Accounting Standards are driven by the Governments and their own accounts are not signed off

Accounting Standards are being driven by the governments across the world for corporates. If Governments had to follow corporate accounting standards, then people would have been in jail. So how many people have you heard who have been fired for bad accounting for years and decades? Think EU and other govts. And these people are responsible for setting standards for corporates. And they spend more than corporates. Good Heavens. Some examples:

1. Defense Ministry’s Accounting ‘Unacceptable,’ U.K. Panel Says

The U.K. Defense Ministry is guilty of administrative failures that have led to officials losing track of sensitive equipment and wasting hundreds of millions of pounds, a panel of lawmakers said.

The cross-party Defense Committee criticized the failure of the ministry to gain full approval for its accounts from the National Audit Office for the third successive year.

For THREE YEARS!!!!

2. The Department for Work and Pensions’ numbers have been qualified for 17 years in a row.

And its not just that, here’s some more detail.

Accounts from the department of work and pensions, defence and the Equalities Commission were also qualified in reports slipped out amid a deluge of paperwork from Whitehall.

Morse said he declined to sign off the Treasury's resource accounts for 2008/09 because the department incurred £24bn more expenditure than Parliament authorised, arising from losses from the operation of the Asset Protection Scheme.

Morse also reported the Treasury's balance sheet showed the net of total assets, less liabilities, now stand at £44bn – up £2bn on 2007/08.

The NAO qualified the accounts of the DWP for the 20th consecutive year because they showed a net £2.7bn loss in fraud and error across all benefits except the state pension.

And Revenue and Customs' were subject to error and fraud in the tax credit system

totaling between £1.58bn and £1.84bn (up on the £1.31bn to £1.54bn in 2006/07).

Morse said he qualified the MoD's accounts because of a ‘net error’ of £140m in the amount a new computer system that allows servicemen and women to enter expense claims without further checks. There was missing radio and computer equipment worth £155m and a ‘significant risk of error’ over £14.1bn in raw materials and spares.

The Equality Commission’s accounts were qualified because £629,000 was spent paying consultancy fees to former staff whose departure terms excluded being rehired.

But the EU goes one better

3. EU’s spending of agricultural money and the structural fund, have been beset with so many difficulties that the court of auditors has not signed off the numbers for 12 years in a row. 

That was 3 years back. In 2009, they were still not signed off making it a grand total of 15 years.

when domestic laws cross boundaries - A race to the top anybody?

Extra-territoriality of laws is one thing that is guaranteed to get some people very wound up. In other words, how dare laws not passed by the country's elected representatives impact the country, its citizens and its businesses? Whether its the United Nations, the World Trade Organisation, the European Commission, International Criminal Court or what have you. I previously talked about how a US court had asked Iran to pay damages to US citizens. Now that's extra-territoriality in practise. Remember when the Sarbanes Oxley Law started impacting European Businesses or when American laws meant that British citizens were extradited to USA despite committing no crime under British Law? Remember how NY Mayor Giuliani and Mayor Bloomberg fulminate against the city tax evaders amongst the UN delegations? That's extra-territoriality!, Or when London Mayor splutters against the US Ambassador for not paying his beloved congestion charges because the US thinks the congestion charges are extra-territorial laws. So on and so forth. Generally, countries try to avoid doing this, it needlessly gets people upset and the eventual benefits are not worth it.



But the EU is different. It is pushing for standards above and beyond what national European parliaments have agreed to. I would like to draw an attention to how the EU's soft power is established through these standards. I point to MiFID, REACH, ICC and IFRS as four standards that are now global or are getting global respectability. This is, in turn causing national governments to lose power. Let us take each example. MiFID (Markets in Financial Instruments Directive) is a European wide standard for investor protection, information transparency, pricing and quoting of advice and financial instruments, reporting of transactions, etc. This, very simply speaking, will standardise the behaviour of all investment firms across the EU and is really quite path breaking in nature. It also allows for a British investment firm to work in Athens and anywhere else seamlessly (well, near enough). Guess what? European investment banks who have to cater for MiFID are now considered to be at the top of the investor protection league. The quality mark. So the Japanese, Australian and other Asian and Latin American branches are actually telling their customers that they dont just satisfy Japanese protection requirements, but go for the gold standard called as MiFID!. So here we are, it’s almost like a slap in the face of the local financial regulator like the FSA in Japan, which states that it doesnt really care as much about investors as that of EU!



