IFAC's Response to Globalization
Graham Ward, CBE | IFAC President (November 2004 to November 2006)
Sep 21, 2006 | at 7th Congress of the Eastern Central and Southern African Federation of Accountants | Mangochi, Malawi | English
Chairman, Presidents, fellow accountants, ladies and gentlemen. Good afternoon. It is a great pleasure to be here in Mangochi in the Warm Heart of Africa to address the 7th Congress of the Eastern Central and Southern African Federation of Accountants. Thank you for your kind invitation
Africa has a special place in my heart, because my wife, Ann, was born in Africa and spent her childhood in Africa: Egypt, Ethiopia, Kenya, Morocco and Nigeria. I myself lived in South Africa on an international secondment with my firm and have visited eight other African countries.
The theme for this Congress – Africa’s response to globalization – is especially relevant; it keeps us focused on understanding the challenges resulting from globalization, the opportunities presented to Africa for increased economic development and growth and the role of the accountancy profession in that process. My comments today are focused, therefore, not simply on IFAC’s response to globalization, but more specifically, on IFAC’s role in assisting African countries – and indeed all developing countries – in addressing the challenges of globalization in order to create a better world for their citizens.
I would like to thank the Society of Accountants in Malawi, its President, Mr Jimmy Lipunga, its Council and its Executive Director, Mr. Hennox Mazengera, for hosting this Congress and for inviting me to speak with you today.
In addition, I would like to recognize ECSAFA President, Mr. Butler Phirie, and ECSAFA Chief Executive, Mr. Ndung’u Gathinji, who is also a long-standing and highly respected member of the IFAC Board. Their dedication and service to ECSAFA and to our international profession as a whole is to be commended.
Regional accountancy organizations, such as ECSAFA, often serve as a vital link between international standard setters and regulators; and members of our profession. As exemplified by ECSAFA, they promote international standards; provide training, education and networking resources; and support development efforts. ECSAFA has been especially supportive of the IFAC Member Body Compliance Program, a landmark program initiated in 2004 to provide comprehensive and measurable information on the progress made by IFAC members and associates in adopting international standards. I will speak more about the Member Body Compliance Program in a few minutes.
ECSAFA has a long history of working closely with IFAC and for this I am very grateful. Since its founding in 1989, ECSAFA has worked at a regional level to support the development of a high quality accountancy profession and to promote convergence to international standards. Thank you.
It is through the commitment of the volunteer members of IFAC boards and committees, the support of our 163 member bodies in 120 countries, such as the Society of Accountants in Malawi, and of regional accountancy organizations, such as ECSAFA, that IFAC is able to achieve its mission, which I will state for you now:
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.
IFAC’s mission is to strengthen the accountancy profession in all sectors and all nations worldwide. To accomplish this, IFAC is focused on five key areas:
- Strengthening national accountancy bodies in countries around the world;
- Developing an internationally recognized single set of standards and promoting convergence to those standards;
- Focusing on ethics and ethical conduct;
- Supporting all sectors of the profession, including professional accountants in business, in government, and small and medium practices; and
- In all things we do, protecting the public interest.
IFAC has as a primary goal to strengthen the accountancy profession in both developed and developing countries worldwide and to contribute to the growth and development of strong economies. Because IFAC is a global organization, and because it is predicted that 95 percent of the world’s population growth will occur in developing nations, we have made strengthening the profession in these 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; it is a critical step in providing the people with access to food, healthcare, education, energy and water.
IFAC’s goal is to have a member body, with an established accountancy profession, in every country around the globe. This includes all African nations. 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. Without an established accountancy profession, I believe that we cannot succeed in helping African countries, or any others, in reaping the benefits of globalization. IFAC is engaged in a number of initiatives to achieve this goal.
