ACCOUNTING - Say no to the EC. We neither want nor need to adopt

Let’s be crystal clear about this point: UK companies should not be forced by the European Commission to adopt international accounting standards. To say so is not to be jingoistic, or anti-European, or critical of the concept of international accounting standards. It is to state what is best for UK quoted companies at the present and what will be best for international capital markets over the long term. For finance directors and others closely connected with financial reporting, the idea of tossing away all the hard won gains made over the past decade in UK accounting standards and financial reporting is absurd. But it could happen. The EC knows that comparable financial information is crucial to support investment decisions in a single pan-European capital market. Pressure for such homogeneous information has grown with the introduction of the euro. It is no use having the accounts of companies across Europe denominated in a single currency if the accounting policies are all over the place. So the EC has put three possible options for EU accounting policy to the Financial Services Policy Group. The first is to scrap the existing accounting directives and allow, in effect, a free for all, with capital markets and individual governments deciding the issue. Second, the Commission could withdraw the directives but insist that all companies of whatever size report under IASs. The third option – and according to reports from Brussels, this is the one that the EC has told finance ministers it prefers – is to make all listed companies comply with IASs, while unquoted companies continue to follow its directives. This idea of sacrificing national standard setting and handing the business over, lock, stock and barrel, to an international standard-setting body has been given unwarranted credence here in the UK by the company law review, which has raised the possibility of backing the EC’s stance. But there are two objections to this global approach, and both should concern all European companies, wherever they are located. The first is that some of the present international standards are decidedly iffy; the second is that the present international accounting standard-setting process is similarly iffy. Indeed, there is a possibility that the international standard-setting process could become, in effect, an offshoot of the US Financial Accounting Standards Board. If these suggestions were emanating from Brussels at the end of the 1980s or in the early 1990s, there would have been a good chance that sensible commentators would have suggested the UK give up making accounting standards in the same way that it gave up digging coal and making ships. But in the decade of the ASB’s existence, the standing of UK accounting standards has increased sharply. Accounting standards are no longer openly flouted and subjected to fierce criticism. Individual FDs and auditors may rail at certain standards – and many standards are not liked – but these days they are respected. A simple adoption of international standards would quickly reverse this healthy state of affairs. One of the great problems in the UK in the 1980s was off-balance-sheet financing; the IASC has no standard for off-balance-sheet financing. Another issue that the ASB has just resolved is the banning of big bath provisions; but the IASC has declined to work on a standard on provisions in acquisitions. Remove these standards and those two scams would return. As well as having a small but crucial number of different standards from the IASC, the UK standard setters have consciously rejected certain measures. For example, while the UK has led the cause of international harmonisation wherever possible, this has not been at the lowest common denominator. The UK has deliberately set its face against current international standards such as those on tax, pensions and derivatives. The ASB has always been careful to retain the authority to opt-out of any standard if it fundamentally disagreed with the direction of the international community. This get out clause has always been used sparingly, but without the UK ASB, unpalatable standards would come flooding in. Apart from some severe doubts over the validity of some of the present international standards, there are also doubts about the future of international standard setting in general (see Standard bearers for the millennium, Financial Director Year-book, page 23). And in the document Shaping IASC for the Future, which is out for consultation until the end of this month, the IASC is proposing an eleven person Standards Development Committee (SDC), which would replace the present steering committees. Six or eight SDC members would be drawn from national standard setters and the others from the IAAS secretariat. They would write the standards, which would then be approved by an IASC board, which itself would have two members from 25 countries and would have final approval on standards presented to it. The reaction to the IASC plan is as yet unclear. Many serving board members might object, as they would see their power diluted. On the other hand, FASB is against the idea of the board having any role other than to advise the SDC. And if the EC were to turn European national standard setters into toothless bodies, then it is difficult to see how Europe could be adequately represented on the crucial SDC. Even allowing for the fact that the programme of core standards for the international stock exchanges is complete, there is a possibility that fighting over a revamped IASC could slow down the process of international standard setting for years. And who would nip in to fill the power vacuum left by a crippled IASC and a non-existent national European standard-setting process? Step forward the US FASB. There are even suggestions that the FASB could embrace the role as the world’s standard-setter by inviting, say, four foreigners to join the five US members. Fanciful? Well maybe it is. But with all the current uncertainties in this area, this is not the time for Britain to allow Europe to make any rash moves. A fully resourced, fully functioning ASB must stay. Peter Williams is a freelance journalist.