ENHANCING FINANCIAL

REPORTING AND AUDITING

NEW INITIATIVES OF IFAC AND THE PROFESSION

I N T E R N A T I O N A L F E D E R A T I O N O F A C C O U N T A N T S

ENHANCING FINANCIAL REPORTING AND AUDITING

NEW INITIATIVES OF IFAC AND THE PROFESSION

THE MISSION OF THE INTERNATIONAL FEDERATION OF ACCOUNTANTS

IFAC was established in 1977; its mission is the world-wide development and enhancement of an accountancy profession with harmonized standards, able to provide services of consistently high quality in the public interest.

IFAC is a non-profit, non-governmental, non-political international organization of accountancy bodies. It currently has 153 member bodies in 113 countries around the world. Membership is open to accountancy bodies recognized by law or general consensus within their countries as substantial national organizations of good standing within the accountancy profession. The membership of IFAC member bodies comprises more than 2 million accountants in public and private practice, industry and commerce, education and government service.

Through co-operation with member bodies, regional organizations of accountancy bodies and other world organizations, IFAC initiates, co-ordinates and guides efforts to develop international technical, ethics and education pronouncements for the accountancy profession in both the public and private sectors.

IFAC sets international standards on auditing and ethical standards for global use and strongly supports the work of the International Accounting Standards Board (IASB) in the setting and promotion of international accounting standards.

CURRENT ENVIRONMENT

The world is changing, enterprises’ needs are evolving, as are the expectations of markets, investors and the public at large. Globalization has made it necessary to harmonize standards and guidance used by the professional accountants all around the world.

In the present environment, IFAC has a unique opportunity to consolidate its position as a recognized and credible standard setter, strengthen its influence, become the prime representative of the accountancy profession in

dealing with international institutions or groupings of regulators and assist the profession to narrow the expectation gap.

To capitalize on this opportunity, IFAC must demonstrate its ability to:

issue standards or guidelines of high quality and encourage harmonization and consistent application throughout the world;

enforce the use of the standards issued and if necessary, impose sanctions; and

be the prime spokesman and interface of the profession with international institutions or grouping of regulators.

To achieve these goals, IFAC has recognized that certain key actions are required to strengthen the organization.

THE ELEMENTS OF THE ACTION BEING TAKEN

The plan for strengthening IFAC involves a significant restructuring so that IFAC may better carry out its mission. The four main elements are:

The strengthening of the processes and broadening of the membership of the International Auditing Practices Committee;

The establishment of a self-regulatory regime for firms performing transnational audits, comprising the Forum of Firms and its executive arm, the Transnational Auditors Committee;

The establishment of a Public Oversight Board for IFAC; and

The introduction of a program for monitoring the compliance by IFAC member bodies with IFAC standards and other pronouncements.

It is recognized, however, that IFAC and the profession alone cannot effect all the necessary changes required. Efforts to implement high quality professional standards can be impeded, or even baulked, by governments, legal requirements and cultures that are incompatible with, or even prohibit, the application of such standards. Local standards can be inadequate and result in potentially misleading financial information. In such an environment, it will be difficult, or impossible, for firms to achieve their goal of enhanced and consistent financial reporting and auditing.

For this reason, IFAC and the World Bank established the International Forum on Accountancy Development (IFAD) in 1999. The final portion of this paper describes the key aspects of the IFAD initiative.

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THE REVISED STRUCTURE OF IFAC

The actions being taken during 2001 significantly change the structure of IFAC. This can be illustrated as follows:

Firms Public Members Oversight Board (National

Bodies)

Council

Forum of Firms

Board

Transnational IAPC Ethics Public Compliance Education Non-Auditors Committee Sector Committee Committee AuditCommittee Committee

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INTERNATIONAL AUDITING PRACTICES COMMITTEE

IFAC has identified endorsement of International Standards on Auditing (ISA) by the International Organisation of Securities Commissions (IOSCO) as a major strategic objective. The leadership of IFAC, therefore, has agreed that it would be appropriate to institute a comprehensive review of the membership, organisation and processes of the International Auditing Practices Committee (IAPC) as a matter of urgency. The IAPC Review Task Force was established in January 2001 and has delivered its report to the IFAC Board in July 2001.

