International Federation of Accountants

International Federation of AccountantsInternational Federation of AccountantsGlobal Regulatory Developments

in the

Financial Reporting Supply Chain

by Charles Tilley

Financial Turmoil 2001Financial Turmoil 2001

• Led to IFAC reports to restore credibility, improve Led to IFAC reports to restore credibility, improve governance, achieve convergence & further develop governance, achieve convergence & further develop the financial reporting supply chainthe financial reporting supply chain

• Recommendations emphasize importance of: Recommendations emphasize importance of: – Tone-at-the-topTone-at-the-top– Board & auditor independenceBoard & auditor independence– Risk & control systemsRisk & control systems– Balance between compliance & performanceBalance between compliance & performance– Aligned remunerationAligned remuneration– Transparent & reliable communicationTransparent & reliable communication– Convergence to principles-based global standardsConvergence to principles-based global standards

FRSC GLOBAL DEVELOPMENTS

Global Temperature CGlobal Temperature Check on Progress & Follow-upheck on Progress & Follow-up• Responses from 74 IFAC member bodies from 58 Responses from 74 IFAC member bodies from 58

countries:countries:

• Albania, Armenia, Australia, Austria, Azerbaijan, Bangladesh, Albania, Armenia, Australia, Austria, Azerbaijan, Bangladesh, Botswana, Brazil, Bulgaria, Canada, China, Cyprus, Czech Botswana, Brazil, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Finland, Germany, Hong Kong, Republic, Denmark, Egypt, Finland, Germany, Hong Kong, India, India, Ireland, Israel, Japan, Jordan, Kenya, Kosovo, Ireland, Israel, Japan, Jordan, Kenya, Kosovo, Lesotho, Lesotho, Lithuania, Malawi, Malaysia, Malta, Mexico, Mongolia, Lithuania, Malawi, Malaysia, Malta, Mexico, Mongolia, Netherlands, Nicaragua, Pakistan, Philippines, Poland, Netherlands, Nicaragua, Pakistan, Philippines, Poland, Republic of Korea, Romania, Russian Federation, Saudi Republic of Korea, Romania, Russian Federation, Saudi Arabia, Singapore, Slovakia, Slovenia, South Africa, Spain, Arabia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Switzerland, Tanzania, Tunisia, Turkey, Uganda, Sri Lanka, Switzerland, Tanzania, Tunisia, Turkey, Uganda, Ukraine, United Kingdom, United States of America, Ukraine, United Kingdom, United States of America, Uruguay, Uzbekistan & VietnamUruguay, Uzbekistan & Vietnam


Global Temperature CheckGlobal Temperature Check

Four topic areas:Four topic areas:

1.1. Corporate GovernanceCorporate Governance

2.2. Financial Reporting ProcessFinancial Reporting Process

3.3. Audit of Financial ReportsAudit of Financial Reports

4.4. Usefulness of Financial ReportsUsefulness of Financial Reports









Major Positive Major Positive GovernanceGovernance Developments: Developments:

• New or revised & updated codes of governanceNew or revised & updated codes of governance

Major Negative Major Negative GovernanceGovernance Developments: Developments:

• No major negative regulatory governance No major negative regulatory governance developments in many countriesdevelopments in many countries

• Issues with application of governance conceptsIssues with application of governance concepts

• Issues as identified in previous IFAC reportsIssues as identified in previous IFAC reports

Institute Actions on Institute Actions on GovernanceGovernance::

• Thought leadership, education & awarenessThought leadership, education & awareness


Progress on Progress on GovernanceGovernance Issues IssuesFRSC GLOBAL DEVELOPMENTS

Follow-up on Follow-up on GovernanceGovernance Recommendations Recommendations


Other Remaining Other Remaining GovernanceGovernance Issues: Issues:

• Risk focus too narrowRisk focus too narrow

• Little integration of governance into overarching Little integration of governance into overarching business modelbusiness model

• Lack of safe harbor protectionLack of safe harbor protection

• Need for more governance in public sectorNeed for more governance in public sector

GovernanceGovernance Opportunities for IFAC & Member Bodies: Opportunities for IFAC & Member Bodies:

• Collaboration to further develop, bring together & Collaboration to further develop, bring together & disseminate governance guidancedisseminate governance guidance









Major Positive Major Positive ReportingReporting Developments: Developments:

• Adaption of /convergence to IFRSAdaption of /convergence to IFRS

Major Negative Major Negative ReportingReporting Developments: Developments:

• Implementation is an issue; need for guidanceImplementation is an issue; need for guidance

• Risk on increasing rules and prescriptionRisk on increasing rules and prescription

• Continued focus mainly on historical reporting modelContinued focus mainly on historical reporting model

Institute Actions on Institute Actions on ReportingReporting::

• Commenting on standards;Commenting on standards;

• Providing guidance & training for preparersProviding guidance & training for preparers


Progress on Progress on ReportingReporting Issues Issues


Follow-up on Follow-up on ReportingReporting Recommendations Recommendations


Other Remaining Other Remaining ReportingReporting Issues: Issues:

• Lack of safe harbor protection for companies that make Lack of safe harbor protection for companies that make a “good faith” effort to report relevant infoa “good faith” effort to report relevant info

• Suitable reporting standards for SMEs & other entitiesSuitable reporting standards for SMEs & other entities

• (Also) Principles versus rules(Also) Principles versus rules

• (Also) Fair value accounting and cash flow(Also) Fair value accounting and cash flow

ReportingReporting Opportunities for IFAC & Member Bodies : Opportunities for IFAC & Member Bodies :

• Case studies of companies with high quality, business Case studies of companies with high quality, business oriented reporting in current economic downturnoriented reporting in current economic downturn

• Guidance on business reporting requirementsGuidance on business reporting requirements

• Guidance on audit process for preparersGuidance on audit process for preparers









Major Positive Major Positive AuditingAuditing Developments: Developments:

• Convergence to International Auditing StandardsConvergence to International Auditing Standards

• Emphasis on quality assurance & oversightEmphasis on quality assurance & oversight

• Guidance on SME audits & liability reformsGuidance on SME audits & liability reforms

Major Negative Auditing Developments:Major Negative Auditing Developments:

• Overregulation & move away from self regulationOverregulation & move away from self regulation

• Increased complexity & length of auditing standardsIncreased complexity & length of auditing standards

Institute Actions on Institute Actions on AuditingAuditing::

• Translation and adaption to (clarified) ISAsTranslation and adaption to (clarified) ISAs

• Providing training in ethics & auditing, especially for Providing training in ethics & auditing, especially for SMPs; quality control reviews; liability reformsSMPs; quality control reviews; liability reforms


Progress on Progress on AuditingAuditing Issues Issues


Follow-up on Follow-up on AuditingAuditing Recommendations Recommendations


Other Remaining Other Remaining AuditingAuditing Issues: Issues:

• Challenges for SMPs to keep up-to-dateChallenges for SMPs to keep up-to-date

• Little understanding of benefits of auditLittle understanding of benefits of audit

• (Also) Auditing in today’s turbulent environment(Also) Auditing in today’s turbulent environment

• (Also) Litigation risks around audit of fair values(Also) Litigation risks around audit of fair values

AuditingAuditing Opportunities for IFAC & Member Bodies: Opportunities for IFAC & Member Bodies:

• Further improve convergenceFurther improve convergence

• Share best practices in ethics and auditingShare best practices in ethics and auditing

• Provide additional guidance for SMEsProvide additional guidance for SMEs









Major Positive Major Positive UsefulnessUsefulness Developments: Developments:

• Easier access to financial information; XBRL progressEasier access to financial information; XBRL progress

• More engaged stakeholders & more narrative infoMore engaged stakeholders & more narrative info

• Focus on reporting & assurance due to credit crunchFocus on reporting & assurance due to credit crunch

Major Negative Major Negative UsefulnessUsefulness Developments: Developments:

• More extensive but less reader-friendly & useable More extensive but less reader-friendly & useable financial statementsfinancial statements

• Fair value in illiquid markets is a challengeFair value in illiquid markets is a challenge

Institute Actions on Institute Actions on UsefulnessUsefulness::

• Training & awareness; leadership in standard setting; Training & awareness; leadership in standard setting; providing feedback to regulators; reporting awards providing feedback to regulators; reporting awards


