For and Against

No more ducking and diving

In the late 1980s company results couldn’t be trusted – putting items through the profit and loss account often seemed optional and disclosure simply wasn’t adequate.

Over the last decade the Accounting Standards Board has made the UK’s financial reporting and accounting standard-setting regimes one of the most effective in the world. The promotion of Sir David Tweedie to chairman of the International Accounting Standards Board (IASB) underlines how far the UK has come.

But the advocates of creative accounting are always with us. A little short-term flattering of the profits or a little bolstering of balance sheet values doesn’t seem much to help maintain confidence and ensure share prices remain as high as possible. Especially when the economy shows signs of faltering.

But this is the primrose path to corporate hell. That is why the ASB must ignore finance directors and others threatening to leave the UK if it goes ahead with plans to charge staff share options costs to the profit and loss account.

Of course it is hard for companies – especially those in start-up situations where reserves and cash are in short supply – to find a balancing act between rewarding and keeping their best people and ensuring accounts aren’t torn to shreds by heavy start-up costs. But not accounting for it properly won’t help in the long run.

The last decade or so has seen a healthy and vigorous debate about accounting standards. The ASB has been opposed on many issues and has tried its best to react to justified criticism. But where it has felt itself to be right it has stuck to its guns.

If the ASB caves in on this one it will have taken the first step back to creative accounting. That must not happen.

One defence it has is the consensus it has built up with other major standard-setters. If it pushes ahead on plans over share options then it will do so on the understanding that others will not be far behind.

On that premise one wonders where companies who object will go and how they will operate in a global economy.

Rather than threatening to take their headquarters elsewhere, critics would be better off working with the ASB, engaging in debate about the merits or otherwise of particular treatments. If they do that, they may end up with a standard that reflects their view of economic and accounting reality.

– Peter Williams is a freelance writer

ASB should listen and take note

It is cynical to raise the horrible spectre of creative accounting that so profoundly undermined the UK’s capital markets in the late 1980.

It was a terrible time for investors who found that financial reporting did not live up to its promise and left many wondering just what they could trust when they looked at financial reports.

It is also unquestionably the good work of the Accounting Standard’s Board and its pugnacious former head Sir David Tweedie that did so much to return confidence in financial reporting.

But to say that rejecting one ASB proposal – to charge staff share option costs to the profit and loss account – will return us to the dark day when companies played fast and loose with accounting rule is beautiful, but empty rhetoric.

Much work has already been undertaken by the ASB and there is no risk of that being undone if this one proposal is left in the filing cabinet at Grays Inn Road.

There is a feeling that the ASB, having done so much good, should now take stock of its own approach. Many report a grating ‘take it or leave it’ approach borne out of its past reforming zeal.

There is, therefore, a danger that it comes to be regarded as a ‘reactionary’ institution at a time when new forms of business require a ‘progressive’ body.

IT and internet companies operate in highly competitive markets for skills.

Without the best people they are lost and shares form one of the best ways of attracting highly trained and, subsequently, highly motivated staff.

This way of doing business, so popular in the new economy, is something that cannot be jeopardised.

Bizarrely the ASB runs this risk by being too fervent in its search for the perfect accounting standard. Threats from businesses to leave the country are not helpful either.

Holding a gun to someone’s head is rarely the best way to get them on side. Intimidation is not persuasion and companies indulging in such behaviour should be left to throw their tantrums.

However, where they make substantive points and arguments, there is no doubt the ASB should listen and take note.

These businesses are breaking new ground and doing it with a rigorous set of accounting standards put in place by the ASB. But just because previous standards have been good ideas does not mean all the standards are right.

– Gavin Hinks is deputy news editor of Accountancy Age.

Related reading