Just as IT professionals had to prepare for the Millennium Bug, five years on finance professionals are scrabbling to gear up for an event that could be even more momentous – the arrival of International Financial Reporting Standards.
The realisation that from January 2005 it will be compulsory for publicly-traded companies in the European Union to use standards developed by the International Accounting Standards Board has sent finance departments scurrying for detailed information. It has also forced organisations ranging from financial training operations to universities to offer courses on both the technical aspects of the new system and the potential implications of the change.
However, it still does not seem to be widely acknowledged that the new standards will have an impact far beyond the preparation of accounts.
But, as the description of the courses to be offered by the London School of Economics in April reveals, IFRS will have an effect on investment and financing, mergers and acquisitions, other contractual arrangements and investor relations.
When IFRS is combined with new corporate governance initiatives such as Sarbanes-Oxley in the US and the introduction of a new Combined Code – incorporating the Higgs report on non-executive directors and recommendations on internal controls – the effect is to make finance far too important to be left just to finance specialists.
However, the problem is that many professionals who are not financial specialists have limited knowledge of financial reporting rules as they currently stand, let alone as they will under the new order. “The overall level of financial acumen within UK and global businesses is lower than it should be,” says Eugene Deeny, sales and marketing director of financial training company Intellexis.
When you look at some of the strategic decisions made by boards, or hear senior executives in companies that have collapsed state publicly that they did not suspect anything was wrong, it is easy to conclude that financial understanding is rather patchy in many industries.
Although finance is central to the success of any business, there has been a tendency in many organisations to leave much of it to the specialists.
One result of this has been the creation of a specialised department that uses a language all its own, which can barely communicate with the other divisions within the company.
Deeny says this is likely to have so wide an impact that managers running such activities as leasing or research and development will be in danger of inadvertently affecting the company’s share price or risk profile – and hence the company’s ability to raise funds.
He stresses that IFRS will effect many operational aspects of the business, including budgeting, forecasting and how management is rewarded. But in much the same way that proponents of tighter rules on risk management insist that the best companies already abide by them because they realise that such an approach offers competitive advantage by forcing managers to think more about what they are doing and why, so Deeny stresses that raising the level of financial acumen “creates the ability to make better business decisions”. And if you have that, he adds, “you’d expect all the right things to start happening”.
An important factor in holding companies back from doing much about IFRS has been a lack of the urgency that executives traditionally require before they are prompted into action. But the imminent arrival of a new approach to accounting could change all that. Not least because, unlike the Millennium Bug, it will not be one Big Bang but the start of a process that will evolve over years. “IFRS is a great catalyst for FDs to say, ‘This is exactly what I need to start levering up financial understanding within the business,'” says Deeny.