Auditors: Market concentration and their role - Economic Affairs Committee Contents


Supplementary memorandum by Mr Timothy Bush (ADT 15)

ACCOUNTING ISSUES AT STAKE

  1.  Prudence (not overvaluing assets), loss visibility, no hidden gearing and being alert to contingent liabilities. These all underpin the creditor protection purpose of accounts and the audit. These things are also essential for directors and auditors to assess whether the business is a going concern, and for directors to understand where their businesses are at.

  These things are required for the law to function (the capital maintenance clauses in the Companies Act) but are not delivered by IFRS (or the erroneously copied FRS 26 which directly clashes with Company Law). These things do form the foundation of "UK GAAP".

PERVASIVE VESTED INTERESTS ("RULE OF STANDARDS" RATHER THAN THE RULE OF LAW).

  2.  Since Johnson Matthey (UK, and earlier in the USA), auditing/accounting standard setters have been populated by people with professional expertise in auditor liability defence. The pendulum has therefore swung too far towards protecting auditors, at the expense of directors, creditors, shareholders and the wider public.

  3.  Auditors have benefited from complexity of accounting standards, not just their protective/scope limiting characteristics. Bankers too benefited from the uptick in profits.

BRITAIN CANNOT WAIT FOR THE INTERNATIONAL ACCOUNTING STANDARDS BOARD OR THE EU TO FIX PROBLEMS

  4.  The timescale is slow. The EU is weak on this area, and not united, nor does it have same priorities. Other parts of EU have "dual boards" with non-IFRS accounts for director/creditor assurance (eg Germany). The EU Commission seems to be a "soft touch" for Big 4 lobbying.

  5.  IASB in seeking to converge with the USA is up against the full force of the liability limitation tactics of the Big 4 USA and the pervasive power interests there. The biggest funders of the IASB were the Big 4 and the largest US investment banks. IAS 39 was written essentially in-house at Citigroup, the harmful bad debt provisioning model came from Big 4 USA.

  6.  Britain has got itself into position of "over adopting" IFRS (in companies and banking companies), caught between the worst aspects of the EU and the USA.

SOLUTION AND CONTAINMENT OF PROBLEM

    (i) UK must halt compulsory extension of IFRS as was proposed by (recently stepped down—12 October 2010) chair of UK Accounting Standards Board.

    (ii) The Department of Business must work with Accounting Standards Board to fix the clashes: between IFRS and the capital maintenance clauses of the Companies Act, and the problem of FRS 26, which clashes with both the capital maintenance clauses and the Companies Act accounting rules.

    (iii) UK GAAP must be brought back to its pre-2005 condition. Each accounting and auditing standard should have a statement that it complies with the letter and spirit of the intent of Company Law, so as to avoid clandestine auditor liability limitation tactics (whether omissions or commissions).

27 October 2010



 
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