International Federation of Accountants

International Federation of AccountantsInternational Federation of AccountantsExternal Auditing Structure and Standards

Alta Prinsloo, Senior Technical Manager, IAASB

May 5, 2005

AgendaAgenda• Credibility in financial reportingCredibility in financial reporting• Role of IFAC and its reformsRole of IFAC and its reforms• Role of the IAASBRole of the IAASB• International convergenceInternational convergence• Ethics Ethics • ConclusionConclusion

EXTERNAL AUDITING

Restoring Credibility in Financial ReportingRestoring Credibility in Financial Reporting

• Critical to development of capital marketsCritical to development of capital markets• Requires a multi-faceted solutionRequires a multi-faceted solution

– By all those involved in the financial reporting processBy all those involved in the financial reporting process– Focus on the public interestFocus on the public interest

CREDIBILITY

The Public InterestThe Public Interest• Corporate sectorCorporate sector

– Decisions affect groups and individuals well beyond Decisions affect groups and individuals well beyond traditional stakeholderstraditional stakeholders

– Served by accountants creating wealthServed by accountants creating wealth• Public sectorPublic sector

– Practices applied by governments affect those that receive Practices applied by governments affect those that receive servicesservices

• At an international levelAt an international level– International standards affect national capital markets and International standards affect national capital markets and

service provision at national levelservice provision at national level

CREDIBILITY

AgendaAgenda• Credibility in financial reportingCredibility in financial reporting• Role of IFAC and its reformsRole of IFAC and its reforms• Role of the IAASBRole of the IAASB• International convergenceInternational convergence• Ethics Ethics • ConclusionConclusion

EXTERNAL AUDITING

MissionMission• 163 member bodies in 119 countries163 member bodies in 119 countries• Serious about its public interest responsibilitySerious about its public interest responsibility

– Embraced in its mission Embraced in its mission

ROLE OF IFAC

Mission (cont.)Mission (cont.)• To serve the public interest, IFAC will continue to To serve the public interest, IFAC will continue to

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

ROLE OF IFAC

IFAC Reforms – PIOB IFAC Reforms – PIOB • Public Interest Oversight Board (PIOB) formedPublic Interest Oversight Board (PIOB) formed

– To oversee international standard settingTo oversee international standard setting• Auditing, Ethics, EducationAuditing, Ethics, Education

– To oversee IFAC’s Member Body Compliance ProgramTo oversee IFAC’s Member Body Compliance Program• Eight individuals from seven countriesEight individuals from seven countries

ROLE OF IFAC

IFAC Reforms – HistoryIFAC Reforms – History• Meeting with international regulators in February 2003Meeting with international regulators in February 2003

– How to strengthen international standard-setting processesHow to strengthen international standard-setting processes– How to restore credibility in financial reportingHow to restore credibility in financial reporting

• Basel Committee, EC, FSF, IAIS, IOSCO and World Basel Committee, EC, FSF, IAIS, IOSCO and World BankBank

• Consulted with IFAC member bodies and other Consulted with IFAC member bodies and other interested partiesinterested parties

• Proposals for Reform approved in November 2003Proposals for Reform approved in November 2003

ROLE OF IFAC

IFAC Reforms – FocusIFAC Reforms – Focus• Strengthening standard-setting processes of IFAC Strengthening standard-setting processes of IFAC

PIACsPIACs– IAASB, Education Committee and Ethics CommitteeIAASB, Education Committee and Ethics Committee

• Enhancing transparency of those processesEnhancing transparency of those processes• Providing for public interest oversightProviding for public interest oversight

ROLE OF IFAC

IFAC Reforms – Key Role of PIOBIFAC Reforms – Key Role of PIOB• Evaluate due process of IFAC PIACs and report Evaluate due process of IFAC PIACs and report

publiclypublicly• Approve nomination processApprove nomination process• Approve appointment of chairs and members of Approve appointment of chairs and members of

IFAC PIACsIFAC PIACs• May recommend matters for inclusion in IFAC PIAC May recommend matters for inclusion in IFAC PIAC

work programwork program• May Observe at meetings during discussions May Observe at meetings during discussions

pertaining to IFAC PIACs pertaining to IFAC PIACs

ROLE OF IFAC

Public SectorPublic Sector• IFAC Public Sector Committee established in 1986IFAC Public Sector Committee established in 1986• Not ignored in reform process Not ignored in reform process

– External review commissioned in October 2003External review commissioned in October 2003– Report presented to IFAC Board in July 2004Report presented to IFAC Board in July 2004– Now International Public Sector Accounting Standards Now International Public Sector Accounting Standards

