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The International Federation of Accountants (IFAC) 1977-2007

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The International Federation of Accountants (IFAC) 1977-2007

    “Setting Standards, Making History:

    The International Federation of Accountants (IFAC),

    1977-2007”

    by

    Christopher Humphrey

    and

    Anne Loft

    Draft of short history for IFAC website: Presented at OARnet Conference

    Skåne, January 2008

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    INDEX OF CONTENTS

    Introductory note from the Authors 3

Acknowledgements 4

The Formation of the International Federation of Accountants 5-6

IFAC The First Fifteen Years 6-13

    Implementing Strategy, Developing Strategic Relationships and Seeking to Meet Obligations IFAC, 1992-2001 13-18

    IFAC 2001-2007: A Regulatory Renaissance 19-33

Concluding Comments 33-40

References 40-41

Abbreviations 42-43

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INTRODUCTORY NOTE FROM THE AUTHORS

    IFAC was formed in 1977 and since that time has developed to become a significant international organization, both within the accounting profession and the wider international business community, notably through its role as global standard setter. We have been appointed as IFAC‘s official historians to write its history, exploring, among other things, why and how it was established, how it has evolved and its impact on the accounting profession and the global financial arena.

    The history will form the subject matter of a book, planned to be published in 2009/2010 and is currently involving us in the conduct of interviews with a wide range of people involved with IFAC over the years, including past and current presidents, chief executives, committee members, IFAC staff and outside stakeholders. The interviews we are undertaking are a very important part of the project as we want to put together an exciting, lived history rather than one simply based on a documentary analysis of archival material. Accordingly, we are keen to speak to people who have been involved in a significant way with the development of IFAC, whether directly through membership of IFAC, serving on IFAC committees or study groups or having interacted with IFAC through their work in other organizations.

    Such contributions will help to ensure that a comprehensive history of IFAC is developed, and one which reflects the enthusiasm and dedication of those who have been involved with it and/or influenced its historical development. In a similar spirit, we are actively seeking to obtain photos, papers or memorabilia associated with IFAC, its staff and activities over the years and we very much welcome being contacted by people willing to share any such items with the project. We are also open to suggestions as to possible interviewees and should stress that we are interested not only in talking to people who can provide detailed historical or contemporary perspectives but also those who just wish to recount individual incidents, experiences or anecdotes relating to IFAC‘s history.

     thIn recognition and commemoration of IFAC‘s 30 anniversary, we have prepared this

    summarized version of IFAC‘s history. While only giving a brief insight into what has been a fascinating period of development, we, nevertheless, hope that you find the report to be an interesting and useful historical source of reference and also something that is pertinent to contemporary discussions and debates about the nature and significance of today‘s global

    financial arena and associated regulatory activity. We would be further delighted if reading this report stimulates you to contact us and pass on any reflections, recollections or memories that you may have of prior involvement or contact with IFAC. We can be contacted at history@ifac.org or individually at the following addresses:

Professor Christopher Humphrey Professor Anne Loft

    Manchester Business School School of Economics and Management

    University of Manchester Lund University

    Crawford House Box 7080

    Oxford Road SE 220 07 Lund

    Manchester M13 9PL England Sweden

Tel: Office: +44 161 275 0436 Tel: Office: +46 46 222 4186

    Email: chris.humphrey@msb.ac.uk Email: anne.loft@fek.lu.se

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ACKNOWLEDGEMENTS

    Thanks are due to the libraries at NIVRA, Amsterdam, JICPA, Tokyo, ICAEW, London and the AICPA, New York for their help and the assistance of their staff in providing archive material consulted in the preparation of this report.

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THE FORMATION OF THE INTERNATIONAL FEDERATION OF

    ACCOUNTANTS (IFAC)

    At first sight, accounting appears to have been an international profession for a long time, with the first international congress for accountants being held in St. Louis, USA in 1904, and the second, where there were more substantial numbers of foreign delegates, in Amsterdam in 1922. However, it was not until the 1960s that institutional initiatives seeking international standardization in accounting and auditing practices really started to materialize. The 8th World Congress held in New York in 1962 discussed the need for such standards. In 1965, the personal initiative of Sir Henry Benson saw accounting institutes in the US, Canada and th Britain establish the ‗Accountants‘ International Study Group (AISG)‘, while the 9International Congress (Paris, 1967) set up an international working party to examine the international needs of the accounting profession and to report back to the next International Congress to be held in Sydney in 1972 (Olson, 1982).

