28 October 2004

Accountants warn of potential abuse of new financial reporting rules

The Institute of Chartered Accountants in England and Wales published a report stating that the introduction of International Financial Reporting Standards (IFRS) will increase the risk of companies embellishing their figures to flatter their financial performance.

The report entitled “Agressive Earnings Management” refers to using accounting policies and stretching judgements of what is acceptable to present corporate performance in a more favourable light than the underlying reality. Interviewed audit partners, finance directors, audit committee chairmen, investment analysts and senior financial feared that the threat would increase if the economic climate moved towards recession or if the current post-Enron vigilance falters. Almost all believe there are two key motivating factors giving rise to the threat of manipulation of figures – the need to meet or exceed market expectations and the gearing of director and management income to results.

Suggestions stated in the survey include:

to increase awareness throughout the business community of the vulnerability of corporate reporting to manipulation through the introduction of IFRS

implementing an active investor communications programme to ensure markets are properly informed, to reduce the scope for misunderstanding and the pressure to meet expectations

loser monitoring of the link between executive rewards and financial performance by the remuneration committees

The institute has repeatedly urged its members to step up preparation for the new accounting standards after evidence that many companies were struggling.

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