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In which the ‘exciting content’ meter hits a new low

Accounting isn’t a topic of wide general interest. Nonetheless, accounting professor Prem Sikka’s CIF piece on the International Accounting Standards Board is one of the more bizarre and surreal things that I’ve ever read.

The point of International Accounting Standards is to ensure comparability of accounts of companies that report their financial results in different geographies – so that you can be sure a company reporting €500,000 of profit before tax in Spain has actually generated the same returns as a company reporting the same figure in France.

The IASB’s role is to set these standards. Broadly, it does so by taking national Generally Accepted Accounting Principles (GAAP) from across the world and to try and come up with acceptable ways of making them compatible.

Now, national GAAP is generally determined by a local industry body – in the UK, the accounting standards board. These are made up of accountants, unsurprisingly, and are usually funded by a levy on companies. This has broadly worked (yes, there’s been the occasional corporate disaster – but in nearly all cases, the company in question has deliberately broken the accounting rules in a way that audits have failed to detect, rather than publishing accounts that follow them).

You might, therefore, not be especially surprised to hear that IASB is run on a similar basis: trustees drawn from the Great and the Good of the global accounting profession (senior partners, academics, businesspeople with accounting backgrounds) appoint a board drawn from the Pretty Great And Good But Not Quite So Important of the global accounting profession.

You might, however, be slightly suprised to hear that Dr Sikka believes this is a terrible thing:

the IASB is not accountable to democratically-elected parliaments. Its members are not elected by stakeholders or any representative organisations. Neither is their suitability scrutinised by parliamentary committees.

Yes, what we really need in order to ensure the international comparability of financial statements is for every standard to be approved by a committee of MPs (nearly all of whom don’t have a financial background) in every single country of the world. That would be workable.

However, what really upsets Dr Sikka is that not only do investors want to see consistency between accounts across different countries in the developed world, they also feel that this ought to encompass the developing world. Some people even go as far as to suggest that imposing consistent accounting standards might reduce the incidence of corruption in the developing world, what with ‘bribes paid’ not being a recognised income statement entry under IAS and all…

This is part of new colonialism and ideological domination. Such imposition makes developing countries dependent on the west and prevents them from developing appropriate local institutional structures.

The only spin I can put on ‘appropriate local institutional structures’ that makes any sense whatsoever here is ‘allowing dodgy practices’. Seriously – I can’t think of a single way in which a developing economy would lose by adopting IAS compared with local standards, aside from short-term costs of transition. And nor does Dr Sikka cite one [*].

There are reasons why, and ways in which, it would be good to impose corporate social responsibility standards internationally. But that has absolutely nothing to do with the imposition of financial statements, any more than the technical standards behind DVDs impact on film criticism…

[*] some commenters mention ‘transfer pricing’ – e.g. manufacturing goods in a high-tax country and selling them at an artificially low price (generating an artificially low local profit) to a subsidiary in the low-tax country where you retail them. But IAS says you shouldn’t do that, and in any case tax accounts are separate from financial accounts – they are subject to tax agency rules, not accounting standards.

Categories: Uncategorized
  1. Richard J
    September 2, 2007 at 4:22 am | #1

    I can think of a few instances where IAS throw up stupid answers, all mainly to do with deferred tax and the quirks of countries' tax systems – non-resident companies holding UK properties can find themselves having to recognise huge amounts of deferred tax for no good reason, but that's just about the only place I can think of…

  2. February 25, 2008 at 5:21 am | #2

    Who created accounting principles? Who sets and revises accounting standards? What if you don’t follow all the rules, do you go to jail? Is there an accounting police force that investigates and arrests violators? It would seem that there must be some regulatory force to make sure that providers of financial statements conform to the rules.

  3. February 27, 2008 at 4:36 am | #3

    1) they evolved over c.2000 years, but modern standards were codified by the professional accounting bodies in the UK and (later) the US. More recently, the IAS has created international rules based primarily on US and UK GAAP

    2) the IAS, an organisation made up of representatives from national accounting bodies, accounting academics and accounting professionals

    3) Sorta. If you lie in your financial statements, you are guilty of false accounting and can Go Directly To Jail [in other words, although accounting standards boards don't have the right to stick you in jail themselves, the police can stick you in jail if you don't follow their rules in published accounts]

    4) Indeed. See: Andersen, A…

  1. October 31, 2007 at 5:14 pm | #1
  2. October 31, 2007 at 5:27 pm | #2

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