This version of The Preface to the Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities is a Preliminary Board View. The Preface highlights characteristics of the public sector that underpin the development of International Public Sector Accounting Standards (IPSASs) and Recommended Practice Guidelines (RPGs). The Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities (Conceptual Framework) acknowledges and responds to these characteristics.

This guidance has been prepared by Staff of the International Auditing and Assurance Standards Board (IAASB) to highlight considerations that may be of assistance to audit firms as they plan their field testing of proposed ISA 701. This document is not intended to be prescriptive in terms of an approach to field testing.

This summary provides an overview of the IAASB’s July 2013 Exposure Draft, Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing. An illustrative auditor’s report for an audit of a listed entity’s consolidated financial statements, showing the result of the IAASB’s proposals, is included as an Appendix.

On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued the revised version of its Internal Control-Integrated Framework (the Framework). The revised Framework will help improve implementation of internal control but further adjustments are warranted to align internal control across the globe and to help organizations better manage their risks and improve their overall performance.

The Professional Accountants in Business (PAIB) Committee of the International Federation of Accountants (IFAC) has been closely involved in the revision, with two representatives on the COSO advisory council for the project. Additionally, the PAIB Committee submitted two formal comment letters to both COSO internal control exposure drafts.

Key Features of the Revised Framework

The revised Framework uses the same definition of internal control as the previous version and builds on the same five components of internal control: the control environment, risk assessment, control activities, information and communication, and monitoring activities. The Framework also continues to emphasize the importance of management judgment in designing, implementing, and conducting internal control, and in assessing its effectiveness.

So what has changed? The revised Framework now:

• articulates the fundamental concepts underlying the five components in the form of 17 guiding principles and more detailed points of focus;
• takes into account environmental changes, such as increased globalization, complexity, and regulation, the growing importance of technology, and increased expectations for better governance oversight and fraud prevention;
• expands the operations objective from “effective and efficient use of the entity’s resources” to “effectiveness and efficiency of the entity’s operations, including operational and financial performance goals, and safeguarding assets against loss;”
• broadens the reporting objective from “published financial statements” to “internal and external financial and non-financial reporting;” and
• provides additional approaches and examples relevant to operations, compliance, and non-financial reporting objectives.

COSO also issued two additional publications.

• Illustrative Tools for Assessing Effectiveness of a System of Internal Control assists users when assessing effectiveness of internal control based on the requirements of the Framework.
• Internal Control over External Financial Reporting: A Compendium of Approaches and Examples assists users when applying the Framework to external financial reporting objectives.

The revised Framework will supersede the original Framework at the end of 2014, giving organizations time to transition. COSO anticipates a relatively easy transition process for those organizations that have properly applied the original Framework (1992). In fact, the new principles and points of focus should make it easier for organizations to see what is covered and where gaps may exist.

IFAC PAIB Committee’s View

The IFAC PAIB Committee commends COSO for being one of the first and foremost thought leaders in internal control, starting with the publication of the original Framework and followed by a series of related high-quality publications. The committee agrees that while many of the underlying concepts of the original Framework have proven themselves over time, global developments, including the financial crises, in recent years required a revision.

However, while the revised Framework represents a step forward in articulating principles of effective internal control and incorporating a number of considerations relevant to today’s complex business environment, there remains work to be done to advance and harmonize risk management and internal control guidelines across the globe and to better support organizations dealing with the many economic, social, and environmental challenges they face.

The PAIB Committee believes that it is in COSO’s long-term interest to continue evolving its Framework in order to make it more relevant to the broader global community and the challenges faced, and stands ready to assist COSO make progress in this area. The PAIB Committee has formulated a number of recommendations for further development.

