When “true and fair” accounts disclose either favourable results that are factually unsupportable, or a position much worse than warranted due to an “accounting quirk”, with no bearing on actual performance, we are bound to wonder what is going on.
Arbitrary losses may arise when a business is forced to separate its foreign exchange credits from the transactions that they cover, even when inventory is costed at the FE rate for all decision-making purposes. Or results may be burdened with the “value” of options granted to its directors, when all we ever wanted was a note on the options granted, their pricing, and how much they made when exercised. Worse, if the company cancels the options, the grant cost allocable to future years becomes an immediate revenue hit, even though it will never actually be paid.
enough to convince you that we are dealing with the ramblings of an unhinged mind.
A deferred tax “liability” arises with virtually every “fair value” revaluation (even when there is no intention to sell), despite deferred tax not being a liability at all under IASB’s own definition. The requirement to split land and buildings in property revaluations, to calculate deferred tax on only the building portion of the revaluation, then split that portion between “recover through use” and “recover through sale” and apply different tax rates over different time horizons, is enough to convince you that we are dealing with the ramblings of an unhinged mind.
Little wonder that we come across instances of exasperated non-compliance. A note in the accounts of one public company: “In view of the size of the property portfolio, and the complexity of determining the residual value and anticipated sale dates of these properties, and the fact that any deferred tax liability raised will be offset by deferred tax assets, management believe that an exercise to determine the requisite amounts would require expenditure well in excess of any expected benefit.”
Arbitrary and indiscriminate
The reverse effect can arise too. BT’s pension fund deficit doubled to £5.8 billion in the second quarter of 2009. Yet its IAS 19 “mark-to-market” measure of liabilities showed a £1 billion improvement! Said a spokesman: “While BT is obliged to report the IAS 19 figure each quarter, it has no relevance to the funding of the scheme.” To what, pray, does it have relevance?
Banks continue to be the main beneficiaries of “compliance-generated” profits. Years ago Enron showed that the most deceitful words in the accounting lexicon are “off balance sheet”, yet banks still dodge toxic asset impairment recognition by using credit derivatives held in off balance sheet vehicles.
General Electric agreed in July to pay a settlement of $50 million following SEC allegations that it fiddled its accounting repeatedly, to preserve its reputation for “making the numbers”. The SEC refers to discoveries by in-house accountants of misstatements that more senior executives ordered them to ignore. Two (out of four) violations descended to the level of fraud, including an Enron-type scheme to inflate profits by booking phony sales. The filing includes damaging observations on GE’s auditors, whose spokesman declined to discuss any aspect of the case with reporters.
In none of these cases has there been a breach of standards or a murmur from the auditors. Yet giving such accounts the true and fair imprimatur insults readers’ intelligence. The abiding principle of preferring substance to rule-based form has all but been abandoned.
Remember Epaminondas, the Theban general? When he illegally extended his term of office to complete a successful attack on Sparta, he returned to face capital charges. He demanded that, if executed, his death notice should read: “Epaminondas was executed by the Thebans because he forced them to defeat the Spartans, whom they had never dared look in the face before, rescued Thebes and liberated all Greece.” The jury fell about laughing and the charges were dropped.
Our accounting rules generate no lack of mirth – yet, against all sense, they prevail.