Global standards are set to provoke continental shifts in accounting rules

Andrew Leck

IN THE eye of another economic storm, the issue of whether the world will take a step closer to having one set of accounting standards may not be at the top of most executives’ minds. Yet, in less than a month, the way in which companies around the world report their performances could see a fundamental shift.

The US regulator, the Securities and Exchange Commission (SEC), is in the final stages of deliberating whether the States should adopt International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (ISAB) rather than complying with US Generally Accepted Accounting Principles (US GAAP).

Hot on the heels of the decision will come the G20 in November – which, having already called for the establishment of one set of common reporting standards as a way of bringing the global economy back into line, will be asking for an update on progress.

While ACCA, with more than 600,000 members and students around the world, has always seen the value in having a common set of standards by which to report, we have also believed that the views of the end users of accounts are critical in any decision making.

Too often, investors and potential investors have the sense that they have been kept on the sidelines of the debate, which has broadly raged around the merits of rules-based standards, such as US GAAP, against those of principles-based standards – represented by IFRS.

This is nonsensical given that the issue – which boils down to whether they can trust the numbers they read in accounts and compare them with those of other businesses – is the equivalent of their ball being kicked around.

This is why we asked investors and Chief Financial Officers (CFOs) in Asia Pacific, the Middle East, Europe and the US for their views on whether global standards can really help to resolve global economic issues.

Judging from the responses, it appears that, broadly, they do. Just over half of CFOs and finance directors (FDs), 52 per cent, and 58 per cent of investors, have a positive view of the benefits of global standards.

The international study, which surveyed a total of 163 senior executives from a wide range of industries, including the financial sector across the US, Europe, Asia and the Middle East also found that just 6 per cent of CFOs and FDs and 11 per cent of investors believe that global standards have had a negative effect on international trade.

The study also found that as investors and finance professionals became more familiar with IFRS that any resistance they might have had to using the new standards were eroded.

There were also signs that global standards can bring tangible benefits to business. Critically, more than 40 per cent of respondents said that using IFRS had improved access to capital. And over 50 per cent of respondents said that the spread of IFRS has had quite a positive effect in facilitating cross-border activities.

This is significant, not only in tough times when survival is paramount, but also for businesses which need to recruit more staff, or to buy new equipment to enable them to take advantage of any sustained recovery, when it finally arrives. One of the riskiest times for businesses is during a recovery – because if they are unable to meet increased demand because they do not have capacity or the potential to expand rapidly, they face failure.

Alongside global financial reporting standards the study shows that there is an appetite for global standards in other areas too. For example, over 40 per cent of investors found benefits from a switch to international standards of auditing in terms of quality and cost. And a rising demand from investors and customers for greater disclosure is fuelling an appetite for global standards in non-financial reporting.

The majority of respondents believe global standards would improve areas such as corporate social responsibility and environmental risk, with a view that companies’ risk management would also benefit from having to report to a high, globally recognised standard.

And there was strong support for global standards in the critical area of corporate governance. Interestingly, given all the problems with the ways in which bonuses are paid in the finance sector, 70 per cent of investors and CFOs thought that global standards or benchmarks in corporate governance would encourage more long-term thinking in the boardroom.

There is also a clear recognition of the potential benefits of integrated reporting – whereby financial, governance and sustainability information is presented together – which would improve decision making by giving a more accurate picture of overall corporate performance. We believe that if global standards are to deliver on their full potential for investors, finance professionals and wider society, then countries need to resist the temptation to carve out sections which they do not like, or add on specific requirements because they believe they have a better solution.

The key issue is ensuring the standards that are in place are the best to serve stakeholder interests – and the feedback is that those standards need to be global. Our study suggests that investors and finance professionals recognise that achieving the best possible environment for standards requires a more concerted effort by stakeholders – those who issue and use financial reports – to explain what they want to see in the reports written to these standards.

Judging by the value that many executives see in global standards as a means for better aligning the interests of investors and corporate boards, there appears to be ample motivation for more engagement.

Given that, there is real hope that investors will cease being limited to the role of mere spectators.