ASEM IFRS Seminar Implementation of IFRS – A World Bank Perspective Shanghai, 25-26 March 2006...
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Transcript of ASEM IFRS Seminar Implementation of IFRS – A World Bank Perspective Shanghai, 25-26 March 2006...
ASEM IFRS Seminar
Implementation of IFRS – A World Bank Perspective
Shanghai, 25-26 March 2006
John HegartyManager, Financial ManagementEurope and Central Asia Region
THE WORLD BANK
The World Bank – Our Role
Introduction
Making the link between financial reporting and poverty reductionAdvocate for improved standards and complianceContributor to the policy formulation processAssessorAdvisorFinancierFiduciary reliance on external audit / use of accountants and auditors to support Bank operations
…but not a standard-setter or regulator
Background:
The Need for a Strengthened International Financial Architecture1990s – Emerging Market Crises and contagion effects
East Asia (Thailand)
Philippines
Malaysia
Hong Kong
Indonesia
Taiwan
South Korea
Background:
The Need for a Strengthened International Financial Architecture
Shift from ex-post crisis resolution
Ex-ante crisis prevention
Background:
Origins of the ROSC program
The G-22 Reports: focus on crisis prevention
- Transparency and Accountability (Led to ROSC program)
- Strengthening National Financial Systems
- Government guarantees to the private sector
Accounting and Auditing: A fundamental pillar
Securities Regulation
Banking Supervision
Accounting & Auditing
Corporate Governance
Insurance Supervision
Insolvency & Creditor Rights
Introduction
Importance of High Quality Accounting and Auditing
Accounting and
Auditing
Development of Capital Markets
Job Creation
Financial Stability
Private Sector Growth
Financial Sector Development
Improved Access to Credit
Financial Information
ECONOMIC GROWTH
Introduction
Economic Goals
- Development of capital markets
- Access to credit, particularly for SMEs
- Development of the private sector
- Evaluate corporate prospects, make informed investment and voting decisions
- Assess management performance, thus influencing its behavior
Promote: Avoid:
Introduction
A&A ROSC: Assessing the Quality of the A&A Framework
Economic Context
Legal & Institutional Framework
Accounting in Practice
Auditing in Practice
RecommendationsFINDINGS
Factu
al A
ssessm
en
t
Perc
ep
tion
s
Accounting and Auditing ROSC Program
A&A ROSC: Assessing the Quality of the A&A Framework
Benchmarks:
International Financial Reporting Standards
International Standardson Auditing
Acquis communautaire Good international practice
Accounting and Auditing ROSC Program
What does it mean to “adopt international standards”?
The Lessons Learned
Introduction of “modern” accounting and auditing practicesOne-off “transformations” of financial statements prepared using national standardsDevelopment of national standards “based on” (a selected subset of) IFRS/IAS and ISAOne-time-only adoption of international standards with no, or poor, subsequent updatingProgram of “convergence” between national and international standards over timeUnderestimation of practical implementation challengesIASB and IFAC promotional material not always helpfulDoesn’t compliance mean “all or nothing”?
Mechanisms to grant national authority to international standards
The Lessons Learned
Without force of law/regulation, “international” standards become “offshore” standardsConstraints on granting national public authority to international private standardsBacking for the standard-setting process or for individual standards, keeping up to dateTranslation, copyright/royalties, gazettingRole of legislation -v- standardsCompany law or securities regulation as the legal basis for accounting and auditing requirementsExample of EU IAS Regulation / endorsement mechanism
Linkages between general purpose and regulatory reporting
The Lessons Learned
Policy objectives of international standards and national regulatory reporting regimes not always alignedRegulatory reporting includes that for taxation and company law purposesRisk of conflicts when international standards adopted through regulatory reporting mechanismsHowever, specialist regulatory bodies can play a major and positive role in oversight/monitoring/enforcementAvoid completely parallel systems, encourage adoption of a common general purpose reporting platform, keep reconciling items to a minimum, and harness the oversight/monitoring/enforcement capacity of regulatorsIs the IASB sufficiently attentive to regulatory concerns?
