The Professional Accountants in Business (PAIB) Committee of the International Federation of Accountants (IFAC), the global organization for the accountancy profession, today released International Good Practice Guidance, Project and Investment Appraisal for Sustainable Value Creation.

The guidance supports the accountancy profession’s facilitation of sustainable organizations, financial markets, and economies by providing guiding principles to manage the complexities of performing a robust project and investment appraisal. Greater rigor in the appraisal and decision process can be achieved by using the principles as a benchmark against which to assess an organization’s current practice.

“In today’s world, it is no longer sufficient for investment decisions to be appraised on financial criteria alone. While this guidance reinforces the importance of rigorous and robust project and investment appraisal, it does so  with a specific emphasis on facilitating long-term decision making and incorporating economic, environmental, and social considerations,” said Roger Tabor, chair of the PAIB Committee. “The revised guidance also sets out the critical role professional accountants in business play in advising on the application of financial principles and theory that are being tested during this current period of market instability.”

Accountants in business play a crucial role in helping organizations ensure a systematic and analytical approach to project and investment appraisal. In practice, fundamental principles of corporate finance are often breached, leading to the destruction of value for shareholders and other stakeholders. Far too frequently, decisions ignore the costs and benefits associated with wider external impacts—social (e.g., labor practices), economic (e.g., in communities), and environmental (e.g., pollution). By introducing greater rigor, organizations can assess all important aspects of a project or investment.

“Traditionally, project and investment appraisal is taught and discussed in purely financial terms, which helps an organization focus on decisions that create the most economic value,” said Athalanallur Natarajan Raman, chair of the PAIB Committee Sustainability Advisory Group. “To create sustainable value, it is essential to also take into account every aspect of the project or investment and consider all facets of sustainability.”

About International Good Practice Guidance
International Good Practice Guidance (IGPG) issued by the PAIB Committee cover areas of international and strategic importance in which professional accountants in business are likely to engage. In issuing principles-based guidance, IFAC seeks to foster a common and consistent approach to those aspects of the work of professional accountants in business not covered by international standards. IFAC seeks to clearly identify principles that are generally accepted internationally and applicable to organizations of all sizes in commerce, industry, education, and the public and not-for-profit sectors. Previously issued IGPGs are available on the IFAC website, including Preface to IFAC’s International Good Practice Guidance.

About the PAIB Committee
The PAIB Committee serves IFAC member bodies and professional accountants worldwide who work in commerce, industry, financial services, education, and the public and the not-for-profit sectors. Its aim is to promote and contribute to the value of professional accountants in business by increasing awareness of the important roles professional accountants play, supporting member bodies in enhancing the competence of their members, and facilitating the communication and sharing of good practices and ideas.

About IFAC
IFAC is the global organization for the accountancy profession, dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. It is comprised of 173 members and associates in 129 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

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Accountants in business play a crucial role in helping organizations ensure a systematic and analytical approach to project and investment appraisal. In practice, fundamental principles of corporate finance are often breached, leading to the destruction of value for shareholders and other stakeholders. Far too frequently, decisions ignore the costs and benefits associated with wider external impacts—social (e.g., labor practices), economic (e.g., in communities), and environmental (e.g., pollution).

Workshop Session

During the Professional Accountancy Organization (PAO) Development Committee meeting in Accra, Ghana, a half-day open workshop session was held to which representatives of Pan African Federation of Accountants (PAFA) member bodies from across the continent were invited. The aim of the session was to:

• present the IFAC Statements of Membership Obligations (SMOs) and look at the changes made during the revision process;
• allow participants to share their experiences with adoption and/or implementation of the international standards in the SMOs, regardless of the development stage of the organization and IFAC membership status; and
• familiarize all participants with the Dashboard Reports and allow them to consider the responsibilities, adoption status, and current priorities for one or more SMOs in their own jurisdiction.

Following a presentation from IFAC staff, PAO Development Committee members, observers, and guests split into three groups to focus on three different SMO aspects:

• approaches to adoption and implementation of international standards;
• implementing quality assurance; and
• establishing effective investigation and disciplinary processes.

The workshop promoted exchange between participants and provide an open forum to share experiences and ideas. Below is a summary of some of the themes of discussion.

