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The president of the representative body for the accountancy profession in Europe, David Devlin is at the leading edge of developments within the global profession.

To be elected once to the position of President of the Fédération des Experts Comptables Européens is indeed a great honour. To be elected for a second two year term was unheard of until last year when Irishman and PwC partner David Devlin was so honoured by his peers. And almost a year into his second term he still relishes the challenges and opportunities the role presents.

As the president of the representative body for the accountancy profession in Europe, Mr Devlin is at the leading edge of developments within the global profession and a key influencer of opinion. His day to day work includes meeting EU commissioners and politicians, decision makers and regulators from the US and Europe and addressing captains of European industry as well as meeting his own members. He is constantly on the move as he represents FEE’s 44 professional institute members from 32 countries. FEE member bodies represent more than 500,000 accountants throughout Europe. A highly skilled technical accountant, Mr Devlin is well placed to represent and help his members on the major issues and challenges currently facing the profession from implementing international financial reporting standards to auditor independence and oversight.

Last week in between his normal schedule of flights and meetings, he was preparing for a major FEE seminar on Convergence of Accounting Standards in Brussels on December 1st. The seminar will be opened by Commissioner McCreevy, a fellow chartered accountant who happens to have attended the same university at the same time as Mr Devlin. Speakers including Sir David Tweedie (IASB), Mike Crooch from FASB, an SEC speaker and Astra Zeneca CFO Jonathan Symonds along with Mr Devlin will discuss and debate the issues around the ongoing convergence project. The afternoon session which will be chaired by the EU Commission, will involve a discussion about consistency in the application of IFRSs. It is aimed at trying to establish what is acceptable within the terms of the standards where certain flexibility is allowed and where consistency cannot mean an identical answer or what one particular regulator thinks is the right answer.

GLOBAL STANDARDS Describing the project to develop a set of globally acceptable accounting standards as “tremendously ambitious” Mr Devlin sketches the background.

“At the time we started to look at how Europe would account, some major European companies like Daimler, for example, were raising capital in the US and thus needed to report using US GAAP. So many companies were using US GAAP as the de facto world standard that many countries in Europe amended their laws to permit that group accounts could be prepared in accordance with an acceptable foreign GAAP - code language for US GAAP. From a European point of view the single market initiative needed a common accounting language especially after the arrival of the euro.

“Over the previous twenty years the global accounting profession had developed international accounting standards. Initially it was a sort of compendium of best practice, so if you preferred, say, the American solution or the Australian solution to a particular issue you could probably find some flexibility in IAS. It was like an a la carte menu. In the late 80s/ early 90s it was tightened up and then came an examination of whether the then standards were compatible with the accounting directives and suitable for use in Europe. I did some work in that for the Irish Government and found there were some incompatibilities”, he explains.

“What you had then was a desire to have a common accounting language for Europe. The fact that the biggest European companies were using US GAAP because they were raising capital in the US and the European authorities had no influence on the US standards being used by major European companies was not a good position in public policy terms. So for Europe the idea was to have international accounting standards used in the EU for group accounts by 2005 subject to some form of endorsement because the European Commission could not subcontract the standard setting exclusively to a private body as the standards (IFRS) were to be turned into law.

“That got us to a position where we had two sets of standards - the International standards (IFRS) and the US standards. And then the question was why could we not have one set of international standards and the standard setters got together to discuss it. This resulted in the Norwalk Agreement whereby Bob Herz of the FASB and Sir David Tweedie agreed to work together to eliminate the major differences in the short term and in the longer term to have similar standards.

“But here the problems became apparent - Americans because of their litigious society and many years of tradition like prescriptive rules whereas IFRSs were more principles based. As you can imagine it was going to be a difficult task. So they started down this difficult road and the agreement was welcomed by the SEC for the American authorities and by the European Commission. And at this time the IASB was reconstituted from being owned by the accountancy profession to being under an independent body of trustees chaired by Paul Volker”, Mr Devlin explains.

However, further issues became apparent as IFRSs began to be implemented ahead of the 2005 deadline. “For example, initially in continental Europe some people began to grumble that their views on what should be in accounting standards were not being listened to and there was a perception that the laudable convergence agenda meant there was extra pressure to keep the Americans happy. It was felt that the Americans were in the majority at meetings between the FASB and the IASB and were therefore getting their way. Then lobbying started about one particular standard which resulted in the European ‘carve out’ on IAS 39”, according to Mr Devlin.

The 2005 deadline is now looming. Set in IAS Regulation (EC No. 1606/2002) this requires European listed companies to prepare consolidated financial statements from 2005 (or 2007 in some cases) on the basis of international accounting standards (defined as those IFRSs that have been endorsed by the European Commission). “As people get closer to implementing it they are beginning to wrestle, as with any new set of rules, with the ambiguities and the doubts.

“They are beginning to say. ‘As CFO of a plc I had a perfectly good reporting system. All the analysts knew what the story was. My board knew. I knew and my auditors did. But now nobody is entirely sure and it can take ages to get guidance or a decision on an issue’, so it is difficult.

CONVERGENCE AND THE SEC “And what has made the situation even more interesting is that Charlie McCreevy did a brilliant job of getting agreement with William Donaldson, the then chairman of the SEC, that the SEC will drop the US GAAP reconciliation requirement by 2007 ideally and by no later than 2009. That means that if you have your IFRS accounts you would not have to do US GAAP accounts at all, and this could save millions in costs. But the SEC has quite naturally set conditions - not only will IFRSs have to be closer to the US standards but the SEC will have to be convinced that the new standards are being applied properly. So they are going to survey European company accounts for 2005 and 2006 to see if they comply with the SEC view of how IFRSs should be applied”, he says.

“The convergence process is a wonderful ambition. But what we need to have is perhaps somewhat longer term convergence. “It needs to be slightly less rushed with more emphasis on the already excellent due process - the exposure drafts, open debates and public hearings. Right now you could ask is it going too far too fast”, Mr Devlin feels.

Convergence issues to be addressed and the need for debate A number of questions need to be addressed in order to make convergence a success, he advises. These include: 4what is the balance between rolling out new standards and providing a stable platform during and immediately after the transition to IFRS?

- how far does convergence need to go? If it is to be a single set of identical accounting standards worldwide you will have to get the Americans, the Europeans and others to agree that they will not set any new standards independently in the future, even if there is a big accounting scandal. - how can or should allowances be made for different cultures in the style of standards? - can there not be some flexibility about these standards?

“We do not want to water down global standards - they have to be a neutral reflection of the economic facts and you cannot have anything that does not meet that test, in my opinion But that does not necessarily amount to saying that we have to have every word identical between global standards, US standards, and any other local varieties”, Mr Devlin suggests.

These issues and others need to be debated, he advises, warning: “If there is not a debate and there is not a consensus of some kind, at least a sufficient consensus, there is then a risk that the standards will be exposed to potentially unfair and possibly widespread criticism.”

“This could lead to lack of market and political support which could put the whole project at risk. So the question of what will make this tremendous convergence programme a success needs to be addressed. How can we guarantee that by 2007 the SEC is in a position to drop the reconciliation requirement on the basis of a demonstrated good compliance, or consistency, in Europe and elsewhere and a robust convergence process which is widely accepted and has by then delivered good progress?

That is a very, very political agenda and one which we shall discuss at the FEE December seminar”, he comments.

IFRS interpretation On the area of interpretation there are also issues to be considered, he explains. “If people want guidance or advice about how to deal with a specific problem should there be a forum where people can compare notes and if so who should be at this forum? Would meetings be held in public or in private? What authority would it have?” he asks.

Recently Mr Devlin warned that differences between IFRSs as adopted for use in the EU and IFRSs as adopted by the IASB could cause uncertainty in the market and possibly undermine investor confidence in financial reporting unless they were properly explained. IFRSs as adopted by the IASB may not always be identical to those recognised under European law for two reasons - timing and carve outs. The timing issue arises because once each standard is finalised by the IASB it has to be endorsed by the European Commission, a process which can take some time. And the Commission may decide not to endorse the full standard - allowing so called carve outs - where a portion of the standard is carved out and the rest is endorsed as happened with IAS 39. Mr Devlin feels the carve-out situation should be very rare.

Companies and their auditors could then be faced with the situation that some IFRSs as adopted for use in the EU are different from the full IFRS approved by the IASB.

A way needs to be found to explain this in the description of accounting policies and in the audit report. FEE has asked the European Commission to issue authoritative guidance for referring to the financial reporting framework. Because the objective of convergence is to enable users of accounts to understand and compare the results of companies within and outside the EU, FEE encourages companies to provide an explanation in the notes to the accounts on how their accounting policies depart from the full IFRS when they apply IFRSs as endorsed for use in the EU.

