INTERNATIONAL PANORAMA OF
ACCOUNTING AND AUDITING
By Graham N.C. Ward, CBE
XVI INTERAMERICAN ACCOUNTING CONFERENCE/FORUM ON SMEs
October 23, 2005
It is wonderful to be here in Brazil at this conference, in Salvador, Bahia, of
the Interamerican Accounting Association. Thank you for inviting me. IAA is
an integral part of the international profession and, as a recognized regional
accountancy body, is a long-time partner of IFAC’s. I want to thank personally
your President, Leonardo Rodriguez, for his commitment to IFAC, to the
InterAmerican region and to the development of the profession. His leadership
is widely recognized around the globe and we are most appreciative of it.
Two IFAC Board members, in particular, have been helpful in enabling IFAC
better to understand the issues faced by our profession in Latin America and
how we can best support you: our Deputy President Fermín del Valle from
Argentina, advised by Roberto Resa, from Mexico and IFAC Board member
Guy Andrade from Brazil, who also chairs our Audit Committee.
IFAC has 163 member bodies in 119 countries and 25 IFAC member bodies
are currently located in Latin America. We would like to see that number
increase as, together with IIA, the Inter-American Development Bank and
others, we strive to establish a strong, high quality accountancy profession in
This leads me to my topic for today: International Panorama of Accounting
and Auditing. High quality accounting and auditing standards are at the core
of a country’s financial infrastructure and of establishing a strong accountancy
profession, which is so crucial to the success of that infrastructure. I’d like to
provide you with an overview of where we stand globally with respect to
accounting and auditing and then discuss how we can work together to
achieve further progress – progress that will, I believe, enable our profession further to improve its contribution to economic growth and stability worldwide.
As many of you know, IFAC, through its independent standard-setting boards
and committees, sets, in the public interest, international auditing and
assurance, ethics, education and public sector accounting standards. These
activities are overseen by the International Public Interest Oversight Board,
chaired by Professor Stavros Thomadakis. The International Accounting
Standards Board (IASB) sets International Financial Reporting Standards
(IFRSs). Achieving convergence in respect of all these standards is one of
IFAC’s most important goals. We believe that global convergence to high quality auditing and other professional standards is the only way forward if we
are to realize fully the future benefits of greater cross-border trade in services.
The IASB is also steadfastly committed to convergence. Its mission calls for
the development of a single set of high quality, understandable and
enforceable global accounting standards that require high quality, transparent
and comparable information, in financial statements and other financial
reporting, to help participants in the world’s capital markets and other users
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make effective economic decisions and allocate capital in the most productive
Let me begin by stating that convergence is not some illusory goal, as it was
thought a decade, or even five years, ago. The convergence process is
moving ahead at an increasing pace.
In October 2002, the IASB and the US Financial Accounting Standards Board
formalized their commitment to the convergence of US Generally Accepted
Accounting Principles – US GAAP – and IFRSs by issuing a memorandum of
understanding called the “Norwalk Agreement.” In that agreement, they
pledged their best efforts to make their existing financial reporting standards
fully compatible as soon as practicable. Since national standards in most
countries of the world follow the approach of either IFRSs or US GAAP, it was
recognized that one of the most significant ways to achieve a single set of
global accounting standards in a reasonable time span is to work towards
convergence of these standards.
The US Sarbanes-Oxley Act of 2002 provided further impetus and support for
the Norwalk Agreement. Section 108 of the Act permits the US Securities and
Exchange Commission to recognize standards established by a private sector
accounting standards setter (i.e., FASB) provided that the standard setter
considers “the extent to which international convergence on high quality
accounting standards is necessary or appropriate in the public interest and for
the protection of investors.”
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Since these developments, close to 100 countries now require or permit the use of IFRSs, with some caveats, for public-entity reporting.
