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The Regulatory Framework Costs and Opportunities Lessons learned from the  World Bank’s ROSC Program John Hegarty IFAC SME...
The World Bank – Our Role <ul><li>Making the link between financial reporting and poverty reduction </li></ul><ul><li>Advo...
Financial Reporting and Poverty Reduction <ul><li>Strengthen financial architecture, and reduce the risk of financial mark...
Accounting and Auditing ROSCs <ul><li>Reports on the Observance of Standards and Codes </li></ul><ul><li>Part of World Ban...
What does it mean to “adopt international standards”? <ul><li>Introduction of “modern” accounting and auditing practices <...
Mechanisms to grant national authority to international standards <ul><li>Without force of law/regulation, “international”...
Linkages between general purpose and regulatory reporting (incl. tax) <ul><li>Policy objectives of international standards...
Scope of application of international standards <ul><li>Severe risks to the culture of compliance when the scope of applic...
The enabling environment <ul><li>Market demand for international standards </li></ul><ul><li>The role of disclosure in gov...
Oversight, monitoring, enforcement <ul><li>The inability of third party users to observe compliance </li></ul><ul><li>Reli...
Filling the regulatory gap <ul><li>The need for international consensus on a comprehensive framework of principles for the...
Getting the legal, institutional and policy preconditions right <ul><li>Clarity required as to what “adoption” means </li>...
Impact on the SME/SMP Sector <ul><li>Relevance of international standards </li></ul><ul><li>Increasing impact of the publi...
The Regulatory Framework Costs and Opportunities Lessons learned from the  World Bank’s ROSC Program
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John Hegarty - Regulation

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Transcript of "John Hegarty - Regulation"

  1. 1. The Regulatory Framework Costs and Opportunities Lessons learned from the World Bank’s ROSC Program John Hegarty IFAC SME/SMP and Developing Nations Conference Prague, 10-11 March 2005
  2. 2. The World Bank – Our Role <ul><li>Making the link between financial reporting and poverty reduction </li></ul><ul><li>Advocate for improved standards and compliance </li></ul><ul><li>Contributor to the policy formulation process </li></ul><ul><li>Assessor </li></ul><ul><li>Advisor </li></ul><ul><li>Financier </li></ul><ul><li>Fiduciary reliance on external audit </li></ul><ul><li>… but not a standard-setter or regulator </li></ul>
  3. 3. Financial Reporting and Poverty Reduction <ul><li>Strengthen financial architecture, and reduce the risk of financial market crises and their associated negative economic impacts (especially on the poor) </li></ul><ul><li>Improve the investment climate (foreign direct and portfolio investment, mobilization of domestic savings) </li></ul><ul><li>Facilitate financial intermediation by lowering the barrier of high information and borrowing costs </li></ul><ul><li>Allow investors to evaluate corporate prospects and make informed investment and voting decisions, leading to a lower cost of capital and better allocation of resources </li></ul><ul><li>Enhance corporate income tax collection </li></ul><ul><li>Support economic integration, both regionally and globally </li></ul>
  4. 4. Accounting and Auditing ROSCs <ul><li>Reports on the Observance of Standards and Codes </li></ul><ul><li>Part of World Bank / IMF work on the international financial architecture, international standards initiative, Financial Sector Assessment Program (FSAP) </li></ul><ul><li>IFRS/IAS and ISA used as the assessment benchmarks </li></ul><ul><li>Assessments cover national institutional frameworks for accounting and auditing, comparability of national and international standards, compliance with national standards </li></ul><ul><li>38 accounting and auditing ROSCs completed by 30 June, 2004, confined to “Part II” countries </li></ul><ul><li>www.worldbank.org/ifa/ </li></ul>
  5. 5. What does it mean to “adopt international standards”? <ul><li>Introduction of “modern” accounting and auditing practices </li></ul><ul><li>One-off “transformations” of financial statements prepared using national standards </li></ul><ul><li>Development of national standards “based on” IFRS/IAS and ISA </li></ul><ul><li>One-time-only adoption of international standards with no, or poor, subsequent updating </li></ul><ul><li>Adoption of selected subset of international standards </li></ul><ul><li>Program of “convergence” between national and international standards over time </li></ul><ul><li>IASB and IFAC promotional material not always helpful </li></ul><ul><li>Doesn’t compliance mean “all or nothing”? </li></ul>
  6. 6. Mechanisms to grant national authority to international standards <ul><li>Without force of law/regulation, “international” standards become “offshore” standards </li></ul><ul><li>Constraints on granting national public authority to international private standards </li></ul><ul><li>Backing for the standard-setting process or for individual standards, keeping up to date </li></ul><ul><li>Translation, copyright/royalties, gazetting </li></ul><ul><li>Role of legislation -v- standards </li></ul><ul><li>Company law or securities regulation as the legal basis for accounting and auditing requirements </li></ul>
  7. 7. Linkages between general purpose and regulatory reporting (incl. tax) <ul><li>Policy objectives of international standards and national regulatory reporting regimes not always aligned </li></ul><ul><li>Risk of conflicts when international standards adopted through regulatory reporting mechanisms </li></ul><ul><li>However, specialist regulatory bodies can play a major and positive role in oversight/monitoring/enforcement </li></ul><ul><li>Avoid completely parallel systems, encourage adoption of a common general purpose reporting platform, keep reconciling items to a minimum, and harness the oversight/monitoring/enforcement capacity of regulators </li></ul>
