Ensuring corporate stability and financial soundness Perspective of  accounting standard setting in Australia By Wayne Lon...
This presentation contains ideas that may offend some viewers R It contains: Facts not fictions Different ideas Comments c...
This presentation contains explicit material including: X Coercion Mandatory accounting standards Desire for independence ...
Introduction <ul><li>Financial soundness and accounting standards </li></ul><ul><li>Changes in accounting standard setting...
Creating corporate financial stability <ul><li>Still in progress: </li></ul><ul><li>Financial reporting regime  </li></ul>...
The basic (previous) approach <ul><li>Accounting standards, disclosure and conceptual framework form the backbone of a sou...
The old system Institute Foundation Board of Management Society Government Australian Accounting Research Foundation (AARF...
The old system resulted in … <ul><li>Internationally recognised centre of excellence and intellectual capital developed si...
Australia’s intellectual capital <ul><li>“ The objective of the professional accounting bodies in forming the AARF was tha...
Machiavelli’s plot? <ul><li>Corporate Law Economic Reform Program (CLERP)  </li></ul><ul><li>A new Treasury appointed body...
The new system (assert control) Government FRC AASB AASB staff Treasury  Secretariat
The inevitable outcome <ul><li>“ It will only be to the detriment of the quality of financial reporting in Australia, and ...
Independence of AASB undermined <ul><li>Originally, three funders, no “boss” </li></ul><ul><li>Government veto right only ...
Stacking the deck <ul><li>Reduced number of AASB members (with more diverse interests): </li></ul><ul><ul><li>Government d...
Clearing the decks <ul><li>Loss of key staff and intellectual capital </li></ul><ul><ul><li>AARF in a period of uncertaint...
Derailing the reporting regime <ul><li>Emasculation of the standard setting process </li></ul><ul><ul><li>Merging of the b...
Derailing the reporting regime Australian Accounting  setting  capability Create staff uncertainty Dilute/ disenfranchise ...
The harmonisation dream <ul><li>Australian standard setting (non) agenda </li></ul><ul><ul><li>Mandatory adoption of Inter...
Advocates for  harmonisation claim: <ul><li>Listed EU companies will comply with IAS </li></ul><ul><li>Australian investor...
The harmonisation dream myth <ul><li>Australia’s accounting conceptual framework is more detailed than IAS </li></ul><ul><...
Australia’s previous system <ul><li>Australia’s reporting regime was improving </li></ul><ul><ul><li>reduced scope for cor...
AUS GAAP versus IAS <ul><li>Only the tip of the iceberg … </li></ul>plus asset impairment test, revenue, joint venture acc...
IAS Statement of financial performance <ul><li>Not in time (2005) </li></ul><ul><li>A new P&L? </li></ul><ul><li>Above/bel...
<ul><li>IAS deterred from meeting the primary needs of users of financial statements </li></ul><ul><ul><li>Lack of natural...
Will US support IAS? <ul><li>US unlikely to come to the table </li></ul><ul><ul><li>Largest single market in the world wit...
Benefits to the US of adopting IAS
Will US really adopt IAS? <ul><li>Give up sovereignty  </li></ul><ul><li>Give up unilateral power over standards </li></ul...
<ul><li>Incur lots of costs </li></ul><ul><li>Jeopardise US and international confidence in US capital market </li></ul><u...
Access to US capital markets <ul><li>SEC registrants still need to bear cost of preparing reconciliations to US GAAP   </l...
The international acceptance myth <ul><li>International adoption of international standards isn’t true </li></ul><ul><ul><...
The international acceptance myth <ul><li>Australia the only one of seven IASB liaison countries to fully adopt internatio...
<ul><li>International companies more hassle than they’re worth? </li></ul><ul><ul><li>No enforcement mechanisms for IAS st...
The case for domestic standards <ul><li>Australia has unique needs </li></ul><ul><li>Competition for global capital market...
Sovereignty issues <ul><li>AASB had delegated legislative setting authority </li></ul><ul><li>Privileged position  </li></...
Demise of Urgent Issues Group <ul><li>UIG plays an important role: </li></ul><ul><ul><li>Reviews divergent accounting issu...
