Cashing in on complexity: the ultimate conflict
Last month I deplored the unfathomable regulatory maze into which accounting rules have descended, noting its utter irrelevance to stakeholders’ needs. I condemned the vast tracts of clutter in company reports that leave little room for anything potentially useful, and I denounced the massive sums wasted on consultancies paid to make sense of all this useless verbiage.
Question: What do the following passages have in common?
(a) “All mesons having opposite charges that bond at the juncture point of the gluon and the antigluon in an electric dimension are unstable and subject to destruction by passing articles, energy fluxes and particle interactions.”
(b) “For this purpose, the entity’s own equity instruments do not include puttable equity instruments or instruments that include a contractual obligation for the entity to deliver a pro rata share of its net assets only on liquidation, that do not meet the definition of equity but are classified as such under IAS 32.”
Answer: They share a language. It’s called “Gobbledygook”.
It matters not whether it is, as in (a), taken from a text on quantum physics; or, as in (b), taken from the forthcoming international financial reporting standard IFRS 9 on financial instruments.
IFRS 9, like most standards, exemplifies a surreal dedication to abstraction. Even when a glimmer of meaning pierces the textual mush, its reasoning is defective. Try this: “Expected credit losses of undrawn loan commitments should be discounted by using the effective interest rate (or an approximation thereof) that will be applied when recognizing the financial asset.”
This means (I think!) that if a bank grants its customer a credit facility that, at the year-end, has not been drawn, the bank must account for future losses that might be incurred if and when that facility is drawn, using the same discount rate for the asset and liability that would arise (even though neither of them actually exist at the accounting date!). Or something like that.
Citing Macbeth, “it is a tale told by an idiot, full of sound and fury, signifying nothing.”
Bonanza for Big-4 firms
Banks and large companies with significant debtors will have to comply with IFRS 9, no doubt costing millions – most of which will go to the Big-4 firms on whose help they will rely in interpreting it. Major firms have recruited specialist valuers, mathematicians, economists and probability theorists whose sole purpose is to master the imponderable rules and untested assumptions underpinning IFRS 9.
Complex standards attempt to capture every eventuality, no matter how improbable that it will ever arise. Firms providing both advisory and audit services therefore have a powerful commercial interest in keeping standards as convoluted as possible.
Disregarding the device of spinning off their consulting arms, the unvarnished truth is that increased complexity equals greater fee generation, and every year Big-4 fees from non-audit advisory work rise as a proportion of total fees.
Which is what would you expect when the same firms (a) supply alumni to the bodies whose rules have raised obfuscation into an art-form; (b) consult and advise on interpreting the resulting rules; and (c) audit accounts incorporating those interpretations. The proverbial licence to print money.
Criminal deception too
Labyrinthine rules also facilitate manipulation, but offer no protection to the perpetrators that indulge in it, nor the auditors that condone it. If a company’s cash generation lags far behind its accounting profit, could its policies for accruing unearned income, or treating loans as revenue, or for capitalizing recurring costs, be permitted under some unfathomable IFRS rule? Ask its auditors!
Or the auditors of MF Global, Tesco, Weatherford, RBS, Harlequin, BT, HSBC, Lloyds, Barclays, et al, now paying for the folly their own profession has created!
When Enron’s 2000 accounts included profit on transfers of assets between group companies as if they were sales, its rules for recognizing revenue were based on advice from their lawyers and auditors. The only difference is that today the rules make such inventive contrivance far easier.
If only we could apply Macbeth’s lines to an accounting rule-maker who “struts and frets his hour upon the stage, and then is heard no more.”