PROPOSALS FOR ESTABLISHMENT OF THE IFAC FORUM OF FIRMS
Request for comment on the Draft Constitution and Operating Procedures of the IFAC Forum of Firms
Comments from the Association of Chartered Certified Accountants
October 2001
Executive Summary
The Association of Chartered Certified Accountants (ACCA) is pleased to have the opportunity to comment on the draft Constitution and Operating Procedures of the IFAC Forum of Firms.The IFAC Forum of Firms (the Forum) is intended to promote high standards of ethics and auditing through the quality assurance function it fulfils for its members. We believe that the public interest will be promoted by this and by the setting up of the IFAC Public Oversight Board.
The practical difficulties in setting up and successfully operating the Forum should not be underestimated. In our comments we draw attention to these and suggest changes to the draft Constitution and Operating Procedures to better serve the public interest. These changes are aimed mainly at improving the inclusivity and democracy of the Forum.
It is in the public interest that all firms which carry out transnational audits are members of the Forum, as membership is conditional on the maintenance of high standards of ethics and auditing. To this end we suggest changes to remove purely commercial barriers to entry.
It is vital to the maintenance of public confidence that the Forum is seen to be operating democratically. While we recognise the effort and commitment of the Founding Member Firms that has largely brought about the Forum we recommend changes to voting processes to ensure that there is no automatic majority for such firms in the future.
1 General Matters
1.1 The Association of Chartered Certified Accountants (ACCA) is pleased to have the opportunity to comment on the draft Constitution and Operating Procedures of the IFAC Forum of Firms.1.2 The IFAC Forum of Firms (the Forum) is intended to promote high standards of ethics and auditing through the quality assurance function it fulfils for its members. We believe that the public interest will be promoted by this and by the setting up of the IFAC Public Oversight Board (POB). We have commented separately on the draft Charter of POB.
1.3 We comment below on certain aspects of the draft Constitution and draft Operating Procedures where we believe that the public interest could be better served.
2 Constitution
Objectives2.1 The draft Constitution states that: 'the objective of the Forum is to promote consistently high standards of financial reporting and auditing worldwide in the interest of users of the profession's services.' In order to achieve this, the draft Constitution states that it will involve the firms more closely with IFAC's activities and support IFAC's mission. While these are laudable actions, the main activity of the Forum is not mentioned. The draft Constitution should refer to the quality assurance role of the Forum.
> Preserving quality in the face of change
2.2 There is a provision whereby if a Full Member Firm has entered into a network arrangement with a firm which does not comply with the criteria for full membership, the Full Member Firm incorporating the newly associated firm may continue in full membership provided that it re-establishes its compliance with the criteria for full membership within a period of two years.
2.3 This provision does not deal with the many variations which may occur. For example, a Full Member Firm could enter into a network arrangement with a larger entity, enabling the latter to 'reverse into' Forum membership. The term 'network arrangement' is imprecise and could be interpreted in significantly different ways. It would not be in the public interest to allow full membership to continue in circumstances where the quality of a new entity is potentially significantly lower.
Network of firms
2.4 It is in the public interest that firms carrying out transnational audits are members of the Forum. However, the draft Constitution relies on regarding a network of firms as a single organisation. Indeed, the provisions relating to eligibility for membership could be read as denying membership to firms which are members of a network unless their whole network is a member. We do not believe that it is desirable, or indeed feasible, to constitute the Forum on this restricted basis.
2.5 Many large international networks are made up of firms that are almost wholly independent of one another. If the management of a network does not have sufficient control over member firms to ensure that they co-operate so as to facilitate an International Quality Assurance Review that network cannot be a full member. In such circumstances, there must be provisions in the Constitution to allow firms or groups of firms within a network to join the Forum separately.
2.6 Within networks, there are practical difficulties relating to such matters as control, liability and insurance, and methodology that will militate against many of the provisions of the draft Constitution. It is necessary for the Forum to accommodate this diversity.
