Challenges Facing the Accountancy Profession in Emerging Economies

M. Zubaidur RahmanFinancial Management UnitOperations Policy and Country ServicesThe World Bank

The World Bank GroupWorking for a world free of povertyWorking for a world free of poverty

New Environment - New Challenges

During the last decade, there has been worldwide recognition of the role of professional accountants and auditors in economic development. Consequently, at the turn of this century, a new environment has been created for the practicing accountants and auditors, which has given rise to new challenges for the accountancy profession in both developed and developing countries.

The Great Expectation: Members of the accountancy profession should play proactive roles in a country’s economic development

Background

The international financial crises of the late 1990s brought to light major weaknesses in the international financial architecture, including one of its main component parts—transparency in the financial statements of the corporate entities.The international community highlighted the importance of high quality accounting and auditing practices in strengthening a country’s financial system, with impacts on bolstering the international financial architecture.The World Bank recognized accountancy development as an integral part of economic development; and arrangements have been put in place for assisting Bank’s member countries to strengthen the institutional underpinnings of accounting and auditing practices.

Sound accounting & auditing

practices ensure the availability of credible financial

information

Sound accounting & auditing

practices ensure the availability of credible financial

information

Improved investment climate

Capital market Capital market development and development and access to financeaccess to finance

Market discipline and Market discipline and enhanced financial enhanced financial

sector stabilitysector stability

Better financial management and

efficient utilization of scarce resources

Improved transparency and

accountability of state-owned enterprises

Economic Development

Poverty Alleviation

The Role of Accounting & Auditing in Economic Development

Main Challenges

Demand for more expertise• Complex business transactions, sophisticated and principles-

based accounting standards• Growing needs for independent opinions under new

circumstances (governance issues at both corporate and national levels, expanded markets, and increased technical problems)

• Difficulties in expressing independent opinion (complicated accounting manipulations, industry knowledge, valuations, information technology)

Need for improving professional behavior• Protect public interest• Comply with the international good practices on professional

ethics (e.g. IFAC Code of Ethics for Professional Accountants)• Consider auditing as a profession, NOT as a business

Call for external oversight of the profession to enhance public trust

• Accountability to the stakeholders• Improving image of the profession

Mismatch between accounting and auditing requirements and the capacity to comply

The application of international standards requires certain minimum levels of capacity (i.e., appropriately qualified individuals), which depends on the availability of opportunities for relevant and adequate education, training and experience.

The development and enhancement of capacity applies to educators, regulators and users as much as to preparers and auditors, and places demands on both institutions and individuals.

Meeting Demand for More Expertise:Filling the Knowledge Gap

In early 1900s, a 28 year-old public accountant, Mr. Arthur E. Andersen refused to yield to the wishes of a particular audit client: “There’s not enough money in the whole of Chicago to induce me to change that report.” The firm lost that client’s business. In a 1932 speech, Arthur Andersen himself reveals his ideals:“If the confidence of the public in the integrity of accountants’reports is shaken, their value is gone. To preserve the integrity of his reports, the accountant must insist upon absolute independence of judgment and action. The necessity of preserving this position of independence indicates certain standards of conduct.”

Andersen, one of the leading global accounting firms, lost credibility and went out of the market at the beginning of 21st century

Improved Professional Behavior: Comply with the Ethical Requirements

Independent Oversight: New Regulatory Framework

In most of the industrialized countries, the licensing and regulation of the accountancy profession was founded through the initiative of practicing professional accountants

Over time and in many countries this approach evolved into a workable system of government-sanctioned self-regulation that for many years was considered adequate and efficient without direct interventions by government regulators

The last decade has seen the growth of independent regulators of accounting and auditing in all parts of the world. The newly established independent regulators are developing arrangements for working in partnership with the professional accountancy bodies

Selected Independent Regulatory Bodies

United Kingdom: Financial Reporting CouncilUnited States: Public Company Accounting Oversight BoardCanada: Canadian Public Accountability BoardJapan: Certified Public Accountants & Auditing Oversight BoardIreland: Irish Auditing & Accounting Supervisory AuthorityAustralia: Financial Reporting CouncilSouth Africa: Independent Regulatory Board for AuditorsSri Lanka: Accounting and Auditing Standards Monitoring BoardSwitzerland: Federal Audit Oversight AuthoritySweden: Supervisory Board of Public AccountantsSingapore: Accounting and Corporate Regulatory AuthorityAustria: Austrian Audit Quality Control Oversight BoardVarious other European and African countries have either established or in the process of establishing independent regulatory bodies

Cross-cutting Issues in Most of the Developing Countries—Increases Challenges

Mostly due to weak capacity

Outdated legal framework

Weak accountancy profession

Widespread non-compliance with standards

Inadequate monitoring and enforcement

Lack of access to international standards

Inadequate curricula and training

Non availability of implementation guidance and practice manuals

Strengthen Corporate Financial Reporting Infrastructure

All supporting pillars need to be strengthened

Statutory Framework

Monitoring & Enforcement

Education & Training

Accounting Profession & Professional

Body

Accounting Standards

Auditing Standards &

Code of Ethics

Turn Challenges into Opportunities by:

Concluding Remarks

Building a professional accountancy body which is capable of meeting the IFAC’s Statements of Membership ObligationsImproving practitioners’ knowledge of the practical aspects of IFRS, ISA and other international good practicesComplying with the established accounting, auditing and ethical requirementsParticipating in strengthening the corporate financial reporting infrastructureDeveloping partnership arrangements between the self-regulatory professional body and the independent oversight body

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