Ladies and gentlemen. It is a pleasure to be here with you today for the SC International annual conference and to commemorate the 20th anniversary of the founding of SC International, one of the top 25 global accounting associations. Congratulations on reaching this important milestone.
I would like to thank Mr. Donal Watkin, your Executive Director, for the invitation to be here with you today. The firms you represent are a critical constituency of our international profession and I foresee that you will play an even greater role in the years to come in serving clients around the globe. We know that growing economies in Asia, where you have a strong presence, as well as in other parts of the world are in increasing need of services from professional accountants, as our role, indeed your role, is vital to assisting them in achieving economic growth.
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. Whether we are working in large, medium, or small firms, I believe that our fundamental duty is to the public interest and that our current and future activities must focus on achieving this goal. This is 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 morning, I will consider what future the profession might face and what IFAC is doing to bring about a successful future. I invite you to think about three interrelated 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 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. In this effort, professional accountants will contribute where our expertise is most valuable, by building an investment climate of trust and by 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 of 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 and through firms such as yours.
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: professional 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 to transparency, by delivering relevant and needed services and by being market oriented as professionals and by leveraging our strengths through associations such as the one which you have formed. 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. There are three major initiatives, among others, that demonstrate our profession’s commitment to quality and that serve the public interest: the IFAC Member Body Compliance Program; the Forum of Firms and its commitment to quality; and our standard-setting initiatives.
Let me take a moment to tell you about the IFAC Member Body Compliance Program. This program supports the development of high quality auditing, accounting, ethical, educational and related quality assurance and disciplinary standards in IFAC member bodies throughout the world. The program is intended to guide accounting institutes in the full spectrum of their professional responsibilities and to demonstrate a shared commitment to our profession’s values of integrity, transparency and expertise. As part of the Compliance Program, members and associates provide information on their compliance with IFAC’s membership requirements. This includes promoting and incorporating international standards, issued by IFAC and by the International Accounting Standards Board, into national standards and implementing quality assurance and investigation and discipline programs to monitor compliance with applicable professional standards. Responses to the Compliance Program are posted on the IFAC website once agreed with the member or associate.
The responses provide a valuable global snapshot of the accountancy profession from a standards perspective. Additionally, they help IFAC to gauge where it needs to focus its development work. Lastly, but perhaps most importantly, the responses to the questionnaires demonstrate the global profession’s willingness to be accountable for its actions to meet high standards, to deliver quality and to protect the public interest. Phase 1 of the programme is complete. Phase 2, which requires members and associates to complete a self-assessment questionnaire about their best endeavours to comply with IFAC’s membership requirements, is in progress. Almost all have completed their questionnaires and nearly forty are already available for you to review on our website.
I encourage you to review these responses to obtain information on the standard-setting and regulatory structures in countries around the globe and better to understand the extent to which international standards are promoted and followed in each country. This information could be valuable to you as your firms expand their operations.
The second program I want to discuss with you today is the Forum of Firms.
In addition to the Member Body Compliance Program, IFAC, through the Forum of Firms, is able to promote convergence and adherence to high ethical values. The members of the Forum of Firms, which is comprised of over 20 global networks and associations of public accounting firms, have committed to the use of International Standards on Auditing and of the IFAC Code of Ethics for Professional Accountants for transnational audits. Additionally, these firms have committed to use the IAASB’s International Standard on Quality Control 1, which establishes a high quality standard for the quality control systems within the firms. This commitment to IFAC standards and to the promotion of high quality and consistent performance was reinforced in February 2006 with the approval of a new constitution for the Forum of Firms. The new constitution updates membership requirements to emphasize the firms’ commitment to audit in accordance with the IAASB’s International Standards on Auditing, and all members of the Forum must show that they meet all the requirements to be deemed to be full members. The requirements for membership and the names of all members of the Forum are listed on the Forum of Firms website, which is www.ifac.org/fof.
The Transnational Auditors Committee (TAC) is the executive committee of the Forum of Firms and also a committee of IFAC and is dedicated to meeting the needs of the Forum. Essentially, it assures that the voice of the firms is heard. It identifies audit practice issues and when the issues suggest changes in auditing or assurance standards may be required, it recommends to the appropriate IFAC standard-setting boards that the issue be reviewed. The TAC also provides a forum to discuss "best practices" in areas including quality control, auditing practices, independence, and training and development and acts as a formal conduit for interaction among transnational firms and international regulators and financial institutions with regard to audit quality, systems of quality control, and transparency of international networks. Lastly, the TAC nominates five candidates to serve on each of IFAC’s standard-setting boards (except for the IPSASB).
I encourage SC International to consider membership of the Forum of Firms, as I believe that it represents a substantial opportunity for networks and associations visibly to demonstrate their commitment to quality to their clients, to regulators and to the public. Further, members of the Forum have found the Forum’s membership framework to be an extremely useful means to promote and monitor consistent high quality audit delivery in each of their member firms.
