Thank you very much for your kind introduction. I would like to thank your President, Mr. Syed Mohammad Shabbar Zaidi, and your Executive Director, Mr. Moiz Ahmad, for the privilege of the invitation to speak to you today. This is my first visit toPakistansince becoming President of the International Federation of Accountants, and I am heartened by the warm welcome that I have received. The profession here inPakistanis thriving, as evidenced by the Institute of Chartered Accountants of Pakistan’s growing membership and nearly 30,000 students. Your leadership has much of which to be proud.
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 carry out this role fully, 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 Pakistan or Portugal, we cannot afford to take 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 is comprised of over 160 members and associates in 120 countries, including three inPakistan– the Institute of Chartered Accountants of Pakistan, theInstituteofCostand Management Accountants of Pakistan and the Pakistan Institute of Public Finance Accountants – has also undertaken 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 which 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 Pakistan and to its leaders, who have made a deep commitment to the profession and to the public interest which it serves.
As a long-standing member of the International Federation of Accountants, the Institute of Chartered Accountants of Pakistan has a tradition of active involvement in and support of IFAC. I would like to thank those Pakistani representatives who serve on our boards and committees whose support enables IFAC to achieve its objectives: Abdul Rahim Suriya, a member of our International Accounting Education Standards Board; Khaliq-ur-Rahman, a member of our Small and Medium Practices Committee; and Mujahid Eshai, who served on our Developing Nations Permanent Task Force – now our Developing Nations Committee – from March 2004 to November 2005. These gentlemen exemplify the Institute of Chartered Accountants of Pakistan’s commitment to the international profession and to our core values of integrity, transparency and expertise.
Transparency is a concept that takes on real significance following a disaster, such as the devastatingKashmirearthquake of last October. That tragic event took many lives and has deeply saddened us all. It also destroyed many businesses, including some PKR 1 billion of SME assets, and huge amounts of infrastructure. We accountants, however, have an important role in supporting the recovery efforts through, for example, ensuring that recovery funds are properly managed, that effective governance controls are in place, and that public monies benefit those most in real need. We can also fulfill the pledge of your President, Perves Musharraf, to the Donors’ Conference in Islamabad last November when he affirmed that “therewillbe transparency and therewillbe total accountability” in the rebuilding effort. These are the values that we, as professional accountants, live every day. We embrace these values because they are central to protecting the public interest and to achieving economic growth. Where there is transparency and accountability, there is typically greater public trust and social stability.
Let me turn now to my topic for today: the role of IFAC in restoring public confidence in the accountancy profession, with the goal of achieving economic growth and stability. IFAC 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.
IFAC’s 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 inBrusselslast 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 thatwillhelp to determine how the independence rules should be modified better to address the public interest.
I commend the ICAP for sharing IFAC’s commitment to promoting the highest ethical standards. The Institute bases its Code of Ethics for Chartered Accountants largely on IFAC’s international Code of Ethics. As more and more countries adopt the IFAC Code, we are raising the bar globally for ethical conduct for all accountants.
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.
I am pleased that the Institute of Chartered Accountants of Pakistan has adopted International Standards on Auditing for use inPakistan, which is a further sign of your Institute’s commitment to convergence and to protecting the public interest.
In order further to facilitate convergence to international standards, the IAASB has undertaken a significant 18-month project to improve the clarity and structure of its standards. The IAASB has developed a new drafting style for its standards based on input it received at a forum in July 2005 and through responses to its 2004 Proposed Policy Statement and Consultation Paper on Clarity. In late October 2005, the IAASB released exposure drafts of the first four proposed standards developed using a new drafting style. The proposed standards focus on:
- The auditor’s responsibility to consider fraud in an audit of financial statements;
- Planning the audit;
- Understanding the entity and its environment and assessing the risks of material misstatement; and
- The auditor’s procedures in response to assessed risks.
The exposure drafts are posted on the IFAC website – www.ifac.org – and I encourage you to review them and to provide comment.
In addition to addressing the issue of 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.
The involvement of related parties, such as directors, owners, and management, in major corporate scandals prompted the IAASB to review its current auditing standard on the subject. As a result of its review, in January the IAASB issued an exposure draft, proposed International Standard on Auditing (ISA) 550 (Revised), Related Parties, and is inviting comments on proposed requirements for auditors regarding the audit of related party relationships and transactions.
The proposed standard places new emphasis on evaluating the effects of related party relationships and transactions on the financial statements, even in circumstances where the financial reporting framework does not establish related party accounting or disclosure requirements.
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, 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 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 Standards Board.
A significant event that, I believe,willboost 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: the International Organization of Securities Commissions, 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 Standards Boards 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 oversightwill, 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 international 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 fromNew YorktoNairobi, from London to Lahore. 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 like Pakistan that do 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 is 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.
