Category: Accounting Profession Issues and Trends

Corporate Credibility - Why A Harmonised Global Accountancy Framework Matters

November 1998

In a recent speech on the state of US accounting Arthur Levitt, Chairman of the US Securities and Exchange Commission, made the following observation: "The significance of transparent, timely, and reliable financial statements and its importance to investor protection has never been more apparent. The current financial situations in Asia and Russia are stark examples of this new reality. These markets are learning a painful lesson taught many times before: investors panic as a result of unexpected or unquantifiable bad news".

Corporate credibility, the ultimate key to success in the business world, is a fragile concept. But at the same time, it is the foundation upon which investors and other stakeholders - including employees, customers, suppliers, local communities and other pressure groups - base their confidence in the future success of an enterprise. This confidence can be all too easily damaged - not simply by performance failures but also by the revelation that an enterprise has followed less than rigorous standards in terms of the amount, quality and relevance of information provided to its stakeholders. The dramatic sequence of events leading up to the crisis in South East Asia exemplifies the problem all too well: foreign investors, having risked their capital on deals which were based on inadequate financial information, rapidly withdrew this funding when financial difficulties began to emerge, leaving Asian currencies under enormous strain and Asian businesses short of capital and resulting in the collapse of entire national economies.

The accountancy profession cannot be held to blame for the spiraling downturn of economies in South East Asia. This has been attributed to the inadequacy of local financial infrastructures and supervisory procedures. But the crisis has nevertheless brought the role of the accountancy profession sharply into focus. Under the threat of further financial crises on an even worse scale than in Asia and with world recession widely predicted, national governments, intergovernmental agencies and global financial institutions have been forced to look for ways of securing greater economic stability for the future. And at last, after several decades of largely unproductive debate, there is a growing recognition of the urgency of enforcing a core set of internationally recognised standards to ensure that the information upon which investors and other stakeholders base their decisions is transparent, comprehensive, reliable, consistent and internationally comparable.

The accountancy profession has long recognised the need for a globally harmonised accountancy framework. More than twenty years ago the accountancy profession took the initiative in creating the International Accounting Standards Committee (IASC) and the International Federation of Accountants (IFAC) to produce guidance in response to the increasingly international demands of the business community. It is currently up to and should remain up to these two bodies to develop internationally harmonised standards for the preparation and verification of corporate information.

The key role of IASC is to develop and promulgate International Accounting Standards (IASs). It does so using due process, exposing its ideas for early discussion and subsequently for comment once an exposure draft has been prepared. The final standard is eventually produced after appropriate consideration of comments received. A Standing Interpretations Committee looks at urgent issues arising either from the existing standards or as a result of new concerns relating to existing standards worldwide.

The responsibilities of IFAC are much wider. They include the development and promulgation of International Standards on Auditing (ISAs) and a Code of Ethics, education guidelines, studies and statements for the public sector and of assistance to those accountants in business or involved with IT, whichever branch of the profession they may be in. Insofar as accounting standards are concerned, IFAC's role is to assist in their promulgation and to encourage their development; IFAC is not involved in their development.

As far as auditing standards are concerned, IFAC's work has in the past concentrated on the verification of financial statements. But IFAC is now beginning to work on other areas where the opinion of the independent auditor can add value and credibility to the information provided by directors and management. Thus we can anticipate standards and guidance in areas such as prospective financial information, key performance indicators, corporate governance and in due course matters which may not primarily be financial in nature. In short, the auditing profession has recognised the growing needs of an increasing range of stakeholders for more extensive and more detailed assurance services beyond the traditional audit.

IFAC's member bodies - 142 independent professional bodies in103 separate countries - have undertaken to use their best endeavours to ensure that IFAC's standards and guidelines are introduced within their own countries. Thus, if the concept were entirely successful, there would be 103 countries where IASs and ISAs, together with internationally developed ethical and other guidance would be the norm. In some countries this is indeed the case but in many more it is not - frequently for good reasons.

Neither IFAC nor IASC expects any country to introduce its standards without giving them due consideration to ensure that they are appropriate for their jurisdictions. There may be good reasons why the standards or the ethics code cannot be implemented in full and unchanged - these may be for cultural or legal reasons or due to differing educational and other approaches to business. That said, however, there are unlikely to be significant modifications required to the international standards for them to be appropriate in all jurisdictions, although in many countries new legislation may be required. Thus IFAC and IASC would like to see and anticipate their standards being increasingly adopted throughout the world, albeit with minor modifications and adaptations as may be appropriate. They also acknowledge that additional requirements may be added but, if so, they would hope that national standards can in all cases state that compliance with those standards would ensure compliance with the international standards.

A further reason why the 142 member bodies have in some cases found it difficult to ensure that the international standards are introduced, despite their best endeavours, may be that the standard setters are not within their control. There are many countries where the standards in accounting and indeed in auditing are outside the control of the accounting profession - although the accounting profession may still play a significant part in the development of the national standards. Member bodies may well be trying to persuade the national standard setters to follow the international standards but the power to mandate them lies elsewhere.

Interestingly and significantly, in December 1996, government ministers at the Singapore ministerial meeting of the World Trade Organisation assigned a particular role to IFAC and IASC and indeed to the International Organisation of Securities Commissions (IOSCO). The final communiqué from the meeting included the following words: "we encourage the successful completion of international standards in the accountancy sector by IFAC, IASC and IOSCO". It was therefore acknowledged that the private sector bodies, IFAC and IASC, with the support of the international regulators, have to ensure that appropriate standards are developed and put in place, IOSCO of course having to use its influence on the regulators of individual securities exchanges to require those exchanges to allow financial statements of companies seeking or having a cross border listing to be produced and audited in accordance with IASs and ISAs respectively.

After a lull of almost two years during which the move towards global harmonisation made little apparent progress, the debate has again come to a head. In October the Group of Seven leading industrial nations issued a communiqué urging the need to develop a lingua franca for financial reporting and endorsing the role of IASC as the appropriate vehicle. At about the same time, the World Bank challenged the major international accountancy firms to refuse to give "clean opinions" on accounts which are not prepared in accordance with standards which are internationally acceptable and to take steps to ensure that the auditors themselves comply with internationally recognised standards of practice. The UN, taking matters a step further, shortly afterwards issued a draft report recommending that the major accounting firms should describe in their audit reports any discrepancies between the use of national accounting principles and the international standards.

While the above statements were almost certainly made in the light of the situation of South East Asia, the demand for high quality, internationally comparable information is just as relevant in the more developed nations. In Europe common financial reporting and auditing formats are mandatory under the various accounting directives; but each national government has nevertheless implemented the directives in a subtly different way so that, despite consistency of layout, there remain underlying differences which obscure transparency and comparability of information. Five European member states have introduced dispensations allowing major corporations to use IASs rather than comply with national standards for their consolidated accounts, but what happens when there is a conflict between the international and national requirements? In the meantime, the European Commission is looking into the differences between the directives and IASs: if the Commission is dissatisfied with the results there is a very real threat that, despite the best efforts of the profession, the current situation will be further complicated by the introduction of a third layer of standards at European level.

A globally harmonised accountancy profession will not prevent or cure corporate failures, but it will ensure that investors and other interested parties have prior warning of impending dangers and that they have an opportunity to take remedial action at the earliest possible stage. Where a company's financial health is not in question, reliable, transparent and internationally comparable information can only help to boost confidence and thereby promote future corporate prosperity. The need for harmonisation is self-evident - but it can only become a reality as a result of commitment and concerted effort by regulators, standard setters, financiers, business interests, the public at large and, of course, the accountancy profession.