SUMMARY OF PRINCIPAL RECOMMENDATIONS

The principal recommendations made by the IAPC Task Force are summarised as follows: IAPC’s objectives should be revised to clearly reflect that its goals

are to develop auditing standards of unquestionable quality, and it should operate and be seen as operating in the public interest.

Membership on IAPC should include five representatives from international audit firms, proposed by the Transnational Auditors Committee (TAC) of the Forum of Firms, seven from IFAC member bodies with a majority of those from countries with strong national standard-setters, and three non-auditor representatives. The Nominating Committee of IFAC should be responsible for ensuring a proper balance of countries and firms, always considering the “best person” for the role.

IAPC should open its meetings to the public and make available its meeting materials and minutes to the public. It also should make other changes to its procedures to enhance its efficiency and promote transparency.

IAPC should prepare annual reports and develop a strategic plan for public commentary, and undertake more proactive public relations and technical activity, thereby enhancing its consultative process and image.

IAPC should work closely with national auditing standard-setters on matters important to its goals, including undertaking joint and coordinated projects, thus promoting eventual convergence of standards for global acceptance.

IAPC should take steps to make clear the authority of its standards and other guidance and, if necessary, initiate a project to examine any ambiguity as to such authority.

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IAPC should operate with adequate resources to sustain its activities and follow due process and transparency in carrying out such activities. For IAPC to sustain its activities and meet its goals, a substantial increase in its staff resources and funding is needed.

The report and the recommendations contained therein are now being exposed for public comment until September 21, 2001. The detailed report can be located at www.ifac.org.

FORUM OF FIRMS AND TRANSNATIONAL AUDITORS COMMITTEE

THE OBJECTIVES OF THE FORUM OF FIRMS

The objective of the Forum of Firms (FOF) is to promote consistently high standards of financial reporting and auditing worldwide in the interest of users of the profession’s services. The members of the FOF will work to achieve this objective by:

Complying with the FOF’s Quality Standard (described below);

Subjecting their policies, methodologies and work undertaken in relation to transnational audits to periodic external quality assurance reviews (hereafter referred to as “global peer review”) in accordance with the review guidelines proscribed by the FOF;

Using their best endeavours to promote the use of International Accounting Standards and International Standards on Auditing; and

Involving the firms more closely with IFAC’s activities in audit and assurance related areas.

MEMBERSHIP OF THE FOF

Membership of the FOF will be open to networks of firms and individual firms that are not members of networks that have transnational audit appointments or are interested in accepting such appointments.

International networks of firms that practice under the same name, or whose member firms are otherwise closely identified with one another such as through common elements in their name or through reference to membership of the network on their stationery, will be expected to join as one organization.

Membership of the FOF will consist of two categories: full members and provisional members. Initially, all member firms will be classified as provisional members. Progression to full membership will be subject to

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evidence that the member firm has satisfactorily completed a design and compliance global peer review (see further description of the global peer review cycles below) and that its policies and practices conform to FOF Quality Standard.

THE FORUM’S QUALITY STANDARD

The FOF Quality Standard require that member firms:

have policies and a methodology for conducting transnational audits which meet or exceed the provisions of International Standards on Auditing;

comply, as a minimum, with the IFAC Code of Ethics;

maintain training programs to keep partners and staff aware of international developments relevant to financial reporting; and

maintain appropriate quality control standards and conduct regular quality assurance reviews to monitor compliance with the firm’s policies and methodologies for conducting transnational audits.

The FOF Constitution and Operating Procedures are currently being exposed for public comment.

DEFINITION OF TRANSNATIONAL AUDITS

Transnational audits are defined as those of financial statements which are or may be used across national borders. This will include all companies with listed equity or debt and other major public interest entities such as banks and other financial institutions.

The Transnational Auditors Committee will issue additional guidance to assist firms in the application of the definition for purposes of the FOF quality assurance review.