    Following the report of the international working party, an International Coordination Committee for the Accounting Profession (ICCAP) was formed at the 1972 Congress. The membership of ICCAP comprised five, fifteen year members (namely, Australia, France, the Netherlands, UK and the USA) and six, five year members (Canada, West Germany, India, Mexico and the Philippines, with Japan being voted in as an additional five year member at the first meeting of ICCAP). ICCAP‘s mandate included: selecting the host for, and coordinating the bodies involved in organizing the International Congresses; maintaining a continuing liaison with all participating bodies; monitoring and assisting in the development of regional organizations of accountants (which existed for Europe, parts of Asia and of the Americas); and to keep under review the need for an international secretariat. The responsibility for chairing ICCAP fell to the president of the West German institute, Dr. Reinhard Goerdeler, with the next international congress to be held in Munich (in 1977).

    Between this decision in 1972 and the eventual formation of IFAC at the Munich Congress in October 1977 there was much activity in the form of both official and unofficial meetings and correspondence. ICCAP, significantly, had also been given the remit to recommend changes for widening its work ‗as may from time to time appear expedient‘, but opinions were divided,

    at times quite acrimoniously, as to the necessity of expanding the work of ICCAP to become an ‗International Federation of Accountants‘ with a permanent secretariat. Benson‘s AISG initiative had led to the formation in June 1973 of an ‗International Accounting Standards

    Committee‘ (IASC) based in London. Some of those involved in ICCAP felt that the IASC should become a committee of the proposed IFAC. Those in favor of an international accounting federation with a permanent secretariat, however, struggled to get agreement on where it should be based and the size and cost of the secretariat.

    Eventually a compromise was reached with the final ICCAP report, detailing the proposed constitution of IFAC, duly being approved by heads of delegations to the 1977 World Congress on the morning of 7 October 1977. This created the new body IFAC as a more permanent and formally constituted international organization to coordinate the worldwide 1accountancy profession (Cummings and Chetkovich, 1978, p. 58). That same afternoon, the IFAC Assembly was convened for the first time. It approved IFAC‘s constitution, with 63 professional bodies from 51 countries being official signatories. IFAC was set up with an

     1 IFAC‟s original constitution stated that its purpose was to advance “the development and enhancement of a coordinated worldwide accounting profession with harmonized standards” (para. 2).

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    Assembly consisting of representatives from all subscribing member bodies which would meet at each World Congress. It also had a governing Council of 15 members, a permanent secretariat based in New York and an operating budget of US$145,500 for the first year. Reinhard Goerdeler became IFAC‘s first president and Robert Sempier was appointed as

    IFAC‘s Executive Director. Sempier was formerly the AICPA‘s director of International Practice, and the AICPA supplied the first office facilities for IFAC at its headquarters in New York. Sempier‘s reflections on the way his interest in international accounting and auditing issues developed from the mid-1960s onwards is particularly pertinent: ―This has got to go

    somewhere. This is not something that is going to go away anytime soon….The gut feeling on my part was that this is exciting. I think this is going to happen….It was a feeling, you cannot describe some of these things…I think this is going to go somewhere and I would like to be a part of it.‖

IFAC THE FIRST FIFTEEN YEARS: 1977-1992

    IFAC‘s 1992 annual report noted that its first fifteen years had witnessed an impressive set of achievements, including a membership of 106 professional accountancy bodies in 78 countries representing more than 1 million accountants worldwide; almost a doubling since IFAC‘s foundation in 1977. During this period more than 60 technical pronouncements had been issued, covering virtually all important aspects of the work of the profession, most notably in the field of auditing. IFAC‘s work was increasingly being recognized by

    international organizations and a strategic plan had been established to take the international st century. Behind this development lay a myriad of accountancy profession towards the 21

    initiatives that collectively comprised the daily working life of IFAC. This section highlights some of IFAC‘s activities and identifies a number of key developments in its first fifteen years of operation.

