Is the IFAC doing enough to deliver on global accounting standards? Graham Ward believes its work is more important than ever, post-Enron. But Peter Williams argues more could be done.
The International Federation of Accountants is determined to improve the quality of financial reporting and auditing across the globe.
Actions taken to date include: promoting and facilitating the formation of the International Accounting Standards Board; strengthening ethics through IFAC’s new guidance on independence; and improving auditing standards by instigating a new International Audit and Assurance Standards Board.
In all these areas IFAC also promotes a principles based approach. This is right. Experience shows that detailed rules encourage avoidance but principles encourage compliance.
Establishing high quality standards is not, of itself, enough. Standards must be both implemented and enforced.
This is why, working with transnational auditing firms, IFAC has facilitated the Forum of Firms which is open to audit firms of any size who operate in more than one country. Some 30 firms have joined, committing themselves to meet international standards on auditing; the IFAC code of ethics; training obligations; and quality control.
Delivery of these commitments is to be tested by a system of international quality assurance reviews. At present these are to be peer reviews overseen by a review board comprising highly respected, independent individuals.
Where a country has an independent audit review regime, the joint monitoring unit of ICAEW, ICAS and ICAI being an excellent example, the results of its work will be used in FoF quality assurance. The proposals of the US Securities and Exchange Commission to form a such a body indicates a similar approach may be expected there.
Public confidence is important, not only in firms, but also in professional bodies. IFAC is, therefore, introducing a programme for monitoring the compliance of its member bodies with the obligations of membership of IFAC.
These obligations include supporting IFAC’s code of ethics, international financial reporting standards and international standards on auditing.
The monitoring programme will be overseen by the review board, which will publish an annual assessment of both the programme and the regulatory process applicable to the FoF.
The collapse of Enron emphasises the vital need, in the public interest, for clear confidence in high auditing quality. The work of IFAC and the FoF has never been more important.
Graham Ward is a board member of IFAC and a Pricewaterhouse Coopers partner
The accountancy profession has encountered regulatory storms on a fairly regular basis in recent years. Corporate failures and accusations of negligent auditors are part of an economic cycle.
The response from the profession has been to weather the storm by setting up bodies like the Forum of Firms which have then busied themselves by reviewing the existing rules, making up new ones, pronouncing to the world that the regulations have been tightened up – then what? Hope the next scandal is a few years down the road and most of the players have moved on.
In this particular case the establishment of the Forum now looks quite prescient. No doubt critics should say it should move faster with clearer and stronger leadership at the top, but from the UK perspective the Forum is a strong indication that there is a global move towards a UK framework-based approach regulation.
And over the last few years UK regulation has been a relative success story. The profession could argue that it has moved towards breaking the failure/reform cycle: the introduction of corporate governance in the 1990s went a long way to make it clear to directors and stakeholders that the auditor alone wasn’t responsible for corporate collapses. That good work is in danger of being washed away by recriminations from the US.
The problem at the moment is trying to keep things in perspective. No one corporate failure is necessarily generally representative of the state of auditing across the globe as much as the case of one old lady’s treatment in one hospital is representative of the state of the NHS.
I took time off last week from following the spectacle of the profession being dragged through the court of public opinion and spent a day listening to Stephen Denning, the former program director of knowledge management at the World Bank.
His thesis is that storytelling is a powerful and formal discipline for change. Now I’m not sure accountancy is ready to embrace his proclamations wholeheartedly, but I am convinced that we need a strong, well thought out narrative to explain to ourselves and the outside world what is right and wrong.
Whatever the leaders of the profession decide to do next, it is clear that it should not try to hide its difficulties. We need to find heroes prepared to defend the profession. Maybe Graham Ward and his fellow board members of the Forum can take on that role.
Peter Williams is a freelance writer