THE TRANSNATIONAL AUDITORS COMMITTEE

The Transnational Auditors Committee (TAC) will be a committee of IFAC and the executive arm of the FOF. Among other responsibilities, it will act as the primary communication link between the FOF and the IFAC Board. The primary responsibilities of the TAC will be to:

develop, maintain and administer a global peer review program to assess the consistency of the policies and practices of FOF members with the aforementioned Quality Standard;

encourage the adoption of internationally recognized standards of financial reporting and auditing;

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keep issues relevant to auditors with transnational clients under regular review and provide supplementary guidance of interest to those firms;

report regularly to meetings of the IFAC Board;

report regularly to and consult the IFAC Public Oversight Board (POB) on quality assurance and compliance processes applicable to members of the Forum; and

Report to the annual meeting of FOF members on progress and achievement of approved plans.

TAC will have the authority to establish such structures and relationships as are necessary to provide effective liaison with the public interest committees of IFAC.

PROPOSALS FOR GLOBAL PEER REVIEW

The TAC has formed the Global Peer Review (GPR) Subcommittee to develop, administer and maintain the global peer review program. Accordingly, the Subcommittee has recently issued Guidelines for Performing and Reporting on Global Peer Reviews, a document which provides guidelines and tools for performing global peer reviews. A brief summary of the proposed peer review process follows.

The review will be a firm on firm review by a reviewer selected by the reviewed firm using guidelines developed by the TAC and approved by the FOF and endorsed by the IFAC Board.

The key requirements embodied in the draft constitution regarding the peer review process are as follows:

All members of the FOF join as “Provisional Members”.

Provisional membership is only open until December 31, 2002; after that date firms may only apply as “Full Members”.

Firms applying after December 31, 2002 must proceed directly to a Cycle 3 review (see below for further explanation of the review cycles).

Provisional Members will be subject to exclusion if:

Cycle 1 review is not completed by June 30, 2003; or

Firm does not progress to Full Membership within two years of the completion of its initial Cycle 3 review.

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The Provisional Membership category shall cease three and a half years after the commencement of the Cycle 3 reviews of the Founder Member Firms (Andersen, BDO, Deloitte Touche, Ernst and Young, Grant Thornton, KPMG and PricewaterhouseCoopers).

Based on the current estimated timing for Cycle 3 reviews, Founder Members will commence such reviews as of March 31, 2004. This implies that the Provisional Membership category will cease on September 30, 2007.

All Founder Members have committed to select their peer reviewers in Fall 2001 and commence Cycle 1 reviews as of March 31, 2002 with an anticipated reporting date of September 30, 2002. At least one additional firm has expressed their intent to follow this timetable.

As noted above, the reviews for provisional members will progress through three cycles as follows:

Cycle 1 – Benchmark Review – a review designed to provide observations and recommendations on the reviewed firm’s policies and procedures using the FOF Quality Standards as a benchmark. This review results in a Benchmark Review Memorandum which includes the reviewers observations and recommendations to the firm in regards to the firm’s conformance with the FoF Quality Standards. The individual Benchmark Review Memoranda will be addressed to the reviewed firm, provided to the GPR Subcommittee and will not be a public document.

Cycle 2 – Design Review – a review for the purpose of expressing an opinion on the design of the firm’s policies and procedures in accordance with the FoF Quality Standards. The reviewer’s overall report (i.e., design opinion) will be a public document. The individual Design Review Memoranda will be addressed to the reviewed firm, provided to the GPR Subcommittee and will not be a public document.

Cycle 3 and subsequent years – Design and Compliance Review a review for the purpose of expressing an opinion on whether the design of the firm’s policies and procedures is in accordance with the FOF Quality Standards and whether in practice there is compliance with those policies. The reviewer’s overall report (i.e., opinion on design and compliance) will be public. The individual Design and Compliance Review Memoranda will be addressed to the reviewed firm, provided to the GPR Subcommittee and will not be a public document.

In general, the scope of the review is determined by the peer reviewer based on guidance provided in the Guidelines for Performing and Reporting on Global Peer Reviews and, as applicable, input from the TAC.

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Cycle 1 – The review will cover a firm’s international headquarters and a minimum of 4 country visits, based on an approved geographic stratification to be determined jointly by the GPR Subcommittee and the TAC. The review does not include a review of the firm’s internal inspection results or engagement reviews.

Cycle 2 - The review will cover a firm’s international headquarters and a number of country visits. This review will include a review of the results of the firm’s internal inspection, but will not include engagement reviews.