Next week, together with the Fédération Internationale des Experts-Comptables Francophones and the United Nations Conference on Trade and Development, IFAC and ECSAFA are organizing an Africa Region Learning Workshop, on the accountancy profession’s role in economic development, in Nairobi, Kenya. This Learning Workshop, which is sponsored by the African Development Bank and co-sponsored by the World Bank and IFAC, will bring together representatives of nearly all 53 African nations; donor agencies; national, regional and international accountancy bodies; the private sector; and other interested parties to discuss how to address the challenges and opportunities facing the accountancy profession in Africa. At this important conference, in which some of you here today will participate, we will discuss critical issues such as sustaining good corporate governance; strengthening public sector accounting and auditing; meeting the needs of growing small and medium practices; and developing and promoting ethical conduct. Most importantly, we will have the opportunity to build and to strengthen partnerships, in other words, determining how we can work together, effectively and efficiently, to achieve sustainable economic development in African countries. Globalization has, I believe, made this goal attainable.
IFAC’s Developing Nations Committee, which Mr. Gathinji has led excellently since its creation, is leading our efforts to represent the interests of developing nations and to seek resources and development assistance. The committee is involved in extensive outreach to developing countries and has prepared guidance entitled Establishing and Developing a Professional Accountancy Body. This publication covers the roles and responsibilities of a professional body, education and examination and capacity development. The guide addresses a variety of situations, including where a formal accountancy profession does not exist in a country, where the profession exists and there is a desire to establish a professional accountancy body and where an existing professional body requires further development and enhancement. It also includes suggested areas for priority action based on short-, medium- and long-term goals and projects. The guide is available electronically, along with all other IFAC standards and guidance, free-of-charge from the IFAC website: www.ifac.org.
The Developing Nations Committee is now in the process of preparing a country-specific approach to supporting developing nations, helping both those countries where there is no established profession and those that have only begun to build the professional, financial and regulatory architecture necessary to support economic growth.
In addition, further to support and provide resources to developing countries, the Developing Nations Committee works closely with the IFAC Member Body Compliance Program.
The Member Body Compliance Program was established to help support and encourage IFAC members and associates, throughout the world, in their best endeavors to meet the requirements for membership in IFAC. These include promoting and incorporating international standards issued by IFAC and by the International Accounting Standards Board into national standards; and implementing quality assurance and investigation and discipline programs to monitor compliance with applicable professional standards.
Part 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 have been submitted by all active IFAC members and associates – including all 23 IFAC member bodies in Africa. These responses are now posted on the IFAC website and I encourage you to review them. I would like to thank ECSAFA very much indeed for its support of the Member Body Compliance Program.
Part 2, the SMO Self-Assessment Questionnaire, was launched last December and member and associate responses have begun to be posted on the IFAC website. The responses provide a valuable global snapshot of the accountancy profession from a standards perspective. Additionally, they help IFAC to gauge where it needs to focus its development work. Lastly, but perhaps most importantly, the responses to the questionnaires demonstrate the global 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 this era of globalization and in this complex environment in which we all work.
Responses to the Compliance program will also assist IFAC in understanding where further assistance or development is needed. Action plans will be developed by IFAC members and associates, with assistance from the Compliance staff. During this phase of the program, the Compliance Advisory Panel, which oversees the Compliance Program, will provide feedback to the IFAC standard-setting boards and to the Developing Nations Committee to enable them to develop necessary tools, guidance and resources to assist members and associates in successfully completing the required actions.
The Member Body Compliance Program has as a primary objective to encourage and support member bodies in convergence to international standards set by IFAC’s independent standard-setting boards and by the International Accounting Standards Board.
It is important, I believe, to recognize that, as globalization takes hold, markets have the potential of becoming more integrated and developing countries have greater potential to increase investment and, thereby, to raise the quality of life of their citizens. To achieve these potentials, it is vital that the accountancy profession adheres to high quality standards. It is only through adherence to such standards that accountants can build confidence in the financial reporting process and create an investment climate of trust.
I would like to comment for just a few minutes on IFAC’s standard-setting activities and to emphasize that these activities are conducted by independent standard-setting boards with substantial public interest input.
The International Auditing and Assurance Standards Board (IAASB) sets international standards on auditing and assurance, quality control and related services. 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. It plans to have an aggressive timetable for updating all its standards in this new clarity 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. We hope that this new style will not only make the standards more understandable, but also make them better capable of being translated and used in countries throughout the world.
