'Extend reporting standards beyond accountants.'

Link: IFAC says audit requires massive reform

In the wake of financial scandals, such as Enron and WorldCom, the International Federation of Accountants today released a taskforce report outlining recommendations to help improve global confidence in the now-tarnished accountancy profession.

Many of its recommendations are already being implemented in several countries, such as the US in the form of the Sarbanes-Oxley Act, which last week celebrated the first anniversary of its enactment.

The Higgs report in the UK has also dealt with many of the issues addressed by IFAC. But the accountancy task force also recommended that professionals outside the boardroom, and accountancy professionals involved in financial reporting, play their part.

The report advises that codes of conduct should be developed to clarify the standards. These should apply to the activities of financial analysts, the provision of advice on financial reporting by lawyers and the advice given to companies by investment banks.

In addition, these codes should be made public and monitored both within firms and externally.

It advises that others involved in the process of financial reporting, ranging from credit-control agencies to public relation companies should also play their part.

Despite advocating a whole new level of controls for entities that have so far avoided the fallout from Enron, Graham Ward, former ICAEW president and a member of the IFAC taskforce, is not expecting a negative reaction to the recommendations.

‘Auditors and company boards have legal duties in terms of financial reporting, but that’s where it stops,’ he said. ‘We hope people will see the virtue in what we are suggesting, although it would require some changes to working practice.

‘It is important that they carry out their role in relation to financial reporting to a high standard, and if company directors can adhere to a code of conduct, then why can’t other groups?’

IFAC will now speak to various regulators and industry bodies around the world, including the FRC and the DTI, about its recommendations and will begin comparing its suggestions against current requirements in the autumn.

The anniversary of Sarbanes-Oxley passed last week with little fanfare.

Instead, there were some warnings that the act may have gone too far.

Indeed, many are expressing concern that key business managers are too busy with corporate governance compliance to focus on developing shareholder value.

Alex Cohen, a partner and corporate governance expert with City law firm Latham & Watkins, said: ‘Many people are saying that the Act has some important objectives but has probably gone too far and the concern is that people are being deterred from taking legitimate business risks.’

One benefit of the UK’s combined code on corporate governance, commentators point out, is that its far less prescriptive approach and lack of penalties means that it is much less likely to produce this effect.

Meanwhile, corporate America appears to have reconciled itself to the demands of the new laws and is adopting a philosophical attitude.

‘Psychologists talk about the five stages of grieving: denial, rage, depression, bargaining and then acceptance. We are now in the acceptance stage of Sarbanes-Oxley in the US,’ said Cohen.

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