THE ROLE OF IFAC IN RESTORING PUBLIC CONFIDENCE IN THE
ACCOUNTANCY PROFESSION
By Graham Ward, CBE, MA, FCA
President, International Federation of Accountants
Institute of Chartered Accountants of Pakistan Council
Karachi, Pakistan – February 1, 2006
Thank you very much for your kind introduction. I would like to thank your
President, Mr. Syed Mohammad Shabbar Zaidi, and your Executive Director, Mr.
Moiz Ahmad, for the privilege of the invitation to speak to you today. This is my
first visit to Pakistan since becoming President of the International Federation of
Accountants, and I am heartened by the warm welcome that I have received. The
profession here in Pakistan is thriving, as evidenced by the Institute of Chartered
Accountants of Pakistan’s growing membership and nearly 30,000 students.
Your leadership has much of which to be proud.
There is no question that the international accountancy profession has a unique,
critical and practical role to play in building stronger and more stable economies
around the globe. In order to carry out this role fully, however, we need to
continue to enhance confidence in the profession and to build trust. Investor
confidence and public trust empowers our profession. Without it, the credibility of
the information we produce, indeed the future of our profession itself, is put at
risk. Whether we work in Pakistan or Portugal, we cannot afford to take this risk.
Since corporate fraud and misconduct in the U.S. and elsewhere shook investor
confidence and raised questions about the integrity of capital markets and their
participants, action has been taken around the globe by governments, regulators,
and accountants themselves to strengthen the profession and enhance market
integrity. The International Federation of Accountants, which is comprised of over
160 members and associates in 120 countries, including three in Pakistan – the
Institute of Chartered Accountants of Pakistan, the Institute of Cost and
Management Accountants of Pakistan and the Pakistan Institute of Public
Finance Accountants – has also undertaken major initiatives, consistent with its
mission which is:
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.
Before I describe some of our initiatives, I would like to emphasize that when I
speak about “IFAC” and the work that we do, I am not speaking about a handful
of individuals. I am referring to the broad, global network of volunteers that serve
on our eight technical committees and boards; to our Board, which is comprised
of nominees of IFAC members; to all member bodies which so actively
Page 2 of 21
participate in IFAC, particularly through the IFAC Member Body Compliance
Program; and of course, to the IFAC staff who support all of these groups.
I am especially grateful to the Institute of Chartered Accountants of Pakistan and
to its leaders, who have made a deep commitment to the profession and to the
public interest which it serves.
As a long-standing member of the International Federation of Accountants, the
Institute of Chartered Accountants of Pakistan has a tradition of active
involvement in and support of IFAC. I would like to thank those Pakistani
representatives who serve on our boards and committees whose support
enables IFAC to achieve its objectives: Abdul Rahim Suriya, a member of our
International Accounting Education Standards Board; Khaliq-ur-Rahman, a
member of our Small and Medium Practices Committee; and Mujahid Eshai, who
served on our Developing Nations Permanent Task Force – now our Developing
Nations Committee – from March 2004 to November 2005. These gentlemen
exemplify the Institute of Chartered Accountants of Pakistan’s commitment to the
international profession and to our core values of integrity, transparency and
expertise.
Transparency is a concept that takes on real significance following a disaster,
such as the devastating Kashmir earthquake of last October. That tragic event
took many lives and has deeply saddened us all. It also destroyed many
Page 3 of 21
businesses, including some PKR 1 billion of SME assets, and huge amounts of
infrastructure. We accountants, however, have an important role in supporting
the recovery efforts 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 real need. We can also fulfill the pledge of
your President, Perves Musharraf, to the Donors’ Conference in Islamabad last
November when he affirmed that “there will be transparency and there will be
total accountability” in the rebuilding effort. These are the values that we, as
professional accountants, live every day. We embrace these values because
they are central to protecting the public interest and to achieving economic
growth. Where there is transparency and accountability, there is typically greater
public trust and social stability.
Let me turn now to my topic for today: the role of IFAC in restoring public
confidence in the accountancy profession, with the goal of achieving economic
growth and stability. IFAC activities in four specific areas are directly related to
achieving this goal:
First, we have promoted, indeed required, adherence to high ethical standards by
the 2.5 million accountants represented by our member bodies.
Secondly, we have sought to continue to enhance the quality of the audit process
through the development of high-quality international standards.
Page 4 of 21
Thirdly, we have encouraged firms and our member bodies to monitor the quality
of those processes.