Summary of Discussion

Approaches to adoption and implementation of international standards

Responsibility: It is unusual for a PAO to have the responsibility for every standard-setting SMO (3, 4, 5, and 7). Where the responsibility lies elsewhere, understanding the environment, including any relevant legislation and resource challenges, is key to understanding the PAO’s role in supporting the associated processes. Due to the core role of government, challenges to progress on SMO 5 (International Public Sector Accounting Standards, or IPSAS) include a range of financial and political factors that differ significantly from one jurisdiction to the next. In cases where the PAO is not responsible for education and training, the PAO should consider a formal collaboration with the relevant educational institution(s). This can allow efficient sharing of information around the International Education Standards (IES) for timely updates to curriculum and training programs, resulting in the appropriate training of high quality professionals.

Enforcement: Enforcement of a code of ethics may be challenging where PAOs have limited capacity or a limited legal mandate. A consideration may be to work in partnership with a national anticorruption body to make additional resources available and may permit legal enforcement of a code of ethics in the jurisdiction. Working with a public institution also grants a wider audience, enabling key information regarding cases to be communicated in the public interest.

Proactivity: Not all PAOs evolve in a jurisdiction where the support and development of the accountancy profession is a priority for the government and/or other stakeholders. Where legislation related to the accountancy profession does not exist at the national level, PAOs should consider how best to enhance the relevance of the profession and encourage best practice from their members. This may include amending a PAO’s bylaws and rulebook to require members to use international standards in their professional practice. Such a decision must be supported by appropriate training, tools, and guidance.

Communications: Advocacy around the importance of international standards and information-sharing activities aimed at regulators and governments, as well as the public, should be a key part of a PAO’s strategy. Establishing and maintaining dialogue with key players in the political arena can ensure the accountancy profession is on their agenda. Where responsibility for standard setting or key implementation activities lies elsewhere, clearly communicating the assistance a PAO can provide to relevant stakeholders in support of high-quality financial information is essential.

Strategic planning: The ongoing update of standards by the international standard-setting boards requires processes to be in place to ensure timely adoption and implementation at the jurisdiction level. An agreed-to plan allows for objective setting, appropriate allocation of resources, and determination of a realistic timeline for implementation. SMO Action Plans are a tool that can be used for such an organizational planning process.

Implementing quality assurance

Quality review program: When establishing a quality review program , consider assessing existing internal quality review programs for larger firms and, depending on their effectiveness, placing some reliance on those programs when conducting specific reviews. For smaller firms, a robust quality review program can be monitored and supported by the PAO, which can feed findings into development programs. Peer review is typically ineffective in small jurisdictions where the profession is close-knit and, therefore, finding independent professionals is a challenge. Regional quality assurance systems can be a solution where capacity doesn’t exist at the national level.

Stakeholder engagement: Achieving buy-in from all stakeholders is crucial. A relationship with the auditor general can ensure high-level awareness of the results of all audits. At the early stages of the program’s implementation, when dealing with a firm that falls short of requirements, sensitizing those that will be affected, rather than seeking to instantly punish, can prove most effective. Public reporting of findings at the country level to highlight key themes from reviews, for example, can also help with this process.

Continuing professional development (CPD): Due to the importance of members in practice undertaking relevant CPD, a number of PAOs have introduced percentage-based mandatory practice-related CPD as a condition of annual practicing license renewal. More generally, PAOs should ensure that a wide range of CPD training and resources are available for members to update their knowledge and skills—this is particularly vital to assist small- and medium-sized practitioners (SMPs) who may not have capacity for in-house training.

Establishing effective investigation and disciplinary processes 

Advocacy and communication: Relationships should be built and maintained with government and other regulators to publicize the role of the PAO in investigating and disciplining its members. In jurisdictions where PAO membership is not mandatory to practice, it can be of crucial importance to ensure the public understands requirements and how to access quality professionals. Penalties for practicing without a license should be significant enough to act as a deterrent. Decisions regarding publication of names of individuals found to be practicing without a license or violating other regulations should be tied to the severity of each case.

