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Yellow brick road to the FRRP.

When the Accounting Standards Board was first established in the early 1990s, its chairman, then plain Mr David Tweedie, spent a lot of time on lecture platforms explaining how the new accounting standard setting regime was destined to operate. One part of his speech he clearly relished: when talking about the role and responsibilities of the newly dreamed up Financial Reporting Review Panel (FRRP), he would illustrate his point with a picture of a gallows. The message was clear: any company or finance director messing with the accounting standard would find themselves swinging at the end of the corporate noose. It is a profound disappointment to some observers, and no doubt a testimony to the strength of this particular bit of regulatory framework, that while one or two companies and their auditors have been marched up by the panel to examine the rope in some detail, no neck has actually been wrung. The FRRP has authority over the accounts of quoted companies, other public limited companies and large private limited companies. It can seek a court order requiring directors to revise their company’s accounts. The court may also tell the directors to stump up the costs from their own pockets. To date, no court action has been taken as all the companies hauled up before it have agreed to make the amendments required. The FRRP has succeeded in its primary task of ensuring that accounting standards are followed. But according to research* by the University of Portsmouth, it is clear that many of the directors and auditors who have come into conflict with the panel feel bruised by the experience. According to the academics, there is evidence that the FRRP indulged in “myth” building (though this was not necessarily conscious) when it was established. This idea is based on the work of institutional theorists who say that organisations need to respond to social expectations. A public organisation – such as the FRRP – needs to make efforts to maintain and manage legitimacy to external supporting groups in order to retain outside support. These myths, such as Tweedie’s picture of the gallows, built up the FRRP as providing a solution to the problem of creative accounting which had been so prevalent in the 1980s. And the Wizard of Oz reference in the title of the research report reflects this: although everyone believes in the eponymous wizard, he has no real powers at all. Although all of the directors interviewed by the academics said that they supported the idea of the panel in theory, they were convinced that the FRRP’s motivation in pursuing particular cases was based on a desire to enhance external perceptions of its work. One unnamed director (all the interviews were given on the understanding that anonymity would be preserved) said: “The panel was in its infancy. It wanted to show it had teeth. What better example than a major firm of accountants and a major high-profile plc?” Another said: “We felt that they needed a number of scalps and we were a soft target.” Another hauled up before the panel was disgruntled because he believed equivalent or worse practices were perpetrated elsewhere. He said: “Our accounts are a model compared to some of our competitors’. And it just seemed to be such an unbelievable waste, not only of our time, but of their time as well.” One victim believed his company was the subject of a “fishing expedition”, in that the FRRP originally approached him with a long list of issues for discussion, most of which were subsequently eliminated. The company said it was frustrated at the lack of clarity concerning the alleged breaches. Four of the companies interviewed said that they had considered going to court, but two assumed the FRRP had such wide powers that the directors would lose any court case. The other two, though convinced they would win, backed down because of practical concerns of cost, delay and uncertainty. In many ways it is astonishing that no company has as yet taken on the panel. When its authority is finally tested in open court, it will be fascinating to see who comes off best. * We’re Off to See the Wizard: An evaluation of company experiences with the FRRP by Tony Hines, Karen McBride, Stella Fearnley and Richard Brandt, Department of Accounting and Management Science, University of Portsmouth.

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