    The first key development was made at the initial meetings of the Assembly and the Council in Munich, and that was the acceptance of a twelve point work program at the initial meetings of the Assembly and of the Council in Munich. This was to serve as a guide to IFAC committees and staff over the first five years, and at the same time it was agreed to establish seven committees. The basic elements of the program were as follows (Sempier, 1979. p. 22):

    1. Develop statements which can serve as guidelines for international and auditing guidelines; 2. Establish the basic principles which should be included in the code of ethics of any member body of IFAC and to refine or elaborate on such principles as deemed appropriate; 3. Determine the requirements and develop programs for the professional education and training of accountants;

    4. Collect, analyze, research, and disseminated information on the management of public accounting practices to assist practitioners in more effectively conducting their practices; 5. Evaluate, develop, and report on financial management and other management techniques and procedures;

    6. Undertake other studies of value to accountants, such as a possible study on the legal liability of auditors;

    7. Foster closer relationships with users of financial statements including preparers, trade unions, financial institutions, industry, government, and others;

    8. Maintain good relations with regional organizations and explore the potential for establishing other regional organizations, as well as assisting in their organization and development;

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    9. Establish regular communications among the members of IFAC and other interested organizations, principally through an IFAC Newsletter;

    10. Organize and promote the exchange of technical information, educational materials and professional publications, and other literature emanating from member bodies. 11. Organize and conduct an international congress of accountants approximately every five years; and

    12. Seek to expand the membership of IFAC.

Organizational Structures

    The location for IFAC has been designated as New York, however as a non-governmental organization formed under Articles 60-79 of the Swiss Civil Code, it was registered in Geneva in Switzerland - as was the case with organizations such as the International Red Cross.

IFAC‘s senior governing body, the Assembly (composed of one representative from each of

    the member organizations), held regular meetings on the occasion of the five yearly International Congresses. Much of the Assembly‘s powers, however, had been delegated to the Council, which comprised members from 15 representatives of member bodies elected at ordinary meetings of the Assembly. The constitution provided for the Council to elect from amongst its member a president, a deputy president, who shall service for 2? years, and two vice presidents. The Council meetings were also attended by representatives from the three regional organizations formally recognized by IFAC namely the Union Européene des

    Experts Comptables Economiques et Financiers (UEC), the Confederation of Asian and Pacific Accountants (CAPA) and the Inter-American Accounting Association (IAA).

    Following the decisions of the first meetings of the Assembly and Council, seven committees were quickly established. In particular four basic standing committees were set up to develop practice guidance and principles in Auditing, Ethics, Education and Management Accounting

    (changed to Financial and Management Accounting in 1982). Of these the International

    Auditing Practices Committee (IAPC) was the most important and it chose to make use of

    subcommittees in developing its auditing guidance - with such committees being responsible for the detailed study of a particular area and the preliminary drafting of guidance on a particular topic that would be duly discussed by the IAPC. Countries not represented on the IAPC were invited to serve on subcommittees (see IFAC‘s 1979 Annual Report, p. 5).

    A Planning Committee was also established to deal with strategic and the wider operational issues, the International Congress Committee oversaw the organization and approval of

    congresses, including the congress programs, and lastly, there was a Regional Organizations

    Committee. This latter committee had 6 members, 3 of which represented the approved regional organizations (UEC, CAPA and the AIA). The regional bodies were seen to have an important role in IFAC as a middle ‗layer‘ which could provide advice and participate in IFAC‘s program of work as well as publish IFAC‘s guidelines and statements to their own members. In terms of IFAC‘s recognized regional organizations, a major development saw

    the official establishment of the Fédération des Experts Comptables Europeens (FEE) on 29 October 1986. FEE took over the responsibilities of the UEC and the Groupe d‘Etudes des Experts Comptables de la CEE, but would not act as an audit standard setter (as the UEC had done) on the basis that the prior existence of standards at national worldwide levels had made unnecessary an intermediate layer of European standards‖. FEE instead chose to operate as a ‗clearing house‘ for best practice in Europe, emphasizing the practical application of existing

    (IFAC) auditing standards and guidelines in a European environment. In 1992, formal recognition was given by IFAC to a new regional organization - the Eastern, Central and

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    Southern African Federation of Accountants (ECSAFA), which had been formed in 1990, incorporating nine member bodies in eight countries.

Two important additional committees were established during this period. A Public Sector

    Committee was set up in 1986, with authority to issue pronouncements on accounting, auditing and reporting in the public sector. At the same time a Nominating Committee was

    formed to develop recommendations on the countries to be elected to Council and to recommend to Council the election of IFAC officers (for each two and a half year period of office).

