This Executive Summary of Princples for Effective Business Reporting Processes is part of the International Good Practice Guidance series.

IFAC SMP Committee Chair Giancarlo Attolini spoke at CReCER 2013 on the following:

• Importance of SMEs and SMPs
• IFAC SMP Quick Poll
• Role of IFAC SMP Committee
• Implementation Guides

Introduction

The International Auditing and Assurance Standards Board (IAASB) has released proposals that could fundamentally transform the auditor's report, greatly enhancing its communicative value. The Exposure Draft (ED) proposes a new standard, International Standard on Auditing (ISA) 701, Communicating Key Audit Matters in the Independent Auditor’s Report, and a number of revisions to existing standards, including ISA 700, Forming an Opinion and Reporting on Financial Statements (see IAASB press release). While the proposals stand to significantly change the shape of auditor reporting for listed entities, the impact on unlisted entities is likely to be much smaller. Nevertheless, there are proposed requirements that apply to all audits. These are intended to help demonstrate the value of the audit and, furthermore, may improve service and promote engagement efficiency.

This article summarizes this impact and suggests how small- and medium-sized practices (SMPs) and small- and medium-sized entities (SMEs) can get involved to help ensure the best possible outcome.

Proposals

The proposed new and revised standards deal mainly with reporting considerations, which typically involve decisions by the auditor toward the end of the audit process. There are, however, aspects that may have implications for what the auditor does at or near the beginning of the audit, such as agreeing the terms of and planning the engagement, as well as communicating with those charged with governance. The most significant implications for the audits of unlisted entities are described below.

Content of the Auditor’s Report

The centerpiece of the proposals is proposed ISA 701. This completely new standard establishes requirements and guidance for the auditor’s determination and communication of key audit matters in the auditor’s report. Key audit matters, which are selected from matters communicated with those charged with governance, are required to be communicated in the auditor’s report for listed entities. Auditors of financial statements of unlisted entities may also be required, or may decide, to communicate key audit matters in the auditor’s report.

For example, law, regulation, or national auditing standards may require auditors of unlisted entities in a particular jurisdiction to communicate key audit matters. Moreover, the auditors of other unlisted entities may wish to use the new mechanism of key audit matters on a voluntary basis. Where key audit matters are communicated for audits of financial statements of unlisted entities (either voluntarily or when required by law or regulation) then such matters should be determined and communicated in the same manner as for listed entities (see paragraph 4 of proposed ISA 701 and paragraphs 30 and A30–A31 of proposed ISA 700 [Revised]).

ISA 700 has been revised to establish new required reporting elements, including a requirement for the auditor to include an explicit statement of auditor independence and disclose the source(s) of relevant ethics requirements, for all audits including those of unlisted entities. Similarly, ISA 570, Going Concern, has been amended to establish auditor reporting requirements applicable to all audits. The IAASB believes it is in the public interest for this to have universal application.

Agreeing the Terms of the Engagement

In light of the possibility of auditors of unlisted entities communicating key audit matters in the auditor’s report, or being requested by management or those charged with governance to do so, the IAASB has proposed limited amendments to other ISAs, including ISA 210, Agreeing the Terms of Audit Engagements. Specifically, if the auditor is not required to communicate key audit matters but intends to do so, a new requirement has been established for the auditor to include a statement in the audit engagement letter regarding such intent. This will provide an additional opportunity for the auditor to communicate with management and those charged with governance to ensure there’s a clear understanding as to the nature of the key audit matters to be disclosed.

Communicating with Those Charged with Governance

In light of proposed ISA 701, amendments are proposed to the required auditor communications with those charged with governance for all audits. The most significant proposed change to ISA 260 relates to the existing requirement for the auditor to communicate an overview of the planned scope and timing of the audit with those charged with governance. Proposed ISA 260 (Revised), Communication with Those Charged with Governance, expands this requirement to include communicating about the significant risks identified by the auditor (see paragraph 15 of proposed ISA 260 [Revised]).

