Form over substance in universal accounting standards

Business has changed beyond recognition since I began my career at James Fisher in 1964 and the latest changes in the world of finance may be some of the most profound. There are certain eternal truths that once were, and sadly are no longer.

I spent my career as a finance director talking to various banking institutions, but I never thought I would see any of those banks on the brink of collapse. Or sitting opposite a banker in a meeting and thinking: “your company is more likely to go bust than mine’’. It is a novel position and unprecedented in my lifetime – and it underlines the seriousness of the situation the global economy has been through during the last few years.

As a company, we have always been conservative in our banking arrangements. But the banking crisis does force you to make sure that you are not in a position of being over-reliant on the banks and being careful in the decisions you make regarding financing. We have very good relationships with all our banks, but I would advise continued prudence in this area for all small companies, given some experts are predicting that a second credit crunch could be on the horizon.

Throughout my career as an FD, one lesson I have learned is that a person must adapt swiftly to the quickening pace of business, whether it is to the introduction many years ago of the first automated book-keeping machine, the first computer, or the introduction of accounting rules which, rightly or wrongly, are intended to make accounting universal across the globe. Computers have made our job and that of our team much easier. Universal accounting has made it quite a bit harder.

The role of the accountant – at the time I began my career – was recording the past and ensuring that the company’s assets were protected. Company accounts were written out longhand in a painstaking fashion; punch cards were used to record financial information.

As our business has grown and evolved from a shipping company into a marine services company with international interests, what I have found immensely enjoyable is the changing role of the FD: being part of a growing commercial team and, through the introduction of budgeting, being much more focused on proactively forecasting what is going to happen. It has meant the role is much more ingrained in the running of the company and the performance of different divisions.

While I have relished being a part of these changes and having to adapt, I do not entirely agree with the introduction of universal accounting standards through International Financial Reporting Standards, which effectively meld UK and US standards.

The reasons for my disapproval are as follows. Universality may be seen as a good thing, but what you gain in universality, you lose in terms of a more objective view. The interest is now in form over substance. Everything is about compliance, disclosure and presentation, rather than whether the information being recorded gives a fair and accurate view of the accounts – and therefore the health of the company.

The case in point I would use is Enron. While compliance may be achieved, in my view nobody stood back and said: “is this all correct and does this give a fair view of the company?’’ And did it, given the onerously long length of modern accounts (which I believe only the auditor of a company and the finance team ever read), set off the alarm bells in terms of the banks? Did anyone stand back far enough to see that one or two of them were dangerously over-stretching themselves?

I do not believe that the accounting rules give total protection. At the very worst, and in the wrong hands, they often encourage an indifferent and complacent approach. And that may be one of the more dangerous adaptations FDs have had to make.