Committee composition: Legislation can negatively affect an effective investigation and disciplinary process, since smaller jurisdictions can struggle to maintain the committee composition required by law. Where appropriate, credibility of disciplinary or appeals tribunals can be enhanced through the appointment of ministry or high court officials, or by their involvement in selecting committee members, such as the chair. Public members and legal representation, in addition to the presence of accountants on the committee, can enhance objectivity and transparency.

Cooperation with regulators: Agreements with regulatory authorities can ensure appropriate flow of information around cases. Where there is overlap in the processes of a PAO and those of an independent or audit regulator, a formal relationship can help avoid duplication and may lessen administrative burden on the PAO.

Background

The IFAC Member Body Compliance Program

The IFAC Member Body Compliance Program is one of continuous development and improvement for PAOs—IFAC members and associates. It is based on the IFAC Statements of Membership Obligations (SMOs), which serve as a technical framework for PAOs to set strategic objectives. The program operates with oversight and advice from the IFAC Compliance Advisory Panel (CAP) and is subject to Public Interest Oversight Board (PIOB) review. IFAC member body development staff and the PAO Development Committee work with PAOs to support their progress in addressing the SMOs.

The Revised SMOs

The IFAC SMOs were revised and ratified by the IFAC Council in November 2012 to use “plain English” principles and express member bodies’ obligations more clearly. At a high level, the revisions include:

• clearer definition of obligations;
• greater clarity and improved flow of logic;
• a focus on adoption and implementation, aligned with IFAC’s strategy;
• an applicability framework to guide PAOs with varying levels of responsibility for SMO areas;
• the extension of the scope of external quality assurance review to apply to all audits of financial statements; and
• a clarified process of investigation and discipline with a stronger connection to SMO 1.

IFAC members and associates are required to address the SMOs by developing, executing, reviewing, and regularly updating their SMO Action Plan.

SMO Progress Reports

Dasboard Reports are prepared by IFAC staff based on an evaluation of information presented by the IFAC member or associate in their SMO Action Plan. Dashboard Reports provide a high-level snapshot of the status of a PAO and its jurisdiction at a point in time. To evaluate and monitor progress made by IFAC members and associates, Dashboard Reports use three interrelated indicators.

• The level of responsibility that the PAO has for each of the seven SMO areas.
• The adoption status (at the country/jurisdiction level) of the international standards relevant to each SMO area.
• The status of progress made by the PAO, as represented in their SMO Action Plan.

Dashboard Reports, in addition to addressing these three areas, also provide background information on the IFAC member or associate, including its size, sectors of the profession served, and a general indication of available resources and capacity.

Welcome to IFAC’s Professional Accountants in Business (PAIB) Committee eNews.

In this Issue:

Governance
1. Public Sector Governance Consultation Draft Published by IFAC, CIPFA
2. ICAEW: What are the Principles of Corporate Governance?

Internal Control and Risk Management
3. Revised COSO Framework: IFAC Review Available for Publication
4. Sharing Best Practice on Risk Management and Internal Control

Financial Reporting
5. IFAC Responds to IIRC Consultation Draft on Integrated Reporting
6. GRI Publishes Survey Review of Integrated Reports

Sustainability
7. World Forum on Natural Capital
8. ICAS Announces Sustainability in Business Essay Competition
9. NYSE Joins UN Sustainable Stock Exchanges Initiative

SMP News
10. SMP Quick Poll: Sustainability Services on the Rise

Next PAIB Committee Meeting
11. Next Meeting of Professional Accountants in Business Committee

Governance

1. Public Sector Governance Consultation Draft Published by IFAC, CIPFA

IFAC and the Chartered Institute of Public Finance and Accountancy (CIPFA) issued a Consultation Draft, Good Governance in the Public Sector, to promote the development of robust governance. The Consultation Draft looks to establish a benchmark for good governance in the public sector at both the government and individual public sector entity levels. The Consultation Draft was developed with input from representatives of relevant international organizations. Public sector representatives and other public sector stakeholders are encouraged to respond to the proposed framework to help improve its applicability to public sector entities at all levels internationally. Comments are requested by September 17, 2013.

