PROGRESS ON THE ROAD TO QUALITY:
ETHICS, STANDARDS AND REGULATION
By Graham Ward, CBE, MA, FCA
President, International Federation of Accountants
Institute of Chartered Accountants in England & Wales’ International Firms
Networks Conference
London – February 6, 2006
Thank you for inviting me to speak with you today. Having been to more than
dozen countries in the last few months, it is a pleasure to speak “at home” with
long-standing colleagues and friends.
It is through meetings such as this that the International Federation of
Accountants can keep a pulse on the concerns of firms, and network firms in
particular, which play such a critical role in our global profession. It also gives
IFAC an opportunity to inform you about our expanding role and initiatives to
support the profession in delivering quality and in meeting its public interest
responsibilities.
I am well aware that quality is a word that is frequently bandied about, but not
always defined. When I speak about quality with respect to accounting firms, I
am really talking about three fundamental criteria:

Acting with integrity;

Achieving high quality standards; and

Demonstrating professional competence.
While we all may have the best of intentions, meeting these criteria is difficult in
today’s environment. We are pressed to do more in fewer hours and to deliver
“real time” information. The businesses and other entities we serve as clients are
increasingly more complex, while the growth of litigious societies puts our firms
and livelihoods at risk. Capital markets around the world also face numerous
challenges. The largest economies of the world are experiencing fast paced
change all too similar at times to a roller coaster ride. Developing nations are
looking for leadership. Changing technologies, business restructurings,
consolidations and alliances and fierce global competition all have an effect on
how the markets work and react.
In this environment, the role of accountants and auditors in the effective
operation of the global capital markets is taking on much greater importance.
Indeed, all the important players in the financial market process – standard
setters, preparers and users of financial statements, independent auditors,
supervisory boards and audit committees, regulators and international
organizations – need to be vigilant and active in protecting and continuously
improving investor information.
So how can this best be accomplished? I return now to my definition of quality
and what we must and can work together to achieve. Acting with integrity,
following high quality standards, and demonstrating to the public that we are,
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indeed, adhering to these standards. IFAC has resources that can most definitely
help.
As an organization of 160 member bodies in 120 countries, our primary activities
are:

Promoting our profession’s values of integrity, transparency and expertise;

Developing international standards;

Encouraging compliance and convergence;

Providing guidance for professional accountants in business and SMPs;

