Making the money men accountable
December 25th, 2007 by moniesIF a company’s annual report doesn’t reflect the true state of its finances, the consequences could be serious. It might create a false market in the company’s shares, causing investors to get their fingers burnt. But who would be to blame? Would it be the company itself or the firm of auditors responsible for scrutinising the financial information.
These are some of the many questions that have been driving Frank Harding, the former KPMG chartered accountant who is now president of the New York-based International Federation of Accountants.
On a flying visit to Edinburgh last week, Harding explained that his three key goals as IFAC president are: to ensure that over- zealous US regulators are kept in check; to raise the quality of financial reporting worldwide; and to ensure that the profession plays a lead role in stamping out corruption worldwide.
In May, IFAC, the umbrella organisation for the accountancy profession on a global basis, will stage its annual conference in Edinburgh’s International Conference Centre. The theme? “The needs of capital markets - a measured response”. Speakers include Richard Grasso of the New York Stock Exchange, Howard Davies of the Financial Services Authority and Sir David Tweedie of the Accounting Standards Board.
The conference comes at a critical time for the profession. Not only are most of the “big five” accountancy firms - PriceWaterhouseCoopers, Ernst & Young, KPMG, Deloitte & Touche and Andersen - increasingly discovering that it is virtually impossible for them to operate in the US without contravening government regulations. But the US regulators are also flexing their muscles and seeking to impose their standards on other markets around the world.
Harding said: “The regulators’ job is to ensure there is quality financial reporting, so that investors and others taking economic decisions can make appropriate decisions based on appropriate knowledge. That’s motherhood. The profession has exactly the same desire. We want to see quality stuff out there.”
But Harding questions whether the rules being imposed by the Securities and Exchange Commission, the US body which is increasingly seen as global “lead regulator” are either practical or sensible.
In recent months the SEC has been directing its wrath towards the “big five” firms of accountants. It is particularly concerned that their auditing arms are less than fully independent and that the “chinese walls” between the various parts of these enormous multi- disciplinary firms may be inadequate. Already the companies are responding by demerging or selling off their consulting arms. In February, PwC said it was breaking itself up into “two or more separate operating units.” PwC chief executive, James Schiro, said: “Growing regulatory and legislative scrutiny demand that we vigorously focus on the basics that built the accounting profession.” Last week Ernst & Young confirmed it will sell its consultancy business to Paris-based Cap Gemini for #7 billion.
Harding predicts that none of the big five will retain their consulting arms. “They all need capital to meet their needs for expansion and technical development.”
However, Harding wonders whether some of the SEC’s rules in the area of professional independence may be somewhat over-zealous. Some are virtually impossible to comply with. For example, according to SEC rules, an accountant is expected to resign the account if his brother-in-law is the financial director at a client company. The same applies if his brother in law owns shares in the client company. IFAC advocates a less prescriptive approach to the issue of professional independence which is contained in a “principles-based approach”. This will be elaborated in Edinburgh in May.
The international accountancy body has also set itself the ambitious task of harmonising accountancy standards in 180 countries around the world. “Developing and emerging countries in particular need greater accountability,” explained Harding. Following meetings at the World Bank, Harding’s organisation recently launched the International Forum on Accountancy Development.
Harding said: “The quality of financial reporting worldwide is critical to decision-making. We think there’s a need to improve it and are looking at the quality of financial reporting and examining each country where there is a lack.”
National teams - who could be drawn from local trade ministries, regulators and professional bodies - will be appointed to assess the current state of financial reporting and corporate governance in their domestic market, before seeing how this compares to international benchmarks. IFAD will later finance consultants to visit countries to help plug the gaps wherever these have been identified.
Author: Ian Fraser
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