My principal function today is to talk about the new Public Interest Oversight Board (PIOB) and its mandate to oversee the public interest activities of IFAC.  But although this topic for some of you may be spellbinding on its own, I thought I would embellish it with some context at the beginning and the end.  I propose, therefore, to start with some observations on the globalization of policy-setting.  Following that, I'll talk about the profession's role in setting auditing standards under the supervision of the PIOB.  In that context, I'll examine the current framework, which John Kellas will present in much greater detail and give a brief explanation about how we got to the current structure. 

Finally, I'll conclude with some thoughts on the sustainability of the current structure going forward and examine some of the hurdles that must be overcome if the current structure is to survive.

Globalization of Policy-Making

Globalization has been shaping our markets and our lives for so long now that we take it for granted.  It has been a dominating force in our capital markets, where capital now flows across borders almost without restriction.  But it has been a market-led phenomenon.  Policy makers, while interested observers, largely confined their responses to analysis and study.  Globalization had little effect on domestic policies; local markets continued to be governed by local policies. 

But these local policies were often wildly different from, and sometimes contrary to policies in other connected markets.  After all, they had been formulated over the years in response to local pressures — not international concerns.  Worse still, they were often founded on different legal systems and different regulatory philosophies.

For many market participants, venturing outside their home markets had become necessary for their survival.  They struggled mightily to cope with local legacy regulatory systems that often were barely compatible.  For their part, policy makers stayed on the barricades; jealously guarding their sovereignty.  There was little appetite for deferring to policy-makers in other countries; an impasse that offered little hope of international convergence. 

This impasse might have continued to fester but for the intercession of a world-changing event — the collapse of Enron on December 2, 2001.  The shock of this mostly unpredicted collapse quickly rippled around the world; billions of dollars of investments were lost overnight; the jobs of hundreds of thousands of employees - vaporized. 

It was perhaps magnified, coming as it did only 2 ½  months after the September 11 attacks here in the U.S.  But it was certainly intensified by the aftershocks of the scandals at Global Crossing, Adelphi and WorldCom.

Propelled by voter anger (2002 was a congressional election year), the U.S. congress passed the Sarbanes Oxley Act, a singularly domestic response to what U.S. lawmakers considered to be a U.S. domestic issue.  Initially, policy-makers in many other countries didn't challenge this view as it provided easy justification for their own inaction.  As a Canadian, I remember well the refrain; "...if there is fraud or corruption in corporate America, they should fix it.  Fortunately we don't have the problem here."  Ergo, we needn't take any action.

Many of those same policy-makers soon realized to their horror that imbedded in this U.S. domestic response was a broad extra-territorial reach.  And we now know that the U.S. corporate collapses were not merely U.S. domestic problems.  Their global impact became apparent even before a number of high-profile failures occurred in Europe and elsewhere.

The Enron collapse, with the corroboration of the subsequent scandals, awoke the world to some serious systemic problems in the financial markets.  And this was the catalyst that began the migration of policy-making upward from the national to the international level.

I can best illustrate this evolution, perhaps even a revolution, by recounting how events unfolded amongst securities regulators.  I can then draw some pretty close parallels in your world – in the setting of accounting and auditing standards.

But first some background.  In 2000, I was elected the Chair of the Technical Committee of the International Organization of Securities Commissions.  The Technical Committee is IOSCO's principal policy-making body, and its de facto directing mind.  At that time, it was mostly a "talk shop" or a "meet and greet".  Its principal activity was to survey its members to determine how they were dealing with a particular problem and then publish the results. 

Members were then left to their own devices to determine what, if anything, they could learn from other members' experiences. 

The agenda was controlled by a couple of the major countries and there were some subjects that were untouchable.

The September 11 attacks, and the Enron and subsequent scandals, precipitated a major change in IOSCO's role.  As Chair of the Technical Committee during these world-changing events, I found the organization faced with challenges beyond my wildest imagination.

Following September 11, the most pressing issue for securities regulators was to prevent securities markets from being used to finance terrorist activities. 

We immediately convened a meeting in Rome and devised a plan to combine the enforcement capabilities of the world's securities regulators; a plan that would create a formidable force to combat financial crime and securities fraud. 

We began by drafting a multilateral memorandum of understanding that countries would need to apply to join.  To be accepted, they would need to demonstrate that their laws permitted them to co-operate in international enforcement cases; that there were no impediments to the use of their domestic laws to investigate suspected abuses and to share the information with other regulators; to prosecute participants in cross-border schemes.  Once admitted to the MOU, a country's participation would be monitored to determine that they were walking the talk. 

There are now about 30 countries participating in the MOU with several others working to change their domestic laws so that they too can participate.

The agreement on enforcement co-operation began IOSCO's transformation.  But the real transformation took shape after the Enron and WorldCom scandals.  Enron collapsed on December 2, 2001.  We had previously scheduled a Technical Committee meeting in Hong Kong for late January.  By that time, Enron was big news in virtually every media market.  Although the SEC was reluctant at first to discuss the Enron problem with its peers, it quickly recognized the benefits of having their support. 

The Hong Kong meeting began a process that within a few months saw the creation of international standards for such issues as auditor independence, public oversight of the audit function, analyst standards and the role of audit committees.  In doing so, we had to overcome seemingly impossible barriers, because each standard had to work under all of the different legal systems around the world. 

Several other standards have followed.

IOSCO is now expected to be the international standards setter for securities regulation.  Bodies such as the World Bank, the IMF and the Financial Stability Forum now just expect that IOSCO will deal with securities regulation matters as they occur.

The same transformation is happening in your universe.  It has the same roots and is propelled by the same drivers — fix systemic problems exposed by the corporate scandals and use the opportunity to make differing local systems converge. 

The International Accounting Standards Board and FASB signed the so-called Norwalk accord and IFRS goes a long way towards achieving both of these objectives.  And, as I will describe in a few minutes, IFAC and its auditing and assurances standards setting activities have been given new life and legitimacy with the establishment of the Public Interest Oversight Board.  All of these initiatives are taking place at the international level, drawing on the expertise of domestic standards setters from countries in every corner of the world.

