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.
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What we need is accountancy for the real world.
Perhaps there is a need to return to some basic questions that are perhaps being taken for granted.
What are accounts produced for? Who are accounts produced for; should auditors represent the shareholders alone, or some other party (or the shareholders and a regulator, or the ‘Crown’ or state)? What information is universal and sacrosanct (and why, and is what is currently produced, adequate for whatever purposes users are expected to use the information)? What is the appropriate time-interval? What are the rules of information transparency, why are they there, and how easy is it to circumvent transparency (usually on competition/privacy grounds)? What difference does scale make to what is presented, and to the accounting principles being applied, and how precisely is this difference measured (a £100 off-the-shelf small trader, or a Footsie behemoth)? Should there be any differences in the requirements to publish information where a company is trading in or for the public sector? Are the answers to these questions the same as the answers that would or could have been given in the 1950s, or 1980s, or now? Should they be the same answers?
Finally, quis custodiet, ipsos custodes?
I doubt if all these questions are critical, but I think some have merit.
It is worth looking at the 1975 published ‘Corporate Report’ – search on the web, the ICAEW have a copy on line
It would be a good place to restart from
I don’t subscribe to the position that all accountants are members of a global conspiracy to defraud the public. Nor indeed that there is a conspiracy of those who set accounting standards, or those who legislate for them to be adopted by businesses. (Although perhaps one benefit of Brexit could be UK GAAP diverging from IAS?)
But we probably do need to end a global accountancy oligarchy dominated by the Big Four.
I regret I do not share your optimism on accounting standard setting
I wish I could, but when told point blank, for example, that CBCR is not accounting data and just tax information I am either faced with crass stupidity (possible, I suppose) or a conspiracy
Or both
And that is what I was told, again, recently
Could it be that the reference to CBCR as solely “tax information” is a propostion that could be achieved by the simple conflation of the content of reports with the tax juridictions which would determine (for the OECD for example), what presumably defines a reporting “country” (a tax jurisdiction)? Or am I making a category error?
John
I think it’s deliberate. Most tax jurisidictions are, of course, countries. The pretence by the accountants is that no one could want, or undertsand, data by country. That is absurd, given they are meant to undertsand derivatives data (which most would agree is pretty incomprehensible in most cases)
So there’s no category error: there is just denial
Richard
Andrew’ I agree with you when you say:
“I don’t subscribe to the position that all accountants are members of a global conspiracy to defraud the public.”
I know a very nice Lady accountant who doesn’t set out to defraud the public, but she doesn’t work for the ‘Big Four’, she works to help mostly small business owners and farmers etc. to deal with the sort of stupidity that seems to be endemic in the HMRC and the tax system we all know and hate.
A system which is shot through with much irrelevant political baggage about ‘Punishment’ and penis envy…no that’s not right….’politics of envy’ and assumes that everyone is hard-wired to screw the system to their own advantage. And has forgotten entirely what the tax system is for and what it can do to contribute to the good society.
I do have some serious doubts about the integrity of regulators. All regulators. It is frequently not obvious on whose behalf they are regulating. I suspect them of recruiting from the ranks of disaffected, redundant traffic wardens.
“But we probably do need to end a global accountancy oligarchy dominated by the Big Four.”
Yes. Remember the fuss there was about closed shops in the trade union movement? Is this somehow different? Other than in the scale of the abuse ?
There is a major difference between a ‘closed shop’ and a ‘professional body’. Mostly it has to do with social class and wealth.
I’m not arguing in favour of the closed shop…..
I’m not a fan of FRS 102 – because it seems to me to be designed solely to financialise the accounts of even the smallest companies; and, in the process, change accounts for small companies from a format that most typical clients already struggle, but are at least familiar with, to something none of those clients will recognise or understand and, frankly, I will struggle to explain.
I am currently engaged in a conversation with a Big 4 firm concerning my inclination to write down significantly the value of a debt due by a client to a small company owned by a parent in accordance with the requirements of FRS 102. Although my work extends only to accounts preparation, the Big 4 firm audits the company that provides the funds to the said small company.
As a matter of courtesy, my conversation with the Big 4 firm has been about the potential effect on their audit of my inclination to make the write down of the small company’s debtor.
Notwithstanding the fact that FRS 102 is a standard to which I perceive the Big 4 firm is fully signed up, our conversation has been characterised by their efforts to persuade me that I should not need to make the write down, chiefly, it seems, to appease their client.
In an attempt to find compromise, my last e-mail added a request for two unconditional assurances, the second of which is that the Big 4 firm will not rely on the decision I make on the write down as a basis for any future action against me (primarily because, as cowardly as it might seem, I do not wish to expose myself to risk just as I downscale the volume of my continuing client work.)
Their response? They are unsure whether the first assurance I have requested will be provided and refused to provide the second.
I believed that I had escaped the dead hand of the Big 4 thirty years ago – but it seems not, at least for the time being.
PS Without both assurances, I will decline to continue with the UK accounts and ask the client to replace me.
Nick
I wholeheartedly agree with your first para
And think your last very wise: I was always willing to walk away from a client and never regretted it when I had felt it appropriate to do so
Richard
Occasionally, the blatant smokescreen of “computer models and data” is clearly exposed for what it is.
In New South Wales, Australia, KPMG was commissioned by 2 separate organisations to report on the same policy proposal which concerned the state (NSW) governments plan to merge local government areas. One report was for the state government another was for a group of local councils.
The result was 2 very different KPMG reports that clearly contradicted each other in their respective conclusions about the local region in question. It is not entirely clear whether one report was actually “independent” and the other wasn’t or whether both simply served the client’s wishes.
Once you get past the intro this is actually quite funny:
“Cash for contradictions: KPMG’s model for council mergers”
https://www.governmentnews.com.au/2016/12/cash-for-contradictions-kpmg-council-merger-reports/
The client gets what the client wants
But this was z conflict of interests
I don’t suppose a fuss was made
Not enough of a fuss in that particular case because the NSW govt. and its vested interest friends were out on a limb. Just about everyone else hated the merger proposals and this story got obscured among a number of related outrages.
The really big conflict-of-interest fuss emerged elsewhere on the issue of KPMG’s “independence” as it was discovered that KPMG had access to internal government documents and were working hand-in-hand with the state to build the case for the mergers.
Sydney’s only broadsheet (mercifully non-Murdoch) ran a series of stories about this, as did the Australian Broadcasting Commission (ABC) among others. The Labor and Green opposition went beserk. The whole thing ended up in court. The Supreme Court of NSW made some rulings in favour of the local councils (against the state and KPMG). The whole fiasco has only come to a conclusion quite recently with the NSW government abandoning its merger program halfway through.
There were various factors involved. The KPMG controversy wasn’t the only issue but it was one of the biggest. The overall dispute with local councils contributed to the resignation of the (former) state Premier, Mike Baird, in January this year.
These relatively brief reports give something of an overview:
http://www.abc.net.au/news/2016-06-01/sydney-councils-fight-amalgamations-in-court/7464918
http://www.smh.com.au/nsw/council-mergers-nsw-government-defends-kpmg-independence-20160602-gpa50w.html
http://www.southernhighlandnews.com.au/story/4556751/blow-to-berejiklians-council-mergers-as-court-rules-against-kpmg-report-secrecy/?cs=12
http://www.smh.com.au/nsw/council-victories-in-final-embarrassing-merger-defeat-for-government-20170801-gxn05s.html
Thanks