The International Federation of Accountants' (IFAC's) Professional Accountants in Business (PAIB) Committee has released a new information paper that provides guidance on developing a business plan for small and medium entities (SMEs), including how to develop a corporate values statement and manage business risks. The principles and practices in the paper, entitled Business Planning Guide: Practical Application for SMEs, were designed primarily, but not exclusively, for management operating in SMEs and for the small- and medium-sized accounting practices (SMPs) that service them. It was prepared in collaboration with the Malaysian Institute of Accountants (MIA).

"The publication provides comprehensive guidance to assist SMEs and their SMP advisors in the business planning processes and features critical success factors to help them effectively manage their technological, human and financial resources. We would like to thank the MIA for their contribution to the development of the document," states PAIB Committee Chair Bill Connell.

The paper describes how the business plan may serve as a performance tool on an ongoing basis and support a business in obtaining external funding. It also includes a checklist and a practical example of the structure of a business plan. The information paper can be downloaded from the IFAC online bookstore at http://www.ifac.org/store.

IFAC is the worldwide organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC's current membership consists of over 160 professional accountancy bodies in 120 countries, representing more than 2.5 million accountants in public practice, education, government service, industry and commerce. IFAC, through its independent standard-setting boards, sets international standards on ethics, auditing and assurance, education, and public sector accounting. It also issues guidance to encourage high-quality performance by professional accountants in business.

The International Federation of Accountants (IFAC), the worldwide organization for the accountancy profession, has issued its 2005 annual report. The report highlights the work of IFAC and its independent standard-setting boards in building an investment climate of trust and details the standards, guidance and other services delivered over the past year to protect the public interest.

"Our most notable accomplishments in 2005 included the strengthening of our standard-setting processes; the development of good practice guidance to help developing nations build accounting capacity; and the release of an updated international Code of Ethics for Professional Accountants," states IFAC President Graham Ward. "The Code, which becomes effective June 30, 2006, applies to all professional accountants, including those in public practice, business, industry, and the public sector."

One of the most significant events of 2005 was the formal establishment of the Public Interest Oversight Board (PIOB). The work of the PIOB is detailed in its first public report, which may be downloaded from http://www.ipiob.org. Other significant IFAC achievements included the establishment and expansion of Consultative Advisory Groups for IFAC standard-setting boards to ensure that there is sufficient public interest input; progress on the development of a global electronic knowledge resource for professional accountants in business; and the successful implementation of Part 1 of the IFAC Member Body Compliance Program, which provides comprehensive information about the regulatory and standard-setting frameworks in countries around the world.

The report also highlights IFAC activities to support the work of small- and medium-sized accounting practices as well as the increased recognition by governments and international organizations of the benefits of International Public Sector Accounting Standards in enhancing the accountability of government financial reporting. The report, which includes messages from the IFAC President, IFAC Chief Executive and the Chair of the PIOB, can be downloaded at http://www.ifac.org/about. Print copies can be obtained by sending an email with your postal address to pr@ifac.org.

IFAC is dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC's current membership consists of over 160 professional accountancy bodies in 120 countries, representing more than 2.5 million accountants in public practice, education, government service, industry and commerce. IFAC, through its independent standard-setting boards, sets international standards on ethics, auditing and assurance, education, and public sector accounting. It also issues guidance to encourage high-quality performance by professional accountants in business.

Thank you very much for inviting me to speak to you today. It is a great pleasure to have the opportunity to be back here in Dubai for this conference. A significant proportion – well over 50 percent – of the members of IFAC’s 160 member organizations is employed in business. The more I meet with groups like this one, the more aware I am of the fundamental, but diverse, support our profession provides to thousands, actually millions, of businesses of every size, in every country around the world.

The Institute of Management Accountants (IMA) has long been a leader of and champion for professional accountants in business and industry. The IMA also has a long history of support of and participation in the international profession. It has been an active member of IFAC since 1980, and its representatives have served on the IFAC Professional Accountants in Business (PAIB) Committee, which is dedicated to supporting and raising awareness of the vital role that you play. Specifically, I would like to recognize Bradley Kaplan, who joined the IFAC PAIB Committee in January 2006, and William Brower, who served on the committee from 2001 to 2005. The service of these and of other volunteer members of IFAC boards and committees is vital to achieving our objectives and to supporting professional accountants in all sectors of the economy worldwide.

The diversity of our profession is, I believe, one of our unrecognized strengths. Because professional accountants in business work in a wide variety of roles, at every level of organizations across all industry sectors, we collectively have a perspective that extends well beyond “the numbers.” Professional accountants in business – or PAIBs as we call them at IFAC – understand the drivers behind a business, and therefore play a fundamental role in contributing to the creation of shareholder value. Few other professionals have such a diverse and significant role in the day-to-day operations of businesses and other organizations.

So what then are the challenges that PAIBs face and how can we best meet them to enhance our effectiveness?

The first is mastering change.

Whether we are management accountants or accountants in public practice or any other field, our value to society and our effectiveness is determined in great part by our ability to address the changing environment in which we operate. The last twenty years have witnessed a massive transformation in business organizations, driven by intense competition, the globalization of markets, and the continual need to redefine strategies, structures and processes. Changes in political regimes, new conceptions of management controls, the impact of globalizing forces on commercial affairs, shifts in notions of effective knowledge management, of governance and of ethics, and technological advances have affected all areas of the profession and, notably, management accounting.

Let’s consider for a moment the changing nature of the finance function and the impact on professional accountants in business. In efficiently providing the goods and services that society wants, high performing organizations competing globally demand a unified service delivery model based on achieving a common technology platform, common business processes and common data. To deliver this, finance function initiatives include global strategies for centralizing process-based activities under the shared services and/or outsourcing umbrellas. This involves dealing with challenges such as process improvement and possible relocation to lower cost regions.

The trend calls for smaller finance functions, but more effective PAIBs. “World-class” organizations have a finance cost well below one percent of revenue. On the supply-side, firms such as IBM and Accenture have expanded their business process outsourcing up the value chain to include more strategic activities, and there is ongoing high demand from companies for outsourcing their routine accounting services to external, and often overseas, service providers. As well as achieving greater process quality and efficiency, and cost reduction, reorientation of the finance organization has the potential also to support value creation in organizations. A key objective is to deliver enhanced analysis, insight, and involvement in decision making. To be successful, to remain relevant and to be considered vital in the value creation of organizations, PAIBs need to challenge their roles and participation in organizations and be prepared to review and change structures, accountabilities and incentives. Above all, we may need to dig deeper to understand what customers of finance require from the finance organization and how business partnering can be most effective in a variety of contexts. This is true whether we work in a large corporation or a small or medium enterprise. 

Another major challenge that PAIBs must address is globalization and its impact on organizations.

A number of well-documented and profound shifts affect organizations and the accountants they employ – from economic liberalization, relocating of economic activity to other geographies such as China and India, and within geographies, to technological advances and significant demographic changes. To make any business a global business means more than finding new customers or suppliers in other countries. It requires an openness to change among the owners and the management team. This change requires taking well-informed risks, opening up the firm or company’s culture and making a serious commitment to ongoing learning. It is for this latter reason that IFAC’s International Accounting Education Standards Board has mandated a requirement for all professional accountants, including obviously those in business, to undertake continuing professional development. None of this change happens spontaneously, but requires planning and clear leadership. Hence, the planning of these internal changes should be part of the planning for international activities.

This is especially true for small and medium enterprises. Compared to larger firms, small and medium enterprises are generally less well-equipped to face increases in international trade. As a result of their lower average productivity, many SMEs have found it difficult to compete. Also, given their limited resources, they have found it more difficult to take advantage of the removal of tariff barriers. This does not mean, however, that it is impossible for SMEs to enter the international market place and to do so effectively. They must be prepared to look for new partners, to identify and focus on their market strengths, and to acquire information and expertise about overseas’ markets and cultures.

Recognizing the extent to which SMEs contribute to economic growth and stability around the world, IFAC has focused particular attention on this area. Through the establishments of a Small and Medium Practices Committee last year, we are considering how our organization can best meet the needs of SMPs and SMEs. One of the primary areas we are addressing is international standards and their impact on SMEs. The SMP Committee has provided input to the International Accounting Standards Board SME project, expressing our support for standards that are relevant, simple, and appropriate to the work of SMPs and SMEs. We have also been on the public record recently emphasizing the urgency and importance of financial reporting standards that fit this description. The SMP Committee also works closely with the International Auditing and Assurance Standards Board to ensure that the views of SMPs and SMEs are considered as auditing standards are developed, to ensure that auditing standards too avoid the imposition of requirements that have unwarranted compliance costs. At our upcoming IFAC Board meeting on June 1-2, we will be asking the Board to give the “go-ahead” for a new SME implementation guide to International Standards on Auditing. We view this as a significant project designed to help SMPs and SMEs address the growing challenges of globalization.

In addition, this month the IFAC PAIB Committee will issue an information paper on business planning for SMEs. Many business failures can be attributed to the lack of a sound business plan. The publication is designed to assist SMEs and their SMP advisors in understanding their own businesses, enabling them to evaluate both the potential of the business and the associated risks. The document will include the principles of business planning, a checklist and a sample business plan. It will be available for download free-of-charge from the IFAC website: www.ifac.org.

A third major challenge for professional accountants in business is building trust.

As organizations expand their global activities to exploit competitive opportunities, businesses large and small are coming under increasing scrutiny. Organizations will only be able to build the trust of a range of stakeholders through greater openness, transparency and accountability. The challenge then for professional accountants in business is to serve as an ethical gatekeeper – to be a champion of integrity, transparency, and objectivity – the three core values of IFAC. IFAC’s Code of Ethics for Professional Accountants, which is applicable to all accountants, including those in business, industry, government, academia, and public practice, embraces these core values.

The IFAC Board has recognized that PAIBs are the front-line professionals who could and should be a brake on inappropriate actions taken by their organizations, with that break extending, in some situations, to whistleblowing. Acknowledging that is it often extremely difficult for a PAIB, in isolation, to know what is the appropriate action in a particular situation, the International Ethics Standards Board for Accountants has begun a project to provide greater guidance for accountants in business and in practice with respect to whistleblowing. You can expect to see more guidance in this general area in 2007.

