December 11, International Federation of Accountants 545 Fifth Avenue, 14 th Floor New York, New York 10017

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1 Grant Thornton International Barry Barber Worldwide Director of Audit and Risk Management 399 Thornall Street Edison, New Jersey Direct Fax December 11, 2003 International Federation of Accountants 545 Fifth Avenue, 14 th Floor New York, New York For the attention of the Chief Executive Via Dear Mr. Ball: Introduction: Re: Proposed Statements of Membership Obligations Grant Thornton International appreciates the opportunity to comment on the International Federation of Accountants (IFAC) Proposed Statements of Membership Obligations (SMOs). As a member of the Forum of Firms and independently being committed to the efforts of IFAC, we are very supportive of this initiative and believe that it represents a very significant and positive step for IFAC and its member bodies. We recognize the challenges to IFAC in making operational these obligations in conjunction with its new compliance program and public oversight activities. We believe it necessary for IFAC to determine and state clearly whether it intends that the standards (Education, IPSAS etc) that it sets are minimum standards to be achieved or are maximum levels to be attained. We believe that the standards that it sets should be minimum standards of compliance or achievement. We recommend a statement to this effect be included in the introduction to the SMOs. We support IFAC in its intention to use its compliance activities in relation to SMOs as educational and supportive with action plans for member body development. Our comments on each specific SMO are formed on the basis of our recommendation that these be minimum standards to be achieved. As a consequence of that we are concerned that the SMOs seem to focus on accountants in practice and further on those members that audit financial statements of listed entities. Page 1

2 IFAC represents 155 member bodies in 114 countries. We are aware that many of the more than 2.4 million accountants that IFAC member bodies represent, are themselves not in public practice and of those that are in public practice, even fewer audit listed clients. While acknowledging the professional reputation risks associated with audits we do not think the profession as a whole is well served by the narrow focus of the SMOs. Other high risk areas of work are undertaken in the accounting profession and indeed IFAC should be interested in setting standards/bench marks for its member bodies and their constituent members across the board, and at least in the other commonly provided service areas of other assurance services, insolvency, tax, and management consulting. We recommend in light of this that IFAC schedule to review the SMOs following a short time frame such as two years with a view to ensuring that the SMOs cover a much wider base of a member body s constituent members. The explanatory memorandum, at paragraph five, allows a member body to depart from the requirements of the SMOs, in order to fulfill its public interest duties more effectively. We find it very difficult to think of a situation that would require a member body to depart from any SMO, as currently drafted, in order to fulfill its public interest duties more effectively. The nature of the SMOs and the standards that they require to be implemented are developed in an international setting with regard to public interest the concept of public interest does not vary around the world. We acknowledge that governments in different countries will choose different interventions to meet the public interest in their jurisdiction, but the concept of public interest itself should not be different. We recommend that the explanatory memorandum be amended such that member bodies only are permitted to depart from an SMO when such departure can be justified. For example in circumstances where the local law will not permit them to comply with the SMO or where the public interest duties of the member body are well established in their jurisdiction and these duties are at least as effective as the IFAC member body obligations. SMO 1: Quality Assurance We support the introduction of the proposed Quality Assurance SMO, but are concerned that it could reflect poorly on the accounting profession given that the SMO is so narrowly focused on audits of financial statements of listed entities. We acknowledge the encouragement given to member bodies to extend their review program to other audits. Scope The explanation given for scope of the quality assurance review program (refer SMO1 Scope paragraphs in the explanatory memorandum) is that a broader scope would require most member bodies to implement new programs in addition to regulatory programs or dramatically increase the number of firms or partners covered. This seems to be a very weak argument for the IFAC Board to present in light of its recent reforms based on improving public confidence in the profession and protecting the public interest. In our opinion, IFAC member bodies should at a minimum cover all areas of work performed by their members where individual accountants or firms have been given any form of operating protection to deliver that type of work for example any form of licensing or restriction on others entering that market and competing with them. Such restrictions usually reflect the belief by the local legislature that there is some element of public interest concern with regard to services only permitted to be performed by appropriately qualified persons. We recommend that IFAC should take more leadership in this area and as a minimum require the review of all assurance work. Page 2

