Chapter 8 International Financial Reporting: Ethics & Corporate Governance Considerations

The focus of this chapter is key international standards with respect to independence, corporate governance provisions and ethics standards. If youve already taken ACCT425, then most of the chapters content will be familiar to you. If you havent taken International Accounting (ACCT425), then sit back and enjoy the reading. I would also ask that after youve read the chapter, consider taking ACCT425it will be our future in accounting (eventually). In the March 2008 CFO Magazine there was an interesting article on IFRSa capsule version of the article

IFRS: No Longer If, but When Its coming to a company near you. International financial reporting standards (IFRS), that is, which SEC chairman Christopher Cost says will eventually empower investors to make better-informed investment decisions by giving them information that is more easily comparable. The exact date of that eventuality will be spelled out b the SEC later this year, when it release a road map for the convergence of GAAP and IFRS. Critics say that standard-setters still have a lot more work to do to craft IFRS into a set of accounting guidelines that equals the more time-tested US GAAP, and fear that the road map will conclude with an end date thats unrealistic. Many signs point to a 2011 as that end date, although its unclear whether the companies would have the option of filing in either GAAP or IFRS, or be required to adhere to one converged standard.

My opinion....this should prove to be an interesting struggle between the SEC and AICPA. I'm with the SEC; we need to move to international standards....the world is getting smaller. With all of the MNC's located here in the States, it's only logical that we join the rest of the world in our reporting standards. And if I'm correct, the AICPA will have their work cut out for them....along with the textbook publishers! Included in this chapters lecture notes is the following: KPMG powerpoint presentation that further discusses the History of IFRS, the Framework and General IFRS vs US GAAP Differences. News release from September 2010 regarding the completion of the first stage of the Conceptual Framework that is referenced by the authors in this chapter.

Also for your information and possible research the International Accounting Standards Board website is www.iasb.org

So the move to IFRS has been on a long roada result is the development of a single set of auditing standards. IAASB International Auditing and Assurance Standards Board of the International Federation of Accountants (IFAC) has established international auditing and assurance standards including International Standards on Auditing (ISAs) The IFAC group has also developed a Code of Ethics for Professional Accountants, known as the Global Code

SEC Road Map for Adoption of IFRS in the United States Factors that must be considered US GAAP is rules based; IFRS is principles-based o They are actually a little bit of both but the label of US GAAP being rules based is because it is heavy in rules not to say that it doesnt have principles. Same is true of IFRS, it does have some rules but is most principle based US GAAP Codification 17,000 pages IFRS 2,500 pages Do we adopt IFRS or do we converge the two systems o Convergence implies the adoption of one set of standards internationally by reducing the differences SEC study objectives-oriented standards o Greater emphasis on the responsibility of both managment and auditors to ensure that finance reporting captures the objective of the standard. o Requires less use of judgment that either rules-based or principles-based. Earning management concerns Accounting standards change depending on which type of system is used o Examples are given in the text for leases and PPE Provisions and reserves o In the US they are handled differently than they are in the EU

IFRS for Small and Medium-Sized Entities 95% of all companies fall into this category Companies that do not have public accountability and publish general-purpose financial statements. Reference Exhibit 8.2 in the text for the comparison of the accounting rules for full IRFS and IFRS for SMEs

Comparative Corporate Governance Moving to IFRS will require: Audit committee and Boards to deal with convergence issues Boards will have to monitor the quality and robustness of the conversion process and the road map to IFRS Ethical issues differ in countries this will have to be factored in when working in those countries. o Business practices and cultural considerations directly affect company management and control

Corporate Governance in Germany Two-tiered Board structure 1. Management Board 2. Supervisory Board a. Large labor representation

Germany has formalized the distinction between managing the company and supervising the management of the company.

