MAKING PROGRESS ON THE INTEGRATION OF THE WORLDWIDE ACCOUNTING PROFESSION
By: Fermín del Valle, President
International Federation of Accountants
Chamber of Hungarian Auditors 75th Anniversary International Conference
Budapest, Hungary – October 24, 2007
Good afternoon and thank you for inviting me to join the 75th anniversary celebration of the Chamber of Hungarian Auditors (CHA). Congratulations on this wonderful occasion.
It is significant that we are marking this75th anniversary on October 24th; one day after the Hungarian National holiday that celebrates the freedom fighters of the Hungarian Revolution of 1956. The accounting professional organization, established in 1932, has faced the challenges of operating during wartime, pushing ahead in the face of hostile political regimes and staying the course in times ofgreat economic upheaval. Facing adversity, surviving, and thriving aretestimony to the spirit of the people in this room, as well as the rest of the Hungarian people.
But Hungarians are known for more than just an enduring spirit. Hungarians are known for a tradition of innovation. Famous Hungarian inventors and their inventions include: John von Neumann and digital computing; Laszlo Biro and the ball point pen; and Erno Rubik and his Rubik’s cube. Such inventions require vision and a belief that the world needs what you have got to offer, which brings us to our topic this afternoon.
You have asked me to talk about integrating the worldwide accountancy profession in Hungary and across the globe. Some might say getting all the accountants in the world to come together and agree on the many aspects of their professional lives is about as easy as making all sides of the Rubik’s cube snap into place.
But those of us who are committed to the future of the worldwide accounting profession – members of organizations such as IFAC and CHA – welcome these challenges and we are doing very well.
In fact, I believe that the accountancy profession is an example in this respect.
We can say that the accounting profession has advanced a great deal more than average in the matter of convergence and effective integration and we have achieved this through continuous dialogue and cooperation.
In my opinion, there are three conditions for us to continue being successful in this process: alignment, collaboration and communication. Member Bodies, Regional Organizations, and the Forum of Firms should join IFAC in focusing on these three drivers of integration.
Integration today not only demands active participation in regional and international organizations and alignment of strategies and action plans, but also demands us to think in terms of the effective globalization of our professional organizations.
We have all been and we are still witnesses to globalization. We have seen companies become global and watched even the smallest entities adopt structures that enable them to insert themselves in the global marketplace.
We have been present for, and we continue to be present to, the globalization process of the professional firms. We know about the demands of the SMPs to generate a different type of global network.
Globalization is a fact for organizations of all types.Professional organizations are not excluded.
What has globalization meant and what does it mean for member bodies?Have we advanced sufficiently in our globalization process?The response to these questions will have a substantial impact on our strategy over the next few years.
CHA has participated actively in IFAC boards and committees. I wouldlike to extend my appreciation to Ferenc Eperjesi, Vice President of International Affairs at CHA, who serves on IFAC’s Developing Nations Committee, and who previously was a member of IFAC’s International Accounting Education Standards Board (IAESB), the Compliance Committee, and the Developing Nations Task Force. I would also like to acknowledge the valuable contributions of Laura Ipacs, a member of the International Accounting Education Standards Board since January 2006.
It is my sincere hope that this participation continues and that the CHA is increasingly involved in the future.
We know that, right now, any plan involving our profession in Hungary must include, among other things, changes mandated by the European Union’s Eighth Company Law Directive on Statutory Audit.
An active and timely participation of the accountancy professional organizations in Europe, including CHA, is vital in the implementation process of such a Directive. I know that this has been the case of the CHA.
Because all 27 European Union member states are required to comply with the Eighth Directive, it will have an immediate effect on the accountancy profession in several significant areas, including convergence to a single set of international auditing standards, full implementation of quality assurance processes and strengthened auditor independence requirements.
Let’s look briefly at these three areasof impending change and examine how IFAC and CHA can participate to contribute to a positive result. First, the Eighth Directive will affect the profession by mandating convergence to a set of international auditing standards.
As required by the 8th Directive, audits should be carried out in accordance with the international auditing standards adopted by the European Commission. The Directive also specifies that the Commission will adopt international auditing standards only if they:first, have been developed according to a due process with public oversight and transparency and are generally accepted internationally;secondly, contribute to a high level of credibility and quality of annual or consolidated statements; and lastly, are driven towards the European public interest.
We are absolutely convinced that the International Standards on Auditing (ISAs) comply with all of these requirements and many more, especially once the revised standards are put into effect under the Clarity Project. Moreover, we do not believe there are other sets of standards that could possibly fulfill these conditions.
Nevertheless, the legislation does not set a deadline for the European Commission to make the decision and today the estimated date is unknown.
IFAC believes ISAs, the standards issued by the IAASB, are the highest quality international standards and should be adopted by all 27 member states.
The IAASB expects to complete all 35 ISAs as final standards, redrafted under the Clarity project, by October 2008 and, on this basis, is proposing that these standards become effective for financial periods beginning on or after December 15, 2009, in order to give auditors around the world and European Union member states a chance to digest and properly implement them.
Additionally, to remain open to all member states’ concerns about converging to ISAs, IFAC has invited the European Commission to act as an observer at the IAASB table.
