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State of the profession report: Reporting & regulation

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27th Jan 2010
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John Stokdyk continues our review the challenges facing accountancy in 2010 with a look at IFRS controversies and the profession’s underlying structures.

What were the big concerns in financial reporting back in 2005? Converging different financial reporting codes and finding a viable international financial reporting standard for small companies. No change there, then.

The Great Project to bring about a single set of global standards has stalled in the past five years, with massive technical efforts and compromises undermined by the vested interests of US and European politicians.

With the change in administration in the US, the Securities and Exchanges Commission has become strangely reticent about announcing its commitment to IFRS. On this side of the Atlantic, meanwhile, fears are growing that the US litigation-defence approach is playing such a big role in the new standards that the project is looking more and more like a US takeover than true convergence.

The fair value debate

Nothing epitomises this conundrum more than IAS 39 ‘Financial Instruments’. To hear some bankers tell it, the global economic crisis wasn’t so much a product of outrageous duplicity and risk-taking by the securitisers and hedgers, but the folly of Sir David Tweedie’s faith in fair value accounting which crippled the financial viability of a thriving investment industry.

But if the fair value accounting model was to blame for forcing banks to show losses on assets they were forced to mark down as market prices fell, the same approach was equally to blame for allowing companies to book profits they hadn’t really earned when asset values were on the rise.

The crunch for this issue – or more of a short-term fudge to quell dissent – came last October, when the IASB amended IAS 39 to let banks and other financial instrument-holders reclassify many of their assets to keep them out of the dreaded mark-to-market category. It was an unprecedented U-turn for the board that stirred up almost as much criticism as the original version of the standard.

The financial instruments debate crystallised what has become an increasingly intractable situation. Many observers are suggesting that dream of a single set of global standards is just that – a dream. While the arguments continue in Washington and among the standard-setting camps, accountants will continue to muddle along, as they have done for the past one and ahalf decades of transition.

Small company reporting

At the other end of the scale, international proposals for a small company reporting standard were a big issue on AccountingWEB during my previous stint on the site. In this case however, the board has made progress and the full working edition of IFRS for SMEs was published last July.

In August 2004 the draft standard was flame-grilled by Richard Murphy on AccountingWEB.co.uk as “irrelevant” to the needs of small businesses. The vast majority of UK businesses almost don’t trade internationally and few are required to file full accounts on public record, he argued. As a result, they don’t really need a 500-page standard telling them whether remote liabilities need discounting to current value. They want their accountants to tell them basic things like whether a balance sheet is needed or not and if it is, how to account for drawings, capital introduced and the apportionment of profit.

Other sources confirm that this view retains considerable sympathy among practitioners and preparers in the UK. If and when convergence is mandated this country, the result is likely to be extra cost and anxiety for the small business community, with few benefits. As the authors of the switch, accountants will need to prepare themselves for the resulting flak.

But then my theory has always been that inside every accountant is a masochistic streak.

M&A activity
Within the wider profession, there have been a flurry of fast-growing acquisitive firms such as Bentley Jennison, whose aggressive growth campaign carried it into the arms last month of Tenon, one of the original 1990s consolidators.

The nearest parallel I can think of to how accountancy has changed in the past five years is football’s Premier League, where an elite of four clubs has monopolised the most lucrative international competition. In their wake is a group of 20 or so also-rans that survive on scraps left over by the big boys and struggle to stay in the same league. There is then a huge gulf between the top tier and the lower leagues, where the game’s grass roots are withering away.

But as with football, the underlying decay is beginning to show at the top level. The banking crisis revealed just how fragile business life and confidence is and I was surprised by number of times my background reading and conversations touched on the likelihood of the potential failure of one of the Big Four. So much so that incoming FRC chief executive Stephen Hadrill made it very clear last year that the council was no longer going to encourage market-led initiatives to promote competition among top level audit firms, but would focus instead on contingency plans for when one of the big firms failed.

Regulation

The FRC has taken over as the profession’s “super regulator” in the place of the Accountancy Foundation. While the structure appears to have overcome the old credibility issues of “chaps regulating chaps”, the FRC exhibits many of the same bureaucratic characteristics of its predecessors. The Financial Reporting Review Panel (FRRP) chews through a workload that is reflected by roughly one public pronouncement every two months, and the Accountancy & Actuarial Discipline Board (AADB) is only just ahead of it with one every six weeks or so. The first disciplinary case to cross my desk on my return to AccountingWEB.co.uk concerned the 2006 revenue recognition shenanigans at iSoft. With the FSA’s case due to be heard next month, the AADB has still to reach a conclusion.

Time is a constant for all of us and from what I can see the seasonal demands of annual reporting and tax deadlines have changed little in the past five years. In recent weeks I’ve made contact again with many familiar faces, all slightly greyer and perhaps a little more creased at the edges than the last time we met. For all of the political sagas and takeovers that have taken place in the past five years, the profession’s ageing demographic is the most disturbing trend I’ve encountered. A recent survey we conduced with e-conomic found that nearly half of accountants who took part were looking forward to retirement in 3-5 years and a straw poll at the ICAEW’s sole practitioner’s day in December produced very similar results.

The challenges accountancy faces are global in nature and touch on some of the core principles that have developed over the past 150 years. But feedback from many rank-and-file members is that they’re getting fed up with the hassles and can’t wait to turn their backs on accountancy. If this is the way relativey active and forward-looking AccountingWEB members are thinking, what is the likely result? Accountancy had a cachet during the boom years of the 1980s and 90s. If it cannot continue to attract new entrants and the enthusiasm they bring, I fear the profession will face even more difficult struggles in the years ahead.

State of the profession report 2010
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