MAKING PROGRESS ON THE INTEGRATION OF THE WORLDWIDE
ACCOUNTING PROFESSION
By: Fermín del Valle, President
International Federation of Accountants
Chamber of Hungarian Auditors 75th Anniversary International Conference
Budapest, Hungary – October 24, 2007
Good afternoon and thank you for inviting me to join the 75th anniversary celebration of
the Chamber of Hungarian Auditors (CHA). Congratulations on this wonderful occasion.
It is significant that we are marking this 75th anniversary on October 24th; one day after
the Hungarian National holiday that celebrates the freedom fighters of the Hungarian
Revolution of 1956. The accounting professional organization, established in 1932, has
faced the challenges of operating during wartime, pushing ahead in the face of hostile
political regimes and staying the course in times of great economic upheaval. Facing
adversity, surviving, and thriving are testimony to the spirit of the people in this room, as
well as the rest of the Hungarian people.
But Hungarians are known for more than just an enduring spirit. Hungarians are known
for a tradition of innovation. Famous Hungarian inventors and their inventions include:
John von Neumann and digital computing; Laszlo Biro and the ball point pen; and Erno
Rubik and his Rubik’s cube. Such inventions require vision and a belief that the world
needs what you have got to offer, which brings us to our topic this afternoon.
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You have asked me to talk about integrating the worldwide accountancy profession in
Hungary and across the globe. Some might say getting all the accountants in the world to
come together and agree on the many aspects of their professional lives is about as easy
as making all sides of the Rubik’s cube snap into place.
But those of us who are committed to the future of the worldwide accounting profession
– members of organizations such as IFAC and CHA – welcome these challenges and we
are doing very well.
In fact, I believe that the accountancy profession is an example in this respect.
We can say that the accounting profession has advanced a great deal more than average
in the matter of convergence and effective integration and we have achieved this through
continuous dialogue and cooperation.
In my opinion, there are three conditions for us to continue being successful in this
process: alignment, collaboration and communication. Member Bodies, Regional
Organizations, and the Forum of Firms should join IFAC in focusing on these three
drivers of integration.
Integration today not only demands active participation in regional and international
organizations and alignment of strategies and action plans, but also demands us to think
in terms of the effective globalization of our professional organizations.
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We have all been and we are still witnesses to globalization. We have seen companies
become global and watched even the smallest entities adopt structures that enable them to
insert themselves in the global marketplace.
We have been present for, and we continue to be present to, the globalization process of
the professional firms. We know about the demands of the SMPs to generate a different
type of global network.
Globalization is a fact for organizations of all types. Professional organizations are not
excluded.
What has globalization meant and what does it mean for member bodies? Have we
advanced sufficiently in our globalization process? The response to these questions will
have a substantial impact on our strategy over the next few years.
CHA has participated actively in IFAC boards and committees. I would like to extend my
appreciation to Ferenc Eperjesi, Vice President of International Affairs at CHA, who
serves on IFAC’s Developing Nations Committee, and who previously was a member of
IFAC’s International Accounting Education Standards Board (IAESB), the Compliance
Committee, and the Developing Nations Task Force. I would also like to acknowledge
the valuable contributions of Laura Ipacs, a member of the International Accounting
Education Standards Board since January 2006.
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It is my sincere hope that this participation continues and that the CHA is increasingly
involved in the future.
We know that, right now, any plan involving our profession in Hungary must include,
among other things, changes mandated by the European Union’s Eighth Company Law
Directive on Statutory Audit.
An active and timely participation of the accountancy professional organizations in
Europe, including CHA, is vital in the implementation process of such a Directive. I
know that this has been the case of the CHA.
Because all 27 European Union member states are required to comply with the Eighth
Directive, it will have an immediate effect on the accountancy profession in several
significant areas, including convergence to a single set of international auditing
standards, full implementation of quality assurance processes and strengthened auditor
independence requirements.
Let’s look briefly at these three areas of impending change and examine how IFAC and
CHA can participate to contribute to a positive result. First, the Eighth Directive will
affect the profession by mandating convergence to a set of international auditing
standards.
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As required by the 8th Directive, audits should be carried out in accordance with the
international auditing standards adopted by the European Commission. The Directive
also specifies that the Commission will adopt international auditing standards only if
they: first, have been developed according to a due process with public oversight and
transparency and are generally accepted internationally; secondly, contribute to a high
level of credibility and quality of annual or consolidated statements; and lastly, are driven
towards the European public interest.
We are absolutely convinced that the International Standards on Auditing (ISAs) comply
with all of these requirements and many more, especially once the revised standards are
put into effect under the Clarity Project. Moreover, we do not believe there are other sets
of standards that could possibly fulfill these conditions.
Nevertheless, the legislation does not set a deadline for the European Commission to
make the decision and today the estimated date is unknown.
IFAC believes ISAs, the standards issued by the IAASB, are the highest quality
international standards and should be adopted by all 27 member states.
The IAASB expects to complete all 35 ISAs as final standards, redrafted under the
Clarity project, by October 2008 and, on this basis, is proposing that these standards
become effective for financial periods beginning on or after December 15, 2009, in order
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to give auditors around the world and European Union member states a chance to digest
and properly implement them.
Additionally, to remain open to all member states’ concerns about converging to ISAs,
IFAC has invited the European Commission to act as an observer at the IAASB table.