Loss of influence <ul><li>Corporate submissions are not forthcoming </li></ul><ul><li>Big 4 submissions captured by intern...
“ On motherhood” <ul><li>International harmonisation is a nice idea </li></ul><ul><li>But mandatory adoption isn’t the rig...
Lessons for financial soundness <ul><li>Globalisation and lobbying has lead to the emasculation of Australian accounting s...
The outcome <ul><li>The seeds of destruction for the next round of corporate collapses have already been sown </li></ul>
Lessons for actuaries <ul><li>Maintain board independence </li></ul><ul><li>Maintain financial independence </li></ul><ul>...
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  1. 1. Ensuring corporate stability and financial soundness Perspective of accounting standard setting in Australia By Wayne Lonergan
  2. 2. This presentation contains ideas that may offend some viewers R It contains: Facts not fictions Different ideas Comments contrary to conventional wisdom Parental or institute guidance is recommended
  3. 3. This presentation contains explicit material including: X Coercion Mandatory accounting standards Desire for independence Making auditors think Offensive fetishes Depictions which purposefully debase the enjoyment of accountants and auditors
  4. 4. Introduction <ul><li>Financial soundness and accounting standards </li></ul><ul><li>Changes in accounting standard setting over time </li></ul><ul><li>Why is it important? </li></ul><ul><li>Emasculation of the standard setting process in Australia </li></ul><ul><li>Why mandatory compliance with international standards is flawed </li></ul><ul><li>Lessons for the future </li></ul>
  5. 5. Creating corporate financial stability <ul><li>Still in progress: </li></ul><ul><li>Financial reporting regime </li></ul><ul><li>Improved corporate disclosure </li></ul><ul><li>Current focus: </li></ul><ul><li>Developing a culture of integrity and trust in corporate governance </li></ul><ul><ul><li>Directors, Executives, Bankers and Analysts, Auditors </li></ul></ul><ul><ul><li>Difficult to mandate and enforce </li></ul></ul><ul><ul><li>ASX Corporate Governance Best Practice Guidelines </li></ul></ul><ul><ul><li>Lots of form </li></ul></ul><ul><ul><li>Effectiveness?? </li></ul></ul>
  6. 6. The basic (previous) approach <ul><li>Accounting standards, disclosure and conceptual framework form the backbone of a sound financial reporting regime </li></ul><ul><li>Accounting standards approved by the Australian Accounting Standards Board (AASB) have legislative backing </li></ul>
  7. 7. The old system Institute Foundation Board of Management Society Government Australian Accounting Research Foundation (AARF) Australian Accounting Standards Board (AASB) Jointly funded but no control
  8. 8. The old system resulted in … <ul><li>Internationally recognised centre of excellence and intellectual capital developed since 1966 </li></ul><ul><li>(Largely) independent standard setting body </li></ul><ul><li>Delegated ‘legislating’ accounting standards </li></ul><ul><li>Development of basic conceptual framework </li></ul><ul><li>Improved financial reporting </li></ul>
  9. 9. Australia’s intellectual capital <ul><li>“ The objective of the professional accounting bodies in forming the AARF was that it should undertake research and development of accounting standards to underpin the accounting discipline as a body of knowledge” </li></ul>
  10. 10. Machiavelli’s plot? <ul><li>Corporate Law Economic Reform Program (CLERP) </li></ul><ul><li>A new Treasury appointed body – the Financial Reporting Council imposed on top </li></ul><ul><li>FRC responsible for the oversight of accounting setting process and sets agenda for private and public sector issues </li></ul><ul><li>Merged private and public sector boards </li></ul><ul><li>Start Date 1/1/00, couldn’t meet until 6/00 </li></ul><ul><li>Uncertainty for / disempowerment of AARF staff </li></ul>
  11. 11. The new system (assert control) Government FRC AASB AASB staff Treasury Secretariat
