It’s a tale of intrigue with a hint of conspiracy theory. Two of the key characters are Sir David Tweedie, a power hungry autocrat; and the English institute, a feeble body cowering in the shadow of government. The mission is to take on the establishment and revert back to a time when honour and professionalism reigned.
Against a backdrop of accounting scandals, author and academic David Myddelton is taking on the regulators with his claim that excessive regulation is in danger of exacerbating the very problem it sets out to solve. Published last week, his book – Unshackling Accountants – argues that over-regulation of the accountancy profession will be the root cause of future Enrons.
Myddelton, also chairman of the Institute of Economic Affairs, is proposing to scrap all regulation and revert to a situation where the profession offers guidance to members – where ‘accounting suggestions’ replace accounting standards. His alternative framework would rely on the judgement of auditors sign off accounts as giving a true and fair view of financial performance. ‘If there was an argument about it, then the courts would decide.’
The professor of finance and accounting at Cranfield Business School presents a refreshingly controversial, if not compelling, argument. As the UK and EU follow what he describes as the ‘failed’ approach of the US in prescribing in detail how companies produce accounts, the only outcome that has changed is that public expectations have been raised.
‘The Dearing report, wonderful new committees, enforcement powers, Sarbanes Oxley; people think this will make a difference, but it never does. But it does encourage the public to expect accounts to be accurate. We’re actually doing more harm than good in that respect,’ he says.
Sox is a good case in point, he says. It was introduced so quickly by politicians desperate to show they were responding to public concerns about scandals, that it’s plagued with flaws. Then there’s the cost of compliance, recently estimated at between $20m (£10.9m) and $50m a year for the biggest companies.
‘In nine years the volume of accounting regulation has increased by 150%, from an already high level, at a huge cost to companies, without any corresponding benefit.’
Today the rules and regulations governing the profession, have, according to his estimations, expanded to around 2,000 pages of print. ‘There’s nothing to justify that,’ Myddelton complains. ‘On the back of my office door I have the Companies Act rules from 1948. I’ve condensed it down to seven pages. We didn’t have any accounting standards in those days, but I don’t think we were any worse off.’
The move to increased regulation is understandable, if only as an inevitable human response to concerns about corporate misdemeanours, but it’s counterproductive, he argues. ‘People want it to seem as if we’re doing something about scandals. And nearly always there is a scandal that leads to some step up in regulation. In England it wasn’t a scandal at all, it was a takeover bid in 1967 – GEC and AEI – that led to us setting up accounting standards in the first place.’
Myddleton is scathing of the professional bodies – namely the institutes – that he feels should have stepped in long ago and taken a far stronger stance on the issue.
‘I’ve been a member of the English institute for 40 years and I’ve not been wildly impressed with them. It’s a sort of trade union desperately worried about government interference. These guys do not want to be politically incorrect. You can sort of understand that. But I think the profession has the wrong mindset. They’re not actually trying to protect accounting.’
He says the notion of a ‘single correct answer’ is nonsense, as is the idea that it’s the regulator’s job to impose requirements on everyone that leads to that. ‘The scandals have come about because people expect too much of accountants so they’re disappointed when sometimes there are margins of error,’ he says.
Scandals aside, one of Myddelton’s main gripes with accounting standards is that they do not reflect the consensus of the profession. He also takes issue with the antics of the ASB, an organisation he describes as power hungry to the detriment of the profession.
‘When the Accounting Standards Board issued its revolutionary statement of principles in the 1990s, the top six firms did not agree with them. We’ve now got principles – quite different principles from what we had 20 or 30 years ago – that most professional accountants don’t agree with.’
Sir David Tweedie, head of the ASB is very bright, and means well, Myddelton concedes, but he’s gone too far. ‘It’s very arrogant to impose rules that nearly all professional accountants don’t agree with.
‘If Sir David was prepared to say “I have sinned, we meant well but it has been a disaster, I am now just going to issue suggestions, and by the way they will be one or two-page suggestions”, that would be great.’
