IRELAND'S CENTRAL BANK is toying with the idea of requiring its smaller compatriots to report expected losses. This would put them ahead of the curve when it comes to International Financial Reporting Standards and other users like the UK, which currently require only the reporting of incurred losses.

Furious debate has blown up again as a result, with IFRS-doubters triumphantly calling it proof of a lack of prudence, while critics insist the old UK GAAP's loss provisioning requirements were essentially the same as those under IFRS.

The debate is technical, with disputes arising over semantics and the weight of the Companies Act versus accounting standards - essentially a question of which trumps which.

According to critics, IFRS allows banks to pay out on unrealised profits by not forcing them to make adequate provision for loans that could go bad. They claim UK GAAP required directors to make forward-looking provisions for these bad assets, whereas IFRS only requires reporting and provisioning for incurred losses, meaning crisis could be looming with no financial cushion in place.

Nay-sayers claim UK GAAP called for a similar level of provisioning and forbade crystal-ball gazing; they said the two standards would produce similar figures and it is madness to believe otherwise.

They argue both standards forbid predicting a crisis when one is not already happening. This means that, when looking at losses that may result from loans but have not yet been identified, only current economic and other factors affecting the business climate should be taken into account, rather than distant crystal-ball predictions.

UK GAAP-defenders turned to the Companies Act; in legislation governing large companies (such as banks) and provisioning, it says cash should be set aside for clearly defined liabilities and those which are "either likely to be incurred, or certain to be incurred but uncertain as to amount or to date on which it will arise". This, it is claimed, is proof of the requirement to provision for expected losses.

However, IFRS supporters disagree. One Big Four partner noted that UK GAAP included a Statement of Recommended Practice (SORP) covering bank loan provisioning. A two-parter, it called upon banks to make specific provisions against loans that have already gone bad, plus general provisions "to cover the impaired advances which will only be identified as such in the future".

On the surface, this seems like an exhortation to expected loss provisioning. However, the SORP underlined that general provision "relates to impairment already existing in the advances portfolio ... it does not relate to advances which ... are subject to no more than normal credit risk, but which in the nature of things may become impaired in the future".

Supporters said this means it is essentially the same as IFRS - only incurred losses should be reported, and expected losses - divined by looking beyond current economic conditions at future projections - were not to be included.

It is here that the semantics become confusing. UK GAAP lovers said the old standard's version of incurred loss covers "likely to be incurred" - essentially the same thing as 'expected to be incurred'. IFRS supporters said not only do the two standards refer only to "incurred loss" provisioning, but also, IFRS's incurred losses are no less extensive than UK GAAP's as both required directors to consider only current financial and economic conditions when setting aside provisions.

Aside from the semantics, experts are also jostling over whether the Companies Act or accounting standards carry more weight. UK GAAP proponents say the legislation trumps all, while IFRS defenders point out that it is a requirement of the Act to follow the standards.

The complexity doesn't end there. The Accounting Standards Board effectively overrode the relevant SORP in 2005, the same year as IFRS became a requirement for listed companies. The ICAEW continues to feature a link to the guidelines on its website, and commentators said this is proof that the institute prefers the old UK GAAP-inspired way of provisioning for losses.

What is certain is that both standards allow and require a degree of judgement when provisioning for losses. And what the debate seems to show is not that one standard or the other is more prudent, but rather, that the experts on each side have a different idea of what prudence means. Those fighting for UK GAAP seem to consider the banks fundamentally incapable of prudently making provision for losses - and blame IFRS for allowing them to get away with it - while their opponents trusts banks to adequately plan for their uncertain assets.

In the current climate the debate is loaded, and Ireland's decision will no doubt add fuel to the fire. The next thing to keep an eye on is IFRS's potential move to an expected loss model, a process that will not doubt draw furious commentary from stakeholders large and small.

CURSORILY GLANCING over the responses to the Accounting Standards Board consultation on standards for SMEs, the eye snags on the words 'housing association', repeated over and over.

Of the 290 responses received, more than 100 are from social housing providers, and almost 50 came from were sent by credit unions. These two groups are worried the proposed standards - conceived as the little sister of International Financial Reporting Standards - will force them to prepare accounts in a way that is damaging to the organisation.

Credit unions don't think they should be classed as publicly accountable; the definition would force them to report under full IFRS, which they say would be a disproportionate burden for small, often volunteer-led community credit groups.

Housing Associations have a fistful of grievances, all of which they say would hack at the health of their balance sheets and tempt banks to raise borrowing rates. With such a vociferous response, it is clear the ASB will have their hands full producing a mutually agreeable set of standards by the end of their consultation period later this year.

THE DEPARTMENT for International Development has committed £7m to help Afghanistan sort out its floundering financial sector, after Kabul Bank was brought to its knees by an insider loans scandal last year.

It is not yet known which auditor will be handed the contract - the project was only approved yesterday - but it will be interesting to see if a domestic firm is engaged, or whether the Big Four will fill the role.

