On behalf of the Australian Government, I would like to welcome you all to Sydney for this important forum on International Financial Reporting Standards.
I cannot overstate the importance of accounting standards.
We need effective financial reporting for investor confidence. And we can only achieve effective financial reporting if we have a solid foundation of relevant and well-designed accounting standards.
Accurate financial reporting also promotes good corporate governance and accountability among our corporations.
All of these are essential factors for sustaining economic growth in modern market economies.
The environment in which accounting standards are developed has changed significantly in recent years.
In many countries, there has been a dramatic shift from accounting standards being developed and issued domestically to an environment where one international body — the International Accounting Standards Board — plays the primary role.
Almost 100 nations around the world including Australia are currently working towards adopting, or harmonising with, International Financial Reporting Standards (IFRS).
All jurisdictions should adopt the financial reporting framework that is optimal for their own situation. Australia did not take the move to IFRS lightly. The decision to adopt IFRS was made only after concluding it was in Australia’s best interests to do so.
There are sound reasons for this.
As Sir David Tweedie, Chairman of the International Accounting Standards Board points out:
“As the world’s capital markets integrate, the logic of a single set of accounting standards is evident. A single set of international standards will enhance comparability of financial information and should make the allocation of capital across borders more efficient.”
There’s also another compelling reason to adopt IFRS. Sir David went on to say:
“A large number of sets of national standards, each different from the other to some degree, imposes an unacceptable cost on capital markets. Some of that cost is direct and is borne by companies that must meet multiple standards if they seek to raise capital in different markets. There is a more important cost — a systematic increase in the cost of capital.
Markets demand a price for uncertainty, including uncertainty about accounting standards that govern reported information. The existence of multiple, and sometimes unknown, sets of accounting standards increases that uncertainty and drives up the cost of capital.”
The adoption of international accounting standards will also promote integrity and transparency among our corporations. In turn, this will foster trust and confidence in our capital markets.
Maintaining the high standards that promote investor confidence must be a high priority for everyone involved in financial markets today — regardless of their company or country.
This becomes increasingly important in global markets where investors can — and do — move capital around the globe with a few keystrokes on a computer.
Recent history has taught us that capital will flee unstable or unpredictable environments. It doesn’t matter whether that instability is the by-product of law, corporate governance, ineffective accounting standards, or a lack of transparency.
Investors must be able to see for themselves that companies are living up to their obligations, and embracing the spirit of all securities and governance requirements.
This is a critical element for investor confidence around the globe.
The global embrace of International Financial Reporting Standards represents a landmark in the arena of financial reporting.
This sea change saw Australia and New Zealand uniting to form the Trans-Tasman Accounting Standards Advisory Group — or TASAG.
TASAG comprises accounting standard setters, professional bodies and policy-makers from Australia and New Zealand. This Forum is the Group’s first major initiative.
As Alan Cameron mentioned earlier, the primary goal of today’s gathering is to bring together accounting policy representatives to encourage an ongoing dialogue between parties in our region.
I strongly support the process of establishing open and constructive dialogue. I hope that today will be just the beginning of such a dialogue.
I am on the public record as saying I am firmly committed to the process of productive consultation.
In this context, this morning I would like to outline my views on the importance of cross-border cooperation in an environment of global capital markets.
But before I do, I would like to thank the Australian Accounting Standards Board and the profession for its approach to IFRS. Such large projects require active engagement of all stakeholders and I believe the implementation phase is being assisted in this regard.
Globalisation and Financial Markets
So, to the challenges that a ‘boarder-less’ market presents us with.
Globalisation is happening at an ever more rapid pace.
This means that our economic relations are increasingly with other countries. This is particularly true in our region where, for some countries, foreign trade far exceeds GDP.
Increased foreign trade has brought about an increase in the number of multinational corporations.
Australia’s Business Review Weekly estimates that Australia’s 30 top multinational companies earned foreign revenue of just over $120 billion in 2003-04.
The Asian region continues to be a key focus for Australian companies looking abroad, accounting for over 30 per cent of their foreign revenues.
And the importance of this region is set to increase as Australia’s neighbours continue to grow at a rapid rate.
But globalisation is not only about trade. Financial markets are also part of this process. Over the last 50 years, barriers to international financial investment have fallen dramatically in most markets.
During this time, technological advances have revolutionised financial markets. This means that investors can buy securities of many foreign companies almost without restriction.
Investors now take a far more global perspective.
Asian investors wonder about how the US markets performed while they were asleep.
On the other side of the Pacific, morning news shows discuss the overnight performance of Asian markets. Meanwhile, American analysts try to forecast the performance of US markets from the overnight returns of the Nikkei and Hang Seng.
