03 July 2002

FT: Accounting watchdog adopts 'brutal' stance

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Sir David Tweedie, chairman of the International Accounting Standards Board (IASB) told a Commons inquiry yesterday how American business had lobbied the board to drop any proposal to tighten the rules on stock option accounting. Threats by American business to 'destroy' the global body charged with stamping out poor accounting practices would not deter it from imposing tough standards, its chairman vowed yesterday according to a FT article.

American business told the IASB last October it had 'spent $70m [successfully] lobbying Congress to stop US standards and therefore would threaten to withdraw cash and maybe destroy the organisation', he said. The intensity of the threats reflects the immense damage such measures could inflict on many US balance sheets, where some companies rely on options to a 'farcical' extent to boost profits and incentivise executives. Forcing companies to account for stock options as expenses would wipe an average of 8 per cent from US companies' profits, with some high-technology businesses losing 50 per cent or more, Sir David said.

The IASB's determination to push through global standards in the teeth of such opposition will be effective only if the US political establishment can be persuaded to take a harder line. But Sir David said there was now a 'better chance' of that. 'Americans watching corporate greed [are] pretty horrified . . . there's almost been a climate change.'

This climate change - and the inevitable corporate pain new standards will bring - is needed to restore confidence in the financial markets, the IASB believes. The paucity of some accounting standards means analysts are having to rely on estimates of costs and liabilities in areas such as leasing.

Sir Howard Davies, chairman of the Financial Services Authority, told the committee that the 'most unfortunate' reduction from the Big Five to Big Four meant a 'competition analysis of the overall state of the market would be useful'. But he said it was an international issue that would be best addressed by the European or US competition authorities.

The pressure for compulsory rotation was increased yesterday by Sir Howard, who signalled he favoured a 'backstop' preventing the same firm auditing a company in perpetuity. Companies would be required to switch audit firms after, for example, 15 years, he said.

FT: Accounting watchdog adopts 'brutal' stance
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