ERIC BAIRD previews this week's ICAS Summer Conference as emotions run
high following changes in accounting procedure.
TALKING to a Scottish captain of industry recently about changes in
accountancy I was dismayed to hear in scathing tones that he was ashamed
of his old profession.
Feelings do run high, mainly I suspect as a result of controversial
changes and a spate of reports which have mostly sidestepped the real
issues.
On the face of it this week's summer conference of the Institute of
Chartered Accountants of Scotland in St Andrews will have plenty to
discuss. I do hope that they get to grips with these matters causing
concern.
The event appears to have two themes, one being ''Out of recession: no
more boom, no more bust'' which seems wide of the mark; the other is
''Maintaining the edge'' which, I'm assured, will range over latest
developments and issues affecting the profession. Would the opener
please question whether CAs have the edge?
ICAS has had a busy year, between Cadbury and corporate governance,
changes imposed by EC regulations and audit reporting. Some useful
contributions have certainly resulted, together with a lot of high
falutin' statements which fill out reports.
Too often outsiders are left with the distinct impression that the
whole objective is to put up a smokescreen, so that members of the
profession can slide out unnoticed. Why not, when competition is severe,
fee income is falling, and the cost of indemnity is out of reach?
One has sympathy but might have more respect if only the occasional
set of company accounts carried an overdue audit qualification. Good
gracious, the client would never forgive! Is that not preferable to
endorsing dubious accounting?
Realistically, of course, there should be no such conflict of
interest, with the auditors given the independence of a fixed term, say
five years, in office and then a compulsory change to a fresh team.
ICAS, in a major review, which took two years and 74 pages of text,
favoured companies having their own internal audit teams and external
assessors. I doubt we shall not hear much more about that job creation
project, though the Institute of Internal Auditors has welcomed it.
Doubtless there will be a self-congratulatory mood between drives over
the Old Course that the formal certificate has been elaborated into an
auditors' report in company accounts. The statement is four times
longer, means even less, and ducks responsibility even more effectively.
In many respects I feel the present wave of annoyance stems not so
much from audit as from the introduction of FRS3 as a new accounting
standard. It reminds of the short-lived saga of current cost or
so-called ''inflation accounting'' which the pros thought was clever
stuff -- it put the fees up -- but which proved deeply unpopular with
most companies.
FRS3 is a similar resolution of a temporary situation; namely that any
form of restructuring should be stripped out. So now we have some larger
companies using this formula, referring to pre-tax profit as
''normalised'' and, since it is not mandatory, rather more sticking to
the old pattern.
All anyone wants in fact is a true and fair declaration of profit. It
would hardly seem necessary to throw all accounting into confusion to
decide what is acceptable and what must be taken below the line as
extraordinary.
Britain's top retailer, Marks & Spencer, recently reported pre-tax
profit (normalised) of #738.4m against #623.5m, restated under FRS3 as
#736.5m compared with #588.9m in 1992. A good example. More confusing
was Marley's normalised interim of #13.2m which looked better against
the comparative figure of #6.1m, because it had been restated under new
rules to take out a previous #3.6m disposals' loss which had been below
the line. Operating profit of #17.4m against #13m was a more reliable
guide to progress.
A complex international example is anticipated from Reckitt & Colman,
with analysts indicating that ''normal'' pre-tax profit could be around
#150m but only #77.8m under FRS3, against #150m the previous year in
both cases. They make the point that restatement must flatter
comparisons, as a result of previously deconsolidated loss-makers being
including in the corresponding period last year.
A topic which seems of much wider import, and to which too little
attention has been paid, is that of harmonising international accounting
standards.
Not long ago a most useful report was published by the Chartered
Association of Certified Accountants, highlighting the fact that
differences between the UK and US requirements could result in
companies' profits measured under our rules being anything from 34%
below to 41 times higher than the US value.
The absurdity of that needs no elaboration and did it not reflect on
their own profession, accountants the world over would be scathing. I am
told that an Edinburgh conference in June naturally showed opposition to
American ideas of forcing others into their system. There is, however,
machinery to get agreement and four years' recognition of the problem is
quite long enough without result.
Professor Pauline Weetman of Heriot-Watt University, Carol Adams, a
lecturer at Glasgow University, and Professor Sidney Gray, University of
Warwick, prepared the report which highlighted the major differences as
being in accounting for goodwill, deferred tax and fixed asset
valuation.
''These are areas where emotions run high, particularly in the UK,
when suggestions are made for aligning international practice more
closely,'' they acknowledge. It is also recognised that there could be
significant economic consequences for the accounts of perhaps 40 UK
companies.
What is clear is that the problem will not go away; indeed there are
indications that the increased international trading is adding to the
difficulties. There is concern also over harmonising with Europe, though
the EC as usual tends to seek uniform presentation rather than be overly
concerned about numbers. It does rather explain how the ERM fell apart.
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