The Institute of Chartered Accountants of Pakistan has supported convergence through its involvement both in IFAC and in the International Accounting Standards Board. It has also demonstrated this by adopting International Standards on Auditing; by basing its Code of Ethics on the international Code developed by IFAC’s Ethics Standards Board; and by implementing the IFAC Education Standards Board’s International Education Standards, including the new requirements for Continuing Professional Development. Thank you for this outstanding commitment to quality.
To give further assistance to IFAC member bodies and others in understanding the challenges and issues related to convergence, IFAC staff, in consultation with members of our boards and committees and other relevant interested parties, 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 ICAP 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.
Phase 1 of the Compliance Program, a fact-based questionnaire to assess the regulatory and standard-setting frameworks of IFAC member bodies, is now complete. Responses from more than 105 member bodies, including the response from the Institute of Chartered Accountants of Pakistan, have been posted on the IFAC website. The goal is to have all responses posted as soon as reviews are completed. Part 2, the SMO Self-Assessment Questionnaire, was distributed to member bodies last November and responseswillbe posted to the IFAC website beginning in the second half of this year. The responses from these questionnaires are important for several reasons: they provide a global snapshot of the accountancy profession from both a regulatory and standards perspective. Additionally, they can be used to help IFAC gauge where it needs to focus its efforts to support the development of the profession and to work to achieve convergence. Lastly, but perhaps most importantly, the responses to the questionnaires demonstrate the international accountancy profession’swillingness to be accountable for its actions to meet high standards, to deliver quality and to protect the public interest – all of which contribute to building confidence in the profession.
As we look to the future, we see that the global economy will continue to challenge the international accountancy profession, regulators, standard setters, and business leaders to compete and to deliver quality. In anticipation of these challenges, and in recognition that we must never waiver in our commitment to build public trust, IFAC’s Board has recently agreed to lead a new study on enhancing the quality of the financial reporting supply chain. The project will identify investor expectations and needs and include practical suggestions for enhancements that the global accountancy profession can provide by direct action and those where it will need to engage with others to create change. Among the issues to be considered in the new study are corporate management and governance, regulatory developments, auditor independence and rotation and the expectations in respect of the board’s and the auditor’s responsibilities for the detection of fraud.
IFAC has also focused on promoting strong corporate governance, an area that your country is also addressing. The newInstituteofCorporate Governance, established just over one year ago by the Securities and Exchange Commission ofPakistanand of which the ICAP is a founding member, is a strong example of this. The Pakistan Institute of Corporate Governance is an important step in the process toward ensuring sound corporate governance practices and protecting the interests and rights of shareholders.
IFAC’s focus on corporate governance is best expressed in an independent report it commissioned, entitled Rebuilding Public Confidence in Financial Reporting, that was developed two years ago under the leadership of John Crow, a former governor of the Bank of Canada. The report emphasized that a wide range of actions, by a wide range of entities, must be taken to strengthen corporate governance. For example, corporate management must place greater emphasis on the effectiveness of financial management and controls, corporate ethics codes need to be in place and effectively monitored and threats to auditor independence need to be given greater attention in corporate governance. The report’s findings and recommendations provided much impetus to IFAC’s Professional Accountants in Business (PAIB) Committee, as well as to other international groups. The PAIB Committee recently issued an exposure draft of proposed guidance to assist professional accountants in business in implementing corporate codes of conduct in their organizations. The proposed good practice guidance is designed to draw greater attention to the need for corporate codes of conduct, to provide practical guidance on the scope and implementation of such codes, and to support sound corporate governance practices. The proposed guidance highlights the benefits of an effective code of conduct and identifies the professional accountant’s role in the development, monitoring, reinforcement and reporting of such codes in their organizations.
IFAC’s PAIB Committee has also turned its attention to how best to improve the performance of organizations, and thus to ensure wider prosperity for all. In 2004, the committee, in conjunction with The Chartered Institute of Management Accountants in the UK, issued a report on corporate governance best practices entitled, Enterprise Governance – Getting the Balance Right. The joint group conducted an in-depth analysis of corporate successes and failures in 27 case studies from 10 countries. Among the report’s findings were that there are four key determinants of corporate success and failure: the culture and tone at the top, the chief executive, the board of directors and the internal control system.
The report also revealed that good governance on its own cannot make a company successful. Companies need to balance conformance with performance. To quote: “Unlike the conformance dimension, there are no dedicated oversight mechanisms, such as audit committees, in the arena of strategy. … There is a danger that in the laudable attempt to improve standards of control and ethics, insufficient attention is paid to the need for companies to create wealth and to ensure that they are pursuing the right strategies to achieve this.”
