Auditing in the Public Sector

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Presentation by Ian Ball, chief executive officer of the International Federation of Accountants, at the L'Institut des Réviseurs d'Entreprises’ European Study Day conference in Brussels, Belgium, which details the societal role of the audit, the need for adoption of accrual-based accounting by governments and public sector institutions, and IFAC’s commitment to global convergence of international standards.

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Auditing in the Public Sector

  1. 1. Auditing in the Public Sector Ian Ball CEO International Federation of Accountants European Study Day 10 February, 2012 Brussels, Belgium
  2. 2. Auditing in the Public SectorIFAC Comments on European Commission Proposed LegislationThe International Federation of Accountants (IFAC), the global organization for the accountancyprofession with members and to continually improve audit quality, enhance the role of audit, and IFAC supports initiatives associates in 127 countries, today commented on the EuropeanCommission (EC)’s proposed legislation, issued this week. safeguard auditor independence. As such, IFAC supports the following measures proposed by the EC:IFAC supports initiatives to continually improve audit quality, enhance the role of audit, and safeguardauditor independence, and believes that innovation and evolution are essential for this vital service to • Compliance with International Standards on Audit (ISAs)maintain its relevance and meet the needs of investors and other stakeholders. As such, IFAC supports • measures proposed by the EC, which we believe are consistent with views widelythe followingStrengthening of audit committeesexpressed in response to the Green Paper: • Enhanced dialogue between auditors and regulators • Greater transparency in auditor selection • Greater cross-border mobility for auditors • Enhanced auditor reporting
  3. 3. Auditing in the Public Sector IFAC Comments on European Commission Proposed LegislationThe International Federation of Accountants (IFAC), the global organization for the accountancyprofession with members and associates in 127because there iscommented on evidence that they will have a IFAC does not support several proposals, countries, today not sufficient the EuropeanCommission (EC)’son auditorlegislation, issued this week. positive impact proposed independence and audit quality, and that benefits will outweigh risks andIFAC supports initiatives to continually improve audit quality, enhance the role of audit, and safeguard costs. Further research should be conducted to support their feasibility and impact.auditor independence, and believes that innovation and evolution are essential for this vital service to • Mandatory firm rotationmaintain its relevance and meet the needs of investors and other stakeholders. As such, IFAC supportsthe following measures proposed by the EC, which we believe are consistent with views widely • Prohibition of non-audit servicesexpressed in response to the Green Paper: Also, IFAC is of the view that the proposed legislation, if passed, could have a negative impact on the audit profession and professional accountancy organizations (PAOs). In particular: . • PAOs’ role in audit oversight arrangements • Extraterritorial impacts
  4. 4. Auditing in the Public Sector 2.1 1.1 Introduction …It is important to stress that auditors have an important role to play and are entrusted by law to . conduct statutory audits. …The independence of auditors should thus be the bedrock of the audit environment. It is time to probe into the true fulfillment of this societal mandate.
  5. 5. Auditing in the Public Sector 2.1 IFAC believes that there is a need to more effectively set out the societal role of the audit. Ultimately, the value of the audit is dependent upon the quality and usefulness of . the audited financial statements.
  6. 6. Auditing in the Public Sector “1.1 In relation to the need for high-quality and timely accrual-based financial reporting, IFAC recommends that the G-20 actively encourages and facilitates the adoption of accrual-based accounting by governments and public sector institutions.”
  7. 7. Auditing in the Public Sector “IFAC is concerned that the standards and regulations governing sovereign issuers are not of sufficient quality to protect investors and ensure the stability of capital markets…” “…looking at potential measures that could improve the quality and reliability of information disclosed by sovereign issuers and therefore increase the protection of investors and improve the stability of capital markets.”
  8. 8. Auditing in the Public SectorGovernment issued financial instruments are a veryimportant part of the financial market2010 NYSE• All equity trades $218 trillion• Mortgage backed securities $104 trillion• Mutual funds $3 trillion• US Government securities $1,100 trillion
  9. 9. Auditing in the Public SectorLatin American sovereign debtNumber of years in default, 1824-2004 Latest period of default 0 20 40 60 80 100 120 Ecuador 116.0 1992-90 Mexico 85.0 1984-97 Peru 75.0 1995-97 Venezuela 65.0 2001-04 Argentina 50.0 1983-90 Chile 45.0 1983-94 Brazil 45.0 1986-97 Bolivia 40.0 2003 Uruguay 25.0
  10. 10. Auditing in the Public SectorCountries with Sovereign Restructuring between 1990-2005(Agreement Date)1 Algeria (07/1996) Pakistan (12/1999) Argentina (04/1993, 04/2005) Panama (05/1996) Brazil (04/1994) Peru (03/1997) Bulgaria (06/1994) Philippines (12/1992) Chile (12/1990) Poland (10/1994) Cote dIvoire (03/1998) Russia (08/2000) Croatia (07/1996) South Africa (09/1993) Dominican Rep.(08/1994, 05/2005) Ukraine (04/2000) Ecuador (02/1995, 08/2000) Uruguay (05/2003) Mexico (05/1990) Venezuela (12/1990) Morocco (09/1990) Vietnam (12/1997) Nigeria (12/1991) Serbia & Montenegro (07/2004) Source: Cruces J and Trebesch C, Sovereign Defaults: The Price of Haircuts (Preliminary Paper) December 2010
