Presentation by Ian Ball, chief executive officer of the International Federation of Accountants, at the L'Institut des Réviseurs d'Entreprises’ European Study Day conference in Brussels, Belgium, which details the societal role of the audit, the need for adoption of accrual-based accounting by governments and public sector institutions, and IFAC’s commitment to global convergence of international standards.

1. Auditing in the Public Sector
Ian Ball
CEO
International Federation of Accountants
European Study Day
10 February, 2012
Brussels, Belgium

2. Auditing in the Public Sector
IFAC Comments on European Commission Proposed Legislation
The International Federation of Accountants (IFAC), the global organization for the accountancy
profession with members and to continually improve audit quality, enhance the role of audit, and
IFAC supports initiatives associates in 127 countries, today commented on the European
Commission (EC)’s proposed legislation, issued this week.
safeguard auditor independence. As such, IFAC supports the following measures proposed by
the EC:
IFAC supports initiatives to continually improve audit quality, enhance the role of audit, and safeguard
auditor independence, and believes that innovation and evolution are essential for this vital service to
• Compliance with International Standards on Audit (ISAs)
maintain its relevance and meet the needs of investors and other stakeholders. As such, IFAC supports
• measures proposed by the EC, which we believe are consistent with views widely
the followingStrengthening of audit committees
expressed in response to the Green Paper:
• Enhanced dialogue between auditors and regulators
• Greater transparency in auditor selection
• Greater cross-border mobility for auditors
• Enhanced auditor reporting

3. Auditing in the Public Sector
IFAC Comments on European Commission Proposed Legislation
The International Federation of Accountants (IFAC), the global organization for the accountancy
profession with members and associates in 127because there iscommented on evidence that they will have a
IFAC does not support several proposals, countries, today not sufficient the European
Commission (EC)’son auditorlegislation, issued this week.
positive impact proposed independence and audit quality, and that benefits will outweigh risks and
IFAC supports initiatives to continually improve audit quality, enhance the role of audit, and safeguard
costs. Further research should be conducted to support their feasibility and impact.
auditor independence, and believes that innovation and evolution are essential for this vital service to
• Mandatory firm rotation
maintain its relevance and meet the needs of investors and other stakeholders. As such, IFAC supports
the following measures proposed by the EC, which we believe are consistent with views widely
• Prohibition of non-audit services
expressed in response to the Green Paper:
Also, IFAC is of the view that the proposed legislation, if passed, could have a negative impact on the
audit profession and professional accountancy organizations (PAOs). In particular:
.
• PAOs’ role in audit oversight arrangements
• Extraterritorial impacts

4. Auditing in the Public Sector
2.1
1.1 Introduction …It is important to stress that auditors have an
important role to play and are entrusted by law to
. conduct statutory audits. …The independence of
auditors should thus be the bedrock of the audit
environment. It is time to probe into the true
fulfillment of this societal mandate.

5. Auditing in the Public Sector
2.1 IFAC believes that there is a need to more effectively set
out the societal role of the audit. Ultimately, the value of
the audit is dependent upon the quality and usefulness of
. the audited financial statements.

6. Auditing in the Public Sector
“1.1 In relation to the need for high-quality and timely accrual-based
financial reporting, IFAC recommends that the G-20 actively
encourages and facilitates the adoption of accrual-based
accounting by governments and public sector institutions.”

7. Auditing in the Public Sector
“IFAC is concerned that the standards and
regulations governing sovereign issuers are
not of sufficient quality to protect investors and
ensure the stability of capital markets…”
“…looking at potential measures that could
improve the quality and reliability of
information disclosed by sovereign issuers and
therefore increase the protection of investors
and improve the stability of capital markets.”

8. Auditing in the Public Sector
Government issued financial instruments are a very
important part of the financial market
2010 NYSE
• All equity trades $218 trillion
• Mortgage backed securities $104 trillion
• Mutual funds $3 trillion
• US Government securities $1,100 trillion

9. Auditing in the Public Sector
Latin American sovereign debt
Number of years in default, 1824-2004 Latest
period of
default
0 20 40 60 80 100 120
Ecuador 116.0 1992-90
Mexico 85.0 1984-97
Peru 75.0 1995-97
Venezuela 65.0 2001-04
Argentina 50.0 1983-90
Chile 45.0
1983-94
Brazil 45.0 1986-97
Bolivia 40.0
2003
Uruguay 25.0

10. Auditing in the Public Sector
Countries with Sovereign Restructuring between 1990-2005
(Agreement Date)1
Algeria (07/1996) Pakistan (12/1999)
Argentina (04/1993, 04/2005) Panama (05/1996)
Brazil (04/1994) Peru (03/1997)
Bulgaria (06/1994) Philippines (12/1992)
Chile (12/1990) Poland (10/1994)
Cote d'Ivoire (03/1998) Russia (08/2000)
Croatia (07/1996) South Africa (09/1993)
Dominican Rep.(08/1994, 05/2005) Ukraine (04/2000)
Ecuador (02/1995, 08/2000) Uruguay (05/2003)
Mexico (05/1990) Venezuela (12/1990)
Morocco (09/1990) Vietnam (12/1997)
Nigeria (12/1991) Serbia & Montenegro (07/2004)
Source: Cruces J and Trebesch C, Sovereign Defaults: The Price of Haircuts (Preliminary Paper) December 2010