Lastly, we have focused on encouraging strong corporate governance and
management accountability.
The bedrock of our international commercial system is high quality financial
information: information based on ethics and integrity, on high-quality
international accounting and auditing standards and on the work and sound
judgment of both internal and external professional accountants. Credible and
reliable financial information is fundamental to investment. It builds investor
confidence which, in turn, facilitates business development, contributes to job
growth and leads to individual financial prosperity.
Let me return to the first point – promoting high ethical standards.
Ethical conduct lies at the core of all business. We do business with those we
trust; we get business from those who trust us. It is at the root of generating
confidence in both individuals and entities. Ethics, therefore, is a driver of
business growth which demands attention from boards and investors alike. As
the world becomes more interconnected, it is the values that we share that unite
us as a profession.
Page 5 of 21
IFAC’s values of integrity, transparency and expertise are reflected in every facet
of our work. To build credibility in financial systems and to contribute to sound
economic systems, we must also promote these values to all professional
accountants, both in practice and in business, as well as to all those in the
financial reporting supply chain. And we must do so in a way that is relevant and
meaningful.
IFAC’s International Ethics Standards Board for Accountants, which develops the
international Code of Ethics for Professional Accountants, does just this. The
Ethics Standards Board recently released an updated Code of Ethics which
establishes a conceptual framework for all professional accountants to ensure
compliance with the five fundamental principles of professional ethics. These
principles are integrity, objectivity, professional competence and due care,
confidentiality and professional behavior. Under the framework, professional
accountants are required to identify threats to these fundamental principles and,
if there are threats, to apply safeguards to ensure that the principles are not
compromised. The framework applies to all professional accountants, those in
public practice as well as those in business and government. The Ethics
Standards Board, recognizing that both governmental and business accountants
play significant roles in safeguarding the public trust, plans to provide further
guidance for these accountants in particular.
Page 6 of 21
IFAC’s Ethics Standards Board is also focused on an issue that is perhaps most
central to public trust and one that has received widespread attention by the
media and regulators: independence. A forum on the topic was held in Brussels
last October and attended by regulators, standard setters, corporate
management, and representatives of IFAC member bodies. This input is part of
an extensive Ethics Standards Board consultative process that will help to
determine how the independence rules should be modified better to address the
public interest.
I commend the ICAP for sharing IFAC’s commitment to promoting the highest
ethical standards. The Institute bases its Code of Ethics for Chartered
Accountants largely on IFAC’s international Code of Ethics. As more and more
countries adopt the IFAC Code, we are raising the bar globally for ethical conduct
for all accountants.
The second way in which IFAC is working to build confidence in the profession
and contribute to economic growth is through one of its most core activities:
developing international auditing and assurance standards. These standards are
developed by the independent International Auditing and Assurance Standards
Board and, like IFAC’s ethics code, are subject to a rigorous due process that
includes extensive public interest input.
Page 7 of 21
I am pleased that the Institute of Chartered Accountants of Pakistan has adopted
International Standards on Auditing for use in Pakistan, which is a further sign of
your Institute’s commitment to convergence and to protecting the public interest.
In order further to facilitate convergence to international standards, the IAASB
has undertaken a significant 18-month project to improve the clarity and structure
of its standards. The IAASB has developed a new drafting style for its standards
based on input it received at a forum in July 2005 and through responses to its
2004 Proposed Policy Statement and Consultation Paper on Clarity. In late
October 2005, the IAASB released exposure drafts of the first four proposed
standards developed using a new drafting style. The proposed standards focus
on:

The auditor’s responsibility to consider fraud in an audit of financial
statements;

Planning the audit;

Understanding the entity and its environment and assessing the risks of
material misstatement; and

The auditor’s procedures in response to assessed risks.
The exposure drafts are posted on the IFAC website – www.ifac.org – and I
encourage you to review them and to provide comment.
In addition to addressing the issue of clarity, the IAASB has issued a new
international standard on audit documentation, designed to enhance auditor
Page 8 of 21
performance and audit quality by establishing stricter requirements for audit
documentation. Beginning with this standard, the IAASB staff is preparing a
“Basis for Conclusions” for each new international standard to increase
understanding about the development of the standard – in particular, how the
IAASB has responded to input received. We hope that you find this to be helpful.