The study examined “enterprise governance,” an emerging concept in the new global economy.Enterprisegovernance has two equal parts: probity and profitability. I would suggest that one without the other isn’t worth having. Businesses that have the highest ideals but go bankrupt through poor strategic choices are as disastrous to shareholders, to other stakeholders and to public confidence as are businesses that fail because of ethical lapses. Profitable businesses that are run with little regard for the public interest, the law, regulation, employees or shareholders, should not be in business and, ultimately, will not be in business. I encourage the Pakistan Government and those of you here today who serve local businesses and industry to encourage the highest ethical practices at all levels of business. This is good not only for local business, but for your economy as a whole and, indeed, the future of your country.
In addition to our work to support professional accountants in business, IFAC’s Small and Medium Practices Committee serves the needs of small- and medium-sized accounting practices and other accountants that provide services for small and medium entities. SMEs are a fundamental driver of economic growth. Here inPakistan, according to the Asian Development Bank, SMEs account for 80 percent of employment in the industrial sector and a total of 30 percent of value added to the economy. The importance of SMEs extends to developed nations, where, for instance, in the European Union they represent 99 percent of all enterprises. To ensure that international standard setters are aware of and give consideration to issues relevant to SMEs andSMPs, IFAC’s Small and Medium Practices Committee is active in representing their interests to both the IAASB and to the International Accounting Standards Board. The committee is currently providing input to the IASB’s project considering the development of financial reporting standards for SMEs. The committee is also developing guidance materials forSMPs, especially in relation to the application of ISAs to the audit of SMEs and establishing an electronic data exchange on SME andSMPissues.
IFAC is committed to ensuring that all professional accountants, in every country of the world, both developed and developing, have the tools they need to face the challenges of the new global economy.
Because IFAC is a global organization, and because it is predicted that 95 percent of the world’s population growth will occur in developing nations, we have made strengthening the profession in those nations a key objective. Our position is this: we have a fundamental role and responsibility to play in fostering progress in the developing world, in eradicating poverty and in building prosperity. Establishing a sound and viable accountancy profession is a critical step in building a sound financial infrastructure and addressing these issues. We welcome assistance from established accountancy bodies, such as the Institute of Chartered Accountants of Pakistan, in this effort to grow and develop our profession worldwide.
IFAC’s goal is to have a member body with an established accountancy profession in every country around the globe. There is no doubt that this is a lofty goal, but as we look ahead and see that the growth of the world’s population will largely be in developing economies, I am more and more certain that this goal is one that we cannot compromise or forsake. To achieve this goal, IFAC’s Developing Nations Committee is involved in extensive outreach to developing nations and has prepared new guidance, with the input of IFAC members, to assist developing nations in establishing an accountancy body and where an accountancy body already exists, further to develop and enhance it. The guidance may be downloaded from the IFAC website and CD-ROMs have been sent to every IFAC member body. Please take a look at the guidance and let us know if you have any input or any need for additional information.
The guidance is one part of a comprehensive program designed to help IFAC achieve the goal of creating a respected accountancy organization in every country. In so doing, we can help to build strong financial architectures around the globe – architectures that are supported by strong ethical standards, high professional standards and an unwavering commitment to act transparently and to be accountable.
Pakistan, like many nations, faces some significant challenges, most recently the tragicKashmirearthquake. However, the important steps that you are taking and those that youwillcontinue to take to encourage transparency and accountability in the public and private sectors, to increase privatization and to ensure fiscal responsibility will, I believe, greatly contribute to the economic prosperity of your country. As the World Bank and the International Monetary Fund stated in their 2004 joint assessment: “Pakistan has undertaken major reforms in recent years in the financial sector that have resulted in a sounder and more efficient financial system.” These reforms include “a return to market-based monetary and exchange rate policies, a diminishing role of the state in the financial sector through privatization of nationalized commercial banks, improvement in corporate governance, disclosure, and transparency and the adoption of a modern regulatory approach in the oversight of the financial sector.” I encourage you all to continue to support these reform efforts.
Certainly, your future is bright. According to the economic outlook produced by The Economist magazine and updated just last month, the economy ofPakistan, despite the earthquake, is expected to perform strongly, with real GDP growth of 6.6 percent in the fiscal year July 2005 to June 2006 and six percent in fiscal year 2006/07.
Professional accountants, such as those of us here today, play an important part in protecting the public good, encouraging transparency and achieving economic growth and stability. Through adherence to high ethical standards we can, together, bring about social stability and good governance in business. Through convergence to international standards we can, together, deliver on our promise of quality. And through acting in the public interest, we can, together, build public trust and sound economies that support a better quality of life for all.
I am proud to work with the profession inPakistanin IFAC’s drive to generate economic growth and stability in every country of the world.
Thank you very much for your attention.