OxBowBusiness

Accounting Standards ... why?

I received a heartfelt plea from Amber the other day and thought you'd like to see what I said in reply.

Firstly the question:

Hi there

My name is Amber and I am studying Financial accounting this semester and admittedly I find it confusing to say the least. I was wondering if I could get your opinion on why there is a need for so much regulation? If we already have the conceptual framework and the "true and fair view" provision why do we need the rest? I guess I'm trying to understand it all while wishing it didnt all exist!!! : ) Look forward to hearing from you

Kind regards, Amber.

Now my response.

Dear Amber,

There are many accountants who think that we don't need all of these financial reporting standards. There are now hundreds of them world wide: British, International, American, French ...

However, since we are still suffering from major financial scandals in spite of all of these standards, there are many more accountants and enforcement officials who think they are both vital and not yet enough.

What about harmonising standards? Why does each country or region have its own standards? Well, that's how they came to be developed. Until the International standards came along. The European Union has harmonised standards by insisting that all listed companies in the EU present their financial reports according to IFRS from 1st January 2005 and onwards. There are also projects to harmonise American and International standards but that is such a difficult problem that I think it will never really be done. Just go to www.fasb.org to see the number and range of American standards and then compare them with www.iasb.org.uk to see how many American standards there are relative to the number of IFRS.

UK and International standards are being very closely harmonised now.

The biggest problem I think that we face is the accountant who is suffering from the must beat or must find a loophole syndrome: accountants who either don't understand the standards or are looking for a way to hide or twist something. They then find a way of hiding and twisting: possibly true and fair but in breach of substance over form ... Or vice versa ... Or something else entirely.

When the ASB from the UK produced its own Framework, it was labelled as a complete waste of time and as too little and too late and as a mere jumble of words. The IASB and the FASB produced their own frameworks a long time before the ASB and what is wrong with the ASB's version is that it was really just a copy of the other two. The FASB was the original, I think and the IASB copied that too, at least in part.

Define true and fair view and then ask me to do the same. Then ask 1,000 accountants to do that. Then ask 1,000 shareholders what they mean by true and fair ... It will turn into a nightmare. That shouldn't stop us trying, of course; but there are problems with trying to define such things. The most important thing is that the standard setters are trying to set standards that accountants can all agree with and apply. No standard is set in stone, however, so any definition and description is available to be changed. Indeed, UK standards on inflation accounting ... Don't exist any more ... Ditched ... No one liked them and then inflation went away so we don't need one any more. The IASB did the same, essentially; and they just have a standard for hyper inflation.

I think one of the real problems is that the standrds are incomprehensible to a lot of people. They are written in some of the of astonishingly arcane language you could ever wish to come across. The Boards tend not to illustrate everything with meaningful examples. Examples that are given are often presented by accountants or academics who seem either not to understand what they are writing about or who can't effectively communicate what they are trying to say.

Conclusion? Sorry, Amber, these standards are here to stay.

Sorry

Best wishes


Duncan Williamson

posted by Duncan Williamson @ 9:10 AM