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


Further supplementary memorandum by Mr Timothy Bush (ADT 18)

THE CLASH OF OBJECTIVES IFRS VERSUS COMPANY LAW, AND PROBLEMS IN IMPLEMENTATION OF THE LAW


THE "TRUE AND FAIR" PROBLEM—LIMITATION OF SCOPE WITH IFRS

  1.  DTI (now BIS) advice was that notwithstanding IFRS, UK statutory accounts should still discharge solvency obligations.

  2.  However, the IFRS enabling law (DTI 2004 for 2005 commencement) was drafted "true and fair (fairly presents) in accordance" with IFRS. IFRS defines "fairly presents" as following IFRS standards (or where not a standard, what is in "the Framework") the problem is that the Framework is in its objects is excluding things needed for discharge of solvency obligations. IAS 39 in particular is at odds with solvency discharge.

  3.  There was a problem of structure; of law frustrating law, and standards themselves entirely at odds with the law and in cases directionally wrong (eg leaving out losses).

  4.  To solve the law problem, investors' lawyers came up with an opinion questioning the form in which IFRS had been incorporated in UK law. This led to revisions in the Companies Act 2006, but these were only operative from April 2009. (See Hansard debate below).

  5.  However, even with the law adjusted to allow overriding IFRS, beyond the limited terms IFRS itself allows, there are no accounting standards to deliver the law. Some IFRS are directionally at odds with discharge of solvency obligations. Further, the FSA had used UK GAAP as the basis for prudential returns, and substituted IFRS in its place. (See ICAEW Audit Quality Forum below on the mismatch).

HANSARD—DEBATE OF THE COMPANY LAW BILL 2006

  Hansard 13 July 2006, there further probing amendments to extract whether the new true and fair view clauses were enough, but it clearly describes concerns with a "tick box" regime.

Justine Greening (Putney)

  These probing amendments seek clarification of the concept of "true and fair". One thing the Bill does is move the auditing profession increasingly to a tick-box approach to auditing whereby, if accounting and auditing standards are fulfilled, the accounts and the business of the audit, as well as the accountants, are, by definition, deemed to be successful. I understand that, nevertheless, the concept of "true and fair" still underpins financial statements.

  We are moving increasingly to an IAS basis for international companies, and IAS 1 includes the concept of fair presentation, which is not exactly the same, potentially, as "true and fair". I understand that when this has been debated at European Union level, "true and fair" has predominated over even "fair presentation". Again, it would be helpful to get clarification from the Minister that, irrespective of the fact that all accounting and auditing standards might have been followed, the accounts that emerge from that process must give a true and fair view of the financial position of the company at the date of those accounts. That must predominate, and I would be grateful if she gave the Committee that assurance.

  ICAEW—Audit Purpose, Audit Quality Forum (March 2006), recognises that accounting standards headed in different direction to the law http://www.icaew.com/~/media/Files/Technical/Audit-and-assurance/audit-quality/audit-quality-forum/meeting-notes-2006/july-2006-audit-purpose.ashx

  "The purpose of the statutory audit, as set out in law, reflects the stewardship role and is backed up by case law."

  "The group believes that further consideration of the potential differences between International Financial Reporting Standards as a reporting framework and the purpose of the audit under the current UK legal framework (and future framework) by an appropriate forum would be helpful in understanding these differences and what the likely implications may be."

  Solution (TB comment) In an era of "following standards", it is absolutely hazardous to have a regime of standards that absolutely frustrate the discharge of solvency obligations and fiduciary obligations to the members and creditors. There needs to be a statutory basis to put the basic Companies Act Accounting Rules back into operation to allow law to function. (Directors of large groups will not be getting reliable subsidiary accounts either to show their directors' discharge).




2.  OUTPUT STANDARD

Company law transparency (for members) and discharge of solvency obligations

  Extant in law, but, IFRS does not deliver to that standard (directly clashes in places).

  Also, FRS 26* (ASB copy copy of IAS 39) does not deliver to that standard either, and it is inconsistent with the Companies Act Accounting Rules it is inferior to in law (ie it is replicating the clash that IFRS also has with the law).




 
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