• For the Framework to remain relevant in an environment of greater global integration, COSO should further integrate its Internal Control Framework with its Enterprise Risk Management (ERM) Framework, released in 2004, as well as better align it with the concepts and terminology in other frameworks, standards, and guidelines on governance, risk management, and internal control from across the globe. This will enable organizations to make internal control a natural and integrated part of their overall risk management and governance arrangements.
• The Framework should embrace a wider perspective than its current limited application to internal control over reporting, operations, and compliance, for example, by broadening the definition of internal control so as to permit the inclusion of other areas, such as business strategy and finance, in which internal control also plays a crucial role. Before the string of financial crises, many organizations were overly focused on financial reporting controls. These crises highlighted the fact that many, if not most, of the risks that affected organizations derived from external circumstances. This includes the increasing social and environmental risks that organizations encounter, such as mitigating the threats and taking advantage of the opportunities related to global warming.
• As the achievement of objectives is at the heart of the COSO definition of internal control, objective setting should be included in the components of internal control. This would assure better alignment with the related COSO ERM Framework, which includes objective setting as a separate component, and emphasize that strengthening an entity’s systems of internal control can only be done from the perspective of the organization’s objectives.
• The Framework should further align the various concepts and terminology in relation to risk management and internal control with the other standards, guidance, and frameworks that have been issued since the conception of the original Framework. This includes the definitions of risk and internal control, balancing the positive and negative sides of risk, and rethinking of difficult to understand concepts such as risk appetite and inherent controls.

Constructive Dialogue

IFAC is well-positioned to facilitate a constructive dialogue with the issuers of standards, guidance, and frameworks in the area of governance, risk management, and internal control across the world on how the terminology, various concepts, and guidelines could be better aligned in the future.[1]

Further international alignment is an ambitious and challenging goal, but the potential benefits are significant. It is up to all those responsible for developing, implementing, using, and enforcing requirements and guidelines on governance, risk management, and internal control to work together to produce globally-aligned terminology, concepts, and guidelines that are relevant to all. IFAC and the PAIB Committee look forward to contributing to this collaborative effort.

Additional IFAC Guidance

Despite the existence of sound internal control guidelines, such as the revised COSO Framework, it is often theapplication of such guidelines that fails or could be further improved in many organizations. With the International Good Practice Guidance, Evaluating and Improving Internal Control in Organizations (IFAC, 2012), the PAIB Committee provides a practical guide focused on how professional accountants in business can support their organization in evaluating and improving internal control as an integral part of its governance system and risk management. The guidance is complementary to existing internal control guidelines and is based on those internal control matters that often cause difficulties in practice. Both the full guidance as well as an executive summary are available free of charge on the IFAC website. 

The latest IFAC SMP Quick Poll showed that the vast majority (73%) of the nearly 4,000 small- and medium-sized accounting practices (SMPs) surveyed are either currently providing or have plans to provide sustainability services to their clients, suggesting that there’s a sizeable market for these services among the small businesses that SMPs typically serve.

Of those who offer sustainability services, many offer more than one service; the most common service provided, indicated by over 75% of respondents, is advisory services. Reporting and assurance are the next most commonly provided services with about 50% and 40%, respectively.

“The widespread provision of sustainability services suggests that small businesses are increasingly recognizing the tangible benefits of operating more sustainably. This, in turn, seems to be fueling a desire to seek advice from their professional accountants,” commented SMP Committee Chair Giancarlo Attolini. “SMPs can help their SME clients in many ways, for example, advising on the costs and benefits of behavioral changes aimed at reducing waste, appraising potential investments in alternate sources of energy, and assisting with the implementation of an environmental management system (EMS). This is a large and growing area of demand that SMPs need to be prepared to meet.”

Results varied somewhat by size of practice and region. The larger the size of the SMP, the more likely it was to be offering sustainability services. More than half of the practices with 21 or more professional accountants currently offer these types of services, compared to 37% of sole practitioners. By region, Asia and Africa/Middle East were most likely to offer sustainability services, while Central/South America and Australasia/Oceania were the least likely.

The report also includes results on the biggest challenges facing SMPs and their clients, among other topics. As in previous polls, burden of regulation and economic pressures ranked highest. However, tensions around rising costs, competitive stresses, and keeping up with technology gained in importance. This changing mix suggests that SMPs are enjoying a more favorable economic climate and planning for growth.

See the full report in the SMP Committee area of the IFAC site: www.ifac.org/SMP. Due to different response rates in different geographic areas, results may not be statistically representative of global or regional populations of SMPs.