Cycle 3 – The review will cover a firm’s international headquarters and a number of country visits. This review will include a review of the results of the firm’s external monitoring and internal inspection as well as engagement level reviews.

Each year, the applicable Review Memoranda will be summarized by the GPR Subcommittee for the TAC, with no firm level attribution, for reporting to the FoF, IFAC Board and the IFAC Public Oversight Board.

GLOBAL PEER REVIEW – MATTERS TO BE ADDRESSED

It is acknowledged that there are a number of significant matters that will need to be addressed in relation to Cycles 2 and 3. Many of these matters have been identified and discussed by the Subcommittee and work continues to clarify the way forward. A brief summary of the major matters to be addressed is as follows:

Interaction with national Quality Assurance processes – the national professional body in each country may have a quality assurance review process. Many of these processes are well developed and function effectively. Accordingly, there is no desire to duplicate these processes. To the extent possible, the GPR Subcommittee would like to rely on these processes to reduce the work of the peer reviewer. The GPR Subcommittee is developing a standardized approach to evaluate the governance, methodology and content of these processes so that each peer reviewer will understand how a review in any particular country is impacted by the national quality assurance process. A key issue within this area is gaining access to the results of the national quality assurance reviews. Protocols will need to be established between IFAC and the professional body and regulators in each country. As each national process is somewhat different, these evaluations and protocols will have to be made on a country-by-country basis. This activity will require extensive contact, education and liaison with each national professional body.

Formal GPR Subcommittee operating procedures will need to be developed.

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Detailed standards will be developed for Cycles 2 and 3, including:

Report formats;

Scope and coverage requirements and related guidance in order for reviewers to issue opinions on an entire international network; and

Guidance on how a peer reviewer can rely on a firm’s internal inspection process.

The GPR Subcommittee will further study the timing of Cycles 2 and 3 and how such timing is established in relation to each firm’s internal inspection.

Once established, the IFAC Public Oversight Board can be expected to have significant input into the further development of the peer review process.

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IFAC PUBLIC OVERSIGHT BOARD

THE OBJECTIVES OF THE PUBLIC OVERSIGHT BOARD

The objective of the Public Oversight Board (POB), as the public oversight body for IFAC is to oversee IFAC’s public interest activities in order to demonstrate in fact and appearance that IFAC activities are conducted in the public interest thereby enhancing the external profile, credibility and authority of IFAC as the global standard-setting, regulatory and representational organization for the accounting and audit profession (other than in the area of international private sector accounting standards). The POB’s activities will serve to preserve and strengthen the public confidence in financial reporting and the effectiveness and integrity of the audit process.

THE CHARTER OF THE IFAC POB

The POB will be independent of both the profession and the regulators; it should be involved with oversight not management and its charter must respect the fact that it has an international brief and therefore cannot follow the approach used in any one country.

The POB will oversee the public interest activities of IFAC and, in particular,

The setting of auditing, ethical, public sector and educational standards;

The obligations of membership and compliance processes applicable to its member bodies; and

The quality assurance, compliance and other self-regulatory processes applicable to the membership of the Forum of Firms

The POB shall assess their sufficiency and efficacy and the degree to which these public interest activities protect the public interest and shall publish an annual report thereon, with recommendations.

In performing its role the POB should focus on whether the interests of users of financial statements are being appropriately reflected in the processes and outputs of IFAC and its committees.

A prime responsibility of the POB will be oversight of the process, the effectiveness and the results of quality reviews conducted on members of the Forum. The POB’s focus, as it relates to quality reviews, should be on the appropriateness of the TAC’s process, the quality control processes in place within the FoF members and on the effectiveness of those processes in practice.

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THE MEMBERSHIP OF THE IFAC POB

POB members should be capable and highly respected individuals, drawn from diverse geographic and functional backgrounds.

The members should be independent of IFAC and of the members of the Forum. Members should not be active partners in, or otherwise dependent on, accounting practices. Members of IFAC Member Bodies would not be excluded from membership of the POB, but should not be in the majority.

The members of the POB should also be independent of the securities and banking regulators. Members should not be current regulators or otherwise be directly associated with regulators. The reason for this restriction is that with the varying quality of regulatory practice around the world it is likely that the POB will wish to focus on regulation or its absence in commenting on the quality of work performed by the profession. Any current regulator might be constrained or be perceived to be constrained in this role.

