View from the House

The Company Law Review, the encouragement of stakeholder pressure on directors pay increases and bonuses, and the encouragement of environmental auditing and reporting are all ways of encouraging an active and open market in corporate performance to develop.

A significant new step forward is the setting up of the Myners review of fund management. This will also include a review of how institutional shareholders use their powers. The government is already encouraging institutional shareholders to vote their shares, and play a more active part in companies. Perversely, the initial apparent backing of Barclay’s Global Investment in the Standard Life demutualisation campaign is itself a big step in active involvement!

The Myners Review will also have to consider a more active role for government itself in evaluating corporate performance, for example, in the statutory regulation of insurance companies solvency margins.

Now it is time for the Accounting Standards Board to join in these efforts!The Accounting Standards Board (ASB) claims to be guided by a conceptual framework (CFR) for financial reporting. In reality, this is a reworking of the framework developed by the US-based Financial Accounting Standards Board (FASB) in the 1970s and the 1980s. A remarkable feature of the UK debate is that the CFR has become a ‘zone of no comment’.

To the outsider, the CFR is promoted almost as a version of the ‘Holy Grail’ that can somehow dissolve all technical accounting problems and guide standard setters. This has clearly been demonstrated by the recurring arguments about goodwill, leasing and brands.

The CFR seems to do little for the users of financial reports, especially as little is know about the way accounting affects affect people’s life chances. But it enables accountants to deflect criticisms!

Existing accounting practices will be challenged by pressure for faster and more informative reports. Company reporting is now widely available on the Internet and will inform investment decisions very rapidly. Pressure for better and faster information, and the benchmarking of company performance on Internet based information services will be a great new impetus for an active market in corporate performance.

Any inquiry into accounting practices needs to be guided by the new ways accounting could shape people’s lives and decisions.

This requires that accounting be looked as a political technology that is implicated in wealth creation and transfer. Yet these aspects do not form any visible part of the ASB’s work. It is time they did.

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