The involvement of related parties, such as directors, owners, and management,
in major corporate scandals prompted the IAASB to review its current auditing
standard on the subject. As a result of its review, in January the IAASB issued an
exposure draft, proposed International Standard on Auditing (ISA) 550 (Revised),
Related Parties, and is inviting comments on proposed requirements for auditors
regarding the audit of related party relationships and transactions.
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.
Other current IAASB projects are the development of standards on auditing
accounting estimates and on materiality in the identification and evaluation of
misstatements.
Page 9 of 21
In addition to International Standards on Auditing, the IAASB also issues
International Standards on Quality Control, to be applied by accounting firms for
all services falling under the IAASB’s international standards. While its current
agenda is clearly focused on ISA-related matters, to address expanding and
changing business needs, the IAASB also has a mandate to issue International
Standards on Assurance Engagements, which are to be applied by practitioners
in assurance engagements dealing with information other than historical financial
information, and International Standards on Related Services. To promote good
practice, the IAASB issues Practice Statements to provide interpretive guidance
and practical assistance in implementing its standards.
To assist professional accountants in meeting the demands of a changing
business environment and to build further credibility in financial information
provided by accountants globally, IFAC has placed increased effort on improving
the transparency of the IAASB standard-setting processes and on devoting more
resources to them. The same focus has been placed on the standard-setting
work of the International Ethics Standards Board for Accountants and the
International Accounting Education Standards Board.
A significant event that, I believe, will boost confidence in the profession and trust
in our work is the establishment of the international Public Interest Oversight
Board (PIOB). Formed in February of last year and chaired by Professor Stavros
Thomadakis (a former Chairman of the Hellenic Securities Commission), the
Page 10 of 21
PIOB has eight members and two observers, all very senior people, appointed by
international bodies of regulators and institutions. It also is strongly supported by
the Financial Stability Forum. The appointing bodies are: the International
Organization of Securities Commissions, the International Association of
Insurance Supervisors, the Basel Committee, the World Bank and the European
Commission. The PIOB oversees the work of the IAASB and of IFAC’s Ethics
and Education Standards Boards and endorses appointments to them. In
September 2005, it approved the due process and working procedures that they
should follow and in December approved new appointments. This oversight will, I
believe, contribute to increased credibility in all the standards that IFAC develops
through its independent boards.
Before I move off the topic of standard setting, I want to comment on one of
IFAC’s most important objectives: convergence with international standards.
Convergence is, I believe, at the core of building an investment climate of trust.
Here’s why. Globalization demands high-quality standards that can be applied
from New York to Nairobi, from London to Lahore. This puts everyone on a level
playing field.
Second, global standards will result in increased transparency and accountability.
Investors will be better able to compare company financial statements across
borders. I also believe that developing countries like Pakistan that do adopt
international standards will see increased outside investment in their economies,
Page 11 of 21
by institutional and retail investors who are familiar with, and confident in, the
standards, regardless of geography.
There is another consideration as well. Having a multiplicity of accounting,
auditing and other standards around the world is against the public interest. It
creates confusion, encourages error and facilitates fraud. The cure for those ills
is to have a single set of international standards, of the highest quality, set in the
public interest by an international expert body which transparently consults with,
and recognizes the legitimate interests of, the international community.
The Institute of Chartered Accountants of Pakistan has supported convergence
through its involvement both in IFAC and in the International Accounting
Standards Board. It has also demonstrated this by adopting International
Standards on Auditing; by basing its Code of Ethics on the international Code
developed by IFAC’s Ethics Standards Board; and by implementing the IFAC
Education Standards Board’s International Education Standards, including the
new requirements for Continuing Professional Development. Thank you for this
outstanding commitment to quality.
To give further assistance to IFAC member bodies and others in understanding
the challenges and issues related to convergence, IFAC staff, in consultation with
members of our boards and committees and other relevant interested parties, is
further developing the concept of “international convergence.” The objective is to
Page 12 of 21
develop guidance to accompany IFAC’s Statements of Membership Obligations
(SMOs), which form the basis of the IFAC Member Body Compliance Program.
The IFAC Member Body Compliance Program, in which the ICAP is an active
participant, is directly related to a third initiative of IFAC’s: encouraging quality
performance by the international profession and encouraging firms and member
bodies to ensure that appropriate quality control mechanisms are in place.
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, to
demonstrate a shared commitment to our profession’s values of integrity,
transparency and expertise.
