International Federation of Accountants

International Federation of Accountants External Auditing Structure and Standards Alta Prinsloo, Senior Technical Manager, IAASB May 5, 2005

EXTERNAL AUDITING Agenda • Credibility in financial reporting • Role of IFAC and its reforms • Role of the IAASB • International convergence • Ethics • Conclusion

CREDIBILITY Restoring Credibility in Financial Reporting • Critical to development of capital markets • Requires a multi-faceted solution • By all those involved in the financial reporting process • Focus on the public interest

CREDIBILITY The Public Interest • Corporate sector • Decisions affect groups and individuals well beyond traditional stakeholders • Served by accountants creating wealth • Public sector • Practices applied by governments affect those that receive services • At an international level • International standards affect national capital markets and service provision at national level

ROLE OF IFAC Mission • 163 member bodies in 119 countries • Serious about its public interest responsibility • Embraced in its mission

ROLE OF IFAC Mission (cont.) • To serve the public interest, IFAC will continue to strengthen the worldwide accountancy profession and contribute to the development of strong international economies by establishing and promoting adherence to high-quality professional standards, furthering the international convergence of such standards, and speaking out on public interest issues where the profession’s expertise is most relevant.

ROLE OF IFAC IFAC Reforms – PIOB • Public Interest Oversight Board (PIOB) formed • To oversee international standard setting • Auditing, Ethics, Education • To oversee IFAC’s Member Body Compliance Program • Eight individuals from seven countries

ROLE OF IFAC IFAC Reforms – History • Meeting with international regulators in February 2003 • How to strengthen international standard-setting processes • How to restore credibility in financial reporting • Basel Committee, EC, FSF, IAIS, IOSCO and World Bank • Consulted with IFAC member bodies and other interested parties • Proposals for Reform approved in November 2003

ROLE OF IFAC IFAC Reforms – Focus • Strengthening standard-setting processes of IFAC PIACs • IAASB, Education Committee and Ethics Committee • Enhancing transparency of those processes • Providing for public interest oversight

ROLE OF IFAC IFAC Reforms – Key Role of PIOB • Evaluate due process of IFAC PIACs and report publicly • Approve nomination process • Approve appointment of chairs and members of IFAC PIACs • May recommend matters for inclusion in IFAC PIAC work program • May Observe at meetings during discussions pertaining to IFAC PIACs

ROLE OF IFAC Public Sector • IFAC Public Sector Committee established in 1986 • Not ignored in reform process • External review commissioned in October 2003 • Report presented to IFAC Board in July 2004 • Now International Public Sector Accounting Standards Board • Steps taken to increase public input in its standard-setting processes

ROLE OF THE IAASB Objective of the IAASB • To serve the public interest by setting, independently and under its own authority, high-quality standards for quality control, auditing and other assurance, and related services engagements, and by facilitating convergence with them. This enhances the quality and uniformity of practice throughout the world, and strengthens public confidence in the global auditing and assurance profession.

ROLE OF THE IAASB Composition of the IAASB • Full-time chairman and 17 volunteer members • Three public members (two of which are Auditors-General) • Appointed by IFAC Board based on recommendations from IFAC Nominating Committee • Appointments approved by PIOB • Meets four-five times per year

ROLE OF THE IAASB IAASB Reforms • Meetings are open to the public • Project histories, agenda papers and meeting summaries are posted on the website • Audio recordings of IAASB meetings are available on the website • Exposure drafts and comment letters are posted on the website • Full-time chairman has been appointed and technical staff have been increased • Due process has been reviewed

ROLE OF THE IAASB Public Interest Input • Public members • Consultative Advisory Group • Appointed independent chair • Recently revised membership and scope of activities • Provides input on IAASB work program, priorities, and technical issues • INTOSAI is a member of CAG • Observers • US PCAOB and Japanese Financial Services Agency

ROLE OF THE IAASB Other Stakeholders • Annually meets with national standard setters • Maintains an ongoing dialogue with the EC • Participates in meetings of: • IOSCO’s Standing Committee No. 1 • US PCAOB Standing Advisory Committee • Basel Committee

ROLE OF THE IAASB New ISAs Relevant to the Public Interest • New and revised quality control standards • ISQC 1 • Quality control at firm level • ISA 220 (Revised) • Quality control at audit engagement level • Reflects the IAASB’s commitment to improve the quality of auditor performance

ROLE OF THE IAASB New ISAs Relevant to the Public Interest (cont.) • Revised fraud standard • Builds on new audit risk standards • Requires auditors to: • Focus on areas of risk of material misstatement • Design and perform audit procedures responsive to identified risks • Will result in increased work

ROLE OF THE IAASB The Road Ahead • Focus on issues that build confidence in the audit of financial statements • Be responsive to needs of those with an interest in financial reporting • Complete implementation of reforms • Consider process for interpretive guidance • Strengthen and maintain stakeholder relationships • Consider other assurance projects • Consider needs of SMEs and SMPs

CONVERGENCE Support • IFAC • Statements of Membership Obligations • Financial Stability Forum • 12 Key Standards for Sound Financial Systems • Credibility Task Force • Recommendation in report on Rebuilding Public Confidence in Financial Reporting – An International Perspective • INTOSAI • Guidelines for Financial Audit to be based on ISAs

CONVERGENCE Challenges • “Wong Report” • Understanding meaning of international convergence • Translation of international standards • Complexity and structure of international standards • Frequency, volume and complexity of changes to international standards • Challenges for SMEs and SMPs • Potential knowledge shortfall • Implication of endorsement of IFRSs

CONVERGENCE Recommendations • All participants in financial reporting process have a role to play • IFAC and IAASB initiatives • Developing the concept of international convergence • Translations and availability of pronouncements • IFAC Member Body Compliance Program • IAASB clarity project • Addressing the needs of SMEs and SMPs

CONVERGENCE Public Sector • IAASB / INTOSAI ASC Memorandum of Understanding signed in 2004 • Enables INTOSAI ASC to use ISAs as basis for Guidelines for Financial Audit • Enables IAASB to obtain public sector expert input in standards • INTOSAI ASC nominees participate in IAASB task forces • Contribute public sector perspective

ETHICS High Ethical Standards • Accountancy profession is built on public’s trust • Requires commitment to: • High ethical standards • Integrity • Requires effective codes of conduct for all participants in financial reporting process • IFAC Code of Ethics for Professional Accountants • Specific public-sector related issues are being considered by IFAC’s Ethics Committee

EXTERNAL AUDITING Conclusion • “Cooperation is the cornerstone of development and common well-being in the world.” • Budapest Accords – 2004 INCOSAI • “Working with other external accountability partners to establish standards and guidelines produce mutual benefits.” • INTOSAI Strategic Plan 2005-2010 • IFAC and IAASB will continue their cooperative approach

International Federation of Accountants

International Federation of Accountants