Yesterday’s
Lex column referred to the emerging conflict, on which I have commented before, between the needs of banking regulators and investors in banks. Lex suggested the conflict was between regulators and accountants but I think recognised that accountants – in this case accounting standard setters – were representing the interests of investors.
Lex is quite direct – “Accounting needs to stay a true business snapshot. Regulators must find their backbone elsewhere.”
I agree.
Standards & Regulators 
1 Comments
March 9th, 2010
Earlier this week the US Securities and Exchange Commission (SEC) issued a statement confirming their support for a single-set of high quality global accounting standards. Although this fell short of explicitly stating that this will be IFRS, it did set out a basis (subject to addressing a number of issues) whereby the US could adopt IFRS in 2015 – or shortly thereafter.
The issues mentioned by the SEC all seem reasonable and include the need to ensure that “...accounting standards are set by an independent standard-setter for the benefit of investors.” and “Determining whether IFRS is sufficiently developed and consistent in application for use as the single set of accounting standards in the US...”.
Whilst it would have been good to see the SEC set a date certain for US adoption of IFRS (subject to conditions) it was probably unrealistic to expect this. However, it was good to see what I think is a positive step forward toward the adoption of IFRS in the US and a clear commitment to moving towards a single set of global accounting standards.
Standards & Regulators 0 Comments
February 26th, 2010
In the past several months I have done my best to support the adoption of IFRS as the accounting standard of choice – and the only one suitable to be the single high quality global accounting standard as requested by the G20. I have done so recognising that IFRS is not perfect (but what is?) but that it is the best we have and that it is pretty good. I have also recognised that changes will be needed to the governance of the IASB – not least to address concerns in the USA and the EU.
I was thus disappointed that the IASCF (the oversight body of the IASB) issued a Press Release earlier this week setting out proposed changes to the governance structure which in many respects seem to me to be too timid.
Some of the IASCF’s changes are welcome, in particular the creation of a vice chair for the IASB so that the current role of the chair can be split, but it seems to me this Press Release is seeking to give the impression that all the necessary changes are being made when in my view they are not. We need a more fundamental review which acknowledges the changes that will be required over the coming years as a number of additional, significant jurisdictions adopt IFRS, and which looks ahead to what a truly global standard setter will require. Further, I think the explanation for the reason for creating a vice chair (to “... ease the burden on the chair, and give the option of wider geographical distribution in the leadership) fails to recognise that the issue is not just one of geography or workload, but also includes the need to have someone who can handle the technical aspects of the role and someone else who can handle the diplomatic/political aspects of the role (ie a Chair and a CEO not a Chair and a Vice Chair).
It would be appropriate for the Trustees of the IASCF to state that they know more far reaching governance changes will be needed both to retain the support of existing constituents, and to gain this from those jurisdictions that are looking ahead to the adoption of IFRS. This, of course, includes the EU and the US, but extends more widely to the many other countries that either have already adopted, or will soon adopt, IFRS. While there is mention in the Press Release of a review this year for the strategy in the period post June 2011, there needs to be a clear signal that there will be a further overall review of the constitution in the near term. At the IASCF round table meeting held in London in September of last year, we called for the next review of the constitution to be accelerated to take place well before the next required date. While the current arrangements do allow for this, I would encourage the IASCF to signal that they will do just that, and that they look forward to actively engaging with the relevant bodies in the US, EU and elsewhere to secure their support for a more fundamental reconsideration of the governance model.
Global Accounting Standards & Regulators 2 Comments
February 16th, 2010
... earlier this week (you can see a copy of it here
http://www.bdointernational.com/BDOGCO/website/BDOGCO/website.nsf/pages/bdo-film).
I must admit I was a bit nervous about this when it was initially proposed and whilst it was being made but I am delighted with the result. It is intended for both internal and external use and I hope it conveys what BDO is and what makes us different to our key stakeholders, particularly our existing and prospective clients and all our people.
I hope you find it interesting and useful – as always any feedback gratefully received.
