Dispatch

• under pressure
• lighter touch regulation
• Andersen's last hurrah
• public sector risk

under pressure

The International Accounting Standards Board is facing increased pressure from a range of interested parties to ensure that IFRS becomes more acceptable. ACCA is leading the critics.

Allen Blewitt, ACCA’s chief executive, said that although he is enthusiastic about international standards, unless IFRS were made less complex then implementation and compliance would suffer.

Speaking at a Lexis Nexis conference in London on IFRS, Blewitt argued that the IASB must instigate a “shift in emphasis” towards the concerns of countries trying to adapt IFRS to their national circumstances. The IASB must also do more to help smaller, non-listed companies, he told delegates.

“What I believe the IASB most urgently needs to address are the barriers to implementation,” said Blewitt. “From talking to our members working in business around the world, it is clear that the length of the standards and complexity of the concepts represent a very real problem in many countries. The standards have been described to me as a major turn-off and disincentive for accountants in commerce and industry. People who initially qualified as accountants and are now principals and managing directors resent that they can no longer understand the accounts of the business that they helped to build.”

IFRS focused too much on listed companies and were not appropriate for the great majority of businesses, asserted Blewitt. The IASB’s “Small and Medium-Sized Enterprise” project was now an urgent priority. “I am concerned that, despite the name of the project, the focus of IASB’s considerations are going to be large unlisted entities,” Blewitt explained. “The overwhelming need for a new set of standards is not for these few companies, but for the much larger numbers of genuine SMEs. If the IASB fails to satisfy this real and urgent demand that exists around the world, then some other body must step in and deal with the real problem.”

Moreover, if international standards are to be truly international, then the concerns of non-English speaking countries must be taken more seriously, ACCA’s chief executive warned. “What is needed is highly sophisticated translators with good knowledge of language as well as technical accounting concept. Such people are rare. This is compounded in the standard setting process when there is a short period of time between exposure draft and finalisation. This does not give sufficient time for those countries where translation is required to first complete the translation, then disseminate the exposure drafts and finally synthesise a response. Global standard setting will have to grapple with these issues if it is to be ultimately credible, beyond the largest entities.”

Criticisms of the IASB are now increasing in number and coming from more sources, not least with the continuing dispute with the European Commission. Internal market commissioner, Charlie McCreevy, is showing no sign of backing down in his complaint against the IASB in its failure, as he sees it, to take more notice of European concerns.

Europe’s major companies, working through the European Round Table of Industrialists, are also growing more irritated with the approach of the IASB. In a letter to the FASB and IASB over progress towards standards convergence, the Round Table showed its frustration. “We are concerned that the discussions at meetings of the International Working Group on Performance Reporting are not addressing what we believe are the most important issues in sufficient depth, and there appears to be too much focus on accounting technical issues rather than utility and relevance,” wrote the group’s representative, Wolfgang Reichenberger, chief financial officer of Nestlé. He urged the IASB and FASB to be more willing to listen to those companies who prepare accounts in order to provide “a robust and relevant framework for performance reporting”.

Speaking to accounting & business, Reichenberger added that his group was also very unhappy about the governance arrangements of the IASB, including what he regards as excessive independence permitted to the IASB by its trustees. (For a longer version of our interview with Reichenberger, see a&b direct, 16 June.)

lighter touch regulation

Lighter touch regulation is suddenly in fashion. On both sides of the Atlantic, regulators are being urged by governments not to throw the enterprise baby out with the dirty bath water of rogue behaviour.

“In my view, we are in danger of having a wholly disproportionate attitude to the risks we should expect to run as a normal part of life,” said UK Prime Minister, Tony Blair. An example of this in practice, he said, is that “the Financial Services Authority that was established to provide clear guidelines and rules for the financial services sector, and to protect the consumer against the fraudulent, is seen as hugely inhibiting of efficient business by perfectly respectable companies that have never defrauded anyone”.

A similar message is going around in the United States. Its Securities and Exchange Commission also seems set for a major rethink in how it goes about its regulatory business. William Donaldson - who came in two-and-a-half years ago to take a tough line on the at times dodgy commercial culture epitomised by Enron and WorldCom - is to go. His replacement is Christopher Cox, a Republican congressman, who is likely to take a much less intrusive approach to business regulation.