Phase 1 of the Compliance Program, a fact-based questionnaire to assess the
regulatory and standard-setting frameworks of IFAC member bodies, is now
complete. Responses from more than 105 member bodies, including the
response from the Institute of Chartered Accountants of Pakistan, have been
posted on the IFAC website. The goal is to have all responses posted as soon as
reviews are completed. Part 2, the SMO Self-Assessment Questionnaire, was
distributed to member bodies last November and responses will be posted to the
IFAC website beginning in the second half of this year. The responses from
these questionnaires are important for several reasons: they provide a global
Page 13 of 21
snapshot of the accountancy profession from both a regulatory and standards
perspective. Additionally, they can be used to help IFAC gauge where it needs to
focus its efforts to support the development of the profession and to work to
achieve convergence. Lastly, but perhaps most importantly, the responses to the
questionnaires demonstrate the international accountancy profession’s
willingness to be accountable for its actions to meet high standards, to deliver
quality and to protect the public interest – all of which contribute to building
confidence in the profession.
As we look to the future, we see that the global economy will continue to
challenge the international accountancy profession, regulators, standard setters,
and business leaders to compete and to deliver quality. In anticipation of these
challenges, and in recognition that we must never waiver in our commitment to
build public trust, IFAC’s Board has recently agreed to lead a new study 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 to be considered in the new study are corporate management
and governance, regulatory developments, auditor independence and rotation
and the expectations in respect of the board’s and the auditor’s responsibilities
for the detection of fraud.
Page 14 of 21
IFAC has also focused on promoting strong corporate governance, an area that
your country is also addressing. The new Institute of Corporate Governance,
established just over one year ago by the Securities and Exchange Commission
of Pakistan and of which the ICAP is a founding member, is a strong example of
this. The Pakistan Institute of Corporate Governance is an important step in the
process toward ensuring sound corporate governance practices and protecting
the interests and rights of shareholders.
IFAC’s focus on corporate governance is best expressed in an independent
report it commissioned, entitled Rebuilding Public Confidence in Financial
Reporting, that was developed two years ago under the leadership of John Crow,
a former governor of the Bank of Canada. The report emphasized that a wide
range of actions, by a wide range of entities, must be taken to strengthen
corporate governance. For example, corporate management must place greater
emphasis on the effectiveness of financial management and controls, corporate
ethics codes need to be in place and effectively monitored and threats to auditor
independence need to be given greater attention in corporate governance. The
report’s findings and recommendations provided much impetus to IFAC’s
Professional Accountants in Business (PAIB) Committee, as well as to other
international groups. The PAIB Committee recently issued an exposure draft of
proposed guidance to assist professional accountants in business in
implementing corporate codes of conduct in their organizations. The proposed
good practice guidance is designed to draw greater attention to the need for
Page 15 of 21
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.
IFAC’s PAIB Committee has also turned its attention to how best to improve the
performance of organizations, and thus to ensure wider prosperity for all. In 2004,
the committee, in conjunction with The Chartered Institute of Management
Accountants in the UK, issued a report on corporate governance best practices
entitled, Enterprise Governance – Getting the Balance Right. The joint group
conducted an in-depth analysis of corporate successes and failures in 27 case
studies from 10 countries. Among the report’s findings were that there are four
key determinants of corporate success and failure: the culture and tone at the top,
the chief executive, the board of directors and the internal control system.
The report also revealed that good governance on its own cannot make a
company successful. Companies need to balance conformance with
performance. To quote: “Unlike the conformance dimension, there are no
dedicated oversight mechanisms, such as audit committees, in the arena of
strategy. … There is a danger that in the laudable attempt to improve standards
of control and ethics, insufficient attention is paid to the need for companies to
Page 16 of 21
create wealth and to ensure that they are pursuing the right strategies to achieve
this.”
The study examined “enterprise governance,” an emerging concept in the new
global economy. Enterprise governance has two equal parts: probity and
profitability. I would suggest that one without the other isn’t worth having.
Businesses that have the highest ideals but go bankrupt through poor strategic
choices are as disastrous to shareholders, to other stakeholders and to public
confidence as are businesses that fail because of ethical lapses. Profitable
businesses that are run with little regard for the public interest, the law, regulation,
employees or shareholders, should not be in business and, ultimately, will not be
in business. I encourage the Pakistan Government and those of you here today
who serve local businesses and industry to encourage the highest ethical
practices at all levels of business. This is good not only for local business, but for
your economy as a whole and, indeed, the future of your country.
