Andreas Noodt, WP StB, completed his second and final term as a member of the International Federation of Accountants® (IFAC®) Small and Medium Practices (SMP) Committee at the end of December 2015. In this article Herr Noodt, who is also a member of the Institut der Wirtschaftsprüfer (IDW)’s main technical committee (HFA―IDW Auditing and Accounting Board), looks back at the work done by the IFAC SMPC and on his own experience as a committee member during the last six years.
Overview of IFAC and the Standard-Setting Boards
The Wirtschaftsprüferkammer (WPK) and the IDW have a long history of involvement in international cooperation. Both were founding fathers of the present day IFAC, which was established in Munich in 1977. Indeed, the first president of IFAC, Reinhardt Goerdeler, was from Germany.
IFAC’s focus was initially on the establishment of accounting and auditing standards at an international level and the promotion of a global accounting profession. The notion of a united single profession providing high-quality accounting and assurance services has long been a central ideal. The oft-used phrase “an audit is an audit” typifies this stance. The profession has hitherto laid great store in ensuring that global standards dealing with key services—assurance and non-assurance—remain principles-based enabling all factions of the profession to deliver high-quality services to clients irrespective of the individual client’s size or complexity. Moving away from this approach could give rise to perceptions of first- and second-class service delivery, which, in the long run, could be especially harmful to SMPs.
IFAC has achieved wide recognition of its work over the years and done much to unite the accounting and auditing profession globally, particularly with its standard-setting activities.
Today, the standard-setting boards responsible for developing auditing standards (International Auditing and Assurance Standards Board® [IAASB®]), the Code of ethics (International Ethics Standards Board for Accountants® [IESBA®]), education standards (International Accounting Education Standards BoardTM [IAESB TM]), and public sector accounting standards (International Public Sector Accounting Standards Board® [IPSASB®]) at the international level continue to operate under the auspices of IFAC. The establishment of a separate standard setter—currently the International Accounting Standards Board (IASB)—several years ago removed IFAC from any responsibilities in the development of international standards for financial reporting in the private sector (IFRS).
Gaining the necessary global recognition for international standards governing the work of the auditing profession necessitates the wide acceptance of the standard-setting processes used by these various Boards. For one, perceptions that accountants and auditors “write their own standards” and thus primarily do so in their own interests needed to be countered. To this end, in discussion with major regulatory bodies together forming the “Monitoring Group,” IFAC underwent a series of reforms in 2003.
The Monitoring Group is comprised of representatives from:
- International Organization of Securities Commissions;
- Basel Committee on Banking Supervision;
- European Commission;
- Financial Stability Board;
- International Association of Insurance Supervisors;
- International Forum of Independent Audit Regulators; and
- The World Bank.
Among other things, the reforms specifically aimed to increase the transparency of IFAC’s standard-setting activities and to facilitate involvement beyond members of the accountancy and auditing profession.
A key feature in achieving this legitimization was the establishment of a Public Interest Oversight Board (PIOB) to oversee the adherence to due process by various standard-setting boards, recognizing that standard setting is undertaken in the wider public interest. According to the PIOB’s website: “The objective of this collaborative model between the profession (IFAC) and the international regulatory community (MG) is to produce high-quality global standards that are responsive to the public interest”.
Representing the Concerns of Small and Medium-Sized Practices
The enhanced focus on the profession’s public interest role has meant revision of the composition of the various standard-setting boards. These boards now include representatives from a wide range of backgrounds, including regulatory authorities, academia, and the profession. Consequently, while the profession retains a degree of representation within these boards, it is not the only voice in setting the standards governing its professional activities.
As the different parties can have widely diverging views at times, it is not always easy for the boards to ensure that their proposals also take full account of the legitimate interests of members of the accounting and auditing profession, and specifically those of SMPs. The exposure of proposals before a standard is finalized is one measure that allows everyone – the public and the profession – the opportunity to voice opinions to address these interests.
Within the last few years, the influence of representatives from the regulator community has become significantly more evident in the development of auditing standards and the IESBA Code in particular. Consequently, it has become increasingly important for the SMP community to be represented in standard-setting debates and to highlight its concerns, especially those that could impact SMPs to a disproportionate extent.
As a busy practitioner myself, in a medium sized practice in Germany, I am keenly aware that individual SMP practitioners, whether sole practitioners or within a firm, are not able to devote technical resources to detailed analyses of the increasingly numerous proposals issued by the standard-setting boards – proposals which do not always take a fair-minded approach to the interests of SMPs, but which can, in part, even be problematical. Indeed, the boards generally do not receive comment letters from individual SMP practitioners, which is why the IFAC SMPC’s work in this area is so important.
The IFAC SMPC
A significant part of the accountancy profession worldwide consists of SMPs. Firms range from the sole practitioner working alone to quite medium-sized practices with a larger number of partners. Indeed, in many jurisdictions worldwide, SMPs constitute majority large part of the over 2.8 Million accountants that comprise the profession.
