Ritchie sets out his seventeen questions that, in his view, need to be answered. So let's answer them.
1. Why we gave up control of accounting disclosure to the accounting profession
2. Why we gave up control of auditing regulation to the auditing profession
There's simply no evidence of this. Yes, the IASB and FASB both contain people who used to be preparers (is this what Ritchie means by the accounting profession? It's not clear) and people who used to be auditors. I think we'd be flabbergasted if this weren't the case. The alternative - regulation being made by people with absolutely no knowledge of the topics they're tasked with regulating - is too awful to contemplate. Only a raving madman would advocate it.
However, there are added controls to ensure that both boards don't get captured by any special interest group, and that they meet their overall strategic objectives. In the case of the IASB, this is the role of the IFRS Foundation (formerly the IASCF), which operates according to a constitution.
At every stage, there are public consultations. Anyone can respond with their points of view. The IASB and FASB are held accountable to the proper operation of their consultative processes.
3. Why we allowed the definition of an audit to be limited to confirmation of compliance with an accounting framework and abandoned the true and fair override
Because we didn't. The UK Financial Reporting Council has obtained Counsel's opinion that has confirmed the centrality of the true and fair requirement to the preparation of financial statements in the UK, whether they are prepared in accordance with international or UK accounting standards.
The European Union endorsement process only permits endorsement of a standard if it "it is not contrary to the 'true and fair principle' set out in Article 16(3) of Council Directive 83/349/EEC and Article 2(3) of Council Directive 78/660/EEC." (source: iasplus.com).
US GAAP, as a result of legal cases (e.g. Global Crossing, see Lehmans Examiner Report vol 3, p.965) and Sarbanes-Oxley (s302) requires financial statements to be not misleading. Merely following GAAP is insufficient to fulfil this requirement.
4. Why we allowed the users of financial statements to be considered the providers of capital alone
5. Why we don’t demand financial statements that meet the needs of other major user groups including:
a. Employees
b. Suppliers
c. Customers
d. Regulators
e. Tax authorities
f. Civil society groups
g. People at large
These two questions go together. Frankly, they're idiotic. Companies produce their annual accounts for shareholders. That's what the annual accounts are for. It's right that the regulations over the form and content of accounts should put shareholders first.
Other people find accounts useful, and it's right that they can access material that's filed on the public record. However it's daft to suppose that you could ever have a one-size-fits-all approach to financial reporting.
Employees, especially those involved in financial management or strategy, will always need a different form of reporting. And they have one - in management accounts. Management can determine the form and content of information needed by employees generally. It's a place regulation doesn't need to be.
Suppliers may find the information in company accounts useful. However, accounts take time to prepare, and by the time the supplier is considering extending credit to a company it may be some 18 months after the balance sheet date. So suppliers will always need additional sources of information, such as credit reference agencies, and will want to increase credit limits only gradually until they trust the company enough.
I don't quite know what Richard has in mind when he says customers need information from accounts. It might help customers in situations such as Farepak or Wrapit, subject to the timing issues identified above. But there are other, better sources of information, and other courses of action they can take, such as using a credit card for added consumer protection.
Regulators and tax authorities are in a privileged information. They often choose to use the financial accounts, because they are signed off by directors who can be fined if they get it wrong and, where audited, have added reliability of an audit report. Both regulators and tax authorities can require additional information to be provided. And both can require companies to submit to inspections. They simply don't need added information to be included in the accounts just for them.
Civil society groups and people at large, to the extent that they are different to any of the aforementioned groups, may also get useful information from financial statements. If they wish, they can buy a small number of shares and then seek further information either directly from the company or at its AGM.
6. Why we limited auditor liability so much
Because audit quality is more important. As of today, auditors of US-listed companies don't enjoy limited liability. I'm not aware of any UK-listed company that has negotiated limited liability for its auditors (that's not to say that there are none). And the Big 4 audit firms are legally separate partnerships. We need to respect the legal form when considering legal liability. It would be perverse to set aside legal process when determining what, legally, is owed to a third party.
7. Why we allowed the concept of limited liability to be porous when it comes to failure and yet so restrictive when it comes to sharing information and reward
I guess we're off auditors' liability for now. It's a one-way street by definition. We permit firms to have limited liability because we all benefit from its existence. Many modern inventions simply wouldn't have been invented at all if investors hadn't been able to protect themselves from future liabilities through the use of limited liability companies. We already dealt with sharing information above. And better profits means more tax revenues for the government.
8. Why we allow limited liability within limited liability i.e. subsidiaries have limited liability distinct from parent companies
Because limited liability pertains to a company and companies can own other companies. Isn't Ritchie supposed to know this sort of stuff?
9. Why we consider group accounts the only useful perspective on corporate activity
Because, by and large, shareholders only own shares in the parent company, which commands the assets of the total group through its subsidiaries. Investors might be interested in subdividing the group, which is why they are required to disclose segmental information, but they're more interested in the overall picture of the consolidated group.
10. Why we allow off balance sheet accounting
And, Ritchie, when did you stop beating your wife?
11. Why we still allow auditors to undertake other commercial activities
Who do you think you are to restrict the purchasing decisions of companies?
In many cases, what is disclosed as non-audit fees are actually intrinsically linked to the audit, and would be considered by the man on the Clapham omnibus as audit work. Thanks to the arcane workings of our regulatory systems, they are not (e.g. see Q21 of the Treasury Committee uncorrected evidence from February 2010).
Non-audit services purchased from the audit firm need to be pre-approved by the audit committee (whereas those that are purchased from other firms do not need pre-approval). If management was genuinely trying to cheat shareholders, they would presumably use anyone other than the auditors, in order to avoid this added level of challenge.
12. Why we don’t increase company registration fees to ensure auditors can always be fairly remunerated from a communally managed purse
Because we're not in a communist country. Thank God.
13. Why we allow companies to not file accounts on public record
All UK limited companies must file accounts at Companies House. Some smaller companies can file abbreviated accounts on the public record.
There's a proposal in the EU to allow member states an option to remove 'micro' (i.e. very small) companies from the requirement to follow the accounting directives, which includes the requirement to file on the public record. Even if it goes through, and there's no certainty that it will, it will still need to be taken up by BIS before it would become law here.
14. Why we accept a lack of transparency on group structures
I seem to recall that UK companies are required to have a registered office, at which they must display the company's full name on a sign. Consolidated accounts list the (parent) company's major subsidiaries. If foreign company law is less good than English company law, then perhaps Ritchie should take that up with them.
15. Why we don’t demand full accounts on public record from all entities created under law wherever they are in the world, whether they be companies, partnerships, all variations on these, trusts, charities, foundations and other such entities. Such information to include full information on ownership, entitlement to assets, establishment, constitutions, management and accounts.
See above. English company law does require information to be filed on the public record. This could, of course, change if the EU micro company proposal goes through. Then we can have a debate about the relative benefits and costs of this requirement.
Other countries have already concluded that there's no need to have accounts on the public record. These aren't "secrecy jurisdictions", but actually the majority of countries around the world.
16. Why we allow companies to be struck off public registers without questions being asked and substantial fees being paid in lieu of accounts.
You've lost me. We fine companies if they don't file accounts on time. Eventually we strike them off if they won't comply.
17. Why fit and proper tests aren’t conducted for all persons incorporating and owning companies.
We prefer to ban them once we're proved they're rotten.
Filed under: Accounting, Auditing, Corporate governance, Current issues, Other blogs, Regulation with tags companies house, european union, farepak, fasb, iasb, idiots, limited liability, micro entities, richard murphy, sarbanes oxley act, us gaap, wrapit
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