  12. 12. The inevitable outcome <ul><li>“ It will only be to the detriment of the quality of financial reporting in Australia, and in the corporate sector, the reputation of Australia’s capital market and the impact on the cost of capital, if vested interest groups and politics overtake the process under the guise of a broader and more effective constituency involvement and the need for “commercial” standards.” </li></ul><ul><li>Mr Greg Pound, Former Acting Executive Director of AARF </li></ul><ul><li>FRC member and Chief Accountant of ASIC </li></ul>
  13. 13. Independence of AASB undermined <ul><li>Originally, three funders, no “boss” </li></ul><ul><li>Government veto right only exercised once </li></ul><ul><li>Now primary funder is ASX (with strings attached) </li></ul><ul><li>ASCPA and ICAA don’t even exercise significant influence </li></ul><ul><li>Technical issues not the domain of FRC </li></ul><ul><li>AASB undermined by mandatory adoption of international standards </li></ul><ul><li>FRC disproportionately under represented by accounting profession and over represented by corporates/public sector </li></ul>
  14. 14. Stacking the deck <ul><li>Reduced number of AASB members (with more diverse interests): </li></ul><ul><ul><li>Government dominates appointments: </li></ul></ul><ul><ul><ul><li>13 members to the FRC </li></ul></ul></ul><ul><ul><ul><li>Chairman of AASB </li></ul></ul></ul><ul><ul><li>FRC appoints: </li></ul></ul><ul><ul><ul><li>9 members to the AASB </li></ul></ul></ul><ul><ul><ul><li>Half public sector focus </li></ul></ul></ul><ul><ul><ul><li>Eliminated the corporate memory </li></ul></ul></ul><ul><ul><li>Only 1 member of the former AASB was appointed to the new AASB (term now expired) </li></ul></ul>
  15. 15. Clearing the decks <ul><li>Loss of key staff and intellectual capital </li></ul><ul><ul><li>AARF in a period of uncertainty for over a year </li></ul></ul><ul><ul><li>Most of top AARF staff resigned (2 to IAS) </li></ul></ul><ul><ul><li>Less challenge for new staff </li></ul></ul><ul><ul><li>Diluted expertise over public sector issues </li></ul></ul><ul><ul><li>Becoming passive followers of/subordinate to IAS </li></ul></ul>
  16. 16. Derailing the reporting regime <ul><li>Emasculation of the standard setting process </li></ul><ul><ul><li>Merging of the boards </li></ul></ul><ul><ul><li>Board members with disparate needs, interest, agendas, backgrounds </li></ul></ul><ul><ul><li>Loss of intellectual capital and corporate memory </li></ul></ul><ul><ul><li>Largely under funded </li></ul></ul><ul><li>Standard setting power removed </li></ul><ul><ul><li>FRC has authority under legislation to ‘direct’ the AASB on matters of policy in developing standards </li></ul></ul><ul><ul><li>Globalisation of standard setting agenda (eradication of Australian standard setting capacity) </li></ul></ul>
  17. 17. Derailing the reporting regime Australian Accounting setting capability Create staff uncertainty Dilute/ disenfranchise intellectual capital Change agenda Stack the Decks Disempower Board Undermine influence
  18. 18. The harmonisation dream <ul><li>Australian standard setting (non) agenda </li></ul><ul><ul><li>Mandatory adoption of International Financial Reporting Standards (IFRS) for periods beginning on or after 1 January 2005 </li></ul></ul><ul><ul><li>Formerly International Accounting Standards </li></ul></ul><ul><ul><li>Less detailed and different (in parts) conceptual framework </li></ul></ul><ul><ul><ul><li>Every single AASB to be amended </li></ul></ul></ul><ul><ul><ul><li>Several new standards will be introduced, where no previous Standard existed </li></ul></ul></ul><ul><ul><ul><li>No international equivalent for specific Australian standards </li></ul></ul></ul><ul><ul><ul><li>IAS ignores particular Australian needs </li></ul></ul></ul>
