly related to a third initiative of IFAC’s: encouraging quality performance by the international profession and encouraging firms’ and member bodies ’ to ensure that appropriate quality control mechanisms are in place.
This program supports the development of high quality auditing, accounting, ethical, educational and related quality assurance and disciplinary standards in IFAC member bodies throughout the world. The program is intended to guide accounting institutes in the full spectrum of their professional responsibilities, to demonstrate a shared commitment to our profession’s values of integrity, transparency and expertise. We know that India shares this commitment to these values and that it, too, through its most recent Professionals Act, is continuing to provide for greater transparency and accountability on the part of the profession.