Implications for Policy Setters

But these activities have profound implications for domestic policy-setters.  Emerging problems are now discussed at the international level before domestic solutions are implemented.  Domestic policy-setters realize that they must be at the table for two important reasons: First, they want to be able to influence the ultimate standard — to try to ensure that elements important in their markets are reflected.  Second, they want to be plugged in to the discussion and the emerging consensus so that they will know how to implement it back home; what are the important elements?  What flexibility will international markets tolerate?

One of the huge benefits of this transformation is that we are seeing for the first time a global harmonization of regulatory standards.  But it has also brought with it a restriction on the freedom of domestic policy-makers to craft purely domestic responses to emerging issues.  Once an international standard is articulated, policy-makers will be able to depart from the standard in their local markets only for very good reasons.  Indeed these effects are already being felt in many countries.  Canada is a good example: on the securities side, we used the emerging international standards as checklists in drafting the Canadian auditor oversight body, our equivalent to the PCAOB. 

We also use the new international standards as the basis for new rules relating to audit committees, new requirements for auditor independence and new and tougher standards for analysts.  And Canadian accounting and auditing standards-setters have recently proposed the adoption of IFRS and ISAs as Canadian Generally Accepted Accounting and Auditing Standards.  The setting of unique accounting and auditing standards in Canada is largely a thing of the past.

And so the globalization phenomenon has finally overtaken domestic policy-makers; no doubt a welcome development for the thousands of market participants who operate internationally. 

Role of the Accounting Profession in Setting Global Auditing Standards

As investigators sorted through the wreckage from the Enron, WorldCom and other financial disasters, it quickly became clear that most of the checks and balances upon which market participants relied, had been ineffective to prevent the collapses or even to provide an early warning.  Although, stunned investors demanded answers about the roles of boards of directors, audit committees, analysts, rating agencies, lawyers and securities regulators, attention quickly was focused on the audit profession and the adequacy of accounting and auditing standards.  Inevitably, this latter enquiry led to questions about the suitably of the accounting profession continuing to set auditing standards. 

This question became the principal focus of a group which came to be known as the "Monitoring Group"; comprised of representatives of five international regulatory organizations; IOSCO; the Basel Committee on Banking Supervision; the International Association of Insurance Supervisors; the World Bank and the Financial Stability Forum.  The common goal of all five was to establish independent and effective supervision over the standard-setting process for accountants. 

At about the same time, IFAC began to recognize the desirability of some public oversight of its standards-setting process.  Following a fairly long process of planning and negotiation between IFAC and the members of the Monitoring Group, a consensus emerged for reforming IFAC's constitution and for the creation of a new, independent Public Interest Oversight Board (PIOB). 

The Board's mandate is to oversee all of IFAC's public interest activities.  These include the setting of auditing, ethics and educational standards and the monitoring of compliance with these standards.  The Board is also expected to oversee the process for populating these committees, including approving both the process for seeking nominations and the actual selection of nominees.  Thus, responsibility for ensuring that proper consideration is given to the interests of the public – those outside the profession with a stake in the outcome – is now at least shared by both IFAC and the PIOB.

The PIOB has been designed to be independent of the accounting profession.  Seven of its eight members are appointed by the regulators, one of whom is designated as chair.  The eighth member is appointed by IFAC and can be an accountant by profession.

On February 28 when the PIOB was born, a new period started.  For the first time all the major regulatory organizations came together at a unique confluence of views, working in tandem with IFAC, to implement meaningful reform. 

The challenge of fulfilment of the goals of reform has now shifted to the PIOB itself.  And these challenges will be formidable; by design, all but one of our members are not trained in accountancy.  Fortunately, we have available to us the substantial resources of IFAC, its member bodies and its consultative advisory groups.  And we currently have on the PIOB Board an excellent balance and a variety of Board Members' skills, experience and perspectives. 

Members come from a number of professions and all branches of regulation, often with broad and deep experience in several spheres.  The Group has also been well-balanced geographically with three members domiciled in Europe, four in North America and one in Japan. 

The working atmosphere among PIOB members is excellent and we are all optimistic about the output of its work.  Recently, the European Commission appointed two observer members to the PIOB.  We welcomed this development and believe it will add an important new dimension to the quality of PIOB deliberations and the balance of perspectives within the Board. 

Marshalling these resources, we will work to further the goals of quality, independence, transparency and convergence.  In doing this we will strive to fully recognize the needs of all of the users of the outputs of the accounting and audit functions.  Our challenge will be to assert our role of public interest overseer, but to do so without disrupting the efficient operation of the existing process.

Our learning curve has been steep and the Board has taken up the challenge with enthusiasm.  We have attended virtually all meetings of public interest activity committees to date, covering the International Audit and Assurances Standards Board, the Ethics and Education committees, their related consultative advisory groups and IFAC's nominating committee. 

Our intention is to attend as many of these public interest meetings as feasible during the coming year to deepen our understanding of the work and of the process of these groups.

Although this first year of operation has been dedicated primarily to learning, we have also been providing input to IFAC due process.  We recently approved a critical document setting out the framework under which all standard-setting projects are to be conducted.  As a result, IFAC has now adopted a common due process for all standards-setting committees and their related consultative advisory groups.

We are currently considering draft terms of reference for Consultative Advisory Groups and their Chairs, as well as the draft Terms of Reference for the standards committees themselves. 

We have also monitored very closely the IFAC nomination process during the past year and have recommended some improvements in its conduct.  It is our view that the nominating cycle which we observed this year was conducted in a highly professional and transparent fashion.  We will be recommending further improvements in the future, as our engagement continues and deepens.

We also worked during our first year to establish an active liaison with national oversight authorities such as the PCAOB in the United States, the Canadian Public Accountability Board and the U.K. Financial Reporting Council. 

This past year has seen a rapid development of similar bodies in a number of jurisdictions around the world, each of whom will have key roles to play in regulating the accounting profession.

Clearly the quality of audit standards, the level of ethical codes and the professional capacity and quality of the participants in the process of reporting on financial results are crucial foundations for the market system. 

