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Although the time frame for
implementation is unclear, a widely
supported plan is in place to merge
the IFRS with the US’s Generally
Accepted Accounting Principles
(GAAP) to provide globally
recognized accounting rules.
Although the rules are becoming
clearer, important areas for debate
remain. These might be raised
internally, in arguments between
company accountants and directors;
or the debate might be between
independent auditors and the
organization. When UK bank Halifax
Bank of Scotland (HBOS) collapsed
in 2008, the UK government bailed
it with $32 (£20) billion, before the
bank was acquired by Lloyds Bank.
In 2008 the gap between the bank’s
loans and its deposits was $341
(£213) billion. The bank’s auditor,
KPMG, was heavily criticized over
the HBOS collapse, although KPMG
had consistently raised warnings
over the risks involved. When the
UK’s regulator, the Financial
Services Authority, published a
report on HBOS in 2012 it noted
that KPMG had “consistently
suggested that a more prudent
approach would be to increase the
level of provision” against bad debts.
Ultimately, the directors of HBOS
had decided to take an optimistic
view of the bank’s lending. They
chose to play beyond the rules.Cautious accounting
Professor David Myddelton, a
UK management scholar, argues
strongly against the expansionPLAY BY THE RULES
Mark-to-market accounting is a risky method of valuation, since it
values a company’s assets according to current market value. Historic
cost valuation is a more reliable, and cautious, measure of value.
of rules in accounting. He believes
in traditional accounting principles,
because these supply the required
flexibility for accountancy across
many different types of companies.
He claims that the idea that there
is a “single correct answer” when
preparing a company’s accounts is
nonsense. Nevertheless, this idea
lies behind the call for increased
regulation. “People want it to seem
as if we’re doing something about
scandals,” he says; they think that
greater regulation will make a
difference, “but it never does.”
Myddelton also believes that
directors should gain a “true and
fair view” of their accounts, instead
of being forced to rely on a picture
produced by someone else’s idea
of the accountancy rules.
Some “creative accountancy”
practices stretch the flexibility
within the rules so far that they
can produce potentially misleading
accounts. “Mark to market”
accounting, for example, values
assets at their current market value.
This means that when the stock
market is booming, any investment
(such as shares in another business)
will also be booming. This boosts
the value of the company’s balanceMoral duty
Julian Dunkerton is the founder
and major shareholder in the
fashion business SuperGroup
plc, whose leading brand is
the popular street-wear label
Superdry. Based in Britain,
but with business and outlets
worldwide, SuperGroup could
easily follow the lead set
by other organizations and
manipulate accounts to
minimize its tax liabilities.
Instead, the business plays
by the spirit of the tax rules,
paying about 30 percent of itsprofit to the tax authorities. Not
that Dunkerton wants to claim
the moral high ground—in its
annual report, SuperGroup plc
explains that “We recognize the
commercial value, as well as
the moral duty, of consistently
operating with integrity,
honesty, and a commitment to
responsible and ethical business
practices.” Dunkerton has the
wisdom to appreciate that
acting responsibly can yield
financial benefits, particularly
in the long term.During a stock-market
boom, valuing a company’s
assets and investments
according to their
current market value
can lead to an
overinflated
balance sheet.If the stock market
falls, the value of the
balance sheet will
shrink, leaving the
company in a
vulnerable
position.