According to the International Accounting Standards Board the main purpose for the accounts that are produced using its International Financial Reporting Standard is to provide potential investors, lenders and other creditors of a company with the information they need to make decisions about buying, selling or holding equity or debt instruments issued by it or on providing or settling loans or other forms of credit with it.
It's an extraordinarily narrow view of accounting and accountability, made all the narrower by the fact that they say that they are aware that "other parties, including prudential and market regulators, may find general purpose financial reports useful. However, the Board considered that the objectives of general purpose financial reporting and the objectives of financial regulation may not be consistent. Hence, regulators are not considered a primary user and general purpose financial reports are not primarily directed to regulators or other parties."
As a result the IASB nots "that general purpose financial reports cannot provide all the information that users may need to make economic decisions. They will need to consider pertinent information from other sources as well."
The trouble is, what is that other data? With regard to most companies the information provided by accounts is far too limited. Specific market data is not available. Country based data is missing in all too many cases. The accounts of subsidiary companies can be and are in many cases prepared using different accounting rules from parent companies meaning that views are hard to reconcile. If enough subsidiaries are used the position becomes opaque, maybe deliberately. Adding an offshore dimension creates a black hole that is almost certainly planned in many cases and which means, because of the combination of offshore opacity and the removal of all intra-group transactions from view in consolidated accounts, that large areas of a company's activities may be completely hidden from view. To put it bluntly, the other data that the IASB suggests should be consulted is not available, and they must know that.
Unsurprisingly in that case people do not trust the data they are given by companies. And why should they when the companies themselves and the accountants who act for them, and coincidentally have a major influence on setting the rules for corporate reporting, deliberately exclude most users of accounts from consideration when deciding what information the users of that data do or don't need?
As long ago as 1975 the UK's Accounting Standards Steering Committee, a body that can be seen as a precursor of the current International Accounting Standards Board published a seminal document entitled the Corporate Report. That report said that published accounts should enable a user to appraise information on:
1. The performance of the entity;
2. Its effectiveness in achieving stated objectives;
3. Evaluating management performance, including on employment, investment and profit distribution;
4. The company's directors;
5. The economic stability of the entity;
6. The liquidity of the entity;
7. Assessing the capacity of the entity to make future reallocations of its resources for either economic or social purposes or both;
8. Estimating the future prospects of the entity;
9. Assessing the performance of individual companies within a group;
10. Evaluating the economic function and performance of the entity in relation to society and the national interest, and the social costs and benefits attributable to the entity;
11. The compliance of the entity with taxation regulations, company law, contractual and other legal obligations and requirements (particularly when independently identified);
12. The entity's business and products;
13. Comparative performance of the entity;
14. The value of the user's own or other user's present or prospective interests in or claims on the entity;
15. Ascertaining the ownership and control of the entity.
It can, quite reasonably be argued that very little has changed since 1975 in this regard.
It is important to note that there is good evidence for suggesting that those with interest in financial statements have almost certainly not changed much since 1975. The Corporate Report identified these as:
- The equity investor group (shareholders)
- The loan creditor group (banks and bondholders)
- The analyst-adviser group who advise the above groups
- Employees
- The business contact group
- The government
- The public.
Since 1975 the focus of reporting has been narrowed: at most the first three groups are now served by accounting data, and then only partially. And in the meantime of the 15 potential uses data to meet many is not provided, by choice. Although country-by-country reporting had not been thought of in 1975 it can also quite reasonably be argued that country-by-country reporting would add, in some cases considerably, to the understanding of those issues italicised. and yet the accounting profession still opposes it.
What can reasonably be argued is that in 1975 accountancy had a better understanding of its public duty than now, and still believed it had a duty to meet that responsibility.
It's very hard to argue that the modern set of financial statements issued by most multinational corporations go anywhere near meeting user need.
No wonder the public are cynical. They'd be all the more so if they realised that this failure is by design.
If, as John Gapper argues in the FT this morning companies are to adapt to new rules that must meet public expectation then so must accounting be reformed. But it has a long way to go, and the pre-requisite is to understand that the primary purpose of corporate reporting is to meet the public need for data that is required as a result of the grant of the privilege of limited liability to a company at potential cost to society at large. The duty to report is not a choice, it is an obligation. Accountants have forgotten that and in the process have spectacularly missed the point of their work. It's time for them to go back to basics and fulfil their public obligation.
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Is it time for Cadbury 2.0?
When SSI put up prices by 8.2% they sent a letter out saying they only make £2 a week per customer for a dual fuel bill. This is disingenuous. These companies have huge investment arms for making economic ‘rent’ and the visible identification with the underlying activity only forms a part of their affairs – more misinformation and opacity. How are people like me, non-accountants, going to make sense of this?
