Roger W Ferguson, Jr: International financial reporting and auditing
Remarks by Mr Roger W Ferguson, Jr, Vice Chairman of the Board of Governors of the US Federal
Reserve System, to the Financial Stability Forum, International Accounting Standards Board, and
International Federation of Accountants Roundtable on Financial Reporting and Auditing, Paris,
16 February 2006 (via videoconference).
* * *
It is a pleasure to join you for this joint Roundtable on Financial Reporting and Auditing. As chairman
of the Financial Stability Forum, I would like to express my appreciation to all of you that are
participating in this roundtable as distinguished speakers or in other roles. In addition, I appreciate the
very good partnership that we have had with the International Accounting Standards Board (IASB) and
International Federation of Accountants (IFAC), and with our host, the World Bank, in preparing for this
gathering.
Since our last joint Roundtable in October 2004, much has transpired in the international accounting
and auditing arenas. Indeed, 2005 was a very big implementation year for international standards
around the world. The topics of this Roundtable--dealing with the experience of implementing IASB
and IFAC standards and related regulatory challenges, international convergence and harmonization,
issues associated with using fair values in the financial reporting model, and risks and vulnerabilities
arising from the financial reporting chain--all reflect the interconnectedness of accounting, auditing,
and regulation and the need to consider these issues from the unique perspectives that all of you bring
to the table. It is very important that this type of constructive dialogue continues to take place among
the many key stakeholders in the financial reporting chain.
The focus of the roundtable--international financial reporting and auditing--continues to gain increased
attention from members of the international regulatory community such as the Financial Stability
Forum, the International Organization of Securities Commissions (IOSCO), the International
Association of Insurance Supervisors (IAIS), and the Basel Committee as well as from national
supervisors, standards setters, banks, investors, analysts, auditors, and many others. As we all know,
in recent years, accounting and auditing scandals and other developments have found their way onto
the front pages of your daily newspapers in ways rarely seen before. These challenging developments
have led to a new resolve on the part of governmental, regulatory, and business leaders that there
must be a reinforcement and improvement of standards-setting processes and a return to sound
accounting, auditing, and disclosure practices by companies and their auditors.
The unprecedented problems of a few years ago fueled efforts to help restore investor confidence in
U.S. and European capital markets through legislative reforms affecting both the accounting
profession and corporate management and directors. For example, these efforts led to, for example,
the enactment of the Sarbanes-Oxley Act in the United States which set the stage for a new audit
oversight authority--the Public Company Accounting Oversight Board--to regulate, inspect, report on,
and in some cases enforce penalties against auditors and led to new requirements for corporate
management to maintain strong internal controls and to make periodic public reports on the adequacy
of their companies' internal controls. In the European Union, the Eighth Directive and other initiatives
were undertaken in recognition of the important role of audit oversight authorities. These initiatives
seek to strengthen accounting standards, internal controls, and transparency.
But long before these legislative initiatives were being considered, steps were taken to establish
independent international standards-setting frameworks for both accounting and auditing standards,
as reflected by the creation of the IASB in 2001 and the IFAC International Auditing and Assurance
Standards Board (or IAASB). Both of these standards-setting processes have been reviewed and
enhanced over time and continue to be subject to improvements.
In his keynote speech earlier today, Michel Prada shared with you IOSCO's initiatives to address
international accounting and auditing issues. It is clear that IOSCO has played a very important role in
these arenas for many years. Likewise, central banks and banking supervisors have taken steps to
enhance their focus on accounting and auditing matters that affect institutions they supervise. During
the mid-1990s, the Basel Committee started to devote more resources to developing principles that
would help shape and improve bank disclosure, supervisory reporting, and accounting practices.
Moreover, the committee recognized that it was also important to support high-quality
standardssetting processes. With the formation of the Accounting Task Force by the Basel Committee in 1997,
the Basel Committee began to participate more actively in processes for setting accounting and
auditing standards. This participation led to the development of enhanced accounting guidance on
financial instruments and more comprehensive bank audit guidance. The IAIS has also shown a
strong interest in the development of sound international accounting and auditing standards, as
evidenced by its participation in the IASB's Insurance Working Group and the recent Group of Thirty
(G-30) effort to enhance the transparency of reinsurance activities.
