Accounting Standards

Global ethics and international accounting standards

The Publish What You Pay campaign is where international politics, financial reporting, and the developing world intersect. The campaign seeks to force companies in extractive industries (such as oil and gas) to make public their payments to governments in the developing world.

It began in 1999 with an “exposé of the apparent complicity of the oil and banking industries in the plundering of state assets during Angola ‘s 40-year civil war. It became clear that the refusal to release financial information by major multinational oil companies aided and abetted the mismanagement and embezzlement of oil revenues by the elite in the country.”

The campaign is supported by numerous charities and political organizations such as Oxfam Great Britain and Human Rights Watch. They lobby bodies like the World Bank and IMF, as well the IASB, the International Accounting Standards Board.

Publish What You Pay calls for an International Financial Reporting Standard for the extractive industries to include a requirement that extractive industry companies disclose in their accounts all payments that they make to the governments of countries in which they extract resources, and to agencies or representatives of those governments.

Sounds like a good idea to me. It’s actually surprising to me as a young idealist that this isn’t already part of international standards. But the most recent letter sent from PWYP to the IASB on the matter expresses the campaign’s consternation with the IASB’s actions to date, and I have to agree.

The IASB’s proposed standard leaves segmentation up to management’s discretion, rather than mandating country-by-country grouping. The standard is barely even that – it basically just codifies laissez-faire.

I’m dismayed to say the least by the lack of support this has received from the Board thus far. In a few years I will be working primarily with IFRS as Canadian GAAP converges. I’d like to see a greater sense of urgency on their part in matters of this importance.

The PWYP letter smartly points out “companies already need to generate [country-by-country segmenting] in order to complete tax returns in each country of operation, this should not prove an additional burden.” They also use the lingo: “The citizens of [poor yet resource-rich] countries are important, if non-traditional, users of financial information.”

This is one of those areas where the IASB could showcase those pervasive qualities in public accountancy like ethical conduct and protecting the public interest.

Accounting Standards

No new international accounting standards effective before 2009

The International Accounting Standards Board (IASB) has announced they won’t be issuing any new standards or major amendments to existing standards with effective dates before January 1st, 2009, in order to give companies reporting under the standards a bit of a breather to get their house in order.

Word around the accountant blogosphere has been tentatively in favour of the break. Maybe it’s my impetuous youth, but I’m not. Full speed ahead, as far as I’m concerned. If businesses are having trouble getting their accounting in line with new standards, then they need to hire someone to help them get it done. Business waits for no one, so why must accounting?


First options backdating investigation initiated by SEC

Brocade Communications Systems has become the first company to be formally investigated by the SEC regarding the recent options backdating issue.

According to the SEC’s complaint document, which names three former executives of the company as plaintiffs, from 2000 through 2004 the company inflated net income by understating their options-related expense through fraudulent schemes to backdate options.

Under US GAAP, options granted with an exercise price higher than the current market price did not need to be expensed, but options granted with an exercise price lower than the market price (known as “in the money”, or as I like to call it – instant profits) must be expensd.

So, Brocade is alleged to have granted in the money options to their execs and backdated them to when they were “out of the money”, in order to avoid the expense while allowing the executives to reap instant profits.

I’m going to have a post in the near-future where I outline current Canadian GAAP related to stock-based compensation, so stay tuned for that gem!


What Enron meant to me

Enron burst into flames around January 2002. I was just starting my second semester at Brock University in the esteemed Bachelor of Accounting program when the Houston-based company went down.

What did this mean to a 19-year-old Canadian accounting student with no share holdings and no knowledge of the energy trading giant from Texas? Actually, a lot more than I’d ever have imagined.

From then on, every single accounting or even business class I took touched on Enron in one way or another. I don’t think another class of accounting students got such an in-depth education in various types of off-balance sheet financing.

The business ethics course I took during the balmy summer of 2003 was dominated by Enron. Sure, there were other cases. Eli Lilly and Union Carbide spring to mind. But Enron was dominant. And, as accounting students, Arthur Andersen’s complicity in Enron’s deception was also a focal point in class discussions.

We studied Sarbanes-Oxley, the comprehensive legislation enacted in the wake of Enron and aimed at preventing a repeat, as it occurred. It’s primary focus is on documenting controls. At the time I probably knew more about Sarbanes-Oxley’s requirements than the people it was going to affect the most – management at American companies.

Right around that time the reference in the CICA Handbook to “assuming management’s good faith” was removed, mainly to avoid the legal liability issue that such an assumption may give rise to in the event of another Enron.

Enron changed a lot. Accounting was thrust into the spotlight in terms of further government regulation, the Big Five became the Big Four accounting firms, and nothing will ever be like it was.


FASB’s new man talks advanced accounting topics

The accounting standards setting group in the United States is known as the Financial Accounting Standards Board (FASB) and consists of seven board members who are appointed to five year terms. The most recent appointment was Thomas J. Linsmeier, and has a pretty good interview with him on some of the issues currently facing the Board.

The issues he discusses are: the conceptual framework underlying the principles of accounting, fair value accounting, and the complex topics of pension and lease accounting.

When you talk about historical cost and fair value, those two numbers are identical at an exchange transaction date. Then the issue becomes whether or not you want to re-measure the transaction price at a fair value in the future in the [accounting] model, or take the old transaction price and allocate it over time to the income statement. The real open question when you make that trade-off is, how might investors best be served?

I previously blogged about fair value accounting, when I talked about an article that was unrealistic in its stated desire for the net assets of the balance sheet to represent the stock market value of the company. It’s important to note that fair value is cost on the date of the transaction, and it’s only later on through use that the asset’s value is different from its cost less depreciation.

Our accounting model — and the standards in it — have been developed component by component. A weakness in the model is that we have not seriously considered the implications the separate accounting decisions have on aggregating financial reporting across line items. So a mixed-attribute model obviously causes challenges in that aggregation.

This is a weakness of all accounting models, whether its Canadian GAAP, US GAAP or International Financial Reporting Standards (IFRS). I don’t really see any alternative, giving the evolving nature of business transactions.

We could conceivably take everything we’ve done to this point and construct a simpler, unified set of principles, but it would inevitably end up convoluted again as we would add more components to account for financial constructs the likes of which we can’t imagine at this point.

I don’t think it’s hopeless or not worth trying to achieve, but I’m skeptical it will stand the test of time.

Anyway, check out the interview if you’re interested in the accounting profession in the US. Interesting that no mention is made of convergence with international standards, however.