Try telling Vince Cable, who’s office seems to think that the Cosalt directors failure to file accounts for 18 months before going into admin is nothing serious & not in the public interest to prosecute.
You are right (and I am an Accountant). But unfortunately there is a big underlying problem in reporting to every interest group. Accounts are an imperfect model of economic transactions, I would say it was nigh impossible to produce one set of Accounts to satisfy all user groups. Large Company Reports are already now so long and complicated that they are almost useless.
There is much in financial statements that is as you say useless
It is now there to stop useful in formation being added
On the point that group and local accounts are often prepared on different bases – Unfortunately that is true. Groups have to prepare accounts on IFRS, US GAAP or whatever, but often local reporting requirements mean local subsidiary accounts have to be prepared under some local GAAP which is different. And Richard, that is a pain for us in business too, it means we have to effectively keep two separate sets of books one for each GAAP.
I also agree it seems the IASB seems to have lost its way in saying the users are the limited few it lists. Clearly the employees and trading partners should be on the list as should regulators and governments – And why not the public too when looking at whether they want to consider things like how ethical a company is when deciding whether to buy its products.
I Know CBCR reporting is your desire and I can understand it. My main concern (apart from how much extra work it might create for me but that’s by the by, I do/will get paid to do it after all) is that in large groups the extra information will add to an already lengthy set of financial statements and I wonder how many will actually have the time to properly understand/use it other than interested parties such as tax authorities and people like yourself.
How many do you think the hedging notes now?
Are you suggesting they go for that reason?
Ah the hedging notes under IFRS13 – I am sure there are people out there who can make sense of all that information, but I suspect they are few and far between. That information is so OTT it ought to go in my view – Another case of acedemic nicety over practicality/usefulness – But I suspect some would not agree.
I just wonder if putting all the CBCR in the published accounts is the right way to go. If it becomes a requirementthen maybe it should be made available elsewehere – e.g. on line somewhere – but not necesarily included in the published/hardcopy accounts – I can only begin to imagine how big a set of accounts would be if they had CBCR reporting for a group with 500 – 1000 companies in the group! But maybe that is what you are prosposing anyway?
… and I saw your other blog re CBI etc. objecting (I was thinking of going to the CBI discussion but had other commitments so am not privvy to the discussions) which may sway the OECD – but we shall. Personally I suspect the OECD wants to see something and be seen to moving forwards so may start with a watered down version of what you want.
I have always argued the data should be and needs to be in readable and downloadable format online and not in printed accounts but covered by the audit report
A link would be enough
The auditor could be protected by them having control of the file once published
And I am arguing for a report per country – not per subsidiary
But I do also want all subsidiary accounts on parent company web site
One glaring omission from the 1975 list is information about the risks which companies to groups are exposed as at the reporting date, which is only vaguely covered by point 8. It is pretty difficult to see how anyone can make usueful decisions about a company without having such information to hand – backwards looking/stewardship information has its purpose – but if you don’t have decent information about a company’s current risk exposures and future plans then some really stupid decisions are going to be made. Was anyone really told about the bank’s risk exposures to poor credit risks and asset backed securities back in 2005 to 2007 – perhaps if they had been told early then we could all have been spared an awful lot of pain.
The risk and hedging disclosures in IFRS 7 (and FRS 13 under UK GAAP) (not IFRS 13 as mentioned above by Verth) are meant to tell the readers of accounts about financial risk exposures and how they are hedged – but they really are not fit for purpose. They are a combination of specific disclosures – which because one size does not fit all when it comes to risk exposures – really end up being pretty meaningless and risk disclosures which are meant to be based on the measures used by management to measure risk. The latter should be better than the standardised measures but they are not because management are allowed to get away with disclosing nothing of meaning by auditors, regulators, analysts and investment managers.
The same happens in the overlong sets of accounts that many investors receive – where in the front ends management are allowed to use non GAAP measures of performance that often leave out the bad stuff and bear little relationship to reality and the narrative provided is just an exercise in spin doctoring that is then pushed out to the press, analysts and investment managers. In the meantime auditors and regulators hardly raise a challenge or even seek to challenge the current broken model for corporate reporting.
Quite frankly until this whole nexus between the management of senior companies, their auditors, regulators and standard setters, analysts, financial journalists and investment managers is broken apart so that each takes their individual roles seriously then whether financial information is put in the accounts or elsewhere, or the level of detail in which it is prepared will just be an irrelvance. The ordinary person is always going to be dependent on others to analyse the vast volume of information that is available on any corporate – they just need to honest and skilled intermediaries to do so.
IFRS 7 (and befo