Sweet Clarity: Rightly or Wrongly, Recent High-Profile Accounting Scandals in the US Have Dented Shareholders' Faith in the Quality of UK Firms' Financial Reporting. the Whole Accountancy Profession Is under Pressure to Improve the Transparency of the Information It Provides. Ruth Prickett Explains What Management Accountants Can Do to Restore Confidence. (Cover: Feature Reporting)
Prickett, Ruth, Financial Management (UK)
Ask a City fund manager to identify the best investment of the past year and they are likely to say "bottled beer--at least when you've drunk it you can take the bottles back and get the deposit". What they don't add is that bottled beer has another advantage: buyers are likely to get exactly what they paid for, which is something that few investors are confident about in the light of the accounting scandals that have rocked corporate America.
As the hype about "global recession" continues, it is worth remembering that share prices have plummeted for two distinct, albeit closely connected, reasons. First, there is a consensus that many shares, especially those in the telecoms industry, have long been overvalued and the readjustment is timely and necessary. Second, the discovery of massively overstated profits in huge US companies has destroyed investor confidence in company accounts, the integrity of the board and, perhaps most seriously, the independence of external auditors.
The furore has raised myriad questions about the relative virtues of US Gaap and international accounting standards (IAS); the value of the "true and fair view" in the UK reporting system (which was revised after the Polly Peck and BCCI scandals in the early 1990s); the role of non-executive directors, the incompatibility of auditing and consultancy services under the same roof; and the liability of individual directors. All these questions are valid, but companies cannot afford to wait for the arrival of new regulations to reassure shareholders. Trust is a nebulous quality. It is not enough to know that your firm's accounts are entirely accurate; your investors have to believe that too. Unfortunately, it is far harder to prove innocence than to prove guilt.
It doesn't help that Andersen's shredding machines did more than demolish faith in external auditors--most people do not distinguish between different types of accountants.
"It is unfortunate that the scandals happened in America," says one City pension fund manager. "Surveys have shown that the US public had huge faith in their accountancy profession and its regulations. If this had happened in Italy, where public expectation of corruption is much higher, the shock would have had afar smaller impact on share prices."
Others argue that the US and UK views of auditors actually helped to cause conflicts of interest. "In France, when the accountant comes through the door, people react with deference and view him like a judge. In the UK, they say `oh no, not the bloody auditors again'," says Christopher Jenkins, senior partner at accountancy firm Wingrave Yeats.
"There has been an increasingly strong emphasis for auditors to `add value' to the firms they audit. External accountants should not be that closely involved in the business. They should be the ones remembering that the firm's money belongs to the shareholders, not the board" Jenkins says. "Who looks after the the interests of the owners when the people they've given responsibility for running the firm are being advised by those who should be policing the business for the shareholders?"
Of course, accountants are not the only ones who have been critieised for failing to safeguard investors' interests. Analysts have been accused of being more likely to recommend investors to buy stocks in companies that their firms are advising. The independence of non-execs has also come under increasing scrutiny.
Other commentators have pointed out that investors often fail to research their purchases adequately. "They tend to focus on a few headline figures and often ignore the following 20 pages of notes on accounts," says Julia Penny, director of training at accountancy firm Chantry Vellacott DFK. "Non-finance people often don't understand that very important information about companies' assets or liabilities may appear only in the footnotes."
It's now time for accountants to pick up the pieces and restore faith as best they can. …