IFAC member and regional organizations are invited to publish the supporting article, “New Guidance Aims to Improve Public Sector Governance,” in their journals, newsletters, website, and other forums. The article can also be tailored to suit the needs of each organization and membership. Email permissions@ifac.org for permission to translate or reproduce.

2. ICAEW: What are the Principles of Corporate Governance?

Governance is also discussed in What are the Overarching Principles of Corporate Governance? from the Institute of Chartered Accountants in England and Wales (ICAEW). The thought piece encourages corporate boards to focus on a set of simple but fundamental principles of corporate governance. It also outlines five short, purposeful, and aspirational overarching principles that apply to a wide range of companies. These principles should serve to remind corporate boards, and their stakeholders, what corporate governance should look like if a company is to meet its business purpose and other responsibilities.

Internal Control and Risk Management

3. Revised COSO Framework: IFAC Review Available for Publication

In response to the publication of the Committee of Sponsoring Organizations of the Treadway Commission (COSO)’s Internal Control-Integrated Framework in May (see PAIB Committee eNews May 2013 for details), IFAC has written a review discussing the changes in the new COSO publication and the work still to be done. “Revised COSO Framework: Improved but Further Adjustments Warranted” outlines recommendations COSO should take up in future revisions to make the Framework more relevant to a broader global community. This article is also available for publication by member bodies. Email permissions@ifac.org for permission to translate or reproduce.

4. Sharing Best Practices on Risk Management and Internal Control

IFAC staff recently gave a presentation on risk management, internal control, and the COSO Framework at the 94^th Annual Institute of Management Accountants (IMA) Conference in New Orleans, US. The presentation, made with J. Stephen McNally of the Campbell Soup Company, outlines some of the pitfalls many organizations face with their current systems of risk management and internal control. Vincent Tophoff, IFAC senior technical manager, and Mr. McNally also addressed the changes in the newly revised Internal Control-Integrated Framework from COSO.

The presentation:

• summarizes the most important pitfalls in current risk management & internal control (RM/IC) practice;
• provides insight into current thinking on risk management and internal control;
• outlines key concepts contained in the most important risk management and internal control guidelines;
• discusses the impact of these developments and approaches for organizations; and
• identifies and discusses other emerging trends related to risk management and internal control.

IFAC staff also recently gave a presentation on the effective integration of risk management and internal control, especially as it relates to the International Organization for Standardization (ISO)’s standard on risk management, ISO 31000 – Risk Management, at the Second International Conference on ISO 31000 in Toronto, Canada.

Financial Reporting

5. IFAC Responds to IIRC Consultation Draft on Integrated Reporting

IFAC responded to the landmark Consultation Draft of the International Integrated Reporting Framework, published in April by the International Integrated Reporting Council (IIRC). In its comment letter, IFAC recommends, for example, adjusting the Framework to encourage a principles-based, rather than a rules-based, approach to integrated reporting and advocates that it should be the individual organizations that determine their intended audiences, instead of the blanket assumption that integrated reports are primarily for providers of financial capital. The IIRC is now in the process of analyzing the 350 responses it received to the proposed Framework.

6. GRI Publishes Survey Review of Integrated Reports

The Global Reporting Initiative (GRI) released a new survey report reviewing different ways integrated reports are taking shape around the world. The Sustainability Content of Integrated Reports—A Survey of Pioneers looks at 756 reports published from 2010 to 2012 following GRI Guidelines and surveys 52 organizations that issued integrated reports during all three years. 

Sustainability

7. World Forum on Natural Capital

The World Forum on Natural Capital, an UN-backed event, will be held in Edinburgh, UK, November 21-22, 2013. The event will be the first major global conference devoted to putting an economic value on natural capital (additional information on natural capital is available in Special Edition eNews—Accounting for Natural Capital). Synergies between public and private sector natural capital accounts will be explored, as will the links with integrated reporting and the issues affecting different sectors. The conference is organized by the Scottish Wildlife Trust in association with the United Nations Environment Programme, World Business Council for Sustainable Development, International Union for Conservation of Nature, TEEB for Business Coalition, and the Wildlife Trusts. IFAC stakeholders are being offered a 10% discount on registration (promotional code IFAC10 when registering). Additional information, including the program, is available at www.naturalcapitalforum.com. Early bird registration closes September 12, 2013.

