Globalisation of accounting: Guyana's challenge
by Christopher Ram
March 28, 2004
Repeatedly over its life, this column, perhaps not unexpectedly, has referred readers to such terms as 'accounting principles' and 'accounting standards,' in a way which unwittingly suggests that it takes for granted that readers are aware of, and understand these terms. For that, this column apologises, and today seeks to trace and explain, hopefully with as little jargon as possible, recent developments in the accounting profession. Even without being religious/Christian, readers may be aware of many accounting concepts reported in the Bible while registration with the tax authorities was one of the stated reasons for Christ's parents being in Bethlehem at the time of his birth. But the concept and structure of accounting as we know it today in the west - every transaction having an equal and corresponding debit and credit - goes back only about five hundred years, and its origin is credited to one of Columbus's friends in Italy, a gentleman by the name Pacioli.
For centuries, Pacioli's accounting has remained the standard, and it is safe to say that nothing will ever change that. Not only that, but the world operated on what were, and still are referred to as generally accepted accounting principles, which of course were not as general as claimed, being more a matter of degree. It is a reminder of my age that the first attempt at the codification of accounting standards in the UK took place while I was a student of accounting in that country. While the accounting bodies from a group of countries got together to formulate, promote and enforce International Accounting Standards, there are no global standards and there are still significant differences among the major countries on how specific accounting matters are dealt with, giving rise to the comment in the UK immediately after the Enron affair exploded in the USA, that "it could not happen in the UK."
We must not forget that Europe took a fairly similar position, and it took the revelations of accounting and governance failures in leading companies such as Vivendi, (France) Ahold (Holland) and more recently Parmalat (Italy) to moderate European arrogance. Part of the problem it seemed was that neither the accounting professions nor the securities regulators were willing to accept the possibility that each country has the seeds of its own Enrons, or to contemplate the consequences on their economy of any major failure, particularly when their 'blue chip' companies were involved. This is not to suggest that there were not serious attempts at reforming the rules of accounting coincidental with the reform of corporate governance, which by its general nature is considered a more sexy issue as it appears to be a logical extension of the debate on accountability and transparency.
In June 1973 the professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland and the United States of America formed the Accounting Standards Committee (IASC) with the stated intent that the new international standards it released must "be capable of rapid acceptance and implementation world-wide." The IASC survived for 27 years, until 2001, when the organisation was replaced by the International Accounting Standards Board (IASB).
Just a few months ago, the International Accounting Standards Board published the revised versions of fifteen standards and withdrew one. Two standards have also been issued under the new name 'International Financial Reporting Standards,' while a few new standards are expected during this year.
While some credit must go to the accounting profession across the world for finally completing the improvement project, it is Europe, representing the largest grouping of countries, that is driving the process, as it seeks to meet a 2005 target for the financial statements of all listed companies in EU member countries to be prepared in accordance with International Accounting Standards. Needless to say, the countries of the Caribbean are mere spectators in this process, although the impact will be direct and immediate for two unavoidable reasons. The first is that both the leading indigenous as well as international companies in the region are audited by one of the 'Big Four' international accounting firms, which make no exceptions about the standards they follow. The second is that the national professional bodies in the Caribbean are affiliated to the International Federation of Accountants, by virtue of which compliance with international auditing and accounting standards are mandatory.
But the real driving force has been circumstances and the regulators of international capital markets (stock exchanges) represented by the International Organisation of Securities Commissions (IOSCO), as they followed the goal of the integration of capital across the world. They were in pursuit of financial globalisation and were attempting to minimise, and if possible, avoid, the financial and corporate governance failures which Enron and WorldCom came to characterise.
In July 1995, the Board of the IASC and IOSCO's Technical Committee announced that an important milestone had been reached in the development of IAS. The board had developed a work plan (to become known as 'the core standards work programme') that the technical committee agreed would result, upon successful completion, in IAS comprising a comprehensive core set of standards. Only in 1998 did the IASC complete its core standards.
At the end of the work programme, the IOSCO Technical Committee assessed the core standards, and recommended that their members permit incoming multinational issuers to use the 30 standards in existence in 2000 to prepare their financial statements for cross- border offerings and listings. Supplemental treatments were given to address outstanding substantive issues at a national or regional level.
A world view
In February 2000, (pre-Enron, WorldCom, Tyco etc) the US Securities and Exchange Commission (SEC) published a 'Concept Release' that was effectively an uncomplimentary critique of International Accounting Standards and sought comments to determine under what conditions the SEC "should accept financial statements of foreign private issuers that are prepared using the standards promulgated by the International Accounting Standards Committee."
America's own reluctance to accept IAS which it considers inferior to US GAAP, a view which many accountants share, was certainly helped by the fact that even barring the US, not all of the countries which were involved in the formation of the IASC have adopted the standards created by the body.
The signs are however fairly encouraging as except for Canada, Japan, Mexico and the United States, all of the founding members have taken steps to adopt these Standards by 2005. Several of these countries are in the European Union so would have been part of the convergence discussion of the entire grouping.
Australia has announced that it will be adapting the IASB Standards modified to accommodate the Australian legislative environment, a position which Jamaica initially took. Canada will allow the use of the IASB Standards by foreign issuers and registrants listed on their Stock Exchange from March 30, 2004 and will also permit US GAAP.
In the United States, the Securities and Exchange Commission voted just a few weeks ago to propose amendments which will ease the transition by foreign issuers to IFRS's including comparatives for two years only but requiring issuers to provide adequate reconciliation to US GAAP. The Mexican Institute of Public Accountants follows International Accounting Standards and uses US GAAP when the International Standards do not address an issue. Japan has identified convergence with International Standards of primary importance while most other Asian/Pacific countries generally follow IAS.
Guyana like the rest of the Caribbean follows IAS's, compliance with which is quite onerous for small companies, a fact inferentially recognised by the Companies Act which allows the Minister to dispense with the audit requirement, but which he has failed to trigger. As a result, even a company with sales of ten thousand dollars per month requires an audit and compliance with IAS's.
There are grounds for optimism and relief as the IASB is currently working on a set of standards suitable to small and medium-sized businesses. While some issues facing the profession are affected by the pace of our law makers, the local institute is not without options.
Guyana's difficulties are compounded by the lack of clarity and intellectual rigour of some of the accounting standards, including the strange situation where the 'benchmark' treatment is not superior to the alternative treatment, the resistance of public companies to comply with disclosure requirements, the absolute incapacity of the office of the Registrar of Companies to carry out its mandate under the Companies Act, the under-resourced Securities Council, the general lawlessness in the country, the unwillingness of the institutional investors to exert any influence on companies and the spinelessness of independent directors.
Accounting standards are part of and not a substitute for good governance. Compliance with the standards is quite costly and discourages incorporation in favour of the non-incorporated entity, which is often an easy route to tax evasion with which regrettably some so-called accountants seem to be willing to lend their names.
Even the professional accountants must be willing to live up to their higher duty to their profession than to submit to the baser instinct for fees. One accountant told me very recently that he is being courted by attorneys to help defend non-compliance! The Institute of Chartered Accountants of Guyana needs to do more both to educate the public and ensure that its members promote compliance.
There is a need for the society to recognise and respect the regulators, especially the Registrar of Companies, the Guyana Securities Council and the Bank of Guyana. In return they must understand that to earn that respect they will need to fully and fearlessly execute their mandate.