Failing standards

IASB's Canon Street headquarters

The UK was promised consistency and quality when it signed up to international accounting rules in 2005.

What it got, according to smaller listed companies, is a tangle of complex accounting rules which some finance directors feel failed two long-standing accounting tests – they weren’t exactly true and, for smaller companies, they’re weren’t very fair either.

Small listed companies shoulder the international financial reporting burden more heavily than their bigger FTSE 350 cousins. With limited resources and a dire need to win over investors, finance directors say international financial reporting standards (IFRS) tie them down, rather than free them up, to promote and grow their business.

Nonsensical disclosures

James Geddes, chief financial officer of AIM-listed market researchers Brainjuicer, said most of the public accounting information he produces is “fairly meaningless and at worst misleading”.

“Our auditor agrees that what we are having to disclose is nonsensical, but they say we can’t do a lot about it,” he says. “It is important to have consistency across the world…That doesn’t obviate the need that those consistent standards make sense.”

Geddes believes the effort involved in preparing annual accounts in accordance with international accounting rules, is not matched by any discernable benefit.

He’s not alone. Richard Hope, FD with FTSE Fledgling manufacturing firm Treatt PLC, said he spends months compiling accounts which confuse, rather than inform, potential investors.

“The reality of more disclosure is that it is more meaningless… Our year end is September and I have had to start a month ago, with our auditors, doing a technical review of our accounts from last year and the amount of verbiage we need to put in to satisfy IFRS requirements. It has become so heavy it is the case that people can’t see the woods for the trees,” he said.

“A company like Treatt is a simple business; we have a range of products in one industry and it shouldn’t be rocket science to understand our reports and accounts.”

Their cause isn’t exactly top of the agenda at the International Accounting Standards Board (IASB), the body which sets global accounting rules, but it’s likely to attract growing attention as companies look to find easy ways to grow their businesses and cut costs in the wake of the crisis.

Tim Ward, chief executive of Quoted Companies Alliance, which represents small and mid-cap quoted companies, met with the IASB to lobby for reduced disclosure requirements. He was not happy with the response. “We didn’t get any indication it would be something they would look at in the short term – we would be keen to get them to change their minds on this,” he said.

Keep it simple

Ward believes finance teams are being distracted while they untangle their finances to comply with complex international accounting requirements. Instead, he would like to see small-cap companies using the simplified IFRS for SMEs – a set of international accounting rules designed for non-listed businesses.

“We are certainly keen to see IFRS for SMEs explored. What we are saying is we want more appropriate disclosure for smaller, quoted companies and we believe there are areas which could be explored,” he said.

IFRS for SMEs is designed with accountants and small businesses in mind. The standard is being considered as replacement for UK GAAP, and little consideration is being given to using it for listed companies at the moment. Some believe that’s the way it should stay.

Philip Secrett, corporate finance partner with Grant Thornton, shepherds smaller listed companies through to listing. He believes companies should be disclosing more, not less in their public accounts, to give investors the comfort they need to invest.

“With any interaction with markets it is not about satisfying the minimum disclosures, companies should be looking to exceed them,” he said. “Yes, you might save some costs by not including financial notes 10 to 15, but I don’t think that is a barrier for a company failing as a successful public company…It’s all part of growing up as a smaller public company.”

Richard Williams, FD with BLME, Europe’s largest Islamic Bank, already uses most international accounting rules. He believes the proper application of international standards is needed not only to fulfill regulatory requirements, but also to establish a company’s reputation. “If you want to be a premier financial institution, then you have to do it,” he said.

“It is a burden, but it is one that I embrace.”