BDO International 3 Comments
February 9th, 2010
... always provides an opportunity to look back but, more importantly, to look forward to the coming year. The general consensus is that, at least in economic terms, the coming year should be significantly better than last year – but will 2010 be much different to 2009 for the accounting profession?
Clearly, a better economic environment will provide a boost to all businesses – including accounting firms – and we will also benefit from the improving performance of our clients and what is expected to be a better market for transactions, fund raising and general corporate activity. However, it is important that we don’t forget the lessons of the last few years and that we assist our clients in avoiding some of the ‘excesses’ we have seen that have damaged so many businesses. We must remember that ‘if it looks too good to be true – it probably is’.
For the profession as a whole we will continue to see a continuation of some of the topics that have dominated 2009 – particularly the search for a single set of high quality global accounting standards. I think everyone has accepted that IFRS are the only credible global accounting standards to fill such a role but there remain issues over their adoption by certain countries – notably the USA – as well as concerns about the governance and accountability of the IASB (the body that issues IFRS). It is vital that we make progress on this in early 2010 and that the USA is persuaded to confirm that it will adopt IFRS by a specified date. There can be conditions for this acceptance (such as there being an acceptable governance structure for the IASB – but we urgently need the USA to confirm that they will, in principle, adopt IFRS. Japan has committed to the adoption of IFRS, it is already adopted in Europe and China will, I am confident, fully adopt IFRS as well. With the USA on board this will cover the world’s leading capital markets and should ensure that IFRS becomes the single, high quality global accounting standard called for by the G20 – and the accounting profession.
Increasing regulation is also likely to be a feature of 2010 – mostly for the financial services sector, but it must be possible that some of this will drift into the accounting profession. I hope not as, in general terms, I think the profession is well regulated although there are some countries that need to adopt regulatory systems similar to those in the more developed countries. Indeed, I would argue that in some aspects the accounting profession may be over-regulated but I see no chance of a lessening of regulation so there seems little point in arguing this case.
As we emerge from the global recession we may see a few more mergers between some of the smaller mid tier firms who want to increase their market share. However, I do not think these will significantly affect the market place as most of these firms act for smaller clients and few have many, if any, significant public interest clients. However, because size is seen as such an important indicator in the accounting profession I have no doubt that some firms will be regarded as moving into a market position that is not wholly appropriate. This may be an issue for BDO, and possibly one or two other networks who can credibly be regarded as an alternative choice to the Big 4 in much of the marketplace. We will have to work harder to explain how BDO is able provide a real challenge to the Big 4 for those companies that would prefer not to use the services of the Big 4 and how BDO is different from networks that may be growing their revenues through merger but who don’t have the necessary global infrastructure and support to be a credible choice for businesses that might otherwise use a Big 4 firm. In this context, I suspect that unless there is a major corporate collapse that prompts concerns over the role of the auditor, the Competition and Choice debate will rumble on but is unlikely to make any real progress – and in this regard 2010 will be much the same as previous years.
For me personally, 2010 will have many challenges – helping our member firms respond to changed economic circumstances, ensuring we maintain our investment in the network and, later this year, the launch of our new audit methodology and new audit process tool – ensuring that a ‘BDO audit is a BDO audit’ in whatever country it is delivered and whatever the nature of the client – a guarantee of a consistently delivered, high quality, robust audit.
BDO International Ethics Global Accounting Mark to Market Standards & Regulators 2 Comments
February 2nd, 2010
... is the overwhelming market share held by the Big 4 (actually most of it is held by three of them) which is far greater than in the USA, Europe or elsewhere.
The smallest of the Big 4 (PwC) is only about 25% of the size of the other three firms – and the next largest firm, which is a Japanese firm associated with PwC, is about 20% of the size of PwC – and thus only 5% of the size of the largest firm in Japan. And the next several firms, including BDO, are even smaller. Clearly we need to address this if we are to deliver on our brand promise to be the leading mid tier firm and a credible alternative to the Big 4 in every major economy. At present we deliver an extremely high quality service but our lack of market share makes it difficult to overcome prejudices in favour of the Big 4 – and this is a challenge faced by all the firms aside the Big 4.