The mid-year 2013 poll received 3,678 responses and was conducted in 16 languages from May 29 to July 8. The poll, conducted twice annually, is intended to take a snapshot of key challenges and trends influencing SMPs globally. IFAC wishes to thank the many member and regional organizations that helped with translation and distribution of the poll.

About the SMP Committee
The SMP Committee of the International Federation of Accountants (IFAC) represents the interests of professional accountants operating in small- and medium-sized practices (SMPs). The committee develops guidance and tools and works to ensure the needs of the SMPs are considered by standard setters, regulators, and policy makers. The committee also speaks out on behalf of SMPs to raise awareness of their role and value, especially in supporting SMEs, and the importance of the small business sector overall.

About IFAC
IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 173 members and associates in 129 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

This report summarizes the results of the IFAC SMP Quick Poll, conducted May 29-July 8, 2013. This edition of the poll received 3,686 responses and was conducted in 16 languages.

The International Public Sector Accounting Standards Board (IPSASB) has issued Recommended Practice Guideline 2 (RPG 2), Financial Statement Discussion and Analysis.

Financial statement discussion and analysis assists users to understand the financial position, financial performance, and cash flows presented in an entity’s general purpose financial statements. It also enables users to gain further insights into the operations of the entity, from the perspective of the entity itself. RPG 2 provides guidance for presenting such information.

While the form and content of the information depends on the nature of the entity and its regulatory environment, financial statement discussion and analysis will generally include:

• An overview of the entity’s operations and environment;
• Information about the entity’s objectives and strategies;
• An analysis of the entity’s financial statements; and
• Risks and uncertainties related to the financial statements.

“Financial statement discussion and analysis presented in accordance with RPG 2 represents good practice,” explained IPSASB Chair Andreas Bergmann. “It sets out the status, scope, and reporting boundary for the information. RPG 2 is intended to encourage more public sector entities to provide users with financial statement discussion and analysis.”

Dr. Bergmann added, “It will promote comparability across entities that present financial statement discussion and analysis; at the same time, its flexible application will benefit entities in jurisdictions that have local requirements or regulations. The issuance of RPG 2 is an important step for the IPSASB, because it further extends our pronouncements on presentation of information beyond that presented in general purpose financial statements.

How to Obtain the RPG
To access the RPG, visit the IPSASB website. The IPSASB encourages IFAC members, associates, and regional accountancy bodies to promote the availability of these documents to their members and employees.

About the IPSASB
The IPSASB develops accounting standards and guidance for use by public sector entities. The structures and processes that support the operations of the IPSASB are facilitated by IFAC. The IPSASB receives support (both direct financial and in-kind) from the World Bank, the Asian Development Bank, the Chartered Professional Accountants of Canada, the South African Accounting Standards Board, and the governments of Canada, New Zealand, and Switzerland.

About IFAC
IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. It is comprised of 173 members and associates in 129 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

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The International Auditing and Assurance Standards Board (IAASB) today released proposals to enhance the future auditor’s report. The IAASB’s Exposure Draft, Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing (ISAs), responds to calls from investors, analysts, and other users of audited financial statements in the wake of the global financial crisis for the auditor to provide more relevant information in the auditor’s report based on the audit that was performed.

“We expect the proposed new and revised standards will result in substantive changes to how auditors contemplate and approach communication to users of their reports—the beneficiaries of a financial statement audit,” explained Prof. Arnold Schilder, IAASB Chairman. “These changes are critical to the perceived value of the financial statement audit and thus to the continued relevance of the auditing profession.”

The IAASB’s deliberations on the proposed new and revised ISAs were informed by international research, two public consultations, stakeholder outreach including three public roundtables held in 2012, and the 165 responses to the June 2012 Invitation to Comment: Improving the Auditor’s Report. “The signals from these inputs were clear: Change is essential. There is support for the IAASB’s direction, and for a global solution. Challenges exist, but they can be overcome,” added Prof. Schilder.

The Exposure Draft includes a new proposed ISA titled Communicating Key Audit Matters in the Independent Auditor’s Report. This proposed ISA directs auditors of financial statements of listed entities to communicate in their report those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements. “The intended outcome of this proposal is more informative audit reports, with information about the audit of the financial statements that is unique and more specific to the entity that has been audited,” noted James Gunn, IAASB Technical Director.

Among other enhancements, the IAASB is also proposing requirements for auditors to include specific statements about going concern in their reports, to make an explicit statement about the auditor’s independence from the audited entity and, for listed entities, to disclose the name of the engagement partner in the auditor’s report. The Exposure Draft includes example reports that illustrate the application of the proposed new and revised ISAs in various circumstances.

How to Comment
The IAASB invites all stakeholders to respond to this Exposure Draft, which includes specific questions for respondents on key aspects of the proposals and highlights areas of focus for various stakeholders in responding to the Exposure Draft. To access the Exposure Draft and submit a comment, visit the IAASB’s website at www.iaasb.org. Comments on the Exposure Draft are requested by November 22, 2013.

About the IAASB
The IAASB develops auditing and assurance standards and guidance for use by all professional accountants under a shared standard-setting process involving the Public Interest Oversight Board, which oversees the activities of the IAASB, and the IAASB Consultative Advisory Group, which provides public interest input into the development of the standards and guidance. The structures and processes that support the operations of the IAASB are facilitated by the International Federation of Accountants (IFAC).

About IFAC
IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. It is comprised of 173 members and associates in 129 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

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The International Public Sector Accounting Standards Board (IPSASB) has issued Recommended Practice Guideline 1 (RPG 1), Reporting on the Long-Term Sustainability of an Entity’s Finances. RPG 1 provide guidance on reporting on the long-term sustainability of a public sector entity’s finances over a specified time horizon in accordance with stated assumptions on policy and demographic and economic variables.   RPGs are a new type of publication that provides guidance on the broader aspects of financial reporting that are outside the financial statements.

The sovereign debt crisis brought into sharp focus the importance of the fiscal condition of governments and other public sector entities to the global economy. Concerns persist about the ability of governments to meet debt servicing obligations. The extent to which governments can maintain their current levels and quality of service delivery and meet social benefit program obligations—without raising taxes and contributions or increasing debt to unsustainable levels—is a major economic and social issue.

Although such concerns have generally existed in nations with well-established social programs, there is a growing realization that they also extend to fast-developing nations that have recently established such programs.

Policies and decisions current as of the reporting date have a long-term impact on future inflows and outflows of resources. Information on the consequences of such policies and decisions supplements information on liabilities, expenses, assets, and revenue in the financial statements. Flows that are captured by long-term fiscal sustainability reporting include:

• Future tax receipts and intergovernmental transfers that do not meet the definition of an asset
• Obligations relating to social benefits programs that do not meet the definition of a liability

“RPG 1 provides straightforward guidance on presenting information about the capacity of an entity to provide social benefits at existing levels, to maintain existing taxation revenues and to meet its financial commitments,” said IPSASB Chair Andreas Bergmann. “By developing guidance on reporting information about the long-term sustainability of an entity’s finances, RPG 1 reflects the IPSASB Conceptual Framework’s position that, in order to meet users’ needs, the scope of financial reporting is more comprehensive than the financial statements.”

The development  and finalization of the RPG benefited greatly from the oversight of a task force with a wide membership, including representatives of (a) standard setters with involvement in developing guidance for reporting on fiscal condition, (b) governments that have many years’ experience reporting on long-term fiscal sustainability, and (c) supranational organizations such as the International Monetary Fund, the Organisation for Economic Co-operation and Development, and Eurostat, the statistical agency of the European Union.

How to Obtain the RPG
To access the RPG, visit the IPSASB website. The IPSASB encourages IFAC members, associates, and regional accountancy bodies to promote the availability of these documents to their members and employees.

About the IPSASB
The IPSASB develops accounting standards and guidance for use by public sector entities. The structures and processes that support the operations of the IPSASB are facilitated by IFAC. The IPSASB receives support (both direct financial and in-kind) from the World Bank, the Asian Development Bank, the Chartered Professional Accountants of Canada, the South African Accounting Standards Board, and the governments of Canada, New Zealand, and Switzerland.

About IFAC
IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. It is comprised of 173 members and associates in 129 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

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