With Brexit, the question now is whether the British lawmakers would ask the British companies to file their financials using a different set of accounting rules than the current International Financial Reporting Standards. Some British politicians and investors have been heard saying that the IFRS has compounded the financial crisis and that these rules lack rigor.
I wouldn’t say that IFRS lacks rigor, as IFRS is more principle based it could lead to different interpretations for similar transactions which might lead to different accounting presentations by different companies. IFRS doesn’t necessarily define everything in the standard, it lets accountants use their judgment.But it doesn’t lack rigor, it is more open to interpretation and judgment.
If the listed companies in Britain do not use IFRS, then there are multiple issues. One being what would the new standards be, then implementing those standards and recreating the financials. As with change of standards, one would have to show prior period numbers under the new standards as well. It would be an accountant’s biggest nightmare. Considering that year end is nearing, this should be resolved quickly and in favor of status quo.
The other thing to consider is, if Britain moves away from IFRS, then the International Accounting Standards Board which is the standard setting board and is the one that issues IFRS will have to move from its current headquarter location in London to another country in the European Union. If Britain stops using IFRS, it puts a big question mark on the future of the standard itself. Also considering that for the past few years both FASB (Financial Accounting Standards Board- the board that works on US Generally Accepted Accounting Principles) and IASB have been working on the convergance project, it puts a question mark on the future of the project as well.
The recent accusation of HP against Autonomy, the British software company that HP bought for $11B, raises fingers in all directions. Who is it at fault- Autonomy management, the management of HP, the auditors, or the differences in the accounting standards? Let’s look at the issue and the various parties involved.
HP wrote down the value of Autonomy on its books from $11B to $2.2B. $5B of the $8.8B write off HP alleges is due to serious accounting improprieties and willful effort by Autonomy to mislead shareholders. According to HP general counsel John Schultz, Autonomy created more than $200 million in revenue over a two-year period from 2009, which would amount to 12.5 percent of Autonomy’s $1.6 billion in revenues in their annual accounts for 2009 and 2010. HP accuses that Autonomy booked licensing revenue upfront before deals closed thereby inflating revenue.
In his defense Mike Lynch, head of Autonomy puts part of the blame on the differences between International Financial Reporting Standards (IFRS) (Autonomy maintained books under IFRS prior to its accusation by HP) and US GAAP (The standard HP uses). IFRS as we know is broader and does not have strict rules; it has more room for interpretation vs US GAAP which is rule based.
The question is when HP was buying Autonomy did they not do their own due diligence. When a company spends $11B, the investors expect that they would have reviewed the financials and done thorough check of the acquiree. Why did HP not look into the books deeper? In their defense HP says they relied on the stamp from the auditors, Deloitte in this case. Isn’t it the duty of the board and management to take an extra step and do their own due diligence!
Next party in this fiasco is Deloitte. Not only is Deloitte auditors of Autonomy but also of HP. The issue raises the topic again whether audited financial statements can be relied on completely. Are auditors doing their job properly, because if they were there would not be such big fiasco every few months?
Well I believe all these parties are to blame, HP for not doing their own due diligence, Autonomy for taking the most lenient interpretation of the standards, and Deloitte for not doing their job properly.
When the financial crisis was at its peak in 2009, the G20 group met to set a date for the worldwide convergence of the financial standards by end of the year. The deadline got postponed to mid-2011 and then again mid-2013. In a recent report from the SEC which made it clear that the IASB cannot be the lead, the convergence project is in doldrums now.
The G20 met again this week to talk about the deadline. The update is that The Financial Stability Board, a G20 task force, will request by no later than end June 2013 a joint IASB-FASB report on all outstanding items with a specific timetable for completion.
Let’s hope that there will be some resolution on the convergence project before there is another financial crisis.