The Agony (of large changes and new complexities) and the Ecstasy (of worldwide standards and better figures)
David Damant
Editor’s Note: This article was extracted from a longer paper by Mr. Damant, published in the Journal of Asset Management, giving extensive history and background information about the development, current status, and future prospects of IAS. It also discusses the new structure of the International Accounting Standards Committee (IASC). As readers of Accounting Report are aware of many of the details given in this article, they have been condensed and the primary focus is on current issues and future prospects. Readers who would like to have a copy of the entire article may request it from ICAR (telephone/email/fax).
Financial Statements: One set of accounting standards for the world
The developments in the world of accounting in the last two years have been dramatic and the content of financial statements is about to change radically – and in all countries. These developments have two elements:
A change in the structure for setting accounting standards – the IASC had been essentially representative, with appointment of members based on informal geographic considerations to represent countries and regions and some functional sectors. Now the members will be representative of IAS stakeholder groups, regardless of geography, and appointed on the basis of individual qualifications – such as high technical competence, recognized leaders in standards-setting, independent (remuneration from and allegiance to IASC), and having the ability to work with others.
A change in the nature and objectives of the accounting standards – which in many countries have focused on enterprises’ internal users, banks that furnished credit and equity capital, tax authorities, etc. Even in the areas of «Anglo-Saxon» influence, reliance on historical cost and attempts to differentiate between kinds of balance-sheet and income statement items (current/non-current, ordinary/extraordinary, etc.) have not enabled the users to take the best economic decisions. This resulted in costs and inefficiencies. Now the focus will be on transparency and economic reality (fair value), with users making their economic decisions on a discounted cash flow basis. The concept of «comprehensive income» will replace past distinctions, including those between «income» and «reserves.»
At the moment, the difficulty is that, although the principles have been around for some time, there is no set of national accounting standards in the world that has fully implemented the consequences of IAS. This not only impairs the value of financial information in particular countries, but also means that none can be readily compared across the world.
The good news is that there has been significant movement in the right direction, and there is the prospect of a lot more movement in the near future. Actions by the EC and regulators in major countries such as the US, UK, and Japan, all point to a convergence of accounting standards and elimination of most national differences within the next five years.
Impact on Investment Houses and Other Users of Financial Information
Investment houses and their customers can get better information on which to compare investment opportunities. Enterprise management and directors also will have better bases on which to choose strategies, allocate resources, and take major decisions involving potential mergers, acquisitions, and IPOs. But for both external and internal purposes users of financial information will need to redesign their global stock selection and tactical asset allocation models. They will also need to redefine and standardize economic ratios and comparison methods.
Cross-border differences in both the standards on which financial information is based and in its presentation formats must also disappear. It is clear that any country or region that does not join this convergence of standards to IAS and movement to global uniformity will be left far behind.
Conclusion
The developments now in train, as summarized herein, are a very large step forward in the resolution of two problems: first, that of non-comparability of accounting information across countries and secondly, the need to improve the quality of accounting so that it provides the needed transparency and economic reality. The implications for asset management are substantial, both at the modeling level (with accelerating trends toward global and regional models) and the comparability of data bases of financial information.
For a time, the past and the present will not be comparable, because of the dramatic changes in accounting standards and the development of more sophisticated methodologies. With proper planning and action now, however, within five years both judgmental and quantitative work will be able to progress to a higher level of efficiency.
David Damant is a member of the IAS Standards Advisory Council. He is a former IASC Member, and a past President of the European Federation of Financial Analysts Societies. He is a Senior Advisor to ICAR.
IIA Issues Revised Internal Auditing Standards; Moscow IIA Chapter Publishes Russian Translation he Institute of Internal Auditors (IIA) concluded several years ago that, due to the revolutionary changes that were occurring in audit practices and techniques, as well as increased needs of shareholders, boards of directors, and other stakeholders, a comprehensive revision of internal auditing standards should be undertaken. This revision was done in several major steps:
- An extensive research project was undertaken, in part to identify a common body of knowledge and internal auditor competencies throughout the world. Needs and expectations of all of the «customers» of internal auditing, the likely future roles of internal auditors, and the best ways the profession can add value, were also taken into account.
- A «guidance task force», made up of audit professionals representative of the IIA’s world-wide membership, was assembled to establish a new standards framework, including the code of ethics.
- Based on that framework, the IIA’s Standards Board and its Professional Issues Committee developed the revised standards and code of ethics, which were then sent out in exposure draft form to the IIA’s membership and other interested professionals.
- Earlier this year, the IIA issued the new Code of Ethics and Standards for the Professional Practice of Internal Auditing (Standards). The Standards were also reformatted to group them into Attribute, Performance, and Implementation Standards and to separate the essential/mandatory concepts and principles from the next level of guidance, called «Practice Advisories» (techniques and processes recommended, and considered as best practices, but not mandatory).
With respect to basic attributes, such as independence, objectivity, proficiency, and due professional care, the substance of many of the Standards did not change significantly. Other elements, such as scope of work, risk assessment, planning, and quality assurance, did change considerably. In particular, internal auditing roles, much broader than the traditional assurance functions, were specified. These include internal consulting services focused on strengthening enterprise risk management (not just looking at audit risk); improving an enterprise’s business processes; fostering and facilitating self-assessments to measure performance and enhance accountability; increasing management’s ownership and use of management control; and other value-adding activities. Many of these were being done by internal auditors, especially in larger enterprises, but needed to be codified as standards applicable to all practitioners.
Practice Advisories have already been issued for many of the basic Standards and the remainder are expect to be completed by the 1 January 2002 effective date of the Standards (earlier adoption is recommended). In addition, model charters and programs, risk assessment and planning tools, manuals, and other practice aids are being revised to align them with the new Standards.
Of all the changes, perhaps the most significant is the quality assurance and improvement program for internal auditing, particularly the mandatory external review requirement. Now, at last, there is a clear answer to the question, «Who audits the auditors?» There is presently underway a major overhaul of the IIA’s Quality Assurance Review Manual.
The Moscow Chapter of the IIA, has recently completed the Russian translation of the mandatory portion of the new Standards framework. The English original and the translation will be furnished to Chapter members and other interested parties, as well as be posted on the Chapter’s website (http://www.iia-ru.divo.ru). ICAR will also post these documents on its website (http://www.icar.ru). Both Moscow IIA Chapter and ICAR can be contacted for printed copies (telephone/fax/email). English originals and translations of the Practice Advisories and selected other practice aids will be made available by the Chapter and/or ICAR as time and resources permit.
For contacting Moscow IIA Chapter please e-mail Alexei Sonin (asonin@eur.ko.com) or Tatyana Lavinskaya (tatyana.lavinskaya@westlb.com.ru).