    Council and committee members were ‗country‘ representatives, meaning that if there were two or more member bodies in one country, they were all represented by the appointed national representative. It was also made clear early on that only people who were members of an IFAC member body could sit on IFAC‘s committees. Technical advisers, though, were allowed to attend meetings, and it is notable that some played a long and important role in IFAC, such as Björn Markland (Sweden), John Williams (England) and Henk Volten (Netherlands). Henk, for example, at one stage served as adviser to the Dutch members of three different IFAC committees. Overall, it was a lot of activity to be coordinated by a small secretariat and as Bob Sempier commented: ―I can only tell you that it was no easy task to organize these committees. The problem, of course, was that ―the members are spread all over the world‖ (Sempier, 1979, p. 23).

Officers, Offices, Staff and Budgets

    During its first fifteen years IFAC had seven presidents; Reinhard Goerdeler (W. Germany, 1979-81); Gordon Cowperthwaite (Canada, 1981-83); Washington SyCip (Philippines, 1983-85); Robert May (USA, 1985-87); Richard Wilkes (UK, 1987-90); Bertil Edlund (Sweden, 1990-92). Robert May remains, thirty years later, the only US-based president of IFAC. Robert Sempier was IFAC‘s first Executive Director a post he kept until 1991 when he was succeeded by John Gruner as Director General. Presidents not only played a role in IFAC itself but they also acted as global ambassadors for the organization and its work; both in discussions with international organizations as well as through holding speeches at national and regional professional accounting conferences. The period also saw the holding of three international/world accounting congresses (Mexico City, 1982; Tokyo, 1987; Washington 1992). Tokyo was the first congress to be labeled as a ‗world‘ rather than an ‗international‘ congress; it was also the first to be held in Asia and the first to be officially sponsored by IFAC.

    In the process of establishing IFAC, there had been much discussion (and disagreement) over the scale of IFAC‘s budget and the size and permanency of any secretariat. IFACs initial budget in 1977 was US$145,500, with an established staff of four people (Robert Sempier, Philip Carrel - of the ICAEW, employed on a part-time, consulting basis, Wilfred Copeland, seconded from Peat Marwick Mitchell‘s San Francisco office, to act as secretary to the IAPC and a further secretary for the executive director. IFAC started out in 1977 operating in premises (1270 Avenue of the Americas, NY) and with office furniture, equipment and other services, that were all provided freely by the American Institute of Certified Public Accountants (AICPA). IFAC ended this arrangement in 1982 and moved premises (540 Madison Avenue, NY), these being sublet on an actual cost basis from the AICPA. The first lease agreement signed under IFAC‘s name was made in 1992 when it moved to 114 West th47 Street, Suite 2410, NY), under an initial 8 year lease.

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    Sempier had employed from the outset what he described as ―a modest staff‖ (Sempier, 1979, p. 21). Often the professionals IFAC employed were seconded from national associations for a limited period rather than being permanent staff. By 1992, IFAC‘s total expenses (as reported in the annual accounts) had risen to just over US$1 million, although the permanent staffing levels only stood at the director general plus four additional staff (some of whom were on secondment from national accountancy institutes). Financially, IFAC‘s annual expenses exceeded its revenues for 9 of its first 15 years of operation, reflected in an accumulated fund balance of just US$82000 by 1992. IFAC gained some substantial financial recompense from the World Congresses, taking 10% of each delegate‘s conference fee with the Tokyo and Washington congresses contributing over US$560,000. A significant cost in IFAC‘s budget was, and has continued to be, the costs of attending IFAC

    meetings (which by 1991 amounted to 38 Council, committee and sub-committee meetings throughout the world during the financial year). The travel costs of committee members did not form part of IFAC‘s budget, but were paid by their associations, so in this way an extra

    subsidy from member bodies was obtained. A pooling system was devised to try and ensure that country representatives were not penalized due to having to travel longer distances (with a significant number of IFAC‘s meetings being held in North America or Europe). In terms

    of setting the levels of member bodies‘ subscriptions to cover the costs of IFAC‘s activities, it was recognized at an early stage that this was an essentially subjective process. When reviewing the financing method for the 1982-87 period, the then IFAC president, Gordon Cowperthwaite, noted at the New York, May 1991 council meeting, that ―it was virtually impossible to develop a formula for sharing the cost of IFAC that would be equitable to all countries and therefore ‗rough justice‘ was used to determine the method of allocation‖ (p. 12). ‗Rough justice‘ effectively meant that the larger and more economically powerful and successful countries paid significantly more per capita member than less developed countries.