Communication with those charged with governance about significant risks is likely already occurring in many audits, including those of SMEs, as ISAs demand a risk-based approach to the audit. But the IAASB believes audit quality could benefit from explicitly requiring such communication in every audit. The proposed requirement would provide those charged with governance with insight into those areas for which the auditor determined special audit consideration was necessary and, in so doing, help those charged with governance to fulfill their responsibility to oversee the financial reporting process. This will also provide the auditor with an opportunity to garner additional insights into significant risks from those charged with governance and, thereby, help ensure the audit program is appropriately focused.

The IAASB believes it is in the public interest to establish this requirement for audits of financial statements of all entities, not only for listed entities. Communicating with those charged with governance about significant risks is not expected to result in a significant burden on auditors who are not required to communicate key audit matters in the auditor’s report (e.g., auditors of unlisted entities), as proposed ISA 260 (Revised) remains flexible for such communication to be made orally. In addition, the IAASB proposes requiring the auditor to communicate, as part of communicating the significant findings from the audit, circumstances that require significant modification of the auditor’s planned approach to the audit, to align with the factors the auditor considers in determining key audit matters (see paragraph 16(c) of proposed ISA 260 [Revised]). This will provide further opportunity for dialogue with those charged with governance to help ensure all responsible parties have a full understanding of areas of significant auditor attention.

Feedback

The IAASB believes that the proposed ISAs can be implemented in a manner proportionate to the size and complexity of an entity and welcomes the views of both preparers and auditors of financial statements of unlisted entities, including SMEs, in this regard. The IAASB also invites respondents to comment on areas where additional guidance may be helpful to illustrate how the proposed ISAs can be implemented in a proportionate manner. The IFAC SMP Committee has been providing regular and robust input to the IAASB throughout the ED's development, starting with a response letter to the Invitation to Comment. Please tell us and the IAASB (click on Submit Comment) what you think about the ED and consider field testing ISA 701 on unlisted entities.

IFAC offers a number of recommendations for consideration at the G-20 Leaders’ Summit on September 5-6, 2013 in St. Petersburg, Russia.

The Professional Accountants in Business (PAIB) Committee of the International Federation of Accountants (IFAC), the global organization for the accountancy profession, today released International Good Practice Guidance, Project and Investment Appraisal for Sustainable Value Creation.

The guidance supports the accountancy profession’s facilitation of sustainable organizations, financial markets, and economies by providing guiding principles to manage the complexities of performing a robust project and investment appraisal. Greater rigor in the appraisal and decision process can be achieved by using the principles as a benchmark against which to assess an organization’s current practice.

“In today’s world, it is no longer sufficient for investment decisions to be appraised on financial criteria alone. While this guidance reinforces the importance of rigorous and robust project and investment appraisal, it does so  with a specific emphasis on facilitating long-term decision making and incorporating economic, environmental, and social considerations,” said Roger Tabor, chair of the PAIB Committee. “The revised guidance also sets out the critical role professional accountants in business play in advising on the application of financial principles and theory that are being tested during this current period of market instability.”

Accountants in business play a crucial role in helping organizations ensure a systematic and analytical approach to project and investment appraisal. In practice, fundamental principles of corporate finance are often breached, leading to the destruction of value for shareholders and other stakeholders. Far too frequently, decisions ignore the costs and benefits associated with wider external impacts—social (e.g., labor practices), economic (e.g., in communities), and environmental (e.g., pollution). By introducing greater rigor, organizations can assess all important aspects of a project or investment.

“Traditionally, project and investment appraisal is taught and discussed in purely financial terms, which helps an organization focus on decisions that create the most economic value,” said Athalanallur Natarajan Raman, chair of the PAIB Committee Sustainability Advisory Group. “To create sustainable value, it is essential to also take into account every aspect of the project or investment and consider all facets of sustainability.”

About International Good Practice Guidance
International Good Practice Guidance (IGPG) issued by the PAIB Committee cover areas of international and strategic importance in which professional accountants in business are likely to engage. In issuing principles-based guidance, IFAC seeks to foster a common and consistent approach to those aspects of the work of professional accountants in business not covered by international standards. IFAC seeks to clearly identify principles that are generally accepted internationally and applicable to organizations of all sizes in commerce, industry, education, and the public and not-for-profit sectors. Previously issued IGPGs are available on the IFAC website, including Preface to IFAC’s International Good Practice Guidance.

