International Accounting Issues
The Interamerican Accounting Association's Pierre Barnès on global accountancy issues.
Pierre Barnès, FCGA, of Montreal, has recently been elected President of the Interamerican Accounting Association (IAA). Barnès has served on the board of the IAA since 1994 and has been the organization's vice-president for the past two years. The IAA was formed in 1949 to represent the broad interests of professional accountants and their member bodies in 23 countries within North, Central, and South America.
Since assuming the IAA presidency in late 2005, Barnès has been speaking to many international audiences with a focus on international issues as they affect the accounting profession today.
CGA Magazine sat down with him to explore these issues in greater detail.
What are the overall themes which are of concern today for professional accountants within a global context?
Barnès: The last few years have been eventful ones for the profession. There are several
long-term trends that impact the profession — such as globalization. As trade and investment across borders increase, it becomes more and more important for financial information to be reliable, transparent, and comparable. This is particularly important within an international context.
I know that we speak a lot about globalization these days, but there are several other trends worth noting. The International Federation of Accountants (IFAC) identifies four key environmental factors impacting the profession: globalization, regionalization, distribution of wealth, and technological advances.
Globalization impacts the international accounting profession mainly in terms of the global flow of capital which is creating much of the pressure for harmonized international standards. The other big impact of globalization is the way new powers are emerging and changing the flow of capital. We're all aware of the emergence of China and India as global economic forces for instance. These new economic powerhouses will have a significant impact on national economies in all parts of the world.
Globalization not only has an impact on large transnational corporations. It's impacting small and medium-sized enterprises, or SMEs, as well. Today companies of all sizes are finding that their best customers, investors, suppliers, partners, and even employees, may be across national borders.
IFAC has identified regionalization as another key factor here. Can you elaborate?
Barnès: Regionalization is also helping to reshape the world in a profound way. Today many countries are seeking stronger economic ties with their regional neighbours. The growth of regional economic unions and associations, free trade agreements, and even regional professional associations such as the Interamerican Accounting Association are evidence of this trend.
The third long-term trend IFAC has identified is the distribution of wealth. And the fourth major factor is technological advances. As we all know so well, the impact of information technology affects accountants in all sectors of the profession and in all parts of the globe. The availability of information and the speed at which it is processed creates both challenges and opportunities for our profession across boundaries, borders, and time zones.
In addition to these long-term trends, the collapse of Enron and various other corporate scandals at home and abroad continue to have deep ramifications. The magnitude of these events has focused public attention on the accounting profession as never before, and has increased the pressure to ensure that universally high standards of accounting practice are in place everywhere.
We can't really talk about the future of the profession on a global scale without some reference to the Enron fallout, can we?
Barnès: Absolutely not. One of the reasons Enron resonated so strongly in developed countries is that, here, almost everyone is an investor. We may not actively buy and sell stocks but through mutual funds or pension fund investments, all of us are impacted by shifts in the stock markets.
And as we know, regulators and legislators responded quickly. In the United States, the
Sarbanes-Oxley Actwas introduced to tighten corporate governance and accountability. The Public Company Accounting Oversight Board was created there, to oversee the audit profession. And similar moves were made in Canada and elsewhere.
I would imagine that the Enron events and their aftermath played out much differently in other less developed regions. Is that true?
Barnès: Yes definitely. Although it was important, it didn't resonate with the public the same way it did in
North America and Western Europe. The challenges facing most people in the developing world are much different. Basically their challenges are restrictive trade policies which limit their growth potential, creating access to investment capital, governance issues both at the political and corporate levels, and a lack of basic infrastructure development.
And two other key issues facing the accounting profession in developing countries are whether or not to adopt international financial reporting standards, and the overall lack of professional resources.
Talk in a bit more detail about the evolution of international accounting standards and how that is affecting the profession today in this international context.
