Raise Awareness Of The Value Of Strong Corporate Governance

Raise Awareness Of The Value Of Strong Corporate Governance

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Distinguished guests, fellow accountants, and colleagues. It is truly a privilege to participate in your Congress and to speak on this very important topic of good corporate governance. I am making this presentation on behalf of René Ricol, IFAC’s President, who regrets that an unavoidable conflict prevents him from being with you today. During his tenure as IFAC President, Mr. Ricol has worked to raise awareness of the value of strong corporate governance and he applauds your efforts to make this a focus of your Congress.

I am particularly pleased to be with you for this Congress, as it is the first of your Congresses since the IFAC Board acknowledged the Association of Accountancy Bodies of West Africa as a regional grouping, so it is a special pleasure to be able to welcome ABWA to membership of the IFAC ”family”. I would also like to acknowledge the contribution that two of the IFAC Board members, Ndung’u Gathinji of Kenya and Ignatius Sehoole of South Africa, have made significant contributions in the process of acheiving this acknowledgement for ABWA. IFAC sees its regional groupings and regional organisations as an increasingly important element of the IFAC structure and would encourage the strengthening and expansion of these networks.

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As I turn to my theme of corporate governance, I would note that while my presentation today focuses on corporate governance in the private sector, the need for sound governance arrangements in the public sector are also critically important. As the former Vice-President and Controller of the World Bank, Jules Muis, has observed, an economy can be likened to an aeroplane – both wings must be sound for it to fly safely. For an economy to grow and develop, its governance structures in both the public and private sectors must be solid. I should also note that the need for the governance of the public sector to be sound was recognised by the Eastern Southern and Central African Federation of Accountants a number of years ago when they urged the Public Sector Committee of IFAC to produce its document ”insert”.

Sound corporate governance is, of course, critical to capital market development in West Africa, in other emerging economies and around the globe. Effective corporate governance can create safeguards against corruption and mismanagement and promote transparency, and therefore efficiency, in economic affairs. It is at the heart of building confidence in financial systems and that is at the heart of sustainable economic growth.

At one level it is that simple – if sustainable economic growth is the goal, good corporate governance is essential.

As professional accountants, we understand that while corporate governance is a concept that is presently making the headlines, it is also much more than that. Corporate governance is about actions and behaviors -- actions and behaviors that need to be taken by private and public enterprises, that need to be reinforced by governments, and that must be supported by professional accountants and all those involved in the development and disclosure of financial information. Good corporate governance hinges on a number of elements such as principles, values, laws, rules, regulations, and institutions. I will touch on some of this today as I seek, first, to provide you with an understanding of good governance from the perspective of the International Federation of Accountants and, second, describe the role we can all play in enhancing corporate governance practices.

First, I’d like you to take a look back with me to the not too distant past, to nearly two- and-a-half years ago when the U.S. energy giant Enron collapsed. Back in 2001, many blamed the Enron failure almost exclusively on the auditors. Corporate governance was not yet seen as so central to the corporate failures. Few understood the depth of the problems. In fact, some predicted that Enron was a storm that would soon blow over. Time has shown that rather than being an isolated event, Enron was the leading edge of a storm front. In fact, ”Enron” has become global shorthand for corporate greed and failed corporate governance. WorldCom, Tyco, Adelphia, Ahold, Vivendi and most recently Parmalat have all followed, each new case tending to reinforce public cynicism towards business in general. Reversing this trend, restoring and improving public confidence in capital markets, in financial reporting and in the accounting profession is the end game of the strategy I will present to you today.

There are many of you who, like me, recall financial failures in previous decades. Scandals involving companies like BCCI, Baring, Sunbeam and Credit Lyonnaise. What has changed? Well, the world has changed since the 1980s and 1990s. More and more people have a stake in the performance and conduct of public companies, through stocks, mutual funds and pension plans. Investing in public companies has in many countries become an activity open to anyone with a computer and a relatively few dollars. This has greatly increased the political salience of capital market performance.

As well, the globalization of business and communications, increasing technology and increasingly complex financial transactions, mean that a business failure anywhere touches people everywhere. A failure in London impacts the markets in Lagos. This is why a recent survey of business leaders by the Economist Intelligence Unit found that the attention being paid to corporate governance is increasing worldwide and will continue to do so into the future.

Some of those behind the scandals of the past two years were accountants. However, they were not the only ones to blame. In fact, thousands of accountants like those of you sitting in this room today are dedicated to providing quality work and to putting your integrity ahead of short-term commercial interests. Nonetheless, the scandals created a ripple effect for our profession -- accountants who fail in London negatively affect the trust and reputation of accountants in Lagos, and vice versa.