8. ICAS Announces Sustainability in Business Essay Competition

The Institute of Chartered Accountants of Scotland (ICAS) has announced its 2013 essay competition to encourage debate regarding sustainability in business. Entry is open to all accountants and students globally. Professionals and students in related fields are also encouraged to apply. Full details, including competition rules and topic details, can be found at http://icas.org.uk/sustainabilityprizeessay/. The competition, sponsored by Grant Thornton UK LLP, closes on September 30, 2013.

9. NYSE Joins UN Sustainable Stock Exchanges Initiative

The NYSE Euronext is the newest member of the United Nations’ Sustainability Stock Exchanges (SSE) Initiative. The initiative aims to “explore how exchanges can work together with investors, regulators, and companies to enhance corporate transparency on environmental, social, and corporate governance issues and encourage responsible long-term approaches to investment.” In announcing its participation, Duncan L. Niederauer, CEO of NYSE Euronext, said, "As the only carbon neutral global exchange group, we are proud to join the SSE initiative and partner with the UN and our industry to support best practices in corporate governance and transparency related to corporate sustainability. We lead by example by running our business in an environmentally responsible manner, and by leveraging the unique power of our platform and our NYSE Euronext community, we empower learning and collaboration within the broader corporate sector."

SMP News

10. SMP Quick Poll: Sustainability Services on the Rise

The latest IFAC SMP Quick Poll results showed that the vast majority, 73%, of the nearly 4,000 small- and medium-sized accounting practitioners (SMPs) surveyed are either currently providing or have plans to provide sustainability services to their clients, suggesting there is a sizable market for these services among the small businesses that SMPs typically serve. Results varied somewhat by size of practice and region. The larger the size of the SMP, the more likely it was to be offering sustainability services.

Next PAIB Committee Meeting

11. Next Meeting of Professional Accountants in Business Committee

The next meeting of the PAIB Committee will be hosted by the Chinese Institute of Certified Public Accountants (CICPA), October 14-15, in Beijing, China. It will be followed by a forum on October 16, 2013, at the CICPA offices. Additional information on the forum, which will be open to the public, will be made available in coming issues of eNews.

Presentation given by IFAC Senior Technical Manager Vincent Tophoff on the integration of risk management and internal control, especially as they relate to the International Organization for Standardization (ISO)'s standard on risk management, ISO 31000 - Risk Management. 

IFAC Senior Technical Manager Vincent Tophoff and Campbell Soup Company Finance Director and Comptroller J. Stephen McNally gave a presentation at the 94th annual Institute of Management Accountants (IMA)'s conference in New Orleans, Louisiana, USA. The presentation outlines some of the pitfalls many organizations face with their current systems of risk management and internal control. Mr. Tophoff and Mr. McNally also discuss the revised Internal Control-Integrated Framework, published in May 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as well as ISO 31000:2009, Risk Management - Principles and Guidelines from the International Organization for Standardization (ISO).

The presentation:

• summarizes the most important pitfalls in current risk management & internal control (RM/IC) practice;
• provides insight into current thinking on risk management and internal control;
• outlines key concepts contained in the most important risk management and internal control guidelines;
• discusses the impact of these developments and approaches for organizations; and
• identifies and discusses other emerging trends related to risk management and internal control.

The International Federation of Accountants (IFAC), the global organization for the accountancy profession, along with the World Bank, the Inter-American Development Bank, and the Global Public Policy Committee, held the seventh Conference for Accounting and Accountability for Regional Economic Growth, or CReCER (Contabilidad y Responsabilidad para el Crecimiento Económico Regional) in Cartagena, Colombia, this week. IFAC member body the Instituto Nacional de Contadores Públicos de Colombia hosted and executed the 2013 CReCER event.

Themed Integrating Approaches to Financial Reporting to Advance Regional Economic Growth: An Exchange between Public and Private Sector, the conference drew more than 350 attendees and speakers and covered important topics, such as national and regional initiatives to advance adoption and implementation of international standards; global perspectives on the evolving role of auditors and accountants; recent capital market developments to support investment; and the future of business reporting, including integrated reporting.