In developing its international standards, the IAASB works with national auditing standard setters, from around the globe, that share the common goals of: promulgating high quality standards and reaching consensus at an early stage in their development. In July, the IAASB issued new guidance for national auditing standard setters that adopt its international standards with limited modifications. While not intended to be a definitive statement on convergence, the document provides guidance on the extent to which modifications to adopted international standards are permitted, while still allowing the national standard setter to assert that the national standards conform to the international standards. I urge all of you who hold a leadership position in an accountancy institute, or with a standard setter, to review this document, which is available in the IAASB homepage at www.ifac.org/IAASB.
The IAASB is also addressing critical issues in auditing and assurance. In March 2006, it 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 or belong to the group auditor's national or international firm or network of firms.
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 has 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 exposure draft 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 around the globe.
Here in Africa, there are many organizations that are promoting strong ethics and good governance as part of their work to eradicate poverty; to place the African countries, both individually and collectively, on a path of sustainable growth and development; and to halt the marginalization of Africa in the globalization process and enhance its full and beneficial integration into the global economy.
NEPAD, the New Partnership for Africa’s Development, is one organization that has made progress in achieving these goals. Indeed, one of the specific priorities of NEPAD is the promotion of democracy and good political, economic and corporate governance.
I had the sincere pleasure, in March 2005, of meeting the NEPAD Chairman, Mr. Reuel Khoza, at the IFAC Board meeting in Cape Town, South Africa. During that meeting, Mr. Khoza addressed the IFAC Board and emphasized the importance of sound corporate governance policies, good accounting and auditing and the need for professional accountants in business to be the conscience of businesses worldwide. He also urged IFAC to do more in these areas in order to eliminate corruption and eradicate poverty.
The need for individuals in government and business to operate with integrity and transparency is absolutely vital to creating the kind of institutions that operate efficiently and create stability. In turn, this brings investment and the opportunity to create prosperity among the public at large. Our profession should be at the forefront of this effort, leading and educating by example.
One way that we can lead is through the development and implementation of high standards of ethical conduct. The IFAC Code of Ethics for Professional Accountants, which is applicable to all accountants worldwide, including those in business and industry, public practice, the public sector and academia, reinforces our profession’s core values of integrity, transparency and expertise. The Code, which is developed by IFAC’s International Ethics Standards Board for Accountants, has been adopted by more than a dozen IFAC members here in Africa, including our member bodies in Botswana, Cameroon, Kenya, Lesotho, Malawi, Namibia, Swaziland, Tanzania, Uganda, Zambia, Zimbabwe and our two member bodies in South Africa. I would like to commend these institutes for their commitment to international convergence and to the adoption of high ethical standards.
IFAC’s Ethics Standards Board is currently engaged in ongoing work to ensure that all professional accountants – whether they work in public practice, business or government – have clear, relevant and high quality ethical guidance. The board has undertaken projects to address 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. In addition, in July 2006, the Ethics Standards Board revised the Code of Ethics by updating the definition of a network firm. Network firms are required to be independent of an audit client of another firm within the network. The updated definition focuses on how networks operate and how they present themselves to third parties.
IFAC’s International Accounting Education Standards Board is focused on ethics and conduct, among other issues, and seeks to bring consistency to accountancy education, training and certification around the world. Our global environment does, I believe, demand this kind of consistency. How else can we assure the public that a professional accountant practicing in the United Kingdom is as qualified as one practicing in, say, Kenya?
Last month, the Education Standards Board issued an information paper entitled Approaches to the Development and Maintenance of Professional Values, Ethics and Attitudes in Accounting Education Programs. The paper, which was the result of a wide-ranging research project into ethics education in our worldwide accountancy profession, is designed to stimulate discussion and debate on the subject of ethics education.
This information paper served as the basis for the Education Standards Board to develop a proposed International Education Practice Statement, entitled Approaches to Developing and Maintaining Professional Values, Ethics and Attitudes. The proposed practice statement provides guidance to IFAC member bodies on how to achieve good practice in developing and maintaining professional values, ethics and attitudes in accordance with International Education Standards and suggests that member bodies may adopt an approach to ethics education based on the IAESB’s Ethics Education Framework. In addition, since ethics education is a lifelong commitment, that starts when an individual begins training to become an accountant, and continues throughout a professional accountant’s career, the proposed new practice statement also provides guidance for member bodies on ethics education through continuing professional development. Comments on this exposure draft are requested by December 15, 2006, and I encourage you to review it and to provide your comments.