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To be sure, some of the criticism concerning auditors and their role in these failures has been fair. Some of it was not. Part of our job, as trained professionals, has been to see what we could learn from the events. I want now to talk about some elements of IFAC’s response to these events, focusing on those related to corporate governance.

IFAC took the approach of addressing this challenge on two levels: focusing on improving the role of accountants in the governance and financial reporting chain, and developing a plan of action to improve corporate governance as a whole. We recognized that enhancing public trust through our commitment to the highest standards of quality and integrity required real action as well as the ability to effectively communicate that action to all of our stakeholders, including the public.

While these corporate failures have placed the accounting profession under unparalleled scrutiny, they have also provided us with unparalled opportunity to effect reform and change. Obstacles to enhancing professional standards of quality, integrity and independence have melted away. In a sense, Enron and its cousins compelled us to take a hard look at our core values. What we have relearned is that our profession is built on public trust. It’s all we have. But it’s an awful lot. It’s what keeps the markets working. In order for the public to have confidence in the quality and integrity of our work, we need to earn their trust every day.

With 158 member organizations in 118 countries, representing 2.5 million accountants worldwide, IFAC is ideally placed to effect change, and we have seized the opportunity. Accountants play a key role in the value creation chain, in which one link is good corporate governance. Our analysis illustrates very clearly the connection between business failure and reporting failure. The two go hand in hand.

Even before Enron collapsed, IFAC had issued a robust new principles-based standard on independence for public accountants as part of the Code of Ethics for Professional Accountants. This framework is the most rigorous international guidance ever issued, and its principles and guidance are being adopted by a growing number of national accounting and auditing standard-setting bodies.

At the same time, we welcome oversight of the profession. For most of our national organizations, this means the acceptance of some external oversight mechanism or process. Internationally, IFAC undertook a wide-ranging consultative process that resulted in a series of reforms, unanimously supported by international regulators and approved by IFAC’s Council last November. This initiative also received the endorsement of the Financial Stability Forum.These reforms, currently being implemented, include the establishment of a Public Interest Oversight Board to oversee IFAC’s standard-setting and compliance regimes, as well as increased transparency and public participation in governance and standard-setting activities.

The end result of these reforms is that IFAC has moved from a self-regulatory framework to a mixed or shared regulatory structure.

We have also focused on developing a more transparent standard-setting process for the International Auditing and Assurance Standards Board (IAASB) as well as for the Education Committee and the Ethics Committee. The IAASB meetings are open to the public, and its papers are posted on the IFAC website. We have increased technical support to the IAASB in order to channel energies in areas that most seriously touch on the public interest. In the past few months, the IAASB has released two new quality control standards. One establishes a firm’s responsibilities to set up and maintain a system of quality contrl for all audits and assurance engagements. The second establishes standards for the specific responsibilities of firm personnel for an individual audit engagement.

Now to the broad scope of corporate governance. As many of you know, IFAC has taken a leadership role in responding to the crisis in corporate governance. We regard this as a long-term challenge, one that will require long-term solutions, not quick fixes. And we are far from alone in addressing these issues. Just last month, the Organization for Economic Cooperation and Development – OECD – approved a revised version of its Principles of Corporate Governance to address issues that have undermined the confidence of investors in company management. The revised principles include new recommendations for good practice in corporate behavior. IFAC contributed to the process through which the OECD undertook the revision and supports both the principles and the encouragement for international convergence of corporate governance practices that are based on these principles. I would encourage you all to go to the OECD website to view and understand these principles.

The issuance of these new principles further reinforces IFAC’s position that to rebuild and maintain public trust in companies and stock markets, action must be taken at all points along the information supply chain.This involves management and boards of directors, auditors, standard setters as well as lawyers, investment bankers, credit rating agencies and the media. At each point, individuals must take responsibility for their actions. Everyone in this room shares this responsibility. We must succeed, because the stakes are too high to do otherwise. All of us must be committed to high ethical standards and be vigilant in discharging the responsibility we have for ensuring public confidence in the markets. This must be our shared vision because, again, the stakes are so high.

In 2002, IFAC established an independent, international Task Force that produced a report, Rebuilding Public Confidence in Financial Reporting, released in July of last year. This report provides a number of important recommendations addressing a range of corporate governance issues. The report lists and explains principles of best practices that call for specific action at all points in the information supply chain.

Specific recommendations include the following:

Effective corporate ethics codes need to be in place and actively monitored; such codes should be supported by training.

Codes of conduct need to be put in place for other participants in the financial reporting process - such as investment analysts and lawyers - and their compliance should be monitored.