BoardBoard– Steps taken to increase public input in its standard-Steps taken to increase public input in its standard-

setting processessetting processes

ROLE OF IFAC

AgendaAgenda• Credibility in financial reportingCredibility in financial reporting• Role of IFAC and its reformsRole of IFAC and its reforms• Role of the IAASBRole of the IAASB• International convergenceInternational convergence• Ethics Ethics • ConclusionConclusion

EXTERNAL AUDITING

Objective of the IAASBObjective of the IAASB• To serve the public interest by setting, independently To serve the public interest by setting, independently

and under its own authority, high-quality standards and under its own authority, high-quality standards for quality control, auditing and other assurance, and for quality control, auditing and other assurance, and related services engagements, and by facilitating related services engagements, and by facilitating convergence with them. This enhances the quality convergence with them. This enhances the quality and uniformity of practice throughout the world, and and uniformity of practice throughout the world, and strengthens public confidence in the global auditing strengthens public confidence in the global auditing and assurance profession.and assurance profession.

ROLE OF THE IAASB

Composition of the IAASBComposition of the IAASB• Full-time chairman and 17 volunteer membersFull-time chairman and 17 volunteer members• Three public members (two of which are Auditors-Three public members (two of which are Auditors-

General)General)• Appointed by IFAC Board based on Appointed by IFAC Board based on

recommendations from IFAC Nominating recommendations from IFAC Nominating CommitteeCommittee

• Appointments approved by PIOBAppointments approved by PIOB• Meets four-five times per year Meets four-five times per year

ROLE OF THE IAASB

IAASB ReformsIAASB Reforms• Meetings are open to the publicMeetings are open to the public• Project histories, agenda papers and meeting summaries Project histories, agenda papers and meeting summaries

are posted on the websiteare posted on the website• Audio recordings of IAASB meetings are available on Audio recordings of IAASB meetings are available on

the websitethe website• Exposure drafts and comment letters are posted on the Exposure drafts and comment letters are posted on the

websitewebsite• Full-time chairman has been appointed and technical Full-time chairman has been appointed and technical

staff have been increasedstaff have been increased• Due process has been reviewedDue process has been reviewed

ROLE OF THE IAASB

Public Interest InputPublic Interest Input• Public membersPublic members• Consultative Advisory GroupConsultative Advisory Group

– Appointed independent chairAppointed independent chair– Recently revised membership and scope of activitiesRecently revised membership and scope of activities– Provides input on IAASB work program, priorities, and Provides input on IAASB work program, priorities, and

technical issuestechnical issues– INTOSAI is a member of CAGINTOSAI is a member of CAG

• ObserversObservers– US PCAOB and Japanese Financial Services AgencyUS PCAOB and Japanese Financial Services Agency

ROLE OF THE IAASB

Other StakeholdersOther Stakeholders• Annually meets with national standard settersAnnually meets with national standard setters• Maintains an ongoing dialogue with the ECMaintains an ongoing dialogue with the EC• Participates in meetings of:Participates in meetings of:

– IOSCO’s Standing Committee No. 1IOSCO’s Standing Committee No. 1– US PCAOB Standing Advisory CommitteeUS PCAOB Standing Advisory Committee– Basel Committee Basel Committee

ROLE OF THE IAASB

New ISAs Relevant to the Public InterestNew ISAs Relevant to the Public Interest• New and revised quality control standardsNew and revised quality control standards

– ISQC 1ISQC 1• Quality control at firm levelQuality control at firm level

– ISA 220 (Revised)ISA 220 (Revised)• Quality control at audit engagement levelQuality control at audit engagement level

– Reflects the IAASB’s commitment to improve the Reflects the IAASB’s commitment to improve the quality of auditor performancequality of auditor performance

ROLE OF THE IAASB

New ISAs Relevant to the Public Interest New ISAs Relevant to the Public Interest (cont.)(cont.)• Revised fraud standardRevised fraud standard

– Builds on new audit risk standardsBuilds on new audit risk standards– Requires auditors to:Requires auditors to:

• Focus on areas of risk of material misstatementFocus on areas of risk of material misstatement• Design and perform audit procedures responsive to identified Design and perform audit procedures responsive to identified

risksrisks– Will result in increased workWill result in increased work

ROLE OF THE IAASB

The Road AheadThe Road Ahead• Focus on issues that build confidence in the audit of Focus on issues that build confidence in the audit of

financial statementsfinancial statements• Be responsive to needs of those with an interest in Be responsive to needs of those with an interest in

financial reportingfinancial reporting• Complete implementation of reformsComplete implementation of reforms• Consider process for interpretive guidanceConsider process for interpretive guidance• Strengthen and maintain stakeholder relationshipsStrengthen and maintain stakeholder relationships• Consider other assurance projectsConsider other assurance projects• Consider needs of SMEs and SMPsConsider needs of SMEs and SMPs

