Accounting rule-makers attacked for putting theory before reality
Jennifer Hughes | Monday, 7 July 2008
Accounting rule-makers are so steeped in theory and academia that they risk endangering the smooth functioning of the world's capital markets, according to a senior industry figure.
Michael Starkie, chief accountant of BP, has attacked the competence of the International Accounting Standards Board (IASB), which sets rules for more than 100 countries.
In a letter in a recent issue of Financial Times, he says the IASB does not collectively have the necessary "experience and wisdom" to produce truly useful accounting rules and he calls for some members to be replaced.
The comments come at a sensitive time for the rule-makers. US authorities are on the verge of agreeing to switch to the IASB's accounting system but are facing domestic concerns about the value of making the move. US acceptance is crucial for the IASB's goal of converging the world on to a single system.
Mr Starkie's views also reflect a long-running concern among many accountants and investors about the focus of some IASB members on developing a coherent theoretical accounting framework without due regard for business practicalities. The danger, they fear, is that if accounting becomes less reflective of companies' operations, investors could lose trust in published accounts, which would raise the cost of capital for companies and upset financial markets.
This has come to the fore in the fight over "fair value" accounting, where assets and liabilities are reported at their market price. While most accept this for frequently traded financial instruments, there are fears that some IASB members want to extend the concept to assets for which there are no markets, potentially forcing companies to produce hypothetical values.
"Ironically, that would introduce a degree of guesstimation into financial numbers that if it were companies who called for it, they'd get howled down with derision for wanting to fix the numbers," said Mr Starkie in an interview with the FT. The IASB has said it has no intention of extending the practice.
Mr Starkie called on the International Accounting Standards Committee Foundation, which oversees the appointment of IASB members but does not have influence over the rules the IASB produces, to take urgent action to "reconstitute" the board.
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Under syndication arrangement with FE
Michael Starkie, chief accountant of BP, has attacked the competence of the International Accounting Standards Board (IASB), which sets rules for more than 100 countries.
In a letter in a recent issue of Financial Times, he says the IASB does not collectively have the necessary "experience and wisdom" to produce truly useful accounting rules and he calls for some members to be replaced.
The comments come at a sensitive time for the rule-makers. US authorities are on the verge of agreeing to switch to the IASB's accounting system but are facing domestic concerns about the value of making the move. US acceptance is crucial for the IASB's goal of converging the world on to a single system.
Mr Starkie's views also reflect a long-running concern among many accountants and investors about the focus of some IASB members on developing a coherent theoretical accounting framework without due regard for business practicalities. The danger, they fear, is that if accounting becomes less reflective of companies' operations, investors could lose trust in published accounts, which would raise the cost of capital for companies and upset financial markets.
This has come to the fore in the fight over "fair value" accounting, where assets and liabilities are reported at their market price. While most accept this for frequently traded financial instruments, there are fears that some IASB members want to extend the concept to assets for which there are no markets, potentially forcing companies to produce hypothetical values.
"Ironically, that would introduce a degree of guesstimation into financial numbers that if it were companies who called for it, they'd get howled down with derision for wanting to fix the numbers," said Mr Starkie in an interview with the FT. The IASB has said it has no intention of extending the practice.
Mr Starkie called on the International Accounting Standards Committee Foundation, which oversees the appointment of IASB members but does not have influence over the rules the IASB produces, to take urgent action to "reconstitute" the board.
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Under syndication arrangement with FE