Business   

Principles must guide accounting standards

Excessive reliance on rules is not sustainable

Graham Ward, President, IFAC

ACCOUNTING STANDARDS in the United States, being "detailed and rule-oriented", are only conducive to promotion of dishonesty, says Graham Ward, President of the International Federation of Accountants (IFAC), which is dedicated to inculcation of "integrity, transparency and expertise" in the profession worldwide.

IFAC, with 163-member bodies from 120 countries and thus representing 2.5 million accounting professionals in the world, believes in "principle-based standards" that encourage compliance and are more effective in ensuring ethics and transparency.

Replying to questions at a recent interaction session with the media in Chennai, Mr Ward said there were differences between the U.S. GAAP (generally accepted accounting principles) and international accounting standards, which were principle-based. Rule-based and detailed standards as in the U.S. encouraged "avoidance'' (of facts) since people tended to look at the details and words and this prompted "clever people'' to "get round the intentions of the regulations'' through interpretation.

He feels that the U.S. is moving in the direction of principle-based accounting standards, and had laid down a road map for total switchover by 2009. Even members of the U.S. Securities and Exchange Commission (SEC) had said in public that they were worried about the proliferation of rules in that country.

According to Mr Ward (a former President of the Institute of Chartered Accountants in England and Wales who has been heading IFAC since November 2004), a situation in which able, intelligent accountants of integrity acting in good faith are all the time worried over whether they are in total compliance with law (as a result of excessive rules) is neither healthy nor sustainable.

Why global standards?

Is not IFAC's commitment to work for universal adoption of international accounting standards (prescribed by the International Accounting Standards Board-IASB) tantamount to acceptance of the "one-size-fits-all'' approach that has often failed multilateral institutions and policy makers in the past? Mr Ward responded by saying that at a time when the capital market and banking operations were becoming global, high and common standards on provision of information to markets would enable investors to put their money in equity or debt and thus help create jobs and promote economic growth in all countries. "Our research has shown that investors find it easier to invest in companies that follow international financial reporting standards'' and capital thus raised costs less.

(Accounting standards are fixed by the IASB, while IFAC evolves and promotes standards relating to auditing, professional education and ethics).

What is the rationale of having common standards, considering that in the U.S. and other developed countries most of the recent scandals were the result of reporting of non-existing profits, while in countries like India the problem was under-reporting or suppression of profits?

"Inflation or suppression of profits is related to the ownership structure of companies,'' Mr Ward said.

Where companies raised money from the public, they had an interest in showing good bottom lines, while companies financed from private or family sources would be interested in understating profits for tax purposes. Also, in countries like the U.S., senior managers often had their remuneration linked to the price of the company's stock and thus had a vested interest in boosting the profit figure through "aggressive earnings management'' or, simply put, fraud. IFAC's guidance to professionals enabled them to ensure that there was neither underreporting nor overreporting of profits, said Mr Ward, who affirmed that national exceptions to international accounting standards were not desirable. "Nations will be increasingly obliged to explain the necessity of deviating from international standards,'' he said.

Poor public sector record

Ian Ball, CEO of IFAC, said the organisation was more concerned over the poor state of accounting in the public sector globally, since the record of the private sector in terms of compliance was much better.

In the U.S., the government could not persuade its auditors for the past several years to give an opinion, even a qualified opinion, on its accounts.

With governments accounting for one-third of national resources, the present situation implied huge costs to the economies, he said.

The visiting leaders of the 28-year-old New York-headquartered IFAC (of which the Institute of Chartered Accountants of India is a founder-member) emphasised the valuable role played by the organisation's many boards and committees, including the committees on developing countries and small and medium practice.

R. GOPALAKRISHNAN
in Chennai

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

Taxable services need precise description
Principles must guide accounting standards
Detecting rampant abuses in public issues
Major changes in Hindu Law on succession
Tracking tutorial resources

Copyright © 2006, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu