ACCOUNTANCY REGULATION IN THE MEDITERRANEAN REGION
By: Jim Sylph, Executive Director, Professional Standards
International Federation of Accountants
Federation des Experts Comptables Mediterraneens Conference
Athens, Greece – November 19, 2007
Good morning. I’m delighted to be returning to your annual conference and speaking to you today atthe sixth FCM conference. Thank you to FCM and SOEL for inviting me to be present today. I bring greetings from IFAC President Fermín de Valle and Chief Executive Officer Ian Ball.
I’m also delighted to be in Athens, one of the oldest and most fascinating cities in the world. It’s quite appropriate that we are focusing on the accountancy profession here in an ancient Mediterranean city, because this region, in addition to serving as the cradle of civilization, is also the cradle of our profession. The great ancient Greek mathematicians -- Pythagoras, Euclid and Archimedes -- laid the foundation for all numeracy and hundreds of years after their deaths, the innovative Italians of the Renaissance formulated the basis for modern accounting.
In particular, the Benedetto Cotrugli invented the “double entry” and Frater Luca Bartolomes Pacioli invented Pacioli’s System of memorandum, journal and ledger and wrote many of the first accounting text books. Yet, Pacioli and Cotrugli were not, by any means, the first accountants in the world. Historians believe humans have been practicing some form of accounting seemingly since time began. In fact, some of the earliest known writings discovered by archaeologists are records of tax accounting found on clay tablets from Egypt and Mesopotamia as early as 2000 to 3300 B.C.
And yet while I look back 5000 years, it is sobering to realize that a formalized accounting profession is so young. While you celebrate your 8th anniversary as a federation of accounting bodies, the oldest IFAC member body, the Institute of Chartered Accountants in Scotland formed in 1854, is just 153.
The foresight of a group of accountants with international vision resulted in the creation of IFAC at the World Congress in Munich in 1977, and as we celebrate our 30th anniversary next month, I assure you we all feel proud of what we have been able to accomplish in such a short time. From a concept of helping the accountancy profession in less developed parts of the world, IFAC has matured into an organization recognized by stakeholders as one acting in the public interest to further the high quality practices followed by all 2.5 million members of IFAC’s 158 members and associates. I don’t need to tell this audience that our commitment to the development of high quality auditing, ethics, accounting education and public sector accounting standards is well recognized and over 100 countries now use International Standards on Auditing (ISAs) as the basis for their own national audit standards.
As part of IFAC’s celebrations, we have been listening very carefully to the advice that our Board member and your President, William Nahum, has been giving us. He has been strong on pointing out that IFAC represents many languages. As a result, I am pleased to be able to tell you that we have translated many parts of our site into the six United Nations languages. For many of you in this room the French, Spanish and Arabic versions may be helpful.
All 16 countries of Federation des Experts Comptables Mediteraneens, from Greece, Italy and Egypt toSerbia and Kosovo,have made historic contributions to the development of the global accountancy profession as we know it today, despite major differences in each country’s size, history and economic development.
FCM has also made important contributions to the sustainability of the profession here in this region, and I’d like to commend you for your work. I’d also like to thank the many volunteers from FCM member organizations who serve on IFAC boards and committees and are dedicated to our mutual professional goals.
As I was preparing for this speech today, I was struck by how closely FCM’s diverse membership resembles IFAC’s membership. Indeed, FCM seems almost a microcosm of IFAC. You count countries both large and small as your members and, while some of your member countries have fully developed economic infrastructures and capital markets, others are still emerging. IFAC’s membership is similar in its diversity.
To understand IFAC’s diversity, it’s important to know that the IFAC 158 members and associates are based in 123 countries and represent accountants employed in public practice, industry, commerce, government, and academia. It is IFAC’s goal to have a member body in every country in the world and to work in concert with accountancy groupings such as FCM.
Despite all the differences among our member bodies and associates, there’s one public policy issue that affects us all similarly, regardless of our national allegiances, and that is the regulation of the profession.
As I just mentioned, IFAC’s mission is to speak as the voice of the profession on relevant public policy issues, and often, regulation is one of these issues. In recent years, particularly after the business failures of companies such as Enron, Ahold and Parmalat, how the accountancy profession should be regulated has been the subject of much debate and change. Professional accountants, their clients, professional accountancy bodies and governments seek to ensure that the profession continues to deliver high quality services and contributes to economic growth and development by producing financial statements that investors can have confidence in.
