A conference for Audit Committees and CEOs on their roles and governance responsibilities arising from the impending changes as a result of Sri Lanka’s Convergence with International Financial Accounting Standards was organised recently by Ernst & Young, in Colombo.
The well-attended conference was conducted by Mark Seddon, Managing Partner for Financial Accounting Advisory Services in the Asia Pacific, who counts over 20 years experience in the provision of accounting and business risk advisory services.
The Institute of Chartered Accountants of Sri Lanka (ICASL) has adopted International Financial Reporting Standards, known in Sri Lanka as Sri Lanka Financial Reporting Standards (SLFRS), with effect from 1 January 2012. Convergence with International Financial Accounting Standards is an important step towards achieving the global trend in enabling a common language for the financial reporting process. The objective of this conference was to offer an insight to participating CEOs & CFOs on critical areas such as the governance framework, and how Boards and Audit Committees need to engage and align successfully to the new financial reporting norms.
Setting the tone for the conference, Seddon pointed out that the adoption of the new standards could be leveraged upon as a major change initiatives rather than a mere accounting exercise, thereby positively impacting the businesses and its operations. He discussed some key concerns that participating heads of companies would have to keep in mind while inducting these new financial reporting standards into their organisations.
Some of the issues under the spotlight at the conference were: the current status of the new standards; timeline for issue; lessons learned from his experiences leading multinational conversions in Australia and the US; the different adoption approaches and models that have been used when looking at conversions; the pitfalls and pros and cons of different approaches to conversions and the timeline.
Also brought into sharp focus were the key questions that will need to be asked by the Audit Committee of management in respect of the conversion — how to appropriately frame the questions so as to make sure that management delivers the information needed in order to fulfill the Audit committee governance requirements.
Seddon went on to explain: “SLFRS is not a static platform and as more and more countries get on board with the new standards, so do interest groups and issues arise that require constant revisiting, refining and improving of these standards. Most companies want to wait for the final standards to come out, but unfortunately, final standards don’t exist when it comes to SLFRS — everything is really an interim standard.” He noted however that it was a positive trend that discussions were taking place in Sri Lanka about how the regulators will look at the new standards and what their role would be in an SLFRS regime.
Explaining the minutia of the new standards, Seddon went on to boost the enthusiasm of the participants by adding that though an element of the rule based approach will come into the new standards, at the moment it is still a principles-based model, which is helpful because it leaves room for interpreting the standard as it is appropriate for each organisation.
Addressing audit committee members, he said, “Critically if you are moving into a new paradigm for financial reporting it is clearly going to require the oversight of the audit committee. There will be many choices to be made but will you be provided with management recommendations to approve? Are you in a position to consider whether the right choices are being made for your organisation?” Many of these decisions and responsibilities fall on the shoulders of the Audit committee, as part of their oversight role, particularly as the Audit Committee signs off on the Financial Statements, Accounting Policies and recommendations. The realisation that was brought to bear on the participants was that every organisation will have to establish a process of governance that is ‘wrapped’ Engaging CFOs next, Seddon stated that CFOs would need to express their expectations of the conversion, decide what form of leadership and steering committee will be put in place and what kind of performance scorecard will be developed and provided to the Audit Committees in order to track the conversion milestones and provide confidence that the CFO and his team are meeting the timeline and looking at the appropriate issues and managing the costs.
One of the recurring questions at the Conference was how an organisation should tackle the different accounting frameworks used across their operations. In response, Seddon said: “One of the major issues I think yet to be dealt with under the new standards is that there is going to have to be accommodation for you to get the full benefit of one single platform and not have two IFRSs (equivalent to SLFRS) running, as well as a regulating framework. This issue needs to be embedded into your change management approach!” The other concern that was echoed amongst the participants was about how organisations can simultaneously gain greater alignment with the new standards and the tax regime. Many participants raised concerns about the costs and resource requirements involved in the conversion process.
Participants were apprised further on global experiences in this conversion process. The Australian conversion experience was a top-down approach: cheaper in the short run and quickly implemented. However, this approach does not address the need for reengineering of processes required for the financial reporting standards to be firmly embedded in the company’s accounting policies.
On the other hand, the US approached IFRS adoption from the ‘bottom up’, understanding the impact on the business, its processes and systems, in order to embed the core principles. Although the two approaches were different, the latter one is favoured despite its costly nature, because organisations adopting this method are taking the right approach towards IFRS adoption as not only an accounting initiative, but a larger finance transformation.
The timeliness and relevance of the conference evoked an overwhelming response from key decision-makers and financial heads across the country’s corporate landscape, thereby adding immense value to enabling Sri Lanka’s adoption of IFRS in a transparent manner that enhances its country competitiveness further.