Call for the sword of Damocles Accounting

Tuesday, 01 October 2002


    One of the most important factors in ensuring the smooth functioning of any corporate disclosure regime is having an active and properly resourced enforcement regime.

    The recently released CLERP 9 does not provide much evidence that the Federal Government has thought much about how it intends to ensure accounting standards and their interpretation must be dealt with to ensure the maintenance of investor confidence in the quality of financial reporting. CLERP 9 sets down many ideas – some good, others rather pedestrian – but it is the absence of an effective device to bring directors and executives to account for their interpretation of accounting standards is a hole to be plugged for the package to work. Some threat needs to hang over the head of all major players involved in the preparation of financial statements to provide an additional incentive to comply with the spirit of accounting pronouncements. The present regime has a disciplinary board that deals with auditors and liquidators. Auditors are of particular relevance in this context because of the stark contrast between the way auditors and others involved in the process of communicating with the markets are treated.

    No disciplinary structure exists to bring directors, chief executives and chief financial officers to heel when it is discovered they have participated in preparing a set of financial statements that contravene one or more accounting standards. There is a need for a body consisting of appropriately qualified individuals with the authority to hear matters related to contraventions of accounting standards that are brought before it by ASIC. Such a board would ensure accounting matters will be decided by individuals who have more than a casual familiarity with the content and application of accounting standards when company accounts are being prepared. A board with a similar statutory status as the Companies Auditors and Liquidators Disciplinary Board should be formed to make determinations on whether financial statements did not meet the Corporations Act objectives of compliance with accounting standards and truth and fairness. Where it is found that those objectives have not been met the offending corporation must be forced as a minimum penalty to restate and reissue its financial statements.

    A schedule of financial penalties would need to be set so to those sitting on the panel of what could be termed the Financial Statements Review Board can determine the most appropriate financial penalty for the company. One of the features lacking in the CLERP 9 package is the requirement to force chief executives and chief financial officers to attest to the correctness of their financial statements. That practice, which was supported by in the recently issued report of the Joint Committee of Public Accounts and Audit on auditor independence, places an emphasis on the behavior of those actively involved in both preparing and supervising the preparation of financial statements. Such a sign-off – a requirement that's been downloaded from the US – would also allow a Financial Statements Review Board to bring those individuals before it to explain why certain practices were adopted in the preparation of accounts as a means of having a disciplining regime available for those individuals. It is not just the board of directors that will bear the brunt of an action against the company.

    Members a board to hear a dispute over an account matter should be drawn from a pool of talent selected by a nominating committee of highly respected individuals. Matters should be heard by a board of five selected from a pool and the hearings must be in public. There is little point in dealing with this kind of matter in private when it is clear that the financial statements under question have been issued to investors and sent to others in the community. Once the financial statements have been issued then any disciplinary action must be heard in public. This is important for the preservation of the transparency of the system. Unless the community can see these processes at work there is always the potential for the lack of transparency to be used against the profession and the corporate community when another series of collapses occurs. Those who think opening up processes to the public gaze will result in huge numbers fronting to the meetings of any disciplinary board, think again. The Urgent Issues Group and the Australian Accounting Standards Board have hearings in public and few people sit in the public gallery.

    CLERP 9 also spends much time justifying the move to international accounting standards by 1 January 2005. All it amounts to, in fact, is some reasoning of the decision made by the FRC to direct the AASB to ensure the standards of the IASB are adopted in Australia by 1 January 2005. That decision is now being subjected to greater questioning by the financial reporting experts and companies because of the manner in which the decision was made. No formal consultation process involving an exposure draft explaining what the council's directive means and how the change will affect the general business community. That fact alone should ensure that the merits of transferring of various oversight functions to the FRC such as that of oversight of the audit standard setting process should be questioned. And that point may well be behind the questioning of the FRC's decision that occurred during the recent forum on accountability held in Canberra last month.


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