Challenges Facing the Accountancy Profession in Emerging Economies M. Zubaidur Rahman Financial Management Unit Operations Policy and Country Services The World Bank
The World Bank Group Working for a world free of poverty
New Environment - New Challenges During the last decade, there has been worldwide recognition of the role of professional accountants and auditors in economic development. Consequently, at the turn of this century, a new environment has been created for the practicing accountants and auditors, which has given rise to new challenges for the accountancy profession in both developed and developing countries. The Great Expectation: Members of the accountancy profession should play proactive roles in a country s economic development
Background The international financial crises of the late 1990s brought to light major weaknesses in the international financial architecture, including one of its main component parts transparency in the financial statements of the corporate entities. The international community highlighted the importance of high quality accounting and auditing practices in strengthening a country s financial system, with impacts on bolstering the international financial architecture. The World Bank recognized accountancy development as an integral part of economic development; and arrangements have been put in place for assisting Bank s member countries to strengthen the institutional underpinnings of accounting and auditing practices.
The Role of Accounting & Auditing in Economic Development Capital market development and access to finance Improved transparency and accountability of stateowned enterprises Market discipline and enhanced financial sector stability Improved investment climate Sound Sound accounting accounting & auditing auditing practices practices ensure ensure the the availability availability of of credible credible financial financial information information Better financial management and efficient utilization of scarce resources Economic Development Poverty Alleviation
Main Challenges Demand for more expertise Complex business transactions, sophisticated and principlesbased accounting standards Growing needs for independent opinions under new circumstances (governance issues at both corporate and national levels, expanded markets, and increased technical problems) Difficulties in expressing independent opinion (complicated accounting manipulations, industry knowledge, valuations, information technology) Need for improving professional behavior Protect public interest Comply with the international good practices on professional ethics (e.g. IFAC Code of Ethics for Professional Accountants) Consider auditing as a profession, NOT as a business Call for external oversight of the profession to enhance public trust Accountability to the stakeholders Improving image of the profession
Meeting Demand for More Expertise: Filling the Knowledge Gap Mismatch between accounting and auditing requirements and the capacity to comply The application of international standards requires certain minimum levels of capacity (i.e., appropriately qualified individuals), which depends on the availability of opportunities for relevant and adequate education, training and experience. The development and enhancement of capacity applies to educators, regulators and users as much as to preparers and auditors, and places demands on both institutions and individuals.
Improved Professional Behavior: Comply with the Ethical Requirements In early 1900s, a 28 year-old public accountant, Mr. Arthur E. Andersen refused to yield to the wishes of a particular audit client: There s not enough money in the whole of Chicago to induce me to change that report. The firm lost that client s business. In a 1932 speech, Arthur Andersen himself reveals his ideals: If the confidence of the public in the integrity of accountants reports is shaken, their value is gone. To preserve the integrity of his reports, the accountant must insist upon absolute independence of judgment and action. The necessity of preserving this position of independence indicates certain standards of conduct. Andersen, one of the leading global accounting firms, lost credibility and went out of the market at the beginning of 21st century
Independent Oversight: New Regulatory Framework In most of the industrialized countries, the licensing and regulation of the accountancy profession was founded through the initiative of practicing professional accountants Over time and in many countries this approach evolved into a workable system of government-sanctioned selfregulation that for many years was considered adequate and efficient without direct interventions by government regulators The last decade has seen the growth of independent regulators of accounting and auditing in all parts of the world. The newly established independent regulators are developing arrangements for working in partnership with the professional accountancy bodies
Selected Independent Regulatory Bodies United Kingdom: Financial Reporting Council United States: Public Company Accounting Oversight Board Canada: Canadian Public Accountability Board Japan: Certified Public Accountants & Auditing Oversight Board Ireland: Irish Auditing & Accounting Supervisory Authority Australia: Financial Reporting Council South Africa: Independent Regulatory Board for Auditors Sri Lanka: Accounting and Auditing Standards Monitoring Board Switzerland: Federal Audit Oversight Authority Sweden: Supervisory Board of Public Accountants Singapore: Accounting and Corporate Regulatory Authority Austria: Austrian Audit Quality Control Oversight Board Various other European and African countries have either established or in the process of establishing independent regulatory bodies
Cross-cutting Issues in Most of the Developing Countries Increases Challenges Outdated legal framework Weak accountancy profession Widespread non-compliance with standards Inadequate monitoring and enforcement Lack of access to international standards Inadequate curricula and training Non availability of implementation guidance and practice manuals Mostly due to weak capacity
Strengthen Corporate Financial Reporting Infrastructure All supporting pillars need to be strengthened Accounting Standards Statutory Framework Monitoring & Enforcement Education & Training Accounting Profession & Professional Body Auditing Standards & Code of Ethics
Concluding Remarks Turn Challenges into Opportunities by: Building a professional accountancy body which is capable of meeting the IFAC s Statements of Membership Obligations Improving practitioners knowledge of the practical aspects of IFRS, ISA and other international good practices Complying with the established accounting, auditing and ethical requirements Participating in strengthening the corporate financial reporting infrastructure Developing partnership arrangements between the self-regulatory professional body and the independent oversight body
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