REVISED EIGHTH COMPANY LAW DIRECTIVE Welcoming the revised 8th Company Law Directive recently passed by the European parliament, Mr Devlin sees the reforms as supporting high standards in auditing and driving the harmonisation of audit practice. The Directive will now be translated into the official community languages and published in the Official journal and must be implemented within 2 years.

Explaining that it is a minimum harmonisation directive, Mr Devlin is particularly pleased that the issues of quality control and public oversight can be tackled. “If the Directive is well and evenly implemented it will help restore confidence in a profession that has been damaged by recent scandals”, Mr Devlin feels.

AUDITOR LIABILITY AND INDEPENDENCE But he would like to see the issue of auditor liability tackled as a matter of urgency and welcomes the Commission decision to undertake an objective analysis on to the issues involved. “The long term viability of auditing as a profession requires this issue to be addressed. Auditors should be appropriately responsible for their statutory audit but to no greater extent than in reasonable. The Commission study will address what is appropriate liability in the public interest”, he says. On auditor independence he would like to see a materiality clause to ensure reporting and form filling requirements are appropriate. Concerned about the impact of recent scandals on the perception of the profession, Mr Devlin feels that moral behaviour and a sceptical attitude by accountants is critical to restoring confidence. “Auditors have not always come across as robust watchdogs. Accountants must be sceptical and tough minded. They must stand back and ask themselves if the figures or reports they are associated with give the correct impression overall. They must tell it in black and white and not over complicate the story. “If we wish to restore trust in our profession, we must stand for truth, excellence and integrity and be clear about our duty to others and to the public interest and we must act consistently with these principles.” “One challenge going forward will be to see if we can catch more significant fraud and at the same time to explain what an audit is and how difficult it can be to detect fraud especially where there is collusion”, he stresses. “We do sometimes detect suspected fraud and we report it as required by law in Ireland, but such frauds are not always prosecuted because the standard of proof required is so high”, he adds. In a recent speech in Helsinki, Mr Devlin pointed out to delegates that recent accounting scandals were not just technical or financial shortcomings. They involved deliberate deception which has important social implications because of their impact on confidence in the capital markets.

“Through loss of confidence, the cost of capital rises, inhibiting economic development and expansion, undermining pensions, sapping business confidence and reducing employment prospects,” he warns. At European level reforms in auditing through the implementation of the 8th Directive and reporting reforms through amendments to the 4th and 7th Directives as well as corporate governance initiatives and new oversight and enforcement arrangements will lead to improvements, he expects. But he warns that it is not possible to legislate for integrity or competence.

“I believe that most people instinctively want to do the right thing at all times and the vast majority of our profession do act correctly. But I feel it is worth reinforcing the moral dimension to our work frequently and emphasising that in auditing it means respecting the truth at all times. There is no room for anything less and to stop short of the complete truth is deliberately misleading. If we constantly remind ourselves of our real duty and the identity of our ultimate clients, I think it becomes easier to avoid the inherent risk of taking refuge in technical compliance with detailed rules”, he stresses. “Understanding our duty and having a moral purpose requires consistency in action. Respect of our public interest role as auditors will be widely recognised over time only if all our actions are consistent with that aim. There is no point in providing outstanding auditing services of real excellence and integrity if at the same time members of the profession are involved in abusive tax schemes or turning a blind eye to non compliance with taxation legislation or to money laundering, for example, which are inconsistent with the public interest”, he explains.

But he is confident about the future. “The scandals have been a grievous blow to the profession and to others but I believe we are on the verge of a new era of success and respect for the accounting profession in a new environment of transparency, openness and monitoring. On a personal level Mr Devlin enjoys working out of the Brussels headquarters of FEE though he has not moved to live in the Belgian capital and commutes from his home in Dublin. “When I went to Brussels first in 1978 with PwC it had a much better infrastructure - banking, transport and telephones - than Dublin and a great quality of life. Now Dublin has caught up and has become much more cosmopolitan. But I enjoy the atmosphere in Brussels, particularly the cuisine”. Pointing out that he is not the first Irish president of FEE, Mr Devlin explains that Margaret Downes was the founding president of the Federation. But there can be little doubt that the wealth of experience and breath of contacts garnered in his period at FEE will open many new and interesting doors for Mr Devlin when he finishes his second term in about 14 months time.

Mary Canniffe was Investment Editor at The Irish Times and now works in the Consumer Directorate of the Financial Regulator.