The globalisation of financial investment is illustrated by Australia’s capital market. Over the last five years, portfolio investment in both debt and equity securities has consistently made up the majority of the total foreign investment into Australia.
International investors are the largest ownership group on the Australian Stock Exchange. In June 2004, they held 42 per cent of shares in Australian listed companies.
International Standards and Codes
As cross-border financial investment increases, capital markets become more dependent on each other.
This means that shocks felt in one market reverberate around the region — and potentially, around the world.
This was dramatically illustrated during the Asian financial crisis.
As financial markets become increasingly interdependent, there is also an increased shift towards the development of internationally recognised codes and standards dealing with capital market regulation.
This provides a stable environment in which international capital flows can take place.
Several organisations are developing international standards and codes for market regulation. I’ll give you just a few examples…
The International Organisation of Securities Commissions — or IOSCO — brings together representatives from securities commissions from over 100 countries to discuss issues of mutual concern. It has released several papers on the regulation of securities markets and financial intermediaries.
In particular, IOSCO’s “Objectives and Principles of Securities Regulation” sets out the principles for an effective system of regulating securities and derivative markets. The Financial Stability Forum has recognised this paper as one of 12 key standards for sound financial systems.
For its part, the OECD has released Principles of Corporate Governance. These have been designed to assist governments and regulatory bodies in both OECD countries and elsewhere to draw up and enforce effective rules, regulations and codes of corporate governance.
The Principles also provide guidance for stock exchanges, investors, companies and other agencies with a role in developing good corporate governance.
The International Auditing and Assurance Standards Board develops and issues standards for auditing, assurance and quality control. These standards are used as the basis for national auditing standards in more than 70 countries.
As well, there’s the work of the International Accounting Standards Board in developing IFRS with which I’m sure you are all very familiar.
The development of IFRS can be seen within this broader framework. They are another tool designed to promote a stable and certain international regulatory environment.
There is an obligation on the makers of international standards and codes to be responsive to any concerns over the application or interpretation of the standards. By being responsive, the makers can help promote confidence in these standards and codes.
On this note, I welcome initiatives to review the operations of the IASB’s interpretative body announced earlier this year following concerns expressed by some constituents about the responsiveness of the body. It is timely to address these matters at this stage given so many countries are now committed to IFRS. I understand that some steps have already been implemented to address these concerns, and I look forward to seeing the results of the full review.
Of course, developing international standards and codes, in itself, serves very little purpose.
Standards and codes can only be effective where they are adopted and implemented by national authorities.
In this context, the current work of the International Monetary Fund and the World Bank is particularly important.
The IMF and World Bank carry out assessments of the extent to which a country complies with particular codes and standards. This is part of their “Reports on the Observance of Standards and Codes” process
As well, the IMF and World Bank have jointly developed the Financial Sector Assessment Programme — or FSAP.
This programme is designed to help countries enhance their resilience to crises in the financial sector by identifying strengths, vulnerabilities and risks in the country’s financial systems.
FSAP assessments look at the countries’ compliance with codes on banking supervision, securities regulation, insurance supervision and payment systems.
Many countries in our region have completed or are undergoing these processes including Australia.
International cross-border cooperation
As I mentioned earlier, we are living in an increasingly globalised society.
So it’s in all our interests to work together — cooperating across both international and regional borders.
Cross-border cooperation is essential to the successful development and implementation of high-quality international standards and codes.
This involves representatives coming together on both an international and regional level to work together on issues of mutual interest.
I mentioned earlier the work of IOSCO in developing international standards and codes. IOSCO also plays an important role in international cross-border cooperation.
IOSCO identifies and addresses emerging global issues from a regulatory perspective. As part of this, IOSCO has been heavily involved in the area of international standards and codes.
This is illustrated by the topic of the most recent IOSCO Technical Committee meeting in Frankfurt — ‘Global Rules, Local Supervision: How can IOSCO fill the Gap’.
With regard to accounting standards, IOSCO helped to further the adoption of IFRS by endorsing their use in cross-border offerings and listings.
Looking ahead, IOSCO is progressing a project on regulatory interpretations of IFRS. This project will produce a central database of regulatory decisions, as well as a process for facilitating communication and cooperation among regulators and other enforcers relating to IFRS.
This will help to ensure a consistent approach to the enforcement of IFRS around the globe.
Work is also being progressed on an international level to assist in the implementation of International Financial Reporting Standards.
The International Federation of Accountants — or IFAC — commissioned a report on the challenges and successes in implementing IFRS.