Today, I’d like to share with you IFAC’s vision of regulation of the accountancy profession globally, as well as talk about specifics here in the Mediterranean. Of course, the state of regulatory affairs will differ by jurisdiction, but there are some themes we can paint in broad strokes, including:
- Issues and trends in the regulatory environment;
- How effective regulation can help to ensure that the accountancy profession meets its long term objectives; and
- What roles professional accountancy bodies and government play in regulation.
Let’s start off by focusing on regulatory issues and trends. Perhaps the most significant regulatory issue in this region is the looming implementation of the Eighth Directive in the 27 European Union member countries. Basically, the directive will require EU countries to converge to an international set of professional standards, to implement quality assurance processes in accountancy firms and to increase responsibility for accountants in serving the public interest.
The Eighth Directive will also change the way the accountancy profession is regulated. EU member state professional accountancy organizations will play an important part in regulation by reaching out and forging cross-border relationships with other European professional accountancy organizationsand with newly developed oversight bodies in each country as well as the European Grouping of Auditor Oversight Bodies. This is crucial, of course, because trade is not limited to national boundaries and as our world becomes more and more “flat,” seamless regulation of the accountancy profession will ease the inevitable process of globalization.
Cross-border regulatory cooperation is a trend in regulation that goes well beyond Europe and the Mediterranean region. For example, regulators in the United Statesrecently cited the need for American markets to move out of isolation and participate as part of a global marketplace. In the past year, the Securities and Exchange Commission has been actively cooperating with the Financial Services Authority in Britain and Germany’s BaFin. The groups are talking about mutual recognition to cope better with cross-border capital flows and to detect fraud. And just last week, the SEC announced that filing financial statements using International Financial Reporting Standards(IFRSs) without reconciliation will be acceptable.
Clearly, an action that would ease the process of globalization and further cross-border regulatory cooperation but one that goeswell beyond mutual recognition is convergence to an international set of professional standards. IFAC not only champions convergence to its own international standards but also to the IFRSs of the International Accounting Standards Board (IASB). As many of you know, IFAC’s four independent standard-setting bodies are: the International Auditing and Assurance Standards Board (IAASB), the International Accounting Education Standards Board, International Ethics Standards Board for Accountants, and the International Public Sector Accounting Standards Board.
We have promoted convergence since the beginning, long before convergence became a commonly accepted objective. We can’t quit now, and we can’t be satisfied with anything less, because convergence is essential to raising the quality and uniformity of practice by professional accountants throughout the world.
As more and more countries open their doors to foreign investment and as businesses expand across borders, both the public and private sectors, including regulators, are increasingly recognizing the benefits of having a commonly understood financial reporting framework, comparable across borders, that is supported by strong, globally accepted auditing standards. When investors understand and have confidence in a company’s financial information, they tend to be more confident about investing. In turn, steady investment in a region’s business ultimately makes that region more prosperous.
Convergence promotes quality within the profession as well as consistent performance by the profession across the world. Convergence also contributes to the sustainability of the worldwide accountancy profession. Sustainability depends upon the quality and consistency of the services provided by its members and the profession’s capacity to respond effectively and efficiently to the demands of the economy and society. Effective regulation can help to ensure that the accountancy profession meets its long-term objectives,such as consistency, quality and sustainability. Let’s explore this area a little further and examine why exactly our profession requires efficient and effective regulation.
Every profession is defined by the knowledge, skills, attitude and ethics of those in the profession. Regulation is an acknowledgement that certain standards must be met by practicing members of that profession and that the services they provide must be of the highest possible quality.
Clients often seek out professionals because they have specialist knowledge in a certain area and the client needs to tap into such expertise. For the most part, the accountants and auditors know more about their area of expertise than the clients do, which creates an imbalance in their relationship. In other words, the accountant providing the service is in a better position to know the quality of his or work than the client purchasing that service. This imbalance of expertise is not limited only to our profession. You could say the same of doctors, lawyers and even auto mechanics.
Of course, when you find a good mechanic or a good doctor, you tend to stick with them and build trust in them. But where no previous relationship exists, there is the potential to provide shoddy service or overcharge for the work done. Regulation seeks to make the relationship between professional and client more balanced and to ensure that the services the professional provides are of the right quality.