A DfID spokeswoman suggested an Afghan firm would be preferable due to its knowledge of the local environment and language, Dari. However, Big Four contenders could argue their superior size and international experience make them well placed to get Kabul Bank back on its feet.

Deloitte almost certainly won't be in the offing as it recently got its fingers burnt, losing a USAID contract to advise the central bank, The Wall Street Journal reported. The contract was suspended after corruption fears caused a run on the bank, and Deloitte was criticised for failing to flag up the possible fraud.

USAID spokesman Lars Anderson said: "We don't believe that Deloitte can be held responsible for the fraud at Kabul Bank but we do want our technical assistance to be as effective as possible."

With DfID stumping up the cash, great emphasis will surely be placed on accountability and value for money. Undoubtedly there will be debates about strengthening local capacity via the contract; this could result in it being awarded in its entirety to an Afghan firm, or to a consortium of local firm(s) with international partners. The alternative would be engaging a firm with an existing presence in the country, with obvious contenders being PwC, KPMG and Grant Thornton.

With scant knowledge of Afghan firms' capacity and experience, it is difficult to say whether they are up to the task of auditing a bank accused of granting off-the-record loans to shareholders and their friends, including the brother of president Hamid Karzai. Millions of pounds in aid have been suspended until donors are satisfied the banking sector has cleaned up its act, and the Kabul Bank audit promises to be interesting and emotive.

CIMA AND US institute the AICPA are to decide later this month whether a hook-up between the two professional bodies is imminent.

Earlier this year, the institutes announced the possible joint venture, which would create a new not-for-profit group called the Association of International Certified Professional Accountants.

The collaboration would also spawn a new credential for management accountants, and give a "substantially wider footprint" to the profession, according to CIMA chief executive Charles Tilley.

Later this month will see the two governing bodies decide whether the link up goes ahead. When pressed on whether he thought a yes vote was likely, Tilley said: "I would be extremely disappointed if not." The implication that this is already a done deal was strong.

The AICPA counts 350,000 members in the states, of which 140,000 are business members and "of interest" to CIMA.

Tilley said one of the institutes' biggest challenges was to "effectively demonstrate on a global basis the criticality of management accounting". Perhaps the hook-up will give him the wider audience he craves - watch this space.

TODAY'S ICAEW council meeting offered a glimpse of an old-established organisation paddling determinedly to keep up with modern life.

Early in the session, chief executive Michael Izza was at pains to stress support for the coalition's anti-tax-avoidance measures. He pointed to "some areas of tax planning that are no longer regarded as legitimate", saying the situation has changed appreciably over the past five years.

Attendees raised concerns over constitutional changes that will change the number of council members, demanding to know whether they make a mockery of the upcoming elections that will see half of the council subject to a vote.

The changes come partly in response to dwindling membership in regional chapters, and are intended to better reflect the make-up of Britain's oldest accountancy institute. In the same vein, the questions were raised over how the ICAEW's increasingly global membership will be reflected in council composition. President Gerald Russell said a mixed bag of co-opting and constitutional election is currently being used, and promised a paper on the subject within the next six months.

Demographics seemed to be worrying many council members, as Owen Finn raised the issue of co-opting young, female members in order to improve representation. He described the policy as "a fudge" and "an insult", demanding to know where the young, co-opted male members were.

A number of other issues caught the board by surprise, as Alan Livesey raised the problem of students in China - where the ICAEW has recently opened a new office, to great fanfare - passing their exams without ever having paid their membership. The board was taken aback by the suggestion, and promised to investigate.

The open session concluded with thanks to the council chairman Philip Hollins, who is soon to step down. He was almost moved to tears by a vote of thanks - perhaps contemplating the changes ahead for both him and the 131-year-old institute.

MANY MID-TIER FIRMS are pushing for a higher SME audit threshold, but one partner has warned the value of the annual checks should not be dismissed for the sake of simplicity.

Andrew Watkin, partner at Baker Watkin, has outlined several reasons businesses ought to be wary of relinquishing their audits, saying less experienced directors should be most concerned.

Investment in audit "can pay for itself", he suggested, highlighting weaknesses in structural and operational systems, and potentially flushing out fraud. Experienced managers can also count the return on their investment, as those seeking to sell their business will find buyers willing to pay more on the back of an independent audit.

Even companies not looking to sell might find an audit pays dividends, Watkin claimed, as it can "help identify tax adjustments which, undetected, could lead to interest penalties and tax investigations".

There is no doubt that audits have become more complex, Watkin conceded; but this is due to increasing sophistication, more planning and less box-ticking, meaning the value has increased accordingly.

Mid-tier firms calling for a higher audit threshold are looking to replace the review with services such as risk management and internal control advice, saying this will add value in a more targeted way. However, these checks are part and parcel of a full audit, and the more robust review has the added bonus of identifying unlooked-for weaknesses; this can lift an SME from mediocrity to success, making the money and man-hours well worth it.

