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Accounting policies that
are both consistent and reflect the underlying business facts are important
to one's ability to make sound investment decisions. If the profits of a
company are overstated or understated, then investors make poor decisions,
and financial resources can be misallocated.
For example, until a few years ago it was
convention that any goodwill that arose on an acquisition would be
immediately written off. In other words, it would not need to be expensed
though the profit & loss statement even though the acquirer had effectively
spent more on the acquired assets than their "book" value. This enabled
acquisitive companies to show much better profits than they were in fact
achieving on an underlying cash basis. In effect they were not amortising
the capital investment in intangible assets.
Goodwill now has to be
written off, but the period used is still to some extent discretionary and
management has become adept at presenting earnings in many different ways,
which confuses everyone. For example, the prominently displayed earnings
figure in press releases and annual reports can be that after adding back
goodwill and/or after adjusting for exceptional items (and there is still
common abuse about what is classified as exceptional). Even more distorting
is the additional inclusion of such figures as EBITDA (earnings before
interest, tax, depreciation and amortisation) - a favourite of technology
companies as a surrogate for cash flow but a figure which can be grossly
misleading.
Creative accounting by
companies can grossly mislead the public about their level of profitability.
Enron, which was a major corporate disaster in the USA, is just one of the
examples in recent years where the accounts simply did not reflect the
underlying business reality. Was this a result of over-reliance on
prescriptive rules or a failure of ethics in the accountancy profession?
Possibly both.
As you can see, there
are many issues still unresolved as to how to present accounts that are
comprehensive, accurate and yet easy to understand. UKSA will continue to
campaign for accounting standards that clearly communicate honest financial
information.
In October 2006, UKSA issue the following
Press Release which commented adversely on a proposed new accounting
standard:
Press035_Accounting_and_Stewardship. |
