Jelil Bouraoui presentation to the Institute of Chartered Accountants - - PDF document

Jelil Bouraoui presentation to the Institute of Chartered Accountants of India January 8, 2012 Dear friends, President, Vice President, and members of the Indian Institute, distinguished delegates, ladies and gentlemen, Good Morning. I am pleased and honored to be here in Chennai to attend your Prestigious International Conference on a subject dear to my heart ACCOUNTANCY PROFESSION: LEVERAGING EMERGING CHALLENGES FOR INCLUSIVE GROWTH. I like the challenges and inclusive terms, that’s what our world needs most today. First of all I must present the apologies of our IFAC President Goran Tidstrom for not being able to attend; he must have very serious agenda conflict. I also would like to convey to you all the friendship of the Tunisian chartered accountants institutes council members and the Tunisian people who are now busy to learn about the Democracy. What I want to do this morning, because of the time constrain, and also because the Governance topic is well covered through other sessions, is to go over what IFAC has done on the subject and post my complete presentation on ICAI and IFAC web sites. Prior to the financial and economic crisis, IFAC commissioned a global survey of 341 investors, preparers, company management and directors, auditors, standard setters and regulators to determine the extent to which governance had improved and where there was a need for further improvement. The survey observed progress in the area of governance, compared to the time of the Enron crisis and other corporate financial reporting failures around the world (2001-2004). Interestingly, however, well before the current financial and economic crisis, from 2008 onward until now, developed, a number of persistent governance issues are now widely seen as among the factors that contributed to the crisis: Adoption of governance in name but not in spirit, providing a false sense of security. Many governance changes had been made “in letter, but not in spirit.” They shared the view that some

• rganizations are pushed to improve their governance more by the regulatory bodies than by an inner

drive “to do the right thing.” “Numerous organizations and boards of directors consider governance as yet another certification, and still think that forming committees and hiring consultants to write polices solves the problem.” Regulatory overload (especially for SMEs), Leading to legalistic compliance (“checklist mentality”) rather than a principles-oriented practice approach. As a result, compliance activities would take too much time and attention and real risk areas and

• pportunities would be overlooked.

Behavioral and cultural aspects of governance “The ethical dimension – social, cultural and personal behavior – is fundamentally important throughout the whole governance process.” It is good to improve accounting and auditing, but banks, financial advisers and analysts, credit raters and lawyers should also adhere to a code of ethics. Remuneration structures with little relation to long-term sustainable performance. There are difficulties in relating remuneration to long-term performance and difficulties in discouraging short-term opportunism and rewarding failure. Remuneration structures should seek better alignment with longer term sustainable performance and be more transparency in executive compensation. Expand view from compliance governance to business governance There is too much compliance governance instead of business governance – not only to satisfy regulators, but also because many institutional investors put too much emphasis on compliance with governance rules We think that the overemphasis on internal control over financial reporting should be reconsidered. After the survey, IFAC conducted interviews with key leaders from around the globe to capture the governance recommendations from prominent preparers, directors, auditors, standard setters, regulators and investors. In these interviews the participants explore potential solutions for the major governance issues that emerged from the global financial and economic crisis, as well as for those issues that are now appearing in the horizon. Expand from shareholder perspective to stakeholder perspective Both public and private sector organizations have an ever-growing impact on social and economic life and are of increasing significance, not only for their owners and other investors, but also for their clients, employees, suppliers, neighbors, governments, regulators, financial markets, and for societies as a

• whole. Moreover, individual persons now fill numerous stakeholder roles at the same time: the same

person can be a client, an employee, a neighbor of, and an investor (via his or her pension fund for example) in a specific company. To accommodate these different and, at times, conflicting perspectives,

• rganizations should adopt a wider stakeholder view.

Governance and sustainability should be better integrated in the strategy, operations, and communications of an organization Governance and sustainability are key elements in achieving long term social, environmental and economic performance, as well as in enhancing investor and stakeholder confidence. Put differently, the long term survival of organizations is no longer affected only by economic factors, but also by social and environmental ones. Therefore, these aspects should be better integrated in the strategy, operations, and stakeholder communications of an organization. Organizations should not produce first and think about

the social and environmental consequences only as an afterthought. Sustainable organizations tackle these issues upfront instead of finding solutions after the event. With respect to business reporting,

• rganizations mostly produce social and environmental reports completely separate from their financial

report, if they report at all on those aspects. This produces at best a fragmented view of the performance

• f the organization. When social, environmental and economic results of an organization are in one

integrated report, taking into account the various interdependencies, we believe it is then possible to see the true performance of the organization Develop and implement codes of conduct to create a value-based culture We recommend formulating the values to which an organization will adhere in a code of conduct, and integrating them in the operations of the organization. In addition, investor codes of conduct are considered to be a route to much-improved monitoring of governance as shareholders have not been very pro-active in their role as owners and should actually start to take more action in this space. All these recommendations are easier said than done! The main question, therefore, is how to best enable organizations to make the transition to this next level of governance. At IFAC we believe that the Professional Accountant is in the heart of the Governance system and as a matter of fact we just added in our Mission to value the role, as a leader, of the Professional Accountant globally and we also geared the DNC to the PAODC, stressing the role and the importance of the PA. Professional accountants, delivering professional services to organizations, support effective governance and social, environmental and economic performance in various roles, which may be classified into creators, enablers, preservers, reporters, and (external) auditors for organizations.

