IFAC’S VISION FOR THE FUTURE OF PROFESSIONAL REGULATION
By: Fermín del Valle, President
International Federation of Accountants
Fédération des Experts Comptables Européens (FEE) Leaders’ Dinner
London, United Kingdom – May 31, 2007
Good evening, ladies and gentleman. I’m very happy to be here with you all this
evening.
I am sure you will join me in thanking our hosts, the Association of Chartered Certified
Accountants (ACCA), for the wonderful dinner this evening. I would like also to thank
Allen Blewitt, ACCA’s Chief Executive, for the invitation to speak with you this
evening.
As indicated in its “European Manifesto,” the ACCA shares IFAC’s focus on education
and training, financial reporting, auditing, small business issues and corporate
governance. The manifesto makes an important point that I would like to reiterate:
“Forming partnerships is key to shaping the EU’s future agenda.” In addressing so
central an issue as regulation of the profession, I believe that it is vital for IFAC, its 155
member bodies worldwide, and regional organizations like FEE, to work in partnership
to shape the agenda. As in so many other matters, collaboration in relation to regulation
is essential.
I have been asked to share with you IFAC´s vision of the future of professional
regulation.
What is the relationship between the profession and regulation?
Every profession is a response to a societal need and fundamentally is defined by the
knowledge, skills, attitude and ethics of those in the profession. Regulation of a
profession is a response to the need by society for certain standards to be met by the
members of that profession, and the need for and nature of such regulation is dependent
on the specific profession.
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Let me begin with our profession – the accountancy profession - and then I will turn to
regulation.
When we speak about our profession, we should always remember that it is a profession
with a broad field of action and with many diverse specializations. The members of our
profession work in public practice, in both large and small firms or as individuals. They
work within organizations, public or private, where, again, they can have many different
roles, ranging from those who work as CFOs in companies or in public sector or nonprofit organizations to teachers and academics. Our profession also includes
consultants in many and varied areas related to public administration or business, such
as management, taxation, information systems, corporate finance, business intelligence
and much more.
This, for example, is reflected very well in the message that the ACCA sends to young
people considering their career options. The ACCA says, accurately, that a job in
accountancy can put students on a fast track to the top for roles such as chief financial
officer, finance director, senior internal auditor, entrepreneur or owner-manager of
small business, director or partner in an accounting firm, auditor general or influential
position in government finance, forensic accountant or business adviser.
The diversity of the profession is a very important reality that none of us should forget.
Even though in some professional organizations the members may include only one, or
a very few, of these specializations, the profession as a whole includes them all. This
certainly is the reality for IFAC.
As we said, a profession is defined by its fields of action and by the specific
competencies of its members. While individual members of the profession have an
obligation to serve the public interest, professional organizations have a more specific
responsibility and role in this regard. Professional organizations need to be oriented
toward the public interest. To achieve this they must be dedicated to upholding and
promoting best professional practices, including through the regulation of their
members, and in this way contributing to the common good. This is, I believe, an
essential characteristic of professional organizations. However, their public interest
objectives are shared by their members. What else but this dedication to the
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development of the profession could explain the phenomenal contribution in time and
talent made by thousands of professionals around the world working as volunteers in
their respective professional organizations and in IFAC with no compensation other
than the satisfaction of serving their profession and their society?
The sustainability of our profession, like that of any other, depends on the quality and
the consistency of the services provided by its members and the capacity to respond to
market demand, or if you prefer, the demands of the community in which it acts.
In general, there are three ways that a community might seek to achieve the quality and
consistency of services that it seeks. The first is to allow the market to resolve the
respective interests of consumers and producers of a particular service. The second is
for a self-regulatory approach, where a profession, through its formally established
body, regulates the behavior of its members. Third is the regulation of the profession by
an independent (public sector) agency. It is possible also to have some combination of
these approaches, such as self-regulation by a professional body combined with
oversight carried out by an independent agency.
In fact, in most jurisdictions, the solution is a mix of approaches. The particular mix
depends upon a number of factors, including:

the historical experience in the jurisdiction (financial reporting failures being
associated with more external regulation);

the self-regulatory performance of the profession;

the general political orientation to regulation as an instrument of economic
management;

the development path of the economy (in some jurisdictions the trend is to
greater external regulation while in others – especially transition economies –
the trend is to strengthening the self-regulatory role of the profession), and;