Engaging with individual SMPs directly can be difficult enough for national institutes. It is certainly challenging for IFAC, operating at an international level. However, as explained above, it is important for SMP concerns to be brought to the attention of policy makers and standard setters and for the needs of SMPs to be addressed in terms of support material. IFAC acknowledges the significance of small- and medium-sized entity (SME)/SMP issues in the global economy, and first established a committee in 2005 to facilitate these.
The SMPC currently has 18 members from different countries. Most are practitioners working within an SMP; some are technical staff of IFAC member organizations with responsibility for SME/SMP issues.
The committee as a whole has the chance to exert influence that could not be achieved by single SMPs in isolation, as explained in more detail in the following sections.
The Role of SMPC Members
Members are expected to attend SMPC meetings that may be held throughout the world and to undertake so-called outreach activities attending and/or presenting at events at the regional or national level. In addition, they are involved in the work of the various task forces (explained below), which necessitates their involvement between meetings via telephone conferences and email. Members may be supported by a technical advisor (TA). In my case, this was initially Herr StB Dr. Helmut Klaas and over the last few years Mrs. Gillian Waldbauer (FCA, England and Wales); both of whom deal with international issues in the technical department of the IDW.
Although IFAC provides certain resources, including staff support to the SMPC, individual committee members and their Technical Advisors participate on a purely voluntary basis. This involves a considerable commitment from the individual members and, of course, they need to have the support of their fellow partners at home, as applicable.
Each member’s contribution is assessed annually and discussed in a meeting with the SMPC Chair. This assessment takes account of active participation at the SMPC meetings as well as the individual member’s contributions to the work of the various task forces in which that member is involved.
The Scope of the IFAC SMPC’s Activities
The SMPC is active in the following areas:
1. Standard Setting
The IFAC SMPC advises international standard-setting boards of relevant SMP perspectives:
- Voicing SMP-specific concerns to standard setters (IAASB, IESBA, etc.) operating under the auspices of IFAC:
- Input on projects of particular SMP relevance ahead of each quarterly meeting of the standard-setting boards, by means of individual letters (not on public record);
- Submission of formal comment letters regarding selected Consultation Papers and Exposure Drafts (on public record);
- Interaction with individual board members (SMP Liaison); and
- Where possible, nominating an SMPC member to join the relevant task force of the relevant board;
- Participating directly in the IAASB and IESBA Consultative Advisory Groups (CAGs), as one of the few representatives speaking out for the profession; and
- Submitting comment letters to other standard setters on a case-by-case basis (e.g., IFRS for SMEs).
This input to the work of the various standard-setting boards has become an increasingly important focus of the SMPC’s work. Recently, specific mention of or reference to comments made by the IFAC SMPC are increasingly either noted in the boards’ Agenda Papers or by task force chairs at the relevant standard-setting board’s meetings.
2. Speaking Out for SMPs
The committee monitors developments, outreach, and information sharing among IFAC member organizations in SMP matters. The following in particular, should be mentioned:
- Annual Global SMP Survey (aims to track changes in SMP perceptions and obtain SMP views on topical issues);
- Regional SMP Forums, aiming for worldwide coverage over time;
- Exchange of information within the committee as to SMP services offered by member organizations;
- IFAC SMPC representation at various events (including outreach—see below);
- Monitoring significant developments that may impact SMPs;
- Providing input to IFAC papers on matters of policy and regulation;
- External outreach, by presentation of SMP-specific topics at various events; and
- Ensuring SMP presence on the IFAC Gateway, the knowledge database on the IFAC website.
Generally one of the SMPC’s meetings each year is held in combination with a a Regional SMP Forum, organized with a local member or regional organization. This enables committee members to reach audiences from many countries to which they might otherwise not have ready access. The committee’s outreach activities are well received by members of the local profession. For example, during recent years, events were held in Kuala Lumpur, Malaysia; Kampala, Uganda; and Singapore.
3. Resources and Tools
The SMPC develops practical guidance and related material that IFAC member organizations may adapt/ translate or supply to their members.
To date these comprise:
a. Guide to Using International Standards on Auditing in the Audits of Small- and Medium-Sized Entities (ISA Guide);
b. Guide to Quality Control for Small- and Medium-Sized Practices;
c. Guide to Review Engagements;
d. Guide to Compilation Engagements;
e. Guide to Practice Management for Small- and Medium-Sized Practices; and
f. Good Practice Checklist for Small Business.
Rather than providing direct support to individual SMEs, the IFAC SMPC’s primary aim is to assist IFAC member organizations in providing the necessary support to practitioners in their individual jurisdictions. Member organizations can obtain permission from IFAC to use all or part of the guides in translation or as a basis for derivative national material, as appropriate. The guides are designed to provide comprehensive support, and, when taken in full, may be particularly suitable as training material. Practitioners use the guides as reference material when designing their firm’s own quality control systems against a benchmark, or they serve as reference material. Case studies and in illustrative examples of documentation also guide practitioners in their own technical work. The SMPC’s guides and further support material can be downloaded from the IFAC site for individual use. However, reproduction and translation are subject to IFAC copyright.
In Germany, the Guide to Practice Management for Small- and Medium-Sized Practices has formed the basis for the IDW’s series that will comprise nine modules: “IDW Handbuch für das Management kleiner und mittelgroßer WP-Praxen”. German translations of further selected guides are also currently underway.