Certainly, much momentum is being provided by the European Union’s (EU)
adoption of International Financial Reporting Standards in 2005. In all EU countries, as well as in South Africa, IFRSs are now required for the consolidated accounts of all domestic listed companies. In Australia, Hong Kong, New Zealand, Philippines, and Singapore, standards are virtually identical to IFRSs but are defined as national or local GAAP. In China, Russia and Switzerland IFRSs are permitted or required in limited circumstances. There is still, however, progress to be made. For example, in 33 countries, including Mexico, IFRSs are not permitted for domestic listed companies. To facilitate convergence, one of the key items that the IASB is addressing is accounting standards for small and medium enterprises. I realize that this is a topic that will be discussed in further detail throughout the conference, so I will not spend time on it now. I do, however, want to point out that IFAC agrees that this is a real issue and was instrumental in encouraging the IASB to address accounting standards for SMEs. A number of the IASB task force members studying this issue were nominated by IFAC, including Leonardo Rodriguez. Many of them are at this meeting and we will be listening carefully to their views.
The International Auditing and Assurance Standards Board (IAASB) is also focused on convergence and works to achieve this through substantial outreach and an inclusive, open and comprehensive standard-setting process.
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In recognition of how important countries in Latin America are in the convergence process, the IAASB met in Peru last year and participated in seminars organized by the Peruvian Institute to help expand and support the adoption of International Standards on Auditing (ISAs) in Peru. We also strongly welcome the Argentine government’s plan to adopt ISAs.
The recent approval of the EU’s Eighth Company Law Directive and its
requirement for the adoption of international auditing standards is also contributing significantly to the global adoption of ISAs. Of course, there will always be some variations reflecting the different legal environments in which various standard setters operate. For example, there are differences between ISAs and US auditing standards put out by the Public Company Accounting Oversight Board (PCAOB), which tend to include more detail. In principle, however, this difference is more historical than prospective. While both the PCAOB and the IAASB have maintained their independent authorities to set standards, there is a significant degree of consultation between the boards. I am pleased to report that the PCAOB is embracing the standards issued by the IAASB in the areas of quality control and audit risk, while the IAASB recently issued a new standard on audit documentation that is significantly based on a PCAOB standard issued last year.
Currently, more than 70 countries have adopted ISAs or use them as the basis for their national standards. In this part of the world, countries such as Mexico are leading the way towards convergence and are being joined by other countries such as Chile, Uruguay and Honduras, who are supported in their efforts by the Inter-American Development Bank.
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Of course, achieving convergence with standard setters in both developed
and developing countries is not without its challenges. One of the most
significant of these challenges is ensuring that the standards are
understandable and capable of being translated. Toward this end, the IAASB
has launched a comprehensive project to improve the clarity and structure of
its standards. An international forum – organized by the IAASB in July and
attended by representatives of regulators, oversight bodies, standard setters,
small and medium accounting practices (SMPs) and developing nations –
provided important direction for this effort. Based on the input from the
meeting and other input obtained as a result of its 2004 Proposed Policy
Statement and Consultation Paper on Clarity, the IAASB has developed
proposals to rewrite the standards following a new drafting style. The
enhancements in the standards comprise:
? Basing the standards on objectives, as opposed to procedural
? Clarifying the obligations imposed on the professional accountant and
using the word “shall” instead of the current “should” to emphasize the
expectation that these obligations will be met in the vast majority of
? Eliminating any ambiguity about the requirements a professional
accountant must fulfill by modifying the language of current present
tense statements either by elevating them to “shall” statements or by
eliminating the present tense to make it clear that there is no intention
to create a requirement; and
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? Improving the overall readability and understandability of the standards
through structural and drafting improvements.
This drafting style will form the basis for an ambitious program of revisions to
be undertaken by the IAASB over the next 18 months, as well as the basis for
new standards currently under development. At its meeting last week, the
IAASB approved four exposure drafts (EDs) in the new style:
? ISA 240 (Redrafted), The Auditor’s Responsibility to Consider Fraud in
an Audit of Financial Statements;
? ISA 300 (Redrafted), Planning the Audit;
? ISA 315 (Redrafted), Understanding the Entity and Its Environment and
Assessing the Risks of Material Misstatement; and
? ISA 330 (Redrafted), The Auditor’s Procedures in Response to
These EDs will be posted on IFAC’s website in the next few weeks, and we
encourage you to review and provide comments on them.
As an international standard setter with global convergence as an objective,
IFAC has a responsibility to consider and accommodate the needs of
developing economies, small and medium enterprises, and private sector not-
for-profit organizations. It is a responsibility that we take very seriously indeed.