About the PAIB Committee
The PAIB Committee serves IFAC member bodies and professional accountants worldwide who work in commerce, industry, financial services, education, and the public and the not-for-profit sectors. Its aim is to promote and contribute to the value of professional accountants in business by increasing awareness of the important roles professional accountants play, supporting member bodies in enhancing the competence of their members, and facilitating the communication and sharing of good practices and ideas.

About IFAC
IFAC is the global organization for the accountancy profession, dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. It is comprised of 173 members and associates in 129 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

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Accountants in business play a crucial role in helping organizations ensure a systematic and analytical approach to project and investment appraisal. In practice, fundamental principles of corporate finance are often breached, leading to the destruction of value for shareholders and other stakeholders. Far too frequently, decisions ignore the costs and benefits associated with wider external impacts—social (e.g., labor practices), economic (e.g., in communities), and environmental (e.g., pollution).

Workshop Session

During the Professional Accountancy Organization (PAO) Development Committee meeting in Accra, Ghana, a half-day open workshop session was held to which representatives of Pan African Federation of Accountants (PAFA) member bodies from across the continent were invited. The aim of the session was to:

• present the IFAC Statements of Membership Obligations (SMOs) and look at the changes made during the revision process;
• allow participants to share their experiences with adoption and/or implementation of the international standards in the SMOs, regardless of the development stage of the organization and IFAC membership status; and
• familiarize all participants with the Dashboard Reports and allow them to consider the responsibilities, adoption status, and current priorities for one or more SMOs in their own jurisdiction.

Following a presentation from IFAC staff, PAO Development Committee members, observers, and guests split into three groups to focus on three different SMO aspects:

• approaches to adoption and implementation of international standards;
• implementing quality assurance; and
• establishing effective investigation and disciplinary processes.

The workshop promoted exchange between participants and provide an open forum to share experiences and ideas. Below is a summary of some of the themes of discussion.

Summary of Discussion

Approaches to adoption and implementation of international standards

Responsibility: It is unusual for a PAO to have the responsibility for every standard-setting SMO (3, 4, 5, and 7). Where the responsibility lies elsewhere, understanding the environment, including any relevant legislation and resource challenges, is key to understanding the PAO’s role in supporting the associated processes. Due to the core role of government, challenges to progress on SMO 5 (International Public Sector Accounting Standards, or IPSAS) include a range of financial and political factors that differ significantly from one jurisdiction to the next. In cases where the PAO is not responsible for education and training, the PAO should consider a formal collaboration with the relevant educational institution(s). This can allow efficient sharing of information around the International Education Standards (IES) for timely updates to curriculum and training programs, resulting in the appropriate training of high quality professionals.

Enforcement: Enforcement of a code of ethics may be challenging where PAOs have limited capacity or a limited legal mandate. A consideration may be to work in partnership with a national anticorruption body to make additional resources available and may permit legal enforcement of a code of ethics in the jurisdiction. Working with a public institution also grants a wider audience, enabling key information regarding cases to be communicated in the public interest.

Proactivity: Not all PAOs evolve in a jurisdiction where the support and development of the accountancy profession is a priority for the government and/or other stakeholders. Where legislation related to the accountancy profession does not exist at the national level, PAOs should consider how best to enhance the relevance of the profession and encourage best practice from their members. This may include amending a PAO’s bylaws and rulebook to require members to use international standards in their professional practice. Such a decision must be supported by appropriate training, tools, and guidance.

Communications: Advocacy around the importance of international standards and information-sharing activities aimed at regulators and governments, as well as the public, should be a key part of a PAO’s strategy. Establishing and maintaining dialogue with key players in the political arena can ensure the accountancy profession is on their agenda. Where responsibility for standard setting or key implementation activities lies elsewhere, clearly communicating the assistance a PAO can provide to relevant stakeholders in support of high-quality financial information is essential.

Strategic planning: The ongoing update of standards by the international standard-setting boards requires processes to be in place to ensure timely adoption and implementation at the jurisdiction level. An agreed-to plan allows for objective setting, appropriate allocation of resources, and determination of a realistic timeline for implementation. SMO Action Plans are a tool that can be used for such an organizational planning process.