Barnès: As we know, international accounting and auditing standards are seen as a way to ensure reliability and comparability in financial statements across regions and jurisdictions. They are also seen as a way to restore confidence in the profession as a whole and in capital markets. But the needs and concerns of developing nations are quite different than those of developed ones in this regard. And the needs and concerns of small and
medium-sized enterprises are also quite different from those of large, transnational corporations when it comes to the adoption of international standards.
As you know, here in Canada, the discussion about the adoption of international financial reporting standards (IFRS) has gone on for years, as it has in many other developed nations. But, in the developing countries they are asking: "What are the costs and/or benefits of adopting international standards?" Some people feel the significant costs involved in adopting international standards are not worth the benefits.
Then there are translation and linguistic concerns. The translation of IFRS into other languages poses a very significant challenge — one we shouldn't underestimate. For example, an English word such as "material" relates to a key accounting concept. Yet in some languages, this word can be translated many different ways, each with a subtle, yet very distinct meaning. As well, broader cultural differences can also make it difficult to translate key accounting concepts.
In most developing nations there are few large,
publicly-traded business entities. SMEs tend to drive the economy. Yet for the most part, international standards have been developed with the needs of large firms in mind.
The same issue exists within the accounting profession itself. The profession in developing nations is made up predominantly of small and
medium-sized practitioners (SMPs). But again international standards seem best suited to the requirements of large transnational accounting firms.
So, as you can see, there are many complex issues to contend with and many obstacles to overcome, as we move forward towards IFRS in the developing world.
Given these concerns, is IFAC moving to address the unique needs of SMEs when it comes to international financial reporting standards?
Barnès: Yes they are. Earlier this year, IFAC succeeded in placing two representatives on the SME working group of the International Accounting Standards Board (IASB), the body responsible for developing international financial reporting standards. Those two representatives are my predecessor as President of the IAA, Leonardo Rodriguez, and the current Chair of
Dany Girard. I know that the IASB working group on SMEs is going to provide strong leadership on this important issue, as we move forward with the development of IFRS. And this is certainly good news for the world's developing economies as well.
Overall, when you take the long view, can you see benefits for the developing nations and the developing economies of moving to the adoption of IFRS?
Barnès: Definitely there will be benefits. There certainly will be challenges, but ultimately this is going to be a good thing. There is of course, the obvious reason that it will make financial statements from different jurisdictions more comparable. In this age of globalization and the rapid exchange of financial information across global boundaries, that comparability is very important. It will also ensure that standards throughout the world remain uniformly high.
One particular advantage will be that, as developing nations adopt international standards, it will save them the trouble and expense of developing their own local or regional standards. And that's a benefit which can continue to pay off over time for them, as the environment changes and new standards are being developed or revised. The adoption of international standards can help to ensure that individual countries keep up with change and are in step with the rest of the world.
Adoption of international standards can also help developing nations gain access to international resources (capital/investment) for professional and economic growth. So certainly, I would have to say the benefits will far outweigh the obstacles in the long term.
You mentioned a lack of professional resources for the accounting profession. How is this affecting the developing world?
Barnès: This is a significant challenge. Many international institutions are at very different stages of maturation. That results in education programs and certification standards which may not meet international expectations. As well, regulatory bodies lack resources and maturity. Capital markets also lack many of the structures and safeguards we have come to take for granted. Professional associations also lack the resources required to advance the accounting profession and meet the expectations of the international profession and the public.
And as you can imagine, these sophisticated structures and institutions take time and resources to create. The ones in the developed world were not built overnight. And the ones in developing countries will not mature to a comparable level overnight either. This, more than any other issue, is where the developing world needs the understanding and support of bodies such as IFAC.
Given all these major challenges, are you optimistic about the future of the profession in a global sense?
Barnès: Despite the many challenges, I am very optimistic. There is much work to be done but I also see a great deal of hard work, determination, and focus on the part of the international bodies which I have had the privilege to work with. In some cases, international bodies such as IAA look to Canada and Canadian professionals to assist them in supporting their growth and maturity. We definitely have a key role to play.
CGA-Canada is well positioned to support this effort and I am more than pleased to lend my energy and that of my CGA designation to the cause.