ROLE OF THE IAASB

AgendaAgenda• Credibility in financial reportingCredibility in financial reporting• Role of IFAC and its reformsRole of IFAC and its reforms• Role of the IAASBRole of the IAASB• International convergenceInternational convergence• Ethics Ethics • ConclusionConclusion

EXTERNAL AUDITING

Support Support • IFACIFAC

– Statements of Membership ObligationsStatements of Membership Obligations• Financial Stability ForumFinancial Stability Forum

– 12 Key Standards for Sound Financial Systems12 Key Standards for Sound Financial Systems• Credibility Task ForceCredibility Task Force

– Recommendation in report on Rebuilding Public Confidence Recommendation in report on Rebuilding Public Confidence in Financial Reporting – An International Perspectivein Financial Reporting – An International Perspective

• INTOSAIINTOSAI– Guidelines for Financial Audit to be based on ISAsGuidelines for Financial Audit to be based on ISAs

CONVERGENCE

ChallengesChallenges• ““Wong Report”Wong Report”

– Understanding meaning of international convergenceUnderstanding meaning of international convergence– Translation of international standardsTranslation of international standards– Complexity and structure of international standardsComplexity and structure of international standards– Frequency, volume and complexity of changes to Frequency, volume and complexity of changes to

international standardsinternational standards– Challenges for SMEs and SMPsChallenges for SMEs and SMPs– Potential knowledge shortfallPotential knowledge shortfall– Implication of endorsement of IFRSsImplication of endorsement of IFRSs

CONVERGENCE

RecommendationsRecommendations• All participants in financial reporting process have a All participants in financial reporting process have a

role to playrole to play• IFAC and IAASB initiativesIFAC and IAASB initiatives

– Developing the concept of international convergenceDeveloping the concept of international convergence– Translations and availability of pronouncementsTranslations and availability of pronouncements– IFAC Member Body Compliance ProgramIFAC Member Body Compliance Program– IAASB clarity projectIAASB clarity project– Addressing the needs of SMEs and SMPsAddressing the needs of SMEs and SMPs

CONVERGENCE

Public SectorPublic Sector• IAASB / INTOSAI ASC Memorandum of IAASB / INTOSAI ASC Memorandum of

Understanding signed in 2004Understanding signed in 2004• Enables INTOSAI ASC to use ISAs as basis for Enables INTOSAI ASC to use ISAs as basis for

Guidelines for Financial AuditGuidelines for Financial Audit• Enables IAASB to obtain public sector expert input Enables IAASB to obtain public sector expert input

in standardsin standards• INTOSAI ASC nominees participate in IAASB task INTOSAI ASC nominees participate in IAASB task

forcesforces– Contribute public sector perspectiveContribute public sector perspective

CONVERGENCE

AgendaAgenda• Credibility in financial reportingCredibility in financial reporting• Role of IFAC and its reformsRole of IFAC and its reforms• Role of the IAASBRole of the IAASB• International convergenceInternational convergence• EthicsEthics • ConclusionConclusion

EXTERNAL AUDITING

High Ethical StandardsHigh Ethical Standards• Accountancy profession is built on public’s trustAccountancy profession is built on public’s trust• Requires commitment to:Requires commitment to:

– High ethical standardsHigh ethical standards– IntegrityIntegrity

• Requires effective codes of conduct for all Requires effective codes of conduct for all participants in financial reporting processparticipants in financial reporting process

• IFAC Code of Ethics for Professional AccountantsIFAC Code of Ethics for Professional Accountants– Specific public-sector related issues are being Specific public-sector related issues are being

considered by IFAC’s Ethics Committeeconsidered by IFAC’s Ethics Committee

ETHICS

AgendaAgenda• Credibility in financial reportingCredibility in financial reporting• Role of IFAC and its reformsRole of IFAC and its reforms• Role of the IAASBRole of the IAASB• International convergenceInternational convergence• Ethics Ethics • ConclusionConclusion

EXTERNAL AUDITING

ConclusionConclusion• ““Cooperation is the cornerstone of development and Cooperation is the cornerstone of development and

common well-being in the world.”common well-being in the world.”– Budapest Accords – 2004 INCOSAIBudapest Accords – 2004 INCOSAI

• ““Working with other external accountability partners Working with other external accountability partners to establish standards and guidelines produce mutual to establish standards and guidelines produce mutual benefits.”benefits.”– INTOSAI Strategic Plan 2005-2010INTOSAI Strategic Plan 2005-2010

• IFAC and IAASB will continue their cooperative IFAC and IAASB will continue their cooperative approach approach

EXTERNAL AUDITING

International Federation of AccountantsInternational Federation of Accountants