Conference on Accounting and Accountability for Regional Economic Growth Mexico City

Notes from 14 June 2007

Higher credibility through better standards

Stavros Thomadakis (Chairman, IFAC Public Interest Oversight Board) delivered a keynote address and spoke of the institutional responses to high-profile failures in the financial reporting system. IFAC, representing the accounting profession, had adopted new models of operation and oversight which recognised the crucial role of public involvement and scrutiny. Those changes had at their core recognition of public interest in the accounting profession, and its standards.

Dr Thomadakis noted that the restructuring of the IASB was a bold example of responding to public interest in accounting standard setting. The adoption of IFRS for use by publicly-listed entities in the European Union and elsewhere, together with the ongoing convergence projects with US GAAP demonstrated the increased credibility that international accounting standards had gained by disconnecting accounting standard-setting from the accounting profession. Even if true convergence with US GAAP and other accounting systems is not achieved in the short term, convergence over the long term will happen: the overriding need for comparability will drive the process.

The lessons of the IASB were used by IFAC when it reorganised its activities. The PIOB was instituted in 2005 and represented a shift to involve outsiders, and to provide specific opportunities and mechanisms for consultations with outside experts. This had led to increased confidence in IFAC's standards, including International Standards on Auditing (ISAs), the IFAC Code of Ethics, Public Sector Standards, and the Standards of Accounting Education.

In both the IASB and IFAC, confidence in the standard-setting process had been enhanced by having a transparent appointment process, attracting high-quality candidates with varied backgrounds and experience. All the standard-setting activities carried on by the IASB and IFAC boards follow a rigorous, open due process that encouraged involvement and input by all constituent groups. As such, both institutions had shown a clear willingness to change and to be true to their stated ambition of serving the public interest.

Strengthening the role of the accounting profession

There followed a series of presentations, each addressing aspects of efforts to strengthen and increase public confidence in the accounting profession.

John Kellas (Chairman, International Auditing and Assurance Standards Board) spoke of the challenges of convergence of international standards. The IAASB is convinced that adoption of international standards is preferable to convergence. Adoption is seen as more realistic than convergence for most jurisdictions; it is sensible; it allows for all jurisdictions to participate in the development of the standards; and it is the fastest way of achieving the desired goal. He acknowledged that not all jurisdictions will be starting from the same point: established economies may face cultural and philosophical challenges; developing and transition economies face capacity challenges – the ability to cope with the change in the financial reporting architecture.

IFAC is helping its members to meet these challenges, in cooperation with national standard-setters. It is committed to developing high-quality standards that are jurisdiction-neutral, enabling all jurisdictions to adopt them. IFAC's activities go beyond auditing standards; the successful implementation of ISAs is supported by international quality control standards; the IFAC Code of Ethics for Accountants; implementation guidance; training and education and monitoring and enforcement.

Anthony Hegarty (World Bank) addressed the challenges faced by the accounting profession in developing nations. He noted the role of the accounting profession in the global fight against poverty and stressed that good governance – both in the public and private sectors – was vital to economic growth. The World Bank had established a governance and anti-corruption (GAC) strategy, which seeks improved financial management of Bank aid at global, jurisdicitonal, and project level. As part of the GAC strategy, the Bank had undertaken a series of jurisdictional financial accountability assessments, as a result of which it had identified a number of cross-cutting issues, the most significant of which was weak capacity in many countries.

The World Bank works with recipient countries to overcome these structural challenges. However, it realises that, to be effective, any action plan must be owned by the jurisdiction concerned; it must be tailored specifically to the needs of that jurisdiction; it must have a comprehensive and realistic implementation programme; and it must have the support of donor agencies. He concluded by noting that the increased funding promised by the world's developed nations as part of the Millennium Development Goals must be matched by improved governance and financial management in the recipient jurisdictions.

Russell Guthrie (IFAC) introduced IFAC's initiatives to strengthen the accounting profession, in particular the Member Body Compliance Programme. The programme was part of the Statement of Membership Obligations and was based on a core principle of encouragement and improvement. The programme requires a local commitment to the membership obligations; encourages constant communication between Member Bodies and IFAC; and requires demonstrable progress to be made (although the timeline may be over many years). Failure to meet the membership obligations can (and has) result in suspension or revocation of IFAC membership.