IAS/IFRS: Current Challenges (1/2)
Guiding principles
- Independent standard
setting
- Principle based standards
- Thorough due process
Prioritization
Relevance &reliabilityConvergence
Quality
Resourceconstraints
Existing guidance
What is convergence?- Old approach was “harmonization”
- National standard-setters work with the IASB
- Convergence with the FASB
Accounting Regulation - International Dimension
IAS/IFRS: Current Challenges (2/2)
Barriers on the road to harmony: serious issues or “teething problem?”
Accounting agenda driven by the U.S. model (accounting framework)?U.S.: Financial statements present “value” information for the marketEurope/U.K.: Reporting on stewardship by directors is an important aspect
Fair value potentially misleading (e.g., UPM Kymmene)?Pine and spruce assets to be fair valued using a discounted cash flow methodology with assumptions stretched over the 70-year life of a tree.
Fair value discretion and variation (subjective modelling)?Clarity of communication lost in complexity?
Trillions of dollars of unaccounted for derivatives now on the booksPension deficits once buried in the footnotes now on the booksShare-based compensation not previously recognized as a cost…Stop “games” on provisioning (e.g., on acquisitions and big-bath provisions)
The other side of the coin…
Accounting Regulation - International Dimension
Scope of application of international standards
The Lessons Learned
Severe risks to the culture of compliance when the scope of application is inappropriate IFRS/IAS not suitable for use by all enterprisesWidespread general purpose reporting obligations for enterprises other than “public interest entities”Managing the “Big GAAP / Little GAAP” distinctionFuture of (“Little GAAP Only”) national standard settersISAs suitable for all auditsRisks of an excessively broad statutory audit requirementAddressing gaps/weaknesses in international standardsPrinciples-based standards -v- rules-based enforcement
The enabling environment
The Lessons Learned
Market demand for international standardsThe role of disclosure in governance and regulatory regimes
Public access to audited financial statements
Patterns of financial intermediation and enterprise ownership
Significance of foreign direct and foreign portfolio investment
The political economy costs and benefits of transparency
Capacity to complyEducation, training and experience
Reaching a critical mass of demand for relevant skills
Financial sustainability of capacity development mechanisms
Leveraging resources on an international scale
Oversight, monitoring, enforcement
The Lessons Learned
The inability of third party users to observe complianceReliance on reputational agents; limits of self-regulationDetermining role of oversight/monitoring/regulatory bodiesAbsence of agreed international best practice modelsLack of appropriate mandates, resources, methodologiesLack of leverage when specialist regulators are not concerned with general purpose financial reportingPrinciples-based standards -v- rules-based enforcementProblems of regulatory capture, effectiveness of judicial systems, macro-governanceInternational audit firm networks do not deliver consistently high quality internationally, and thus cannot be relied upon to compensate for weaknesses in national regulatory regimes
Filling the regulatory gap
The Lessons Learned
The need for international consensus on a comprehensive framework of principles for the regulation of accounting and auditing
IFRS/IAS and ISA are not a complete framework
Making explicit the implicit assumptions about legal, institutional and policy preconditions which underlie international standards
Enhancing cooperation and consistency between regulators, both nationally and across borders
National/regional models are not necessarily replicable internationally
Building on the linkages with other standards and codes
Trade and competition policy considerations
Global monitoring of progress
Importance of the financial reporting infrastructure not just accounting and auditing standards
Statutory Framework
Monitoring & Enforcement
Education & Training
Accounting Profession &
Ethics
Accounting Standards
Auditing Standards
Financial Reporting Infrastructure
All supporting pillars need to be strengthened
Statutory Framework
Monitoring & Enforcement
Education & Training
Accounting Profession &
Ethics
Accounting Standards
Auditing Standards
Financial Reporting Infrastructure
From Diagnostic to Reform
From ROSC to Reform
CountryStrategy andAction Plan (CAP)
Support funding the CAP, mobilizing financial support from Bank and development partners. For example:
GDLN Program in Accounting and Audit Regulation for EU8 (12 modules)
Road to Europe – Program of Accounting Reform and Institutional Strengthening, including:
GDLN Program in Accounting and Audit Regulation for South East Europe (28 modules, 14 locations, 8 languages)
Vienna Workshop on Accounting and Audit Regulation (March 14 and 15, 2006)
CountryActionPlan
Critical Success Factor: Integration with other areas of regulation / standards and codes