The Future

Where do we go from here?  IFAC has been reorganized; the PIOB is in place.  But will this baby fly?

There's no question that we're off to a good start.  IFAC participants have welcomed the PIOB's involvement and I believe that encouraging progress has been made in just a few short months. 

But there remain many sceptics.  International accounting standards are now set by a group of full-time professionals under the supervision of a group of trustees who themselves are now accountable to a council of regulators.  Audit standards-setting in many local jurisdictions has been wrestled away from the accounting profession and vested in quasi government entities.  Internationally, our new structure is somewhat unique.  I am not aware of any international SRO with authority for setting global standards.  In each of the banking, securities and insurance industries, international standards are set by groups of national regulators, supported by strong secretariats of fulltime professionals.

Realistically, I think it is prudent to view the current structure as somewhat of an experiment, the results of which will only become apparent over time.  Indeed, the sceptics seem to have adopted a wait-and-see posture.

What then are the likely ingredients for success?  What are the hurdles which must be overcome?

If success is to be solely dependent upon the quality of the standards resulting from the process, then one would expect to see comprehensive, comprehensible standards that address all of the important aspects of the auditing process plus the independence of the auditor, other ethical requirements and meaningful educational and experience requirements both at the entry level and on a continuing basis. 

There must be no evidence that standard setters are avoiding controversial issues.  And, perhaps most importantly for such an analysis, it must be demonstrable that proper consideration has been given to the public interest throughout the process. 

There are clear advantages to having the profession itself setting the rules by which professionals will conduct themselves.  For example, compliance is far more likely if the conduct has been specified by the profession rather than by government.  In this respect, a clearer case can perhaps be made for professional involvement in auditing standards than for accounting standards. 

Speaking personally, I have been impressed with the sheer numbers of volunteers both from within the profession and external to the profession and the extremely high level of expertise being brought to bear by these people into the standards setting process.  I've also been impressed with the rigour of the discussion and willingness to address tough issues.  In my view, however, we need further effort to ensure that the interests of stakeholders outside the profession are understood and properly considered. 

To consider only the output of the standards setting process, success will be measured by the quality and clarity of the standards, the rigour of the process by which they have been developed and the extent to which the public interest has been recognized.

Unfortunately, however, life is not that simple.  These reforms were born out of the corporate scandals of the last few years and the failure of our system to disclose the true financial condition of the companies on a trajectory to failure.  Critics of the profession will thus be looking to see whether the reforms have materially lessened the risk that such faulty financial information will ever again be accompanied by a favourable audit opinion.  While audit standards meeting the highest of the quality tests to which I referred a minute ago are a necessary ingredient to ensuring this success, they are by no means sufficient.

If standards meeting or exceeding ISAs are not adopted by a high percentage of local bodies around the world or if adopted they aren't rigorously enforced, then there is strong likelihood that these reforms will be judged to be unsuccessful.  This underscores the importance of the IFAC member compliance program.  But it also demonstrates the need for IFAC members to rigorously enforce adherence to the standards by all professionals practicing accountancy in their jurisdictions.  And where enforcement is not part of a member's remit, the member must work with responsible authorities to ensure that enforcement is adequate.

And so implementation of the IFAC reforms is critical to the preservation of the profession's continued role in standards setting.  But real success will also depend on compliance and enforcement.

Thank you.

I am delighted to be here inSri Lanka, where I have had the opportunity to experience first hand your warmth, generosity, and openness. The determination and strength your people have shown over the past year are much admired throughout the world and the results of your hard work are giving new meaning to the word “recovery.” You truly are an inspiration to all.

Since becoming President of the International Federation of Accountants (IFAC) in November 2004, I have had the opportunity to meet with professional accountants from many cultures and in all walks of life. I have also met with international standard setters, regulators, representatives of international development and funding agencies, business and government leaders, and the leadership of other professional groups that focus on ethics and corporate governance. What I have learned is that we share a common objective: creating an investment climate of trust around the world. Creating an investment climate of trust is vital to economic development and to stability in countries of every size, in every part of the world and at every stage of development.

This is not a new challenge toSri Lanka, which has been and continues to be poised to benefit from global commerce. A look at your history, particularly that ofGalle, is a reminder ofSri Lanka’s involvement, from its earliest days, in globalization. The Chinese explorer Zheng arrived in this post city in the early 1400s. Then, in 1505, a Portuguese fleet arrived, setting the stage for a bigger commercial boom. And in 1663, the Dutch built Galle Fort, the city’s main tourist attraction. Today, despite the setbacks of the tsunami, Sri Lanka is, I believe poised once again to increase its commercial and trade activities, to boost its economy, and to improve the quality of life of its citizens. Doing so requires a global perspective, a commitment by those in government and business to increased accountability and a willingness to demonstrate greater transparency in all transactions – both public and private. My comments today are limited to how CFOs and the accountancy profession in general can contribute to building an investment climate of trust. It is important, however, to acknowledge that building sustainable economic growth – growth that can effectively close the gap between the “haves” and “have nots”, growth that is based on increased employment and growth that leads to higher standards of living for all your citizens -- requires actions by many other individuals, professions and entities here in Sri Lanka.

Let me begin by commenting on why IFAC is involved and indeed, cares about your situation, here inSri Lanka. IFAC’s mission is global in thrust and public-interest oriented. I’d like to state it for you now:

“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.”

IFAC works with its member bodies, such as the Institute here inSri Lanka, to achieve this mission. To serve the public interest effectively and to contribute to the development of strong economies, also involves much more than the work of IFAC. It involves actions by governments, regulators, standard setters, and most especially, by business leaders such as yourselves. And it begins by creating an investment climate of trust, which is my topic of discussion today.

Chief financial officers and other business leaders play a key role in building this climate of trust. As the gatekeepers of financial information and the financial and strategic decision makers, you are in a key role to develop the business strategies that promote not only growth and profit, but also confidence.

