By Venkatramanan Vishwanath | Chartered Accountant
Article
As corporate India approaches IFRS convergence commencing
from 1st April 2011 (and extending over the next few years for most companies),
internal audit function arises within most corporate entities need to consider
what this process of convergence means to them and what is it that they should
be doing to participate in the process to safeguard the interests of their
organisations.
In many organisations, the IFRS convergence process is led by
and primarily owned by the finance and reporting function and other support
groups like taxation, information technology and systems and internal audit have
a relatively limited role to play in practice.
However, given that IFRS convergence means a fundamental
change in financial reporting and measurement processes, the implications and
therefore the onus on internal audit is significant. While it is obvious that
internal audit needs to look at the training and skill enhancements relating to
IFRS for the internal audit team itself, there are a number of areas where
internal audit can, and should, look to provide assurance to senior
management/board of directors on whether the process of convergence itself
(within a company) is being handled appropriately.
I have tried to set out below five of the top
areas for internal audit to focus on as this process unfolds.
Organisational readiness :
Internal audit function should assess how the organisation
has planned and is implementing the IFRS convergence process. Critical factors
to consider include :
- How have teams been staffed and is the organisational commitment (people,
infrastructure and technology) to the process of rolling out IFRS adequate
in the context of the organisation ?
- Are there adequate knowledge and skills in the hands of the persons who
are leading this project i.e., are the project leaders/team members suitable
for the task ?
- Have aspects such as budgeting and planning moved to an IFRS basis ? If
not, what is the organisational roadmap to address potentially different
basis for financial reporting and performance management ?
In the case of future acquisitions and business combinations, is there an
ability to manage and measure financial performance on a basis different
from historical cost accounting (i.e., given that IFRS requires acquisition
date fair valuation; the basis and results will be different) ? Also are the relevant reconciliations and related controls in place to ensure that IFRS financial
data and performance is adequately understood and analysed within the
organisation ?
Training, skills and awareness :
IFRS convergence brings with it a significant challenge in
terms of technical skills and the need to learn new concepts and unlearn old
practices for most affected parties. Internal audit function should consider how
structured and thought through the training and awareness plan relating to IFRS
convergence is and consider the following key factors :
- What is the quality, timeliness and breadth of training available to all
interested/affected parties ?
- Have current recruitment practices recognised the change imposed by IFRS
and are those skills being actively sought
- For existing staff (including senior management) what is the incentive/dis-incentive
to learn and unlearn as required by IFRS ?
- What has been the external communication strategy to create awareness
around IFRS convergence and how it affects the organisation (with parties
such as investors, bankers and lenders, credit rating agencies, key
suppliers and customers, etc.) ?
Information technology change management :
One of the areas that is often neglected by companies working
on IFRS convergence is the impact that IFRS changes could cause to information
technology infrastructure within the organisation. Internal audit functions
should ideally focus on this area from an early stage as a poorly executed IT
change program can have significant and long-lasting repercussions for entities.
Key areas to focus on include consideration of how MIS, taxation and other
statutory/regulatory-related reporting and IT needs are going to be catered for
on a post-IFRS convergence basis; what are the checks and controls (including
reconciliation controls) that are being put in place for this purpose and the
robustness of the IT solution being implemented.
Another fundamental area relating to IT changes would be in
the context of business acquisitions and carve-outs proposed in the Indian
context. For business combinations/acquisitions, etc., given that the IFRS
standards require fair valuation to be performed on the acquisition date, the
post-consolidation cost basis would differ from the standalone cost basis for
various financial statement captions. Accordingly, entities need to have the
systems and IT ability to be able to manage the reporting and measurement
requirements on a parallel basis post acquisition. Additionally, if theentity
desires to report/measure performance on pure IFRS (as issued internationally by
the IASB) in addition to the Indian IFRS like standards (IND AS) because it is
listed overseas or wants to provides such information to its investors, IT
systems need to be able to cope with these requirements too. Internal audit
teams should consider the robustness of all IT solutions that are being applied
in the context of the above challenges.
Keyman risk :
There is a dearth of IFRS conversant and experienced resources in India currently. Accordingly talent management and control over key-man/ personnel risk is an important aspect for organisations to think about as they approach IFRS convergence. If too few people are involved in the IFRS convergence process, it can create/accentuate concentration and keyman risk and exposes organisations to more risk than they budget for.
It is critical therefore this risk is recognised and dealt with appropriately from an early stage. Adequate consideration should be given to the size of team involved in the IFRS convergence process, succession planning and most importantly the level and quality of documentation of the process and decisions associated with IFRS convergence, so that organisational interests are protected and the collateral of knowledge/decisions is retained even if there is an increase in staff turnover levels.
Quality control:
Probably the most tricky and challenging aspect of managing the IFRS convergence process in an organisation is ensuring quality control. This aspect is both difficult to measure and often even if a process is managed poorly, the effects may not be evident till well after the convergence process is considered complete. In today’s age where accounting restatements and errors can cause serious reputational and organisational damage, maintaining quality in the convergence process is critical. Internal audit should focus on what are the checks and balances in place to ensure a certain level of quality is maintained in the convergence process and the post convergence environment. For instance, a few areas that require careful consideration are:
- has an adequate benchmarking exercise with peers been conducted of the process followed by the company as part of the convergence process;
- are the accounting policies in line with industry peers (locally and internationally);
- how robust has been the consideration of choices and what is the quality of those choices in the context of the organisation’s operating philosophy;
- is there adequate communication to people in positions of governance (senior management, audit committees and boards of directors) of the choices proposed to be made and has their feedback been adequately factored into the convergence process;
- what is the quality of the review process of actual work done and adjustments computed relating to IFRS transition;
- are all people in reviewing positions adequately informed, skilled and aware about IFRS to discharge their functions adequately in a post-IFRS environment?
- are external auditors adequately involved in the IFRS convergence process and do they have appropriate skills to be able to perform the audits in a post-convergence environment?
Conclusion:
IFRS convergence is certainly a significant challenge for many organisations and internal audit functions would best serve their organisational mandate if they did not only react to the change once it happens, but instead look to provide their inputs and insights into the process by which convergence is being achieved. A number of board of directors and audit committees are interested in understanding these aspects and internal audit can provide an independent and timely view that assists them in steering the organisation through the maze that is IFRS convergence in a effective and efficient manner.