Defining transnational audits
2.7 Transnational audits are defined as 'audits of financial statements which are or may be used across national borders; this will include all companies with listed equity or debt and other major public interest entities such as banks and other financial institutions.' This definition is too wide as the growth of Internet reporting and the globalisation of business means that almost any financial statements may be used across national borders. It would be more appropriate to adopt a definition based on transnational public interest in auditees rather than the availability of their financial statements.
> Setting a standard for quality
2.8 The draft Constitution requires firms to meet the Quality Standard. The Quality Standard is not set out other than in paragraph 6(b). We find the statement in paragraph 6(b) to be inadequate for the purpose of establishing a standard. The wording is imprecise (what is meant by the 'provisions' of ISAs?), has obvious omissions (such as education and training in relation to auditing and ethics) and sets no actual criteria against which firms will be judged. We suggest that a separate and detailed Quality Standard be prepared.
> Clarity of dispute resolution
2.9 There is a provision for a panel established by IFAC Council to consider and determine appeals (paragraph 16). The draft Constitution does not contain any mention of the right of appeal in the first place. Coupled with the introduction in paragraph 16 of wording that indicates that the IFAC Board itself may appeal, this argues for simplification and extension of the material dealing with appeals and perhaps with dispute resolution in general.
Voting rights
2.10 The voting rights at annual and special meetings are to be in proportion to annual assurance turnover (modified by certain other conditions). The remainder of the Constitution refers to audit. The relevance of 'assurance' is therefore not clear. Given that networks will have different year ends, the annual period to which the paragraph refers should be specific. In addition, networks will not normally publish audited financial statements and we question therefore whether such information as envisaged by the paragraph will be available.
2.11 In any case we do not believe that this approach to voting is appropriate for the Forum. It has long been a democratic principle that, irrespective of an individual's contribution to the revenue of an institution, there should be one vote per person. The views of every member of the Forum should be of equal weight. If this is not implemented, the public perception (irrespective of any limits on turnover-related voting) will be that the Founder Members control the Forum and that it is just an extension of their activities. The proposal that the Founder Member firms should be limited to a total of 51% of the votes will lend weight to this public perception.
> Observers on certain IFAC committees
2.12 The paragraph dealing with the right of the Forum to be represented by observers on certain of IFAC's committees needs to be considered, and possibly revised, in conjunction with the proposals of the current review of IAPC. The IAPC review proposes that the Forum has direct representation through membership. Our members who currently serve on IFAC committees have found the involvement of non-voting observers from major firms to be beneficial to the work of the committees and we support the continuation of such arrangements.
3 Operating Procedures
Founder Members3.1 The draft Operating procedures differ in certain respects if a firm is a Founder Member. We do not believe that this approach is appropriate for the Forum, as the public perception will be that the Founder Members control the Forum and that it is merely an extension of their activities.
Even-handed appointment
3.2 We are concerned that the detail of the wording of paragraph 17 (concerning the need for observers to be able to participate fully in technical discussions and contribute to the debate) may be used to justify discrimination against those who are not personally fluent in English. The first part of paragraph 17 deals with such matters as technical competence, so we see no need for the inclusion of the wording which we cite.
> Clarity in incompatibilities of representation
3.3 Paragraph 19 deals with incompatibilities of representation. The bare statement of prohibitions does not indicate why such arrangements are considered to be inappropriate. A principles based approach should be adopted as, properly dealt with, it should provide an explanation which is comprehensible to stakeholders.
Barriers to entry
3.4 We note that paragraph 20 allows the Transnational Audit Committee to establish a minimum financial contribution to be made by each Member Firm. This is justified by reference to: 'costs which will not vary directly with the size of the Member Firm'. We consider that the setting of a minimum financial contribution is not compatible with the public interest. Entry to the Forum must potentially be available to any firm with transnational audits which meets the Quality Standard. Entry barriers resulting from such costs would be anti-competitive.