The Committee’s Work
The committee meets in full three times each year. However, much of the committee’s work is achieved within the six dedicated task forces explained below, which are comprised of committee members and TAs. All committee members participate in at least one, but usually more of these task forces. I, together with my Technical Advisor, have been involved in several of these task forces during my terms (SPTF, IGTF, IRRTF, ETF, PPRTF).
Strategic Planning Task Force (SPTF)
The SPTF develops the SMPC’s due process and operating procedures, as well as its strategy and work plans.
Implementation Guidance Task Force (IGTF)
The IGTF is responsible for overseeing the development, maintenance, and promotion of the SMPC’s implementation guides listed in a) – d) above and related materials.
I chaired the IGTF at the time the committee developed and published the Guide to Review Engagements (1st Edition, 2013). The committee decided to produce this particular guide for two reasons. Firstly, the IAASB had recently made significant revisions to the International Standard on Review Engagements 2400, and secondly, reviews are unknown, or not well known in many jurisdictions, whereas in many countries the marked tendency for the threshold for statutory audit to increase means that reviews will potentially come to be seen as an alternative service for some SMPs and their clients.
For 2016 an update of the Guide to Using International Standards on Auditing in the Audits of Small- and Medium-Sized Entities is planned, which will reflect revisions and additions to International Standards on Auditing made in 2015, including the ISA 700 series of auditor reporting standards. In addition, following on from the guides to auditing, review and compilation a publication of case studies depicting agreed-upon procedures engagements pursuant to ISRE 4400 is also currently being planned.
IAASB Rapid Response Task Force (IRRTF)
The IRRTF provides input in the form of comment letters in regard to the majority of the IAASB’s projects, including strategy development and implementation. For some time now, the SMPC is in the unique position of providing detailed input on relevant agenda items ahead of each IAASB meeting. The IRRTF determines which themes are of particular relevance for SMPs. The work is carried out by both email and telephone conference to a tight deadline prior to each IAASB meeting. Where appropriate, the IRRTF may also develop a formal submission letter on selected IAASB Exposure Drafts.
This Task Force also assists the SMPC CAG representative.
Ethics Task Force (ETF)
The ETF provides comments in regard to the many of the IESBA’s projects, including strategy development and implementation, and supports the SMPC CAG representative.
As the result of a recent agreement reached with the IESBA, the SMPC is now also in the unique position of providing detailed input on relevant agenda items ahead of each IESBA meeting.
The ETF is currently dealing with a particularly important issue. Specifically this relates to the ED recently issued by the IESBA which proposes the confidentiality requirements for auditors be restricted in those cases where the auditor identifies or suspects serious incidences of non-compliance with laws and regulations by the client. Even though the German legislator requires auditors to adhere to client confidentiality, the IESBA’s NOCLAR project was particularly important to me personally, because placing a potentially “policing” role on the auditor can result in considerable uncertainty, which, in the long term, could damage the trust in the entire profession. The WPK, the IDW and the SMPC have repeatedly been highly critical of this aspect of the proposals in their comment letters. Together with Mrs. Waldbauer I published a technical article on this issue on the IFAC Global Knowledge Gateway in August 2015 in order to sensitize smaller and medium-sized firms to what had been proposed, and to foster the discussion further. The Ethics Board’s project has not yet been finalized and the results are still awaited.
Public Practice and Regulation Task Force (PPRTF)
The PPRTF provides input to IFAC’s policy development and regulatory dialogue, and briefs the SMPC Chair, ahead of each IFAC PPRAG meeting/telephone conference, thus ensuring that SMP perspectives can be included in the discussions on IFAC policy decisions and related pronouncements.
SMP Business Support Task Force (SBSTF)
The SBSTF is responsible for overseeing the development, maintenance, and promotion of the SMPC’s practice management materials, the SMPC website, and IFAC member organization sharing initiatives. It also develops, maintains, and promotes materials to help position and equip SMPs in supporting their SME clients. The publication of a guide to integrated reporting for small and medium entities is planned in the coming year, as well as an update of the Practice Management Guide..
Conclusion
As the voice of small and medium-sized practices, the IFAC SMPC is charged with an important task in our worldwide profession. In recent years the development of the profession has been shaped by high pace of change in standard setting as well as increasing influence on the part of the regulatory authorities. Given this situation, it is more essential than ever that the interests and concerns of those members of the profession who do not have sufficient resources to work alongside technical committees or, for example, to provide their individual comments within the established due processes of standard setters are accorded due consideration.
The WPK and IDW have supported a member of the 18-strong SMPC since its formation 10 years ago. Retaining this influence going forward is important for the future positioning of the German profession within IFAC. Therefore I am pleased that the Nominating Committee of IFAC has again selected a member from Germany as my successor. I wish my successor WP StB (German Public Auditor, German Licensed Tax Advisor) Klaus Bertram, every success as incoming German committee member to the IFAC SMPC from January 1, 2016, as he will continue to represent the interests of SMPs going forward.
*This article originally appeared in WPK Magazin, December 2015.