This new guidance will also help professional accountants in business carry out one of your most important responsibilities: setting the tone at the top in your organization. Earlier this year the PAIB Committee issued an exposure draft, Guidance for the Development of a Code of Corporate Conduct, proposing guidance to assist professional accountants and others in establishing and implementing codes of conduct in their organizations. The publication draws greater attention to the need for corporate codes of conduct and provides practical guidance on the scope and implementation of such codes. The goal of the proposed new guidance is to support sound corporate governance policies worldwide. The proposed guidance highlights the benefits of an effective code of conduct and identifies the professional accountant’s role in the development, monitoring, reinforcement, and reporting of such codes in their organizations. To assist in the creation of codes of conduct, the guidance includes information on presentation and content, on organizational and management challenges, and on implementing a code of conduct in a global organization.

Effective codes of conduct are a vital component of an organization’s control system. This new publication will enable professional accountants, who are largely responsible for internal control and risk management, to work with senior management to develop such codes, which, in turn, will support the control, direction and evaluation of their organizations’ performance. 

This leads me to a fourth area of challenge for PAIBs: decision making in their organizations.

The scope of the role of PAIBs in supporting and enabling better decision making is driven by a recurring issue in all organizations: that of ensuring decision making is not too heavily based on heuristics – “instinct,” “common sense,” “rules of thumb” and “gut feeling.”

Bad decisions are usually traceable to the way the decisions were made. Management accounting may be seen as a counter to what has been described as “bounded management rationality,” as an antidote to excessive confidence, as it enables decisions to be based on more than instinct. Research over the past few decades has helped us to understand better the manner in which humans make decisions. This can assist in determining how to present information in a manner that is easier to process and understand – for example, it is clear that size ordering, as opposed, say, to alphabetic ordering, of a set of numbers enables the reader to see and recall patterns very much more readily. Similarly, this research also helps us to understand the systematic ways in which we make inappropriate decisions, though mis-weighting recent events or low frequency, high impact events, or through myopia, to give some examples.

PAIBs can support managers in achieving better outcomes in relation to organization objectives. They assist to define alternatives, collect appropriate information and evaluate cost versus benefit. Numerous tools and techniques are at the PAIB’s disposal to support decisions – such as a range of investment appraisal techniques, net present value, business forecasting, performance management, competitive analysis and performance information. A number of mistakes are made time and time again in organizations, such as the sunk cost trap where sunk costs, although irrelevant to a present decision, have nonetheless been shown in research to be given undue weight in decision making. Another is the oversight of opportunity cost – the next best alternative that is forgone when a decision is made.

In order to make the right decisions, management needs to treat decision making as a distinguishing competence, which is supported by high quality, timely and multi-dimensional information about a company’s business model and performance drivers, and which focuses on the big issues and opportunities, as well as an awareness, not yet adequately accommodated within management accounting, of the realities of human decision-making processes.

Frequent roadblocks to robust strategic decision making include:

• Boards lacking a clear grasp of their organizations’ business model and key performance drivers, or pursuing an inherently flawed business model. People might see accounting profits in the short-term, but nevertheless be destroying value in everyday decision making.
• Decision making not being underpinned by rigorous value and risk analysis. Finance staff and others within management too often get distracted by the natural bias towards the financial reporting cycle and external compliance requirements and expectations, a factor that has become a greater concern as regulatory regimes demand increasing compliance activity.
• For all the talk of strategic management accounting, many accountants in industry have not been able to give sufficient attention to value precursors, the prerequisites for value creation, which are mainly non-financial, such as market sector dynamics and brand health indicators.
• Culture and communication: Let’s not forget that employees play the biggest part in generating shareholder value but, so often, the focus on adding value is blurred and diluted when you get a few levels down in the organizational hierarchy.

To provide guidance on governance issues from both a conformance and performance perspective, the PAIB Committee, in conjunction with the Chartered Institute of Management Accountants in the United Kingdom, published a report, Enterprise Governance – Getting the Balance Right. It explores the emerging concept of enterprise governance, which incorporates organizational performance into a business governance framework, especially in terms of decision making, strategy formulation and execution. The report, which is available on the IFAC website, argues how both perspectives must be in place in order to support high performance in organizations. This publication highlights the role of PAIBs in these processes.

To help professional accountants worldwide meet these and other challenges, IFAC’s PAIB Committee has this year begun developing a series of principles-based good practice guidance statements. This development is one that is happening through the leadership and support of the IMA. The guidance will promote and support consistent and high quality practice across the global community of PAIBs. Covering topics in the areas of management control, costing and corporate finance and financial management, this IFAC guidance will raise understanding of the role of the PAIB. It will recommend objectives in relation to the role of the PAIB, and define key principles, which are widely accepted features of good practice and which support the achievement of the objectives of the PAIB, and will provide practical guidance to support application of the principles.

This leads me to the fifth and final challenge that I will comment on today with respect to professional accountants in business – that is, learning how to manage knowledge.

Managing change means managing knowledge. For professional accountants in business, this may require a fundamental change in how we process and convey information. For example, we must develop a mindset that is open to new ideas, receptive to challenges, and capable of insightful analysis. We should and can, I believe, apply the principles of human information processing to our management and recruitment techniques to strengthen our organizations. This means enabling professional accountants to process information differently and more independently, and to help remove organizational bottlenecks that prevent them from making the types of contributions that can best add value to an organization.

Ours is a profession that is responsible for far more than historical compliance related activities. We cannot forget this. We must focus on building organizational capacity and performance, and on developing a new generation of PAIBs who can not only embrace change but thrive in a world in which it is inevitable.

In conclusion, it is important to recognize that business has a central role in driving economic and social welfare but that it requires high quality information for the effective management of resources and sound corporate governance to achieve these objectives. PAIBs, as the primary providers of business information and reporting, play a crucial role in contributing to the growth and development of business.

Our recent publication, The Roles and Domain of the Professional Accountant in Business, was developed to build understanding of the diverse roles, competencies and value PAIBs contribute to organizations. Pointers from this document include:

• As managers of value, PAIBs should understand that delivering sustained shareholder and stakeholder value (or “best value” as it has sometimes been described in the public sector) is the main goal when assessing alternative options. PAIBs have a key role in developing strategies for managing value and growth, and in moving other functions towards these goals;
• PAIBs have a responsibility to ensure that the organization understands fully its key performance drivers and that these are communicated in internal and external reporting; and
• PAIBs should ensure there is a relentless pursuit of efficiency and effectiveness from the investment base, particularly in areas such as capital expenditure, working capital management, brand management and R&D.

Specifically, the IFAC PAIB Committee’s role is to enhance the role of PAIBs by helping them to think and to act strategically and globally, and to develop the necessary knowledge and competencies to deliver sound decision making in organizations. PAIBs need to be in a position to deal with the increasing complexity of managing business. For example, the move to modular design and platform development to enable organizations to deal with considerably shorter product and service life cycles requires a more sophisticated approach to planning, costing, risk and control.

To help PAIBs obtain access to information that can help them meet these challenges, the PAIB Committee has spearheaded the development of an electronic knowledge resource center. It is a unique web project that aims to publicize and consolidate the valuable information produced by IFAC member bodies for the benefits of professional accountants worldwide. It will enable member bodies to offer their professional accountants access to increased, relevant and high quality information resources, including helping them to deal with ethical leadership and public interest challenges such as corporate responsibility.

The challenges for both IFAC and its member bodies, such as the IMA, are to sustain the relevance of professional accountants in business, to continually investigate and adopt new concepts and new learning models, and to increase awareness of the PAIB’s capabilities. There are awareness gaps in which IFAC is making a significant impact, for example, in improving accounting information in the public sector, and highlighting the role of PAIBs in driving economic activity and their contribution to the governance agenda. This is coupled with IFAC’s role in supporting trust and credibility in both the wider accounting profession and in capital markets, which is central to its mission of protecting the public interest.

Over the past few years, IFAC has stressed its public interest objective. While some might think that objective is confined to public practice and auditing, that is a very narrow conception of what is in the public interest. The public interest is served when organizations produce products and services that have a value greater than the resources consumed in production. Economic growth and development is in the public interest. So when we talk about the public interest, PAIBs are included in that. 

IFAC’s leadership, its Board and the members of the IFAC PAIB Committee all recognize the role of PAIBs in protecting the public interest and in contributing to economic growth and stability. Through their daily work in organizations around the world, PAIBs contribute to the growth of their businesses and organizations and to greater economic prosperity for all. This must be why the late management guru, Peter Drucker, declared in the Harvard Business Review, that “The most exciting and innovative work in management today is found in accounting.” I believe that assertion still holds true, as I am sure do all of you.

Thank you for your attention. This speech will be posted on your website and on IFAC’s within 24 hours if you would like to read it, and I would welcome any comments you may have.

The Professional Accountants in Business Committee identified a practical business planning guide as a very useful tool for management, principally but not exclusively, operating in the small and medium entities (SMEs) area of the market. This information paper provides practical guidance that will help SMEs to understand their own business and industry, enabling them to better evaluate the business potentials and their associated risks. It will also be useful to small and medium-sized practitioners that are providing professional accounting services to SMEs.

At a meeting held recently in London, more than 30 chief executives of accountancy bodies and regional accountancy organizations around the world expressed support for appropriate, simplified guidance being developed for small and medium entities. They also agreed that a major challenge for the accountancy profession is ensuring that requirements for financial information and assurance are appropriate for both large and small entities in both developed and developing countries. The requirements should be straightforward, clear and brief as possible.

Recognizing that international standards that are right for a large public company may be burdensome for a small enterprise, the International Federation of Accountants (IFAC), together with its member bodies, is urging standard setters and regulators to consider the unique needs of small and medium enterprises (SMEs) in developing their rules and regulations.

"We believe the goals of standard setters like the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB) should be to develop succinct, relevant and understandable guidance that eases the compliance burden on SMEs and ensures that benefits exceed costs," states IFAC President Graham Ward. "This essentially means that the costs of preparing, auditing and disseminating financial statements should be proportionate to the information needs of the financial statement users."

IFAC expressed these views in its comments on the IASB Discussion Paper, Preliminary Views on Accounting Standards for Small and Medium-Sized Entities. "Concerns over the high costs of complying with full International Financial Reporting Standards have prompted many countries, particularly those with developing economies, to look at alternatives to international standards or to delegate standard setting to organizations that may not be appropriate for such a role," emphasizes IFAC Chief Executive Ian Ball. "Such actions are not in the public interest and, therefore, it is critical that standard setters be conscious of the effect of compliance costs on small and medium entities."