Past Bills successfully nominated by Cox included a law protecting investors from abusive lawsuits and a ban on internet commerce taxes, suggesting that his is a more free enterprise agenda than that of Donaldson. Indeed, Cox claimed that, following the Enron and WorldCom collapses, lawyers were pursuing “a legalised extortion racket” in seeking compensation for investors from companies that were business partners of the failed corporations.

Cox’s response to his nomination by Bush stressed the importance of the role of the SEC in supporting entrepreneurs through “clear and consistently enforced rules” which enable “the free and efficient movement of capital”. The general impression is that the SEC will seek, under Cox’s leadership, to be more transparent in its operations and less likely to interfere with companies and their big investors.

While this policy shift at the SEC may go further than that at the UK’s FSA, there is a noticeable similarity in removing the burden of perceived over-regulation. Tony Blair argued: “Bodies set up to guard the public interest have one-way pressures. It is in their interest never to be accused of having missed a problem. So, it is a one-sided bet. They will always err on the side of caution.” It seems that the Prime Minister is determined to steer a course away from this.

This new direction for the FSA is backed by a general reshaping of business regulation, intended to produce regulatory bodies which are committed to less duplication of activities, more risk-based analysis, less cost for both government and commerce and a reduced impact on business innovation. Following the Hampton and Arculus reviews of regulation, published to coincide with the Budget, the Government is bringing together 31 existing regulators and merging them into seven “super regulators” to reduce inspection costs by a third. A risk-based inspection process will be backed by much larger fines on businesses that contravene rules regarding, for example, health and safety and environmental protection.

A new unit in the Cabinet Office, the Better Regulation Executive, will be responsible for an overall reduction in business regulation, setting tough targets for reducing the cost of administering regulations and further rationalising inspection and enforcement systems. This is to be backed-up by a Better Regulation Commission which will monitor deregulation progress and vet departmental plans to reduce regulation. This Commission will be expected to listen to business organisations and professional bodies which make proposals for regulatory simplification.

Andersen's last hurrah

Having gone, pre-Enron, from a Big Five firm employing 85,000 staff to, today, a rump organisation with just 200 employees, something has at last gone right for the once illustrious Arthur Andersen firm. Apparently it wasn’t guilty after all.

The case of Arthur Andersen LLP v United States could now become one more example of how the legal system sits in a parallel universe to that of real life. In some senses, this judgement now has little meaning. The firm is, to all intents and purposes, no more. Its clients have found other auditors and advisers. Its staff have found other jobs. But, more than three years after the original verdict of guilty of fraud, was it all one gigantic legal mistake?

After winding its way through the US judicial system, the Arthur Andersen case finally reached the Supreme Court at the end of May, on an appeal by the remnants of the Andersen firm against its conviction for fraud as a result of its role in the Enron audit. The judgement hinged on whether there was a need for the firm to have been proven to have had a conscious intention of wrongdoing in its act of destroying various documents relating to the audit.

According to the Supreme Court, the trial jury had been misdirected by the District Court judge when he said there was no need to show intent for Andersen to be found guilty. “The jury was told that, even if [the Arthur Andersen firm] honestly and sincerely believed its conduct was lawful, the jury could convict,” said Chief Justice Rehnquist on behalf of the Supreme Court. “The instructions also diluted the meaning of ‘corruptly’ such that it covered innocent conduct.”

But the Supreme Court did confirm the role of one of Andersen’s partners, Michael Odom, who (prior to Enron’s collapse, but when the company was known to be in serious trouble) in urging staff to comply with the firm’s document retention policy, told staff at a training meeting that “if it’s destroyed in the course of normal policy and litigation is filed the next day that’s great… we’ve followed our own policy, and whatever there was that might have been of interest to somebody is gone and irretrievable”.

However, the Chief Justice also explained in his judgement that “‘document retention policies’, which are created in part to keep certain information from getting into the hands of others, including the Government, are common in business”.