• Professional accountants as creators of value. In this role professional accountants are involved in

leadership roles in governance, strategy and performance management and in overseeing the allocation

• f resources to ensure long-term sustainable value creation. Examples of specific roles include executive

director, chief financial officer, financial director and treasury manager. As part of the organization’s management, professional accountants should ensure a strong link between business strategy, governance and sustainability so that boards and managers consider these areas in an integrated rather than isolated way.

• Professional accountants as enablers of value. In roles such as business unit controller, business-,

financial- and/or performance analyst, management or cost accountant, professional accountants influence and support those who make decisions. By providing relevant insight and analysis, and by challenging assumptions and conventional thinking, professional accountants as enablers of value will typically guide and assist sustainable strategic and operational decision making and implementation, and evaluate its ongoing relevance and success. Professional accountants should enable governance, risk management and control as a strategic activity and an integral part of an organization’s management system.

• Professional accountants as preservers of value. Professional accountants are familiar with the

national governance codes, (and other) regulatory rules and procedures in order to guarantee, as far as possible, that compliance with the applicable regulatory regimes is met. They could also ensure that

• rganizations stay on track to achieve their sustainable strategic and operational goals by testing whether

financial and non-financial information systems are working correctly and that the resulting information from these systems reflects the true sustainable performance of the organization. They are well positioned to effectively identify, prioritize, manage and control, mitigate and report strategic and

• perational risks and control deficiencies. Examples of such roles include risk and business assurance

manager, compliance manager, and internal auditor.

• Professional accountants as reporters of value. Professional accountants − in roles such as group

controller, head of reporting, investor relations manager and financial or management accountant − design, implement, and manage performance measurement and reporting systems. They measure social, environmental and economic performance, prepare high quality business and financial reporting, and provide internal and external stakeholders with facts, analysis and insights on sustainable value creation. Ifac participating in International Governance Initiative.

• a. IFAC/UNCTAD collaboration on governance

Collaboration on governance between IFAC and UNCTAD dates back to 2006 when IFAC participated in the revision of UNCTAD’s revised Guidance on Good Practices in Corporate Governance Disclosure (2006), designed to assist the preparers of enterprise reporting in producing disclosures on governance for investors and other stakeholders. Furthermore, IFAC and UNCTAD organized a joint conference in April 2010 addressing (a) the role of the accountancy profession in governance in the wake of the financial and economic crisis, and (b) on the next steps to take in integrating governance and sustainability into the strategy and

• perations of an organization.
• b. OECD

When the OECD issued its revised OECD Principles of Corporate Governance in 2004 – after a consultation process involving representatives of governments, standard setting bodies, including IFAC, as well as businesses, professional bodies, trade unions and civil society organizations – IFAC was among the first international organizations that actively welcomed and supported them as an extremely important element of the international financial system. IFAC agrees with the OECD's assertion that governance is a key element of improving economic efficiency and growth, and strongly supports the position that governance practices internationally should be based on the OECD principles. IFAC also participated in the Global Consultation of the OECD on governance and the financial and economic crisis to discuss the monitoring, implementation and enforcement of governance standards and codes, as well as possible reforms and improvements. In light of this consultation, IFAC prepared a reconciliation of IFAC’s International Good Practice Guidance, Evaluating and Improving Governance in

Organizations with the OECD corporate governance principles. In its series of recommendations to the Group of Twenty Finance Ministers and Central Bank Governors G20 in 2009, IFAC explicitly expressed its continued endorsement of the OECD Principles of Corporate Governance.

• c. IFAC’s G20 recommendations

IFAC submitted a series of recommendations for the reform of the global financial system to the G20 Working Groups. With respect to governance, IFAC recommended that G20 should call for measures to enhance governance in their respective countries and in the global marketplace as a matter of urgency. Recently, in their meeting in Cannes, France the G20 reaffirmed the endorsement of IFAC recommendations.

• d. IFAC is participating in the revision of the COSO (committee of sponsoring organizations of Treadway

commission) Internal Control Integrated Framework (being a member of the technical advisory group). The launch of COSO's exposure draft will be in 2012.

• e. In addition to IFAC's continuing participation in the revision of the COSO Internal Control Framework, a

meeting was held in May with representatives of the ISO 31000 risk management standard, which resulted in an invitation for IFAC to participate in the ISO working group responsible for the further development of this standard and accompanying implementation guidance. Good collaboration with these two organizations is seen as an important step to increase IFAC's influence in this very important area for professional accountants and to bring better align these frameworks.

• f. Jointly with CIPFA, IFAC is developing an international public sector governance framework and set of

principles. Finally IFAC released an Exposure Draft in December 2011, comments requested by February 29, 2012 Evaluating and Improving Internal Control in Organizations IFAC Guidance and information on Governance

• a. Evaluating and Improving Governance in Organizations
• b. Sustainability Framework
• c. Code of Conduct for Organizations
• d. Code of Ethics for Professional Accountants
• e. International Standards on Auditing

f. Governance in the Public and not-for-profit Sector