Implementing quality assurance

Quality review program: When establishing a quality review program , consider assessing existing internal quality review programs for larger firms and, depending on their effectiveness, placing some reliance on those programs when conducting specific reviews. For smaller firms, a robust quality review program can be monitored and supported by the PAO, which can feed findings into development programs. Peer review is typically ineffective in small jurisdictions where the profession is close-knit and, therefore, finding independent professionals is a challenge. Regional quality assurance systems can be a solution where capacity doesn’t exist at the national level.

Stakeholder engagement: Achieving buy-in from all stakeholders is crucial. A relationship with the auditor general can ensure high-level awareness of the results of all audits. At the early stages of the program’s implementation, when dealing with a firm that falls short of requirements, sensitizing those that will be affected, rather than seeking to instantly punish, can prove most effective. Public reporting of findings at the country level to highlight key themes from reviews, for example, can also help with this process.

Continuing professional development (CPD): Due to the importance of members in practice undertaking relevant CPD, a number of PAOs have introduced percentage-based mandatory practice-related CPD as a condition of annual practicing license renewal. More generally, PAOs should ensure that a wide range of CPD training and resources are available for members to update their knowledge and skills—this is particularly vital to assist small- and medium-sized practitioners (SMPs) who may not have capacity for in-house training.

Establishing effective investigation and disciplinary processes 

Advocacy and communication: Relationships should be built and maintained with government and other regulators to publicize the role of the PAO in investigating and disciplining its members. In jurisdictions where PAO membership is not mandatory to practice, it can be of crucial importance to ensure the public understands requirements and how to access quality professionals. Penalties for practicing without a license should be significant enough to act as a deterrent. Decisions regarding publication of names of individuals found to be practicing without a license or violating other regulations should be tied to the severity of each case.

Committee composition: Legislation can negatively affect an effective investigation and disciplinary process, since smaller jurisdictions can struggle to maintain the committee composition required by law. Where appropriate, credibility of disciplinary or appeals tribunals can be enhanced through the appointment of ministry or high court officials, or by their involvement in selecting committee members, such as the chair. Public members and legal representation, in addition to the presence of accountants on the committee, can enhance objectivity and transparency.

Cooperation with regulators: Agreements with regulatory authorities can ensure appropriate flow of information around cases. Where there is overlap in the processes of a PAO and those of an independent or audit regulator, a formal relationship can help avoid duplication and may lessen administrative burden on the PAO.

Background

The IFAC Member Body Compliance Program

The IFAC Member Body Compliance Program is one of continuous development and improvement for PAOs—IFAC members and associates. It is based on the IFAC Statements of Membership Obligations (SMOs), which serve as a technical framework for PAOs to set strategic objectives. The program operates with oversight and advice from the IFAC Compliance Advisory Panel (CAP) and is subject to Public Interest Oversight Board (PIOB) review. IFAC member body development staff and the PAO Development Committee work with PAOs to support their progress in addressing the SMOs.

The Revised SMOs

The IFAC SMOs were revised and ratified by the IFAC Council in November 2012 to use “plain English” principles and express member bodies’ obligations more clearly. At a high level, the revisions include:

• clearer definition of obligations;
• greater clarity and improved flow of logic;
• a focus on adoption and implementation, aligned with IFAC’s strategy;
• an applicability framework to guide PAOs with varying levels of responsibility for SMO areas;
• the extension of the scope of external quality assurance review to apply to all audits of financial statements; and
• a clarified process of investigation and discipline with a stronger connection to SMO 1.

IFAC members and associates are required to address the SMOs by developing, executing, reviewing, and regularly updating their SMO Action Plan.

SMO Progress Reports

Dasboard Reports are prepared by IFAC staff based on an evaluation of information presented by the IFAC member or associate in their SMO Action Plan. Dashboard Reports provide a high-level snapshot of the status of a PAO and its jurisdiction at a point in time. To evaluate and monitor progress made by IFAC members and associates, Dashboard Reports use three interrelated indicators.

• The level of responsibility that the PAO has for each of the seven SMO areas.
• The adoption status (at the country/jurisdiction level) of the international standards relevant to each SMO area.
• The status of progress made by the PAO, as represented in their SMO Action Plan.