In addition, Mr Guthrie outlined the significant work undertaken by the Developing Nations Committee (DNC), which helps Member Bodies to meet their action plans. The DNC has developed a large range of materials designed for the profession in developing nations.

Luis Moiron Llosa (President, Mexican Institute of PAs) spoke of the need for the accounting profession to raise its profile outside the public accounting sphere and be recognised as an integral part of the educational, government, and business sectors. In particular, there was a need to be more active and contribute positively to the SME and SMP areas, which are main drivers for growth in Latin America.

Break-out session – Ensuring government accountability: the role of the supreme audit institution

A panel consisting of representatives of Supreme Audit Institutions from Brazil, Costa Rica, the Dominican Republic, El Salvador, Peru, and Tanzania addressed aspects of ensuring government accountability. Through their responsibility for the external audit of governments, supreme audit institutions have become important collaborators in governance; helping to prevent fraud, money laundering and other forms of corruption. In some jurisdictions, there is a dynamic relationship between the auditor and the legislature. Supreme audit institutions are also contributing to increasing the professional capacity throughout Latin America and the Caribbean and highlighting the role of the IFAC Code of Ethics in their regions.

There is increased cooperation between the region and supreme audit institutions more experienced in using modern standards-such as Canada and the United Kingdom. Some of this involves seconding staff to Canada or the UK (and other developed nations), but there is also a growing awareness of the need for peer review of supreme audit institutions, so that international best practices are used by all SAIs in the region.

Creating an enabling environment for growth and development: the role of government

The second plenary session of the day examined the role of government.

Stephanie Fox (Technical Director, IPSASB) introduced the work and current focus of the International Public Sector Accounting Standards Board. The IPSASB recognises that government financial reporting is important because fiscal responsibility is critical in a democratic society. Taxpayers are entitled to high-quality financial reporting: governments are accountable to their citizens; but governments also need timely and accurate financial information to manage their resources.

The current IPSASB agenda includes four strategic themes: a public sector conceptual framework, based as far as possible on that being developed by the IASB; IFRS convergence wherever these do not conflict with public sector-specific requirements; public sector-specific issues, such as convergence with statistical basis of accounting; and promotion and communication.

IPSASs are becoming more widely accepted as the benchmark for government general purpose financial reporting. Successful implementation of these standards is, however, dependent on acceptance by governments for the need to implement IPSASs, a strong external audit and the political will in the jurisdiction. Implementation requires adequate planning, and mentoring by more developed jurisdictions is very helpful.

Joao Batista Fraga (Brazil) examined the importance of enforcement for reliable corporate governance. Using the Brazilian Novo Mercado as an example, he demonstrated how a private-sector initiative had enabled a vibrant exchange to grow and attract significant foreign investment. The Novo Mercado has resulted in a cultural change in companies through adopting high-quality corporate governance practices.

Hector Dominguez (Argentina) explained that an effective external audit was an essential component of the supervision of financial institutions in Argentina. The external audit complements the work of the central bank. Independence is ensured through mandatory audit rotation after five years.

Ernesto Jeger (DFID, Brazil) demonstrated how governments and development partners can work together effectively to achieve results. Using the example of Brazil, he highlighted how a coherent and coordinated approach resulted in a stronger supreme audit institution structure at all levels of government in Brazil – federal, state, and municipal.

Break-out session – Accounting in regulated sectors: reconciling prudential and financial reporting

A panel of financial institution supervisors from Brazil, Germany, Mexico, and Spain addressed the challenges faced by prudential supervisors and regulators when the general purpose financial statements of a financial institution are prepared using IFRS, which might differ from the accounting practices used for prudential supervision. There was acknowledgement that general purpose financial statements are not usually appropriate for supervisory purposes. However, maintaining two sets of accounting records – one for IFRS and the other for the regulator-was inefficient. The most likely approach, at least for the moment, would be some kind of 'IFRS reconciled to prudential basis' reporting.

Panelists shared their experiences and noted that convergence at a regulatory level was happening. Basel II was an example of regulatory convergence in the banking sector; the insurance sector is less well advanced but is making progress through the International Association of Insurance Supervisors.

Asked by the moderator what were the most significant differences for recognition and measurement, panelists noted reserve valuation and the mismatch between assets and insurance liabilities (for insurance entities); and the reliability of fair value, demand deposit 'intangibles', and hybrid financial instruments (for banks).