IFAC REFORM

Introduction

The background to these reform proposals lies in the decline in confidence in financial reporting and in the accounting profession associated with corporate collapses and failures in financial reporting and auditing in a number of countries. The consequence of this has been greater regulation of the profession in many countries in an attempt to restore public and investor confidence in financial reporting. While the events themselves have not occurred in all countries, they have significantly influenced the international regulatory environment in a way that requires a response. The address by the President of the International Federation of Accountants (IFAC) at the World Congress of Accountants in Hong Kong, November 2002, stated that there was a need to move towards a system of mixed regulation of the profession. The proposals below are IFAC’s response to the decline in confidence in financial reporting and auditing and the changed regulatory environment. These changes are designed to lead to higher quality standards and as a consequence enhanced performance by the accounting and auditing profession. This in turn should contribute to greater confidence in the quality of financial reporting and auditing. These

proposals reflect the continuing commitment of the profession to its public interest role and to the goal of global convergence to high quality standards. Underpinning these proposals are a number of core values and beliefs. First, that the accounting and auditing profession has an obligation to serve the public interest. Secondly, that global convergence to high quality accounting, auditing and other professional standards is in the public interest. Thirdly, that transparency in standard setting leads to higher quality and more widely accepted standards. This paper does not seek to consider options or to explain the rationale for the design of the reform proposals. Rather, it should be seen as the product of the development process described below, which involved extensive discussion and consultation with a wide range of parties both internal and external to IFAC, and is intended to be a proposal that all parties involved can agree will help ensure that IFAC’s standard setting activities reflect the public interest and address the concerns of the regulatory community.

1.2 Objectives

The objective of this proposal is to increase confidence that the public interest activities of IFAC (including the setting of standards by IFAC boards and committees1) are properly responsive to the public interest and will lead to the establishment of high quality standards and practices. These proposals will result in highly transparent standard setting processes with public and regulatory input, within a framework of regulatory monitoring and public interest oversight. During 2003, the International Federation of Accountants (IFAC) reviewed its governance activities and regulatory responsibilities to determine how it could strengthen its role in ensuring that accountants worldwide fulfill their public interest responsibilities. As part of this process, IFAC engaged in an intense series of consultations with international regulatory agencies and other regional and international organizations. It also consulted with its member organizations and the accounting profession. The result of this collaborative effort is a series of reform proposals that IFAC views as critical to strengthening the accountability of the international profession and building investor confidence in financial reporting, in the work of auditors, and in financial securities markets worldwide.

Scope and Objective of Proposals

The objective of the reforms is to increase confidence that the activities of IFAC are properly responsive to the public interest and will lead to the establishment of high quality standards and practices in auditing and assurance. The reform proposals are also designed to contribute to the achievement of global convergence to high quality standards. Strong international standards of accounting, auditing, and professional ethics support effective and efficient capital markets leading to lower costs of capital, higher investment, greater innovation and more job opportunities.

The focus of the reform proposals is those areas within IFAC that have the greatest impact on the public interest – primarily IFAC standard setting activities. These include the standard setting activities of the International Auditing and Assurance Standards Board (IAASB), the Ethics Committee, and the Education Committee. IFAC’s Public Sector Committee will be subject to a separate and independent review process in conjunction with the World Bank and other external parties with an interest in governmental financial reporting.

Following corporate collapses and failures in a number of countries in the early part of the century, there was a decline in confidence in financial reporting and in the accountancy profession. As a result, regulation of the profession increased in many countries in an attempt to restore public and investor confidence in financial reporting.

In response to these events, in November 2003, the Council of the International Federation of Accountants (IFAC), with support from global regulators, unanimously approved the IFAC Reforms. They were developed through consultations with international regulatory agencies, other international and regional organizations, IFAC member organizations, and the accounting profession.

The reforms were designed to:

• Strengthen standard-setting processes; 
• Achieve convergence to high-quality international standards in auditing, professional ethics, and accountancy education, as a means to support effective and efficient capital markets—leading to lower costs of capital, higher investment, greater innovation, and more job opportunities;
• Enhance performance by the accountancy profession;
• Build investor confidence in financial reporting, in the work of auditors, and in financial securities markets worldwide; and 
• Ensure that the international accountancy profession is responsive to the public interest. 