All of these positive efforts by regulators and supervisors reflect a growing recognition that sound
accounting policies and meaningful public disclosure by banking and other financial organizations and
by nonbanking companies can improve market discipline. With sufficient, accurate, and relevant
information, market participants can better evaluate counterparty risks and adjust the availability and
pricing of funds to promote better allocation of financial resources. Thus, more-effective market
discipline can, in a sense, "regulate" the risk-taking activities of banks and other firms in ways that can
complement supervision and regulation of financial institutions and foster stable financial markets.
The concept of market discipline has assumed greater importance among international banking
supervisors with the publication of the new International Capital Framework, called Basel II, which
seeks to strengthen the market's ability to aid bank supervisors in regulating capital adequacy. As you
know, in addition to pillars on risk-based capital requirements (pillar 1) and risk-based supervision
(pillar 2), Basel II includes the very important pillar 3, which addresses disclosure of risks and capital
adequacy to enhance market discipline. This approach to capital regulation, with its market-discipline
component, signals that sound accounting and disclosure will continue to be important parts of the
global bank supervisory approach for many years to come.
In addition to disclosure and market discipline, supervisors and regulators around the world recognize
the need for stronger audit and control standards for financial services firms and other companies. The
quality of management information and supervisory and financial reporting is dramatically affected by
internal control systems, including internal audit programs and reviews by external auditors. Sound
supervisory and financial reporting, good internal controls, and quality audits are becoming more
important to financial services regulators because they directly affect regulators' ability to promptly
identify institutions in distress and work toward a satisfactory resolution.
This shared understanding of the importance of sound audit and control practices led to an
unprecedented level of cooperation among the international regulatory community--in this case,
IOSCO, the Basel Committee, the IAIS, the European Commission (EC), the World Bank, and the
Financial Stability Forum, which came to be known as the Monitoring Group. Working together, they
were able to develop a common position on reforms. This common position served as a basis for
dialogue with the leadership of IFAC about establishing a credible independent oversight authority to
help enhance the integrity and objectivity of the IAASB's international audit-standards-setting
processes. This led to the creation of the new Public Interest Oversight Board of IFAC, which is now
busy assuming its new responsibilities. The Public Interest Oversight Board (PIOB) should, over time,
lead to enhanced audit standards and practices around the world. The Financial Stability Forum is
pleased to have been a strong supporter of this initiative, and I am happy to see that the PIOB is
represented at this roundtable today together with the leaders of IFAC and many Monitoring Group
representatives.
The Financial Stability Forum has taken a close interest in national and international efforts to
strengthen confidence in financial reporting frameworks. Stronger and more-convergent national
systems bring clear financial stability and efficiency benefits. The forum's efforts have included a focus
on the global-standards-setting activities of the IASB on the accounting side and the IAASB on the
auditing side. The goal of global standards in both areas will require a high degree of convergence
between U.S. and international standards, and efforts toward full commonality are well underway. The
forum's interest reflects the strong recognition of its members that the potential financial stability and
efficiency benefits are significant: high-quality global accounting standards can lead to enhanced
transparency that will improve market discipline and foster stable financial markets. Likewise, external
audits performed in accordance with high-quality global audit standards can ensure that financial
statements are reliable, transparent, and useful to the marketplace, thus enhancing market
confidence.
I am sure that we all want to see, over time, a restoration of public confidence in the quality of financial
reporting and auditing, and I hope that dialogue--such as that taking place at this roundtable--and the
initiatives of standards setters, can lead to standards that are fully understandable to preparers, users,
and auditors; that avoid undue complexity and implementation costs; and that truly contribute to
transparency. Let me also stress the need to continue to implement approaches that not only improve
international accounting and audit standards, but also encourage, through the implementation and
enforcement of these standards, an enhancement in actual international accounting and audit
practices.
However, like any professional undertaking, developing accounting and auditing standards and
practices can be complicated, and gaining a shared understanding of the implications for the financial
reporting chain and for financial stability can take time. Therefore, I am pleased to see that the
Financial Stability Forum, the IASB, and IFAC conducted this roundtable on important financial
reporting and auditing matters and that you are taking the time to contribute to the exchange of
valuable information on key issues. I hope that this roundtable will continue to foster constructive
dialogue among the many key stakeholders represented here and that this type of dialogue will
continue after the roundtable has ended.