All of the conditions are in place, therefore, for the European Commission to adopt the
ISAs. However, the timetable is unknown and some situations exist that may indicate a
delay in this decision.
One important aspect to consider is that the member states can apply a national auditing
standard while the Commission has not adopted an international auditing standard on the
issue.
This means that it is not necessary to wait on a decision from the European Commission
to adopt the ISAs. This can be done at a national level and in this way Hungary, and the
companies and organizations that rely on the standards, can realize the benefits even
before the EC adopts them.
Certainly, this would be equally positive for the rest of the countries of Europe and it
would require professional accountancy organizations and national standard setters to
work together.
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It would also be necessary to have timely translation of the new set of redrafted standards
and deliver the proper training for the professional accountants.
I strongly encourage you to fully adopt the ISAs on the proposed effective date.
The second way the Eighth Directive will affect the accounting profession is by
mandating quality assurance processes for audit firms and individual audit
engagements in accordance with international audit standards and subject to public
oversight.
International Standard on Auditing (ISA) 220 establishes specific responsibilities of firm
personnel for an individual audit engagement. International Standard on Quality Control
(ISQC) 1 provides direction at the firm level. Some countries in the European Union,
including Hungary, have already begun using these standards, which aim to ensure audit
quality consistency across nations, international firms, and ultimately, the worldwide
accountancy profession. IFAC is counting on its member bodies to take a leading role in
this area in a very specific way.
IFAC Statement of Membership Obligation 1 establishes the guidelines to implement an
external quality control.
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It is hopeful that the CHA will actively participate and coordinate with the independent
oversight body the establishment of quality assurance, investigation and discipline
activities within the framework of the 8th Directive.
The third way the Eighth Directive will affect the accounting profession is by
mandating strengthened auditor independence requirements. Independence has
dominated the agenda of the International Ethics Standards Board for Accountants for the
past several years. In July, it issued an exposure draft proposing revisions to its
independence rules. The draft proposes to strengthen independence requirements
regarding internal audit services, contingent fees from assurance clients as well as the
size of fees from a single assurance client.
These proposed changes were added to others included in other exposure drafts issued at
the end of last year, also referring to questions of independence. The objective is to
approve all these modifications towards the middle of next year and the hope is that after
these modifications are introduced, those independence standards in the IFAC Code of
Ethics will achieve international consensus and can then be used as a basis to achieve
convergence in this matter.
I would like to encourage CHA to work towards the full adoption of IFAC’s Ethics Code,
including these new independence rules.
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A key activity for the sustainability of the profession is located within the responsibilities
of the Compliance Program.
Launched in November 2003, the program is now entering the third phase, which
involves the development of action plans. The IFAC staff is in the process of developing
policy recommendations for members with gaps in compliance. On the basis of these
recommendations, IFAC members and associates will develop action plans to resolve
those issues and close the gaps between the present situation and their desired future. I
want to thank the CHA for participating in the Compliance Program.
Of course, the action plans of the Compliance Program should be aligned with the
requirements of the 8th Directive and should be carried out within the new regulatory
framework.
This is an ideal area for collaboration. Firstly, it will be apparent from these action plans
that there are similar problems in many countries, and therefore, there will be an
opportunity to develop common solutions that can later be customized nationally. This
can mean significant savings in resources.
Secondly, the Compliance Program presents the opportunity to collaborate with a
neighboring and sometimes less developed professional organization. In this instance,
CHA could be a mentor.
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In May of this year, we had a productive meeting with the presidents and chief executives
of various IFAC Member Bodies of this region. There we established the foundation for
permanent dialogue and greater integration that permits effective collaboration between
these organizations.
IFAC’s vision of professional regulation is one in which professional accountancy bodies
play an important role in the regulation of the profession, working with individual
governments or government agencies.
IFAC also believes that professional accountancy organizations such as CHA have a key
role to play in the quality and consistency of services provided by its members. We have
already focused on the role CHA will play in monitoring audit quality and ethical
behavior, but you also have an obligation to speak as the voice of the profession on other
matters such as entry and licensing requirements, including education and continuing
professional development.
We should not forget that all of these initiatives contribute to one objective: quality in
financial reporting. But this is not an end in itself. The information should serve to make
investment or financial decisions, as a driver of economic growth.
When investors understand, and have confidence in a company’s financial information,
they tend to be more confident about investing. In turn, steady investment in a region’s
businesses ultimately makes that region more prosperous.
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However economic growth is also not an end in itself. That growth should ultimately
improve individual lives; it should be for the benefit of the people. The wealth should
flow through society. The final objective should be ensuring the well being of people and
eliminating poverty.
As I see it, our profession’s public interest responsibility arises from our role in relation
to these objectives. Professional accountants contribute to growth in individual
companies; we develop the information on which investors make their decisions; we
provide assurance on that information; we support and sustain non-profit organizations;
and we assist governments in sustaining the social and physical infrastructure of any
given jurisdiction and in acting in a fiscally responsible way on behalf of its citizens.
As CHA has demonstrated in its 75 years history, you have handled issues far more
challenging than complying with the Eighth Directive. You have already made progress
adopting ISAs, implementing quality assurance processes, and providing compliance
guidance to your members, and I am confident that you will continue to act with
innovation, courage and professionalism, as you have in so many of your endeavors in
your long history.
Thank you for your attention.
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