All members of the POB should have senior level and global experience, a high reputation amongst their peers, integrity, a willingness to express their views openly and a commitment to the POB’s mission and to the strengthening of the profession. All members would be required to act in the public interest. The POB will initially have seven members.

Diversity of experience is important if the POB is to be effective in linking the profession’s activities and performance to the variety of external audiences that rely on them. The members should come from as wide a range of backgrounds as possible. Current or recent experience in government, the judiciary or international institutions, in international business, in public interest and investor organisations and in education would be relevant. If possible, at least one member should have knowledge of the interests of developing countries or economies in transition. In order to bring detailed knowledge of the activities of the profession to the POB, one member should have previously held a senior role in one of the large international accounting firms. Ideally individual POB members will have substantial experience in more than one functional area.

Given that IFAC is a world-wide organisation it is important that there is considerable geographic diversity in the membership of the POB. At least one member should be from the Americas, at least one from Europe, at least one from Asia Pacific and at least one from Africa but with no more than three members from any of the areas.

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The following matrix illustrates how a seven member POB might be constituted:

Background GeographyN America Europe Asia/Pacific Other Areas

Former senior partner in accounting firm

X

CEO/CFO of major company

X X

User of financial statements

X X

Former public official

X X

Many alternative allocations are possible but the aim should be to have representation on each line and in each column.

The size of the POB would be assessed by the POB and the IFAC Board after the POB has been in operation for 3 years based on the workload and the need for geographic or other representation. Any change in numbers would need to be approved by the IFAC Board.

The initial POB members should be appointed for a variety of terms, not to exceed 4 years, so as to avoid having all POB members being replaced or reappointed at the same time. Thereafter, after the initial rotation, POB members should be appointed for a fixed term of 4 years; they shall have a right to be appointed for a maximum of two full terms. Individuals shall not be eligible for appointment or reappointment if at the beginning of their term they would be over 70 years of age.

Replacement members should be selected by a Selection Committee with members from the POB, IFAC and the private sector and using the same general criteria as those used for the first members so as to maintain the geographic diversity and diversity of experience on the POB.

SELECTION OF THE INITIAL MEMBERS OF THE IFAC POB

The selection of the Chairman and the other members of the POB will be led by IFAC but with input from a small Review Panel independent of IFAC. The intention is to have a Chairman and Board members of the highest international reputation who will be seen by all as having the stature and integrity required for such positions.

IFAC has appointed a leading international search firm to draw up a short list of candidates for Chairman. The officers of IFAC will review this list and

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indicate an order of preference. The search firm will approach the preferred candidates and if after discussion including with the officers of IFAC, one of the preferred individuals is willing to serve, his or her name will be put to the Nominating Committee of IFAC and to the Review Panel.

The Review Panel will consist of up to six members and may include representatives of securities or banking regulators, the World Bank or similar international financial institutions and one accountant independent of IFAC and the accounting firms. Membership of the panel will be at chairman level.

The officers of IFAC will present a summary of the process of selection and the results of the search to the Review Panel including the reasons for selecting the preferred candidate. The Review Panel will then give its views focusing particularly on the independence of the individual. If the Review Panel is satisfied as to the individual’s independence, IFAC’s officers will present the candidate for Chairman for approval by the IFAC Board. If the Review Panel is not satisfied as to the independence of the candidate, and is unpersuaded by further input from IFAC, the process would be repeated with further candidates. The Review Panel’s decisions will require a two-thirds majority.

When the Chairman of the POB has been selected he or she will join the IFAC officers to give input on the detailed selection criteria for the other members and to participate in the selection process. The selection team will then receive a further short list from the search firm for the remaining members of the POB. The same review process, including the involvement of the Review Panel, will be followed as for the Chairman ending with the formal approval of the initial membership by the IFAC Board.

THE OPERATIONS OF THE IFAC POB

The POB should meet as frequently as its members consider appropriate but at least four times per year. A quorum shall be at least two thirds of the members. The POB would decide whether its meetings would be held in public. The POB would make its own decisions as to the extent and frequency of its oversight reviews of the various IFAC and Forum activities.