Germany Concentrated ownership and insider control Builds on insider relationship Two-tiered Boards 1. Management Board 2. Supervisory Board Influential stakeholders Employee representation Management Board prepares financials Examined by outside auditors and the Supervisory Board Decisions made in the interest of the company Comply or explain principle requires an explanation of noncompliance with corporate governance provisions of the Code

United States Reliance on external participation Unitary Board of Directors

Large institutional investors Management of company prepares financials Examined by outside auditors Decisions made in the interest of the shareholders CEOs must certify compliance with corporate governance guidelines of NYSE

Corporate Governance in China

China is moving from state-owned and state-managed environment to a corporate environment. It continues to transition from a planned economy to a market economy. Code of Corporate Governance for Listed Companieslaw requires corporations to form three statutory governing bodies 1. Shareholders 2. Board of directors 3. Board of supervisors

China Focus on meeting the needs of the major shareholderthe state Two-tier oversight, overlapping -supervisory board - board of directors Only chair of audit committee needs to be independent Directors have fiduciary duties

United States Focus on meeting the needs of investors Unitary board in the US

All members of audit committee should be independent Management and Board of Directors have fiduciary duties No required certification of financials by mgmt SOX required certification by CEO and CFO or an internal control report Comply or explain gaps in practices and CEOs must certify compliance with corporate recommendations in corporate code no governance guidelines of NYSE penalty for failing to do so

Corporate Governance in India Many similarities between corporate governance in India and the US; probably because of UKs influence in India.

India United States Diverse share ownership including family and Family ownership exists mainly in private some government ownership entities. Government ownership is rare with exception of recent bailouts Between 33 and 50% of directors need to be Majority of directors need to be independent independent Problem directors independence SOX and NYSE require majority of directors problematic due to influence of family be independent businesses and blockholder owners Fiduciary duties of directors act in best Management and Board have fiduciary interests of company and shareholders obligations to shareholders Certification of annual accounts only Certification required under SOX recommended External auditors issue a certificate of Similar requirements exist under NYSE listing assessment of compliance of corporate requirements. governance rules filed to stock exchange Businesses required to comply or explain Compliance explanations also required noncompliance with mandatory recommendations

Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance The OECDs Principles have become an international benchmark for policy makers. There are 12 key standardsdetails can be found.
http://www.oecd.org/daf/corporateaffairs/corporategovernanceprinciples/oecdprinciplesofcorporategoverna nce.htm

Global Code of Ethics The International Federation of Accountants (IFAC) issued the Code of Ethics for Professional Accountants know as the IFAC Code. Details can be found.
http://www.ifrs.com/overview/Accounting_Firms/Global_Standard.html

Also interesting website comparing the AIPCA and IFAC codes

http://www.journalofaccountancy.com/Issues/2010/Oct/20103002

Auditing Standards IFAC also established international auditing standards; please read the summary of important similarities presented by the authors in your textbook

Audit Report and Opinion Also take the time to compare the differences between an international audit report and the one required here in the U.S.

The last interesting topic in this concluding chapter is the difference in terminology in the audit report True and Fair Presented Fairly There is a distinguish between the two terms in terms of the level of assurance to investors and creditors True and Fair UK law Is part of the Fourth Directive (presentation and content of annual reports, valuation methods, auditing reporting and applies to members of the EU) Possible to override a standard requirement in order to give a true and fair view Presently Fairly Governing criteria in the US In conformity with GAAP

Homework Assignment Discussion question #2

Explain the advantages and disadvantages of establishing one set of accounting standards (IFRS) to be followed by all companies around the world. Uniformity is the biggest advantage to establishing one set of accounting standards (IFRS) to be followed by all companies around the world. Uniformity would increase the understanding of financial information and result in greater financial statement comparability and measurements to other companies or countries. However, the disadvantage is that no one set of the accounting standards is a perfect fit globally. There positives and negatives with each standard. U.S. GAAP uses a rules-based accounting standard, while the International Financial Reporting Standards (IFRS) uses one that is principles-based. Unlike rules-based standards, the principles-based standard does establish criteria to guide practitioners and the application relies on an individuals professional judgment. As a result, the principle-based standards are more flexible than a rules-based approach. However, the downside to this flexibility is that inconsistences could form which impedes financial statement comparability and measurements to other companies or countries. The rules-based approach uses clearly defined guidelines that promote uniformity, understanding because its application doesnt vary from company to company. However, the drawback of a rules-based approach is that we currently dont have rules for every situation.

The advantages of one set of accounting standards to be followed by all companies around the world include the comparability of financial statements, irrespective of the location of the companys headquarters; global cost of capital; and its ability to raise capital in world-wide markets, not just the home country. The disadvantages of one set of accounting standards is the failure of one set of standards to be 100% compatible with the unique legal, regulatory, litigious, social, economic, religious, and cultural environments of each country. There are some concerns about the enforcement of IFRS. The SEC is the main regulatory body for U.S. companies. As the standard setting moves to IFRS, the fragmented, country to country regulatory environment will prove a challenge.