  8. 8. Scope of application of international standards <ul><li>Severe risks to the culture of compliance when the scope of application is inappropriate </li></ul><ul><li>IFRS/IAS not suitable for use by all enterprises </li></ul><ul><li>Widespread general purpose reporting obligations for enterprises other than “public interest entities” </li></ul><ul><li>Managing the “Big GAAP / Little GAAP” distinction </li></ul><ul><li>Future of (“Little GAAP Only”) national standard setters </li></ul><ul><li>ISAs suitable for all audits (or is a non-ISA audit an audit?) </li></ul><ul><li>Risks of an excessively broad statutory audit requirement </li></ul><ul><li>Addressing gaps/weaknesses in international standards </li></ul><ul><li>Linking the application of IFRS and ISA </li></ul>
  9. 9. The enabling environment <ul><li>Market demand for international standards </li></ul><ul><li>The role of disclosure in governance and regulatory regimes </li></ul><ul><li>Public access to audited financial statements </li></ul><ul><li>Patterns of financial intermediation and enterprise ownership </li></ul><ul><li>Significance of foreign direct and foreign portfolio investment </li></ul><ul><li>The political economy costs and benefits of transparency </li></ul><ul><li>Capacity to comply </li></ul><ul><li>Education, training and experience </li></ul><ul><li>Reaching a critical mass of demand for relevant skills </li></ul><ul><li>Financial sustainability of capacity development mechanisms </li></ul><ul><li>Leveraging resources on an international scale </li></ul>
  10. 10. Oversight, monitoring, enforcement <ul><li>The inability of third party users to observe compliance </li></ul><ul><li>Reliance on reputational agents; limits of self-regulation </li></ul><ul><li>Determining role of oversight/monitoring/regulatory bodies </li></ul><ul><li>Absence of agreed international best practice models </li></ul><ul><li>Lack of appropriate mandates, resources, methodologies </li></ul><ul><li>Lack of leverage when specialist regulators are not concerned with general purpose financial reporting </li></ul><ul><li>Problems of regulatory capture, effectiveness of judicial systems, macro-governance </li></ul><ul><li>International audit firm networks do not deliver consistently high quality internationally, and thus cannot be relied upon to compensate for weaknesses in national regulatory regimes </li></ul>
  11. 11. Filling the regulatory gap <ul><li>The need for international consensus on a comprehensive framework of principles for the regulation of accounting and auditing </li></ul><ul><ul><li>IFRS/IAS and ISA are not a complete framework </li></ul></ul><ul><ul><li>Making explicit the implicit assumptions about legal, institutional and policy preconditions which underlie international standards </li></ul></ul><ul><ul><li>Recognizing the public interest / non-public interest split </li></ul></ul><ul><ul><li>Growing importance of external audit regulators </li></ul></ul><ul><ul><li>National/regional models are not necessarily replicable internationally </li></ul></ul><ul><ul><li>Building on the linkages with other standards and codes </li></ul></ul><ul><ul><li>IOSCO / Basel Committee /IAIS Joint Forum Model </li></ul></ul><ul><ul><li>Global monitoring of progress </li></ul></ul>
  12. 12. Getting the legal, institutional and policy preconditions right <ul><li>Clarity required as to what “adoption” means </li></ul><ul><li>Proper balance of capacity and institutionalized incentives needed to ensure successful implementation </li></ul><ul><li>Effective legislative and regulatory mechanisms must be in place to grant national authority to international standards, and to oversee/monitor/enforce compliance </li></ul><ul><li>Scope of application of international standards should be appropriate </li></ul><ul><li>International audit firm networks cannot compensate for national regulatory weaknesses </li></ul><ul><li>IFRS/IAS and ISA do not constitute a comprehensive framework of principles to regulate accounting and auditing </li></ul><ul><li>Work needed to fill the framework gaps, monitor progress </li></ul>
  13. 13. Impact on the SME/SMP Sector <ul><li>Relevance of international standards </li></ul><ul><li>Increasing impact of the public interest / non-public interest distinction </li></ul><ul><li>Accounting standards </li></ul><ul><ul><li>Accelerating the IASB SME project </li></ul></ul><ul><ul><li>Conceptualizing the basis for simplification </li></ul></ul><ul><ul><ul><li>Different user needs? </li></ul></ul></ul><ul><ul><ul><li>Different preparer/auditor capacity? </li></ul></ul></ul><ul><li>Auditing standards </li></ul><ul><ul><li>Is a non-ISA audit an audit? </li></ul></ul><ul><ul><li>Different standards or different assurance levels? </li></ul></ul><ul><ul><li>Acceptability of the underlying financial reporting framework </li></ul></ul><ul><li>Regulation, monitoring and enforcement </li></ul><ul><ul><li>Credibility and confidence have a price, set outside the profession </li></ul></ul><ul><ul><li>Conceptualizing the basis for simplification </li></ul></ul><ul><ul><ul><li>Different user needs? </li></ul></ul></ul><ul><ul><ul><li>Different preparer/auditor/regulator capacity? </li></ul></ul></ul><ul><li>Making transparent the impact of differential standards/regulation </li></ul><ul><li>How to reconcile a single profession with differential standards/regulation </li></ul>
  14. 14. The Regulatory Framework Costs and Opportunities Lessons learned from the World Bank’s ROSC Program
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