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October 2008

IFRS implementation Û Auditors’ Training

By Uday Chitale, Murtuza Vajihi, Chartered Accountants
Reading Time 5 mins

Accountant Abroad

Earning your stripes as a certified public accountant is not
an easy job. This is about to get even more complicated as the United States
Securities and Exchange Commission is moving toward adoption of International
Financial Reporting Standards (IFRS).

There is going to be a scramble to train people who are in or
headed for financial accounting careers. Plus, there will be a host of issues
that arise for the profession: Training institutes and firms will be stretched
to prepare auditors for the switch. Accounting firms may face new legal
liability. And, investors will have a new breed of financial statements to
study. There’s work ahead for all involved.

Principle-based v. rule-based :

One thing most accountants have probably learned is this :
U.S. GAAP largely is considered a rules-based set of standards, while IFRS is
considered more principles-based and, therefore, subject to more interpretation.
This requires that accountants know business, the economics behind transactions
and the accountant’s responsibility to society to report things that reflect
economic reality. Without this knowledge, data could be presented in ways that
could be misunderstood or misleading. If rules are going to be less specific,
then intent needs to be understood.

Will professors focus more on principles and the conceptual
framework for the rules rather than on the rules themselves ? But will there be
time to teach anything but regulations and the how-to mechanics of accounting ?
These questions remain un- answered.

There is a need to graduate students who know more ‘canon’
than context since partners and managers can do the interpretive work. There is
a requirement for entry-level people who know enough rules to be effective when
sent out on a job. Most agree that principles will be of increasing importance
in training the next generation of accountants as there is more judgment needed
in applying IFRS.

However, this does not take away the fact that focus needs to
be on the conceptual framework, which is more heavily relied upon in IFRS.
Professors can round out this knowledge by comparing IFRS specifics to those of

This brings in the issue of litigation. One can take a legal
stand when it comes to rules by saying that ‘These are the rules. We made sure
the company conformed to them.’ This is not the same with principles. They can
be interpreted differently, and the interpretation that seemed like a good idea
during audit might not look as good in front of a jury. In light of legal
issues, the shift to fewer rules and more principles will prompt accountants to
hone skills in documenting interpretations and procedures clearly and concisely,
resulting in the entry-level person turning into a critical thinker and a good

The other point to ponder is discussions between auditors and
corporate management over disclosures and unqualified financial statements. IFRS
may give managers more power in negotiating with auditors over rules’
interpretation and adverse opinions in statements. Issuing an audit opinion is
the auditor’s discretion including the type of opinion to issue. However, there
is a school of thought which opines that this could result in additional
disclosures in the financial statements whether by way of a footnote or
otherwise. If this takes place, then investors will need to work harder to
understand the financial health of companies they’re researching.

World-class catch-up :

Since 2005, companies in the European Union have been
adhering to IFRS, a circumstance that some feel puts U.S. markets at a
disadvantage. “Banks are interested in IFRS because U.S. regulations place a
significant cost on firms.”

GAAP compliance makes U.S. markets more expensive places to
raise capital and less competitive than foreign markets. That was particularly
true for foreign firms, as they had to reconcile statements to U.S. GAAP prior
to this past January, when the SEC dropped the GAAP-reconciliation requirement.
The fact that the SEC said it’s OK to file under IFRS is tantamount to saying
those standards are acceptable.

IFRS may soon be acceptable for U.S. securities issuers, too.
The SEC voted on August 27, 2007 to publish for public comment a proposed
roadmap that could lead to the use of IFRS by U.S. issuers beginning in 2014.
The proposed multi-year plan sets out several milestones that, if achieved,
could lead to the use of IFRS by U.S. issuers in their filings with the
commission. With market globalisation as a driver, the push to bring U.S.
accounting in line with international standards is definitely on. This is going
to result in a requirement for much more robust IFRS education. Academics expect
IFRS questions to first appear on the CPA exam this year. Convergence between
the two standards — U.S. GAAP and IFRS — already is under way.

(Source :

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