Implementation of International Accounting and Auditing Standards by yBw1rt


									The Regulatory Framework
for Accounting and Auditing
   Lessons learned from the
  World Bank’s ROSC Program
                 John Hegarty
       Manager – Financial Management
Europe and Central Asia Region – The World Bank
              Baku, 17 May 2005
Financial Reporting and the World Bank
 Strengthen financial architecture, and reduce the risk of
  financial market crises and their associated negative
  economic impacts (especially on the poor)
 Improve the investment climate (foreign direct and portfolio
  investment, mobilization of domestic savings)
 Facilitate financial intermediation by lowering the barrier of
  high information and borrowing costs
 Allow investors to evaluate corporate prospects and make
  informed investment and voting decisions, leading to a lower
  cost of capital and better allocation of resources
 Enhance corporate income tax collection
 Support economic integration, both regionally and globally
Accounting and Auditing ROSCs
 Reports on the Observance of Standards and Codes
 Part of World Bank / IMF work on the international financial
  architecture, international standards initiative, Financial
  Sector Assessment Program (FSAP)
 IFRS/IAS and ISA used as the assessment benchmarks
 Assessments cover national institutional frameworks for
  accounting and auditing, comparability of national and
  international standards, compliance with national standards
 38 accounting and auditing ROSCs completed by 30 June,
  2004, confined to “Part II” countries
What does it mean to “adopt
international standards”?
 Introduction of “modern” accounting and auditing practices
 One-off “transformations” of financial statements prepared
  using national standards
 Development of national standards “based on” IFRS/IAS
  and ISA
 One-time-only adoption of international standards with no,
  or poor, subsequent updating
 Adoption of selected subset of international standards
 Program of “convergence” between national and
  international standards over time
 IASB and IFAC promotional material not always helpful
 Doesn’t compliance mean “all or nothing”?
Mechanisms to grant national
authority to international standards
 Without force of law/regulation, “international” standards
  become “offshore” standards
 Constraints on granting national public authority to
  international private standards
 Backing for the standard-setting process or for individual
  standards, keeping up to date
 Translation, copyright/royalties, gazetting
 Role of legislation -v- standards
 Company law or securities regulation as the legal basis for
  accounting and auditing requirements
Linkages between general purpose
and regulatory reporting (incl. tax)
 Policy objectives of international standards and national
  regulatory reporting regimes not always aligned
 Risk of conflicts when international standards adopted
  through regulatory reporting mechanisms
 However, specialist regulatory bodies can play a major
  and positive role in oversight/monitoring/enforcement
 Avoid 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 regulators
Scope of application of international
 Severe risks to the culture of compliance when the scope of
  application is inappropriate
 IFRS/IAS not suitable for use by all enterprises
 Widespread general purpose reporting obligations for
  enterprises other than “public interest entities”
 Managing the “Big GAAP / Little GAAP” distinction
 Future of (“Little GAAP Only”) national standard setters
 ISAs suitable for all audits (or is a non-ISA audit an audit?)
 Risks of an excessively broad statutory audit requirement
 Addressing gaps/weaknesses in international standards
 Linking the application of IFRS and ISA
The enabling environment
Market demand for international standards
   The 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 comply
   Education, 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 inability of third party users to observe compliance
 Reliance on reputational agents; limits of self-regulation
 Determining role of oversight/monitoring/regulatory bodies
 Absence of agreed international best practice models
 Lack of appropriate mandates, resources, methodologies
 Lack of leverage when specialist regulators are not
  concerned with general purpose financial reporting
 Problems of regulatory capture, effectiveness of judicial
  systems, macro-governance
 International audit firm networks do not deliver
  consistently high quality internationally, and thus cannot
  be relied upon to compensate for weaknesses in national
  regulatory regimes
Getting the legal, institutional and
policy preconditions right
 Clarity required as to what “adoption” means
 Proper balance of capacity and institutionalized incentives
  needed to ensure successful implementation
 Effective legislative and regulatory mechanisms must be in
  place to grant national authority to international standards,
  and to oversee/monitor/enforce compliance
 Scope of application of international standards should be
 International audit firm networks cannot compensate for
  national regulatory weaknesses
 IFRS/IAS and ISA do not constitute a comprehensive
  framework of principles to regulate accounting and auditing
 Work needed to fill the framework gaps, monitor progress
The Regulatory Framework
for Accounting and Auditing
   Lessons learned from the
  World Bank’s ROSC Program

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