Our two permanent task forces – the Small and Medium Practices Permanent
Task Force and the Developing Nations Permanent Task Force – are
ensuring that international standard setters are made aware of issues both
from a small and medium enterprise perspective and from an emerging
economy perspective. They have been very active in this regard and have
made a real difference to the standards being issued.
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We also are increasing our support to SMPs in other important ways. The SMP Permanent Task Force is developing an electronic information exchange to assist SMPs and SMEs. At our most recent IFAC Board meeting in July, we also approved the development of guidance for SMEs to assist them in implementing ISAs. To identify a qualified developer of such materials, a request for proposals has been circulated internationally.
We are determined to work even harder in our support of SMPs. Earlier this year, in Prague, we held a well and widely attended Forum on the issues that are important to SMPs. I and other members of the IFAC leadership attended and spoke at this Forum. More importantly, we listened a lot, we learnt a lot and, as a result, IFAC’s program for SMPs was improved a lot. This was an
excellent event. It will be a regular annual event, open to SMPs from all IFAC member bodies, and other relevant organizations. At this annual Forum, SMPs will be able to let the SMP Permanent Task Force and IFAC’s leaders know what they think, what action they believe should be taken and, thereby, inform the agenda priorities of both the SMP Permanent Task Force and IFAC as a whole. Your voice is assured.
As further demonstration of IFAC’s commitment to SMPs, subject to the approval of the forthcoming Council meeting, the SMP Permanent Task Force will become a full Committee of IFAC.
One of the fundamental ways in which IFAC assists developing nations in converging with and implementing international standards is through the IFAC Member Body Compliance Program. This program is designed to support the
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development of high quality auditing, accounting, ethical, educational and related quality assurance and investigation and disciplinary standards. Last year, Part 1 of the program, the Assessment of the Regulatory and Standard-Setting Framework, was conducted. Over 150 IFAC member bodies, including many of those in Latin America, completed the assessment questionnaire. A Spanish version of the Part 1 questionnaire was circulated and IFAC’s compliance staff are in the process of managing the translations of
responses. All responses will be posted on the IFAC website after appropriate clearance from the IFAC member body concerned.
Part 2 of the Member Body Compliance Program, the member body self-assessment, will focus on understanding how member bodies are addressing the specific requirements of the seven Statements of Membership Obligations (SMOs) – that is, whether member bodies have used their best endeavors to
incorporate the international standards and have ensured that quality assurance, investigation and discipline processes are in place, as required by the SMOs. A field test of this questionnaire has just been completed and member bodies can expect to receive the questionnaire by early December. Complementing the Compliance Program, the Developing Nations Permanent Task Force is preparing a country-specific approach to supporting developing nations, helping both those countries where there is no established profession and those that have only begun to build the financial and regulatory architecture necessary to support economic growth. It also plans to leverage IFAC strengths by establishing a process whereby accountancy institutes in more developed countries can serve as mentors to those in less developed
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countries. Finally, the group is creating a tool kit, to be released next month, which clearly delineates the steps involved in establishing a high quality accountancy profession.
Initially, the tool kit will be produced in English. Next year, the Developing Nations Permanent Task Force, with the support of the Inter-American Development Bank, plans to develop a Spanish translation. Other translations will also be developed.
IFAC is also taking other initiatives with respect to translations. Last year it issued a new translation policy giving member bodies the authority, under appropriate due process, to translate its standards. The International Public Sector Accounting Standards Board, which issues International Public Sector Accounting Standards, recently published Spanish and French translations of its standards, using the International Accounting Standards Committee Foundation, which translates IFRSs for the IASB, to assist in the translation process. We plan that initiatives like this will be able to continue, with the help and support of organizations like the World Bank and the United Nations Conference on Trade and Development, with whom we work closely.
In addition to technical standards, IFAC also encourages translations of its Code of Ethics for Professional Accountants.
Let us focus on ethics for a moment. Ethical conduct lies at the core of all business. We do business with those we trust; we get business from those who trust us. Ethics, therefore, is a driver of business growth which demands attention from boards and investors alike. We also need to remember that
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