  19. 19. Advocates for harmonisation claim: <ul><li>Listed EU companies will comply with IAS </li></ul><ul><li>Australian investors gain as IAS are superior quality and give rise to high-quality financial reports </li></ul><ul><li>High cost of reconciling accounts between international regimes for Australian companies </li></ul><ul><li>Australia’s small capital market means we need to conform to attract international capital </li></ul>
  20. 20. The harmonisation dream myth <ul><li>Australia’s accounting conceptual framework is more detailed than IAS </li></ul><ul><li>Adoption will dilute some of Australia’s current accounting standards </li></ul><ul><li>Australia’s superior accounting standards represent a competitive advantage in a corporate world full of uncertainty at present </li></ul><ul><li>Australia represents just over 1% of the global equity capital market </li></ul><ul><li>Adoption will result in the loss of Australia’s competitive advantage and a higher cost of capital for Australian companies </li></ul>
  21. 21. Australia’s previous system <ul><li>Australia’s reporting regime was improving </li></ul><ul><ul><li>reduced scope for corporate abuse (still bad) </li></ul></ul><ul><ul><li>facilitated quicker development of new and innovative capital market products and securitisation market </li></ul></ul><ul><ul><li>economically efficient </li></ul></ul><ul><ul><li>aim to reduce the cost of capital </li></ul></ul><ul><ul><li>increased employment </li></ul></ul>
  22. 22. AUS GAAP versus IAS <ul><li>Only the tip of the iceberg … </li></ul>plus asset impairment test, revenue, joint venture accounting, research and development, acquisition of assets, accounting policies, leases, foreign currency translation, self-generating and regenerating assets, and many more … Source: CFO November 2002; page 32-35 IAS19 None Pension accounting None AASB 1023 General insurance activities None AASB 1022 Extractive industries None AASB 1039 Concise financial reports IAS 40 None Investment property IAS 39 None Financial instruments (recognition & measurement) IAS 38 None Intangible assets IAS standard AUS standard Divergent areas include:
  23. 23. IAS Statement of financial performance <ul><li>Not in time (2005) </li></ul><ul><li>A new P&L? </li></ul><ul><li>Above/below the line issues </li></ul><ul><li>Is it a weak link compromise? </li></ul>
  24. 24. <ul><li>IAS deterred from meeting the primary needs of users of financial statements </li></ul><ul><ul><li>Lack of natural funding sources (dependent on private business contributions) </li></ul></ul><ul><ul><li>Conditional on European Advisory Group approval ( must be listened to) </li></ul></ul><ul><ul><li>Financial independence a former strength of the Australian accounting standard setting process lost </li></ul></ul><ul><ul><li>Australian funding brings obligations </li></ul></ul><ul><ul><ul><li>Government </li></ul></ul></ul><ul><ul><ul><li>ASX </li></ul></ul></ul><ul><ul><ul><li>Business community (Group 100) </li></ul></ul></ul>The reality of IAS
  25. 25. Will US support IAS? <ul><li>US unlikely to come to the table </li></ul><ul><ul><li>Largest single market in the world with over 50% of the world’s equity market </li></ul></ul><ul><ul><li>US has 5 out of 14 members on the IAS board </li></ul></ul><ul><ul><li>Highly unlikely proposition that the largest market will give up domestic accounting standard setting to a body it does not control </li></ul></ul><ul><ul><li>US doesn’t need IAS, IAS must have US </li></ul></ul><ul><ul><li>Will be some convergence over time </li></ul></ul>
  26. 26. Benefits to the US of adopting IAS
  27. 27. Will US really adopt IAS? <ul><li>Give up sovereignty </li></ul><ul><li>Give up unilateral power over standards </li></ul><ul><li>Let emerging companies access US Capital Markets </li></ul><ul><li>Help Europe to become a better competitor </li></ul><ul><li>Destroy existing professional knowledge base of US Accounting profession </li></ul>
  28. 28. <ul><li>Incur lots of costs </li></ul><ul><li>Jeopardise US and international confidence in US capital market </li></ul><ul><li>Destroy existing educational base, entrenched skills and legal precedents </li></ul>Will US really adopt IAS? (cont.)