3 Application We note that a member body is responsible for quality assurance review programs in respect of their members only if, and to the extent that, those members are performing engagements in the country or countries which the member body gave as its domicile in its application for admission to membership of IFAC. We understand the sentiment behind this statement but we are concerned in regard to the quality assurance over member body constituent members who operate freely in jurisdictions other than that of the domicile of their member body. The language of accountancy is worldwide and IFAC itself is promoting international convergence. We are all aware for example of the reach of the ACCA (to name just one IFAC member body that trains its members outside of the domicile jurisdiction). Many ACCA members operate in developing countries where there is no less need for quality assurance review than in developed countries. How will quality assurance reviews be conducted over these individual members? We recommend that IFAC make a positive statement that member bodies that train and support their individual members offshore or where individual members perform audits of listed entities and those members are not otherwise subject to a quality assurance program from another IFAC member body, that they must conduct quality assurance of that member. Paragraph 6 - Definitions We do not find it helpful to have the Definitions section placed after the introduction when that introduction itself has a black letter obligation. We recommend that either the black letter obligation be removed from the introduction and that obligation contained elsewhere in the SMO or that the definitions be placed either at the beginning of the SMO or at the end. It would be helpful to many member bodies to include a definition for the term serious deficiencies. This term is used in paragraph 15 bullet seven. Paragraph 16 Quality Assurance Review Program Review Cycle We support the requirement that the review cycle should be a maximum of three years for firms performing audits of financial statements of listed companies. However we are concerned that the practical affect of this paragraph could be somewhat confusing as the three year requirement seems to conflict with the potentially longer review period for partners performing audits of financial statements of listed entities. We assume that this is to allow a large firm to have different partners reviewed at each three-year review when the quality and effectiveness of the partner s firm s internal inspection program is adequate. We believe that the SMO would benefit from further explanation for clarity on this point in a grey letter paragraph. Paragraph 35 The Quality Assurance Review Team Leader Paragraph 35 which states that the quality assurance review team leader may perform the review without assistance of additional team members, is surprising given the requirement of the SMO is primarily for review of audits of listed clients. While we accept the point being made in paragraph 35 and believe that one person may review a small firm, we recommend that paragraph 35 be reworded to state: The quality assurance review team should consist of an appropriate number of reviewers to accomplish the review Page 3

4 within a reasonable time period given the size of the member firm under review and the nature of the audits being reviewed. Additional Paragraph One of the procedures established in paragraph 21 (Quality Assurance Review Team Procedures) states that the review will include an assessment of the system of quality control for the practice relating to audits of financial statements of listed entities. As the referred system of quality control might be manual, technological based or a combination of both characteristics, we recommend that appropriate consideration should be given to the background of the reviewers when dealing with complex, automated quality control systems usually present in large professional firms. We propose the additional paragraph, to follow paragraph 35: 36. The system of quality control may vary depending the size of the practices, the complexity of its operations and the degree of technology used in the application of such quality control system. For quality control systems highly based in the application of automated procedures and technological tools, the member body will assign a quality assurance review team leader with appropriate expertise and background capable of performing an overall assessment of those systems. Paragraph 46 - Reporting Paragraph 46 requires that on an annual basis the member body should prepare a summary report of the results of the quality assurance review program into a publicly available report and send copies of the report to regulatory authorities, on request. While we support the extension of the quality assurance program beyond that of audits of listed clients, we do not support the obligation for member bodies to prepare a publicly available report, summarizing the results of the quality assurance review program, nor do we support sending copies of the report to regulatory authorities, on request. The program should have both elements of enforcement and education. These should be managed within the member body. Also, there are most likely to be significant issues around privacy considerations for such reports. While we understand IFAC s intention is to prepare a publicly available summary report on the member bodies it has reviewed for compliance with its SMOs and believe this to be a laudable approach, it is one that we believe does not sit well in regard to individual members or firms. We recommend the deletion of paragraph 46. However, should this requirement be retained we recommend explicit comment that any such summary should not provide detail regarding specific members, firms or clients. Paragraph 50 - Corrective and Disciplinary Actions We agree with the guidance provided in paragraph 50 regarding the various forms of corrective actions that could be taken, but believe that corrective action may be required with regard to an engagement. For example for clearly misleading financial statements and auditor s reports that were not appropriate in the circumstances, the quality assurance review team might propose reissuing such documents, if this is allowed in the jurisdiction. Page 4