the segment of the profession (while the audit segment is commonly subject to
external regulation, other segments such as accountants in business typically are
not).
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One of the fundamental objectives of any professional organization is to provide
assurance as to the quality of services provided by its members. One perspective on the
formation of professional bodies is that they were established to give consumers of their
members’ services protection against abuse or misconduct. This potential risk exists
because, in general, the consumer is not in a position to judge the quality of the advice
or services provided by the professional.
The economic term to describe this imbalance between, in this case, a professional and
the consumer of their services is information asymmetry. This information asymmetry
is one of the two main market failures that can lead to regulation of the profession. A
further concept used by economists in the context of regulation is that of externalities.
Asymmetry of information exists when those providing a service are in a much stronger
position to judge the quality of the service than those receiving it. The providers professional accountants - have superior information which they can potentially exploit
by providing a poor quality service or over-charging for that service or doing more than
is really necessary, for example.
Externalities exist when the effects of what professionals do have positive or negative
effects on third parties who are not directly involved in the contracting for the service.
An example is where investors or creditors, who don’t pay the auditor, benefit through
being able to take decisions based on the report prepared by the auditor. Regulation including self-regulation- may be used to ensure that such external benefits or costs are
taken account of.
Taken together, these two concepts do much to explain, at a conceptual level, why
societies seek to have the activities of a profession regulated. It is therefore important,
in designing systems of regulation, to be conscious of the problems that regulation is
seeking to address. In particular it seeks to ensure that services provided are of the right
quality and are supplied at an appropriate price.
In fact, of course, we almost never have complete and unfettered self-regulation or
complete external regulation. There are some things that external, government
regulation does better, some things that self-regulation does better and some things that
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are better left to the market. And, as we noted above, the particular solution depends on
a number of factors.
This makes a universal solution for the respective roles of governments, professional
institutes and the market problematic. And if it is problematic at the national level, it is
more so at the international level.
At the national level, regulation can be provided by the profession itself, by a
governmental agency or by a combination of both. Generally it is a combination of
both, as few governmental regulatory bodies have sought to regulate the behavior of
accountants in business, for example. Also, while the events in the early part of this
century have lead to a change in the balance between self-regulation and external
regulation of the audit profession, the extent of such re-balancing has varied between
countries and in many cases does not replace self-regulation but rather requires that it be
subject to appropriate external oversight.
In considering the role of self-regulation at the national level, it is important to
recognize the value of that self-regulation. In almost every country a degree of selfregulation remains. So for the accounting profession it is critical to ensure that selfregulation is effective. One of the means to achieve this, of course, is to ensure the
existence of appropriate public oversight. In the recommendation of the SRO
Consultative Committee of IOSCO (2000) it was noted that “ SROs .... have the
specific knowledge and ability to implement and conduct efficient and cost-effective
regulatory programs”1and that “when properly implemented, self-regulation can lead to
efficient rules, wide compliance with and acceptance of those rules, timely adjustment of
rules to meet changing conditions, and flexible and effective enforcement of rules”2.
And while in 2007 some of the elements of the IOSCO recommendation would now be
difficult to sustain, it is equally hard to argue that the analysis in that report fails
completely; self-regulation, when properly designed and with appropriate oversight, can
still be an efficient regulatory mechanism.
1
2
Ibid, page 13.
Ibid, page 13
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At the international level, of particular importance to IFAC of course, self-regulation
with appropriate public sector oversight has significant advantages. Of greatest
importance is the ability of a self-regulatory organization (SRO) to act relatively quickly
in light of changing circumstances. SROs at the international level also have the ability
to set standards that are not subject to the same difficulties of achieving a consensus
among jurisdictions with widely different capacities and initial standards. The SRO
must, however, be subject to oversight that is sufficiently rigorous to give it legitimacy
in its international setting.
Whether regulation is carried out by the profession or by an external regulator, or a
combination of both, that regulation should be of high quality. It should be directed
towards solving the market failure, and the benefits of this regulation should exceed its
costs. And irrespective of who conducts the regulatory activities, it is necessary to be
conscious that regulation is not a necessary consequence of market failure – regulation
is appropriate when there is both market failure and, importantly, policy analysis that
demonstrates regulatory intervention will improve the situation. In the history of
regulation it is not unknown for interventions undertaken with the best of intentions to
have results which aggravate the situation they were intended to resolve or which have
compliance costs far larger than predicted.
In general, whether carried out by the profession or by an external regulator, or a
combination of both, to achieve the objectives of the regulation of the profession, that
regulation should cover:

the conditions of entry to the profession;

the creation and maintenance of the register of licenses representing the right to
practice the profession;

the issuance of standards relating to the profession,

the monitoring system, including independent quality control, and;

the disciplinary system.
With respect to standards, these include the code of ethics for Professional Accountants,
applicable to all professional accountants, and the specific standards for the exercise of
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the profession, which depend on the specialization. In the case of independent
professional auditors, then we are talking about the standards on auditing.
In the last five years, as a consequence of the financial failures, the concept of selfregulation has been seriously questioned. Yet, if one reviews the elements of regulation
listed above, the failures in respect of the regulatory role of the profession were not
general, but related primarily to the monitoring system, and in particular to “peer
review” as a mechanism for assuring quality control in respect of auditing. But this
element of monitoring is only one element of professional regulation, albeit an
important one. The other elements have not been subject to the same questioning. In
reality, there is little evidence to support serious questioning of the other aspects of
regulation by the profession.
Today, the appropriate balance between self-regulation and governmental regulation of
the profession continues to be debated in many countries. This debate is necessary and
healthy. What is worrying, however, is the notion that professional institutes might
have little or no role in professional regulation at all.
To say the least, this would be an enormous error.
In the first place, professionals have a close knowledge of what can be complex matters,
and they are close to the markets in which they operate and have, therefore, a good
sense of how regulations might affect behavior.
Secondly, in any event, the organized profession must maintain its own regulation of the
actions and behavior of its members, if it is to be effective in maintaining the reputation
of its membership. There is no one with a more direct interest in overseeing the quality
of their services than the members of the profession. Equally, there is no one more
affected by improper actions of their colleagues than they.
Thirdly, it needs to be recognized that professional organizations in many jurisdictions
fulfill their regulatory obligations responsibly and well. Taking a long-term, global
view, one can see that self-regulation has been an efficient regulatory mechanism in
many jurisdictions and across many professional areas.
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As a minimum, to ensure a high quality of regulation, there needs to be a dialogue and
an alignment of actions between the professional organizations and the regulators.
Taking a global view, the profession in a significant number of countries still has a key
regulatory role. And even where its role is more limited, a professional institute must
be concerned about the quality, behavior and standards of its members. To be otherwise
is to be a club, not an association of professionals.
These concerns for the quality, the behavior and the standards of its members, and an
awareness of the public interest imperative for any profession, means that the profession
and governmental regulators have a very substantial commonality of interests and
alignment of objectives.
In fact, today, in general, the professional organizations do a very great deal for the
proper regulation of the profession, and, even in environments where the profession is
highly regulated, there is still an obligation on the professional body to conduct some
significant elements of self-regulation.
Finally, in considering the respective roles of external and self-regulation, it is
important that we all focus on what constitutes good regulation. Many governments
and other organizations have addressed this issue, and IFAC is currently addressing this
in its work on the “public interest”. We now have well specified sets of principles for
what constitutes good regulation, such as those issued by the Organization for
Economic Co-operation and Development3. These sets of principles differ in their
detail, but they all emphasize issues such as the need for regulations to be efficient,
proportionate, non-discriminatory, subject to review, not anti-competitive, directed to
the public interest, and so on. Both external and self-regulatory mechanisms need to be
judged against these principles.
If we think about IFAC, the global accountancy organization, there are many very
important initiatives that are being carried out in support of quality and consistency of
professional services and in support of appropriate regulation of the profession.
3
OECD, OECD Guiding Principles for Regulatory Quality and Performance, 2005.
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In the first place, we issue standards for auditing, ethics, and education of professional
accountants, and we do it through a process that can be considered both best practice
and at the same time a model of shared regulation, demonstrating the alignment of
interests. Each standard-setting board has non-practitioner and public members as well
as an independently chaired Consultative Advisory Group comprised of various
stakeholders. In addition to communications on technical issues, this group provides
comments on the work programs of each of their respective boards and draws attention
to significant public interest concerns. This structure, along with the current due process
and the oversight of the Public Interest Oversight Board, makes these standard-setting
boards exemplary international models.
Secondly, we have implemented a Member Body Compliance Program that is possibly
the most ambitious program carried out by an international organization to promote a
primary objective of regulation: the application of high quality standards, the existence
of a system of quality control and an appropriate disciplinary system.