Let me turn now for a moment to our standard-setting initiatives. IFAC, through its independent standard-setting boards, sets standards in four areas: auditing and assurance, ethics, education and public sector accounting. Time does not permit me to elaborate on the roles of all of these boards or to describe all of the new standards, but I would like to highlight for you now a few of those which are most significant to well informed markets.
In the area of auditing, the International Auditing and Assurance Standards Board (IAASB) sets international standards on auditing and assurance, quality control and related services that are recognized throughout the world. A key objective of the IAASB is supporting international convergence to its International Standards on Auditing (ISAs). So far, more than 100 countries worldwide have adopted ISAs or are using them as the basis for national auditing standards. In addition, I am very pleased to report to you that at its General Assembly meeting, earlier this month, the World Federation of Exchanges announced its endorsement of ISAs. This important endorsement by the World Federation of Exchanges, which represents 57 securities and derivative markets that account for more than 97 percent of world stock market capitalization, provides important recognition of the high quality of the IAASB’s standards and of the reforms that we have implemented over the past three years to protect further the public interest and to enhance the transparency of the IAASB and of our other standard-setting boards.
To strengthen support for convergence at the national level, the IAASB has developed new guidance, for national auditing standards setters that adopt its standards with limited modifications, which was issued in July. While not intended to be a definitive statement on convergence, the document provides guidance on the extent to which modifications to adopted international standards are permitted, while still allowing the national standard setter to assert that the national standards conform to the international standards.
To ensure that its standards are clear and understandable the world over, the IAASB has undertaken a significant project to improve the clarity and structure of its standards. In September, it approved the first three standards redrafted in its clarity drafting convention, which will be released later this year. The IAASB has now undertaken an ambitious timetable to redraft all its standards in the new clarity style, with a provisional effective date for all new standards of December 15, 2008. The new style was developed based on input it received at an international Clarity forum last year and through responses to its 2004 Proposed Policy Statement and Consultation Paper on Clarity. We hope that this new style will not only make the standards more understandable, but also make them better capable of being translated and used in countries throughout the world.
The IAASB is also addressing several critical issues in auditing and assurance. In March 2006, it issued a re-exposure draft designed to enhance the quality of audits of group financial statements, entitled proposed ISA 600 (Revised and Redrafted), The Audit of Group Financial Statements. Following earlier consultations, the IAASB has modified the proposals and reissued the exposure draft to address issues related to the extent to which the group auditor needs to be involved in the audits of components that are audited by other auditors, whether these auditors are independent of the group auditor or belong to the group auditor's national or international firm or network of firms.
We at IFAC are also focused on strengthening the transparency and accountability of the financial reporting of governments and of other public sector entities. Through the International Public Sector Accounting Standards Board (IPSASB), IFAC develops International Public Sector Accounting Standards (IPSASs), which are designed to improve public sector financial management and accountability. We view this as an increasingly important area of IFAC activity. The IPSASB is currently addressing key issues for public sector accounting, including accounting for social policy obligations of governments, non-exchange revenue and budget reporting.
An important IPSASB objective is facilitating convergence with International Financial Reporting Standards, upon which the IPSASs are based, and with statistical bases of financial reporting. Last year, the IPSASB issued exposure drafts further to converge its standards with International Financial Reporting Standards and with statistical reporting bases. The IPSASB is making great strides in its convergence efforts. An increasing number of governments and public sector entities worldwide, including the Organisation for Economic Co-operation and Development, the World Bank and the North Atlantic Treaty Organisation, are using IPSASs. In addition, earlier this year, the United Nations General Assembly adopted a financial management reform program that calls for the adoption of IPSASs by all the organizations within the UN group.
Today, we accept that if we are to achieve convergence, particularly in the area of auditing standards, 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. In this context, let me turn now to public interest oversight – which I see as essential to the credibility of standard setting and essential to building confidence in the work of auditors. In February 2005, a new independent Public Interest Oversight Board (PIOB) was created to oversee IFAC’s standard-setting activities in the areas of auditing, ethics and education; and the Member Body Compliance Program. The PIOB, led by Professor Stavros Thomadakis, and comprised of very high quality people, was established by IFAC in cooperation with international regulators and institutions. Its members are nominated by international regulators and other international 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.
The PIOB has approved the standard-setting processes of three standard-setting boards: the IAASB, International Accounting Education Standards Board, and the International Ethics Standards Board for Accountants and the new members of these boards for 2006 and 2007. I should point out that the PIOB does not oversee the IPSASB. That board is subject to different oversight. The PIOB’s oversight has helped to enhance the credibility of IFAC’s standards, build confidence in them by regulators and fuel international convergence. The power of its credentials has led recently to the European Commission committing to appointing two full members to it.
