Conference on accounting and auditing in Latin America – day 1

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14 Jun 2007

The World Bank, the International Federation of Accountants, and the Interamerican Development Bank are jointly sponsoring a conference on Accounting and Accountability for Regional Economic Growth in Latin America and the Caribbean.

The conference is being held in Mexico City on 13-15 June 2007. About 500 people are participating. The main purpose of the event is to create greater awareness of the importance of sound financial reporting and auditing to the development of a well-functioning market economy and of an efficient public sector. Presented below are notes taken by Deloitte observers at the first day of the conference.

Conference on Accounting and Accountability for Regional Economic Growth Mexico City

Notes from 13 June 2007

Official Welcomes

Delegates were welcomed by the Vice-Minister of Finance, Mexico, who noted that transparency and accountability were essential for economic growth throughout the Latin American region. These ingredients were essential not only for the private sector but the public sector as well. In the public sector, governments are more than ever being held responsible for the most efficient use of their resources; there are high levels of accountability and responsibility in budgeting and the objective assessment of government programmes. As such, it is in everyone's best interests to support the work of convergence in the financial reporting supply chain's standards: accounting, auditing, corporate governance, ethics, and education.

Pamela Cox (Regional Vice-President, Latin America and Caribbean, World Bank) also highlighted cost of capital issues, noting that as governments become more transparent in their fiscal matters, the cost of sovereign debt should decrease. If a government's credit rating is high, it can borrow more efficiently, need to raise less money through domestic taxation and generally release other forms of finance to the private sector. As such, it is in everyone's best interests to contribute to the effective use of resources and delivery of goods and services.

Carlos Hurtado (Vice-President, Finance and Administration, Inter-American Development Bank) welcomed the conference as a first step in greater cooperation in the region. He noted that accounting loses its relevance if it is not accompanied by accountability.

IFAC President's remarks: Financial reporting and the professional accountant

Fermin del Valle (IFAC President and a partner in Deloitte (Argentina)), noted that there was no reason why Latin America and the Caribbean could not have as high quality financial reporting as other areas in the world. He reviewed the recent efforts of IFAC to strengthen the accounting profession's position of trust in the world's financial markets (such as its work on improving auditing standards, accounting education and the IFAC Code of Ethics).

He stressed the importance of the local standard-setter in ensuring the success of international standards, especially IFRS, globally. Local jurisdictions should 'adopt' and not 'adapt' international standards. Adaptation is expensive and frustrates convergence; it incurs higher costs with fewer benefits to those who use the standards.

The role of national standard-setters is changing. In future it should concentrate on ensuring involvement in the development of standards by participating in the due process; and in ensuring proper implementation of those standards. This is not ceding sovereignty: it is engaging with other jurisdictions on an equal footing. A key role is in ensuring that institutional barriers to implementation are removed or mitigated. Such barriers include conflicts between international standards and national laws.

He stressed the special needs of small and medium-sized entities. IFAC welcomed the IASB's Exposure Draft and supported its aims. It was helping the IASB to engage with constituents around the world. All participants were encouraged to respond to the IASB's proposals.

The IFAC president also noted the progress being made by IFAC on auditing standards; public sector accounting standards-bringing an increased level of transparency to the financial reports of central government; to audit quality; to accounting education; and confidence in the auditing profession as a whole through the enhanced Code of Ethics and the IFAC compliance programme. He noted that IFAC is working to avoid duplication in the regulation of the accounting profession, but noted that regional cooperation is vital to the success of IFAC's work.

The role of governance: a corporate perspective

Roberto Truque (CFO, Atlas Electrica Group, Costa Rica) spoke effectively about how implementing IFRSs and an enhanced corporate governance structure in the Atlas Electrica Group had lowered the company's cost of capital. Its reforms had included a code of ethics for directors, management and employees; truly independent board members and an independent audit committee that oversaw both internal and external audit matters. In financial reporting, Atlas not only complied with all the requirements of the securities regulations, but was working with users and analysts to establish best practices for additional voluntary disclosures.

He noted that the implementation of the changes was costly, but the benefits far outweighed these costs. Atlas was now able to borrow money as better rates without additional security; and it had higher credibility with shareholders, analysts and other stakeholders.

The impact of globalisation on financial reporting practices

Jan Engstrom (IASB Board Member) spoke of the IASB's vision of one set of global accounting standards for use in global capital markets. Noting that the world is getting smaller, he noted that cross-border investments in the US markets had increased 10-15 percent over the past ten years. About 50 percent of the world's capital markets were using IFRS or moving to do so, and he noted the forthcoming developments expected in the US. He reviewed the current IASB agenda and highlighted the SME ED and the more recent Discussion Paper on Insurance Contracts.

Henri Fortin (World Bank) spoke about the lessons learned from the World Bank's Reports on Observation of Standards and Codes (ROSC) assessments in Latin America and the Caribbean. He reviewed the Bank's objectives in undertaking the ROSC assessments, noting especially that they were part of the Bank's programme to ensure financial stability. With respect to accounting and auditing, the ROSC assessments highlighted that there is a jigsaw puzzle that included the education and training of the accounting profession; laws and regulations in the jurisdiction; the accounting and auditing profession; and enforcement. For implementation to succeed, a holistic approach was needed that was gradual and properly sequenced and had appropriate human resources. Effective transition to international standards needed the involvement of both government sectors and the private sector. With respect to SMEs, he noted that there was recognition that SMEs should not be subjected to an unnecessary degree of accountability and compliance.