Incentives to misstate financial information need to be reduced, and companies must refrain from forecasting profits with an unrealistic level of precision.

Audit effectiveness needs to be raised, primarily through greater attention to audit quality control processes.

Complementing this report is a document released just this past February by IFAC’s Professional Accountants in Business Committee, the PAIB Committee. This report, entitled Enterprise Governance: Getting the Balance Right, analyzes a number of prominent recent case studies to develop recommendations covering the range of enterprise governance. For those of you unfamiliar with the term, enterprise governance includes both corporate governance and corporate performance. The committee found that four key elements underpin an organization’s success: culture and tone at the top; the chief executive; the board of directors; and internal controls. The report notes that governance and performance need to be in harmony and performing well in order to enhance the chances of organizational success. Our focus is on good governance, but as the PAIB discovered, good governance on its own cannot make a company successful. Companies need to balance conformance with performance. Bad governance can ruin a company, but cannot, on its own, ensure its success.

These reports have not been issued in isolation. Instead, they are one part of a strategy that includes IFAC reviewing and monitoring corporate governance standards worldwide. IFAC member bodies have agreed to encourage key stakeholders in their home countries to adopt the recommendations from these two reports. It is a global campaign that is gaining momentum.

In undertaking the Credibility and Enterprise Governance reports, three new realities became apparent. I call them realities because they mark a fundamental shift from the pre-Enron world in which we all worked, and because they are bringing fundamental change in how we will do business for years to come. Some elements were emerging or under development prior to Enron, but the corporate scandals of recent years have given them visibility and significance as never before.

The first new reality is that improving standards of corporate governance is not only a national issue that each country must address, but it is also an international issue.

At the national level, many countries are taking steps to improve governance through tougher legislation and regulation, new codes of ethics, and the establishment of oversight bodies. Our stakeholders recognize the role that accountants and auditors play in value creation as well as in contributing to good corporate governance. As an example, the EU has already indicated its plans to adopt international accounting standards and international standards on auditing by 2005. This is a very important development, though Europe is not alone in taking this course.

Governments and regulators increasingly understand that international standards, already established or being developed by bodies like IFAC, are the soundest method of ensuring the reliable functioning of the global capital markets. To this end, on the international front, IFAC seeks to work closely with organizations like the Financial Stability Forum, which aims to achieve stability in capital markets through dialogue amongst national governments and financial institutions. These activities help to achieve IFAC’s goal of convergence to international standards – a goal that is vital to achieving comparability of financial information around the globe and ultimately, financial stability.

IFAC also actively supports the International Accounting Standards Board’s program of global International Financial Reporting Standards, and we endorse countries around the world that implement regulations consistent with IOSCO’s Principles of Securities Regulation.

The second of the three new realities I referred to is that enhanced corporate governance is a team effort. It takes the committed effort of accountants, executive management, the board of directors, audit committees and regulators. Each of these groups must recognize its unique public interest responsibility. There’s a dichotomy at work here: no one profession or group can ensure an organization’s good corporate governance, but the failure of one group can put good governance at risk – thus compromising the protection offered to stakeholders.

Finally, the third, and perhaps most important reality, is that good corporate governance cannot be established if organizations are not committed to high standards of individual and institutional integrity. As we’ve seen over the past two-and-a-half years, failures in integrity were perhaps the lead factor in these corporate scandals. In order to prevent them from occurring in the future, a culture of integrity must take hold. While sanctions are necessary for those who do not comply with legal and regulatory requirements, what is far more effective is building a culture of good governance that prevents those sanctions from ever having to be implemented. In IFAC’s recent Enterprise Governance report, the writers describe the ideal environment as comprising a virtuous circle of integrity and ethics, based on the conscious decision by all parties to take good governance seriously.

I meet regularly with the international leaders of accountancy bodies and the leaders of the accounting accounting firms, as well as regulators and standard setters. What I have learned is that we are increasingly viewed as a global profession with the ability to effect change that is in the public interest. This brings with it tremendous opportunity, as well as challenge. We can all take a leadership role in enhancing public trust not only in our profession, but through the whole governance chain. Everyone in this room has an equal role to play; we are all partners. Every day, we must bear in mind we have deliberately set the bar high because we demand no less of ourselves and because the public demands no less of us.

I urge you to pursue activities to promote good corporate governance and to continue to explore, at a regional level, the exchange and coordination of ideas. It is through exchanges such as this that the accountancy profession can become the impetus for strengthening corporate governance policies, and in doing so, rebuild trust not only in the profession but in the markets in which we operate.

I will end by repeating what I said earlier - at one level is very simple – if sustainable economic growth is the goal, good corporate governance is essential.

Thank you very much for your attention.

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