With SMEs representing 95.77 percent of the businesses in the European Union, over 97 percent of the total companies in the Asia Pacific region, and 99.7 percent of all United States employers, the issue needs to be addressed urgently. The issue is at the forefront of the agendas of IFAC's Developing Nations and Small and Medium Practices (SMP) Committees and is a matter of concern to IFAC's Professional Accountants in Business Committee. The Developing Nations and SMP Committees provide regular input to both the IASB and IAASB to ensure that the SME perspective is considered during the development of international accounting and auditing standards.

IFAC is the worldwide organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. Its current membership consists of over 160 professional accountancy bodies in 120 countries, representing more than 2.5 million accountants in public practice, education, government service, industry and commerce. IFAC, through its independent standard-setting boards, sets international standards on ethics, education, and public sector accounting. It also issues guidance to encourage high-quality performance by professional accountants in business.

I am honoured to be here with you today to share in this celebration of your 100^th anniversary. Both personally, and on behalf of IFAC’s Board, committees, and staff, I offer you our sincerest congratulations on this important milestone. I would also like to thank the Consiglio Nazionale dei Ragionieri e Periti Commerciali, its President, William Santorelli and its Vice President, Francesco Distefano for inviting me to participate in this historic event by making some brief remarks about IFAC and the role of the international profession.

There can be no more appropriate place to discuss the international accountancy profession and to celebrate its history than here in Italy, the birthplace of Luca Pacioli who is credited with founding our great profession during the 14^th century. Pacioli was a man of diverse backgrounds and talents: he was a tutor, a professor of mathematics, an author and a Franciscan Friar.  He associated with the common merchants, devising bookkeeping methods that could assist them with their businesses and, at the same time, counted Leonardo Di Vinci amongst his friends. A true Renaissance man, Pacioli continues to be a model for our profession today. Like Pacioli, our lives as professional accountants result in us working with individuals in all paths of life. We are continually challenged to understand business’s changing needs, to deliver credible financial information and to adopt the vision necessary to serve the public interest effectively in the years ahead.

The CNRPC is dedicated to helping professional accountants  to meet these goals. As an active member of the International Federation of Accountants for a dozen years, CNRPC has demonstrated its commitment to the development of a high quality accountancy profession both here inItalyand internationally. And we are very grateful to the leaders of your organization for sharing IFAC’s mission to protect the public interest. I would like to recognize and to thank those Italian representatives currently serving on our boards and committees,  whose support enables IFAC to achieve its mission and objectives: Dr. Roberto D’Imperio, a member of the IFAC Board and his technical advisor Gianfrancesco Padoan; Prof. Roberto Tizzano, a member of the International Auditing and Assurance Standards Board; Prof. Stefano Pozzoli, a public member of the International Public Sector Accounting Standards Board; and Lino De Vecchi, Deputy Chair of our Small and Medium Practices Committee. I would also like to thank Angelo Casò, who retired from the IFAC Board last November after more than five years of service on the Board and four years as Chair of the SMP Committee. These outstanding professional accountants, like the great Italian Pacioli, possess the leadership, integrity and vision necessary further to develop our profession and to serve the public interest.

Today, I would like to speak to you briefly about recent IFAC initiatives – initiatives that are themselves designed further to strengthen our accountancy profession and its ability to contribute to economic growth and stability worldwide.

IFAC’s activities are driven by a mission that reflects our broad vision to consider the public’s welfare. Our mission is:

To serve the public interest, IFAC will continue to strengthen the worldwide accountancy profession and contribute to the development of strong international economies by establishing and promoting adherence to high-quality professional standards, furthering the international convergence of such standards and speaking out on public interest issues where the profession's expertise is most relevant.

In striving to meet this mission, IFAC has taken significant steps in four key areas, working closely with its 160 member organizations:

• Strengthening our standard setting and promoting ethical conduct;
• Achieving convergence with international standards;
• Reaching out to and supporting developing nations, professional accountants in business and small and medium practices and enterprises; and
• Strengthening the financial reporting supply chain.

Our initiatives in each of these areas are central to our mission to serve and to protect the public interest. Let me begin with standard setting. IFAC sets international auditing and assurance, ethics, education and public sector accounting standards. Over the past year, we have continued to increase public interest input into these processes through Consultative Advisory Groups and other means and enhanced the transparency of those processes by including more information on the IFAC website (www.ifac.org). Time does not permit me to outline all of our standard setting initiatives but I would like to highlight a few of the most significant ones for you now.

In the area of auditing standards, the International Auditing and Assurance Standards Board has undertaken a significant project to improve the clarity and structure of its standards. Last October, the IAASB issued four exposure drafts of proposed standards re-drafted using its new drafting style. This new style was developed based on input it received at a forum in July last year and through responses to its 2004 Proposed Policy Statement and Consultation Paper on Clarity. These proposed new standards are the first to be issued as part of an ambitious program to make IAASB standards more understandable and capable of being translated and to facilitate international convergence.

In addition to focusing on clarity, last year the IAASB released a new international standard on audit documentation, designed to enhance auditor performance and audit quality by establishing stricter requirements for audit documentation. Beginning with this standard, the IAASB staff is preparing a “Basis for Conclusions” for each new international standard to increase understanding about the development of the standards – in particular, how the IAASB has responded to input received. We hope that you find this to be helpful.

Other current IAASB projects are the development of standards on the audit of group financial statements and related parties issues. In January, the IAASB issued an exposure draft of a proposed revised International Standard on Auditing that would require the auditor to perform a minimum set of procedures to identify related party transactions and transactions not identified or disclosed by management.  I view this exposure draft as being particularly important.

In the area of ethics, IFAC’s International Ethics Standards Board for Accountants has updated the Code of Ethics for Professional Accountants, further emphasizing the five fundamental values, which are integrity, objectivity, professional competence and due care, confidentiality and professional behavior. The development of the updated Code is part of an ongoing effort to ensure that all professional accountants – whether they work in public practice, business or government – have clear, relevant and high quality ethical guidance.

The Ethics Standards Board is also addressing issues such as audit independence and whistle-blowing and is in the process of developing new guidance for professional accountants in government and in business.

IFAC’s International Accounting Education Standards Board is also focused on ethics, among other issues. It is in the process of developing a tool kit and an International Education Guideline to assist member bodies, academic institutions and others in instilling a strong ethical foundation in the accountants of tomorrow. The guideline will offer recommendations for good practice models of ethics education, while the tool kit will provide practical tools – such as sample course outlines, teaching notes and case studies – to be used by member bodies and educators. The tool kit and proposed guideline are expected to be available later this month.

As part of its effort to help ensure that there are competent professional accountants worldwide, the Education Standards Board is developing new guidance on the training of audit professionals. The Board is also in the process of updating International Education Guideline 11, Information Technology for Professional Accountants, to reflect changes in the information technology field, and it plans to release an exposure draft in the near future.

Through the International Public Sector Accounting Standards Board, IFAC develops Standards which are designed to improve public sector financial management and accountability. This is an area that we cannot afford to overlook and IFAC views it as an increasingly important area of activity. The IPSASB is currently addressing key issues for public sector accounting, including accounting for non-exchange revenue, heritage assets and budget reporting.

The IPSASB’s recent consultation paper on accounting for heritage assets, such as museum collections, historic buildings and nature reserves, will be very relevant toItaly, a country  that has such significant heritage assets.

In consultation with IFAC boards and committees, and other relevant interested parties, IFAC staff are further developing the concept of “international convergence.” The objective is to develop guidance to accompany IFAC’s Statements of Membership Obligations (SMOs), which require IFAC members and associates to use their best endeavors to incorporate international standards, set by IFAC and by the International Accounting Standards Board, into their national standards. The SMOs, which also require member bodies to implement quality assurance and investigation and discipline programs, form the basis of IFAC’s Member Body Compliance Program.

The Compliance Program supports the development of high quality auditing, accounting, ethical, educational and related quality assurance and disciplinary standards in IFAC member bodies throughout the world. The program is intended to guide accounting institutes in the full spectrum of their professional responsibilities, to demonstrate a shared commitment to our profession’s values of integrity, transparency and expertise.

Part 1 of the Compliance Program, a fact-based questionnaire to assess the regulatory and standard-setting frameworks of IFAC member bodies, is now complete. Responses from more than 130 member bodies, including the CNRPC, have been posted on the IFAC website, and the remaining responses are in the process of being agreed and posted.

Part 2, the SMO Self-Assessment Questionnaire, was launched last December and member body responses will be posted beginning in the second half of this year. The responses from these questionnaires will  provide a global snapshot of the accountancy profession from both a regulatory and standards perspective. Additionally, they can be used to help IFAC gauge where it needs to focus its efforts to support the development of the profession and to work to achieve convergence. Lastly, but perhaps most importantly, the responses to the questionnaires demonstrate the international accountancy profession’s willingness to be accountable for its actions to meet high standards, to deliver quality and to protect the public interest – all important responsibilities in the changing and complex environment in which we all work.

This focus on convergence is fundamental to all IFAC standard-setting activities. We firmly believe that it is in the public interest to have a single set of international standards, of the highest quality, set in the public interest by an international expert body which transparently consults with, and recognizes the legitimate interests of, the international community. The IAASB and  IFAC’s Education and Ethics Standards Boards develop standards that do meet these requirements. The independent international Public Interest Oversight Board, formed in February 2005, oversees these standard-setting activities as well as the IFAC Member Body Compliance Program. Last September, the PIOB approved the due process and working procedures for these standard-setting boards and in December,  it approved IFAC’s nominations of members of them .

In order to achieve its goal of developing a high quality profession that meets the public interest, IFAC must ensure that it supports the roles of all professional accountants. For this reason, over the past year, we have reached out to accountants in developing nations, to those in small and medium practices and to professional accountants in business. IFAC’s Small and Medium Practices Committee is increasingly active in representing the interests ofSMPs to both theIAASB and the International Accounting Standards Board. The committee is providing input to theIASB’s project considering the development of financial reporting standards for SMEs. It is also planning to develop guidance materials forSMPs, especially in relation to the application of ISAs to the audit of SMEs and to establish an electronic data exchange on SME andSMPissues.

Our Developing Nations Committee is also focused on the goal of high quality in the public interest. As a result of an extensive consultative process, the committee 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 professional, financial and regulatory architecture necessary to support economic growth.