These proposals aimed to provide increased transparency with respect to IFAC governance and the standard-setting activities IFAC supports, with greater public and regulatory input, within a framework of regulatory monitoring and public interest oversight. The proposals also called for the establishment of a Public Interest Oversight Board (PIOB); regular, ongoing dialogue between regulators and the accountancy profession; and broad-based external participation in international standard-setting activities.

The reforms demonstrated the commitment of IFAC and the entire profession to building public confidence in the quality of audits. The result has been a more collaborative and comprehensive international process for determining how accountants and auditors can best contribute to the integrity of the international financial system.

 

Overview of Proposals

The proposals provide for more transparent standard-setting processes; greater public and regulatory input into those processes; regulatory monitoring; and public interest oversight. The proposals also ensure that there is regular, ongoing dialogue between regulators and the accountancy profession. This is to be accomplished through the creation of several new

structures, some of which will be within IFAC while others will be independent of it. Key features of the reform proposals include provision for the establishment of the following groups:

Public Interest Oversight Board (PIOB) -- This board will oversee IFAC standard setting activities in the areas of audit performance standards, independence, and other ethical standards for auditors, audit quality control and assurance standards. It will also oversee IFAC’s proposed Compliance Program. The PIOB will decide other areas that might fall within the scope of its oversight after consulting with the Monitoring Group (MG) and the IFAC Leadership Group (ILG) (see below). The composition of the PIOB will be selected by the MG. It will be made up

of members of the organizations within the MG or their representatives.

Monitoring Group (MG) -- The MG will comprise international regulators and related organizations including representatives of the International Organization of Securities Commissions, the Basel Committee on Banking Supervision, the European Commission, the International Association of Insurance Supervisors and the World Bank. The MG will update the PIOB regarding significant events in the regulatory environment, and among other things, will be the vehicle for dialogue between regulators and the international accountancy profession.

IFAC Leadership Group -- The ILG includes the IFAC President, Deputy President, Chief Executive, the Chairs of the IAASB, the Transnational Auditors Committee, the Forum of Firms, and up to four other members designated by the IFAC Board. It will work with the MG and address issues related to the regulation of the profession.

Public Input

Additional public input into the standard setting process will be obtained through consultative advisory groups, whose members will provide input into the technical activities of each area. Under the reform proposals, the role of these groups is being augmented and strengthened.

IFAC Council and Board

The IFAC Council will continue to be responsible for overall governance of IFAC and the IFAC Board will oversee the management of the organization. Actions will be taken to ensure greater transparency and participation in the operations of the IFAC Council. As part of the reform, the IFAC Board will also take actions to enhance the transparency of certain IFAC activities, expand its size to include more member bodies, and ensure that IFAC meets its obligations to the PIOB.

IFAC BOARD

The key proposals below result from the work of the IFAC Governance Issues Group, which

reviewed the IFAC constitutional changes given effect in 2000.

The key changes proposed in relation to the IFAC Board are:

• A formal constitutional requirement that the President, Deputy President and Board members make a declaration that they will act in the public interest and with integrity in discharging their roles within IFAC. Chairs and members of IFAC boards and committees will also be required to make this same declaration

• An increase in Board membership, from 16 members to 21 members, to enable a wider member body representation on the Board

• A more transparent process for the selection of Deputy President, involving both Board members and member bodies

• Changes to the criteria adopted by the IFAC Nominating Committee to recognize that the over-riding principle of the “best person for the job” encompasses issues of the size of member body, geography and sector of the profession as factors to be considered

• The Board will have the function of ensuring that the obligations of IFAC with respect to the PIOB are met, for example the provision of information to the PIOB

• The Board will in the future approve for submission to the PIOB the names of the chairs and members of the PIACs

• The Board will in the future consult with the PIOB prior to any decision to remove chairs or members of the PIACs

• The Board will in future approve for submission to the PIOB all changes proposed to the terms of reference of the PIACs

• The establishment of formal terms of reference for the Audit Committee of the Board

• The right of the PIOB, through its chair, to bring matters to the attention of the Board and to present those issues to the Board, and where circumstances warrant for the members of the PIOB to meet with the Board.