ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 1

Definition and Enforcement of Definition and Enforcement of International Accounting StandardsInternational Accounting Standards

15 February 200515 February 2005

Kathleen M. MoktanKathleen M. Moktan

Pr. Financial Mgmt Spec.Pr. Financial Mgmt Spec.

ADBADB

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 2

Principles versus StandardsPrinciples versus Standards

•• Principle: a comprehensive and Principle: a comprehensive and fundamental law, doctrine or fundamental law, doctrine or assumptionassumption

•• Standard: a uniform benchmark Standard: a uniform benchmark or system of benchmarksor system of benchmarks

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 3

Why Do Accounting Standards Why Do Accounting Standards Matter?Matter?

•• A common framework to enable review, A common framework to enable review, analysis and interpretation of financial analysis and interpretation of financial information across entities, countries information across entities, countries and regionsand regions

•• Transparent, timely, reliable financial Transparent, timely, reliable financial information instills investor confidenceinformation instills investor confidence

•• Access to efficiently priced capital is Access to efficiently priced capital is key to economic growthkey to economic growth

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 4

Bad Disclosure Costs…Bad Disclosure Costs…

0

5

10

15

20

25

30

35

40

Singapore UnitedStates

HongKong,China

Pakistan India Thailand Indonesia

Opacity Risk Premium Tax-Equivalent Effect

Source: Pricewaterhouse Coopers Opacity Index (2001)

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 5

Negative Impact of OpacityNegative Impact of Opacity

Every one point increase in a country’s Opacity Every one point increase in a country’s Opacity Index correlates to:Index correlates to:

•• $986 decrease in per capita income$986 decrease in per capita income•• 1% decrease in FDI1% decrease in FDI•• 57 basis point increase in the average 57 basis point increase in the average

borrowing interest rateborrowing interest rate•• .46% increase in inflation .46% increase in inflation Source: The Global Cost of OpacitySource: The Global Cost of OpacityJoel Joel KurtzmanKurtzman, Glenn , Glenn Yago Yago and and Triphon Phumiwasana Triphon Phumiwasana October 2004October 2004MIT Sloan Management ReviewMIT Sloan Management Review

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 6

Investors and Policymakers Agree on Key Investors and Policymakers Agree on Key Priorities for Improved Corporate GovernancePriorities for Improved Corporate Governance

CorporateFactors

Accounting disclosure

Shareholder equality

CapitalMarket Factors

Broad Country level

factors

Factors affectingInvestment decisions

Factors policy makers believe support corporategovernance

73 86

54 73

International acct stdsMarket liquidityMarket reg & infrastructure

4847

46

55

5368

Property rightsPressure on corruption

4535

6443

Source: McKinsey Global Investor and Emerging Market Policymaker Opinion Surveys on Corporate Governance, 2002

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 7

ADBADB--OECD AntiOECD Anti--Corruption Corruption Initiative for AsiaInitiative for Asia--PacificPacific

AntiAnti--Corruption Action Plan for Asia and the Corruption Action Plan for Asia and the PacificPacific

•• Pillar 1 Pillar 1 –– Developing Effective and Developing Effective and Transparent Systems for Public ServiceTransparent Systems for Public Service–– Appropriate auditing proceduresAppropriate auditing procedures

•• Pillar 2 Pillar 2 –– Corporate Responsibility and Corporate Responsibility and AccountabilityAccountability–– Promotion of good corporate governance Promotion of good corporate governance

including adequate internal controlsincluding adequate internal controls–– Legislation requiring transparent company Legislation requiring transparent company

accounts accounts

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 8

UN Convention Against UN Convention Against CorruptionCorruption

Article 12 (1), Private SectorArticle 12 (1), Private Sector•• Each State Party shall take measures, in Each State Party shall take measures, in

accordance with the fundamental principles accordance with the fundamental principles of its domestic law, to prevent corruption of its domestic law, to prevent corruption involving the private sector, involving the private sector, enhance enhance accounting and auditing standards in the accounting and auditing standards in the private sectorprivate sector, and where appropriate, , and where appropriate, provide effective, proportionate and provide effective, proportionate and dissuasive civil, administrative or criminal dissuasive civil, administrative or criminal penalties for failure to comply with such penalties for failure to comply with such measures. (measures. (italics added)italics added)

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 9

UN Convention Against UN Convention Against CorruptionCorruption

Article 12 (3), Private SectorArticle 12 (3), Private Sector•• Measures as necessary to prohibitMeasures as necessary to prohibit

–– Establishment of offEstablishment of off--thethe--books accountsbooks accounts–– Making of offMaking of off--thethe--books or inadequately identified books or inadequately identified

transactionstransactions–– Recording on nonRecording on non--existent expenditureexistent expenditure–– Entry of liabilities with incorrect identification of Entry of liabilities with incorrect identification of

their objectstheir objects–– Use of false documentsUse of false documents–– Intentional destruction of bookkeeping documents Intentional destruction of bookkeeping documents

earlier than foreseen by the lawearlier than foreseen by the law

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 10

OECD Convention on OECD Convention on Combating BriberyCombating Bribery

•• Article 8 Article 8 AccountingAccounting–– Reinforces Article 12(3) of the UN Reinforces Article 12(3) of the UN

ConventionConvention–– Calls upon parties to provide effective, Calls upon parties to provide effective,

proportionate and dissuasive civil, proportionate and dissuasive civil, administrative and criminal penalties for administrative and criminal penalties for omissions and falsification of books, omissions and falsification of books, records and accounts for the purpose of records and accounts for the purpose of concealing bribery.concealing bribery.

