Founder and blogger Tax Research UK
Columnist
Share this content

Who are accounts actually for?

The era of accounting to shareholders alone appears to be over and the world of accountancy will never be the same again, writes Richard Murphy.

6th Dec 2019
Founder and blogger Tax Research UK
Columnist
Share this content
Slash and burn farming, Asia
istock_mslightbox_aw

There was a time when it was easy to decide to whom an accountant reported: the law said it was the shareholders. The audit report (if there was one) was addressed to them. And in practice, the accountant liaised with the directors and/or owners of the entity that they were working for, and pretty much delivered what they wanted.

Then along came the Companies Act 2006, in which section 172 introduced what might be called ‘enlightened shareholder value’. 

The directors of a company were now meant to have regard to employees, customers, society at large, the environment, reputation and other issues. But the truth was that nothing really changed.

Until now that is. Suddenly the world has noticed that everything is different. You could blame it on climate change, a decade of austerity, or the simple fact that nothing has seemed to change the behaviour of banks since so many needed bailing out by the state.

Whatever it might be, the world beyond accountancy is suddenly suggesting that reporting to shareholders alone is no longer sufficient.

Does capitalism need a reset?

The Financial Times has suggested that capitalism needs to be reset, which is pretty radical for the Pink’Un.

Even more radically, the US Business Roundtable of 181 CEOs of major corporations, including all of the Big Four accounting firms, suggested in August 2019 that the business of business was no longer making profit. It was instead, it suggested, about ‘companies [being run] for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders.’

And in November 2019, Professor Colin Mayer of the Said Business School at Oxford University wrote for the British Academy suggesting something remarkably similar, saying that ‘the purpose of business is to solve the problems of people and planet profitably, and not profit from causing problems’.

Mayer also suggested that ‘measurement should recognise impacts and investment by companies in their workers, societies and natural assets both within and outside the firm.’ Measurement here does, of course, mean accounting.

Accountants have a ‘broader duty’

So, is there a new role for accounting? I would suggest not, but only for a perverse reason.

My suggestion is that as accountants, we have always known we have a much broader duty than just to the shareholders alone.

The strongest evidence comes from a 1975 report issued by the then-new UK based Accounting Standards Steering Committee, entitled ‘The Corporate Report’. Issued right at the start of the era of UK accounting standard-setting, the document considered to whom accounts should be addressed and suggested that there were many stakeholders groups with an interest in the accounts of a company, all of whose needs should be met.

I now summarise those stakeholder groups as:

1) Suppliers of capital to the reporting entity
2) Its trading partners, whether suppliers or customers
3) Its employees
4) Its regulators
5) Its tax authorities
6) All parts of civil society with which it might engage.

The recent commentary noted previously in this article omits much reference to regulators or tax authorities. On other issues, it is clear that those commentators have rediscovered what we already knew in 1975, which is that accounts have to meet the needs of a wide range of users, and not just the shareholders.

I stress, we are talking about limited liability entities here. I suggest unlimited business entities, whether sole traders or partnerships, have a right to privacy in their accounting, and no responsibility excepting to a tax authority for publishing it. That is because they have accepted responsibility to pay their dues, come what may.

That, though, is not true of limited companies. Their owners have been granted an extraordinary privilege by society, which is to not have to settle their bills in some situations. The quid pro quo is accountability. It’s my suggestion that deep down the accounting profession has always known that this quid pro quo existed, but tried to ignore it.

The trouble for accounting is that now the rest of the world, from the FT and the British Academy to US CEOs, have realised that this broader obligation exists.

The era of accounting to shareholders alone does then look to be over. And accounting will never be the same again. 

Replies (14)

Please login or register to join the discussion.

avatar
By mkowl
06th Dec 2019 11:10

Hopefully retirement before this all kicks in

Thanks (0)
avatar
By johnjenkins
06th Dec 2019 11:13

The Accounts have been for anyone that is interested. The onus has always been on the Director(s) to present the accounts. So in a way it was up to them how the figures were presented (legally).
Capitalism and Communism are on there way out and there certainly is a need for a replacement. The world is a smaller place and communications a lot easier. With the advent of "high tech", which is leaving a lot of people behind, whatever the replacement, it will have to encompass a lot more than just tradition.
The role of Accountant will never change.

Thanks (0)
avatar
By johnt27
06th Dec 2019 11:17

Auditors may address their reports to the shareholders, but their remit is to consider all stakeholders when assessing risk, setting materiality etc. The problem is that auditors have little incentive or power to address other stakeholders' concerns if these are particularly under/mis-represented in the financial statements.

Thanks (0)
Replying to johnt27:
avatar
By Dennis K. CPA
07th Dec 2019 22:19

Really? I'd love to have you present a real-life example of this. Audit firm, company and year is all you'd need to provide us here.

Auditors are duty bound to have management correct the financials or modify their opinion should additional information become available to them that shows the original audited financials to be inaccurate/misstated.