In addition to the information paper and the practice statement, the Education Standards Board is preparing a toolkit on ethics education to assist member bodies, academic institutions and others in instilling a strong ethical foundation in the accountants of tomorrow.
The Education Standards Board is also addressing issues such as auditor competence and the information technology training needs of professional accountants. In June, the Board released a new International Education Standard (IES) 8, Competence Requirements for Audit Professionals, that requires all IFAC member bodies to ensure that professional accountants acquire and maintain the specific capabilities required to work as competent audit professionals. Under the new standard, IFAC member bodies will need to modify their policies and procedures to ensure that audit professionals meet the requirements of IES 8, which includes having advanced level knowledge of auditing and financial reporting; relevant information technology knowledge; and the professional skills and professional values, ethics and attitudes expected from audit professionals. The new standard also establishes requirements for the education and development programs of new audit professionals, including that they undertake a period of practical experience in audit and that they undergo an assessment of capabilities and competence.
In August, the Education Standards Board also issued an exposure draft of a proposed International Education Practice Statement, entitled Information Technology for Professional Accountants. Information technology is one of the critical areas for all of us in this globalized world. The proposed practice statement provides details of the knowledge and skills required of professional accountants in the IT environment to prepare them to use information technology, to work in the information technology environment and to rely on information technology.
Another important aspect of IFAC’s work is its program to strengthen public sector financial reporting and financial management. 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 and 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.
The IPSASB is also currently developing proposed new International Public Sector Accounting Standards (IPSASs) on impairment of cash-generating assets and accounting for employee benefits – two important areas of public sector financial reporting.
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. In addition, in June of this year, the United Nations General Assembly approved a package of financial management reforms that called for UN agencies to use IPSASs for its financial statements.
To enhance government’s credibility, both 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 operation 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. Without a financial structure that engenders confidence, a government’s infrastructures may crumble and with them, its ability to support its citizens.
IFAC is committed to ensuring that all professional accountants, in every country of the world, both developed and developing, have the tools that they need to deliver high quality work. IFAC’s Professional Accountants in Business (PAIB) Committee is addressing the key issues facing accountants in business, including internal control, sustainability, and business planning. Last month, the committee released a new information paper, Internal Controls – A Review of Current Developments, that summarizes key internal control frameworks, highlights recent legislative and other initiatives, and discusses the role of internal control in enhancing corporate governance. The paper finds that current views on internal controls support a principles- and market-based approach in which organizations make a commitment to develop internal control systems particular to their own specific internal and external environments. It also identifies the importance of the tone at the top and the culture and the ethical framework throughout the organization to the effective implementation of an internal control system.
Also last month, the PAIB Committee released two new publications on a growing issue of concern in our globalized work – the environmental and social impact of the operations of businesses and organizations. These two publications explore the role of the professional accountant in business in sustainability reporting. The first paper, Why Sustainability Counts for Professional Accountants in Business, provides an overview of enterprise sustainability and sets out the business case for addressing sustainable development at the enterprise level in terms of the risks that sustainable development poses and the opportunities which it brings. It also seeks to identify the main sustainability related roles which the professional accountant in business might occupy: today, tomorrow or at some point in the future. The paper was published simultaneously with an information paper, entitled Professional Accountants in Business – At the Heart of Sustainability, in which high profile professional accountants in business explain how sustainability issues affect them.
To support small- and medium-sized entities (SMEs) and their small and medium practice (SMP) advisors in developing business plans, in May the PAIB Committee released new guidance entitled Business Planning Guide: Practical Application for SMEs. The new guide includes information on how to develop a corporate values statement and to manage business risks. In addition, it describes how the business plan may serve as a performance tool on an ongoing basis and support a business in obtaining external funding.
SMPs and SMEs are an important part of our globalized world and a vital part of national and international economies around the world. SMPs and SMEs are particularly relevant to developing economies. Yet they often find it very difficult to obtain the financial and other resources necessary for them to grow. According to the United Nations Economic Commission for Africa’s Economic Report on Africa 2004: Unlocking Africa's Trade Potential in the Global Economy Overview, “Africa desperately needs to create national … small business institutions that coordinate comprehensive programs for SME support.”