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 11

International Accounting and International Accounting and Auditing StandardsAuditing Standards

•• International Standards on Auditing (ISA) International Standards on Auditing (ISA) ––applicable to private and public sector auditsapplicable to private and public sector audits

•• International Financial Reporting standards International Financial Reporting standards (IFRS) (IFRS) –– applicable to private sector and applicable to private sector and publicly owned business unitspublicly owned business units

•• International Public Sector Accounting International Public Sector Accounting Standards (IPSAS)Standards (IPSAS)

•• Compliance with international accounting and Compliance with international accounting and auditing standards would meet the auditing standards would meet the requirements of the three documents requirements of the three documents

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 12

Private Sector Accounting Private Sector Accounting Standards (IFRS)Standards (IFRS)

•• Apply to private sector entities and Apply to private sector entities and business entities owned by the public business entities owned by the public sectorsector

•• Promulgated by the International Promulgated by the International Accounting Standards BoardAccounting Standards Board

•• Accrual accounting Accrual accounting

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 13

A Global Accounting Standard…A Global Accounting Standard…

Undecided 5 %

Undesirable 5 %

Desirable 90 %

••McKinseyMcKinsey & Company & Company asked 200 institutional asked 200 institutional investors the question:investors the question:

••To what extent is a single To what extent is a single global accounting global accounting standard desirable?standard desirable?

••Source: Source: McKinseyMcKinsey & Company & Company (July 2002)(July 2002)

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 14

…… But Can’t Agree on Which OneBut Can’t Agree on Which One

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 15

Meanwhile, Most Refer to IFRSMeanwhile, Most Refer to IFRS

Use IAS DirectlyWill Directly Adopt IASAre Harmonizing with IASDirectly Consider IASSome Consideration of IASDo Not Refer to IAS

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 16

IFRS is the AsiaIFRS is the Asia--Pacific BenchmarkPacific Benchmark

Use IAS DirectlyWill Directly Adopt IASAre Harmonizing with IASDirectly Consider IASSome Consideration of IASDo Not Refer to IAS

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 17

National Economy:System of National

Accounts (SNA)

Public Sector:Int’l Public

Sector Accounting Standards

(IPSAS)

State Enterprises:Int’l Financial

Reporting Standards (IFRS)

International Public Sector AccountingInternational Public Sector Accounting

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 18

Accounting Status in the OECD (2002)Accounting Status in the OECD (2002)

0%

20%

40%

60%

80%

100%

AgencyReporting

AggregateReporting

Budgeting Appropriations

Modifiedcash

Modifiedaccrual

Introducingfull accrual

Full accrual

Sources: OECD, IFAC, other

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 19

IASB IOSCO ISACABISINTOSAI

ASOSAI SPASAI

UNCTAD

ISARIAASB

IFAC

CAPA

AFA SAFA

Committees

International Accounting and Auditing ArchitectureInternational Accounting and Auditing Architecture

IASC

Global

Regional

Sub-regional

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 20

International Accounting and International Accounting and Auditing ArchitectureAuditing Architecture

•• International Federation of Accountants International Federation of Accountants (IFAC) (IFAC) –– international standards on international standards on auditing (IAS) and International Public auditing (IAS) and International Public Accounting StandardsAccounting Standards

•• International Accounting Standards International Accounting Standards Board (IASB): international financial Board (IASB): international financial reporting standardsreporting standards

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 21

International Accounting International Accounting Standards Board (IASB)Standards Board (IASB)

•• Responsible for promulgating Responsible for promulgating international private sector accounting international private sector accounting standards (IFRS)standards (IFRS)

•• Independent, privately funded standard Independent, privately funded standard settersetter

•• Based in LondonBased in London•• International Accounting Standards International Accounting Standards

Committee (IASC) FoundationCommittee (IASC) Foundation•• www.www.iasbiasb.org.org

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 22

International Federation of International Federation of Accountants (IFAC)Accountants (IFAC)

•• Federation of professional accountancy Federation of professional accountancy bodiesbodies–– Developing Nations Permanent Task ForceDeveloping Nations Permanent Task Force

–– Education CommitteeEducation Committee

–– Ethics CommitteeEthics Committee

–– Small and Medium Practices/Enterprises Small and Medium Practices/Enterprises Permanent task ForcePermanent task Force

•• Based in New YorkBased in New York

•• www.www.ifacifac.org.org

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 23

IFACIFAC

•• Compliance Advisory PanelCompliance Advisory Panel–– Two part exerciseTwo part exercise

•• Assessment of Regulatory and Standard Assessment of Regulatory and Standard Setting FrameworkSetting Framework

–– FactFact--based questionnaire containing 10 based questionnaire containing 10 sections and 138 questionssections and 138 questions

–– 127 survey responses vetted and now on 127 survey responses vetted and now on internetinternet

•• Member body self assessmentMember body self assessment–– assessment tool to be distributed in 2005assessment tool to be distributed in 2005

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific -3rd Master Training Seminar, February 2005 24

Hot topics in accountancyHot topics in accountancy

•• ConvergenceConvergence

•• Regulation and oversightRegulation and oversight

•• Big GAAP/Little GAAPBig GAAP/Little GAAP

•• Access to standardsAccess to standards