Supporting the global development of the profession; and

Sharing in the regulation of the profession.
Under the auspices of IFAC, there are four independent standard-setting boards:
the International Auditing and Assurance Standards Board (IAASB), the
International Accounting Education Standards Board, the International Ethics
Standards Board for Accountants, and the International Public Sector Accounting
Standards Board. I say that these boards are independent because they have
the sole authority for issuing standards in their respective areas. IFAC’s Board
and Council are not directly involved in these activities. Each of these boards
obtains public interest input through a Consultative Advisory Group, which also
assists that board in prioritizing agenda items.
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Firms also have input into the standard-setting processes through representation
on specific boards and through the Forum of Firms. IFAC obtains the
perspectives of the firms through the Transnational Auditors Committee, or TAC.
The TAC is the executive arm of the Forum of Firms and nominates members to
the IAASB and to the Ethics and Education Standards Boards.
Time does not permit me to comment on all the activities of these boards, but I
want to highlight a few that are directly relevant to you.
Let us focus on ethics for a moment. Ethical conduct lies at the core of all
business. We do business with those we trust; we get business from those who
trust us. Ethics, therefore, is a driver of business growth which demands attention
from boards and investors alike. We also need to remember that ethics is
personal. It involves a commitment to values that affect how we make our
personal decisions and, in fact, how we live our lives every day.
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. I believe that each of us must do much more
than give lip service to these values. We must become advocates for them in our
firms, with our clients and in all our business relationships.
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The IFAC Code of Ethics for Professional Accountants promotes these values. A
member body of IFAC or firm that conducts audits using International Standards
on Auditing may not apply less stringent standards than those stated in this Code.
It is important to note that the Code of Ethics is not static. It is continually
reviewed to ensure that it addresses the most significant public interest issues.
As you may be aware, the International Ethics Standards Board for Accountants,
formerly the Ethics Committee, issued an exposure draft (ED) in June of last year
proposing revisions to the definition of a network firm. I understand that at your
meeting in September you received a presentation on the exposure draft and
held break-out sessions to discuss the issues raised in the ED.
The comment period ended on September 30, 2005, and the task force has
considered the comments received. The Chairman will be taking these for
discussion at the next meeting of the IESBA later this month. I understand that
two of the more significant comments received related to alignment of the
definition to that provided in the EU 8th Directive and the effective date of the new
requirements. I understand that the task force will be recommending that the
definition should be aligned to the EU 8th Directive and that the effective date
should be deferred by one year, to provide firms with sufficient time to implement
the new proposals. I see that Frank Attwood, Chairman of the task force is here,
so I am sure that he would be happy to answer any specific questions which you
might have. The task force will be taking draft wording to IESBA for consideration
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at its February meeting, with a view to obtaining approval in June. For more
information about the IESBA’s agenda, you can go to our website, www.ifac.org.
I would like to comment now on fundamental changes to our profession, the
effects of which are already being felt far more broadly. The auditing profession
in most countries now has independent oversight, with the result that audit firms
are subject to independent inspections and rule making. This change brings farreaching implications. There is clearly more engagement by companies’ boards
of directors, which will improve both governance and financial transparency. And
companies as well as auditors are paying much more attention to the control
processes surrounding the preparation of financial statements.
We all well recognize that quality control is crucial to high-quality audit work.
IFAC, and in particular the IAASB, supports the profession in delivering quality on
a number of different levels. The IAASB has issued two standards on quality
control. The new International Standard on Quality Control (ISQC) 1, Quality
Control for Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements,
establishes a firm’s responsibilities to set up and maintain a system of quality
control for all audits, other assurance and related services engagements. A part
of ISQC 1 requires the firm to do internal monitoring. Not only is it a professional
standard, it is also an essential activity for the firm to manage its risk and to
protect its reputation. Where you have network firms, e.g., firms operating under
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the same names in various jurisdictions, the need to manage risk and protect
their reputations exists at the international level. The revised International
Standard on Auditing (ISA) 220, Quality Control for Audits of Historical Financial
Information, establishes standards for the specific responsibilities of firm
personnel for an individual audit engagement and is based on the requirements
of the firm-wide quality control standards set out in ISQC 1.
Auditors may find these new standards demanding but they are necessary to
meet public expectations. Not only do they enhance auditors’ responsibility for
quality control but many audit firms will also need to strengthen and redesign
their quality control systems.
The quality control standards, over the long term, will help to restore and
maintain public confidence in auditing following the corporate scandals of recent
years and to ensure the highest level of quality in the delivery of other assurance
services by professional accountants. Together, they reflect the IAASB’s and
IFAC’s commitment to enhancing the quality of auditor performance throughout
the world.
IFAC’s Statements of Membership Obligation (SMOs), which form the basis of
the IFAC Member Body Compliance Program, provide another important
benchmark of quality. The SMOs clarify and strengthen IFAC membership
obligations and seek to enhance the performance of accountants worldwide. The
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SMOs require member bodies to use their best endeavors when promoting,
incorporating and implementing IFAC and International Accounting Standards
Board standards, including monitoring of their members through quality
assurance and investigation and discipline programs. In fact, SMO 1 requires
member bodies to have quality assurance review programs for their members
performing audits of listed entities, unless this function is discharged by a
regulatory authority. IFAC monitors the extent to which member bodies meet
these requirements, and the information will be made publicly available when
Part 2 of the Member Body Compliance Program, the SMO Self-Assessment, is
completed later this year.
Networks that are members of the Forum of Firms (FoF) have assumed an even
greater responsibility with respect to quality control by complying with the
Forum’s Quality Standard. The standard requires, among other things, that firms
participate in a globally coordinated internal inspection program. This is a
commitment above and beyond the explicit requirements of ISQC 1. As a result
of recent changes to the Forum’s Constitution, the FoF network firms have also
agreed to specifically report that they have undertaken these reviews as part of
their annual reporting process to the Forum. As part of revisions to the FoF
membership obligations, they first have also agreed to strengthen and reinforce
their commitment to convergence of national standards with ISAs and to their use
of ISAs in their global policy and audit methodology. We very much appreciate
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the commitment of the FoF members to quality and the support that they provide
to IFAC activities both technically and financially.
Firms’ efforts to enhance the quality of their services are reinforced by external
review processes administered by national professional bodies, like the ICAEW,
or by regulators, such as the Public Companies Accounting Oversight Board in
the United States and the Professional Oversight Board for Accountancy here in
the UK, which oversees external reviews for public companies.
The ICAEW is setting a high standard in the area of quality assurance. Its
introduction, about a year ago, of a new, overall practice assurance program, its
audit inspection program in relation to non-FRC and POBA inspections, along
with the implementation of the new FRC arrangements for oversight, standards
setting and inspection go a long way toward protecting the public interest.
On the international stage, we now also have a very powerful mechanism for
ensuring that the public interest is protected. The international Public Interest
Oversight Board (PIOB) for the accountancy profession, established in February
2005, works to ensure that there is sufficient public interest input into IFAC
standard-setting processes. Public oversight of these processes is crucial as it
assists in building credibility and confidence in international standards and
auditing, which then contributes to confidence in the financial information
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produced by companies; in the examinations carried out by their auditors; and
ultimately, in the capital markets that rely on such information.
The PIOB, chaired by Professor Stavros Thomadakis (a former Chairman of the
Hellenic Securities Commission) 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: IOSCO, 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.
It is also important for you to be aware that IFAC and international regulators
have significantly increased their dialogue in recent years. The result, I am
pleased to report, has been greater recognition of the value of the standards we
produce and of the international profession’s commitment to quality.
IFAC’s relationship with the regulatory community is formalized on our part by the
IFAC Regulatory Liaison Group – which comprises senior members of IFAC and
includes senior representatives of the Forum of Firms and on the regulatory part
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by the Monitoring Group and the PIOB. Through those bodies, we also have
established links to the Financial Stability Forum and its constituents. This very
integrated approach, supported by both regulators and the international
accounting firms, is what gives each of us strength in carrying out our
responsibilities and produces high quality outcomes.
Before closing, I would like to turn to IFAC’s relationship with the firms. I truly
believe that we share a common objective – to serve the public interest and to
contribute to economic growth and stability worldwide.
Over the past few years, our relationship has changed significantly, and, I believe,
for the better. We work together much more closely and have a greater mutual
understanding of each other’s respective roles and priorities.