Dashboard Reports, in addition to addressing these three areas, also provide background information on the IFAC member or associate, including its size, sectors of the profession served, and a general indication of available resources and capacity.

Welcome to IFAC’s Professional Accountants in Business (PAIB) Committee eNews.

In this Issue:

Governance
1. Public Sector Governance Consultation Draft Published by IFAC, CIPFA
2. ICAEW: What are the Principles of Corporate Governance?

Internal Control and Risk Management
3. Revised COSO Framework: IFAC Review Available for Publication
4. Sharing Best Practice on Risk Management and Internal Control

Financial Reporting
5. IFAC Responds to IIRC Consultation Draft on Integrated Reporting
6. GRI Publishes Survey Review of Integrated Reports

Sustainability
7. World Forum on Natural Capital
8. ICAS Announces Sustainability in Business Essay Competition
9. NYSE Joins UN Sustainable Stock Exchanges Initiative

SMP News
10. SMP Quick Poll: Sustainability Services on the Rise

Next PAIB Committee Meeting
11. Next Meeting of Professional Accountants in Business Committee

Governance

1. Public Sector Governance Consultation Draft Published by IFAC, CIPFA

IFAC and the Chartered Institute of Public Finance and Accountancy (CIPFA) issued a Consultation Draft, Good Governance in the Public Sector, to promote the development of robust governance. The Consultation Draft looks to establish a benchmark for good governance in the public sector at both the government and individual public sector entity levels. The Consultation Draft was developed with input from representatives of relevant international organizations. Public sector representatives and other public sector stakeholders are encouraged to respond to the proposed framework to help improve its applicability to public sector entities at all levels internationally. Comments are requested by September 17, 2013.

IFAC member and regional organizations are invited to publish the supporting article, “New Guidance Aims to Improve Public Sector Governance,” in their journals, newsletters, website, and other forums. The article can also be tailored to suit the needs of each organization and membership. Email permissions@ifac.org for permission to translate or reproduce.

2. ICAEW: What are the Principles of Corporate Governance?

Governance is also discussed in What are the Overarching Principles of Corporate Governance? from the Institute of Chartered Accountants in England and Wales (ICAEW). The thought piece encourages corporate boards to focus on a set of simple but fundamental principles of corporate governance. It also outlines five short, purposeful, and aspirational overarching principles that apply to a wide range of companies. These principles should serve to remind corporate boards, and their stakeholders, what corporate governance should look like if a company is to meet its business purpose and other responsibilities.

Internal Control and Risk Management

3. Revised COSO Framework: IFAC Review Available for Publication

In response to the publication of the Committee of Sponsoring Organizations of the Treadway Commission (COSO)’s Internal Control-Integrated Framework in May (see PAIB Committee eNews May 2013 for details), IFAC has written a review discussing the changes in the new COSO publication and the work still to be done. “Revised COSO Framework: Improved but Further Adjustments Warranted” outlines recommendations COSO should take up in future revisions to make the Framework more relevant to a broader global community. This article is also available for publication by member bodies. Email permissions@ifac.org for permission to translate or reproduce.

4. Sharing Best Practices on Risk Management and Internal Control

IFAC staff recently gave a presentation on risk management, internal control, and the COSO Framework at the 94^th Annual Institute of Management Accountants (IMA) Conference in New Orleans, US. The presentation, made with J. Stephen McNally of the Campbell Soup Company, outlines some of the pitfalls many organizations face with their current systems of risk management and internal control. Vincent Tophoff, IFAC senior technical manager, and Mr. McNally also addressed the changes in the newly revised Internal Control-Integrated Framework from COSO.

The presentation:

• summarizes the most important pitfalls in current risk management & internal control (RM/IC) practice;
• provides insight into current thinking on risk management and internal control;
• outlines key concepts contained in the most important risk management and internal control guidelines;
• discusses the impact of these developments and approaches for organizations; and
• identifies and discusses other emerging trends related to risk management and internal control.

IFAC staff also recently gave a presentation on the effective integration of risk management and internal control, especially as it relates to the International Organization for Standardization (ISO)’s standard on risk management, ISO 31000 – Risk Management, at the Second International Conference on ISO 31000 in Toronto, Canada.