5 We recommend that bullet point one have additional wording as follows: Requiring corrective measures, including consideration by a firm of appropriate actions with respect to individual personnel, and engagements. SMO 2: International Education Standards for Professional Accountants and Other EDCOM Pronouncements We understand that a number of IFAC member bodies will at this point have difficulty in meeting some of the SMOs. However, we are of the view that certain SMOs, and in particular SMO 2, needs to be worded such as to avoid the possibility of member bodies falling short of the requirements. We recommend the wording in obligation 2(a) should require best endeavors to implement all IESs and not the lesser obligation of best endeavors to work towards implementation of all IESs. The more stronger worded obligation combined with the effective date of January should give member bodies sufficient time to consider the standards and develop plans to demonstrate to IFAC the way in which they intend to implement IESs. SMO 3: International Standards on Auditing and Other IAASB Pronouncements We recommend rewording SMO 3 to reflect a stronger commitment from member bodies to ISAs and to remove the possible contradiction between the obligations to incorporate and converge. We recommend that SMO 3 read as follows: 1. Member bodies should bring to the notice of their members all ISAs and other pronouncements developed by the IAASB 2. Member bodies should use their best endeavors: a. To implement ISAs and other pronouncements developed by the IAASB. b. To converge national standards with ISAs and as a minimum should incorporate in their national standards the principles and essential procedures on which ISAs are based, or, where responsibility for development of national auditing standards lies with third parties, to persuade those responsible for developing national audit standards to converge to ISAs and as a minimum incorporate the principles and essential procedures in ISAs; and c. To monitor compliance with ISAs by reviewing the audits of financial statements purporting to comply with ISAs to the extent that such engagements are included in the scope of the quality review program established by Statement of Membership Obligation 1 Quality Assurance. Page 5

6 SMO 4: IFAC Code of Ethics for Professional Accountants The Code of Ethics is the corner stone of the accounting profession and we recommend a strengthening of wording in Obligation 1 by removing the wording work towards. We also recommend the deletion the words when and to the extent possible under local circumstances, as the term best endeavors already encapsulates this caveat. Therefore we propose that the obligation read as follows: 1. Member bodies use their best endeavors to implement the IFAC Code and other pronouncements developed by the Ethics Committee. SMO 5: Public Sector Accounting Standards and Other Pronouncements We recommend the inclusion of the same obligation as contained at SMO 7 International Financial Reporting Standards 1(iii), so that SMO 5 includes the following wording: 2. Member bodies should use their best endeavors: (c) To foster acceptance of IPSASs internationally; and SMO 6: Investigation and Discipline This SMO along with SMO 1 Quality Assurance have very different styles to the other SMOs. We understand this is necessary, as SMO 6 and SMO 1 do not directly refer to another set of IFAC (or IASB) standards. However, we believe that the level of prescription in this SMO given the nature of the topic is too high. We recommend the black lettering of only the high level principles, with much of the detail prescription reverting to grey lettering. Specifically we recommend that only the following paragraphs, with suggested rewording, remain black letter: 3. IFAC member bodies should include in their constitution and rules provision for investigation and discipline of misconduct, including, but not limited to, breaches of professional standards and rules by their individual members, and if local laws and practices permit, by member firms. 7. IFAC member bodies should operate a just and effective investigative and disciplinary regime unless a third party effectively maintains a regime or local laws prevent this. A range of penalties should be available to those who judge such issues 9. Member bodies should ensure that their members are made fully aware of all provisions of the ethical code and other professional standards, rules and requirements applicable to them, whether issued by IFAC or at a national level and of the consequences of the failure to comply with such pronouncements. 10. There should be provision in the constitution or rules of member bodies for the timely reporting by member bodies to the appropriate public authority of possible involvement (complicity) in indictable crimes and offences by members Page 6