Your contention that auditors have little power to address misstatements in financial statements is factually incorrect. Your contention that they have little incentive to address misstatements in financial statements is an unsubstantiated opinion.

Thanks (0)
Replying to Dennis K. CPA:
avatar
By johnt27
09th Dec 2019 10:10

Not sure I used the words misstatement in my comment but if I were to I'd make sure to say that auditors only have to address material misstatements in the financial statements and only in the last 18 months or so have they had to consider the accuracy of narrative reporting.

Thanks (0)
avatar
By JDBENJAMIN
06th Dec 2019 11:17

In other words, leftist professor wants to create the impression there is some great groundswell movement towards socialism, and we need to get on board. I'm going to ignore him and carry on as before, and so should all of us.

Thanks (4)
Replying to JDBENJAMIN:
avatar
By SWAccountant
06th Dec 2019 13:58

it would be easy to believe you aren't a fan of AWeb in any way at all. Yet here you are, constantly commenting about how much you dislike it...

Thanks (1)
avatar
By Michael Davies
06th Dec 2019 12:01

Interesting I was this year ripped off by a company whose directors had stripped the company of cash,leaving customers high and dry.I am more or less solely a tax person,and the advice on this site suggested that the unqualified report was purely for the shareholders direction.No more and no less.

Thanks (0)
avatar
By AndyC555
06th Dec 2019 17:07

"I stress, we are talking about limited liability entities here. I suggest unlimited business entities, whether sole traders or partnerships, have a right to privacy in their accounting, and no responsibility excepting to a tax authority for publishing it. That is because they have accepted responsibility to pay their dues, come what may."

That makes no sense. "Let the public snoop around in the tax affairs of businesses unless they are run as a sole trader or partnership".

An LLP's accounts, of course, tell us nothing about the tax affairs of the members who own it. A company can easily look as if it is doing nothing to avoid tax whilst its owners can be up to all sorts in their private affairs.

A strange inconsistency here. We either want greater tax transparency in all affairs or we don't.

It's all very well saying that individuals accept responsibility to pay their dues, but if they've manipulated their tax affairs there might not be any dues.

Finland, Norway and Sweden are notable countries where all tax returns are available for public scrutiny. In those countries it is clear what their dues are.

I recall that during the London mayoral battle, Boris Johnson and Ken Livingston both published their personal tax returns. It seems to me that this is a fine example that any crusader for tax transparency would be only too happy to follow. Any reason why not, Mr Murphy?

Thanks (1)
avatar
By timworstall
06th Dec 2019 17:17

Well, no, not really:

"The directors of a company were now meant to have regard to employees, customers, society at large, the environment, reputation and other issues."

The very act linked to states:

"A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—"

That is, shareholder primacy is still the thing. They being the members of the company of course. All the other bits and bobs are subsidiary to that.

As to creditors:

"The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company."

That is, the law does not now state that creditors are members who must be so considered. That's why the mentioned them in a different bit, and mention them differently.

Thanks (1)
avatar
By Dennis K. CPA
07th Dec 2019 22:30

"The trouble for accounting is that now the rest of the world, from the FT and the British Academy to US CEOs, have realised that this broader obligation exists."

I hate to break it to you, but the people who develop and set financial reporting standards already seek guidance and feedback from all stakeholders. It is part of the development process, it is open to shareholders, stakeholders and the public at large, and it is completely transparent.

And as a CPA and businessman from the USA, I can tell you this: The CEO Roundtable has no influence on anyone inside or outside the process of developing and setting accounting standards. It is a public relations vehicle for its membership. Nothing more, nothing less.

Thanks (0)
Replying to Dennis K. CPA:
Richard Murphy
By Richard Murphy
13th Dec 2019 13:10

I note what you say

But the Business Roundtable does have influence

And whilst in theory stakeholders are consulted research shows that in practice they are not

There is room for a great deal of change, and business wants it

Thanks (0)
Hallerud at Easter
By DJKL
10th Dec 2019 17:38

To be brutally frank the way accounts of smaller limited companies are presented is possibly more for the benefit of the accounting profession and those that sit on high announcing whatever new metric of valuation/presentation they consider appropriate, frankly users of accounts appear more to be an afterthought to this process.

For a start if transparency is required /deemed helpful vis a vis small companies then surely full accounts ought to be on record at Companies House, dividends paid certainly ought to be disclosed, as a user of accounts re those myriad companies who, over the course of my working year, I might transact,that which is published does little to reassure me as to the financial trading and activities of such parties and the number of times one tries to get full trading figures direct from prospective tenants has convinced me that at the bottom of the accounting food chain a lot of practices do not even bother supplying full accounts to their clients.

Frankly statutory accounts are more and more a joke.

Thanks (1)
Replying to DJKL:
avatar
By peterdell
12th Dec 2019 10:49

My thoughts exactly. I don't even know why we bother having to produce statutory accounts for Micro's because they are meaningless. Anyone with any reasons?

Either insist on full accounts (my preference) so there is transparency on what companies and LLPs are doing, or don't bother at all because its a paper exercise which has no value.

Thanks (1)