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.

PAIB Committee members are often asked "What exactly does an accountant in business do?" Most members of the public have some perception of the traditional work carried out by accountants but with regard to those working outside that sphere, they seem unsure. The PAIB Committee produced this paper in an effort to demonstrate the many areas in which accountants work in and for business.

A new international study, commissioned by the Board of the International Federation of Accountants (IFAC), identifies the challenges to adopting and implementing International Financial Reporting Standards (IFRSs) and International Standards on Auditing (ISAs) and recommends actions to be taken by all those in the financial reporting supply chain to achieve convergence to international standards.