In a recent post Damian Wild recalls Sir John Harvey-Jones’ optimistic expectation that “at the present rate of progress, everyone will know the financial position of the company at every level in real time”. However, Sir John was sufficiently realistic to note, “FDs could be the key gatekeepers making that happen or they could be the abominable snowman preventing that from happening.”
Unfortunately, casting around in the snows of corporate reporting for recent signs of Bigfoot there is plenty of evidence that FDs, and the accounting profession in general, are leading the corporate world deeper and deeper into the trackless wastelands. Financial reporting has now become so esoteric that fewer and fewer people understand the figures that are put in front of them. We are light years away from the stewards of the business (directors) accounting to owners (shareholders) for their conduct and we seems to be accelerating.
City figures have asked questions about the reliability and relevance of fair value accounting when mark-to-market valuations are based on an insignificant number of related market trades. Many have been even more sceptical about mark-to-model assumptions used to value illiquid assets. If Sir John’s Yeti is a mythical creature of folklore and legend, perhaps it is only fitting that FDs are now accounting in make-believe money.
The Association of British Insurers has claimed recently that investors feel audit committees don’t know enough about what is going on. According to Peter Montagnon, director of investment affairs, “This relates to the committees’ knowledge and also to the accounting standards and what has to be reported.” Where does this leave the average shareholder? The ceaseless change, standardisation and internationalisation of accounting rules when combined with the increasing complexity of financial instruments has succeed in generating an impenetrable fog around the conduct and condition of our major institutions.
Grant Thornton claims that “audit committees, are having to place increasing reliance on financial directors and auditors to explain the IFRS accounts and to obtain appropriate assurance” as they attempt to find their way through the traps and tripwires set by standards on financial reporting. If this level of support is required by highly paid and experienced businessmen at the head of our major quoted companies, how is the man in the street expected to cope? In trying to understand the labyrinthine logic of their own conduct do our public companies now face the centipede’s dilemma?
Last week’s Accountancy Age editorial wonders whether the current confusion and uncertainty being experienced by audit committees would be most easily resolved by regulation, such that those that serve on them meet some minimum level of financial acumen. This proposal only serves to distance the shareholders even further from the core issues. If only those who are specially trained can hope to understand what is happening where does that leave the underlying fundamental associated with accounting – giving a convincing explanation of what is going on?
Sir David Tweedie, head of the International Accounting Standards Board has suggested a form of parallel balance sheet on which entities such as SIVs could be explained in greater detail. Sir David must accept a large measure of blame for the sorry mess that corporate reporting now finds itself in. Floating the idea that companies ought to keep two sets of books would appear to be the final scene in an increasingly farcical drama.
Sir David claims, “What we’re trying to do is simplify the accounting”. Wonderful! Then let’s do just that. Let us make everything as simple as possible, but not simpler and introduce what I shall dub “The Alf Garnett Test”:
Unfortunately, casting around in the snows of corporate reporting for recent signs of Bigfoot there is plenty of evidence that FDs, and the accounting profession in general, are leading the corporate world deeper and deeper into the trackless wastelands. Financial reporting has now become so esoteric that fewer and fewer people understand the figures that are put in front of them. We are light years away from the stewards of the business (directors) accounting to owners (shareholders) for their conduct and we seems to be accelerating.
City figures have asked questions about the reliability and relevance of fair value accounting when mark-to-market valuations are based on an insignificant number of related market trades. Many have been even more sceptical about mark-to-model assumptions used to value illiquid assets. If Sir John’s Yeti is a mythical creature of folklore and legend, perhaps it is only fitting that FDs are now accounting in make-believe money.
The Association of British Insurers has claimed recently that investors feel audit committees don’t know enough about what is going on. According to Peter Montagnon, director of investment affairs, “This relates to the committees’ knowledge and also to the accounting standards and what has to be reported.” Where does this leave the average shareholder? The ceaseless change, standardisation and internationalisation of accounting rules when combined with the increasing complexity of financial instruments has succeed in generating an impenetrable fog around the conduct and condition of our major institutions.
Grant Thornton claims that “audit committees, are having to place increasing reliance on financial directors and auditors to explain the IFRS accounts and to obtain appropriate assurance” as they attempt to find their way through the traps and tripwires set by standards on financial reporting. If this level of support is required by highly paid and experienced businessmen at the head of our major quoted companies, how is the man in the street expected to cope? In trying to understand the labyrinthine logic of their own conduct do our public companies now face the centipede’s dilemma?
Last week’s Accountancy Age editorial wonders whether the current confusion and uncertainty being experienced by audit committees would be most easily resolved by regulation, such that those that serve on them meet some minimum level of financial acumen. This proposal only serves to distance the shareholders even further from the core issues. If only those who are specially trained can hope to understand what is happening where does that leave the underlying fundamental associated with accounting – giving a convincing explanation of what is going on?
Sir David Tweedie, head of the International Accounting Standards Board has suggested a form of parallel balance sheet on which entities such as SIVs could be explained in greater detail. Sir David must accept a large measure of blame for the sorry mess that corporate reporting now finds itself in. Floating the idea that companies ought to keep two sets of books would appear to be the final scene in an increasingly farcical drama.
Sir David claims, “What we’re trying to do is simplify the accounting”. Wonderful! Then let’s do just that. Let us make everything as simple as possible, but not simpler and introduce what I shall dub “The Alf Garnett Test”:
- Take your next financial instrument, accounting standard or set of Statutory Accounts into a randomly selected local boozer (wine bars, tapis parlours and cocktail lounges excluded) .
- Approach the nearest person at the bar.
- Ask him or her to explain what they understand your document to mean.
- If they can give a cogent explanation in ten minutes or less, then you may publish.
- If not, scrape it, buy a round of drinks and get back to reality.
