Ensuring corporate stability and financial soundness

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Ensuring corporate stability and financial
soundness

• Perspective of
• accounting standard setting in Australia
• By Wayne Lonergan

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This presentation contains ideas that may offend
some viewers
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It contains Facts not fictions Different
ideas Comments contrary to conventional
wisdom Parental or institute guidance is
recommended
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This presentation contains explicit material
including
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Mandatory accounting standards
Coercion
Desire for independence
Offensive fetishes
Depictions which purposefully debase the
enjoyment of accountants and auditors
Making auditors think
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Introduction

• Financial soundness and accounting standards
• Changes in accounting standard setting over time
• Why is it important?
• Emasculation of the standard setting process in
  Australia
• Why mandatory compliance with international
  standards is flawed
• Lessons for the future

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Creating corporate financial stability

• Still in progress
• Financial reporting regime
• Improved corporate disclosure
• Current focus
• Developing a culture of integrity and trust in
  corporate governance
• Directors, Executives, Bankers and Analysts,
  Auditors
• Difficult to mandate and enforce
• ASX Corporate Governance Best Practice Guidelines
• Lots of form
• Effectiveness??

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The basic (previous) approach

• Accounting standards, disclosure and conceptual
  framework form the backbone of a sound financial
  reporting regime
• Accounting standards approved by the Australian
  Accounting Standards Board (AASB) have
  legislative backing

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The old system
Institute
Society
Government
Jointly funded but no control
Foundation Board of Management
Australian Accounting Research Foundation (AARF)
Australian Accounting Standards Board (AASB)
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The old system resulted in

• Internationally recognised centre of excellence
  and intellectual capital developed since 1966
• (Largely) independent standard setting body
• Delegated legislating accounting standards
• Development of basic conceptual framework
• Improved financial reporting

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Australias intellectual capital

• The objective of the professional accounting
  bodies in forming the AARF was that it should
  undertake research and development of accounting
  standards to underpin the accounting discipline
  as a body of knowledge

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Machiavellis plot?

• Corporate Law Economic Reform Program (CLERP)
• A new Treasury appointed body the Financial
  Reporting Council imposed on top
• FRC responsible for the oversight of accounting
  setting process and sets agenda for private and
  public sector issues
• Merged private and public sector boards
• Start Date 1/1/00, couldnt meet until 6/00
• Uncertainty for / disempowerment of AARF staff

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The new system (assert control)
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The inevitable outcome

• It will only be to the detriment of the quality
  of financial reporting in Australia, and in the
  corporate sector, the reputation of Australias
  capital market and the impact on the cost of
  capital, if vested interest groups and politics
  overtake the process under the guise of a broader
  and more effective constituency involvement and
  the need for commercial standards.
• Mr Greg Pound, Former Acting Executive Director
  of AARF
• FRC member and Chief Accountant of ASIC

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Independence of AASB undermined

• Originally, three funders, no boss
• Government veto right only exercised once
• Now primary funder is ASX (with strings attached)
• ASCPA and ICAA dont even exercise significant
  influence
• Technical issues not the domain of FRC
• AASB undermined by mandatory adoption of
  international standards
• FRC disproportionately under represented by
  accounting profession and over represented by
  corporates/public sector

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Stacking the deck

• Reduced number of AASB members (with more diverse
  interests)
• Government dominates appointments
• 13 members to the FRC
• Chairman of AASB
• FRC appoints
• 9 members to the AASB
• Half public sector focus
• Eliminated the corporate memory
• Only 1 member of the former AASB was appointed to
  the new AASB (term now expired)

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Clearing the decks

• Loss of key staff and intellectual capital
• AARF in a period of uncertainty for over a year
• Most of top AARF staff resigned (2 to IAS)
• Less challenge for new staff
• Diluted expertise over public sector issues
• Becoming passive followers of/subordinate to IAS

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Derailing the reporting regime

• Emasculation of the standard setting process
• Merging of the boards
• Board members with disparate needs, interest,
  agendas, backgrounds
• Loss of intellectual capital and corporate memory
• Largely under funded
• Standard setting power removed
• FRC has authority under legislation to direct
  the AASB on matters of policy in developing
  standards
• Globalisation of standard setting agenda
  (eradication of Australian standard setting
  capacity)

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Derailing the reporting regime
Australian Accounting setting capability
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The harmonisation dream

• Australian standard setting (non) agenda
• Mandatory adoption of International Financial
  Reporting Standards (IFRS) for periods beginning
  on or after 1 January 2005
• Formerly International Accounting Standards
• Less detailed and different (in parts) conceptual
  framework
• Every single AASB to be amended
• Several new standards will be introduced, where
  no previous Standard existed
• No international equivalent for specific
  Australian standards
• IAS ignores particular Australian needs

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Advocates for harmonisation claim

• Listed EU companies will comply with IAS
• Australian investors gain as IAS are superior
  quality and give rise to high-quality financial
  reports
• High cost of reconciling accounts between
  international regimes for Australian companies
• Australias small capital market means we need to
  conform to attract international capital