How can we create an investment climate of trust that will lead to economic growth and stability not just here inSri Lankabut worldwide? In a report released last year by the World Economic Forum’s Global Corporate Citizenship Initiative (GCCI), based on surveys of CEOs worldwide, the majority of CEOs agreed that the most important contribution business leaders can make to development is in the way they run their own businesses. They must set the example for quality and lay the groundwork for achieving profitability that can then benefit others.

So how can you set the example for others? The answers were outlined in the IFAC report, Rebuilding Public Confidence in Financial Reporting: an International Perspective, also known as the “Credibility Report.” 

After extensive discussion and debate with leaders of businesses, accountancy firms, governments and regulatory bodies, in August 2003, the IFAC Task Force on Rebuilding Public Confidence in Financial Reporting, chaired by John Crow, a former Governor of the Bank of Canada and a former Chairman of the Central Bank Governors of the Group of Ten countries, of which I was a member, issued its final report. It included recommendations on principles of best practices in the areas of financial reporting, corporate governance, corporate disclosure and auditor performance. I will highlight a few of these best practice areas now, because I believe that they are central to building an investment climate of trust and are relevant to all of us today. Before I do so, however, I would like to emphasize the major finding – and that is, that building investor confidence requires action by all those in the financial reporting supply chain, from boards of directors to management to auditors, even to bankers, lawyers and investment analysts. Thus, while all of us here are accountable for building an investment climate of trust, we are not alone.

Let me turn now to four recommendations in the report that are directly relevant today: those relating to ethics; financial management and control; auditor independence and corporate governance; and audit standards and regulation. 

The first recommendation relates to values. Effective corporate ethics codes need to be in place and actively monitored. The task force recommended that companies set out their ethical policies in a code that is widely distributed both within the company and to shareholders. We also recommended that training be given and that support be provided for individuals better to enable them to face difficult ethical questions. More and more companies, out of a real desire to do the right thing, as well as a result of regulatory pressures, are developing ethical codes. To be effective, this must be taken one step further: board-monitoring procedures should be put in place so that adherence to the ethical values of a company can be measured.

IFAC’s Professional Accountants in Business Committee is also in the process of developing new guidance on corporate codes of conduct. Scheduled to be released in an exposure draft format this month, the new proposed 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

In addition, IFAC’s Code of Ethics, which applies to all accountants, including those working in business, is being revised to provide more specific guidance for professional accountants in business, particularly in instances where they encounter fraud.

A second key recommendation in the Credibility Report is that corporate management should place greater emphasis on the effectiveness of financial management and controls. Certainly, regulatory changes in the light of Enron and other business failures have also focused on this need. To build investor confidence, there should be formal reporting to shareholders setting out the responsibility for financial reporting and for internal controls, as well as regular assessment by the audit committee of the appropriateness of the resources being devoted to the adequacy and effectiveness of internal control.

Knowledge of reporting and controls, I believe, should be considered a core competence of the Chief Financial Officer (CFO). As many of you can attest, your roles and responsibilities have greatly expanded to include everything from strategic planning, to information technology, to financing, and investor relations. Despite these changes in the CFO’s role – all of which I do believe are crucial -- it is vital that financial controls and reporting issues remain a priority.

Another key recommendation in the Credibility Report is that threats to auditor independence should receive greater attention in corporate governance processes and by auditors themselves. Sound corporate governance practices have become critical to worldwide efforts to stabilize and strengthen global capital markets and protect investors. As the Credibility Report pointed out, all public interest entities should have an audit committee, or similar governance body or bodies, formed from directors independent of management with clearly defined responsibilities, including monitoring and reviewing the integrity of financial reporting, financial controls, the internal audit function and relations with the independent auditors. Audit committees play a critical role in the systems of checks and balances designed to protect investor rights. 

The Credibility Report also recommended that the IFAC Code of Ethics for Professional Accountants should be the basis for national codes of independence. The ICASL models its code on the IFAC code and includes additional requirements to address specific national issues and laws.

The IFAC Code emphasizes that auditors need to be constantly vigilant to identify threats to independence and that any such threats should be appropriately addressed through safeguards. For example, it is important for auditors to communicate regularly with the audit committee on matters with respect to independence, in particular the provision of non-audit services. With respect to rotation of auditors, there is no evidence that supports the need for firm rotation as a means of improving audit quality; indeed, the evidence is to the contrary. IFAC’s Code addresses the familiarity threats, while retaining the emphasis on audit quality, by requiring the rotation of the audit partner on listed entities.

Let me now move on to another of the key recommendations in the Credibility Report that relates to building investor confidence: That is the recommendation that audit standards, and all IFAC standards, as well as regulation, be strengthened. IFAC has invested and is continuing to invest a significant amount of effort in these areas. We well recognize that in order for practitioners to deliver quality, they need high quality, internationally accepted standards. Thus, at IFAC, increased effort has been placed on enhancing our standard-setting processes, on improving the transparency of those processes and on devoting more resources to them. Over the past year, the International Auditing and Assurance Standards Board, Ethics Standards Board for Accountants, International Accounting Education Board and International Public Sector Accounting Standards Board have sought to increase public interest input into their standard-setting processes. 

Each of these boards has public members as well as a consultative advisory group, comprised of relevant stakeholders, who can provide meaningful input on the work programs of each group from a public interest perspective. Time does not permit me to enumerate all the projects and standards that are under development by these groups – but I can assure you that they each are addressing areas where the public interest is most significant. For example, theIAASB is addressing the clarity of its standards and the Education Committee has released an exposure draft on the training of audit professionals.

I want to emphasize that outreach to regulators, standard setters, and others is also an important part of IFAC’s standard-setting efforts and particularly of theIAASB’s. TheIAASB regularly holds meetings with international standard setters, briefing them onIAASB priorities and obtaining their input. Through IFAC’s Regulatory Liaison Group, speaking engagements, and one-on-one meetings, we have also kept regulators apprised of IFAC standard-setting initiatives and listened to and responded to their views on our activities.