IFAC supports this important event as part of overall efforts to strengthen professional accountancy organizations and their role in contributing to high-quality financial reporting and serving as centers of excellence for the auditing and accountancy profession. This year’s event was especially important because of the timeliness of the sessions on strategies for integrating International Public Sector Accounting Standards with public sector financial management systems and the recent Exposure Draft on auditor reporting from the International Auditing and Assurance Standards Board.

“The discussions, collaborations, and learning that takes place at CReCER by the profession and its key stakeholders have a lasting impact on accountancy and the economies in the region,” according to IFAC President Warren Allen. “These three days set up the next few years of work on the ground for professional accountancy organizations and international standard setters.”

IFAC looks forward to continuing to collaborate with nations and organizations in the region to advance the global and local issues of importance to accountancy and accountants, especially strengthening public sector financial management.

About IFAC
IFAC is the global organization for the accountancy profession, dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. It is comprised of 173 members and associates in 129 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

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Globalization is not a new phenomenon but what is new is both its velocity and how it affects small- and medium-sized entities (SMEs). The impact on SMEs has significant implications for the accounting practices, in particular small- and medium-sized practices (SMPs), that typically serve SMEs. According to the Edinburgh Group (EG)’s recently published report, Growing the Global Economy through SMEs, SMPs may need to carefully critique the services they provide to SMEs seeking to internationalize. As a starting point, the report suggests specific actions for SMPs that include developing more understanding and expertise internally, strengthening relationships with funding institutions, and building international networks of trusted professional and business contacts. SMPs have the potential to become a key agent for the internationalization of small business if they are able to provide SMEs with the advice they need.

Globalization of SMEs

SMEs are a vital and integral part of the global economy. According to the OECD, they account for the majority of private sector employment and GDP as well as a disproportionately large share of new jobs; they are a major source of entrepreneurship and innovation. These SMEs are increasingly becoming part of the global business community. Dramatic changes in communications, transportation, and information technology have accelerated the pace of globalization. SMEs now regularly manufacture products and provide services in many countries and sell to customers and clients around the world—just as large multinational companies have been doing for many years.

The EG report reveals a significant amount of international activity among the SME sector. Almost 75% of the SMPs it surveyed have clients that have some sort of international aspect to their business, even if it is simply buying goods or services from abroad.

Role of SMPs

While globalization presents great opportunities for SMEs—not least new markets for their goods and services—it also poses great challenges. Perhaps the greatest challenge SMEs face is the lack of human capital, including managerial expertise, and financial resources to take advantage of these opportunities. IFAC research indicates that SMEs will likely look to SMPs, their trusted business advisors, to fill the resource gap. The EG report, however, suggests that SMPs themselves must ready themselves to capitalize on the opportunities created by the internationalization of small business. 

Recommendations for SMPs from the EG Report            

The EG report (page 5) makes the following recommendations for SMPs:

1. Provide more proactive support to SMEs in their planning for internationalization, including support in identifying the most attractive, fast-growing international markets.
2. Develop knowledge and information resources to guide SMEs through the red tape challenge associated with international activity, and to help them access all appropriate sources of funding.
3. Build relationships with banks and other key financiers of international investment and trade, to facilitate introductions between these funding sources and SME clients.
4. Identify where SMEs are dealing in foreign currency and seek opportunities to provide value-adding advice in areas such as managing foreign exchange risks and forecasting currency needs.
5. Consider whether additional networking opportunities exist to build relationships with other professionals or to help connect SME clients with each other to create mutually supportive environments and information channels.
6. Assess how the proactive delivery of services targeted at SMEs with international ambitions could help to grow practice income, as well as strengthening client relationships and the firm’s wider reputation.
7. Consider whether developing the international resources available to the practice—for example, by participating in an international network of accountancy firms or building more direct close relationships with firms in other countries—could benefit the firm itself, and its SME clients.

SMEs are increasingly being integrated into the global business community. However, in order for SMEs to maximize the opportunities from internationalizing their business, they need timely advice. SMPs are well placed to provide this counsel.