In addition to our work to support professional accountants in business, IFAC’s
Small and Medium Practices Committee serves the needs of small- and mediumsized accounting practices and other accountants that provide services for small
and medium entities. SMEs are a fundamental driver of economic growth. Here
in Pakistan, according to the Asian Development Bank, SMEs account for 80
percent of employment in the industrial sector and a total of 30 percent of value
added to the economy. The importance of SMEs extends to developed nations,
Page 17 of 21
where, for instance, in the European Union they represent 99 percent of all
enterprises. To ensure that international standard setters are aware of and give
consideration to issues relevant to SMEs and SMPs, IFAC’s Small and Medium
Practices Committee is active in representing their interests to both the IAASB
and to the International Accounting Standards Board. The committee is currently
providing input to the IASB’s project considering the development of financial
reporting standards for SMEs. The committee is also developing guidance
materials for SMPs, especially in relation to the application of ISAs to the audit of
SMEs and establishing an electronic data exchange on SME and SMP issues.
IFAC is committed to ensuring that all professional accountants, in every country
of the world, both developed and developing, have the tools they need to face
the challenges of the new global economy.
Because IFAC is a global organization, and because it is predicted that 95
percent of the world’s population growth will occur in developing nations, we
have made strengthening the profession in those nations a key objective. Our
position is this: we have a fundamental role and responsibility to play in fostering
progress in the developing world, in eradicating poverty and in building prosperity.
Establishing a sound and viable accountancy profession is a critical step in
building a sound financial infrastructure and addressing these issues. We
welcome assistance from established accountancy bodies, such as the Institute
Page 18 of 21
of Chartered Accountants of Pakistan, in this effort to grow and develop our
profession worldwide.
IFAC’s goal is to have a member body with an established accountancy
profession in every country around the globe. There is no doubt that this is a lofty
goal, but as we look ahead and see that the growth of the world’s population will
largely be in developing economies, I am more and more certain that this goal is
one that we cannot compromise or forsake. To achieve this goal, IFAC’s
Developing Nations Committee is involved in extensive outreach to developing
nations and has prepared new guidance, with the input of IFAC members, to
assist developing nations in establishing an accountancy body and where an
accountancy body already exists, further to develop and enhance it. The
guidance may be downloaded from the IFAC website and CD-ROMs have been
sent to every IFAC member body. Please take a look at the guidance and let us
know if you have any input or any need for additional information.
The guidance is one part of a comprehensive program designed to help IFAC
achieve the goal of creating a respected accountancy organization in every
country. In so doing, we can help to build strong financial architectures around
the globe – architectures that are supported by strong ethical standards, high
professional standards and an unwavering commitment to act transparently and
to be accountable.
Page 19 of 21
Pakistan, like many nations, faces some significant challenges, most recently the
tragic Kashmir earthquake. However, the important steps that you are taking and
those that you will continue to take to encourage transparency and accountability
in the public and private sectors, to increase privatization and to ensure fiscal
responsibility will, I believe, greatly contribute to the economic prosperity of your
country. As the World Bank and the International Monetary Fund stated in their
2004 joint assessment: “Pakistan has undertaken major reforms in recent years
in the financial sector that have resulted in a sounder and more efficient financial
system.” These reforms include “a return to market-based monetary and
exchange rate policies, a diminishing role of the state in the financial sector
through privatization of nationalized commercial banks, improvement in corporate
governance, disclosure, and transparency and the adoption of a modern
regulatory approach in the oversight of the financial sector.” I encourage you all
to continue to support these reform efforts.
Certainly, your future is bright. According to the economic outlook produced by
The Economist magazine and updated just last month, the economy of Pakistan,
despite the earthquake, is expected to perform strongly, with real GDP growth of
6.6 percent in the fiscal year July 2005 to June 2006 and six percent in fiscal
year 2006/07.
Professional accountants, such as those of us here today, play an important part
in protecting the public good, encouraging transparency and achieving economic
Page 20 of 21
growth and stability. Through adherence to high ethical standards we can,
together, bring about social stability and good governance in business. Through
convergence to international standards we can, together, deliver on our promise
of quality. And through acting in the public interest, we can, together, build public
trust and sound economies that support a better quality of life for all.
I am proud to work with the profession in Pakistan in IFAC’s drive to generate
economic growth and stability in every country of the world.
Thank you very much for your attention.
Page 21 of 21