Financial Reporting

5. IFAC Responds to IIRC Consultation Draft on Integrated Reporting

IFAC responded to the landmark Consultation Draft of the International Integrated Reporting Framework, published in April by the International Integrated Reporting Council (IIRC). In its comment letter, IFAC recommends, for example, adjusting the Framework to encourage a principles-based, rather than a rules-based, approach to integrated reporting and advocates that it should be the individual organizations that determine their intended audiences, instead of the blanket assumption that integrated reports are primarily for providers of financial capital. The IIRC is now in the process of analyzing the 350 responses it received to the proposed Framework.

6. GRI Publishes Survey Review of Integrated Reports

The Global Reporting Initiative (GRI) released a new survey report reviewing different ways integrated reports are taking shape around the world. The Sustainability Content of Integrated Reports—A Survey of Pioneers looks at 756 reports published from 2010 to 2012 following GRI Guidelines and surveys 52 organizations that issued integrated reports during all three years. 

Sustainability

7. World Forum on Natural Capital

The World Forum on Natural Capital, an UN-backed event, will be held in Edinburgh, UK, November 21-22, 2013. The event will be the first major global conference devoted to putting an economic value on natural capital (additional information on natural capital is available in Special Edition eNews—Accounting for Natural Capital). Synergies between public and private sector natural capital accounts will be explored, as will the links with integrated reporting and the issues affecting different sectors. The conference is organized by the Scottish Wildlife Trust in association with the United Nations Environment Programme, World Business Council for Sustainable Development, International Union for Conservation of Nature, TEEB for Business Coalition, and the Wildlife Trusts. IFAC stakeholders are being offered a 10% discount on registration (promotional code IFAC10 when registering). Additional information, including the program, is available at www.naturalcapitalforum.com. Early bird registration closes September 12, 2013.

8. ICAS Announces Sustainability in Business Essay Competition

The Institute of Chartered Accountants of Scotland (ICAS) has announced its 2013 essay competition to encourage debate regarding sustainability in business. Entry is open to all accountants and students globally. Professionals and students in related fields are also encouraged to apply. Full details, including competition rules and topic details, can be found at http://icas.org.uk/sustainabilityprizeessay/. The competition, sponsored by Grant Thornton UK LLP, closes on September 30, 2013.

9. NYSE Joins UN Sustainable Stock Exchanges Initiative

The NYSE Euronext is the newest member of the United Nations’ Sustainability Stock Exchanges (SSE) Initiative. The initiative aims to “explore how exchanges can work together with investors, regulators, and companies to enhance corporate transparency on environmental, social, and corporate governance issues and encourage responsible long-term approaches to investment.” In announcing its participation, Duncan L. Niederauer, CEO of NYSE Euronext, said, "As the only carbon neutral global exchange group, we are proud to join the SSE initiative and partner with the UN and our industry to support best practices in corporate governance and transparency related to corporate sustainability. We lead by example by running our business in an environmentally responsible manner, and by leveraging the unique power of our platform and our NYSE Euronext community, we empower learning and collaboration within the broader corporate sector."

SMP News

10. SMP Quick Poll: Sustainability Services on the Rise

The latest IFAC SMP Quick Poll results showed that the vast majority, 73%, of the nearly 4,000 small- and medium-sized accounting practitioners (SMPs) surveyed are either currently providing or have plans to provide sustainability services to their clients, suggesting there is a sizable market for these services among the small businesses that SMPs typically serve. Results varied somewhat by size of practice and region. The larger the size of the SMP, the more likely it was to be offering sustainability services.

Next PAIB Committee Meeting

11. Next Meeting of Professional Accountants in Business Committee

The next meeting of the PAIB Committee will be hosted by the Chinese Institute of Certified Public Accountants (CICPA), October 14-15, in Beijing, China. It will be followed by a forum on October 16, 2013, at the CICPA offices. Additional information on the forum, which will be open to the public, will be made available in coming issues of eNews.

Presentation given by IFAC Senior Technical Manager Vincent Tophoff on the integration of risk management and internal control, especially as they relate to the International Organization for Standardization (ISO)'s standard on risk management, ISO 31000 - Risk Management.