Resources

IFAC’s website hosts a range of resources and tools to help SMPs implement these recommendations. These resources and tools help SMPs enhance their practice management and build their capacity to offer business advisory services.

On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued the revised version of its Internal Control-Integrated Framework (the Framework). The revised Framework will help improve implementation of internal control but further adjustments are warranted to align internal control across the globe and to help organizations better manage their risks and improve their overall performance.

The Professional Accountants in Business (PAIB) Committee of the International Federation of Accountants (IFAC) has been closely involved in the revision, with two representatives on the COSO advisory council for the project. Additionally, the PAIB Committee submitted two formal comment letters to both COSO internal control exposure drafts.

Key Features of the Revised Framework

The revised Framework uses the same definition of internal control as the previous version and builds on the same five components of internal control: the control environment, risk assessment, control activities, information and communication, and monitoring activities. The Framework also continues to emphasize the importance of management judgment in designing, implementing, and conducting internal control, and in assessing its effectiveness.

So what has changed? The revised Framework now:

• articulates the fundamental concepts underlying the five components in the form of 17 guiding principles and more detailed points of focus;
• takes into account environmental changes, such as increased globalization, complexity, and regulation, the growing importance of technology, and increased expectations for better governance oversight and fraud prevention;
• expands the operations objective from “effective and efficient use of the entity’s resources” to “effectiveness and efficiency of the entity’s operations, including operational and financial performance goals, and safeguarding assets against loss;”
• broadens the reporting objective from “published financial statements” to “internal and external financial and non-financial reporting;” and
• provides additional approaches and examples relevant to operations, compliance, and non-financial reporting objectives.

COSO also issued two additional publications.

• Illustrative Tools for Assessing Effectiveness of a System of Internal Control assists users when assessing effectiveness of internal control based on the requirements of the Framework.
• Internal Control over External Financial Reporting: A Compendium of Approaches and Examples assists users when applying the Framework to external financial reporting objectives.

The revised Framework will supersede the original Framework at the end of 2014, giving organizations time to transition. COSO anticipates a relatively easy transition process for those organizations that have properly applied the original Framework (1992). In fact, the new principles and points of focus should make it easier for organizations to see what is covered and where gaps may exist.

IFAC PAIB Committee’s View

The IFAC PAIB Committee commends COSO for being one of the first and foremost thought leaders in internal control, starting with the publication of the original Framework and followed by a series of related high-quality publications. The committee agrees that while many of the underlying concepts of the original Framework have proven themselves over time, global developments, including the financial crises, in recent years required a revision.

However, while the revised Framework represents a step forward in articulating principles of effective internal control and incorporating a number of considerations relevant to today’s complex business environment, there remains work to be done to advance and harmonize risk management and internal control guidelines across the globe and to better support organizations dealing with the many economic, social, and environmental challenges they face.

The PAIB Committee believes that it is in COSO’s long-term interest to continue evolving its Framework in order to make it more relevant to the broader global community and the challenges faced, and stands ready to assist COSO make progress in this area. The PAIB Committee has formulated a number of recommendations for further development.

• For the Framework to remain relevant in an environment of greater global integration, COSO should further integrate its Internal Control Framework with its Enterprise Risk Management (ERM) Framework, released in 2004, as well as better align it with the concepts and terminology in other frameworks, standards, and guidelines on governance, risk management, and internal control from across the globe. This will enable organizations to make internal control a natural and integrated part of their overall risk management and governance arrangements.
• The Framework should embrace a wider perspective than its current limited application to internal control over reporting, operations, and compliance, for example, by broadening the definition of internal control so as to permit the inclusion of other areas, such as business strategy and finance, in which internal control also plays a crucial role. Before the string of financial crises, many organizations were overly focused on financial reporting controls. These crises highlighted the fact that many, if not most, of the risks that affected organizations derived from external circumstances. This includes the increasing social and environmental risks that organizations encounter, such as mitigating the threats and taking advantage of the opportunities related to global warming.
• As the achievement of objectives is at the heart of the COSO definition of internal control, objective setting should be included in the components of internal control. This would assure better alignment with the related COSO ERM Framework, which includes objective setting as a separate component, and emphasize that strengthening an entity’s systems of internal control can only be done from the perspective of the organization’s objectives.
• The Framework should further align the various concepts and terminology in relation to risk management and internal control with the other standards, guidance, and frameworks that have been issued since the conception of the original Framework. This includes the definitions of risk and internal control, balancing the positive and negative sides of risk, and rethinking of difficult to understand concepts such as risk appetite and inherent controls.

