The Debate: Lawyers and accounting standards

Choose reality, not legality

By Peter Williams

No doubt, like me, readers were astonished to see lawyers attempting to interfere in the accounting standard setting process (Accountancy Age, page 1, 7 November). Whenever you see a lawyer butting into accounting standards you know trouble lies ahead.

Those of you with long memories will remember that in the 1980s, lawyers attempted to scupper the accounting standard on leasing (SSAP21). Different standard, but the lawyers came up with the same argument they are now using on options: the proposed accounting standard might be against the law. Fortunately, they were defeated over SSAP 21.

The problem with lawyers is that while they may be advocates for good company law, they are not interested in good financial reporting. They do not care for transparency, nor are they interested in reports and accounts reflecting the economic reality.

They are not interested in financial reporting being based on generally accepted principles, instead preferring a cookbook approach where there is a detailed rule for every possible transaction. And if there isn’t one, you have to wait for one to be invented. It’s an interminable game of cat and mouse with the standard-setters always a step behind standard-breakers.

If anyone thinks this is a reasonable approach, they should look at the experience in the US. Lawyers dominate many areas of life, including, unfortunately, financial reporting. So the prevailing philosophy says unless something is explicitly prohibited, it is allowed. No question of asking whether a particular treatment is within the spirit of a standard.

The result? Enron collapsed under the weight of off-balance sheet accounting and special purpose vehicles.

The lesson for the UK is we should not allow the same to happen here.

Lawyers have diametrically opposite views to accountants: they are unmoved by the concept of true and fair, believing in legal substance over economic form. In essence, lawyers prefer legality to reality and they must not be allowed to have their way.

  • Peter Williams is a freelance writer

End the ambiguityBy Marcus Peaker

Accounting for employee share schemes – and associated structures such as employee benefit trusts – is something that the accounting profession has been addressing in a piecemeal fashion over the last five years.

This, coupled with the sidestepping of some of the legal niceties has added an element of confusion and lack of transparency for companies trying to account for their share schemes.

In principal, as an executive compensation and share scheme consultancy, we believe that it is appropriate for companies to account for the ‘cost’ of their share arrangements.

The current lack of confidence in corporate standards brought about by the various accounting scandals in the US make transparency in the area of executive compensation of particular importance. The increasing percentage of the total compensation package provided in shares to UK executives means a transparent method of identifying the true cost to their employing company is paramount.

The problem with the accounting profession ignoring the legal framework around the introduction of new accounting standards is that it increases uncertainty and helps undermine the transparency the various accounting standards are trying to promote.

UITF Abstract 13, dealing with the accounting for employee benefit trusts, ignores the legal position that the company is a separate entity from the trust. UITF Abstract 17 and the proposed new standard do not address the legal issue that charging these share scheme expenses to the profit and loss is charging an expense by shareholders not one of the company.

Why is all this relevant to the real world? Companies are under increasing pressure to generate sustainable profits. If there is any ambiguity surrounding the legal basis of applying accounting standards, there will be a temptation not to apply them where their application will result in a significant charge to profits.

The rationale will be that it is prejudicial to the company to depress its profits while its competitors may not be accounting for their share schemes in the same manner. It is this ambiguity and lack of transparency which everyone, companies, consultants, lawyers and accountants are trying to avoid.

  • Marcus Peaker is chief executive of Halliwell Consulting.

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