IFAC: Key Initiatives to Strengthen the Global Accountancy Profession

Graham Ward, CBE | IFAC President (November 2004 to November 2006)

May 29, 2006 | at Chinese Institute of CPAs – CPA Forum | Beijing, China | English

Good morning. It is a privilege to be here today in the People’s Republic of China to speak before your CPA Forum. Thank you for your kind invitation. This is my third trip to China since I became IFAC President and each time I am here I continue to learn more about your culture, your profession and your people. This enhanced understanding most certainly makes our global world seem to be more coherent and enables the International Federation of Accountants better to support your needs and those of the public you serve.

The Chinese Institute of CPAs is one of IFAC’s newer members, having joined IFAC in 1997. The CICPA is also a very important member and will continue to be so as China’s role in the global marketplace continues to expand. IFAC is dedicated to supporting you in developing our profession. This means providing you with the standards and guidance necessary for professional accountants to carry out their work both effectively and responsibly; it means encouraging accountability and transparency in your undertakings; and it means promoting sound practices of corporate governance.

We are very much working with your leadership in these endeavors. Dr. Yugui Chen serves on IFAC’s Board and Mr. Jianhua Tang is his Technical Advisor on the Board. They thus are able to provide direct input and direction as to how IFAC can best support countries with developing economies and a growing accountancy profession. Ms. Xin Ye, another CICPA member, serves on IFAC’s Small and Medium Practices (SMPs) Committee, which is dedicated to addressing the unique needs of SMPs and small and medium entities (SMEs).

I am here, today, to discuss initiatives of the International Federation of Accountants, and, in particular, our support for accountancy firms. My comments will be presented in the context of what I believe is our profession’s most important goal – that is, to improve the standard of living of and to create better environments for the world’s citizens.  A lofty goal, indeed, but also, I believe, an achievable one.

It is important for all of us – whether we are accounting professionals, government ministers, academics, regulators or standard setters – to remember that we are fundamentally engaged in the business of  “people.”  I emphasize this because, as we discuss policies and standards, approaches and infrastructures, we cannot and should not lose sight of those who can and should benefit from what we do: the world’s citizens.

The best way to help the world’s citizens, including the citizens of the People’s Republic of China, is through financial liberalization. Financial liberalization requires putting out a welcome mat for foreign investors. It requires greater openness to international trade and the privatization of state-owned enterprises. It also means making a commitment to good governance, which can do much to root out corruption – conditions which are essential for successful economic development.

Financial liberalization, the development of sound economic policies, and strong corporate governance are critical steps on the path towards a market economy that is the cornerstone of improving living standards. Accountants have a significant role to play in developing and sustaining market economies by providing the information they need to implement their planning processes

I have been asked to speak to you today about how the accountancy profession is a building block of a market economy. An essential element of a market economy is information. It drives the decision-making process for businesses, investors and individual consumers. From a government or management perspective, high quality financial reporting information is essential in order to manage resources, maintain growth and understand the true health of an enterprise, be it a small start-up company or a nation of millions.

The accountancy profession plays a vital role in the collection, retention and dissemination of financial information of businesses, organizations and governments. The International Federation of Accountants is leading the global accountancy profession in its efforts to ensure high-quality financial reporting, helping to fulfill its role as an essential building block of market economies. High-quality financial information should have three characteristics:

  • First and foremost, it must be credible.
  • Secondly, in order to achieve that credibility, it must be based on strong principles or standards.
  • Thirdly, it must be produced by people with integrity – in other words, individuals who act responsibly and ethically. 

IFAC, through the development of standards and guidance, encourages the accountancy profession, indeed all those involved in financial reporting in both the public and private sectors, to develop information that is consistent with these characteristics. IFAC sets international auditing and assurance, ethics, education and public sector accounting standards. Over the past year, we have continued to increase public interest input into these processes in several significant ways. The first was through the creation of the Public Interest Oversight Board, formed in February 2005, and chaired by Professor Stavros Thomadakis. The PIOB was established through the cooperation of international regulators and IFAC and has just completed its first full cycle of operations. The PIOB oversees auditing, education, and ethical standard setting as well as the IFAC Member Body Compliance Program. Its effect on IFAC over the past year has been extremely positive and we will continue to welcome the PIOB’s comments and input. Its activities are highlighted in its first annual report, which can be downloaded from the new PIOB website.