It was thus slightly ironic that on the plane home I read an article published earlier this month by the American Antitrust Institute (AAI) discussing their concern that the audit market is too highly concentrated in the Big 4 firms.
http://www.antitrustinstitute.org/archives/files/AAI%20Working%20Paper%2010-01_010720101109.pdf Their analysis of the situation and whether we now have accounting firms that are ‘too large to fail’ is interesting although not new other than they link it to current concerns about banks and other financial institutions being ‘too large to fail’. Indeed, the AAI paper suggests that the US Congress should include the Big 4 in its review of the regulation of banks and other financial institutions. The paper also suggests a somewhat more radical proposal – namely that the Big 4 each be required to divest “... no less than 20% of its domestic client revenue and the professionals who are needed to service the clients that are transferred out of the firm.”
Gosh – what do I say? Now, I am well known for expressing concerns about the concentration in the audit market and the effect this has on competition and choice but even I would struggle to support such a proposal. It seems to me to totally disregard the wishes, and the interests, of clients and of the people who work at the Big 4. Clients and our people are not commodities to be ‘sold’ I am all in favour of appropriate action to correct what I regard as distortions in the marketplace, not least the banning of ‘Big 4 only’ clauses in banking and other agreements, but I think it is neither realistic nor desirable to force firms to ‘sell’ their clients and their people.
Global Accounting 2 Comments
January 25th, 2010
... we need to stop it becoming a political debate you need only visit Japan, where I have spent the last week.
Japan is one of the world’s largest economies (probably now 3
rd behind the USA and China but with a smaller population than both those countries) yet seems to have been sidelined in the European ‘squabbles’ over IFRS and the ‘will they/won’t they adopt IFRS’ debate in the USA. Japan is committed to adopting IFRS so that the accounts of Japanese companies (and it has some very large multinationals) can be comparable to those of all other major companies – in Europe, the USA and globally.
It is a mature positive approach and conversion from Japanese GAAP to IFRS is a major topic of debate by all the accounting firms, and major corporates, in Japan – and was raised with me at every meeting I have had in the past few days.
They don’t understand why IFRS has become such a political issue – nor why individual countries or regions expect IFRS to be adapted to deal with their own political or regulatory issues. Why should Japan have different accounting standards because US, UK or other banking regulators want something different for their own purposes? Why can’t regulators use other powers they have to get the information they need rather than expect global accounting standards to be adapted to suit them?
Governments, regulators and accounting standard setters need to fully appreciate that we are seeking to have one single set of high quality global accounting standards – and this involves obligations to others.
I salute the Japanese.
Standards & Regulators 0 Comments
January 22nd, 2010
We will all have been affected by the news of the growing humanitarian disaster in Haiti and the desperate need for aid both to help the victims of the disaster but also to help rebuild the lives of people once their immediate needs have been met. How does one respond?
I believe that the scale of this disaster requires a global response and as a global network I believe that we have to play our part – inevitably this means by giving money to one of the various disaster appeals. Accordingly, BDO International is making a donation to the disaster appeal. We are also asking the people who work for the International Executive Office to play their part and have pledged to match everything that they donate. We are also encouraging all of our member firms to do likewise – by making a corporate donation, by encouraging fundraising from staff or both.
Being a relatively close neighbour of Haiti the British Virgin Islands is already involved in the provision of aid. The major funding drive in the BVI is being spearheaded by the Rotary Clubs of Tortola, of which the Managing Partner of our BVI firm and one of his colleagues are members. The latter is appearing on a Telethon being broadcast on local TV and radio and is an integral member of the organising committee. He is responsible for the IT and is heading up the finance function. BDO BVI and BDO International are both donating to this effort and BDO BVI’s staff are also taking a collection for this effort.
