ENHANCING CONFIDENCE IN THE ACCOUNTANCY PROFESSION TO
PROMOTE ECONOMIC GROWTH
By Graham Ward, CBE, MA, FCA
President, International Federation of Accountants
International Conference on “Role of Accountancy Profession in Anchoring
Economic Growth”
Mumbai, India – January 20, 2006
Thank you very much for your kind introduction and for the privilege to speak with
you today. This is my third visit to India in the past year, and I am always
heartened by the warm welcome that I receive here. Each time, I am also
impressed by the progress of the profession, the dedication of your volunteers
and your receptivity to new ideas that can further strengthen India’s role in the
world economy.
I would like to thank both your President, Shri Kamlesh Vikamsey, and your Chief
Executive, Dr. Ashok Haldia, for organizing this important conference and for
inviting me to speak at it.
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 fully carry out this role, 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 New York or New Delhi, we cannot afford 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 represents over 160
member organizations in 120 countries, has also undertaken some 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 that so actively participate
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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 India and to
its leaders, who have made a very deep commitment to the profession and to the
public interest which it serves.
As a founding member of the International Federation of Accountants, the
Institute of Chartered Accountants of India has a long tradition of active
involvement in and support of IFAC. I would like to thank those Indian
representatives currently serving on our boards and committees, without whose
support, IFAC could not achieve its objectives. Your President, Shri Kamlesh
Vikamsey, represents India on the IFAC Board and is ably supported by Dr.
Haldia, who serves as his technical advisor. I would also like to thank your
immediate past president Shri Sunil Goyal, who is a member of our Small and
Medium Practices Committee and previously served on the IFAC Board; Shri T.N.
Manoharan, the Institute’s Vice President, who joined our International
Accounting Education Standards Board last November; Shri Shanti Lal Daga,
who joined our Developing Nations Committee last November; Shri Pankaj Jain,
who serves on the International Public Sector Accounting Standards Board; and
Shri Rajkumar Adukia, who serves on our Professional Accountants in Business
Committee. These gentlemen exemplify the ICAI’s spirit of active participation in
the international profession.
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This spirit of international involvement has also had a positive effect on your
economy. As a Board Member of the Indo-British Partnership Network, I am very
aware that India, the world’s second fastest growing economy, is now the world’s
second most preferred destination for foreign direct investment. It has posted an
impressive growth rate of seven percent and has begun to reap the fruits of its
steps towards both greater market openness and facilitating direct investment,
such as rapid growth in the technology and communications sectors. I was
encouraged to hear Indian Finance Minister Shri Palaniappan Chidambaram
echo these sentiments at the Indian Economic Summit last November when he
said, ”We must open the doors to foreign direct investment.” It is through greater
international cooperation and investment that India’s impressive economic
growth rate can be sustained, and it is through continued economic growth that
challenges such as poverty and development can be addressed.
Let me turn back to my specific topic for today: enhancing confidence in the
accountancy profession in order to achieve economic growth and stability. To
meet this objective, IFAC’s 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.
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Secondly, we have sought to continue to enhance the quality of the audit process
through the development of high quality international standards.
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
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the world becomes more interconnected, it is the values that we share that unite
us as a profession.
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
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play significant roles in safeguarding the public trust, plans to provide further
guidance for these accountants in particular.
The 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
in 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.
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.
One of the IAASB’s most significant projects is improving the clarity and structure
of its standards. Based on input it received at a forum in July and through
responses to its 2004 Proposed Policy Statement and Consultation Paper on
Clarity, in late October 2005 the IAASB released exposure drafts of four
proposed standards developed using a new drafting style. These standards are
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the first to be issued as part of an ambitious 18-month program to make IAASB
standards more understandable and capable of being translated, and to facilitate
international convergence. The exposure drafts are posted on the IFAC website
and I encourage you to review them and to provide comment.
In addition to focusing on clarity, the IAASB has issued a new international
standard on audit documentation, designed to enhance auditor 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.
Earlier this month, the IAASB issued an exposure draft on another significant
public interest issue – related party transactions. The proposed revised
International Standard on Auditing would require the auditor to perform a
minimum set of procedures to identify related party transactions and transactions
not identified or disclosed by management.
Other current IAASB projects are the development of standards on auditing
accounting estimates and on materiality in the identification and evaluation of
misstatements.
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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 (ISAEs), 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 also 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 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
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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: 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 Committees 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 national 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 Sydney to Stockholm, from Morocco to Mumbai. 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 that adopt international
standards will see increased outside investment in their economies, by
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institutional and retail investors who are familiar with, and confident in, the
standards, regardless of geography.
There’s 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.
In consultation with IFAC boards and committees, and other relevant interested
parties, IFAC staff is further developing the concept of “international
convergence.” The objective is to 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 ICAI 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
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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. We know that India shares this commitment to these
values and that it, too, through its most recent Professionals Act, is continuing to
provide for greater transparency and accountability on the part of the profession.
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 90 member bodies, including the response
from the Institute of Chartered Accountants of India, 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 for completion at the end of November and responses will be
posted to the IFAC website next year. The responses from these questionnaires
are important for several reasons: they provide a global 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.
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As we look to the future, we see that the global economy will continue to
challenge the international accountancy profession, regulators, standards 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.
IFAC has also focused on promoting strong corporate governance, an area that
your country is also successfully addressing. Your new Corporate Governance
Rules, embraced in Clause 49 of the Securities and Exchange Board of India’s
(SEBI) Listing Agreement, which establishes new corporate governance
requirements, including audit committees and independent directors on boards,
is a model that other countries can look to and demonstrates your country’s
commitment to putting the public interest first.
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IFAC’s focus on corporate governance is best expressed in an independent
report it commissioned – Rebuilding Public Confidence in Financial Reporting –
developed two years ago under the leadership of John Crow, 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 is in the process of finalizing a document on
corporate codes of conduct which, among other things, highlights the role of the
professional accountant in business in developing, monitoring and adhering to
such a code.
This IFAC 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,
our Professional Accountants in Business Committee, working with The
Chartered Institute of Management Accountants (CIMA), 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
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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
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.
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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
IFAC is a global organization of more than 160 member organizations in 119
countries, representing 2.5 million accountants worldwide. Because we are a
global organization, and because it is predicted that 95% 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. 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, to further
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
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a look at the guidance and let us know if you have any input or need for
additional information.
The guidance is one part of a comprehensive program designed to help IFAC
achieve the goal of creating an 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.
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 to 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 continue to work with the profession in India, both institutionally
and personally, in IFAC’s drive to generate economic growth and stability in
every country of the world.
Thank you very much for your attention.
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