In addition, to assist in the establishment and development of professional accountancy bodies, last year the committee released new good practice guidance on the roles and responsibilities of a professional body, education and examination and capacity development. This guidance addresses a range of situations, including where the accountancy profession does not exist in a country, where the profession exists and there is a desire to establish a professional accountancy body and where an existing professional body requires further development and enhancement. The guide also includes suggested areas for priority action based on short-, medium- and long-term goals and projects.

I believe that tools such as this new guidance are a key way that the accountancy profession can support economic growth and stability, which in turn can reduce poverty and improve the quality of life for citizens of developing nations.

IFAC is also working to help member bodies to meet the unique needs of professional accountants in business. These accountants hold a wide range of positions in companies inItalyand around the globe and are often the gatekeepers of financial information, and thus, of public trust. Recognizing this very critical role, our Professional Accountants in Business (PAIB) Committee has undertaken several initiatives to provide accountants in business with good practice guidance, including the forthcoming launch of an electronic resource center to provide one-stop access to current information on issues faced by this constituency.

Recognizing the critical role of ethical values and standards on protecting the public interest, the PAIB Committee has issued an exposure draft, Guidance for the Development of a Code of Corporate Conduct, proposing guidance to assist professional accountants and others in establishing and implementing codes of conduct in their organizations. The exposure draft may be downloaded from the IFAC website. The goal of this proposed new guidance is to support sound corporate governance policies worldwide.

Accounting and auditing firms play an important role in the financial reporting supply chain through the provision of assurance about the financial reports of the companies they audit. It is important, however, to keep in mind that accounting firms are only one part of that chain, which also includes accountants within businesses, analysts, lawyers, senior management and boards of directors. It is for this reason that IFAC’s Board agreed to begin a new initiative on enhancing the quality of the financial reporting supply chain. The project will identify investor expectations and needs and include practical suggestions for enhancements that the global accountancy profession can provide by direct action and those where it will need to engage with others to create change. Among the issues being considered in the new study are corporate management and governance, regulatory developments, auditor independence and rotation and the expectations around the board’s and auditor’s responsibility for the detection of fraud.

As IFAC looks to the future, we are aware that the profession’s reputation rests squarely on its ability to protect the public interest and to improve the transparency of financial markets. Ensuring high-quality financial reporting is an area where there is no room for compromise. The CNRPC and the accountancy profession here inItalyhave been vital participants in the development of the international accountancy profession. We are most grateful for your very active role in strengthening our profession and for your continued support for IFAC. Inspired by Pacioli, we need to keep in mind that together, we can make a difference. Together, we can serve the public effectively and strengthen capital markets. Together, we can contribute to stability and prosperity both here inItalyand worldwide.

Thank you very much for your attention.

At a meeting hosted by the International Federation of Accountants (IFAC) on February 20-21 in London, chief executives of accountancy organizations worldwide expressed a strong desire for improvements in the quality of governmental financial reporting and financial management and recognized the benefits this would generate for all taxpayers in all countries.

IFAC, the global organization for the accountancy profession representing over 160 accountancy organizations with more than 2.5 million accountants in public practice, education, government service, industry and commerce, convened the meeting with 35 of its member organizations and regional accountancy organizations to discuss strategic priorities for the profession over the next five to 10 years.

Participants agreed that the international profession must take a strong role in advocating that governments should follow standards in line with those to which they expect companies in the private sector to adhere and, in particular, to promote the use of IFAC's International Public Sector Accounting Standards as a means to strengthen governmental financial accountability. The group also agreed that there was a strong need to strengthen enterprise governance, through, for example, greater numbers of professional accountants on Boards and in CFO positions. This, in turn, can contribute to enhanced corporate performance and economic growth and development.

Another critical issue requiring the attention of the global profession is the recruitment, training and retention of accountancy professionals. "Shortages in the availability of qualified professional accountants and shortages in the quality of potential recruits can seriously affect the production of quality financial information - information which is critical to investors. It can also affect business development, jeopardizing economic growth," emphasized IFAC President Graham Ward. "Better communicating the value of accountancy qualifications and career opportunities and reducing the personal financial risks faced by accountants in practice and in business through liability reform are among the ways in which we can make the profession more attractive and address recruitment and retention issues."

About IFAC

IFAC is dedicated to serving the public interest by strengthening the worldwide accountancy profession and contributing to the development of strong international economies. The organization sets international standards of ethics, auditing and assurance, education and public sector accounting and issues good practice guidance and studies to encourage high quality performance by professional accountants in business.

The unprecedented growth in population and consumption, global resource depletion, and broadening expectations regarding social and environmental accountability are among the reasons for an increased focus on sustainability by leaders worldwide.

Given the increasing role of accountancy firms in preparing assurance reports on sustainability, the International Federation of Accountants (IFAC) has issued a consultation paper that explores the assurance aspects of the Global Reporting Initiative's (GRI's) proposed new Sustainability Reporting Guidelines (G3). Last month, the GRI, which develops and disseminates global reporting guidelines on the economic, environmental and social performance of organizations, released draft new guidelines designed to enhance the comparability, clarity, ease of use, and assurability of sustainability reports. The IFAC consultation paper, Assurance Aspects of G3 - The Global Reporting Initiative's 2006 Draft Sustainability Reporting Guidelines, explores issues in the proposed G3 Guidelines that specifically relate to assurance reporting.

The IFAC consultation paper seeks to stimulate interest among professional accountants in the GRI's proposed new reporting guidelines - especially those aspects related to assurance reporting; to encourage accountants to review and provide comments to the GRI; and to gauge whether G3 would be suitable as criteria for assurance engagements. The consultation paper is also designed to provide IFAC's independent International Auditing and Assurance Standards Board (IAASB) with feedback on the application of its International Standard on Assurance Engagements (ISAE) 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information, to sustainability reporting. The paper is aimed primarily at professional accountants with some familiarity with sustainability assurance and assumes a certain knowledge of GRI Guidelines, the IAASB's assurance framework and ISAE 3000. The IFAC consultation paper can be downloaded from its website at http://www.ifac.org/store/.

How to Comment

IFAC encourages its member bodies as well as professional accountants in business and public practice to review the GRI's draft G3 Guidelines and to provide comments directly to the GRI by March 31, 2006. For more information, to download the G3 Guidelines and to submit comments, visit http://www.grig3.org. Professional accountants and IFAC member bodies are asked to send a copy of their comments to IFAC to the attention of michaelnugent@ifac.org. These comments will assist IFAC in understanding the views of professional accountants on the proposed Guidelines and assist in the development of a possible IFAC response to G3, a further consultation paper, or possible future revisions to the IAASB's assurance framework and ISAE 3000.

About IFAC

IFAC is the worldwide organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. Its current membership consists of over 160 professional accountancy bodies in 120 countries, representing more than 2.5 million accountants in public practice, education, government service, industry and commerce. IFAC, through its independent standard-setting boards, sets international standards on ethics, education, and public sector accounting. It also issues guidance to encourage high-quality performance by professional accountants in business.

Thank you very much for your kind introduction. I would like to thank your President, Mr. Syed Mohammad Shabbar Zaidi, and your Executive Director, Mr. Moiz Ahmad, for the privilege of the invitation to speak to you today. This is my first visit toPakistansince becoming President of the International Federation of Accountants, and I am heartened by the warm welcome that I have received. The profession here inPakistanis thriving, as evidenced by the Institute of Chartered Accountants of Pakistan’s growing membership and nearly 30,000 students. Your leadership has much of which to be proud. 

There is no question that the international accountancy profession has a unique, critical and practical role to play in building stronger and more stable economies around the globe. In order to carry out this role fully, however, we need to continue to enhance confidence in the profession and to build trust. Investor confidence and public trust empowers our profession. Without it, the credibility of the information we produce, indeed the future of our profession itself, is put at risk. Whether we work in Pakistan or Portugal, we cannot afford to take this risk.

Since corporate fraud and misconduct in the U.S. and elsewhere shook investor confidence and raised questions about the integrity of capital markets and their participants, action has been taken around the globe by governments, regulators, and accountants themselves to strengthen the profession and enhance market integrity. The International Federation of Accountants, which is comprised of over 160 members and associates in 120 countries, including three inPakistan– the Institute of Chartered Accountants of Pakistan, theInstituteofCostand Management Accountants of Pakistan and the Pakistan Institute of Public Finance Accountants – has also undertaken major initiatives, consistent with its mission which is:

To serve the public interest, IFAC will continue to strengthen the worldwide accountancy profession and contribute to the development of strong international economies by establishing and promoting adherence to high-quality professional standards, furthering the international convergence of such standards, and speaking out on public interest issues where the profession’s expertise is most relevant.

Before I describe some of our initiatives, I would like to emphasize that when I speak about “IFAC” and the work that we do, I am not speaking about a handful of individuals. I am referring to the broad, global network of volunteers that serve on our eight technical committees and boards; to our Board, which is comprised of nominees of IFAC members; to all member bodies which so actively participate in IFAC, particularly through the IFAC Member Body Compliance Program; and of course, to the IFAC staff who support all of these groups.

I am especially grateful to the Institute of Chartered Accountants of Pakistan and to its leaders, who have made a deep commitment to the profession and to the public interest which it serves. 

As a long-standing member of the International Federation of Accountants, the Institute of Chartered Accountants of Pakistan has a tradition of active involvement in and support of IFAC. I would like to thank those Pakistani representatives who serve on our boards and committees whose support enables IFAC to achieve its objectives: Abdul Rahim Suriya, a member of our International Accounting Education Standards Board; Khaliq-ur-Rahman, a member of our Small and Medium Practices Committee; and Mujahid Eshai, who served on our Developing Nations Permanent Task Force – now our Developing Nations Committee – from March 2004 to November 2005. These gentlemen exemplify the Institute of Chartered Accountants of Pakistan’s commitment to the international profession and to our core values of integrity, transparency and expertise. 

Transparency is a concept that takes on real significance following a disaster, such as the devastatingKashmirearthquake of last October. That tragic event took many lives and has deeply saddened us all. It also destroyed many businesses, including some PKR 1 billion of SME assets, and huge amounts of infrastructure. We accountants, however, have an important role in supporting the recovery efforts through, for example, ensuring that recovery funds are properly managed, that effective governance controls are in place, and that public monies benefit those most in real need. We can also fulfill the pledge of your President, Perves Musharraf, to the Donors’ Conference in Islamabad last November when he affirmed that “therewillbe transparency and therewillbe total accountability” in the rebuilding effort. These are the values that we, as professional accountants, live every day. We embrace these values because they are central to protecting the public interest and to achieving economic growth. Where there is transparency and accountability, there is typically greater public trust and social stability.