Thirdly, IFAC is clearly the champion of convergence of international standards, not
only those issued by the independent standard setting boards of IFAC, but also
International Financial Reporting Standards. It has promoted convergence since it was
established in 1977 – 30 years ago this year – long before convergence became a
commonly accepted objective. The Compliance Program is surely the most important
worldwide program that supports convergence to international standards.
In the area of convergence, we believe that the conditions to achieve it fully are in place
and we have confidence that key regulators, especially the European Commission and
IOSCO, will endorse the International Standards on Auditing and the IFAC Code of
Ethics. This would represent a very important step toward global convergence and an
important contribution to the quality of financial information.
IFAC, especially through the activities of the IFAC Regulatory Liaison Group (IRLG),
continues to promote dialogue with the representatives of the regulators in the
Monitoring Group and also with the International Forum of Independent Audit
Regulators. These relationships are an example of how the concepts of dialogue and the
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cooperation of those with different roles but with common objectives can become
operational. The development of a framework for high quality financial information,
the analysis of the present barriers to quality, the promotion of convergence in terms of
auditing and independence standards, the importance for entities to have professional
accountants for the preparation of financial information and the collaboration in the
development and implementation of rigorous quality control systems and independence
around the world are some of the projects that are on IFAC’s agenda.
I am optimistic about the future of professional regulation and its ongoing evolution. At
IFAC, we have already seen the successful development and implementation of
oversight for our public interest activities through the establishment of the Public
Interest Oversight Board just over two years ago. As he indicated in his message in the
2006 IFAC Annual Report issued last month, PIOB Chairman Stavros Thomadakis
stated that the relationship between IFAC and the oversight board “furnishes an
excellent foundation for our contributions to more orderly, transparent and stable world
markets.” Together, IFAC, its members, regional bodies, and regulators can continue to
work together to strengthen our profession in a manner in which the public, above all
else, significantly benefits.
I am also optimistic that here in the European Union you will see continuing positive
developments in the relationship between the profession and regulators and in
convergence to common standards. The 8th Company Law Directive, which came into
force about one year ago and is due to be implemented by national governments by the
middle of next year, establishes further important oversight mechanisms while also
promoting EU-wide uniformity in practice.
Finally, there are two important considerations to keep in mind about the profession and
regulation.
First, the evolution of the profession, its adaptation to the new market demands, its
response to technological changes, will come not from regulation, but rather from the
profession itself. As a profession, we must be willing to move forward, to work together
and to collaborate in new areas to build stronger economies and societies. We should
continue looking to our markets, whether from the perspective of our members working
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in organizations or those in public practice. We must continue to identify and to design
more efficient ways to deliver our services and to develop new services that better
respond to the changing demands of the market. We need to be prepared to provide
relevant services within the new technology environment.
This is our profession. We should continue to be players, not spectators, in its
development. In order to accomplish all this, a key issue is education. If we don’t see
education as a priority, we will be making a big mistake. For this reason we should
recognize the importance of the strategic plan for the International Accounting
Education Standards Board, with respect to which we have engaged in wide
consultation.
Second, we must also keep in mind that it is ultimately values that drive behavior. There
is no standard or regulation that can be truly effective if it is not accompanied by ethical
behavior. It is the ethical behavior of the professional accountant that is the ultimate
guarantee of good service and quality. Education in values, especially through example,
and the revaluation of professional judgment, based on a solid formation and in
experience, are two elements that will be essential to the future of our profession.
Regulatory systems should be designed to promote and to achieve these behaviors.
High quality service from the profession is ultimately a function of professional ethics,
personal competencies and values, and regulatory systems, which must be consistent
with and supportive of one another.
So IFAC’s vision for the future of professional regulation is one in which the
institutions of the profession will continue to be important, and will continue to work
with external regulators in an ongoing quest to find the right balance of external
regulation and self-regulation with public oversight.
Together, IFAC, its regional organizations such as FEE, and its member bodies
worldwide have a shared objective in supporting and participating in professional
regulation that is appropriately tailored, consistently applied and effectively executed.
As the profession here in Europe has soundly demonstrated, by working together, we
can achieve far greater things in whatever endeavors we attempt than when we work
alone.
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I thank you for your support of and involvement in IFAC, and I look forward to our
continued collaboration on the issues that affect our profession.
Thank you very much for your attention.
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