1 Stella Fearnley Bournemouth University March 2014

Why global standards?  Facilitate cross border business  Reduce cost of raising capital  Help large groups with foreign subsids  Make international auditing more straightforward – comparing like with like  Save cost 3

2002 US GAAP/IFRS plans for convergence (failed 2012)  Strong US influence on IASB, different law in UK (Bush, 2006) Companies Acts  EU required whole set of standards  Big rush to meet 2005-took from US  Other countries became interested 4

Who are these standard setters? Delaware  Funding 20% B4 - B4 major beneficiary of global standards  Limited accountability / independence  IASB Dangling regulator  Obsessed by global dominance  Poor governance  Standards predicated on US litigation defence regime – not independent 5

Did EU/UK plc and investors know what standards brought?  Political decision influenced by experts  Complexity (FRC, 2010; Beattie, Fearnley, Hines, 2008)  Legal conflicts investors v IFRS/FRC re stewardship, prudence, true and fair (LAPFF 2013)  IAS 39 mark to market & loan loss provisioning facilitated crisis 6

UK stewardship / decision usefulness accounting  Accountability to shareholders for running business – can be voted out  Capital and creditor protection  Illegal trading when insolvent  Illegal paying dividends out of capital  Accounting protects directors  True and fair & prudence needed  Going concern 7

True and fair view  Premise (US) in IFRS that compliance with standards produces T&F view  Accounting must be neutral (no bias)  What if IFRS produces dysfunctional outcomes?  Expect T&F to kick in  Not in compliance driven regime-UK 8

Prudence  Imprudence /neutrality socially damaging (Page, 2008)  IASB/US SEC - Prudence allows earnings management (EM) US Cookie Jars 1980s accounting (Hoogervorst 2012)  Staying within rules litigation defence  BUT T&F, prudence essential for UK capital / creditor protection & directors’ duties 9

Mark to market in IAS39  MTM only works in deep, stable and liquid markets B of E (Haldane, 2010)  Major issue re derivative valuations and no real market, unrealised gains  Some unrealised gains could be treated as distributable profits (EY,2005)  False profits used for bonuses and divis 10

IFRS change from expected to incurred loss provisioning  Expected loss includes inherent risk in loans / derivatives, general provisions  Incurred loss provision only when event occurs justifying it.  Credit explosion & sub-prime lending  Understate provisions & overstate profits  Where was true & fair and prudence in all this? And the auditors 11

IFRS encouraged short termism  IASB denied accounting role in crisis  Decision usefulness creates short termism  Capital protection  Free riders and public good 12

How to annoy their Lordships  HOL criticised auditors over true and fair, loan losses and realisations  Loan losses exposed (Bank of England, 2012, LAPFF 2012)  It took Bank of England in 2012 to expose the overstatement of bank assets estimated at £50bn – not over yet 13

Motivations for Cover up  B4 firms get rich from global standards  Barriers to entry / complexity  Makes life easier for largest companies  Preparation cost for all the others  But what if standards are poor quality?  In EU maximum harmonisation regulation  Everyone has to comply  But too long to change and not just banks 14

Dangers of globalisation and global monopoly (IASB)  Banks that are too big to fail are audited by firms that are too big to fail  Some of the largest international companies are not only too big to fail but too big to manage and too big to regulate  Very limited scope for international law or enforcement  Get away with a lot in monopoly 15

Genesis monopolists The whole earth was of one language and one speech Let us build us a city and tower whose top may reach unto heaven and let us make us a name… They had brick for stone and slime they had for mortar.. Nothing will be restrained from them… then God confounded their language and scattered them 16

Co-op bank and mutuals  Accountability to members – but 1 vote each  Governance (Jenkins 2013)  Regulators failed again  No excuse for accounting and auditing  PwC audited Britannia 2009 takeover  Auditors there 30 years  KPMG Kept quiet until mid year