Systemic abuse by the accountancy profession

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I don't always agree with the FT. It's worldview is not one I can always subscribe to. But this, from Jonathan Ford, its City Editor, published yesterday, is spot on:

Notionally, the rules say that accounts should present a “true and fair view” of a company’s profits or losses, assets and liabilities. That suggests they should, at the very least, be clear and comprehensible. Yet in practice, they embed judgments that are impossible for the layman to follow, generally encrypted in a mosaic of impenetrable notes.

Since the Enron scandal nearly two decades ago, accounting and compliance have become ever more technical and esoteric. New techniques such as “fair value” accounting make it ever harder to penetrate the mysteries of corporate figures, especially that which deals with large financial companies.

These changes clearly benefit the Big Four, who alone among the profession have the money and expertise to generate the computer models and data to support these complicated practices. They are great for big finance, whose manoeuvres they shroud in mystery. But they have created an unhealthy and closed priesthood around accounting – where rules are hard to challenge because the public does not understand them.

The result is that big accountancy firms have somehow ended up as the guardians of a system that protects their own market power.

If we want auditors to think twice before deferring to their clients, some hard thinking is needed. The rules need to be simpler, and thus more amenable to the spotting and punishment of infractions. We need more tough-minded laymen, and fewer auditors and financiers, on the FRC board.

I am amongst a small group supplying evidence to the Treasury Select Committee on this issue: we can only hope that they might listen because the case for change is overwhelming now.

And, as Jonathan Ford says that is not just on auditing. What is also required is accounting reform. The complete mumbo-jumbo that now supposedly makes up accounts, that is utterly incomprehensible to users and which is pervasive now from top to bottom within the accounting requirements the UK has established, is designed to achieve three goals.

The first is a continuing role for accountants when software can replace them in producing basic records.

The second is a further role for accountants in supposedly interpreting the resulting nonsense.

And the last is to provide a barrier to claims for mis-statement when the parameters for what is required are so subjectively set that the data supplied fails the most basic reasonableness tests for accounting information and yet is still considered true and fair.

The concern, then, is not just the abuse of standards by specific auditors but the systemic abuse of the public and their reasonable need for relevant, reliable, complete, comparable and comprehensible data by the accountancy profession. This has to end.