Let me turn now to my topic for today: the role of IFAC in restoring public confidence in the accountancy profession, with the goal of achieving economic growth and stability. IFAC activities in four specific areas are directly related to achieving this goal:

First, we have promoted, indeed required, adherence to high ethical standards by the 2.5 million accountants represented by our member bodies.

Secondly, we have sought to continue to enhance the quality of the audit process through the development of high-quality international standards.

Thirdly, we have encouraged firms and our member bodies to monitor the quality of those processes.

Lastly, we have focused on encouraging strong corporate governance and management accountability.

The bedrock of our international commercial system is high quality financial information: information based on ethics and integrity, on high-quality international accounting and auditing standards and on the work and sound judgment of both internal and external professional accountants. Credible and reliable financial information is fundamental to investment. It builds investor confidence which, in turn, facilitates business development, contributes to job growth and leads to individual financial prosperity.

Let me return to the first point – promoting high ethical standards.

Ethical conduct lies at the core of all business. We do business with those we trust; we get business from those who trust us. It is at the root of generating confidence in both individuals and entities. Ethics, therefore, is a driver of business growth which demands attention from boards and investors alike. As the world becomes more interconnected, it is the values that we share that unite us as a profession.

IFAC’s values of integrity, transparency and expertise are reflected in every facet of our work. To build credibility in financial systems and to contribute to sound economic systems, we must also promote these values to all professional accountants, both in practice and in business, as well as to all those in the financial reporting supply chain. And we must do so in a way that is relevant and meaningful.

IFAC’s International Ethics Standards Board for Accountants, which develops the international Code of Ethics for Professional Accountants, does just this. The Ethics Standards Board recently released an updated Code of Ethics which establishes a conceptual framework for all professional accountants to ensure compliance with the five fundamental principles of professional ethics. These principles are integrity, objectivity, professional competence and due care, confidentiality and professional behavior. Under the framework, professional accountants are required to identify threats to these fundamental principles and, if there are threats, to apply safeguards to ensure that the principles are not compromised. The framework applies to all professional accountants, those in public practice as well as those in business and government. The Ethics Standards Board, recognizing that both governmental and business accountants play significant roles in safeguarding the public trust, plans to provide further guidance for these accountants in particular.

IFAC’s Ethics Standards Board is also focused on an issue that is perhaps most central to public trust and one that has received widespread attention by the media and regulators: independence. A forum on the topic was held inBrusselslast October and attended by regulators, standard setters, corporate management, and representatives of IFAC member bodies. This input is part of an extensive Ethics Standards Board consultative process thatwillhelp to determine how the independence rules should be modified better to address the public interest.

I commend the ICAP for sharing IFAC’s commitment to promoting the highest ethical standards. The Institute bases its Code of Ethics for Chartered Accountants largely on IFAC’s international Code of Ethics. As more and more countries adopt the IFAC Code, we are raising the bar globally for ethical conduct for all accountants.

The second way in which IFAC is working to build confidence in the profession and contribute to economic growth is through one of its most core activities: developing international auditing and assurance standards. These standards are developed by the independent International Auditing and Assurance Standards Board and, like IFAC’s ethics code, are subject to a rigorous due process that includes extensive public interest input.

I am pleased that the Institute of Chartered Accountants of Pakistan has adopted International Standards on Auditing for use inPakistan, which is a further sign of your Institute’s commitment to convergence and to protecting the public interest.

In order further to facilitate convergence to international standards, the IAASB has undertaken a significant 18-month project to improve the clarity and structure of its standards. The IAASB has developed a new drafting style for its standards based on input it received at a forum in July 2005 and through responses to its 2004 Proposed Policy Statement and Consultation Paper on Clarity. In late October 2005, the IAASB released exposure drafts of the first four proposed standards developed using a new drafting style. The proposed standards focus on:

• The auditor’s responsibility to consider fraud in an audit of financial statements;
• Planning the audit;
• Understanding the entity and its environment and assessing the risks of material misstatement; and
• The auditor’s procedures in response to assessed risks.

The exposure drafts are posted on the IFAC website – www.ifac.org – and I encourage you to review them and to provide comment.

In addition to addressing the issue of clarity, the IAASB has issued a new international standard on audit documentation, designed to enhance auditor performance and audit quality by establishing stricter requirements for audit documentation. Beginning with this standard, the IAASB staff is preparing a “Basis for Conclusions” for each new international standard to increase understanding about the development of the standard – in particular, how the IAASB has responded to input received. We hope that you find this to be helpful.

The involvement of related parties, such as directors, owners, and management, in major corporate scandals prompted the IAASB to review its current auditing standard on the subject. As a result of its review, in January the IAASB issued an exposure draft, proposed International Standard on Auditing (ISA) 550 (Revised), Related Parties, and is inviting comments on proposed requirements for auditors regarding the audit of related party relationships and transactions.

The proposed standard places new emphasis on evaluating the effects of related party relationships and transactions on the financial statements, even in circumstances where the financial reporting framework does not establish related party accounting or disclosure requirements.

Other current IAASB projects are the development of standards on auditing accounting estimates and on materiality in the identification and evaluation of misstatements.

In addition to International Standards on Auditing, the IAASB also issues International Standards on Quality Control, to be applied by accounting firms for all services falling under the IAASB’s international standards. While its current agenda is clearly focused on ISA-related matters, to address expanding and changing business needs, the IAASB also has a mandate to issue International Standards on Assurance Engagements, which are to be applied by practitioners in assurance engagements dealing with information other than historical financial information, and International Standards on Related Services. To promote good practice, the IAASB issues Practice Statements to provide interpretive guidance and practical assistance in implementing its standards.

To assist professional accountants in meeting the demands of a changing business environment and to build further credibility in financial information provided by accountants globally, IFAC has placed increased effort on improving the transparency of the IAASB standard-setting processes and on devoting more resources to them. The same focus has been placed on the standard-setting work of the International Ethics Standards Board for Accountants and the International Accounting Education Standards Board.

A significant event that, I believe,willboost confidence in the profession and trust in our work is the establishment of the international Public Interest Oversight Board (PIOB). Formed in February of last year and chaired by Professor Stavros Thomadakis (a former Chairman of the Hellenic Securities Commission), the PIOB has eight members and two observers, all very senior people, appointed by international bodies of regulators and institutions. It also is strongly supported by the Financial Stability Forum. The appointing bodies are: the International Organization of Securities Commissions, the International Association of Insurance Supervisors, the Basel Committee, the World Bank and the European Commission. The PIOB oversees the work of the IAASB and of IFAC’s Ethics and Education Standards Boards and endorses appointments to them. In September 2005, it approved the due process and working procedures that they should follow and in December approved new appointments. This oversightwill, I believe, contribute to increased credibility in all the standards that IFAC develops through its independent boards.

Before I move off the topic of standard setting, I want to comment on one of IFAC’s most important objectives: convergence with international standards. Convergence is, I believe, at the core of building an investment climate of trust. Here’s why. Globalization demands high-quality standards that can be applied fromNew YorktoNairobi, from London to Lahore. This puts everyone on a level playing field.

Second, global standards will result in increased transparency and accountability. Investors will be better able to compare company financial statements across borders. I also believe that developing countries like Pakistan that do adopt international standards will see increased outside investment in their economies, by institutional and retail investors who are familiar with, and confident in, the standards, regardless of geography. 

There is another consideration as well. Having a multiplicity of accounting, auditing and other standards around the world is against the public interest. It creates confusion, encourages error and facilitates fraud. The cure for those ills is to have a single set of international standards, of the highest quality, set in the public interest by an international expert body which transparently consults with, and recognizes the legitimate interests of, the international community.

The Institute of Chartered Accountants of Pakistan has supported convergence through its involvement both in IFAC and in the International Accounting Standards Board. It has also demonstrated this by adopting International Standards on Auditing; by basing its Code of Ethics on the international Code developed by IFAC’s Ethics Standards Board; and by implementing the IFAC Education Standards Board’s International Education Standards, including the new requirements for Continuing Professional Development. Thank you for this outstanding commitment to quality.

To give further assistance to IFAC member bodies and others in understanding the challenges and issues related to convergence, IFAC staff, in consultation with members of our boards and committees and other relevant interested parties, is further developing the concept of “international convergence.” The objective is to develop guidance to accompany IFAC’s Statements of Membership Obligations (SMOs), which form the basis of the IFAC Member Body Compliance Program.

The IFAC Member Body Compliance Program, in which the ICAP is an active participant, is directly related to a third initiative of IFAC’s: encouraging quality performance by the international profession and encouraging firms and member bodies to ensure that appropriate quality control mechanisms are in place.

This program supports the development of high-quality auditing, accounting, ethical, educational and related quality assurance and disciplinary standards in IFAC member bodies throughout the world. The program is intended to guide accounting institutes in the full spectrum of their professional responsibilities, to demonstrate a shared commitment to our profession’s values of integrity, transparency and expertise.

Phase 1 of the Compliance Program, a fact-based questionnaire to assess the regulatory and standard-setting frameworks of IFAC member bodies, is now complete. Responses from more than 105 member bodies, including the response from the Institute of Chartered Accountants of Pakistan, have been posted on the IFAC website. The goal is to have all responses posted as soon as reviews are completed. Part 2, the SMO Self-Assessment Questionnaire, was distributed to member bodies last November and responseswillbe posted to the IFAC website beginning in the second half of this year. The responses from these questionnaires are important for several reasons: they provide a global snapshot of the accountancy profession from both a regulatory and standards perspective. Additionally, they can be used to help IFAC gauge where it needs to focus its efforts to support the development of the profession and to work to achieve convergence. Lastly, but perhaps most importantly, the responses to the questionnaires demonstrate the international accountancy profession’swillingness to be accountable for its actions to meet high standards, to deliver quality and to protect the public interest – all of which contribute to building confidence in the profession.