IFAC and the International Accounting Standards Committee (IASC)

    A fascinating issue during IFAC‘s first fifteen years was its relationship with the IASC. The problematic nature of this relationship was recognized in the workings of the International Coordinating Committee of the Accountancy Profession (ICCAP), the predecessor body to IFAC. The final report by ICCAP had left open the need to revisit the relationship once IFAC was formed. The early years of IFAC‘s existence saw ongoing discussions as to whether or

    not the IASC should be brought under the IFAC umbrella. The competing arguments concerned whether integrating the IASC within IFAC would give a more coherent external image as to the accounting profession‘s global standard setting activity, or whether such a

    move would be counterproductive in sending out signals that accounting and auditing standard setting was (overly) dominated by, the accounting profession, with an inadequate voice for outside voices/interested parties. This latter view was influenced significantly by claims that bodies such as the OECD and the UN viewed accounting standards as being too important to be left solely in the hands of the accounting profession.

    The end result of the first four years of discussions which followed the formation of IFAC was the 1982 ‗IASC/IFAC Mutual Commitments‘ agreement. This essentially allowed the IASC and IFAC to exist as separate bodies, but with the IFAC Council being granted the right to appoint all IASC board members; this was coupled with regulations that enabled founder IASC members to retain their positions on the IASC board and allowed non-accountants to become board members. As part of the agreement, a Co-ordinating Committee was established to facilitate close working between the IASC and IFAC and to ensure enhanced compliance with IASC standards and IFAC guidelines. IFAC also agreed (as from 1 January,

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    1983) to contribute 10% of the IASC‘s annual budget. Over the next ten years, this saw IFAC provide over US$ 530,000 funding to the IASC.

    The mutual commitments accord, while gaining the approval of both the Council of IFAC and the IASC Board, subsequently proved to be something of an uneasy truce. Merger talk returned visibly in 1987 and discussions at the Tokyo World Congress held that year led to the formation of a Working Party (chaired by John Bishop, an Australian and former member of both the IFAC Council and the IASC Board) to review the aims, effectiveness and relationship of IFAC and the IASC.

    Significantly, the Bishop Working Party found little evidence of confusion about the respective roles of IFAC and the IASC. It felt that the IASC had ―firmly established itself as the setter of international accounting standards, while IFAC is recognized as the representative of the internationally organized accounting profession whose responsibilities include the development of international auditing, educational, ethical and other standards which are complementary to the international accounting standards set by IASC‖ (p. 12). The

    idea of a merger between IFAC and the IASC was firmly rejected by the Bishop Working Party. Discussion on this issue at the November 1988 IFAC Council meeting in New Delhi (attended by members of the Working Party) under the title ―Future Issue – Whither IFAC

    and IASC?‖ had considered options including: (a) retention of the present relationship; (b) moving IASC closer to IFAC and (c) moving IASC further away from IFAC. The Council minutes note that a wide ranging set of comments were expressed on the above options, with a clear majority of council members in favor of the accounting standard setting function remaining under the control of the accounting profession but supportive of steps being taken

    to ensure that there is adequate representation of users and preparers in the standard setting process.

    The Bishop report noted the argument that the IAPC (as a sub-committee of IFAC, had a degree of autonomy similar to that enjoyed by the IASC) but did not see this as a convincing argument for structuring the IASC in a similar way. It felt that such a move ―could be interpreted as an overt action by the accounting profession to exercise exclusive control over the international standard-setting process and that this could be counter-productive in view

    of the increasing importance, in the public interest, of participation by non-accounting bodies‖

    (p. 12). Key to the Bishop recommendations was the emphasis that the working party placed on its remit of ensuring that ―any changes which it recommended would enhance the status

    and authority of International Accounting and Auditing Standards in the worldwide business and professional community and in the public interest more generally‖ (p. 12). The report noted the views of many respondents who had stated that actions ―which emphasized or

    increased the dominance of the accounting profession over IASC‘s activities would not only threaten the increasing participation and support by non-accounting bodies, but could lead other international or regional authorities and organizations to consider developing and publishing their own accounting standards‖ (p. 12). It concluded that ―any development in this direction would be highly undesirable and should be avoided at all costs‖ (p. 12).

    The Bishop Working Party‘s final report also contained a range of proposals as to how efficiency and effectiveness could be improved, particular suggestions being the establishment of a more concrete strategic planning process, through the replacement of the Planning Committee with an Executive Committee that would meet more regularly and focus explicitly on key strategic and policy issues, this was implemented in 1990, comprising the

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