The firms are part of our Regulatory Liaison Group, as I have mentioned.

We meet regularly with the firms.

The Transnational Auditors Committee and the Forum of Firms provide a
formal relationship with international accounting firms.

The firms are represented on IFAC’s Planning and Finance Committee.

Nominees of the Transnational Auditors Committee serve on IFAC
standard-setting bodies, providing immensely valuable practical expertise.

In addition, many of the individual members of our member bodies are
partners in, or employed by, the firms which, facilitate their participation in
IFAC’s standard setting and other activities.
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Also, more personally, I have found the views expressed to me by the CEOs of
firms give me real assurance that they understand and support both our role in
standard setting and the public interest objective that underpins it.
A coordinated effort by IFAC, its member bodies and network firms, along with
the involvement of regulators, both international and national, can help us
achieve one of IFAC’s most important objectives: convergence. 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 London to
Lahore, from Birmingham to Buenos Aires. This puts everyone on a level playing
field. Adoption of a single set of high-quality international standards will also
result in increased transparency and accountability. Investors will be better able
to compare company financial statements across borders. I also believe that
developing countries that adopt international standards will see increased outside
investment in their economies, by institutional and retail investors who are
familiar with, and confident in, the standards, regardless of geography.
On behalf of IFAC, I look forward to continuing to work with network firms, indeed
all firms worldwide, in building an investment climate of trust. Together, our focus
on quality and the public interest will increase the public’s esteem of our
profession. Your leadership and your willingness to continue to do the right thing
are valued by IFAC, by regulators and by the markets and will continue to
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strengthen our profession and earn the respect that, I believe, each and every
one of us deserves.
Thank you very much for your attention.
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