The POB would determine the extent to which its members and its staff participated in the meetings of the Transnational Auditors Committee (TAC) Quality Review function and the practice review final meetings with individual firms. The POB staff would report at each meeting of the POB on the results of recent TAC quality review activity.

The POB, as part of its oversight activities, would be available for consultation on IFAC’s nominations for chairmanship of the Transnational Auditors Committee, IAPC and its Ethics, Public Sector, Compliance and Education Committees.

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The POB, as part of its oversight activities would expect the Chairmen of the Committees of IFAC over which it has oversight responsibilities to report from time to time on those activities and would provide them with the POB’s views relating to the activities of their Committees.The POB will reach conclusions based upon a simple majority of the votes cast. The election of the chairman and new members (after the initial period of appointment) and proposals for amendments to the POB charter will require a two-thirds majority of the members.

The POB should report annually on its activities and its findings to the Board and Council of IFAC, the Forum and the TAC and to the public at large. The annual report should contain a description of the POB’s oversight activities, an audited statement of its expenditures and any evaluation and recommendations relating to IFAC and its committees over which it has oversight. The report would be expected to comment on the overall results of the quality review process covering the member firms of the Forum but would not contain comments on the performance of individual members of the Forum. The responsibility for action in relation to any recommendations of the POB would rest with those responsible for the areas commented on. The POB would report on the appropriateness of responses in subsequent reports.

The initial POB Chairman will be selected in the manner set out in 2.5 above and be approved by the Board of IFAC. Subsequent Chairmen will be elected by the POB itself, a two-thirds majority of the members being required. The term of office of the Chairman would be 4 years and he or she would be eligible for re-election for a second 4-year term. The Chairman’s term would not extend beyond the term for which he or she had been elected a POB member.

Members of the POB shall be paid a fee based on an assumed work requirement of up to 30 days per year including travel time. The Chairman would receive an additional fee to reflect the additional responsibilities and time requirement. Appropriate expenses will also be reimbursed.

The POB will appoint an executive director who will be responsible for the day to day activities of the POB including ensuring adequate staffing and will report to the POB.

The POB staff will be housed at an appropriate central location either in North America or Western Europe.

IFAC shall provide the POB with the resources needed to discharge its oversight responsibilities. The POB will prepare an annual budget after consultation with the IFAC Board and the TAC. The POB will prepare a separate budget for any non-recurring review again after consultation with the leadership of IFAC and the TAC.

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Given that the focus of the POB’s responsibilities will be on IFAC’s public interest audit related activities including the Forum of Firms and the TAC, the cost of the POB will be borne to a substantial extent by levies on the members of the Forum. The amount will be fixed annually in advance based upon the POB budget. The levy will be incorporated into the total subscription payable to IFAC by members of the Forum.

The method of operation and effectiveness of the POB’s performance of its oversight responsibilities will be assessed after 3 years to determine whether it is operating in a manner so as to achieve its objectives. This review will be conducted by a five person review panel, two selected by the POB and two by the Board of IFAC with the four members selecting the fifth member of the panel. Subsequent reviews will be performed every 4 years.

The Public Oversight Board Charter is currently being exposed for public comment.

IFAC COMPLIANCE COMMITTEE

OBJECTIVE

The objective of the IFAC Compliance Committee is to encourage improvement and enhancement of standards within IFAC member bodies, through greater compliance with the standards, rules and guidelines issued by IFAC.

Specifically, the remit of the IFAC Compliance Committee shall be:

To consider all applications for membership of IFAC and to report thereon to the Board, with recommendations; to carry out periodic reviews of the criteria for admission to membership;

To develop and institute developmental programs for newly admitted member bodies, to assist them to comply with the obligations of membership and to encourage, monitor and if necessary, require implementation of such programs by such member bodies;

To keep under review the relevance, sufficiency and efficacy of the membership obligations of IFAC and the extent to which the member bodies comply therewith and to carry out such work as will enable them to execute these duties;

To consider how member bodies might best be encouraged, or if necessary, required to comply more closely with such obligations and, thus, to assist in the achievement of the objectives of IFAC in the public interest;

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To devise schemes that would assist member bodies to comply more closely and to consider whether additional powers are required to enforce compliance with membership obligations;

To make recommendations thereon to the Board and Council of IFAC;

To work closely with members of the Transnational Auditors’ Committee in its monitoring of the members of the Forum of Firms;

To make recommendations thereon to the IFAC Board; and

To implement agreed policy in this area.