As an international standard setter with global convergence as an objective, IFAC has a responsibility to consider and accommodate the needs of developing economies, small and medium enterprises and private sector not-for-profit organizations. It is a responsibility that we take very seriously indeed. Two key committees – the Small and Medium Practices (SMP) Committee and the Developing Nations Permanent Task Force – are ensuring that international standard setters are made aware of issues both from a small and medium enterprise perspective and from an emerging economy perspective. Our Developing Nations Committee is also increasingly involved in outreach to developing nations and recently produced guidance to help these countries establish and maintain an effective accountancy profession, which we view as a necessary step in building a sound financial architecture in any country.

The formation in February of last year of the new international Public Interest Oversight Board, which is comprised of very senior and independent people and chaired by Professor Stavros Thomadakis, further enhances the credibility of IFAC standards and will, we believe, contribute to building an investment climate of trust. The new Board, created as part of a series of IFAC reforms, oversees the work of IFAC’s Public Interest Activity Committees – theIAASB, our Ethics Board, and our Education Board – as well as of our Member Body Compliance Program. The PIOB, as representatives of the public, will provide the independent verification that IFAC is fulfilling its public interest mandate. The PIOB’s responsibilities include the following:

• It will evaluate the due process of IFAC standard-setting activities and report publicly.
• It will approve the process for nominating members to the Public Interest Activity Committees, and approve the appointment of the chairs and other members of these committees.
• It has the right to recommend that a specific matter be added to the work program or agenda of a Public Interest Activity Committee.
• It has the right to be an observer, with the privilege of the floor, at IFAC Board and other meetings where matters pertaining to the Public Interest Activity Committees are being discussed.

IFAC’s Boards are fully supportive of the PIOB and its members. The PIOB recently approved a due process for all the Boards as well as the nominations of their new members. The PIOB’s active involvement will, we hope, further demonstrate our commitment to quality and accountability and lead to increased confidence in the profession on a global scale. There has never been a global body overseeing the work of the accountancy profession. The creation of the PIOB is a significant “first” and a critical one in ensuring that confidence in the profession and trust in capital markets does not erode.

I want to emphasize that these regulatory initiatives are not meant to duplicate those of national bodies, but rather to reinforce and complement them. We have seen legislation, such as the Sarbanes Oxley legislation in theUnited States, developed as part of the response to business failures. IFAC’s Regulatory Liaison Group continually monitors the development of such legislation and we liaise with regulators, such as the Public Company Accounting Oversight Board (PCAOB) on matters of standard setting and regulation, recognizing that we are all dedicated to improving the quality of financial information and to strengthening corporate governance. We all need to keep in mind, that while the SOX legislation was developed with the public interest in mind, there are aspects of the legislation that were never anticipated – such as the high costs of implementation, which far exceeded the estimate made when the legislation was under consideration. This issue is being addressed by the PCAOB, but there is no short-term solution for businesses affected by the legislation.

As we look to the future, we are likely to see more regulatory changes, changes that I hope will lead to further building an investment climate of trust without placing an unnecessary and disproportionate burden on businesses. While many of us here have little control over what those changes may be, I am confident that if we continue to act with integrity and adhere to high ethical standards, our burdens will be less, the credibility of financial information released by companies worldwide will be greater, markets will be more efficient, the cost of capital will be lower and economies will be more prosperous.

Clearly, the role you play as CFO will become increasingly more critical and complex in the changing national environment and expanding global one. To help CFOs to meet these challenges, our Professional Accountants in Business Committee is developing new good practice guidance and information papers on a number of topics, such as governance, business planning and internal control. For example, the Committee is developing a conceptual framework in respect of governance that will consider both the conformance and performance aspects of governance as it affects the corporate, public and SME sectors. These documents will supplement other PAIB publications, such as the recently released study “The Roles and Domain of the Professional Accountant in Business” which seek to shed light on the changing role of the PAIB.

Clearly, accountants in business and CFOs are in the front line in ensuring the fiscal and ethical soundness and accountability of commercial enterprise. I applaud you all for all that you do in carrying out this responsibility and assure you that IFAC will continue to offer its ongoing support. Please continue to advocate and act with transparency, integrity and expertise. Together, we can build a better world, contributing to greater economic growth and stability. Together we can build an investment climate of trust. And together we can build a better quality of life for the people ofSri Lankaand for the people in countries like yours around the globe.

Thank you very much indeed for your attention. 

Ladies and gentlemen, I am honored to be here with you today. This is my first visit toSri Lankaas President of the International Federation of Accountants and I am heartened by the warm welcome which my wife, Ann, and I have received.

I would like to thank your outgoing President, Mr. Indrajith Fernando and your Chief Executive, Mr. Lakshman Perera, for inviting me to speak to you this evening. They have been kind enough to show us your beautiful country. I am encouraged by the signs of economic recovery and have the greatest respect for the Sri Lankan people who have shown such fortitude and courage in a time of great crisis over the past year.

Mr. Fernando has been President of your Institute during a very challenging time, and I commend him for his strong leadership. Although he is stepping down as your President, I look forward to continuing to work with Mr. Fernando as he was recently appointed to serve on IFAC’s Developing Nations Committee, where he will be a vital part of IFAC’s work in contributing to economic growth and stability in emerging economies around the world.

I also would like to congratulate Mr. Yohan Perera on his appointment as your Institute’s new President. Mr. Perera assumes the presidency of your Institute at a time of great promise and renewed focus on the important role of professional accountants both inSri Lankaand internationally. I am confident that, under his leadership, your Institute will continue to promote transparency and good governance. I look forward to working with Mr. Perera in the months ahead and wish him the very best in his term of office.

We very much recognize that the recovery efforts from the tsunami are still well underway and that our profession has a key role to play in this. It is also important to acknowledge that sound progress has been made. The World Bank reported late last year that some 55,000 homes had been rebuilt or were in the process of being rebuilt. Oxfam International said in December that, one year following the tsunami, 60 percent of those who had lost jobs were back earning a living and this number is expected to rise to 80 percent by the end of 2006. AlthoughSri Lanka’s gross domestic product (GDP) fell immediately after the tsunami, the Asian Development Bank has reported that the GDP is also bouncing back: it grew by 5.2 percent in 2005 and will increase by 5.8 percent in 2006 and by 5.9 percent in 2007, effectively reversing the tsunami’s effects on Sri Lanka’s GDP.