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The harmonisation dream myth

• Australias accounting conceptual framework is
  more detailed than IAS
• Adoption will dilute some of Australias current
  accounting standards
• Australias superior accounting standards
  represent a competitive advantage in a corporate
  world full of uncertainty at present
• Australia represents just over 1 of the global
  equity capital market
• Adoption will result in the loss of Australias
  competitive advantage and a higher cost of
  capital for Australian companies

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Australias previous system

• Australias reporting regime was improving
• reduced scope for corporate abuse (still bad)
• facilitated quicker development of new and
  innovative capital market products and
  securitisation market
• economically efficient
• aim to reduce the cost of capital
• increased employment

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AUS GAAP versus IAS

• Only the tip of the iceberg

plus asset impairment test, revenue, joint
venture accounting, research and development,
acquisition of assets, accounting policies,
leases, foreign currency translation,
self-generating and regenerating assets, and many
more
Source CFO November 2002 page 32-35
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IAS Statement of financial performance

• Not in time (2005)
• A new PL?
• Above/below the line issues
• Is it a weak link compromise?

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The reality of IAS

• IAS deterred from meeting the primary needs of
  users of financial statements
• Lack of natural funding sources (dependent on
  private business contributions)
• Conditional on European Advisory Group approval
  (must be listened to)
• Financial independence a former strength of the
  Australian accounting standard setting process
  lost
• Australian funding brings obligations
• Government
• ASX
• Business community (Group 100)

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Will US support IAS?

• US unlikely to come to the table
• Largest single market in the world with over 50
  of the worlds equity market
• US has 5 out of 14 members on the IAS board
• Highly unlikely proposition that the largest
  market will give up domestic accounting standard
  setting to a body it does not control
• US doesnt need IAS, IAS must have US
• Will be some convergence over time

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Benefits to the US of adopting IAS
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Will US really adopt IAS?

• Give up sovereignty
• Give up unilateral power over standards
• Let emerging companies access US Capital Markets
• Help Europe to become a better competitor
• Destroy existing professional knowledge base of
  US Accounting profession

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Will US really adopt IAS? (cont.)

• Incur lots of costs
• Jeopardise US and international confidence in US
  capital market
• Destroy existing educational base, entrenched
  skills and legal precedents

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Access to US capital markets

• SEC registrants still need to bear cost of
  preparing reconciliations to US GAAP
• Australian companies that are SEC registered
• Are costs significant?
• Doesnt effect many companies

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The international acceptance myth

• International adoption of international standards
  isnt true
• Listed companies of EU member states may only
  adopt IAS standards as endorsed by the European
  Commission for consolidated accounts by 2005
• Only listed companies
• Many other countries permit international
  standards but not fully adopted as domestic
  standard

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The international acceptance myth

• Australia the only one of seven IASB liaison
  countries to fully adopt international standards
• Australia joins such major capital markets as
• Barbados
• Georgia
• Honduras
• Mauritius
• Papua New Guinea

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Critical enforcement issue

• International companies more hassle than theyre
  worth?
• No enforcement mechanisms for IAS standards
• Quality of international companies attracted to
  Australian capital market suspect at best
• International companies wont come to an empty
  well

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The case for domestic standards

• Australia has unique needs
• Competition for global capital markets
• Capital needy economy
• Price taker / me too borrower isnt a viable
  strategy
• Need (but lost) competitive advantage of strong
  financial accounting regime
• Need (but lost) excellence to develop new
  products
• Limited ability to impact debate at global level
• Emasculated by mandatory adoption
• No guarantee of any role (at all)

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Sovereignty issues

• AASB had delegated legislative setting authority
• Privileged position
• Now subordinated to IAS
• One voice (at best) at IAS
• No guaranteed role at IAS
• Effect is parliament has abrogated legislative
  power to IAS

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Demise of Urgent Issues Group

• UIG plays an important role
• Reviews divergent accounting issues
• Timely basis
• Reaches consensus issues authoritative guidance
• Decides if IFRIC determinations should applyin
  Australia
• UIG consensus views are mandatory
• UIG cannot be replaced internationally
• International consensus on any issue takes almost
  1 year
• Long term survival of IFRIC in question

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Loss of influence

• Corporate submissions are not forthcoming
• Big 4 submissions captured by international firms
• Australia isnt relevant
• Mandatory adoption no need to listen to
  Australia
• But have to listen to
• US
• EU

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On motherhood

• International harmonisation is a nice idea
• But mandatory adoption isnt the right way to get
  there

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Lessons for financial soundness

• Globalisation and lobbying has lead to the
  emasculation of Australian accounting standard
  setting system
• Mandatory compliance with international standards
  not a good idea
• International harmonisation of IAS is a myth

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The outcome

• The seeds of destruction for the next round of
  corporate collapses have already been sown

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Lessons for actuaries

• Maintain board independence
• Maintain financial independence
• Maintain / add to intellectual capital
• Maintain centre for excellence
• Avoid the pitfalls of globalisation