Blowing away the smokescreen

TALKING to a Scottish captain of industry recently about changes in

accountancy I was dismayed to hear in scathing tones that he was ashamed

of his old profession.

Feelings do run high, mainly I suspect as a result of controversial

changes and a spate of reports which have mostly sidestepped the real

issues.

On the face of it this week's summer conference of the Institute of

Chartered Accountants of Scotland in St Andrews will have plenty to

discuss. I do hope that they get to grips with these matters causing

concern.

The event appears to have two themes, one being ''Out of recession: no

more boom, no more bust'' which seems wide of the mark; the other is

''Maintaining the edge'' which, I'm assured, will range over latest

developments and issues affecting the profession. Would the opener

please question whether CAs have the edge?

ICAS has had a busy year, between Cadbury and corporate governance,

changes imposed by EC regulations and audit reporting. Some useful

contributions have certainly resulted, together with a lot of high

falutin' statements which fill out reports.

Too often outsiders are left with the distinct impression that the

whole objective is to put up a smokescreen, so that members of the

profession can slide out unnoticed. Why not, when competition is severe,

fee income is falling, and the cost of indemnity is out of reach?

One has sympathy but might have more respect if only the occasional

set of company accounts carried an overdue audit qualification. Good

gracious, the client would never forgive! Is that not preferable to

endorsing dubious accounting?

Realistically, of course, there should be no such conflict of

interest, with the auditors given the independence of a fixed term, say

five years, in office and then a compulsory change to a fresh team.

ICAS, in a major review, which took two years and 74 pages of text,

favoured companies having their own internal audit teams and external

assessors. I doubt we shall not hear much more about that job creation

project, though the Institute of Internal Auditors has welcomed it.

Doubtless there will be a self-congratulatory mood between drives over

the Old Course that the formal certificate has been elaborated into an

auditors' report in company accounts. The statement is four times

longer, means even less, and ducks responsibility even more effectively.

In many respects I feel the present wave of annoyance stems not so

much from audit as from the introduction of FRS3 as a new accounting

standard. It reminds of the short-lived saga of current cost or

so-called ''inflation accounting'' which the pros thought was clever

stuff -- it put the fees up -- but which proved deeply unpopular with

most companies.

FRS3 is a similar resolution of a temporary situation; namely that any

form of restructuring should be stripped out. So now we have some larger

companies using this formula, referring to pre-tax profit as

''normalised'' and, since it is not mandatory, rather more sticking to

the old pattern.

All anyone wants in fact is a true and fair declaration of profit. It

would hardly seem necessary to throw all accounting into confusion to

decide what is acceptable and what must be taken below the line as

extraordinary.

Britain's top retailer, Marks & Spencer, recently reported pre-tax

profit (normalised) of #738.4m against #623.5m, restated under FRS3 as

#736.5m compared with #588.9m in 1992. A good example. More confusing

was Marley's normalised interim of #13.2m which looked better against

the comparative figure of #6.1m, because it had been restated under new

rules to take out a previous #3.6m disposals' loss which had been below

the line. Operating profit of #17.4m against #13m was a more reliable

guide to progress.

A complex international example is anticipated from Reckitt & Colman,

with analysts indicating that ''normal'' pre-tax profit could be around

#150m but only #77.8m under FRS3, against #150m the previous year in

both cases. They make the point that restatement must flatter

comparisons, as a result of previously deconsolidated loss-makers being

including in the corresponding period last year.

A topic which seems of much wider import, and to which too little

attention has been paid, is that of harmonising international accounting

standards.

Not long ago a most useful report was published by the Chartered

Association of Certified Accountants, highlighting the fact that

differences between the UK and US requirements could result in

companies' profits measured under our rules being anything from 34%

below to 41 times higher than the US value.

The absurdity of that needs no elaboration and did it not reflect on

their own profession, accountants the world over would be scathing. I am

told that an Edinburgh conference in June naturally showed opposition to

American ideas of forcing others into their system. There is, however,

machinery to get agreement and four years' recognition of the problem is

quite long enough without result.

Professor Pauline Weetman of Heriot-Watt University, Carol Adams, a

lecturer at Glasgow University, and Professor Sidney Gray, University of

Warwick, prepared the report which highlighted the major differences as

being in accounting for goodwill, deferred tax and fixed asset

valuation.

''These are areas where emotions run high, particularly in the UK,

when suggestions are made for aligning international practice more

closely,'' they acknowledge. It is also recognised that there could be

significant economic consequences for the accounts of perhaps 40 UK

companies.

What is clear is that the problem will not go away; indeed there are

indications that the increased international trading is adding to the

difficulties. There is concern also over harmonising with Europe, though

the EC as usual tends to seek uniform presentation rather than be overly

concerned about numbers. It does rather explain how the ERM fell apart.