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  13. 13. Auditing in the Public Sector “1b. Member States shall move to adopt International Public Sector Accounting Standards within three years of this Directive coming into force.…”
  14. 14. Auditing in the Public SectorAccountingCountry Private Sector Public Sector Standard Set Standard SetUK IFRS IASB UK adopted IFRSs IASB / IPSAS is second tierFrance IFRS IASB Accrual standards Public Sector Accounting Standards for the public sector based on French Council private sector accounting standards. IPSASs are referencesGermany IFRS IASB Cash accounting GovernmentItaly IFRS IASB Cash accounting GovernmentSpain IFRS IASB The Spanish Ministry of Economy IPSASB and Finance is implementing accrual basis IPSASsIreland IFRS IASB Cash accounting Government IFRS IASB Adopts full accrual accounting in IPSASBEstonia accordance with IPSASs
  15. 15. Auditing in the Public Sector CHAPTER II ACCOUNTING AND STATISTICS Article 3 2.1 1. As concerns national systems of public accounting, Member States shall have in place . public accounting systems comprehensively and consistently covering all sub-sectors of general government and containing the information needed to generate accrual data with a view to preparing data based on the ESA 95 standard. Those public accounting systems shall be subject to internal control and independent audits.
  16. 16. Auditing in the Public SectorAuditCountry Private Sector Public Sector (Per EU proposed audit reforms, and as endorsed by the EC) Standard Set Standard SetUK ISAs IAASB ISAs (UK & Ireland) UK APBFrance ISAs IAASB ISAs IAASBGermany ISAs IAASB German Federal Court of Government Auditors auditing standardsSpain ISAs IAASB National Regulation based on Government INTOSAI StandardsIreland ISAs IAASB ISAs (UK & Ireland) UK APBEstonia ISAs IAASB National standards based on Government INTOSAI Auditing Standards, and European Implementing Guidelines
  17. 17. Auditing in the Public Sector Disclaimers of Opinion on the Accrual-Based Consolidated Financial Statements Because of the federal government’s inability to demonstrate the reliability of significant portions of the U.S. government’s accompanying accrual-based consolidated financial statements for fiscal years 2011 and 2010, principally resulting from limitations related to certain material weaknesses in internal control over financial reporting and other limitations on the scope of our work, we are unable to, and we do not, express an opinion on such accrual- based consolidated financial statements. As a result of these limitations, readers are cautioned that amounts reported in the accrual-based consolidated financial statements and related notes may not be reliable.
  18. 18. Auditing in the Public SectorThe material weaknesses that contributed to our disclaimer of opinion on the accrual-basedconsolidated financial statements were the federal government’s inability to• satisfactorily determine that property, plant, and equipment and inventories and related property, primarily held by DOD, were properly reported in the accrual-based consolidated financial statements;• reasonably estimate or adequately support amounts reported for certain liabilities, such as environmental and disposal liabilities, or determine whether commitments and contingencies were complete and properly reported;• support significant portions of the reported total net cost of operations, most notably related to DOD, and adequately reconcile disbursement activity at certain federal entities;• adequately account for and reconcile intragovernmental activity and balances between federal entities; and• ensure that the federal government’s accrual-based consolidated financial statements were (1) consistent with the underlying audited entities’ financial statements, (2) properly balanced, and (3) in conformity with GAAP.
  19. 19. Auditing in the Public SectorMy responsibility is to examine the accounts with a view to satisfying myself that theypresent a true and fair view. I have audited the accounts in accordance with applicable lawand International Standards on Auditing (UK and Ireland).
  20. 20. Auditing in the Public Sector Basis for qualification on accounts • Qualification arising from disagreement relating to inconsistent application of accounting policies • Qualification arising from limitation in audit scope due to lack of evidence supporting the completeness of the elimination of intra-government transactions and balances • Qualification arising from disagreement in the accounting for 3G licences • Qualification arising from disagreement and limitation in audit scope from underlying statutory audits of bodies falling within the Accounts
  21. 21. Auditing in the Public SectorWhole of government accounts 2009-10 - Public Accounts Committee ContentsSummary …a major step forward in improving transparency and accountability.
  22. 22. Auditing in the Public SectorWhole of government accounts 2009-10 - Public Accounts Committee ContentsConclusions and recommendations3. The WGA needs to be unqualified if it is to be an authoritative resource for accountability anddecision-making.7. The information contained in the WGA is out of date because Treasury took 20 months to prepare it,which is around three times as long as it takes other countries to prepare consolidated governmentaccounts.
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  27. 27. Auditing in the Public SectorNew Zealand Government net worth(both absolute and as a % GDP) over the past ten years 70.0 120,000 105,514 60.0 96,827 99,515 94,988 100,000 52.0 57.8 83,971 56.4 53.9 50.0 50.2 80,000 40.0 35.2 54,240 60,000 30.0 27.3 20.9 39,595 18.0 40,000 20.0 28,012 12.9 22,825 15,450 20,000 10.0 0.0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Net Worth ($ millions) Net Worth (as % of GDP)
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  32. 32. www.ifac.org

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