7 or member firms and the disclosure by the member body of all relevant information to that authority, subject only to the provisions of local law and professional obligations of client confidentiality. 13. Member bodies should ensure that appropriate expertise and adequate financial resource is available to investigative, disciplinary and regulatory action to be taken, consistent with the rules of natural justice and other applicable laws. 17. A disciplinary tribunal or similar grouping should be established to hear cases where the decision has been taken pursue (prefer) professional charges. 24. Member bodies should maintain and operate tracking mechanisms to ensure that all investigations and prosecutions are handled in a timely manner and that all necessary action is taken at the appropriate stage. 30 & 29. Member bodies should maintain complete records of all investigations and disciplinary processes throughout the currency of the proceedings and thereafter to the expiry of the retention period established and laid down by the member body for these purposes. Member bodies should maintain secure confidential facilities for the storage of case papers and other evidence. With regard to the existing paragraph 13 requirement that a suitably qualified senior member of staff of the member body should be given the responsibility of managing these processes, we believe that this role could legitimately be outsourced to the like of a suitably qualified solicitor for example and therefore should not be a black letter requirement. Likewise we believe the list of penalties in existing paragraph 7 should be listed as guidance. Further we recommend that these paragraphs be reordered to be the opening paragraphs of the SMO. While investigation and discipline are complex areas we recommend that simpler language be used in certain paragraphs, to accommodate those member bodies where English is a second language. For example we recommend reconsideration of the following: 1. complicity in indictable crimes (paragraph 10) 2. prefer professional charges (paragraph 17) 3. invocation (paragraph 18) Also, we believe that it is appropriate for the boxed statement of application at the beginning of each SMO to be worded the same. The boxed application statement to SMO 6 Investigation and Discipline varies in a number of instances refer in particular to paragraphs three and four of that boxed statement compared to other SMOs. We recommend rewording these paragraphs to be the same as in SMO 4 (for example). As a matter of editorial comment, we suggest the first sentence of this SMO to be A just and effective investigative and disciplinary regime provides a means by which those who fail to maintain high professionals standards can be made answerable accountable. ( ) Page 7

8 SMO 7: International Financial Reporting Standards The obligation set out in paragraph one of SMO 7 International Financial Reporting Standards should be worded similarly to the obligation in SMO 5 Public Sector Accounting Standards and Other Pronouncements. We believe that in terms of these pronouncements they should be held in the same regard as each other from the point of view of IFAC and its SMOs. We recommend that SMO 7 be amended so that is reads as follows: 1. Member bodies should bring to the notice of their members all IFRSs and other pronouncements developed by the IASB. 2. Member bodies should use their best endeavors: a. To facilitate the implementation of all IFRSs and best practices identified in other pronouncements developed by the IASB b. Specifically to incorporate the requirements of IFRSs in their national accounting requirements, or where the responsibility for the development of national accounting standards lies with third parties, to persuade those responsible for developing the requirements for private sector financial reporting that published private sector financial statements should comply with IFRSs and disclose the fact of such compliance. c. To foster the acceptance of IFRS internationally; and d. To monitor compliance with IFRS by reviewing financial statements purporting to comply with IFRS to the extent that such engagements are included in the scope of the quality review program established by Statement of Membership Obligation 1 Quality Assurance. Thank you for the opportunity to submit comments on this very important set of documents issued by IFAC. We would be pleased to discuss any of the matters we have raised in our comment letter with you or the staff member responsible for this project. Please contact me, or April Mackenzie Director of International Financial Reporting at (732) , if you have any questions. Yours sincerely Grant Thornton International Barry Barber Worldwide Director of Audit and Risk Management Page 8