Constructive Dialogue

IFAC is well-positioned to facilitate a constructive dialogue with the issuers of standards, guidance, and frameworks in the area of governance, risk management, and internal control across the world on how the terminology, various concepts, and guidelines could be better aligned in the future.[1]

Further international alignment is an ambitious and challenging goal, but the potential benefits are significant. It is up to all those responsible for developing, implementing, using, and enforcing requirements and guidelines on governance, risk management, and internal control to work together to produce globally-aligned terminology, concepts, and guidelines that are relevant to all. IFAC and the PAIB Committee look forward to contributing to this collaborative effort.

Additional IFAC Guidance

Despite the existence of sound internal control guidelines, such as the revised COSO Framework, it is often theapplication of such guidelines that fails or could be further improved in many organizations. With the International Good Practice Guidance, Evaluating and Improving Internal Control in Organizations (IFAC, 2012), the PAIB Committee provides a practical guide focused on how professional accountants in business can support their organization in evaluating and improving internal control as an integral part of its governance system and risk management. The guidance is complementary to existing internal control guidelines and is based on those internal control matters that often cause difficulties in practice. Both the full guidance as well as an executive summary are available free of charge on the IFAC website. 

The latest IFAC SMP Quick Poll showed that the vast majority (73%) of the nearly 4,000 small- and medium-sized accounting practices (SMPs) surveyed are either currently providing or have plans to provide sustainability services to their clients, suggesting that there’s a sizeable market for these services among the small businesses that SMPs typically serve.

Of those who offer sustainability services, many offer more than one service; the most common service provided, indicated by over 75% of respondents, is advisory services. Reporting and assurance are the next most commonly provided services with about 50% and 40%, respectively.

“The widespread provision of sustainability services suggests that small businesses are increasingly recognizing the tangible benefits of operating more sustainably. This, in turn, seems to be fueling a desire to seek advice from their professional accountants,” commented SMP Committee Chair Giancarlo Attolini. “SMPs can help their SME clients in many ways, for example, advising on the costs and benefits of behavioral changes aimed at reducing waste, appraising potential investments in alternate sources of energy, and assisting with the implementation of an environmental management system (EMS). This is a large and growing area of demand that SMPs need to be prepared to meet.”

Results varied somewhat by size of practice and region. The larger the size of the SMP, the more likely it was to be offering sustainability services. More than half of the practices with 21 or more professional accountants currently offer these types of services, compared to 37% of sole practitioners. By region, Asia and Africa/Middle East were most likely to offer sustainability services, while Central/South America and Australasia/Oceania were the least likely.

The report also includes results on the biggest challenges facing SMPs and their clients, among other topics. As in previous polls, burden of regulation and economic pressures ranked highest. However, tensions around rising costs, competitive stresses, and keeping up with technology gained in importance. This changing mix suggests that SMPs are enjoying a more favorable economic climate and planning for growth.

See the full report in the SMP Committee area of the IFAC site: www.ifac.org/SMP. Due to different response rates in different geographic areas, results may not be statistically representative of global or regional populations of SMPs.

The mid-year 2013 poll received 3,678 responses and was conducted in 16 languages from May 29 to July 8. The poll, conducted twice annually, is intended to take a snapshot of key challenges and trends influencing SMPs globally. IFAC wishes to thank the many member and regional organizations that helped with translation and distribution of the poll.

About the SMP Committee
The SMP Committee of the International Federation of Accountants (IFAC) represents the interests of professional accountants operating in small- and medium-sized practices (SMPs). The committee develops guidance and tools and works to ensure the needs of the SMPs are considered by standard setters, regulators, and policy makers. The committee also speaks out on behalf of SMPs to raise awareness of their role and value, especially in supporting SMEs, and the importance of the small business sector overall.

About IFAC
IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 173 members and associates in 129 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.