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Corporate governance: Happy families

It is the oldest solution to a family squabble. Fractious
participants show no signs of resolving whatever the dispute is. So you step
back and ask a member of the family who is removed from the argument to give
their views. And, invariably, old uncle Arthur’s opinion can bring peace, or at
least a rational judgement, to what had seemed a totally intractable battle
between siblings.

Perhaps it is time to do the same with the vexed question of the
implementation of international financial reporting standards. In the UK and
Europe, finance directors, standard-setters and auditors have all been involved
in the interminable in-fighting over IFRS for so long that there should be no
surprise that exhaustion and resulting poor judgement have now set in.

It is easy to forget that there are other participants in the IFRS
implementation process. We have tended to focus on the arguments of the French
banks, the squabbles between the various interested parties among European
regulators and quasi-regulators, the testy reactions of finance directors caught
between a rock and a hard place with their fellow directors over some IFRS
interpretation or other, and the auditors as they spit blood when accused by
clients of being dilatory over the timeliness of their advice.

We forget that the implementation of IFRS in Europe, which was compulsory and
set in train by the EU itself, is not the be all and end all of the process.
Virtually every developed business nation around the world, somewhere around a
hundred of them, has also implemented IFRS. And unlike the European experience
they have mostly chosen to do so voluntarily, rather than having it imposed upon
them. The European implementation was always going to be the hardest. Companies
across the EU always had a default setting of blaming the EU institutions or the
International Accounting Standards Board available to them if the going got
tough. And many of them did.

So, in Europe it would be easy to look back over the squabbles and think that
something unwanted and complex, and most important of all, useless, had been
foisted upon the corporate world. But if you look elsewhere the picture is
rather different. I have recently produced a report for accounting firm KPMG on
what the movers and shakers around the world think of the IFRS implementation
process so far. And one of the most interesting parts of that process was
talking with Jeff Lucy, chairman of the Australian Securities and Investments
Commission, which both regulates and enforces company and financial services

He talks a different language. Australia has always had a strong
standard-setting tradition and it has an equally strong voice and presence on
the IASB. This, in part, is geographical. If you feel that you are on the other
side of the world from the perceived powerhouses of the UK, US and continental
Europe there is a strong motivation and desire to punch above your weight. So,
for the Australian economy, IFRS was not something primarily to grumble about in
the tetchy way that people do in the European arena. It was a way of staying in
the game. “We were motivated by the need for a common accounting language,” says
Lucy. “We needed to ensure that our major companies were not going to be
disadvantaged.” He believes the process of implementation had gone well. But,
unlike in Europe, this came as no surprise. It is down to having a different
purpose. “I wouldn’t rate it as a surprise,” he says, “but as a regulator we
expected some companies to have more difficulties at, for example, the audit
committee level, finance director level or at the audit level. But everyone has
responded to the challenge.” There is none of the crossness of the European
arena. “I don’t think Australia has any regrets,” he says.

This is important. Australia has a much higher level of direct investing by
members of the public than, for example, in Europe. More than 50% of Australians
have a direct interest in shares. “Comparability is now the key,” he says. “Our
investors are now better served. And anything which lowers the cost of capital
is to the advantage of the Australian community.”

And what does he think of the process so far ? The overall goal of a global
set of standards is “without question much closer,” he says. “It is almost in
the category of ‘beyond our wildest dreams,’” he says. “Many countries in Asia
are now focusing on adoption. The necessity for reconciliation of accounts with
the US will be gone by sometime between 2007 and 2009.”

These views are a huge contrast with the internecine rows still being fought
wearily in the UK and Europe. And there is a lesson in this. Perhaps people
should look rather more at the positives which can be gained from getting on
with the IFRS job. And try and rise above the temptation to simply prolong the
old family squabble.

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