As we look to the future, we see that the global economy will continue to challenge the international accountancy profession, regulators, standard setters, and business leaders to compete and to deliver quality. In anticipation of these challenges, and in recognition that we must never waiver in our commitment to build public trust, IFAC’s Board has recently agreed to lead a new study on enhancing the quality of the financial reporting supply chain. The project will identify investor expectations and needs and include practical suggestions for enhancements that the global accountancy profession can provide by direct action and those where it will need to engage with others to create change. Among the issues to be considered in the new study are corporate management and governance, regulatory developments, auditor independence and rotation and the expectations in respect of the board’s and the auditor’s responsibilities for the detection of fraud.

IFAC has also focused on promoting strong corporate governance, an area that your country is also addressing. The newInstituteofCorporate Governance, established just over one year ago by the Securities and Exchange Commission ofPakistanand of which the ICAP is a founding member, is a strong example of this. The Pakistan Institute of Corporate Governance is an important step in the process toward ensuring sound corporate governance practices and protecting the interests and rights of shareholders.

IFAC’s focus on corporate governance is best expressed in an independent report it commissioned, entitled Rebuilding Public Confidence in Financial Reporting, that was developed two years ago under the leadership of John Crow, a former governor of the Bank of Canada. The report emphasized that a wide range of actions, by a wide range of entities, must be taken to strengthen corporate governance. For example, corporate management must place greater emphasis on the effectiveness of financial management and controls, corporate ethics codes need to be in place and effectively monitored and threats to auditor independence need to be given greater attention in corporate governance. The report’s findings and recommendations provided much impetus to IFAC’s Professional Accountants in Business (PAIB) Committee, as well as to other international groups. The PAIB Committee recently issued an exposure draft of proposed guidance to assist professional accountants in business in implementing corporate codes of conduct in their organizations. The proposed good practice guidance is designed to draw greater attention to the need for corporate codes of conduct, to provide practical guidance on the scope and implementation of such codes, and to support sound corporate governance practices. The proposed guidance highlights the benefits of an effective code of conduct and identifies the professional accountant’s role in the development, monitoring, reinforcement and reporting of such codes in their organizations.

IFAC’s PAIB Committee has also turned its attention to how best to improve the performance of organizations, and thus to ensure wider prosperity for all. In 2004, the committee, in conjunction with The Chartered Institute of Management Accountants in the UK, issued a report on corporate governance best practices entitled, Enterprise Governance – Getting the Balance Right. The joint group conducted an in-depth analysis of corporate successes and failures in 27 case studies from 10 countries. Among the report’s findings were that there are four key determinants of corporate success and failure: the culture and tone at the top, the chief executive, the board of directors and the internal control system.

The report also revealed that good governance on its own cannot make a company successful. Companies need to balance conformance with performance. To quote: “Unlike the conformance dimension, there are no dedicated oversight mechanisms, such as audit committees, in the arena of strategy. … There is a danger that in the laudable attempt to improve standards of control and ethics, insufficient attention is paid to the need for companies to create wealth and to ensure that they are pursuing the right strategies to achieve this.”

The study examined “enterprise governance,” an emerging concept in the new global economy.Enterprisegovernance has two equal parts: probity and profitability. I would suggest that one without the other isn’t worth having. Businesses that have the highest ideals but go bankrupt through poor strategic choices are as disastrous to shareholders, to other stakeholders and to public confidence as are businesses that fail because of ethical lapses. Profitable businesses that are run with little regard for the public interest, the law, regulation, employees or shareholders, should not be in business and, ultimately, will not be in business. I encourage the Pakistan Government and those of you here today who serve local businesses and industry to encourage the highest ethical practices at all levels of business. This is good not only for local business, but for your economy as a whole and, indeed, the future of your country.

In addition to our work to support professional accountants in business, IFAC’s Small and Medium Practices Committee serves the needs of small- and medium-sized accounting practices and other accountants that provide services for small and medium entities. SMEs are a fundamental driver of economic growth. Here inPakistan, according to the Asian Development Bank, SMEs account for 80 percent of employment in the industrial sector and a total of 30 percent of value added to the economy. The importance of SMEs extends to developed nations, where, for instance, in the European Union they represent 99 percent of all enterprises. To ensure that international standard setters are aware of and give consideration to issues relevant to SMEs andSMPs, IFAC’s Small and Medium Practices Committee is active in representing their interests to both the IAASB and to the International Accounting Standards Board. The committee is currently providing input to the IASB’s project considering the development of financial reporting standards for SMEs. The committee is also developing guidance materials forSMPs, especially in relation to the application of ISAs to the audit of SMEs and establishing an electronic data exchange on SME andSMPissues.

IFAC is committed to ensuring that all professional accountants, in every country of the world, both developed and developing, have the tools they need to face the challenges of the new global economy.

Because IFAC is a global organization, and because it is predicted that 95 percent of the world’s population growth will occur in developing nations, we have made strengthening the profession in those nations a key objective. Our position is this: we have a fundamental role and responsibility to play in fostering progress in the developing world, in eradicating poverty and in building prosperity. Establishing a sound and viable accountancy profession is a critical step in building a sound financial infrastructure and addressing these issues. We welcome assistance from established accountancy bodies, such as the Institute of Chartered Accountants of Pakistan, in this effort to grow and develop our profession worldwide.

IFAC’s goal is to have a member body with an established accountancy profession in every country around the globe. There is no doubt that this is a lofty goal, but as we look ahead and see that the growth of the world’s population will largely be in developing economies, I am more and more certain that this goal is one that we cannot compromise or forsake. To achieve this goal, IFAC’s Developing Nations Committee is involved in extensive outreach to developing nations and has prepared new guidance, with the input of IFAC members, to assist developing nations in establishing an accountancy body and where an accountancy body already exists, further to develop and enhance it. The guidance may be downloaded from the IFAC website and CD-ROMs have been sent to every IFAC member body. Please take a look at the guidance and let us know if you have any input or any need for additional information.

The guidance is one part of a comprehensive program designed to help IFAC achieve the goal of creating a respected accountancy organization in every country. In so doing, we can help to build strong financial architectures around the globe – architectures that are supported by strong ethical standards, high professional standards and an unwavering commitment to act transparently and to be accountable.

Pakistan, like many nations, faces some significant challenges, most recently the tragicKashmirearthquake. However, the important steps that you are taking and those that youwillcontinue to take to encourage transparency and accountability in the public and private sectors, to increase privatization and to ensure fiscal responsibility will, I believe, greatly contribute to the economic prosperity of your country. As the World Bank and the International Monetary Fund stated in their 2004 joint assessment: “Pakistan has undertaken major reforms in recent years in the financial sector that have resulted in a sounder and more efficient financial system.” These reforms include “a return to market-based monetary and exchange rate policies, a diminishing role of the state in the financial sector through privatization of nationalized commercial banks, improvement in corporate governance, disclosure, and transparency and the adoption of a modern regulatory approach in the oversight of the financial sector.” I encourage you all to continue to support these reform efforts.

Certainly, your future is bright. According to the economic outlook produced by The Economist magazine and updated just last month, the economy ofPakistan, despite the earthquake, is expected to perform strongly, with real GDP growth of 6.6 percent in the fiscal year July 2005 to June 2006 and six percent in fiscal year 2006/07.

Professional accountants, such as those of us here today, play an important part in protecting the public good, encouraging transparency and achieving economic growth and stability. Through adherence to high ethical standards we can, together, bring about social stability and good governance in business. Through convergence to international standards we can, together, deliver on our promise of quality. And through acting in the public interest, we can, together, build public trust and sound economies that support a better quality of life for all.

I am proud to work with the profession inPakistanin IFAC’s drive to generate economic growth and stability in every country of the world.

Thank you very much for your attention.

Ladies and gentlemen, thank you for inviting me to address you today.

As the title of my presentation suggests, I am going to talk about public sector financial reporting and why we need to raise our expectations of governments. However, I want to frame my comments in the context of our expectations of financial reporting in the private sector. Over recent years our expectations of the quality of financial reporting and auditing in the private sector have increased dramatically, and the efforts that have been devoted to achieving those changed expectations have been enormous. I wish to contrast this with what has happened, or more accurately, what has not happened, in the public sector. To be clear, I am not suggesting that nothing has happened in the public sector. Indeed I have been personally involved in some of that change, as, I am sure, have many of you. However, I do observe a large gulf between the inclination of governments internationally to act to enhance private sector financial reporting and the relative lack of urgency devoted to improving their own financial reporting and financial management.

Let me begin with some comments on corporate failures and the response of regulators and the accountancy profession to those failures.

The Response to Corporate Failures

We are all only too well aware of the scandals that have rocked the private sector in recent years. Examples, from around the globe, include Enron, Global Crossing, Royal Ahold, HIH Ltd, WorldCom and Parmalat. Such failures weaken the public’s confidence in the integrity and transparency of securities markets. The sheer size of the companies concerned, and the impact on public confidence, has been so great that the failures have led to dramatic national and international responses – responses that might be described as a watershed similar to that of the 1930s securities legislation. Over the last few years there has been a raft of regulatory and professional reforms designed to protect investors from financial reporting and audit failure, and from other forms of corporate malfeasance. 

The reforms have been especially dramatic in theUnited States, where, amongst other things, the Sarbanes-Oxley Act created the Public Company Accounting Oversight Board (PCAOB). These reforms have given the Securities and Exchange Commission (SEC) and the PCAOB extensive powers over private sector accounting and auditing, putting in place regulations that affect every facet of private sector accounting and auditing in America and that have had far-reaching international ramifications as well. To curb corporate corruption, strengthen corporate governance and ensure reliable and accurate financial reporting, the Sarbanes-Oxley Act did, amongst other things, make accountants and auditors more accountable, stiffened fines for law-breaking by corporate officers and directors, limited insiders from selling stock during "blackout periods" and directed the SEC to create new rules for financial reporting. Whether the very broad scope of the reforms is cost-effective remains to be seen, but the Act has provided impetus for similar reforms around the world and has unquestionably resulted in significant benefits.

In Europe, the European Commission, through its requirement for the adoption of International Financial Reporting Standards (IFRSs) and its strengthening of the Eighth Directive on Company Law, is also raising the bar significantly for private sector accounting and auditing. As with the Sarbanes Oxley Act, there is debate about the scope and rigidity of the Directive, which is designed to improve governance of EU-listed organizations and the quality of audits. Like Sarbanes-Oxley, at the core of the Eighth Directive is a commitment to restore investor confidence in the markets. So, for example, the Directive specifies the responsibilities of audit committees to include oversight of the internal audit function, internal controls and auditor independence.

