With scandals sweeping the profession into uncertain terrain, effective corporate code of ethics, integrity — both individual and institutional — transparency, and stronger quality controls have been identified as the key components for rebuilding public confidence in accountancy firms worldwide.
In a report titled ‘Rebuilding public confidence in financial reporting: An international perspective’, an independent taskforce commissioned by the International Federation of Accountants and released earlier this week, has recommended strengthening of corporate governance, improving audit effectiveness and raising the standard of regulation of issuers.
It has also presented an international perspective on the challenges facing not only the accountancy profession, but also those involved in regulating a profession that has such a significant involvement in the capital markets across the globe.
The report was prepared by a taskforce chaired by former Bank of Canada governor John Crow, the federation said in New York. The taskforce members were drawn from commercial banking, international economics, academia and law as well as accounting and auditing from six countries — Australia, Canada, France, Japan, Britain and the United States. The report based its recommendations on three assumptions — the credibility of financial reporting is both an issue in each country and an international issue, with action required at both levels; to improve credibility in financial reporting, action will be necessary at all points in the supply chain that delivers financial information and; integrity, both individual and institutional, is essential for building confidence in financial reporting, and, therefore, needs to be fostered.
“Failure to recognise the fundamental responsibility to report fairly has been a major contributor to the financial scandals of recent years,” says Mr Crow.
“In crafting our recommendations, we have kept in mind that public reporting is intrinsically a public-interest activity. So, our report addresses the roles of all those who are involved in the process, including groups such as lawyers, bankers, brokers, analysts, and public relations advisors.
All parties, besides the management, board of directors, and independent auditors, have an unavoidable duty to ensure that public reporting presents the information fairly, and the rules and regulations surrounding corporate reporting should clearly reinforce them,” he says.
Among the major recommendations of the taskforce are the need to put in place and actively monitor effective corporate ethics codes; training support for such codes; code of conduct for other participants in the financial reporting process, such as investment analysts and lawyers, and their compliance; fewer incentives to misstate financial information, and a restraint on companies from forecasting profits with an unrealistic level of precision.
The report also calls for more audit effectiveness, primarily through greater attention to audit quality control processes. Further, it recommends that accounting firms be more willing to give up high-risk clients. Specifically,it states that accounting firms should provide financial information about their businesses, including their degree of dependence on specific clients.