The Development of Global Accounting Standards and the Accountancy Profession
In the light of the Enron affair, and in the UK from the implementation of FRS 17, real questions are now being asked of the global accountancy profession. Indeed, this is probably the greatest challenge that the profession has ever had to deal with. Firms that have had many years of continual growth suddenly have to make new strategic decisions – and these decisions are not always under their own control.
One of the strangest issues to arise out of the whole affair has been the funding of the International Accounting Standards Committee, the IASC. The IASC is the author of global accounting standards on which so much hope has been placed, yet is itself funded by major corporates. It has been reported that Enron was included amongst these corporate donors, which highlights the problem. The last thing you want is the body that is the guardian of everything that should be good about independence being funded by firms whose interests could be best served by the introduction more flexible standards that would allow inappropriate practices to continue.
So what is the strategy for the successful development of the global accountancy profession? Well the objective is clear enough….
PUBLIC CONFIDENCE IN BOTH ACCOUNTING STANDARDS AND THE INDEPENDENCE OF THE ACCOUNTING PROFESSION MUST BE REBUILT
Clearly this is no easy task, but we have all seen how a reputation that has been nurtured and developed over decades can be destroyed in a matter of days. This is no easy task, but there are some actions that would, in our opinion, lead to the necessary change that would enable confidence to return.
1. The IASC should be funded transparently.
There appear to be three options by which this could be achieved:
- By professional bodies of accountants worldwide paying a levy
- By raising fees on all listed companies
- By governmental funding
None of these routes is without some disadvantage. On balance we suspect that governmental funding represents the least worst solution.
2. Accountants involved in the provision of assurance services should be prohibited from providing other services to their clients.
This of course is the end for the combined multinational accounting and service practices that have developed – but that would be a small price to pay for the reinstatement of the prestige of the profession itself. Further, we believe that the separated firms could prosper. The non-assurance firm would become a provider of general services and would have the majority of its independence problems removed. The assurance firm would be able to concentrate on the provision of assurance services, where there is likely to be considerable growth in the future. You only have to look at the pronouncements of the Financial Services Authority in the UK and the comments emanating from the Bank for International Settlements to see what is likely to be required in the future. So we firmly nail our flag to the mast of total separation, indeed Risk Reward Limited may be one of the first of the new breed of consultancy consolidators that fills these new demands.
3. Auditors should have terms of no more that three years for the provision of any specific assurance service to any specific client.
Whilst firms have long argued that the long-term arrangements with clients does not impact their independence and that partner rotation achieves these same objectives, we would not agree. A practice that seems all well and good when things are going well can become difficult to defend when things are going wrong. ‘So you have been undertaking the audit for twenty years – I suggest that you have a very close relationship with the management of the company. Indeed we note that you have provided a range of hospitality to them over that period and have made significant income from your firm – paid for by the company. Are you seriously trying to tell the jury that your independence was not impaired….” I think we all can see where this logic is taking us.
4 Accounting standards should be based on clear guiding principles rather than prescriptive legal analysis and their impact should be considered fully prior to their introduction
Recent problems have highlighted the difficulties that can be caused by ill-conceived accounting standards. In the US the system of narrow prescription has resulted in the substance over form argument being lost. There can be no doubt that the true and fair assessment of the results of firms has become clouded by the morass of accounting standards with which a firm is required to comply. So I would welcome the repeal of the majority of accounting standards and their replacement with general standards of conduct governed by true and fair principles.
The case of FRS 17 in the UK is a particular case in point. FRS 17 requires a firm to show the annual increase or decrease in its pension fund – and to put this through the balance sheet where appropriate. Introduced at a time of equity volatility, it actually serves to feed a stock market momentum. To explain further, when markets fall, pension fund liabilities become unfunded, which is then disclosed and causes the value of the company to decrease and the stock to fall further causing a bigger funding gap in the pension fund….
One the way up surpluses on pension funds would increase the value of a firm, thereby increasing its share price and creating an even greater surplus on the pension fund…. Another momentum effect of what is probably the worst standard ever designed.
So here are four basic lessons which can be learnt and should lead to the development of improved reporting and a greater confidence in the accounting profession. And that is surely in the interests of all of us.