Over the past year, the Institute of Chartered Accountants of Sri Lanka has exemplified what we, as professional accountants and as business leaders and decisions makers, can do to support the rebuilding efforts in a transparent and accountable way, 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 need.

In addition to setting a fine example here in Sri Lanka, your Institute has a long and proud history of participation in and support of the international profession. As a founding member of the International Federation of Accountants, your involvement is essential to IFAC’s ongoing ability to protect the public interest and to fulfill its mission, which I will state for you now:

“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.”

I have been asked to speak to you today about the future of the accountancy profession. While our past success as a profession is a good foundation for the future, predicting the future simply by looking at the past assumes that conditions remain constant. That is like driving a car by looking only in the rear view mirror! 

Conditions certainly are not remaining constant. The environment in which we work has changed dramatically in the last few years and we are likely to see more significant changes in the upcoming years. Our duty to the public interest is to look clearly ahead, while ensuring that we do not forget the lessons of history. IFAC’s mission is fundamental to the future of our profession because our profession will have a future if and only if it serves, and is seen to serve, the public interest above all else. This evening, I will consider what future the profession might have and what IFAC is doing to bring about a successful future. I invite you to think about three inter related global trends:

• First, the nature of business relationships will change in line with the changing balance of economic and, ultimately, geopolitical power between East and West, in particular with the rise of major economic powers here in Asia, such as India and China. We are already seeing the success and vibrancy of their economies. Both these nations have big advantages – an enormous home market with few language barriers, the ability to spread research and development costs, huge investment in education and modern technology and mobile and educated workforces.

• Second, this shift will have a consequential effect on business and on reporting performance. Eastern business relationships are predominantly relationship-based, not transaction-based, and this is a major shift in perception for the West. Western business men and women – from the European Union, the United States and other nations – will need to look more closely at the development of financial and non-financial reporting as the values, expectations and decision-making criteria of society change.

• Third, the imperative that the developed world should be doing more to help developing nations to benefit from globalization in a truly fair way will become a primary focus of achieving world financial stability. Clearly, this objective is right for its own sake – both morally and ethically – as we have seen with the enormous outpouring of support and aid following the 2004 tsunami. In this effort, professional accountants will contribute where our expertise is most valuable, by building an investment climate of trust and supporting both institutional strengthening and organizational performance throughout the world.

I am not alone in believing these to be significant trends. They are also recognized by business and government leaders, international standard-setters, regulators and international development and funding agencies.

Our profession has historically been responsible for the spread of financial knowledge and for a commitment to helping others around the world to develop the capacity to succeed. The growth of the profession has mirrored the growth of the capital markets and clearly – in business, practice and the public sector – we accountants are recognized as being intimately tied to the development and maintenance of sound financial infrastructures and trustworthy, sustainable institutions. There is no doubt that a strong accountancy profession is fundamental to the economic success of every nation. The issues are common to countries throughout the globe, so it is right that we address them globally, as we do, through the International Federation of Accountants, as well as by acting locally, through national institutes such as the ICASL.

Our response is important not only for the future of the accountancy profession but also as part of our responsibility to the future of the societies in which we live and work. Ours is a profession of people. What unites us is not simply shared technical expertise, but rather a shared commitment of people: accountants, to a common set of values, common objectives and a mission to serve the public interest.

Yes, we do need to address competitive pressures, for example, by maintaining our competency through Continuing Professional Development, by demonstrating our commitment to quality and transparency, by delivering relevant and needed services and by being market oriented as professionals. But even more we need to stay true to our core purpose of serving the public interest. Preparers of accounts must safeguard the integrity of financial statements. Practicing firms must meet both the challenges of running a business, thereby attracting high quality people into the profession, and safeguarding the quality, integrity and value of the audit. Accountants in the public sector must safeguard integrity in governments’ relationships with their citizens.

Our response to the trends I have talked about rests on three things:

• Making sure that we keep the public interest at the forefront of our activities – whatever sector we work in;
• Emphasizing the importance of ethics in all that we do – and promoting ethics throughout the whole financial reporting chain; and
• Supporting organizational performance by thinking globally – not just about our own businesses, but also in terms of global standards that promote transparent and useful information for decision making.

Public interest

So first, let us consider the public interest.

The work and high standing of institutes such as the Institute of Chartered Accountants of Sri Lanka are vital to the future reputation and effectiveness of professional accountants in industry, in public practice, in the public sector and in academe.

Through our Member Body Compliance Program, part and parcel of the obligations of membership, IFAC is able to demonstrate the extent of member bodies’ activities to encourage and monitor quality performance by the profession. This program shows that we are committed to transparency within the profession and to promoting high standards on a global basis in the public interest. We are grateful to ICASL for its participation in this program, knowing that you worked on it at a time of great challenge. Your participation, as evidenced by the information you have provided about your standard setting and regulatory framework and which is posted on the IFAC website, is evidence of your commitment to quality and to serving the public interest.

Today, we accept that it’s very important to involve a broad constituency in standard setting in order to ensure that the views of those who use and rely upon those standards are considered. This is necessary because standard setting is now fully a public interest activity. Certainly, IFAC’s own reforms in standard-setting have been designed to ensure that this is the case beyond all doubt, to ensure transparency and so to build confidence in the process. We must work in cooperation with the regulatory community, with whom we share common cause in achieving fair financial reporting.

At the international level, last February an independent international Public Interest Oversight Board was established to oversee IFAC’s standard-setting activities in the areas of auditing, ethics and education; and the Member Body Compliance Program. The PIOB, which was established by IFAC in cooperation with international regulators and institutions, is comprised of members nominated by international regulators and other organizations. In addition, we have obtained the close involvement of investors, regulators, preparers and others in our standard-setting processes through, for example, the Consultative Advisory Groups for each of our standard-setting boards.

We should never forget why we need high standards of financial reporting; that transparency for and accountability to investors is key, guiding the actions of all in the financial reporting supply chain in building an investment climate of trust. Investors’ actions affect all citizens, through, for example, capital allocation to business, and therefore, jobs and quality of life.

