THE HOUSE of Lords audit report was unveiled on Wednesday, and most commentators reacted sharply to the vociferous attack on international financial reporting standards.
IFRS were blamed for worsening the banking crisis by obfuscating the value of assets, encouraging 'box-ticking' and undermining the exercise of prudence. But will the committee's conclusion fetter US adoption of IFRS or its extension to UK SMEs?
Commentators have reacted strongly to the Lords' stinging invective, accusing them of confusing the issues surrounding the new rules and hankering after an imaginary era of perfect accounting standards.
The committee pointed to "specific defects" in IFRS, saying they make no provision for expected losses, but experts have argued this issue comes under the remit of an old accounting standard - IAS 39 - which is currently being revised.
To the assertion that the international standards are too rules based, defenders pointed to the globalisation of business and finance, saying there is no going back to a simpler time of UK-only accounting standards.
Steve Maslin, chairman of Grant Thornton's Partnership Oversight Board, said this international platform means a single set of rules is "essential". He argued the UK's current permissive regime - which allows SMEs to report in either domestic or global accounting standards - is "about right".
Other commentators were more strident, especially on the issue of prudence. One Big Four practitioner said the committee's judgements were "unfair and disappointing". They went so far as to accuse the body of lending too much weight to the views of a few witnesses, to the detriment of pro-IFRS voices.
The practitioner said the Lords had confused prudence as a conceptual framework for accounting with a prudence when doing an audit. Accounts should be neutral, and it is this concept upon which IFRS is based. Prudence as a central tenet of IFRS was considered, but rejected on the basis that this would amount to bias. Instead, neutral accounting allows the facts to surface rapidly, and this supports financial stability, the source concluded.
Maslin agreed, saying prudence should be exercised through supervision and agreements with banks. Prudence, he added, is not the purpose of accounts.
But the national and international impact of the Lords' pronouncement remains to be seen. The committee warned against extending IFRS beyond the largest listed companies, angering auditors who claim extensive consultation has been carried out and IFRS are fit for purpose.
BDO audit partner James Roberts is one of the few prominent voices to side with the Lords. He said the principles of IFRS are "slightly out of balance", losing marks for lack of precision and being difficult to understand. He said this was due to over-emphasis on relevance, and welcomed the recommendation to defer IFRS for SMEs.
The Lords said common international standards raise the risk "that the lowest common denominator will prevail", and their negative comments come at a delicate time. Standard setters are working towards a June deadline for finalising IFRS, and there is still some doubt as to whether the US will go for full - or even partial - adoption.
But commentators are not unduly worried by the turn of events. A senior source in the investment community said the US - which is debating IFRS adoption - has bigger issues to worry about, and will give short shrift to the House of Lords' conclusions.
Experts said the committee's pronouncements will carry more weight when it comes to domestic accounting standards. Michael Izza, chief executive officer of the ICAEW, described the report as "another voice" to which UK stakeholders will be "sensitive".
A consultation is currently underway on the application of the new standards for SMEs, and commentators agreed the House of Lords report will be among the factors taken into consideration.
But with experts roundly denouncing the committee's judgements and accusing them of a lack of clarity, it seems domestic standard setters and the international community are unlikely to lose much sleep over the Lords' conclusions.
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