Programs to support SME growth and development are essential, because SMEs are vital to the economies of African nations. In his March 2006 speech to an International Finance Corporate conference, the Hon. Henry Obwocha, Kenyan Minister for Planning and National Development, who will be a featured speaker at the Africa Region Learning Workshop next week, provided some illuminating statistics on the vital importance of SMEs to national economies. He pointed out that in South Africa, for example, SMEs account for 55 percent of all jobs. And in his home country of Kenya, SMEs employed 5.1 million people and accounted for about 18 percent of GDP in 2003.
Here in Malawi, you have recognized the importance of SMEs to national economies and answered the call to provide them with resources through the establishment in 2002 of the Malawi Poverty Reduction Strategy. The strategy is supporting the growth and development of SMEs by providing financial, information and development training, among other resources.
IFAC is also actively working to support SMPs and other professional accountants that provide services to SMEs. The IFAC SMP Committee, formed in 2005, is a vigorous force both within IFAC and in representing the interests of SMEs and SMPs to international standard setters. Its members, from both developed and developing countries, seek to identify and address the most challenging issues facing SMEs.
In July, the committee organized a forum in Hong Kong to discuss the challenges and opportunities facing SMEs and SMPs. Over 130 participants from 35 countries attended the conference and their deliberations identified two significant challenges facing SMEs and SMPs: SMEs need financial reporting standards that are appropriate for their users’ needs and reduce the associated cost of compliance; and, in an increasingly globalized economy, SMPs should continue to explore new ways to support the growth and accountability of SMEs.
To help to address these challenges, IFAC’s SMP Committee is taking a two-pronged approach to helping SMEs and SMPs converge and comply with international auditing and accounting standards, helping to shape the form and content of international standards and providing practical assistance to SMPs and SMEs that have to use them. It is developing a guide to International Standards on Auditing for SMEs and a web-based knowledge resource for SMPs. Additionally, IFAC continues to respond to exposure drafts of international standard setters where an SMP or SME focus is needed.
In addition to working with professional accountants in business and small and medium practices, IFAC has built and maintained a key partnership with the Forum of Firms, which represents over 20 global networks and associations of public accounting firms. The members of the Forum of 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 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.
The Forum of Firms supports and actively participates in IFAC’s auditing, ethics and education standard-setting processes. The Forum also engages in dialogue with regulators and those that oversee standard setting. For instance, representatives of the Forum have attended and made presentations to meetings of the Public Interest Oversight Board, which oversees IFAC’s auditing and assurance, ethics and education standard setting and the IFAC Member Body Compliance Program. The PIOB was established in February 2005 through the collaborative efforts of the international financial regulatory community, working with IFAC, to ensure that its standards are set in a transparent manner that reflects the public interest. It is chaired by Professor Stavros Thomadakis, a former Chairman of the Hellenic Capital Market Commission, and is comprised of members nominated by international regulators and institutions. The PIOB has approved the due process and working procedures for the IAASB and the Education and Ethics standards boards. It has also approved the nominations to these boards and continues to provide public interest oversight. More information on the work of the PIOB is available on its website.
In summary, uncompromising individual values, strong institutional standards and appropriate oversight are all critical to the development of a trusted and reliable accountancy profession – one that is capable of and recognized for protecting the public interest and one that contributes to building an investment climate of trust. To leverage the opportunities made possible by globalization, the development of such a profession is a crucial first step.
To effectively support and sustain economic development and growth, however, a strong accountancy profession is not enough. We must promote sound governance by all business and governmental entities. We must promote high ethical standards by all those in the financial reporting supply chain. We must be willing to form new partnerships to seek regional and international cooperation in building the financial architectures necessary to achieve worldwide trust. And lastly, we must encourage the design of public policies that maximize the potential benefits from globalization and support human rights.
I truly believe that in this way, together, we can create greater economic stability here in Africa. We can, together, turn pessimism to optimism. We can, together, turn despair, where it exists, into hope. And we can, together, over time, give each and every African a better life.
Thank you very much indeed for your attention.