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


APPENDIX 7: LETTER FROM THE LORD FLIGHT (ADT 76)


Economic Affairs Committee Report

IFRS

I have long been unhappy with IFRS accounting standards. I was one of the signatories with Jeremy Hosking and Timothy Bush to the Times letter of 23rd July 2010 and also wrote the attached[214] piece for Conservative.Home which I believe Lord Lawson circulated to your Committee.

I am particularly concerned that IFRS is about to extend to the public sector as well as the insurance industry where in my judgement not only do the standards make Accounts difficult to understand but can also conflict with the fundamental principles of "true and fair".

I also understand there has been some perceived inconsistency of evidence provided to your Committee, on the one hand provided by senior executives of major Life companies, together with Professor Stella Fearnley and Timothy Bush and, on the other hand, members of the Financial Reporting Council and the FSA. No doubt you and your Committee have formed your own views here.

I would make the point that there are substantial professional and individual vested interests and reputations going back some time, involved here.

I am concerned in particular as regards the legal advice provided to the FRC, on the basis of which I understand it is standard practice for the FRC to respond to letters to Ministers at the BIS.

I observe that both the Bank of England and members of the auditing profession such as Peter Wyman (although himself closely involved with the implementation of IFRS) provide a more independent assessment of the damaging impact of IFRS.

My belief is that, particularly with regard to banks, a major purpose of Accounts is to discharge the solvency obligations of directors and auditors to report the true capital position. When Runs on banks occur, it is largely because markets have spotted that particular banks are potentially insolvent. In the recent banking crisis, I believe there is little doubt that markets spotted that for certain banks IFRS "marked to market" standards had served to overstate capital resources in buoyant times; as subsequently they served to understate capital in difficult times.

My objections to IFRS are, however, wider than that I believe they were a contributor to the banking crisis; as referred to in my attached article, I have always felt that requiring the accounting treatment relating to the granting of options to be booked through the Profit & Loss Account both obscures the real trading position of the particular business and also fails to advise shareholders of the impact of actual or potential dilution. I also consider the requirement to discount pension fund liabilities at a rate of interest measured by prime bond yields overstates effective liabilities and has been a major contributor to the demise of final salary schemes. Liabilities should surely be discounted at the anticipated "blended" rate of return on the pension fund investment portfolio.

Finally, I make the comment from my career background in the investment management industry, that invariably, analysts go through the exercise of adjusting the IFRS statutory accounts to screen out the distortions resulting from "marked to market", the treatment of options and IFRS 17 in order to arrive at an understanding of the performance of particular businesses.

Going back nearly 10 years I felt that IFRS was introduced "by command" and without adequate political and commercial debate. The impact has been demonstrably damaging, particularly in its contribution to the banking crisis.

22 February 2011


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