The starting points for accounting standards ought not to be shareholders, but the needs of a competent board of directors, Roger Davis, head of audit at Coopers & Lybrand told last week’s UK Future Direction of Accounting conference. ‘I defy anyone to say why shareholders should need some different set of principles from those that the board themselves use,’ he said.
Whether shareholders were fooled by company accounts was irrelevant, Davis argued. More important was whether directors fooled themselves.
His views were reinforced by Hugh Collum, finance director at consumer products giant SmithKline Beecham, who said: ‘The first line of defence in investor protection is a manager who has a clear view of what is happening in the business.’
Davis seized the high ground in the conference when he unveiled a 20-point code of principles which, he said, addressed 90% of the financial reporting issues that crop up – the answer to most of which was ‘common sense’ (see box).
He argued that every accounting standard ought to ‘start with an analysis of what it is in that particular area that a competent board needs to manage its business.’ The code was not an alternative conceptual framework, but a set of ‘basic tenets of accounting. If we can’t hold to these, then we’ve lost the rest.’
Davis also warned finance directors that ‘the global accounting standards aircraft may not have taken off yet, but it has been cleared to taxi – and it is absolutely vital that the UK is not only on board, but is up there in the cockpit,’ he said. Finance directors had to take part in the debate on international standards, or else ‘the rest of the world will pass us by’.
Collum agreed: ‘The main role of the ASB must be to act as a link between finance directors in business and the IASC.’ He explained that the pressure for international standards comes from the needs of international companies, not the profession, nor academics. ‘In a competitive world we need access to international capital markets on terms that allow investors and managers to make meaningful and rational choices,’ he argued. International standards had a role to play in making this possible.
‘The point King Canute wished to make was that even a king can’t stop the tide coming in,’ Collum said. ‘Too many think that they can hold back the tide of international accounting standards.’ He admitted after the conference that hundreds of UK companies operate in overseas markets, but there were perhaps only 30 in Britain that could claim to be truly international, in the sense that they need access to international capital markets.
But Davis thought that the need for international standards extended beyond the requirements of capital markets: ‘It is much more an issue of trading partnerships, particularly with the new emerging economies of the East. It’s about global confidence in accounts around the world, for trading purposes as well as capital markets.’