BDO Cayman Islands is also heavily involved in the activities of Rotary Clubs. A member of the Managing Partner’s club has a house (that’s still standing) which is currently acting as temporary hospital for 100 plus people and he has spoken with CNN to share information. He says scenes are far worse than many of the media stations are prepared to show on national television.
I am proud of the response of our firms and our people – it demonstrates our concern for others and the world we live in.
BDO International 0 Comments
January 19th, 2010
... the title of a new report from the Centre for European Reform (‘CER’) which was sponsored by BDO and launched yesterday in Brussels; there is a London launch on 2 February.
The main presentation was by Philip Smythe, the author of the report, but there were contributions from others including Peter Chidgey, a partner from BDO UK who heads up their financial services industry group.
There were some interesting views on whether there is a need to regulate hedge funds. Philip suggested not on the basis that they didn’t cause the crisis; that they were less leveraged than banks; that they had traded in CDOs; and had been allowed to fail without causing contagion to the rest of the system. He contrasted this to banks which were regulated but where these problems had arisen – and suggested the focus should be on improving regulation for banks rather than regulating hedge funds. The main argument for regulating hedge funds (which was expressed as being a ‘Brussels based view’) seemed to be that an unprecedented crisis demanded an unprecedented response and that it may be better to over-react; that we didn’t know if or how hedge funds might have contributed to the crisis; and that the only way we can know what hedge funds are doing (and address political concerns) is by regulating them. Hardly the strongest argument I have heard but if it holds sway in Brussels than I fear that we may face regulation in a variety of areas where it is not needed.
The most interesting view expressed by Philip, however, and which did seem to get widespread support is the need to ‘reverse the terms of trade between state and banks’. As Philip noted, in medieval Europe the biggest concern of the banks was that an individual sovereign (who were the banks major customers) might default on his debt (there were no female sovereigns at the time); the biggest risk now is to the state that a bank might default. This is a complete reversal of roles and there is a concern that by removing the risk of failure for banks we have weakened the incentive for them to take risk management sufficiently seriously. It was noted that Governments have ‘talked tough but acted weak’. I think this is a different way to understand the challenges we face and why there is so much legitimate political and public interest in how banks run themselves; their corporate governance; and even their remuneration policies. As with many other challenges there are no easy – or obvious – answers.
It was an interesting morning and I am glad we had the opportunity to sponsor this report.
Standards & Regulators 0 Comments
January 13th, 2010
As yesterday’s Financial Times reported
http://www.ft.com/cms/s/0/ddc1a5a6-fea3-11de-91d7-00144feab49a.html the Basel Committee have made it clear that the needs of regulators and central banks are different from those of investors when it comes to how, and more particularly when, banks should make provisions for bad debts.
This should not be a surprise as it has been clear for some time that regulators would like to see some form of ‘dynamic provisioning’ which spreads the cost of bad debts over the economic cycle – rather than recognising the bad debts when the losses are foreseeable. There are many arguments for both approaches, some of which I have commented on previously, but the two approaches are different – and they meet different needs. What is disappointing is the implication that one set of accounts should be able to meet both sets of needs or, more particularly, that they must meet the needs of regulators in priority to those of investors.
It is possible to prepare financial statements that the disclose figures on more than one basis, and a reconciliation between them. This would have the advantage of total transparency with clear disclosure of the quantum of any ‘dynamic provisions’ and could be a solution to this apparent conundrum. The other possible solution is for financial statements to continue to be prepared for investors with separate information provided to regulators to meet their needs. Indeed, regulated companies already provide additional information to their regulators so one might wonder why this isn’t the most obvious solution.
It can not be right for financial statements to be prepared solely on a basis that meets the needs of regulators with investors having no right or ability to get the information that they need. Further, it can not be right that the financial statements for regulated companies should be prepared for a different audience, and thus on a potentially different basis, to the financial statements for non-regulated companies. Regulators have the power to get the information they need; they should not do so to the detriment of investors.
Standards & Regulators 0 Comments
January 13th, 2010