IFAC has also provided for more public interest input through the establishment and expansion of Consultative Advisory Groups (CAGs) to standard-setting boards. For the first time this year, meetings of the CAGs are open to public observers. We have also enhanced the transparency of our standard setting, most notably, by including more information on the IFAC website (www.ifac.org).

Let me turn now for a moment to our standard setting initiatives. Time does not permit me to describe all of the new standards, but I would like to highlight for you now a few of those which are most significant to well informed markets.

In the area of auditing, the International Auditing and Assurance Standards Board (IAASB) sets international standards on auditing and assurance, quality control and related services that are recognized throughout the world. Over 70 countries either use the IAASB’s International Standards on Auditing or rely on them as the basis for national standards.  I congratulate The People’s Republic of China and the CICPA for their leadership in deciding to converge to IFAC’s standards and those of the International Accounting Standards Board.  This decision is indeed monumental, as it will help to strengthen the profession here in China, build confidence in your financial reporting model and also increase the credibility of financial information produced by you, in both domestic and overseas markets.

IFAC is dedicated to supporting you as much as possible in the implementation of these standards.  In order to ensure that its standards are clear and understandable the world over, the IAASB has undertaken a significant project to improve the clarity and structure of its standards. Beginning in October 2005, it issued four exposure drafts of proposed standards re-drafted using its new drafting style. The new style was developed based on input it received at an international Clarity forum last year and through responses to its 2004 Proposed Policy Statement and Consultation Paper on Clarity. It is currently in the process of reaching an agreement on the Clarity style. It will then launch an aggressive program to modify all of its standards based on the new style over the next 18 months or so. We hope that this new style will not only make the standards more understandable, but also make them better capable of being translated.

In addition to addressing the issue of clarity, in March of this year the IAASB issued a re-exposure draft designed to enhance the quality of audits of group financial statements, entitled “Proposed International Standard on Auditing (ISA) 600 (Revised and Redrafted), The Audit of Group Financial Statements”. Following earlier consultations, the IAASB has modified the proposals and reissued the exposure draft to address issues related to the extent to which the group auditor needs to be involved in the audits of components that are audited by other auditors, whether these auditors are independent of the group auditor (unrelated) or belong to the group auditor's national or international firm or network of firms (related auditors). The exposure draft can be downloaded from the IFAC website. Comments are requested by 31 July, 2006.  I encourage you to review it and to submit your comments.

Another area that the IAASB is addressing is related party transactions. 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 ISA 550 (Revised), Related Parties. The ED proposed requirements for auditors regarding the audit of related party relationships and transactions. The proposed standard would place 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.

An essential element of credible financial information is a foundation in ethics and integrity. To build credibility in financial systems and to contribute to sound economic systems, we at IFAC promote our values of integrity, transparency and expertise to all professional accountants, both in practice and in business, as well as to all those in the financial reporting supply chain.

IFAC’s International Ethics Standards Board for Accountants develops the international Code of Ethics for Professional Accountants which is applicable to all accountants, including those in business and industry, public practice, the public sector and academia. 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: to those in public practice, as well as to those in business and government.

The Ethics Standards Board is also addressing issues such as audit independence and whistle-blowing and is in the process of developing new guidance for professional accountants in government and in business.

Additionally, IFAC’s International Accounting Education Standards Board is focused on ethics and conduct, among other issues. It plans to issue a tool kit and an International Education Guideline to assist member bodies, academic institutions and others in instilling a strong ethical foundation in the accountants of tomorrow. The guideline will offer recommendations for good practice models of ethics education, while the tool kit will provide practical tools – such as sample course outlines, teaching notes and case studies – to be used by member bodies and educators. The tool kit and proposed guideline are expected to be available in the coming months.

The Education Standards Board is also set to release in June a new International Education Standard 8, Competence Requirements for Audit Professionals, that will require all IFAC member bodies to ensure that professional accountants acquire and maintain the specific capabilities required to work as competent audit professionals. The new standard will also prescribe specific competence requirements for transnational audit professionals. More information on this new standard will be distributed in the coming weeks. 

