BUILDING AN INVESTMENT CLIMATE OF TRUST
By Graham Ward, CBE, MA, FCA
President, International Federation of Accountants
Institute of Chartered Accountants of Sri Lanka
Colombo, Sri Lanka – January 12, 2006
I am delighted to be here in Sri 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.
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This is not a new challenge to Sri Lanka, which has been and continues to be
poised to benefit from global commerce. A look at your history, particularly that of
Galle, is a reminder of Sri 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 in Sri Lanka. IFAC’s mission is global in thrust and publicinterest oriented. I’d like to state it for you now:
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“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 in Sri 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 in Sri Lanka but 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
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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.
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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
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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
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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
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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 standardsetting 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, the
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IAASB 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 the
IAASB’s. The IAASB regularly holds meetings with international standard setters,
briefing them on IAASB 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.
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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 – the IAASB, 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
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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 the United 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.
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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
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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 of Sri Lanka and for the people in countries
like yours around the globe.
Thank you very much indeed for your attention.
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