In addition to public interest input and oversight, IFAC also considers the needs of smaller firms and of small and medium enterprises (SMEs) in the development of international standards. We all are well aware that SMEs are, together, the economic engine that fuels growth, jobs, and ultimately individual prosperity and security, in developing as well as in developed countries, in all parts of the world. Here in the European Union, SMEs represent 95.77 percent of the businesses. These figures are mirrored globally, with SMEs representing 97 percent of the total companies in the Asia-Pacific region and 99.7 percent of all employers in the United States. Because of their sheer scale when taken as a whole and the dramatic effect that successful SMEs can have on national and international economies, their issues must be at and remain at the forefront of IFAC’s priorities. Our focus, through the IFAC Small and Medium Practices (SMP) Committee and other groups, is to develop practical guidance that is universally and easily available to accountants worldwide; to make sure that the voices of SMPs and SMEs are heard by standard setting boards; and to provide forums for the exchange of ideas on how we can all better support one another.
In July, the SMP Committee organized a forum in Hong Kong to discuss the challenges and opportunities facing SMEs and SMPs. Over 130 participants from 35 countries attended the conference and their deliberations identified two significant challenges facing SMEs and SMPs: SMEs need financial reporting standards that are appropriate for their users’ needs and reduce the associated cost of compliance; and, in an increasingly globalized economy, SMPs should continue to explore new ways to support the growth and accountability of SMEs.
To help to address these challenges, IFAC’s SMP Committee is taking a two-pronged approach to helping SMEs and SMPs to converge and comply with international auditing and accounting standards, helping to shape the form and content of international standards and providing practical assistance to SMPs and SMEs that have to use them. It is developing a guide to International Standards on Auditing for SMEs and a web-based knowledge resource for SMPs. Additionally, the SMP Committee continues to respond to exposure drafts of international standard setters where an SMP or SME focus is needed.
I emphasize that all IFAC exposure drafts are posted on the IFAC website and it is very important to us to get comments from firms like those you represent. Please do take the time to respond to the EDs.
Reporting shifts
I would like to return now to the second trend that I described in the beginning of my remarks. 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 has undertaken a 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 of others who use financial reports.
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 (PAIB) 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 firms 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, in our professional standards and in 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 many national codes of professional conduct and ethics are 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 it will become 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 three 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 of 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. Members of firms such as yours should, I believe, encourage your clients to recognize and to act on this responsibility.
Before I move on from ethics, I want to emphasize that a fundamental role of the International Ethics Standards Board for Accountants is to ensure that the Code remains relevant. As part of this process, in July, the Ethics Standards Board issued a revision to the Code of Ethics to update the definition of a network firm. This update provides important guidance to firms in the area of independence and includes information on the application of the definition. The Ethics Standards Board is also currently addressing issues such as audit independence and whistle-blowing and is in the process of developing new guidance for professional accountants in government and in business.
Additionally, IFAC’s International Accounting Education Standards Board has released new guidance on ethics. Last month, it proposed a new International Education Practice Statement (IEPS), Approaches to Developing and Maintaining Professional Values, Ethics and Attitudes, designed to assist IFAC member bodies in developing ethics education and continuing professional development programs for their members. There is no doubt that ethics education programs enhance professional accountants’ ethical judgment and their decision making.
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, and to ourselves to deliver:
- The enduring values I’ve talked about – our commitment to the public interest and to 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.
IFAC’s Developing Nations Committee 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. Towards that end, this past September IFAC, together with the World Bank and the African Development Bank, sponsored a Learning Workshop in Nairobi for government leaders, donor agencies and representatives of the accountancy profession, among others, as a first step in determining a plan of action to help African nations further to develop stable economies.
As a result of an extensive consultative process, the Committee is also 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 – which is viewed as a critical first step in creating a sound and viable financial infrastructure – we have released good practice guidance on the roles and responsibilities of a professional body, education and examination, and on 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 and are, I believe, embraced in SC’s strategic plan. Our profession needs to be respected and influential today, if we are to be so in the future.
All of us here have a role to play in building confidence in financial information and financial infrastructure. Yet we also have a role to play in communicating how those infrastructures work to protect the public interest. Clear information about the financial reporting process needs to be presented to those who rely on – or want to rely on – the information that results from it. Additionally, clear information about the economic policy framework, the regulatory environment, and economic developments is essential to sound business decisions. Thus, while I urge you to continue to take actions in this area, it is equally important to communicate those actions to the public who, ultimately, will benefit from them.
If we continue to 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: For professional accountants in public practice, this means that you will be recognized fully for the role you 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 or accountancy firms that we would recognize as such.
It is a stark choice. I believe that we will make the right choice, together. Working together as a global profession we will live those values of integrity, transparency and expertise. Working together with regulators, investors and other stakeholders, we will command justified public confidence.
As we look to the future, it is evident that the quality of information expected by investors and needed by public and private sector decision makers will become even more critical to the development not only of national market economies, but to the global economy as well. Thus, ensuring high-quality financial reporting is an area where there is no room for compromise. We must all continue to be as proactive as possible and make an ongoing commitment to high-quality financial reporting. Nor can we afford to compromise in any other service area. Acting with integrity, transparency and competency must be the supreme driving force for all accountants. It is good for business and good for society. It is what distinguishes our profession from all others and enables us to contribute to worldwide stability and prosperity.
If I leave you today with only one message, it is that you should never forget this role that you play in the global arena.
Thank you very much for your attention.