Or take ICC for another example, if EU had not pushed hard and made sure that all EU members had signed up, this possibly first extension of criminal laws on an international level would never had come up. What it does mean that unilateral action is going to slowly get more difficult, also war crimes are even more difficult. Take the previous blog post of IFRS, again, the fact that the EU has adopted it means that it has become the global standard and firms love it. Or the fact that California Governor is wanting to sign up to European standards for environmental legislation. Or how about the EU REACH protocol, which is for the safety of chemicals. At this moment, Wall Mart is trying to ask its suppliers to avoid 3-4 chemicals which have been identified by REACH. Now all this is causing some of the American firms and American government quite a lot of angst because if a state the size of California and a company the size of Wall Mart go outside American law and standards to adopt European standards, then it is indeed a slap on the face.



This is the flip side of the race to the bottom, where while on one hand, you have tax arbitrage (countries compete with trying to have the lowest tax rates!) and people accuse them of having a race to the bottom, regulation can be a race to the top. Curious, no?



All this to be taken with a grain of piquant salt!!!

Happy Second Birthday IFRS

Now I know what I am, a boring old banker, and this post will make you think that I am even more boring. But spare a thought of the challenge I am going to face on this post. I am going to try to make accountancy simpler and sexier (ok, so I am exaggerating a bit on the sexy side!). It is now two years that Europe rolled out the International Financial Reporting Standard or IFRS for short. I can already see your eyes glazing rapidly and you are heading towards the back button. But if you are courageous enough, there is a reason why I am talking about this anniversary and this is because this standard is going to impact every person on the globe. I am also dangerously simplifying this very complex matter and for those accountants out there, please do not mind me making huge jumps and missing bits and possibly even making large mistakes.





Before IFRS, each country out there had their own standards for accountancy. So the national and company accounts were extremely national, very very difficult to compare across countries and finally were rarely having the same objective. To take an example, the accountancy standards of Germany were oriented towards the tax authorities, that of France towards the national economics and statistics authorities, the USA for the local state and multiple federal agencies and UK for the investor. So how does it matter? Well, the idea of why it matters comes from the fact that the cost of capital for British and American firms has been up to 10% lower compared to an equivalent German or French firm. So if you were a firm who wanted to incorporate a business and start making widgets, guess where you would do it? There is a large industry in Germany which helps local German firms to incorporate in the UK for the better tax and corporate laws.





But the EU being the EU, it pushed and prodded for a single tax law. Two years after it was mandated, we can say that the implementation and rollout has been a cautious good. Now one can understand accounts across EU (by and large), provided you appreciate the fact that the IFRS meant that the annual account reports are much longer and there are still country level differences. There are also quite a lot of challenges, exclusions (why are you surprised? this is the EU we are talking about, one of their motto's is: never let anything good pass by without missing a chance to bugger around with it) with the standard but by and large, it is good. Also ameasure of success is that almost 100 countries have now signed up to apply this IFRS standard, and most importantly, even the USA is now talking about getting the US GAAP lined up to the IFRS standard.





But why is this important for you and I? Well, at end of the day, every person on this planet works on the basis of assets, directly or indirectly. Whether you are a child or an adult or a pensioner, you will be working with assets. If you are a child, you are working with pencils and footballs, if you are an adult, you are talking about machines and salary and houses, if you are a pensioner, you are talking about pensions, savings on haircuts and health care. In other words, assets. Intangible and tangible "stuff" which helps life along. Now these assets need to be measured and managed. Given the increased mobility of labour and capital across the world, the impact of global aspects on global assets, the valuation of these assets is vital.





So the fact that Chile is adopting IFRS will mean that an electric motor repairman in Assam India will be impacted (no cracks about the butterfly chaos theory effect please!). Chile is one of the biggest exporters of copper, the pricing of copper and the accountancy of Chilean copper firms has a direct impact on copper traded on the world markets which has an impact on the price of copper in India which has an impact on the cost of copper wires which has an impact on the cost of re-wiring a burnt out electric motor in Assam, India. His earnings are therefore, very indirectly, linked to the accountancy standard in Chile. So the fact that these national accountancy standards are going to be internationally standardised means that the cost of assets will come down a wee bit, the cost of raising capital will come down a wee bit (as the global complexity reduces, the risk reduces and thus the price reduces) and generally it is a good thing. Did that make it simple? or would you prefer if I talked about the wiring in the under-wired bra of your partner? (I know, I am pushing it to make accountancy simpler!)





Happy Birthday IFRS! (terrible two's?)





All this to be taken with a grain of piquant salt!!!