Reporting shifts

Recalling the East/West shift, relationship based business, rather than transactional based business, poses its own issues. At present, financial statements report transactions and the results of transactions. In future, companies will also have to report on their relationships, probably through narrative reporting.

The International Accounting Standards Board, of which your Institute is also a member, has begun a new project to consider a possible role in improving the quality of the management commentary. Last October, it issued a discussion paper that offers recommendations on how the IASB might promote the wider adoption of best practice in the interests of investors and others who use financial reports. IFAC is encouraging its member bodies to review this discussion paper and to provide the IASB with comments.

Accounting for sustainability is another area that will gather more impetus. It involves recognizing the intangible costs and benefits of decisions as well as the tangible, for example, how decisions taken today will affect future performance and outcomes. Conventionally, we account in financial statements for the revenues and expenses that fall to or on the organization. Accounting for sustainability involves seeking to account for costs and benefits – including non-financial effects – that fall on other members of society.

To encourage the involvement of the profession in this issue, IFAC has established a Sustainability Experts Advisory Panel which serves in an advisory capacity to both our Professional Accountants in Business Committee and the International Auditing and Assurance Standards Board. The PAIB Committee plans to raise awareness of the issue and to provide good practice guidance for professional accountants in business in this area. As part of this process, it will be coordinating and encouraging member body research and representation. In addition, IFAC is addressing sustainability on a global level through its representation on the Global Reporting Initiative.

Developing credible accounting measures on sustainability is, conceptually, extremely difficult but must be tackled. Coupling this driver with the East/West shift, will traditional accounting measures become the appendices to narrative reports, not the main information for analysis and reaction?

Ethics and the whole financial reporting chain

My second point focuses on ethics. Serving the public interest is grounded in our professional ethics. That will not change.

Our profession is built upon and committed to sustainability and stability, consistency and credibility, and independence and integrity. These are enduring values which are the hallmarks of a profession. They must be upheld and enforced by professional accountancy bodies if the public interest is to be well-served. And they should underpin our future response to the global trends I mentioned.

All IFAC staff and volunteers embrace and promote the values we stand for – integrity, transparency and expertise. These values are reflected in our strategic plan, our professional standards and our decision-making processes as well as in IFAC’s Code of Ethics for Professional Accountants, which is applicable to all professional accountants in business, practice and government and upon which Sri Lanka’s Code of Professional Conduct & Ethics is based. Last June, IFAC’s International Ethics Standards Board for Accountants issued an updated Code of Ethics which reinforces the five fundamental principles of professional ethics: integrity, objectivity, professional competence and due care, confidentiality and professional behavior. These are personal qualities that today’s and tomorrow’s accountants must have.

In future itwillbecome even more important for us to take up the challenge of promoting the importance of ethics throughout the financial reporting supply chain. Because, as was highlighted in the IFAC-initiated independent report on Rebuilding Public Confidence in Financial Reporting, prepared by a Task Force chaired by John Crow, a former Governor of the Bank of Canada and a former Chairman of the Central Bank Governors of the Group of Ten Countries, and published two years ago: failure to recognize the primacy of integrity was a major contributor to the financial scandals of recent years. A key recommendation of the report was that effective corporate ethics codes need to be in place and actively monitored. So often in the past, we have heard that finance directors have acted as the only conscience of the board when, of course, without underestimating the importance of the finance director, ethical behavior should be at the heart of the board and the company as a whole.

So while one cannot over-emphasize that the tone for an organization needs to be set at the top, there is a key role for all professional accountants in business to help in practical ways to promote ethical values throughout an organization. Moreover, as preparers of financial information, we are ideally placed to drive ethics through financial reporting from the very start.

A 2004 report by IFAC’s Professional Accountants in Business (PAIB) Committee in conjunction with the Chartered Institute of Management Accountants in the UK, entitled Enterprise Governance – Getting the Balance Right, found that a virtuous circle of integrity and ethics is fundamental, both to good governance and to business growth. There must be no conflict between probity and profitability.

Later this month, the PAIB Committee will issue an exposure draft of proposed guidance to assist professional accountants in business to develop and implement a corporate code of conduct within their organizations. Entitled Guidance for the Development of a Code of Corporate Conduct, the 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.

Professional accountants – whether within business entities or in the accounting firms that audit them – play an important role in the financial reporting supply chain. It is important, however, to keep in mind that accountancy firms are only one part of that chain, which also includes analysts, lawyers, senior management and boards of directors. It is for this reason that IFAC’s Board agreed to begin a new initiative 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 that will be considered in the new study are corporate management and governance, regulatory developments, auditor independence and rotation, and the expectations around the board’s and auditor’s responsibility for the detection of fraud.

Organizational performance – thinking globally

My third point is on supporting organizational performance by thinking globally.

We have a duty to our profession throughout the world, including both developed and developing nations to deliver:

• The enduring values I’ve talked about – our commitment to the public interest and professional ethics;
• The benefits of global standards, with accountancy as the international language of business; and
• Trust in the capital markets.

We are well-placed to act, bringing benefits now and for future generations.

Our profession is regarded as one of the main conduits to fighting financial corruption. And it is no secret that many developing economies have a problem on this front, often driven by those in developed nations who, for example, offer bribes to gain advantage, but too often driven by poverty. For example, the misappropriation of aid funds has been raised as part of last June’s G8 discussions. So we need to build strong professions that can help to ensure that the right funds are directed to the right places.

I commend the Institute for its work to ensure that tsunami relief funds are properly and effectively managed and utilized. Through initiatives such as the ICASL Trust for Services for Tsunami Projects and the development of the toolkit on Accounting & Management Systems and Procedures for Tsunami Relief Projects, you have made a significant contribution to the rebuilding effort by helping to ensure that appropriate controls, transparency and accountability are in place.

IFAC’s Developing Nations Committee, of which your outgoing President Mr. Fernando is a new member, is working at an international level with organizations such as the World Bank and the United Nations Conference on Trade and Development, to build responsible accountancy professions in developing nations and to support the development of the financial infrastructures within which our profession will operate.