The changes we have seen in theUSand inEuropehave been mirrored in many other countries. There really has been a dramatic shift in the regulation of financial reporting and the accounting profession internationally.

The corporate failures have resulted not just in regulatory action. There has been action by accounting professional institutes at national and international levels, and by accounting firms, amongst others.

I could spend quite some while outlining the actions and initiatives taken by these groups, but will not. It will suffice to sketch just some of the key responses by IFAC and by the firms.

IFAC has developed a series of reforms to help ensure that its standard-setting activities reflect the public interest and are fully transparent. This set of reforms is the most significant shift in IFAC’s governance since its creation in 1977. One of these reforms was the establishment, early last year, of the Public Interest Oversight Board (PIOB). The PIOB oversees the work of IFAC's auditing, ethics and education standard-setting committees and of its Member Body Compliance Program, to ensure that those issues of greatest importance to the public interest are properly addressed. The membership of the PIOB is chosen by aNominating Committee comprised of representatives of the International Organization of Securities Commissions, the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors and the World Bank. 

IFAC has also released a revised Code of Ethics to provide more guidance to all members of the profession – including those in business, public practice, education, and government – on how they can meet their responsibilities to act with integrity and independence.

IFAC has also, through its International Auditing and Assurance Standards Board (IAASB), issued two standards on quality control in relation to audits, which significantly enhance the requirements for quality control in relation to audits.

Audit firms, too, have taken a very hard look at their operations, clients, and services to determine how they could best respond to the changed environment. I will mention just a few, by no means all, of the examples of the response by audit firms to the new regulatory environment.

• First, most major firms have restructured their services, divesting their consulting arms.
• Firms are also more focused on educating clients and investors, producing a plethora of guidance for clients and investors.
• Quality control processes have been strengthened.
• Additional focus is placed on internal control, including the provision of resources for investors and financial market participants.
• There is greater transparency as to the structure of the firm networks.
• The firms have also acted to strengthen their independence policies.

To summarize thus far: the financial reporting failures in the private sector have had a dramatic impact on the regulatory landscape, on accounting professional institutes and on accounting firms. In rounding out this section of my presentation, I would note that there has been a lot of attention given recently to the cost of these reforms. Around the time of the introduction of the Sarbanes-Oxley Act, some smaller firms estimated the cost of complying with the new legislation at between $300,000 and $500,000 annually. More recently estimates of the average cost of compliance with Sarbanes-Oxley for an individual company have ranged from $2m to $3m. According to Financial Executives International (FEI), just complying with section 404 of the Act will cost an average of 62% more than previously anticipated, create a 109% rise in internal costs, a 42% jump in external costs, and a 40% increase in the fees charged by external auditors (PR Newswire, 2004). Estimates of the total cost of compliance for US businesses range from $2bn to $5bn per year. 

My point is this: the new regulatory environment implies very substantial costs. While the costs may be higher than anticipated, it was always clear that the cost would be high. The judgment of the US Government and the European Commission, mirrored by many other governments, is that high quality financial reporting is worth that cost, given the benefits it creates through improved accountability, better decision-making and public confidence in institutions.

The reason I have begun this talk by focusing on corporate failures and their consequences is to highlight the importance to investors and others of being able to rely on the financial information produced by companies and to note the dramatic steps taken to enhance the quality of financial reporting in the private sector. When the objective is important enough, action can be rapid and radical. The crucial importance of financial reporting in the private sector is a useful benchmark when considering financial reporting in the public sector.

IFAC’s Mission

IFAC's mission is to “serve the public interest, strengthen the worldwide accountancy profession, and contribute to the development of strong international economies by establishing and promoting adherence to high-quality professional standards, furthering the international convergence of such standards, and speaking out on public interest issues where the profession's expertise is most relevant.” 

The public interest objective outlined in IFAC’s mission statement encompasses both public and private sectors. Companies influence the strength of an economy – but so, too, do governments. Given the size of the public sector internationally, poor financial management results in a huge economic cost to the world’s economy, and that really is important.

While there are certainly public interest issues associated with the transparent reporting of information on a company’s performance – I would argue that there is an even stronger public interest argument for demanding transparent financial reporting from governments.

Governmental financial reporting

In my discussion of private sector financial reporting, I highlighted the recurring theme of restoring public confidence in financial reporting and financial markets. I wish now to consider the extent to which we can have confidence in governmental financial reporting, but, before doing that, it is appropriate to remind ourselves of the reasons we should expect high quality reporting from governments.

There are at least three key reasons:

• Performance: Governments internationally shift billions, trillions, of dollars from the private sector to the public sector, with the objective of improving the well-being of the society and economy. If governments do not operate in an efficient and effective manner, or invest wisely, this represents a huge drain on an economy. Governments, just like companies, need timely and accurate financial information to monitor and manage their performance.
• Accountability: Governments are not spending their own money. They are spending our money. They are entrusted with the management of assets and liabilities that have been built up over decades and which will have an impact on the welfare of citizens for many more decades. Taxpayers and citizens are entitled to information which allows then to hold governments accountable for their use of public resources, including the extent to which current revenues are sufficient to pay for the services provided, and whether balance sheets are strong enough to withstand external shocks, not to mention meeting their current obligations associated with long-term trends like an aging population.
• Representative government: A government, regardless of the form it takes, represents the interests of the people it governs. Good government requires that constituents have confidence in those that govern. This confidence is enhanced when governments fully inform their constituents, and provide them with reliable financial information. Transparent financial reporting is one means by which governments can engage constituents in the political process and engender confidence.

Having established that we have a right to demand high quality reporting from our governments, what do we see in practice?  Internationally, we see widespread and continuing poor quality financial reporting. By contrast with many governments, Enron would be a model of transparency. Such reporting failures do not generally lead to the bankruptcy of governments, but they do impose an enormous burden on an economy and have a very direct impact on economic growth.

Let me give you a very few examples of poor financial management and financial reporting by governments.

Argentina

In late December 2001,Argentinadeclared the largest sovereign debt default in contemporary history. The aftermath of that debt default is still being worked through. There were a number of contributing factors: the growth in public debt, the denomination of that debt,Argentina’s unusual exchange rate regime and the Argentine government’s failure to adequately manage its liabilities.

One element of the poor financial management observed in many jurisdictions is the poor quality of financial information. If the Argentine government had prepared timely financial reports based on generally accepted accrual accounting practices, its failure to properly manage its liabilities would have been evident much earlier, and the government, lenders or the citizens ofArgentinawould have had the opportunity to take action earlier.

Greece

In 2004, the European Commission launched legal action againstGreecefor drastically under-reporting its deficit. Following a request by a new Greek government, the Commission revisedGreece’s general government deficit for the years between 1997 and 2003.

Eurostat, the EU's statistical agency, was summoned to investigate the findings. Military expenditures and interest payments had been serially under-recorded, and the surplus recorded in the social security account had been overstated. The revised figures showed thatGreecehad been in breach of the EU budget rules every single year since 1997. Had the revised figures been known at the time,Athenswould not have been allowed to join the euro zone in 2001. 

This saga prompted calls for an improvement in the quality of financial information provided by governments in the European Union, a strengthening of the independent process for compilation of such information, and the need for an independent audit of the output. Little substantive action has yet resulted.

Italy

Only a short time after it launched legal action againstGreece, the Commission also initiated an investigation intoItaly’s public accounts. Doubts about the accuracy ofItaly’s financial reporting arose from the fact that forecast annual budget deficits over the period 1997 to 2004 were consistently lower than the amount of cash borrowed to finance those deficits. In addition,Italy’s public debt had been falling more slowly than expected.

Subsequent revisions to the 2003 and 2004 deficit figures by Eurostat showedItalyin breach of the 3 per cent limit on budget deficits imposed by European Union rules.

Government of Pakistan

We might think that the problems experienced by these countries have nothing to do with us here inPakistan. Unfortunately, this is not true.

Just last month “The International News” reported that the National Accountability Bureau had confirmed the existence of a multi-billion rupees fraud involving “ghost” pensioners. The scam was so large that more than half the pensions being paid through thePakistanpost office’s savings bank account system were reported as being fraudulent. By one account, after the fraud was uncovered the number of pensions being paid through the post office’s savings bank in one area dropped from 35,000 to 13,000.

Had an appropriate level of financial management and reporting been in place, this fraud may not have been able to reach such proportions and may have been uncovered earlier.

The good news is that the Government of Pakistan has taken some initial steps to improve financial management and reporting in the public sector. In 2002 it established the National Accountability Bureau to monitor accountability of government entities, and established the Project for Improvement in Financial Reporting and Accounting with the assistance of PricewaterhouseCoopers. I would be very pleased to hear of the progress of this project. These are both significant developments which deserve to be encouraged.

US Federal Government

In the USAthe federal, state and local governments report on an accrual basis in accordance with generally accepted accounting practice, and their financial statements are subject to independent audit. However, despite a long standing drive for better financial information and millions of dollars being spent on upgrading financial systems, the US federal Government continues to experience difficulty in getting a clean audit report on its financial statements and has a deteriorating fiscal condition. Technically, it has not received an audit opinion at all, the auditor, the Comptroller-General, having declined to express an opinion on the grounds that the information was insufficiently reliable.

The 2004 financial report shows:

• Government revenues of $1.9 trillion;
• Net cost of the government's operations of $2.5 trillion; and
• A net operating cost of $615.6 billion.

The reported deficit of $615.6 billion in the financial statements is more than the actual “budget deficit” of $412 billion referred to on the Office of Management and Budget website. In the words of one commentator: “It mostly has to do with Social Security costs and cash vs. accrual accounting.” And so it may, but wouldn’t it be easier for the public if forecast and actual budget outturns were calculated using the same rules as the financial statements? If we are to have informed public debate, it helps if we are all using the same numbers. I will discuss recent moves to align different systems of reporting later in this speech, but would note again that such reporting disparities would not be tolerated by the government in relation to listed companies.

The US Government Accountability Office (GAO) report also highlighted concerns with the government’s reported fiscal position. Last year (May 20, 2005) the Comptroller General, David M. Walker, told a group of New York CPAs that the federal government's current fiscal business model isn't sustainable and major changes need to be made. As well as expressing concern about the government’s worsening financial state, Mr. Walker called on CPAs to educate the public about these issues, noting that as CPAs they had a responsibility to act in the public interest.