Another important aspect of IFAC’s work, and one to which I urge you to give note, is its programme to strengthen public sector financial management and accountability. This is accomplished largely through the International Public Sector Accounting Standards Board, known as the IPSASB.  The IPSASB develops International Public Sector Accounting Standards, which are designed to improve public sector financial management and accountability. It is currently addressing key issues for public sector accounting, including accounting for social policy obligations of governments, non-exchange revenue and budget reporting.

The IPSASB recently released a proposed standard on accounting for non-exchange revenue. Many public sector entities derive most of their revenue from non-exchange transactions – including taxes and transfers, such as grants, appropriations, donations, gifts or fines. The exposure draft proposes requirements for the recognition, measurement and disclosure of revenue from non-exchange transactions and contributions from owners and also includes definitions of: taxes, a taxable event, expenses paid through the tax system and tax expenditures.

A new information paper on the United States’ experience in making the transition to the accrual basis of accounting has also been released recently by the IPSASB. The paper identifies the benefits of this and highlights the challenges in developing and implementing an accrual based accounting system. We believe that this paper will be useful for governments considering implementation of the accrual basis.

An important IPSASB objective is facilitating convergence with International Financial Reporting Standards, upon which the IPSASs are based, and with statistical bases of financial reporting. Last year, the IPSASB issued exposure drafts further to converge its standards with International Financial Reporting Standards and with statistical reporting bases. The IPSASB is making great strides in its convergence efforts. An increasing number of entities worldwide, including the World Bank and NATO, are using IPSASs and the United Nations has indicated that it will be proposing to its General Assembly, next month, that these standards be used for its financial statements.

To enhance government’s credibility nationally and overseas, governments need to report their financial position and performance and their cash flows in a transparent and high quality manner. Such information is vital to the efficient operations of government and can assure the public that government resources are managed effectively. It is important to keep in mind that the need for high quality information from governments is as important as it is for business and industry.

It is business and industry, as exemplified here in China, that are the real drivers of economic growth and development, leading to better lives for citizens.  Professional accountants in business play a vital role in supporting global business and contributing to growth and stability. To give you a sense of the size of this constituency, more than 50 percent of the members of IFAC member bodies, or nearly 1.3 million accountants worldwide, are professional accountants in business. IFAC, through its Professional Accountants in Business (PAIB) Committee, provides professional accountants in business and industry with guidance and tools to support high quality information.

In 2004, the PAIB Committee, in conjunction with the Chartered Institute of Management Accountants, issued a report entitled Enterprise Governance – Getting the Balance Right. This report provides recommendations covering the range of enterprise governance, recognizing the interaction between probity and profitability.

The committee is now expanding the guidance it develops, with a focus on supporting professional accountants in business in providing high quality information and in acting ethically. It recently issued an exposure draft, Guidance for the Development of a Code of Corporate Conduct, proposing guidance to assist professional accountants and others in establishing and implementing codes of conduct in their organizations. The goal of this proposed new guidance is to support sound corporate governance policies worldwide. 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. To assist in the creation of codes of conduct, the guidance includes information on presentation and content, organizational and management challenges and implementing a code of conduct in a global organization.

In addition, to provide professional accountants in business with one-stop access to current information on topics of interest to them, IFAC is preparing to launch, in September, a new web-based global knowledge resource. This resource center will feature a powerful Internet search engine that will enable users to search a key term or phrase to access information on a variety of topics, including budgeting and planning, corporate governance, internal control, and strategic management accounting. In addition, this electronic resource will be expanded early in 2007 to serve the information needs of accountants in small and medium practices. More details on this new resource center will be provided to member bodies in the coming weeks.

Another way that IFAC contributes to the quality of financial reporting and thus to building sound market economies is by facilitating convergence to international standards. Indeed, making best endeavors to converge national and international standards is a requirement for IFAC member bodies as set out in IFAC’s Statements of Membership Obligations (SMOs). The SMOs, which also require member bodies to implement quality assurance and investigation and discipline programs, form the basis of IFAC’s Member Body Compliance Program.

The Compliance 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. I personally believe that it will play a major role in building credibility in the financial reporting process and in the profession in general. 