Jose Justiniano (Multilateral Investment Fund) spoke of the MIF's experience in assisting with the implementation of IFRS and ISA in Latin America. He noted that the implementation has taken longer and was more complex than expected. Reasons for this included a lack of awareness of standards by accountants; a lack of appropriately qualified people to assist with the implementation; structural and cultural barriers to adopting IFRS and ISA; and a lack of internal institutional strength.

William Biese (Deloitte, Mexico) highlighted the progress towards adopting IFRS in Latin America. At present, Argentina, Brazil, Chile, Columbia, Mexico and Uruguay all prohibit IFRS. Brazil is working to complete adoption by 2010, Columbia is developing a similar plan. Several other countries in the region either require or permit the use of IFRS. Noting the potential removal of the IFRS/ US GAAP reconciliation requirement, he stressed the need for adoption of IFRS as a significant benefit to private sector companies. IFRSs were the only credible alternative to local GAAP and US GAAP. IASB's SME project

Paul Pacter (the IASB's Director of Standards for SMEs) introduced the IASB's ED of IFRS for SMEs, in advance of a detailed discussion in a break-out session later in the day. He noted that the ED should raise the standard of SME financial reporting significantly in many regional countries while and that would be a major achievement. He explained the general philosophy behind the IASB's proposals and how the Board went about making the choices it had. In particular, he stressed the 'general purpose financial statement' perspective that had been adopted and the presumption that an SME lacked 'public accountability'. He explained that in developing the proposed standard the Board made five kinds of changes to the principles in full IFRSs: eliminate topics not relevant to SMEs; where full IFRSs allow accounting policy choices, include in the IFRS for SMEs only the simpler option; recognition and measurement simplifications; disclosure reductions; and redrafting in plain English. He noted that the ED has been published in Spanish, French, and German, in addition to English – a first for the IASB, and that the Board is about to launch a programme to field test the ED.

Break-out sessions – Challenges in and benefits of adopting IFRSs

The conference broke into three groups, one dedicated to SMEs, another to financial reporting in the public sector and a third on adopting and implementing IFRS. Your correspondent attended the last session.

Hector Alfonso (World Bank) noted that accounting standards are an integral part of the financial architecture and that the world needed a common language. Quality financial information would lead to sustainable economic growth. Although each jurisdiciton in Latin America was distinct – and some had made more and better progress than others – the success of adopting IFRS depended on all jurisdictions agreeing on the benefit of adopting IFRS. How each jurisdiction got to the goal was less important. However, it was important to recognise the challenges faced by all. These were structural, economic, emotional, and political. However, all could be overcome and the whole economy would reap the benefits.

Roberto Truque (Costa Rica) explained the Costa Rican experience of transitioning to IFRS. Prior to 2001, Costa Rica used a mixture of local, Mexican, and US GAAP. He called it 'Goucho Marx GAAP' after the comedian who once said "Here are my principles and if you don't like them I have others". Since 2001, Costa Rica has implemented IFRS and companies have seen a decrease in their cost of capital (see above). The transition was expensive and complex, but the benefits in terms of higher-quality financial reporting and increased credibility in the market were unmistakable. One of the major challenges that had been resolved was disconnecting financial reporting and corporate taxation.

Lucia Canales (Chile) spoke about the move to adopt IFRS in Chile by 2009. She noted that the high cost of transition is the principle challenge being faced, but that most companies have made or are making their transition plans. She noted that there were also considerable challenges for regulators.

Felipe Cervantes Perez (Mexico) spoke about Mexico's approach to convergence. As a founder member of the IASC, Mexico did not want to adopt US GAAP. However, because of the disparate nature of Mexican standard-setting (there are at least four bodies entitled to issue accounting standards), Mexico had decided on a longer-term convergence strategy rather than a point-in-time change-over. This should allow convergence over all sectors: banking, insurance and general corporate entities. Challenges being faced included translation of accounting and auditing materials; and re-training the profession. However, the benefits were seen to outweigh these: higher-quality financial reporting; long-term cost reduction; and increased comparability. Convergence was expensive and time-consuming, but it was worth doing properly.

Jose Barrios (Panama) noted that IFRS were more responsive than US or local GAAP in some areas, especially some specialised assets. Using IFRS would enable a company such as the Panama Canal Company to reflect the economic capacity of their assets in a manner not possible under US GAAP and thus obtain a more realistic credit rating for the forthcoming expansion of the Panama Canal.

Emerging global standards and the role of national regulators

Patricio Bustamante (National Banking and Securities Commission, Mexico) noted the movement to adopt international standards in the wake of Mexico's economic collapse in 1994. These standards had included IASs/IFRSs and ISAs and, more recently, increased auditor oversight. He detailed several reforms that were intended to align Mexican securities enforcement and auditor oversight with similar requirements such as those in the US, such as the standards of the PCAOB and the requirements of the Sarbanes-Oxley Act.

Accounting Education

Two speakers outlined challenges being felt in Latin America as a result of the rapid changes in accounting and auditing and the responses to these developments. In addition, a third speaker noted the profession's own continuing professional development and education requirements imposed by IFAC educational standard IES-7. Continuing professional development was seen as critical to maintaining public trust in the profession and its ability to react sensibly to a changing environment.

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