John O’Grady traces benefits and challenges of IFRS compliance

John O’Grady is the IFRS Leader for Asia Pacific Area of Ernst & Young. He will share his thoughts on ‘Quest for Balance – IFRS: Theory, Practice and Transition’ at the National Conference of Chartered Accountants – 2011. Following are excerpts of an interview:

Q: Could you give us an insight into your professional achievements?

A: I am a Partner and the Asia Pacific Area International Finance Reporting Standards (IFRS) Leader for Ernst & Young, Australia, with almost 30 years of experience in the fields of audit and accounting. I am also responsible for the quality of IFRS accounting advice to clients in Asia Pacific; the interpretation of accounting pronouncements; the preparation and communication of accounting guidance to Assurance professionals and the development of IFRS training courses.

Moreover, I am a Member of the Australian Accounting Standards Board and was formerly Ernst & Young’s representative on the Australian Urgent Issues Group. I am a Fellow of the Institute of Chartered Accountants in Australia and Ireland, a member of Ernst & Young’s Global IFRS Policy Committee and a member of the firm’s global Income Taxes and Financial Statement Presentation and Disclosure Expert Groups.

Q: What is your job profile in Ernst & Young Australia?

A: I have been appointed Head of the Asia Pacific IFRS Group since 1st July 2010, which consists of 21 countries, including China, Korea, Australia, Singapore, Indonesia and Sri Lanka. As leader of the IFRS Group for the area, I am responsible for the interpretation of IFRS and IFRS-equivalent GAAPs within Ernst & Young. I lead a team of IFRS subject matter experts located across Asia Pacific, who are responsible for consultations and advising on accounting and financial reporting issues.

I have been a Member of the Global IFRS Policy Committee from 1 July 2005. The Global IFRS Policy Committee is comprised of 14 IFRS leaders from around the world, and is the group that determines Ernst & Young positions and views on IFRS matters. This Committee is responsible for the Firm’s interpretation of existing IFRS standards and interpretations and the formulation of the Firm’s views on IASB proposals.

I have also been the Formerly Head of the Oceania IFRS Group (2003 -2010) and worked in the Assurance practice in Arthur Andersen from 1982-’99, before taking up a position in the Professional Standards Group in 1999. In my time in the Assurance field I worked in Dublin, London, Perth (Australia) and Chicago – including as an audit partner for five years in Australia.

In 1999 I transferred into the Professional Standards Group as an accounting technical partner, and have continued in this role since. I am also an Independent Review Partner for a number of large audit engagements in Australia and China. In my time in the technical group I have been involved in the provision of advice and interpretation to most of Australia’s largest companies.

Q: How and why has IFRS compliance taken on such urgency?

A: Compliance will often receive increased focus in times of financial difficulty, as various stakeholders consider the reasons for market failure and regulators seek to prevent future occurrences. An example is the development of the Sarbanes-Oxley Act in the US following the collapses of major corporations in the early 2000’s. Likewise, new regulations such as the Dodd Frank Act and Basel III are responsive to the current financial crisis.

A focus on compliance is often driven by views that a current crisis is due to ‘poor compliance’ with existing regulations, rather than a lack of regulation or a systemic failure. Financial reporting compliance follows the same pattern. Some commentators believed that the financial crisis in 2008 was caused, or at least exacerbated, by inadequate financial reporting – lack of standards, inappropriate standards, and lack of compliance. In such an environment there is a natural increase in regulation and focus on compliance.

Q: What in your view are the various professional unique experiences that have fuelled your experience/knowledge about your forthcoming session on ‘IFRS: Theory, Practice and Transition’?

A: I have been involved in IFRS since 2000 and in a significant way throughout IFRS adoption in Europe and Australia in 2005 and many other countries since. In my roles as an IFRS leader in Ernst & Young - advising and consulting our clients, and as a member of the Australia Accounting Standards Board, I have seen the adoption process from both a company’s and a standard-setter’s perspective.

In assisting companies through the transition process, it is necessary to put theory into practice; to ‘operationalise’ the requirements of the standards. It is also important to assist companies to effectively manage the change across the broad spectrum of affected activities – taxation, regulatory reporting, investor communications, process redesign, data capture, etc. As an AASB member, my role is to understand, discuss and debate the conceptual basis for the standards-setter is still the development of financial reporting standards.

Q: How has experience in the finance field been brought to bear in the current environment of the global economic slowdown?

A: The importance of the accounting profession and its commitment to standards of high quality financial reporting has never been more evident than in the past four years. Common standards for high quality financial reporting increase the transparency of capital markets, both locally and globally. Such increased transparency is fundamental to the effective and efficient operation of capital markets and increased capital flows, as it underpins the confidence of participants in the market.

The global financial crisis provided evidence of the importance of high-quality financial reporting, but also evidence that the role of the accounting profession is critical to the proper functioning of the financial system. The skills and competencies of accountants are needed in both the provision of appropriate financial information and its interpretation for users.

Throughout the past four years, as an IFRS leader in Ernst & Young, my colleagues and I have had to deal with many financial reporting challenges, such as: when are loans and receivables impaired; when are markets inactive; how is fair value determined in the absence of active markets; what constitutes ‘significant or prolonged’ decline in fair value below cost for available-for-sale equity securities; and when should structured entities be consolidated.

Q: In your experience, what difference will IFRS make to companies? How easy/difficult is it for companies to bring about change and make sure it’s implemented without paying mere lip service?

A: IFRS has become, over the past 10 years, a global financial reporting language. As such, IFRS converts the financial reporting of a country and of the companies in that country onto an internationally-recognised basis. This increases the access for companies to the global capital markets and, in theory, lowers the overall cost of capital.

However, such benefits will only be realised if the financial reporting is truly global – that is, it is consistently adopted, interpreted and applied around the world, and participants in the capital markets trust the information provided.

IFRS requires considerable effort for companies to implement. Depending on the extent to which Sri Lankan GAAP is currently aligned with IFRS, there are costs in educating accountants in the new standards, costs of change to financial systems and financial reporting processes, and impacts on other areas that may interact with accounting standards (such as taxation regulations, dividend payment requirements, debt covenants in loan agreements, earn-out clauses in business acquisitions, ratios used for financial analysis, etc.). It is necessary for companies to understand the effect of the changes in financial reporting on areas beyond the financial statements, and to ensure that these areas are managed through the change.

Depending on the circumstances of companies, they will benefit from a number of cost savings when using IFRS. There can be a reduction in the cost of capital based on the fact that many lenders and investment managers will understand the numbers more universally, and as a result companies that wish to reach a wider group of investors will find IFRS statements accepted in all major markets.

Access to international markets also means that companies can have access to wider sources of finance, which could in turn mean their finances become cheaper. A group gains other advantages while using IFRS throughout, such as making the financial monitoring easier to move staff around the group without re-training.