  29. 29. Access to US capital markets <ul><li>SEC registrants still need to bear cost of preparing reconciliations to US GAAP </li></ul><ul><ul><li>Australian companies that are SEC registered </li></ul></ul><ul><ul><li>Are costs significant? </li></ul></ul><ul><ul><li>Doesn’t effect many companies </li></ul></ul>
  30. 30. The international acceptance myth <ul><li>International adoption of international standards isn’t true </li></ul><ul><ul><li>Listed companies of EU member states may only adopt IAS standards as endorsed by the European Commission for consolidated accounts by 2005 </li></ul></ul><ul><ul><li>Only listed companies </li></ul></ul><ul><ul><li>Many other countries permit international standards but not fully adopted as domestic standard </li></ul></ul>
  31. 31. The international acceptance myth <ul><li>Australia the only one of seven IASB liaison countries to fully adopt international standards </li></ul><ul><li>Australia joins such major capital markets as: </li></ul><ul><ul><li>Barbados </li></ul></ul><ul><ul><li>Georgia </li></ul></ul><ul><ul><li>Honduras </li></ul></ul><ul><ul><li>Mauritius </li></ul></ul><ul><ul><li>Papua New Guinea </li></ul></ul>
  32. 32. <ul><li>International companies more hassle than they’re worth? </li></ul><ul><ul><li>No enforcement mechanisms for IAS standards </li></ul></ul><ul><ul><li>Quality of international companies attracted to Australian capital market – suspect at best </li></ul></ul><ul><ul><li>International companies won’t come to an “empty well” </li></ul></ul>Critical enforcement issue
  33. 33. The case for domestic standards <ul><li>Australia has unique needs </li></ul><ul><li>Competition for global capital markets </li></ul><ul><ul><li>Capital needy economy </li></ul></ul><ul><ul><li>Price taker / ‘me too’ borrower isn’t a viable strategy </li></ul></ul><ul><ul><li>Need (but lost) competitive advantage of strong financial accounting regime </li></ul></ul><ul><ul><li>Need (but lost) excellence to develop new products </li></ul></ul><ul><li>Limited ability to impact debate at global level </li></ul><ul><li>Emasculated by mandatory adoption </li></ul><ul><li>No guarantee of any role (at all) </li></ul>
  34. 34. Sovereignty issues <ul><li>AASB had delegated legislative setting authority </li></ul><ul><li>Privileged position </li></ul><ul><li>Now subordinated to IAS </li></ul><ul><li>One voice (at best) at IAS </li></ul><ul><li>No guaranteed role at IAS </li></ul><ul><li>Effect is parliament has abrogated legislative power to IAS </li></ul>
  35. 35. Demise of Urgent Issues Group <ul><li>UIG plays an important role: </li></ul><ul><ul><li>Reviews divergent accounting issues </li></ul></ul><ul><ul><li>Timely basis </li></ul></ul><ul><ul><li>Reaches consensus & issues authoritative guidance </li></ul></ul><ul><ul><li>Decides if IFRIC determinations should apply in Australia </li></ul></ul><ul><ul><li>UIG consensus views are mandatory </li></ul></ul><ul><li>UIG cannot be replaced internationally: </li></ul><ul><ul><li>International consensus on any issue takes almost 1 year </li></ul></ul><ul><ul><li>Long term survival of IFRIC in question </li></ul></ul>
  36. 36. Loss of influence <ul><li>Corporate submissions are not forthcoming </li></ul><ul><li>Big 4 submissions captured by international firms </li></ul><ul><li>Australia isn’t relevant </li></ul><ul><li>Mandatory adoption = no need to listen to Australia </li></ul><ul><li>But have to listen to </li></ul><ul><ul><li>US </li></ul></ul><ul><ul><li>EU </li></ul></ul>
  37. 37. “ On motherhood” <ul><li>International harmonisation is a nice idea </li></ul><ul><li>But mandatory adoption isn’t the right way to get there … </li></ul>
  38. 38. Lessons for financial soundness <ul><li>Globalisation and lobbying has lead to the emasculation of Australian accounting standard setting system </li></ul><ul><li>Mandatory compliance with international standards not a good idea </li></ul><ul><li>International harmonisation of IAS is a myth </li></ul>
  39. 39. The outcome <ul><li>The seeds of destruction for the next round of corporate collapses have already been sown </li></ul>
  40. 40. Lessons for actuaries <ul><li>Maintain board independence </li></ul><ul><li>Maintain financial independence </li></ul><ul><li>Maintain / add to intellectual capital </li></ul><ul><li>Maintain centre for excellence </li></ul><ul><li>Avoid the pitfalls of ‘globalisation’ </li></ul>
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