The Compliance Committee is the process of developing a detailed work plan to achieve the aforementioned objectives.

THE INTERNATIONAL FORUM ON ACCOUNTANCY DEVELOPMENT

WHAT IS IFAD?

The International Forum on Accountancy Development (IFAD) brings together representatives of more than 30 international public and private organizations who have agreed to work in partnership to fulfill a common mission to improve financial reporting, accountability and transparency worldwide. This partnership also extends to public and private national organizations that are working to implement the IFAD Vision at country level.

Through IFAD, for the first time, this broad range of organizations has developed a consensus on:

The importance of sound financial reporting, accountability and transparency for economic and social development, and

The need for concerted national and international efforts to achieve them.

By acting as an international community of interests their intent is to make a lasting impact and significantly improve financial reporting, within a framework of good corporate governance, effective regulation, and professional excellence in accounting and auditing. Each participating organization retains its autonomy in management, programming and budgets. But all are committed to more effective and efficient execution of their programs through better coordination, avoidance of duplication, and enhanced communication and cooperation under the IFAD umbrella.

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THE CREATION OF IFAD

The Asian and other financial crises in the latter part of the 1990s, and their impact on the global economy, demonstrated the importance of sound financial reporting, accountability and transparency for building a solid international financial system. High-quality financial information about corporate and other economic entities is a significant micro-economic complement to effective macro-economic policies that together contribute to national and global financial stability and sustainable growth. IFAD, created in 1999 by IFAC and the World Bank to address this challenge, is dedicated to improving this dimension of international economic cooperation.

IFAD PARTICIPANTS

IFAD partners represent a wide range of international governmental and private sector organizations that have interests in various aspects of the financial reporting process and its underlying infrastructure. These include:

International financial institutions,

Inter-governmental organizations,

Development assistance agencies,

Securities, banking and insurance regulators,

Standard-setters for the public and private sectors,

Capital providers,

Preparers of financial statements,

Government auditors,

Professional accounting and auditing bodies,

Professional education and training organizations, and

Large international accounting and auditing firms

IFAD participation is open to all public and private international organizations that share the IFAD mission and are committed to cooperation in achieving it. National leaders actively engaged in implementing comprehensive country action plans to improve financial reporting, accountability and transparency also are associated with IFAD.

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THE IFAD VISION

The IFAD Vision is to promote accountability and transparency by achieving a rational framework of reporting on the performance of economic entities, which serves the objectives of issuers and users across the world. This entails preparing all general-purpose financial information following a single worldwide framework, with common measurement and fair and comprehensive disclosure, that provides users a transparent representation of the underlying economics of transactions and is applied on a consistent basis.

To promote international convergence the Vision calls for:

Raising national accounting standards and practices using International Accounting Standards as the benchmark,

Raising national auditing standards and practices using International Standards on Auditing as the benchmark,

Improving corporate governance practices using the OECD Principles of Corporate Governance as a point of reference,

Assuring effective legal and regulatory structures, especially related to securities, banking and insurance supervision using principles developed by IOSCO, the Basel Committee on Banking Supervision and IAIS, respectively, and

Strengthening the accounting and auditing profession through enhanced professional education and training, qualifications, and standards on independence and ethics using guidelines developed by UNCTAD and IFAC as points of reference.

The Vision also calls for improvement and greater convergence in governmental accounting and auditing standards and practices.

IFAD'S VISION IMPLEMENTATION STRATEGY

IFAD partners recognize that their Vision will not be achieved overnight and will require significant, consistent long-term efforts, not simply through changing standards and regulations, but also through building or improving the necessary underlying infrastructure for effective implementation. This requires concerted activism by all the parties brought together under the IFAD umbrella; none alone has sufficient authority, legitimacy of representation, expertise or resources to carry out the Vision.