The judgement does not give the Arthur Andersen firm a clean bill of health. It merely - but crucially - says that the trial judge got the law wrong in his direction to the jury. And, as the Chief Justice spelt out in his judgement, now “the case is remanded for further proceedings consistent with this opinion”.

Acting Assistant Attorney-General John C Richter responded by saying he was “disappointed”. “The Justice Department’s decision to charge Arthur Andersen was based at the time on the determination that the substantial destruction of documents in anticipation of an investigation by the Securities and Exchange Commission violated the law,” Richter explained. “We remain convinced that even the most powerful corporations have the responsibility of adhering to the rule of law. We will carefully examine [the] decision and determine whether to re-try the case.”

The legal journey may yet be far from complete. Not only might Arthur Andersen v United States be restarted, but other parties to the collapse have their own problems. Citigroup has agreed to pay Enron investors $2bn to settle claims which alleged that the bank had been involved in creating false investments through off-balance sheet Enron partnerships. The settlement is subject to approval from Citigroup’s board, other parties and the court, and the bank denies violating any laws. Other major banks face similar lawsuits from Enron investors.

public sector risk

Public bodies in the UK must improve their risk management processes, according to a report from the House of Commons Public Accounts Committee. The need for risk management has become a much greater priority, said the MPs, because of the increased use of outside bodies to provide public services and assets and the challenges faced in implementing Sir Peter Gershon’s efficiency review.

Following on from the Gershon report, the Government’s spending review last year announced the intention to achieve savings of £21.5bn a year, staff reductions of 84,000 by 2008 and sales of £30bn assets by 2010, whilst also delivering challenging Public Service Agreement targets. Savings on this scale require new management approaches, streamlined controls and the successful management of associated risks, said the Parliamentary committee.

The scale of the problem facing the civil service, in particular, is shown by just 20% of government departments believing that they appropriately reward well managed risk taking. While the Prime Minister had established a “Risk Programme” to instil in departments a focus on the effective management of risks - which had raised the quality of risk management - this ended last December and, said the PAC, there remained a need fully to embed good quality risk management within departments’ key operations. The failure of departments so far to do this is illustrated by the fact that only a quarter of departments believe they know how much risk they face in achieving their objectives.

Factors which departments should particularly consider are the problem of information overload, the absence of contingency arrangements for particular risks and the need for regular assurance of delivery partners’ risk management arrangements. There may also be a need for greater understanding of risks undertaken by arm’s length bodies.

Edward Leigh, chairman of the Public Accounts Committee in the last Parliament, said: “Risk-taking is essential to radical improvement in public services. But taking risks should not mean leaping into the dark. It is disturbing that only a quarter of government departments know how much risk they face in achieving their objectives. Risk management must become an integral feature of the way public services are planned and delivered.”

He added: “Within departments, necessary cultural changes need to be reinforced, especially by rewarding the well-managed risk-taking that is part and parcel of finding new and innovative ways to deliver services.”

The theme of risk management in relation to Public Finance Initiative contracts was reinforced by Leigh when he spoke at a National Audit Office conference. Too often, he said, the public sector was hampered because of a lack of necessary skills by the public body entering into the contract.

One example quoted by Leigh in his speech was the Norfolk and Norwich PFI Hospital. Coincidentally, an NAO report on the refinancing of the hospital has just been published. Contractors Octagon made a gain of £115m in refinancing the original loan to build the hospital, of which, under a voluntary agreement, only 30% was shared with the hospital trust. The internal rate of return to Octagon’s shareholders increased from 16% to 60% as a result of the refinancing. The NAO also concluded that it might have been possible for the trust to have improved the original deal with greater competition and better defined contract requirements.

But, added Leigh, bodies awarding contracts must not only be aware of the risk of paying over the odds. They should also learn from the Steps contract with Mapeley - which bought some of the Inland Revenue and Customs & Excise property portfolio and leased it back - that under-pricing represents a severe risk.

Public bodies also have to consider reputational impact of contracts. Mapeley legitimately transferred the property portfolio soon after taking it on, to an offshore associated company to avoid tax liabilities, thus undermining the credibility of the Revenue and its policies in the eyes of some.