There is one particular statement in the latest GAO report on theUSfederal government’s financial statements that warrants mention. To quote:

“As in the seven previous fiscal years, certain material weaknesses in internal control and in selected accounting and financial reporting practices resulted in conditions that continued to prevent us from being able to provide the Congress and American citizens an opinion as to whether the consolidated financial statements of the U.S. government are fairly stated in conformity with U.S. generally accepted accounting principles.”

Why the disclaimer? The reasons are discussed more fully in the audit report, but let me quote just one, telling, paragraph:

Just as concerning, the GAO gave an adverse opinion on internal control. As a consequence of poor internal controls, some agencies are meeting their financial reporting requirements by preparing information outside the financial reporting systems. This, as we all know, is an extremely inefficient and risky way to prepare financial statements. What is more, and worse, it tells us that this financial information is not available for financial management purposes within the period. 

For fiscal year 2004, 18 of 23 CFO Act agencies received unqualified audit opinions. This is two less than in 2003 and 2002. This means that approximately 80% of CFO agencies received an unqualified report. However, 20% did not. The government would not accept this standard of financial reporting from the private sector.

As we can see, even in a country that has relatively advance public sector financial reporting, problems can arise.

Responses to governmental failure

The examples I have given you are merely a snapshot of poor financial reporting and poor financial management by governments internationally. There were many, many more examples I could have used.

In the private sector we have witnessed the immediate and powerful reaction of regulators and the profession to large scale corporate failures. By contrast, who is demanding action and who is taking action in relation to governmental financial management and financial reporting failure? While there are some who are attempting to address these issues, and IFAC can be counted amongst those, the primary actors, governments themselves, are not doing enough. Neither is there sufficient comment on these issues in the media. 

I find it interesting and regrettable that, despite the widespread international adoption of International Financial Reporting Standards (IFRSs) in the private sector, there have been few commentators arguing for the adoption of equivalent international standards by governments. As I will discuss presently, such standards are available.

There are, however, a number of organizations that are involved internationally in improving the quality of governmental financial reporting, and, more broadly, the transparency of governments. 

My focus today is on the international scene, and I would like to give some examples of what has been happening internationally and in other countries to strengthen government financial reporting. 

IFAC

Let me start with my own organization – IFAC. 

IFAC’s International Public Sector Accounting Standards Board (IPSASB) focuses on the accounting, auditing, and financial reporting needs of governments and government agencies. This Board has produced International Public Sector Accounting Standards (IPSASs), based on IFRSs, for the best part of a decade. The IPSASB has now issued 21 accrual basis standards and one comprehensive, cash basis, IPSAS. It has also produced other studies and papers designed to provide information on the adoption of accrual accounting and financial reporting initiatives in various jurisdictions. 

I think it appropriate at this point to acknowledge the contribution of Mr. Mohammed Rafi, who served as thePakistanmember on the IPSASB’s predecessor the Public Sector Committee from 2000 to 2002. Mr. Rafi has long been active in theInstituteofCostand Management Accountants inPakistanand is currently a member of that IFAC Member Body’s Council. The development of standards by the IPSASB takes considerable time, effort and expertise – all on a voluntary basis – and IFAC is extremely grateful for the contribution of IPSASB and PSC members such as Mr. Rafi.

Key components of any governance and accountability system in the public sector are the preparation of financial statements in accordance with well understood and generally accepted accounting standards. IPSASs, therefore, provide the foundations for better reporting. We must move beyond the situation where each government writes its own financial reporting rules to one where governments report using the same set of standards. Again, it would not be acceptable for a reporting entity in the private sector to write its own rules, yet this is the case for virtually all national level governments.

Recently, the United Nations’ High Level Committee of Management announced that it would recommend to the General Assembly later this year, that the UN System adopt IPSASs as the basis for preparing financial statements by entities within the UN System.

A press release issued following a high level conference in September 2004, organized jointly by the European Commission and the Fédération des Experts Comptables Européens (FEE), the representative body of the European accountancy profession, advocated the adoption of IPSASs as essential to the development and strengthening of financial reporting by governments.

In 2004, Sir Andrew Likierman, until recently Head of the Government Accountancy Service of the UK Treasury, chaired a Review Panel which conducted an independent review of the activities of the IPSASB, then called the Public Sector Committee (PSC). The review panel made a number of recommendations concerning the composition and governance arrangements of the PSC. The report of the panel noted that over 85% of the respondents to a survey it conducted supported the existence of an independent financial reporting standard setter for the public sector. 

The panel concluded that the PSC had made an effective contribution to global public sector financial reporting through its pronouncements. 

The World Bank, along with others, has supported the development of these standards and encourages their adoption. IPSASs have been, or are being, adopted by a number of governments and public bodies (for example, the Organisation for Economic Co-operation and Development (OECD), the European Commission and the North Atlantic Treaty Organisation (NATO)) and are having a very significant influence on the development of national standards.

In addition, the report stated:

“The success of the Standards Program cannot be gauged purely through the number of jurisdictions and entities that have adopted IPSASs. There is considerable evidence emerging, particularly from East, Central and Southern Africa, South America, Asia and Europe that the pronouncements of the Committee are becoming more influential. … National standard-setters are increasingly reflecting the views of the PSC in their own debates on public sector financial reporting.”

I am very pleased indeed that the IPSASs are having this level of influence internationally. However, I am also aware that we have a very long way to go before there is general adoption of these standards around the world. Obviously, I would want to encourage you all in the ICAP to work to alignPakistan’s public sector accounting standards with international standards.

Setting financial reporting standards is not the only means by which IFAC is seeking to improve the quality of financial management and financial reporting in the public sector. IFAC is also working to ensure that all professional accountants – whether in public practice, business, industry, or in the public sector – have high quality guidance on ethical conduct. IFAC’s International Ethics Standards Board for Accountants has been progressing a project to develop additional guidance for professional accountants in government. The project will consider whether Part C of the Code (which applies to professional accountants in business) should contain additional guidance for professional accountants who work in government. The project will also develop independence guidance for professional accountants in government.

In relation to the International Standards on Auditing that IFAC’s International Auditing and Assurance Standards Board sets, there has been increasingly close cooperation with International Organization of Supreme Audit Institutions (INTOSAI). 

INTOSAI

INTOSAI is the international organization of supreme audit institutions in countries that belong to the United Nations or its specialist agencies. The Office of the Auditor General ofPakistanis a member of INTOSAI.

The Auditing Standards Committee (ASC) of INTOSAI is working in close cooperation with IFAC’sIAASB in developing financial audit guidelines. TheIAASB develops International Standards on Auditing for the private sector. The ASC is working with theIAASB with the aim of including public sector considerations in the ISAs.

Other ongoing work of the ASC includes:

• Principles for independence ofSAIs; and
• Implementation guidelines for Performance Audit. 

World Bank and the IMF

The World Bank and the International Monetary Fund (IMF) have both actively supported and been involved in the development of IPSASs. The two agencies have also engaged in their own exercises entitled “Reports of the Observance of Standards and Codes" (ROSCs) which assess a country’s observance of selected standards relevant to private and financial sector development and stability. They include assessments of fiscal transparency. As part of the ROSC initiative, the World Bank has established a program to assist its member countries in implementing international accounting and auditing standards for strengthening the financial reporting regime, including that of the public sector. 

Developments in Various Jurisdictions

Although I have been critical of the standard of financial reporting by governments, it is only fair to acknowledge that a number of governments have established or are establishing a high quality of financial reporting. TheUSgovernment is producing accrual based financial statements, as noted earlier, and that certainly constitutes progress.

The United Kingdom government has adopted accrual accounting within both local and central government. At present, this is still at an agency and local authority level, but consolidated audited reports are expected in 2006/07. The consolidated financial reports will encompass both local and central government, as, for the purposes of financial reporting, the central government is considered to control local government.

The Australian andNew Zealandgovernments have been reporting on the accrual basis for over a decade now. Notably, both countries have recently announced the adoption of IFRSs in full, not only in respect of companies but also for the public sector. This move illustrates how governments can lead by example - reporting in accordance with exactly the same reporting standards as they expect from companies. In the case ofNew Zealand, the public sector currently reports in compliance with New Zealand Financial Reporting Standards, which are sector-neutral, the same standards applying to both sectors.

Many other countries are looking to move to adopt an accrual basis of reporting and, while the direction is to be applauded, the speed and urgency are, generally, well short of what we should expect and demand. 

Those jurisdictions that have fully adopted the accrual basis (incorporated into appropriations, budgeting and reporting processes) have found it to generate very significant benefits. I do not consider the impediments to proper accounting by governments (at least in developed countries) to be related to cost, nor do I believe them to be related to available expertise. I do believe it requires more than the goodwill of committed professionals – it requires a commitment at the political level that transparency is not a choice but an obligation, and, like the private sector, the rules are written not for the reporting entity but for the users of the financial statements.

Conclusion

I began this talk by noting that there have been some serious corporate failures in the private sector. However, regulators and the profession have done a very great deal in short order to address failures in accounting, auditing and financial reporting and to restore public confidence in financial reporting. 

Unfortunately, and notwithstanding the efforts to which I have referred, we cannot say the same with respect to the public sector. There is ample evidence of financial reporting failure within governments, and I gave a small number of examples of this. I noted that there are organizations, including the ICAP and IFAC, that are working hard to improve the quality of financial reporting by governments. Occasionally, the media comments on the need for better quality reporting by governments. However, the response to governmental financial reporting problems is very much weaker, and appears to reflect a lower level of concern, than we see in relation to the private sector.

What is most troubling is the lack of demonstrated commitment on the part of governments themselves to the production of high quality financial reporting. At best, it seems to be something governments will address as a “nice to have” “when resources permit.” It is not seen as a fundamental obligation. Yet, ultimately, investors can choose whether or not to invest in a corporation – as citizens we have no such choice in relation to the contribution we make to government through taxation. I would argue that within a representative government the exercise by governments of the power to tax carries a fundamental responsibility to account properly for the money so raised.

If governments around the world genuinely believe in the importance of transparency in financial reporting, as suggested by their regulation of public companies, then they need to lead by example. The consequences of poor financial reporting and poor financial management within governments are arguably even more serious than a loss of confidence in securities markets. It violates the relationship between the governed and the governing. It creates an environment ripe for corruption and fraud. And it puts at risk the growth of the global economy and, therefore, the welfare of citizens.

Ladies and gentlemen, we must raise our expectations of governments around the world, just as they have raised their expectations of the private sector.

Thank you.