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March 2002

Regulatory point-scoring





       
Sir David Tweedie
A greater move towards international accounting standards is certain to result from the Enron furore. But already there are signs of regulatory one-upmanship. And bankers worry that the debate on the rights and wrongs of the Enron affair is quickly giving way to a turf battles and point-scoring between regulators and accounting bodies.
Best placed to benefit from a widespread move to internationally accepted principles would be the London-headquartered International Accounting Standards Board (IASB).
The IASB's chairman, Sir David Tweedie, was in Washington in mid-February - along with former Federal Reserve chairman Paul Volcker, who is chairman of the IASB's board of trustees - to testify before the Senate committee on banking, housing and urban affairs.
Though taking care to point out that many international financial reporting standards are similar to US GAAP, Tweedie pointed out that the environment in which standards are set in the US is profoundly different, mainly because of the more litigious culture there.
"The IASB has concluded that a body of detailed guidance (sometimes referred to as bright lines) encourages a rulebook mentality of 'where does it say I can't do this?'" said Tweedie. "We take the view that this is counterproductive and helps those who are intent on finding ways around standards more than it helps those seeking to apply standards in a way that gives useful information."
Speaking to Euromoney on his return to London, Tweedie elaborated on the IASB's plans. "We need to move to simpler standards, based on principles rather than rules," he said. "But more principles mean more risk: they require good auditing and good enforcement."
The key issue is consolidation. Tweedie believes that "huge changes" are on the way for the treatment of three off-balance-sheet areas - leasing, securitization and controlled subsidiaries. For all these areas the IASB is likely to propose full consolidation on the balance sheet. "There could be a hell of a lot of stuff to come back onto the balance sheet," he predicts. "But if you want to have a simple rule, then it's got to be tough."
The Financial Instruments Standard proposal, which is due out by April, will address the thorny subject of securitization. It is likely to propose a tough line on consolidation. "There will be a lot of squealing," forecasts Tweedie.
The plan for all these areas is to set out proposals, wait for the opposition and then consider the options. "We will be saying to people: 'if you don't like that one, then what is the answer - bearing in mind what has happened in the US?' At least that should start the debate," Tweedie says.
He adds: "We will be accused of wrecking things. But our job is to reflect things as they are. All we are saying is: 'Don't duck this. If you've got a liability, show it. There's no point burying your head in the sand and forgetting about it.'"
Substantial differences of opinion are likely between the IASB and FASB - most probably on the issues of SPEs and what constitutes control of subsidiaries. But Tweedie believes there will be a common purpose. "If you are telling lies by manipulating things, then you are not accounting properly," he says. "At the end of the day it is all about ethics. But if you force people to account properly, you can stop companies getting in over their heads."
Some observers doubt that there could ever be a marriage of UK and US accounting guidelines, mainly because giving US accountants a judgemental role in such a litigious corporate society could open a legal can of worms.
"There are huge differences between the UK and US cultures," says Christopher Mahoney, senior managing director at Moody's and chairman of the firm's credit policy committee. "In the UK, people sacrifice consistency for transparency. In the US, people are consistent but in ways that do not reflect the real world. I'm not sure if either is better than the other but to say that accountants have to exercise prudential judgment in the US is not really feasible."
Whatever the outlook for international standards, in the currently feverish climate companies are at pains to be seen to be conforming to investors' desire for clarity. "People are clearly going to be covering their backsides," says Schwarcz. "We're going to see companies announcing changes in their accounting and financing, purporting to be good citizens, and as soon as things quieten down again, they will go back to what they are good at - which is making money."
He adds: "Off-balance-sheet financing has a number of benefits - only one of which is accounting. Most of the time it creates disintermediation and allows companies to access capital markets more efficiently. But what we have at the moment is a witch-hunt. Everyone is trying to find fault and point fingers. The process is losing the voice of reason - people need to sit back and think 'do we really have a problem here?'
"Hopefully, as the process develops, there will be a public airing and cooler minds will prevail."
Fanger at Moody's believes that many companies are entering uncharted waters as a result of the changed priorities of investors and analysts in the equity markets. "What would cause a company to encounter difficulty is if investors changed their view of its value as a result of the accounting change," he says. "We would not change the ratings because we've always looked at these things but equity investors might react differently."
He adds; "Will this result in a permanent change in the way markets value companies? Who knows? But this is exactly the kind of thing that happens after a bubble bursts. People say: 'Hang on a minute, we must have been fooled. So let's change the rules so we don't get fooled again.'"






The long-term prospects for emerging markets are still bright. Western financial institutions quite rightly continue to invest in them. But there is a reason why they are still termed emerging.

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