Conference on Accounting and Accountability for Regional Economic Growth Mexico City

Notes from 15 June 2007

How other regions of the world tackle the challenges of financial accountability

The final plenary session of the conference was a panel whose members discussed the experience of implementing financial accountability reforms in the European Union, South-eastern Europe, and Africa. The panel discussed the various approaches used and noted their advantages and disadvantages. This provided useful context to the 'next stage' of financial reporting developments in Latin America and the Caribbean.

Juan Arteagoitia (European Commission, Internal Markets DG) explained the reform of the 8th European Directive on Company Law with respect to auditing and a related directive on corporate governance. He noted the main features of the reformed Directive, including the mandated use of International Standards on Auditing (subject to Endorsement under a system similar to that for IFRS). Also included are auditor independence standards, based on IFAC requirements and the requirement that the audit committee monitor and report on the effectiveness of internal control. The reformed Directive also addresses auditor qualification and the approval of auditors who qualified in jurisdictions outside the EU. The EU's reforms provide an example of how a developed economy addressed the challenges of changing international standards.

Eric van der Plaats (World Bank) spoke of the experiences of South-eastern Europe in developing a regional approach to accountancy development. Financial reporting reform is seen as an essential building block in regional economic growth. The work is being undertaken by the World Bank's REPARIS agency, which has an objective of building a sound financial reporting system that serves the economy as a whole. REPARIS uses the Bank's ROSC assessments as the basis for developing tailored action plans. It is hoped that a coordinated effort across national boundaries can be taken to resolve common issues, such as adoption of IFRSs and ISAs, tax accounting, SME reporting, prudential reporting and the need for accounting and auditing capacity throughout the region.

Ignatius Sehoole (Chairman, Developing Nations Committee, IFAC) shared with participants the outcomes of a regional accounting conference held in Nairobi in September 2006. That conference highlighted the needs of SMEs and SMPs, in particular the access to standards; translation and implementation guidance; the need for a fundamental change of behaviour to counter corruption and strengthen professional ethics; education of the accounting profession, especially through shared curricula and expertise; building an accounting profession in each jurisdiction, with a focus on the public and private sector-not only at the CA/CPA level but also at the accounting technician level; and high-quality corporate governance. The conference stressed the need to strengthen regional cooperation as a way to achieve its objectives.

Aziz Dieye (Developing Nations Committee, IFAC) spoke of the experience of the West African Economic and Monetary Union (UEMOA), which was formed in 1994 and whose monetary union pre-dates the Euro. The union had succeeded because it was based on economic reality, whereas previous politically-inspired unions had failed. UEMOA seeks to build African unity through regional integration, including a common currency and a shared legal framework for financial reporting. However, even though UEMOA had enjoyed some success, its 'Treaty structure' meant that it could not respond quickly to changes in the international financial reporting environment, such as the changes in corporate governance, accounting and auditing standards since 2001. What was needed was a more flexible methodology that allowed for rapid change.

Closing addresses

Luis Morion Llosa (Chairman Mexican Institute of CPAs) thanked the participants for their contributions over the past several days and expressed the hope that this conference would be the first of many such meetings. He reiterated that the theme of the conference, accounting and accountability for regional economic growth, was a shared interest for all of Latin America and the Caribbean and urged the region to use the discussions at the conference as a springboard to action.

Ian Ball (IFAC Chief Executive) noted that the meeting was a major collaborative event, involving the World Bank, the Inter-American Development Bank, and IFAC. He saw this as a suitable metaphor for the desire to work together to achieve sustainable growth through enhanced financial reporting and corporate governance in the region.

Regional standard-setters meeting

Immediately after the close of the conference, accounting standard setters from the Latin American and Caribbean region met to discuss a range of issues, including:

• Status of adoption of IFRSs in various jurisdictions, and experiences of those jurisdictions
• Adoption of IFRSs, adoption of 'IFRS equivalents', adaptation of IFRSs for local reasons
• The proposed IFRS for SMEs
• Translation of IFRSs
• Involvement of regional standard setters in the IASB's due process

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).

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.