The report was designed to stimulate further discussions on the adoption and implementation of international standards as a means of moving closer to the ultimate goal of international convergence.
As part of furthering discussion on these matters, the Financial Stability Forum held a roundtable on the implementation of international accounting and auditing standards in October 2004 following the release of the IFAC report.
This roundtable looked at a number of key issues including the development of international standards, the impact of IFRS on financial markets and the readiness of preparers to apply IFRS.
These types of international initiatives are fundamental to the consistent application and implementation of global standards.
Regional cooperation
I spoke earlier about the role of international bodies such as IOSCO, the OECD, the IMF and the World Bank.
Of course, rules governing global relationships must be developed in international forums.
But this certainly doesn’t preclude the need for and value of regional input.
In fact, I would go so far as to say that the issues I’ve been talking about today are too important for our region not to have a voice in the process.
Regional cooperation is vital to the effective implementation of international rules and standards.
By discussing the issues, swapping ideas and simply observing the way other countries do things, regional cooperation can help to promote integration and stability among our financial markets.
This open dialogue can also foster greater trade and investment between countries within a region.
Discussion at a regional level is also important to ensure that global standards recognise the great diversity of circumstances that exist between countries, and between regions.
Australia has a history of active involvement in initiatives to improve regional economic architecture. Australia has taken leading roles in projects on corporate governance, insolvency and financial reform in the region through cooperation with organisations including APEC.
Examples of Regional cooperation in the Asian region on financial reporting issues
We are now seeing this kind of cooperation within our region on issues relating to financial reporting.
For example, the accounting standard setters in China, Japan and the Republic of Korea hold regular “Three Countries Meetings”.
At the most recent meeting, held in China in early September, participants discussed the latest developments in accounting standard setting in the three countries, and their stance towards international convergence of accounting standards. They also discussed the obstacles they encountered, as well as specific measures to address them.
We are fortunate to have representatives from the three countries with us here today. It will be interesting to get some first-hand feedback from them on the progress achieved in these meetings.
Another example of individual countries in the region working together is the host of today’s Forum, the Trans-Tasman Accounting Standards Advisory Group (TASAG).
As part of its work to promote cooperation between Australia and New Zealand, TASAG has been organising cross-appointments between the Australian and New Zealand accounting standard setting bodies.
As well, TASAG is developing a protocol between the Australian and New Zealand accounting standard setters, outlining their aspirations for co-operative arrangements between the bodies.
Between Australia and New Zealand there is recognition of the benefits of having a consistent financial reporting framework.
There have been calls from a number of bodies for greater region-wide cooperation on financial reporting issues.
For example, in May 2004, the APEC Business Advisory Council recommended that each economy in APEC endeavour to reach the ultimate target of convergence of accounting standards.
The Business Advisory Council also recommended that there be greater coordination amongst APEC members in providing input to the IASB in the development of their standards.
For its part, the Asian Bankers’ Association – or ABA – has released a paper titled Promoting APEC Economies’ Convergence Toward International Financial Reporting Standards.
In this paper, the ABA expresses its commitment to helping achieve region-wide convergence toward IFRS. It also suggests a number of ways of achieving this.
In particular, the ABA proposes that a regional forum of domestic accounting standard-setting bodies within APEC be established to share concerns on accounting issues.
The ABA considers this forum could also develop common inputs from APEC member economies and feed those into the work of the IASB and its interpretations committee.
We are now starting to see responses to the calls for region-wide cooperation.
For example, an Australian professional accounting body, CPA Australia, has established the Asia-Pacific Financial Reporting Advisory Group.
This Group comprises CPA members and has been established to promote the views of the CPA members in the region in the development of the international financial reporting framework.
The Group is also encouraging debate on issues raised by international standard-setters, and encouraging and supporting education of those involved in financial reporting.
It is vitally important that we all work together collaboratively — no matter what our role is in the financial reporting arena. For my part, I look forward to discussing these matters with my ministerial colleagues in the region.
And I expect today’s Forum will contribute to greater cooperation on financial reporting issues between standard setters, professional bodies and government officials in our region.
To that end, I am very pleased to see representatives from such a diverse range of countries from across the region here today.
Conclusion
The global shift towards IFRS presents many benefits for a wide range of stakeholders.
I firmly believe we will only fully realise these benefits through cross-border cooperation on both an international and regional level.
I am confident that today’s Forum will be another stepping stone towards that goal. And I look forward to receiving feedback on the results of the day.
I would like to give special thanks to our international guests for joining us here today.
I hope your visit to Australia is a pleasant one. And while you are here, I would encourage you to take some time to enjoy some of the great experiences our wonderful country has to offer.
Thank you.