To execute the Vision IFAD participants have adopted a strategy of:

Working in partnership as an international community, in

Developing and implementing Country Action Plans,

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Strengthening the International Federation of Accountants (IFAC) as the global standard-setting, self-regulatory and representational body for the profession's audit and assurance-related services, while

Implementing practical short-term measures to improve the understanding of financial statement information used across borders.

Country Action Plans are the primary vehicle for accomplishing change at national level. They envision creation of individual Country Steering Committees, representing the range of public and private national entities interested in improved financial reporting, accountability and transparency. The Country Steering Committee will oversee an assessment process of national standards and practices in comparison with agreed international benchmarks in order to identify significant gaps. Based on this assessment, the Committee will draw up a Country Action Plan to address these gaps and supervise the plan's implementation. IFAD participants, through IFAD's International Steering Committee, are available, within their individual capabilities and resources, to facilitate and support the development and implementation of Country Action Plans, according to the expressed wishes of the Country Steering Committee.

A principal element of the plan to strengthen IFAC is to bring transnational auditing firms into association with the Federation through the creation of the Forum of Firms and its executive arm, the Transnational Auditors Committee, including the creation of a global quality standard for transnational audits, which will include periodic quality assurance reviews. In addition, IFAC has established a new Compliance Committee to work with national professional bodies, is working to improve its standard-setting procedures, and is establishing a Public Oversight Board to oversee its public interest activities.

As Country Action Plans and the measures to strengthen IFAC are being put into place, the large international accounting firms have agreed to implement a program of identifying the nationality of accounting standards used in the preparation of financial statements and the nationality of the auditing standards used to audit those statements. In some cases additional information is provided to the user of these statements in the form of a legend. These are intended to help users understand that the financial information may not be prepared according to international standards or other national standards with which they are more familiar.

THE POTENTIAL BENEFITS OF ACHIEVING THE IFAD VISION

Achievement of the IFAD Vision promises many potential benefits. For individual countries and national markets -- whether they be developed, developing or transitional economies -- implementation of the IFAD vision has the following potential benefits:

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Improved national economic and social policies based on more reliable information,

Effective integration into the international economy,

Improved national financial stability,

Development of better-functioning and more resilient capital markets, including lower capital costs,

Enhanced ability to mobilize domestic capital and to attract foreign investment and lending, and,

More effective and efficient management of domestic enterprises.

The possibility of public recognition by IFAD, as representative of the international community, also can enhance the image of a country and its businesses in the international marketplace.

There are potential benefits for all the IFAD participating organizations as well. Greater convergence of standards and regulations would:

Help regulators assure the soundness of the financial system and protect investors, depositors and other public interests,

Assist the profession in carrying out its responsibilities and enhancing its relevance in a rapidly globalizing world economy,

Provide investors, lenders and management higher-quality information for decision-making,

Assure more effective use of resources invested in economic and social development around the globe,

Assist the international auditing firms in performing high-quality audits on a consistent worldwide basis, thus, enhancing the integrity of their reputations and brand names, and

Increase the efficiency and effectiveness of each IFAD participating organization's autonomous programs through better coordination with and support from other IFAD participants.

IFAD partners are dedicated through their collective action to making all these potential benefits a reality.

IFAD PARTICIPATING ORGANIZATIONS

(in alphabetical order)

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African Development BankAndersen

Asian Development BankBasel Committee on Banking Supervision

Confederation of Asia and Pacific AccountantsDeloitte Touche Tohmatsu

Eastern, Central and Southern African Federation of AccountantsErnst & Young

European Bank for Reconstruction and DevelopmentEuropean Commission

Fédération des Experts Comptables EuropéensFinancial Stability Forum

Inter-American Accounting AssociationInter-American Development Bank

International Accounting Standards CommitteeInternational Association for Accounting Education and Research

International Association of Financial Executives InstitutesInternational Association of Insurance Supervisors

International Chamber of CommerceInternational Corporate Governance Network

International Federation of AccountantsInternational Monetary Fund

International Organization of Securities CommissionsInternational Organization of Supreme Audit Institutions

KPMGOrganization for Economic Cooperation and Development

PricewaterhouseCoopersUnited Nations Conference on Trade and Development

United Nations Development ProgrammeUS Agency for International Development

World Bank

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