Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

Tweedie takes the helm at ICAS

by
10th Apr 2012
Save content
Have you found this content useful? Use the button above to save it to your profile.

For the past 10 months since he retired as IASB chairman, Sir David Tweedie has been keeping a low profile. But that’s all going to change in a couple of weeks as he takes over as ICAS president on 20 April.

Until now he has deliberately kept out of the way to allow his successor at the IASB to carry on the drive towards convergence of global accounting standards, but ahead of taking up his new role Sir David has started talking to the press again. In this interview with AccountingWEB, he sets out his plans for the year ahead.

While he has tried not to get too involved, preferring to “watch from afar and leave it for the new guys”, Sir David does admit to some frustration that the international project has bogged down - primarily due to the US Securities and Exchange Commission’s reluctance to replace US GAAP with the IFRS approach.

“I feel frustration, but I’m sure [IASB chairman] Hans [Hoogervorst] does too. The subjects they’re tackling are tough, such as leasing, where you have a $600bn industry that’s off-balance sheet and lots of people interested in keeping it that way. There’s a lot to push back and the board wants to be sure it has thought of everything. But what we’re looking for from the SEC is an indication of what they’re going to do and when,” said Sir David.

“Until they do, they’re going to hold up the whole project. Japan is waiting to see what the US does. China too - the project has got to keep going and the Americans hold the key.”

Given its choice of president for 2012, it’s no surprise to learn that ICAS is very pro-IFRS. For Sir David, his new role revives memories of 1978-82, when he was the institute’s technical director. During that time ICAS published a number of research documents that paved the way for much of the work he carried forward at the UK Accounting Standards Board (ASB) and then the IASB in the years that followed. 

Having started the ball rolling with accounting standards reform, Tweedie is keen to pick up the baton 30 years later and do something similar about future of the audit. “That’s the beauty of accounting - there are so many things are not right,” he said, cueing himself up for one of his signature jokes: “How many auditors do you need to change a lightbulb? None, because they’ll form a committee to say it’s not their responsibility.”

Tweedie plans to push on with ideas set out in a 2010 ICAS report on the future of assurance that proposed new audit principles and processes based around more coherent, narrative annual reports. Auditors would have to provide a new “balanced and reasonable” opinion that drew on the auditor’s knowledge of the business to offer a more grounded assessment of the annual report.

“The auditor could do an analytical discussion - for example, what were the key issues that kept them awake at night - and what were the big calls? Where were the arguments? Those are things that don’t come out and we really ought to get that stuff together. Hiding it in note 43 is not great,” he said.

The small business challenge

The role of audit isn’t just a concern for large enterprises using international accounting standards. During his year in office, he is keen to focus on what the same issues mean for small companies, drawing on formative memories as a third year trainee. “I was in my first year of doing the accounts for a father and son company in the Gorbals that typically made a profit of £5,000 in those days,” he recounts.

“I discovered the profit wasn’t £5,000, but was £30,000 and would have to investigate.”

The firm made two main products, one of which was relatively low margin, but accounted for 90% of its output. But when it ran short of materials for that range, the production line switched to making more of its other product, which had a much higher profit margin.

“They were making the wrong product,” said Sir David, who explained that the situation set out the essential challenge for accountants working with small businesses. “Do you go in there and do an informal audit for a company with no auditors? Or do you go in there to do the accounts and use the information to give them business advice?”

Small business accounts have been in the news in recent weeks, but Tweedie is one of many in the profession who have doubts about the Chancellor’s plans to simplify tax accounting.

“It’ll be worth seeing what HMRC thinks,” he said. “Cash flows are essential. But lots can be missed off and you can adjust them. If you don’t want to pay tax, don’t collect for a few weeks. You can manipulate it, no doubt.”

Back to ethics

Hostility to accounting manipulations has been a feature of his career, but to counteract them Sir David plans to re-emphasise the ethical nature of accounting during his year in office.

“Ultimately if the accounting profession isn’t ethical, it will raise question marks over the whole capitalist system. Auditors have been given a monopoly and we’ve got to do something to justify it,” he said.

Once again, Sir David’s agenda harks back to his years as a trainee, when he received most of his instruction on Friday nights and Saturday mornings from the firm’s “warhorses”.

“The ethics just came out of them,” he said. “So I was quite surprised when we started having ethics courses - I didn’t think we needed them.”

In his view, most of the “lousy things” that happen in the financial sector are down to bad ethics. When companies like Worldcom or Enron deliberately conceal assets or directors fudge the numbers to assure their bonuses, “You can write all the standards you want, but they aren’t going to be effective if people do these sorts of things,” said Tweedie.

For the next year, at least, ICAS will mount a big drive to get its students in front of the profession’s contemporary warhorses, who will be able to tell them about the issues they can expect to face and how they will need to tackle them, he added.

One of the contributing factors to the erosion of ethical standards is what the new ICAS president terms the emergence of the “search engine profession”, where you type in “deferred tax” and get the answers for a number of problems you may have with the issue.

“Some people want rules for everything - but how do you do judgement?” he asked.

Tweedie is already planning to publish a professional judgement framework following a request from accountants working in China. “They’ve got a young profession and asked us for guidance on how you approach making up your mind,” he said. “Perhaps the US profession might find that very helpful once they take on IFRS.”

Like his quips, reminders of Tweedie’s previous battles are never far away. He may not be as directly involved in standard-setting now, but his reappearance on the scene should revive interest in the underlying issues.

“When we brought in IAS 39 [‘Financial Instruments: Recognition and Measurement’], there was a huge fight to get it into Europe and lots of pressure from those who argued that derivatives don’t cost anything, so why show them? But as we have seen, they are dangerous and can destroy companies,” he said.

Following the financial crisis, the IASB issued an updated IFRS 9 in November 2009 based on the principle that financial instruments would only be held at cost if the intention was to hold them until maturity. Derivatives that were intended to be traded, or where the value wasn’t known, would be based on market value. But once again Europe is dragging its heels over implementing it.

On pensions accounting, meanwhile, Tweedie remains unrepentant. “Britain pioneered the view of bringing in gains and losses and measuring pension liabilities. But we’re still waiting for actuaries to agree how to do it,” he said.

“[With FRS 17] we wanted to show the actual state of the fund. Two years after it was introduced, one of our most ferocious critics, Douglas Flint at HSBC, admitted that they were now discussing pensions schemes in the boardroom, which they hadn’t done before.

“Gordon Brown did more to destroy pensions. I just measured them. If companies can’t afford defined benefits pension schemes, they shouldn’t have them.”

Expect to hear similar quotable sayings from Haymarket Yard in Edinburgh over the next 12 months. Even if you don’t agree with him, David Tweedie has the knack of making you think about what he is saying, and about the profession’s wider role. “Accounting isn’t just there to show people what’s happening,” he concluded. “I think accountants should change things.”

Tags:

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.