Yet, in creating national regulation for our profession, it’s difficult to take a “one size fits all” approach, because the practice of accountancy is so broad and wide ranging. Accountants work in public practice, as auditors or consultants, in large, medium and small firms, and as individual practitioners. In addition, they are employed by, or serve as consultants to, commercial enterprises, non-profit organizations and public sector entities in the areas of finance, management, taxation, information systems, corporate finance, and business intelligence, among others.
However, the one thing all accountants do have in common is that they work in the public interest. In order to serve the public interest, therefore, regulation must be proportionate, transparent, non-discriminatory, targeted, implemented consistently and fairly, and subject to regular review. It’s also important that regulation allow the profession to remain competitive and that the benefits of regulation to the economy and society must outweigh the costs of regulation.
Regulation of the accounting profession usually covers entry and licensing requirements; monitoring of the behavior and performance of professional accountants; the standards, including ethical standards, that accountants must meet; and disciplinary procedures if professionals do not honor codes of conduct and laws pertaining to them. By having a voice in the creation of regulation in these areas, the profession can help ensure better consistency and quality across the globe and, in turn, help the profession sustain itself into the future.The two major areas of focus in this regard are professional ethics and education standards.
Education in values, especially through example and the appropriate use of experience and professional judgment, based on a solid educational foundation, and reinforced through continuing professional education, is essential to the future of the accountancy profession as are university curricula and continuing professional training that truly prepares professionals for accountancy practice in the ever changing 21st century global workplace.
These concerns for the quality, behavior and the standards of professional accountants, and the awareness of the public interest imperative for the accountancy profession, means that professional accountancy organizations and government regulators have quite a few common objectives. Let us now examine what roles professional accountancy bodies and governments play in regulationand how they can best work together.
Regulation can take many forms, but the two primary forms of professional regulation are are self regulation and external regulation. Under self regulation, accountancy organizations are legally responsible for regulating the profession in a given country. Under external regulation, the government, acting through a government agency, regulates the profession. A combination of these approaches to regulation is also possible. For example, a profession may self regulate but only if oversight is provided by an independent agency. Or, an accountancy body may be responsible for some aspects of regulation, such as setting education requirements, and the government agency is responsible for other aspects of regulation.
IFAC’s vision of professional regulation is one in which professional accountancy bodies, acting in the public interest, play an active role in the regulation of the profession and that professional accountancy bodies and governments work together to ensure that regulation is both effective and efficient. The specific regulatory role of professional accountancy bodies should depend on the situation in each particular country, but in all cases, the professional body has a responsibility to ensure the profession serves the public interest.
No two countries will approach regulation in exactly the same way. Some regulatory systems are firmly in place in some countries, while in other countries, the approach to regulation is still evolving. As I mentioned earlier, European Union member countries are in regulatory flux as they are transitioning to the Eighth Directive and will be participating in increased cross-border regulation. Among FCM countries, Egypt, for example, is in the process of revamping its approach to auditing standards and its regulatory and legal framework, while Morocco continues to make progress on regulatory reforms it began in the 1990s.
Before leaving the issue of regulation, I must comment on one further item which is also on your agenda later today. That is the issue of audit standards for small and medium entities (SMEs). It is usually regulators who determine which entities should be subject to audit – or indeed, which accounting standards need be applied. The role of the IAASB in developing ISAs is to produce the very highest quality standards to perform audits whatever the size of the entity being audited. It is not the job of the IAASB to produce a set of simple audit standards for doing simple audits on small entities. The IAASB has stated clearly and it is worth repeating that “an audit is an audit.”
The IAASB has certainly received calls from many to consider whether there is an alternative service that can be provided to SMEs that would require a different work effort and result in a different form of opinion than the current audit report. IAASB may well undertake this project starting in 2008-9 but it will be up to each of you as IFAC member bodies to work with your national regulator and convince them to change law or regulation to provide for SMEs to file financial reports and accountants’ opinions that are produced at a cost commensurate with the benefit derived.
We trust that all the national accountancy organizations in this region share IFAC’s vision for professional regulation and aspire to participate, or are already actively participating, with governments and will have a voice in regulating the activities and conduct of their members. This is a natural role for professional accountancy bodies as they are close to the markets in which their members operate and, thus, have a good sense of how regulations might affect behavior. In particular, professional accountancy bodies normally have a greater ability to respond and act quickly in light of changing circumstances. In contrast, government and government agencies may need to go through a more complicated and formal legislative process to change regulations, which can limit a quick response.