Not that Myddelton is saying that regulation has not delivered benefits to business, simply that the costs have outweighed the payback. He’s complimentary of their impact on some accounting practices – in particular stock valuation and how you handle leases. ‘But my goodness there have been some disasters – inflation counting or goodwill,’ he adds.
The move to international standards may promise the ability to compare accounts across geographic boundaries, but this core argument is, Myddelton believes, fundamentally flawed.
‘People think, wouldn’t it be lovely if we could compare the accounts of one company with another, and it would but you can’t. And that’s really what’s behind much of the standard setting. There isn’t agreement on these things, so why pretend there is. Let different companies do different things, but say what they’re doing.’
The red tape that continues to engulf accountancy offers concerns in the long term for the profession. The benefit for accountants is that the job still involves an element of judgment. Reams of regulation and a shift away from the more creative elements of the job will only serve to deter good people from entering the profession, Myddelton warns.
Then there’s the issue of auditor liability, a contentious one to say the least. ‘One reason why the standards are so detailed is because the auditors want to avoid liability. Auditor liability is quite unreasonable. It’s the company and the directors that are mainly at fault. Auditors may sometimes have some liability but to bankrupt them is absolutely crazy.’
Auditors are already nervous since the loss of Andersen, and the likelihood of another of the Big Four going to the wall is ‘quite realistic’. ‘If the regulators hold auditors to completely unrealistic standards it could drive another one into bankruptcy. And if we lost one more you could argue there wouldn’t really be enough competition among the larger firms.’
We could do worse than return to the accounting principles prevalent in the late 19th century, Myddelton says.’When Britain was at the peak of its commercial prestige companies didn’t have to publish accounts or have them audited. That’s laissez-faire for you.’
Or perhaps we should simply be more tolerant and accept that in a very complex world, it’s simply impossible to stop all frauds and all mistakes. There’s a school of thought – Myddelton’s in this case – that says there will be a few accounting disasters from time to time and there’s nothing we can do about it.
And besides, whatever happened to good, old-fashioned common sense. Take Shell. The oil giant’s most recent accounts stretched to 120 pages this year, compared to just 80 last year. That fact alone should have been enough to set alarm bells ringing, Myddelton suggests.
‘And besides, you don’t have to know much about accounts to realise that if the accounts are two months late, something is wrong because numbers take longer to add up. Looking at the detail of note 29 on page 116 is really not what it’s all about.’
EXTRACT: why we need more creative accounting
‘If you have to do what you’re told, why bother to think for yourself? Stalin is supposed to have been asked once whether he preferred people to do what he wanted because they were afraid of him or because they really agreed with his views. He replied that he preferred people who obeyed him out of fear since those who agreed with him might change their minds!
Soon after qualifying as a chartered accountant I became convinced of the need for constant purchasing power accounting.
My belief that accounts using money as the unit of measurement in a time of significant inflation could never give a “true and fair view” meant there was no future for me in auditing, since I would never be able to sign an unqualified audit report.
Luckily there is no need for academics to allow official accounting standards to override their own judgement. They are still permitted, even encouraged, to think for themselves. What a pity that accountants and company directors no longer enjoy such a luxury. They have to follow orders. What happens if companies or their auditors disagree with the contents of accounting standards? They have to pretend to hold a view that in fact they do not.
Several books have listed dubious accounting practices such as various methods of inflating profits and off-balance-sheet finance to reduce apparent borrowings. As a result, the term “creative accounting” has become one of abuse, which is rather a pity. For there is plenty of need in accounting for creative thinking in dealing with new conditions.
Accounting is an art not a science, and trying to outlaw thinking and imagination would cripple the profession. Restricting company accountants and auditors to checking compliance with rules is like requiring real artists, childlike, to paint by numbers.’
Unshackling Accountants by D. R. Myddelton, ISBN: 0 255 36559 4, Hobart Paper 149, £14.00.