SOON TO BE concluded, the Accounting Standards Board consultation on the future of financial reporting for SMEs will hopefully decide once and for all whether businesses should haul anchor and set sail for international standards, or stay in the safe harbour of UK GAAP.

The decision is highly charged, with some companies embracing the international financial reporting standards of their larger, listed peers, while others question the wisdom of abandoning serviceable UK rules for companies that are wholly domestically focused.

One expert-in-the-know has suggested the decision is more political than technical. Outside the multinationals, it is arguably better to leave standards at a jurisdictional level, allowing regulators to customise them as necessary.

After all, why drag small companies through the rigmarole of re-training, re-jigging the numbers and fulfilling the extra requirements of IFRS, when their business activity will never extend further than Dover?

Political rather than technical means it looks good to show willing when it comes to IFRS. Swinging the whole raft of companies around to meet the same international guidelines sends a strong message of support, despite the fact that only a fraction will ever put their new-found globalism to good use.

ALMOST two years have passed since auditors delivered clean audit reports for the UK's major banks, which were teetering on collapse.

They did this following private discussions with London's city minister Lord Myners. During those discussions, which included the senior partners of the Big Four firms details, amounting to a virtual guarantee, that the Government would bail out collapsing banks.

Critics say auditors covered up the reality of the faltering banks finances. Auditors say their actions saved the economy from collapse.

The story begins with the collapse of Northern Rock, which for auditors and the markets at large, brought home the destructive power market speculators could have on UK banks.

Banking is built on confidence, confidence that in the event of a worst case scenario banks will be helped by government backed central banks.

Confidence was a quality in short supply in the days leading up to Northern Rock's 2007 collapse.

Central bankers, seeing the excessive rewards being paid to bank executives, sought to caution the financial sector, insisting they should not take their position for granted.

In an attempt to shock the banks into curbing their riskier activities central banks sent a clear message: don't count on us if you get into trouble.

However that slight erosion in confidence spread grew through the banking sector, and provided an opportunity for speculators to undermine the century's old confidence upon which the banking sector sat.

The enormous sums which could be made from falling markets had provided ample incentive for hedge funds and other speculators to not just promote doubt about Northern Rock and other banks, but to actively undermine the bank in the days before its collapse through short selling. It was a phenomena which played out across the world.

But in the UK it was the collapse of Northern Rock which rewrote the rules.

Auditors, who had long relied upon the availability of liquidity and ultimately the central banks as a lender of last resort, , had to reassess some of their longest held assumptions. In a world heavy with speculation and mass media coverage, the ingredients were there for a run on banks, a situation which had not been seen for hundreds of years.

In the year following hope lifted briefly as markets began to stabilise from the Northern Rock Collapse, but it was short lived.

The sub prime market in the US began to rupture as banks slowly recognised their exposure to the toxic assets. However, it was the collapse of Lehman Brothers which sent shockwaves through the audit profession.

Auditors wondered whether they could avoid, modifying their audit reports for their banking clients, if the government could not guarantee support.

That the US government and its central bank had allowed a major bank to collapse, to implode, shook core assumptions in the audit profession. They began asking dangerous questions. If government support could not be guaranteed, how could auditors sign their audit reports, and, critically, their "going concern" reports.

Going concern guidance, is issued by auditors if they believe a company will survive the next year. In the volatile environment following the collapse of Lehman Brothers if auditors were to express doubt in a companies financial health they feared it would be tantamount to signing a death warrant for the bank, and lead to the complete collapse of the UK economy.

In that pressure-cooker environment the Big Four auditors needed evidence the banks would be able to survive the year and only the government could provide that support.

Only now do we know that the heads of the firms took the bold step of approaching government for a secret meeting - a claim which emerged during a House of Lords hearing last month. At that meeting, away from the public eye, the government provided detailed evidence of the support it would provide should the banks collapse. They told the auditors they would step in.

This provided the auditors with the evidence and confidence they needed to report on the basis that the entire UK banks would survive for at least the next year.

It's also a move which has attracted controversy ever since it was aired at a dramatic exchange in the House of Lords committee investigating the role of audit last month.

"Are you saying that, looking at the position, you thought that the bank was likely to be in trouble but you couldn't possibly say that because that might precipitate the crisis and, therefore, by giving assurance you took the view that the accounts were okay?" asked an astonished Lord Forsyth at the hearing last month.

Auditors, as ever, take a very clinical view of the situation.

Meetings with government served a purpose and that was to provide the evidence they needed to ensure there was liquidity support for the banks. In the event the wholesale markets dried up, auditors needed to know the government would step in, and it did.

"If we had started as a profession modifying the reports of banks, I think it is fair to say by the end of the week everyone would be going around with wheelbarrows with goods to barter," one senior Big Four auditor said.
The House of Lord's astonishment at the events add to a growing debate about the role of audit.

It shines a light on an almost overlooked moment in our recent history when, briefly, a handful of senior accountants held the future of the entire UK economy in their hands.