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“1b. Member States shall move to adopt
International Public Sector Accounting
Standards within three years of this
Directive coming into force.…”

14. Auditing in the Public Sector
Accounting
Country Private Sector Public Sector
Standard Set Standard Set
UK IFRS IASB UK adopted IFRSs IASB / IPSAS is second tier
France IFRS IASB Accrual standards Public Sector Accounting Standards
for the public sector based on French Council
private sector accounting standards.
IPSASs are references
Germany IFRS IASB Cash accounting Government
Italy IFRS IASB Cash accounting Government
Spain IFRS IASB The Spanish Ministry of Economy IPSASB
and Finance is implementing accrual
basis IPSASs
Ireland IFRS IASB Cash accounting Government
IFRS IASB Adopts full accrual accounting in IPSASB
Estonia
accordance with IPSASs

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CHAPTER II
ACCOUNTING AND STATISTICS
Article 3 2.1
1. As concerns national systems of public accounting, Member States shall have in place
.
public accounting systems comprehensively and consistently covering all sub-sectors of
general government and containing the information needed to generate accrual data with a
view to preparing data based on the ESA 95 standard. Those public accounting systems shall
be subject to internal control and independent audits.

16. Auditing in the Public Sector
Audit
Country Private Sector Public Sector
(Per EU proposed audit reforms, and as endorsed by the EC)
Standard Set Standard Set
UK ISAs IAASB ISAs (UK & Ireland) UK APB
France ISAs IAASB ISAs IAASB
Germany ISAs IAASB German Federal Court of Government
Auditors auditing standards
Spain ISAs IAASB National Regulation based on Government
INTOSAI Standards
Ireland ISAs IAASB ISAs (UK & Ireland) UK APB
Estonia ISAs IAASB National standards based on Government
INTOSAI Auditing Standards,
and European Implementing
Guidelines

17. Auditing in the Public Sector
Disclaimers of Opinion on the Accrual-Based Consolidated Financial Statements
Because of the federal government’s inability to demonstrate the reliability of significant portions of the U.S.
government’s accompanying accrual-based consolidated financial statements for fiscal years 2011 and 2010,
principally resulting from limitations related to certain material weaknesses in internal control over financial reporting
and other limitations on the scope of our work, we are unable to, and we do not, express an opinion on such accrual-
based consolidated financial statements. As a result of these limitations, readers are cautioned that amounts reported
in the accrual-based consolidated financial statements and related notes may not be reliable.

18. Auditing in the Public Sector
The material weaknesses that contributed to our disclaimer of opinion on the accrual-based
consolidated financial statements were the federal government’s inability to
• satisfactorily determine that property, plant, and equipment and inventories and related property, primarily held by
DOD, were properly reported in the accrual-based consolidated financial statements;
• reasonably estimate or adequately support amounts reported for certain liabilities, such as environmental and
disposal liabilities, or determine whether commitments and contingencies were complete and properly reported;
• support significant portions of the reported total net cost of operations, most notably related to DOD, and adequately
reconcile disbursement activity at certain federal entities;
• adequately account for and reconcile intragovernmental activity and balances between federal entities; and
• ensure that the federal government’s accrual-based consolidated financial statements were (1)
consistent with the underlying audited entities’ financial statements, (2) properly balanced, and (3) in
conformity with GAAP.

19. Auditing in the Public Sector
My responsibility is to examine the accounts with a view to satisfying myself that they
present a true and fair view. I have audited the accounts in accordance with applicable law
and International Standards on Auditing (UK and Ireland).

20. Auditing in the Public Sector
Basis for qualification on accounts
• Qualification arising from disagreement relating to inconsistent application of accounting policies
• Qualification arising from limitation in audit scope due to lack of evidence supporting the
completeness of the elimination of intra-government transactions and balances
• Qualification arising from disagreement in the accounting for 3G licences
• Qualification arising from disagreement and limitation in audit scope from underlying
statutory audits of bodies falling within the Accounts

21. Auditing in the Public Sector
Whole of government accounts 2009-10 - Public Accounts Committee Contents
Summary
…a major step forward in improving
transparency and accountability.

22. Auditing in the Public Sector
Whole of government accounts 2009-10 - Public Accounts Committee Contents
Conclusions and recommendations
3. The WGA needs to be unqualified if it is to be an authoritative resource for accountability and
decision-making.
7. The information contained in the WGA is out of date because Treasury took 20 months to prepare it,
which is around three times as long as it takes other countries to prepare consolidated government
accounts.

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27. Auditing in the Public Sector
New Zealand Government net worth
(both absolute and as a % GDP) over the past ten years
70.0 120,000
105,514
60.0 96,827 99,515
94,988 100,000
52.0 57.8
83,971 56.4 53.9
50.0
50.2 80,000
40.0 35.2
54,240 60,000
30.0 27.3
20.9 39,595
18.0 40,000
20.0 28,012
12.9 22,825
15,450 20,000
10.0
0.0 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Net Worth ($ millions) Net Worth (as % of GDP)

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32. www.ifac.org