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The Actuary The magazine of the Institute & Faculty of Actuaries
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Unshackling accountants

David Myddelton, a chartered accountant and
professor of finance and accounting at Cran-
field School of Management, adds to his impressive text books with a work that has many parallels with the actuarial profession. If his diagnoses of corporate accounting are anywhere near correct then our profession is also hurtling in the wrong direction.

Decision-usefulness
External accounting, which emerged naturally under free markets and competition some 150 years ago, was free of all legal or regulatory duties or constraints until 1900 and the only requirement for the next 50 years or so was a balance sheet audit. The overriding legal requirement a ‘true and fair view’ remains to this day and Professor Myddelton concludes that little else is needed. The orthodox ‘stewardship’ model (accounting for the use of proprietors’ resources) is the least imperfect for the multiplicity of purposes already thrust upon it (monitoring of management, profit calculation, calculations in contracts such as bonuses, information for lenders and suppliers, and taxation). There is now another purpose ‘decision-usefulness’, with particular reference to current and potential investors in listed companies that Professor Myddelton argues is not only a pipedream of career standard-setters but also unsupported by the vast majority of accountants.

Regulatory fitting
As always, the current morass has arisen via regulatory fits, after scandals that as usual remain undiminished thereafter. (A long list of scandals is provided and the same goes for acronyms.) Hence the GEC/AEI takeover in 1967 (despite the relatively trivial role of accounting) led to a statement of intent to advance accounting standards by the Institute of Chartered Accountants in England and Wales (ICAEW) which became the ASC (Accounting Standards Committee) in 1970. Prior to that the ICAEW had been issuing recommendations for 25 years. Its Scottish equivalent forbore to do so: does that mean that its standards were lower or higher? In the US misleading accounts (as opposed to prospectuses) were no more prevalent in the pre-SEC period than after.
The next 25 years produced more of the same plus something much worse. The ‘internationalisation’ of monopoly standard-setters (with legal powers) has now become accepted dogma. From first principles, this is exceedingly dangerous even in exact sciences Professor Myddelton reminds us of Nazi mathematics and Soviet biology. Accountancy is far from exact, for many reasons, covering both the underlying purposes and approaches and hardy perennial issues such as the treatment of goodwill, stocks, research and development and, not least, pensions. Yet here we have an international standard-setter (IFRS) with compulsory powers and the backing of state bodies, including the UK Accounting Standards Board, bringing a revolution in accounting purposes and principles totally unsupported by most accountants including the seemingly ludicrous proposal to jettison the revenue-matching principle and to calculate profit and predict future cashflows from balance sheet snapshots!

Accounting standards
Professor Myddelton examines the arguments for and against (mandatory) accounting standards in detail and plumps firmly for the latter. Much of the former is revealed as irrelevant or wrong for example, possible dishonesty in a company’s preparation of accounts is merely an argument for external audit. The complexities of accounting decisions and there are many are not resolved by settling for a unique answer to the exclusion of all others, which succeeds only in outlawing one or more sides of a debate.
Arguments against standards include the stifling of judgement and legitimising bad accounting. (The ASC was responsible for many such failures, including inflation accounting and the treatments of goodwill and deferred tax.) Expectations are unduly raised. Far better and more up-to-date information for investors lies entirely outwith the annual report and accounts.
In the US, there is no ‘true and fair’ override and the recent flurry of scandals such as Enron and WorldCom (both steeped in federal regulations) came despite the fearsome Securities & Exchange Commission. Yet its influence, and that of academics rather than practitioners, on international standards is huge.

Less is more
This book is far too rich to do justice to in a short review, and the tables and appendices are a dream (including a list of international standards, UK conflicts, and suggestions on several thorny accounting problems such as goodwill).
Professor Myddelton concludes that the best regulatory environment is a minimalist one. For listed companies minimum standards could easily be set by (competitive) Stock Exchanges as well as suggestions (for disclosure only, not measurement) from professional bodies. Outside listed companies, let the market rediscover the best monitors, says Professor Myddelton. Hear, hear.
I urge all actuaries to read it this book.

05_12_09.pdf