Progress on Progress on UsefulnessUsefulness Issues Issues


Follow-up on Follow-up on UsefulnessUsefulness Recommendations Recommendations


Other Remaining Other Remaining UsefulnessUsefulness Issues: Issues:

• Insufficient reporting of non-financial indicators, risks Insufficient reporting of non-financial indicators, risks & sustainability& sustainability

• Unclear link between reporting & strategy of companyUnclear link between reporting & strategy of company

• Use of fair valueUse of fair value

UsefulnessUsefulness opportunities for IFAC & Member Bodies : opportunities for IFAC & Member Bodies :

• Reduce complexity & increase meaningful narrative Reduce complexity & increase meaningful narrative reportingreporting

• Provide leadership, guidance & training in IFRS, Provide leadership, guidance & training in IFRS, XBRL, SME accounting, sustainability reporting etc. XBRL, SME accounting, sustainability reporting etc.

• Develop public sector financial reporting framework Develop public sector financial reporting framework


Overall conclusions from surveyOverall conclusions from survey

• Regulatory progress in many areas of governance, Regulatory progress in many areas of governance, reporting, auditing & usefulness of financial reportsreporting, auditing & usefulness of financial reports

• Many institute actions in areas of governance, Many institute actions in areas of governance, reporting, auditing & usefulness of financial reportsreporting, auditing & usefulness of financial reports

• Remaining issues provide opportunities for IFAC and Remaining issues provide opportunities for IFAC and Member Bodies for further actionMember Bodies for further action


Financial Turmoil 2008Financial Turmoil 2008

• Crisis initially started in USA financial sector, but Crisis initially started in USA financial sector, but spread throughout global economyspread throughout global economy

• Naïve to think that crisis will not be followed by loud Naïve to think that crisis will not be followed by loud calls for more regulationcalls for more regulation

• However, we just saw regulatory progress in many However, we just saw regulatory progress in many areas of governance, reporting, auditing & usefulness areas of governance, reporting, auditing & usefulness of financial reportsof financial reports

• What next?What next?


What next? What next?

• BetterBetter application of already existing regulation and application of already existing regulation and previous recommendations to overcome current crisis:previous recommendations to overcome current crisis:

– Tone-at-the-topTone-at-the-top

– Board & auditor independenceBoard & auditor independence

– Risk & control systemsRisk & control systems

– Balance between compliance & performanceBalance between compliance & performance

– Aligned remunerationAligned remuneration

– Transparent & reliable communicationTransparent & reliable communication

– Convergence to principles-based global standardsConvergence to principles-based global standards


What next? (2)What next? (2)

• Better oversightBetter oversight

• And, if necessary, not And, if necessary, not moremore but but improvedimproved regulation: regulation:

– Based on robust evaluation of what went wrongBased on robust evaluation of what went wrong

– Proportionate to issues it is addressingProportionate to issues it is addressing

– Principles over rulesPrinciples over rules

– Cost-benefit justificationCost-benefit justification


What next? (3)What next? (3)

• Important issues to address:Important issues to address:

– Boards have to take more responsibility for Boards have to take more responsibility for company’s actionscompany’s actions

– Expanded risk management beyond internal control Expanded risk management beyond internal control over financial reportingover financial reporting

– Adequate attention to strategic oversight and Adequate attention to strategic oversight and managing value at riskmanaging value at risk

– Remuneration better linked to implementation of Remuneration better linked to implementation of strategy & risk, and creation of sustainable valuestrategy & risk, and creation of sustainable value

– Better, more useful business reportingBetter, more useful business reporting


Next steps for this project:Next steps for this project:

• Report on global regulatory developments affecting Report on global regulatory developments affecting financial reportingfinancial reporting

• Interview series with investors, preparers, auditors & Interview series with investors, preparers, auditors & regulators on the right things to do to make business regulators on the right things to do to make business reporting more usefulreporting more useful

• International Good Practice Guidance on evaluating & International Good Practice Guidance on evaluating & improving business reporting in organizationsimproving business reporting in organizations


International Federation of AccountantsInternational Federation of Accountants

www.ifac.orgwww.ifac.org

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International Federation of Accountants