Part 1 of the Compliance Program, a fact-based questionnaire to assess the regulatory and standard-setting frameworks in the home countries of each of IFAC’s members and associates, is now complete. Responses from more than 150 members, including the CICPA, have been posted on the IFAC website, and the remaining responses are in the process of being agreed and posted.

Part 2, the SMO Self-Assessment Questionnaire, was launched last December and responses will be posted beginning in the second half of this 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 a 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 important responsibilities in the changing and complex environment in which we work.

We are pleased that member body participation in this program is so significant and I thank the CICPA leadership for making the questionnaire a priority.

In addition to the Member Body Compliance Program, IFAC, through the Forum of Firms, is able to promote convergence and adherence to high ethical values. The members of the Forum of Firms, which is comprised of over 20 global networks and associations of public accounting firms, have committed to the use of ISAs and of the IFAC Code of Ethics for transnational audits. Additionally, these firms have committed to use the IAASB’s International Standard on Quality Control (ISQC) 1, which establishes a high quality standard for the quality control systems within the firms. This commitment to IFAC standards and to the promotion of high quality and consistent performance was reinforced in February 2006 with the approval by the IFAC Board of a new constitution for the Forum of Firms. The new constitution updates membership requirements to emphasize the firms’ commitment to audit in accordance with the IAASB’s International Standards on Auditing, and all members of the Forum must show that they meet all the requirements to be deemed to be full members.

Before closing, I would like to comment on one other area that is critical to economic  development – that is, corporate governance. Across the globe, corporate governance has risen to the top of the agenda for corporate executives, investors and regulators. As your country continues to transition from a planned economy to a market-driven economy, it is important to keep in mind the importance of strong corporate governance. We fully recognize that progress in governance reform has occurred in China, but there are still more changes looming on the horizon for you. I urge you to continue to liaise with the China Project Development Facility and to speak up to legislators about their role.

It is important to note that the quality of a nation’s corporate governance system strongly influences the character of its capital market and the availability of external capital. Ronald Gibson, the Meyer Professor of Law and Business at Stanford University, is among those who calls for developing countries to make a full commitment to corporate governance.  Both good corporate growth and good corporate governance requires the capacity to make credible disclosure of financial results. In the absence of effective financial disclosure, a country’s capacity to support equity markets, and in turn, important kinds of industry, is compromised.

China has made significant economic strides and can achieve even more by addressing governance issues. Just this past week the Organization for Economic Co-Operation and Development – OECD -- noted in its semi-annual report that China is one of the few countries enjoying double digit growth. The report also said that it expected China’s robust expansion to continue, forecasting economic growth of 9.7 per cent this year and 9.5 per cent in 2007. These forecasts imply, however, that China can not just simply hold the course. It must continue to enhance its policies to fulfill its potential.

All of us here have a role to play in building confidence in financial information and financial infrastructure.  Yet we also have a role to play in communicating how those infrastructures work to protect the public interest. Clear information about the financial reporting process needs to be presented to those who rely on – or want to rely on – the information that results from it. Additionally, clear information about the economic policy framework, the regulatory environment, and economic developments is essential to sound business decisions. Thus, while I urge you to continue to take actions in this area, it is equally important to communicate those actions to the public who, ultimately, will benefit from them.

As we look to the future, it is evident that the quality of information expected by investors and needed by public and private sector decision makers will become even more critical to the development not only of national market economies, but to the global economy as well. Thus, ensuring high-quality financial reporting is an area where there is no room for compromise. We must all continue to be as proactive as possible and make an ongoing commitment to high-quality financial reporting. Together, we can contribute to stability and prosperity, not only in the People’s Republic of China, not only in the Asia-Pacific region, but worldwide. Together, we can help to grow your economy and together, we will benefit.

Thank you very much for your attention. 

 
 
 

Primary tabs

Thank you for your interest in our publications. These valuable works are the product of substantial time, effort and resources, which you acknowledge by accepting the following terms of use. You may not reproduce, store, transmit in any form or by any means, with the exception of non-commercial use (e.g., professional and personal reference and research work), translate, modify or create derivative works or adaptations based on such publications, or any part thereof, without the prior written permission of IFAC.

Our reproduction and translation policies, as well as our online permission request and inquiry system, are accessible on the Permissions Information web page.

For additional information, please read our website Terms of Use. ALL RIGHTS RESERVED.

Agree