As a result of an extensive consultative process, the committee is preparing a country-specific approach to supporting developing nations, helping both those countries where there is no established profession and those that have only begun to build the professional, financial and regulatory architecture necessary to support economic growth.

In addition, to assist in the establishment and development of professional accountancy bodies, last month the committee released new good practice guidance on the roles and responsibilities of a professional body, education and examination, and capacity development. This guidance addresses a range of situations, including where the accountancy profession does not exist in a country, where the profession exists and there is a desire to establish a professional accountancy body, and where an existing professional body requires further development and enhancement. The guide also includes suggested areas for priority action based on short-, medium- and long-term goals and projects.

In Conclusion

The future of our profession does rest on staying relevant, up to date and market oriented. But most fundamentally, it depends on demonstrating professionalism, acting in the public interest and not losing sight of our core purpose as custodians of transparency and integrity in financial reporting. It needs to be focused on ethics as the foundation of that purpose and acting and thinking globally, at a local level, to fulfill that purpose.

These objectives are at the heart of IFAC’s work as well as the thought that: he who influences the thought of his times influences the times that follow. Our profession needs to be respected and influential today if we are to be so in the future.

If we commit to putting the public interest first and to living our profession’s values of integrity, transparency and expertise, the future of the accountancy profession is bright:

• Professional accountants in business will be recognized fully for the role they play in creating wealth and contributing to strong governance and fair financial reporting.
• Professional accountants in the public sector will be recognized fully for the role they play in the sound, efficient and ethical operation of governments and in protecting the rights of their citizens.
• Professional accountants in public practice will be recognized fully for the role they play: as auditors, in facilitating fair, well informed capital markets; and as professional advisors, in creating wealth. 

If we fail to commit to the public interest and to sound values, we will lose public confidence and no longer have an accountancy profession that we would recognize as such.

It is a stark choice. I believe that wewillmake the right choice, together. Working together as a global profession wewilllive those values of integrity, transparency and expertise. Working together with regulators, investors and other stakeholders, wewillcommand justified public confidence. Working together, developed and developing nations, wewillachieve sound financial infrastructures throughout the world, fight poverty and help nations such asSri Lankato build even stronger economies. Working together, wewillsucceed and the worldwillbe a better place for it. Certainly, the work of your country after the tsunami is testimony that this is an achievable goal.

Thank you very much for your attention.

The involvement of related parties, such as directors, owners, and management, in major corporate scandals encouraged the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC) to review its current auditing standard on the subject. The IAASB has just issued an exposure draft (ED), proposed International Standard on Auditing (ISA) 550 (Revised), Related Parties, as a result of its review, and is inviting comments on proposed requirements for auditors regarding the audit of related party relationships and transactions.

The current standard requires the auditor to perform certain specified procedures. The proposed standard would extend current practice by requiring the auditor to obtain an understanding of the nature and business rationale of an entity's related party relationships and transactions sufficient to identify, assess and respond to the risks of material misstatement resulting from them. It also places greater emphasis on the difficult task for the auditor of attempting to identify related party relationships and transactions not identified or disclosed by management. 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.

John Kellas, Chairman of the IAASB, explains: "The proposed standard gives greater recognition to the particular risks associated with related parties and calls on the auditor to do more work to identify related parties and the rationale for the transactions between them and the audit client."

How to Comment

Comments on the exposure draft are requested by April 30, 2006. The exposure draft may be viewed online. Comments may be submitted by email. They can also be faxed to the attention of the IAASB Technical Director at +1-212-286-9570 or mailed to the IAASB Technical Director at 545 Fifth Avenue, 14th Floor, New York, NY 10017, USA. All comments will be considered a matter of public record and will ultimately be posted on IFAC's website.

About IAASB and IFAC

The objective of the IAASB, an independent standard-setting board within IFAC, is to serve the public interest by setting high quality auditing and assurance standards and by facilitating the convergence of international and national standards, thereby enhancing the quality and uniformity of practice throughout the world and strengthening public confidence in the global auditing and assurance profession. The international Public Interest Oversight Board* oversees the activities of the IAASB and, as one element of that oversight, establishes the criteria for its due process and working procedures.

IFAC is the worldwide organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. Its current membership consists of over 160 professional accountancy bodies in 120 countries, representing more than 2.5 million accountants in public practice, education, government service, industry and commerce. In addition to setting international auditing and assurance standards through the IAASB, IFAC sets ethics, education, and public sector accounting standards and develops guidance to encourage high-quality performance by professional accountants in business.

* Note to Editors The international Public Interest Oversight Board was formally established in February 2005 to oversee IFAC's auditing and assurance, ethics, and education standard-setting activities as well as the IFAC Member Body Compliance Program. The objective of the PIOB is to increase confidence of investors and others that such activities, including the setting of standards by the IAASB, are properly responsive to the public interest. PIOB members are nominated by international institutions and regulatory bodies.

This IFAC guidance brings together practical introductory guidance for professional accountants and organizations wishing to explore and implement Environmental Management Accounting (EMA). Using some of the best existing information on EMA, the guidance provides a general framework and set of definitions for management accounting that is comprehensive and as consistent as possible with other existing, widely used environmental accounting frameworks with which EMA must coexist.

The PAIB Committee developed this information paper to facilitate understanding of the roles and domain of the professional accountant in business. The paper provides a definition of the professional accountant in business and highlights the many roles that professional accountants in business perform, including implementing and maintaining operational and fiduciary controls, providing analytical support for strategic planning and decision making, ensuring that effective risk management processes are in place, and assisting management in setting the tone for ethical practices.

This research report details the differences between financial reporting in accordance with IPSASs and statistical reporting in accordance with the International Monetary Fund's "Government Finance Statistics Manual 2001," Eurostat's "European System of Accounts 1993" and "ESA95 Manual on Government Deficit and Debt," and the UN's "System of National Accounts 1993."

This paper provides answers to questions raised with regard to requests for auditors to audit, review, or otherwise report on information prepared by entities during their transition to International Financial Reporting Standards.