All of the conditions are in place, therefore, for the European Commission to adopt the ISAs. However, the timetable is unknown and some situations exist that may indicate a delay in this decision.
One important aspect to consider is that the member states can apply a national auditing standard while the Commission has not adopted an international auditing standard on the issue.
This means that it is not necessary to wait on a decision from the European Commission to adopt the ISAs. This can be done at a national level and in this way Hungary, and the companies and organizations that rely on the standards, can realize the benefits even before the EC adopts them.
Certainly, this would be equally positive for the rest of the countries of Europe and it would require professional accountancy organizations and national standard setters to work together.
It would also be necessary to have timely translation of the new set of redrafted standards and deliver the proper training for the professional accountants.
I strongly encourage you to fully adopt the ISAs on the proposed effective date.
The second way the Eighth Directive will affect the accounting profession is by mandating quality assurance processes for audit firms and individual audit engagements in accordance with international audit standards and subject to public oversight.
International Standard on Auditing (ISA)220 establishes specific responsibilities of firm personnel for an individual audit engagement. International Standard on Quality Control (ISQC) 1provides direction at the firm level. Some countries in the European Union, including Hungary, have already begun using these standards, which aim to ensure audit quality consistency across nations, international firms, and ultimately, the worldwide accountancy profession. IFAC is counting on its member bodies to take a leading role in this area in a very specific way.
IFAC Statement of Membership Obligation 1 establishes the guidelines to implement an external quality control.
It is hopeful that the CHA will actively participate and coordinate with the independent oversight body the establishment of quality assurance, investigation and discipline activities within the framework of the 8th Directive.
The third way the Eighth Directive will affect the accounting profession is by mandating strengthened auditor independence requirements. Independence has dominated the agenda of the International Ethics Standards Board for Accountants for the past several years. In July, it issued an exposure draft proposing revisions to its independence rules. The draft proposes to strengthen independence requirements regarding internal audit services, contingent fees from assurance clients as well as the size of fees from a single assurance client.
These proposed changes were added to others included in other exposure drafts issued at the end of last year, also referring to questions of independence. The objective is to approve all these modifications towards the middle of next year and the hope is that after these modifications are introduced, those independence standards in the IFAC Code of Ethics will achieve international consensus and can then be used as a basis to achieve convergence in this matter.
I would like to encourage CHA to work towards the full adoption of IFAC’s Ethics Code, including these new independence rules.
A key activity for the sustainability of the profession is located within the responsibilities of the Compliance Program.
Launched in November 2003, the program is now entering the third phase, which involves the development of action plans. The IFAC staff is in the process of developingpolicy recommendations for members with gaps in compliance. On the basis of these recommendations, IFAC members and associates will develop action plans to resolve those issues and close the gaps between the present situation and their desired future. I want to thank the CHA for participating in the Compliance Program.
Of course, the action plans of the Compliance Program should be aligned with the requirements of the 8th Directive and should be carried out within the new regulatory framework.
This is an ideal area for collaboration. Firstly, it will be apparent from these action plans that there are similar problems in many countries, and therefore, there will be an opportunity to develop common solutions that can later be customized nationally. This can mean significant savings in resources.
Secondly, the Compliance Program presents the opportunity to collaborate with a neighboring and sometimes less developed professional organization. In this instance, CHA could be a mentor.
In May of this year, we had a productive meeting with the presidents and chief executives of various IFAC Member Bodies of this region. There we established the foundation for permanent dialogue and greater integration that permits effective collaboration between these organizations.
IFAC’s vision of professional regulation is one in which professional accountancy bodies play an important role in the regulation of the profession, working with individual governments or government agencies.
IFAC also believes that professional accountancy organizations such as CHA have a key role to play in the quality and consistency of services provided by its members. We have already focused on the role CHA will play in monitoring audit quality and ethical behavior, but you also have an obligation to speak as the voice of the profession on other matters such as entry and licensing requirements, including education and continuing professional development.
We should not forget that all of these initiatives contribute to one objective: quality in financial reporting. But this is not an end in itself. The information should serve to make investment or financial decisions, as a driver of economic growth.
When investors understand, and have confidence in a company’s financial information, they tend to be more confident about investing. In turn, steady investment in a region’s businesses ultimately makes that region more prosperous.
However economic growth is also not an end in itself. That growth should ultimately improve individual lives; it should be for the benefit of the people. The wealth should flow through society. The final objective should be ensuring the wellbeing of people and eliminating poverty.
As I see it, our profession’s public interest responsibility arises from our role in relation to these objectives. Professional accountants contribute to growth in individual companies; we develop the information on which investors make their decisions;we provide assurance on that information; we support and sustain non-profit organizations; and we assist governments in sustaining the social and physical infrastructure of any given jurisdiction and in acting in a fiscally responsible way on behalf of its citizens.
As CHA has demonstrated in its 75 years history, you have handled issues far more challenging than complying with the Eighth Directive. You have already made progress adopting ISAs, implementing quality assurance processes, and providing compliance guidance to your members, and I am confident that you will continue to act with innovation, courage and professionalism, as you have in so many of your endeavors in your long history.
Thank you for your attention.