Americans are increasingly recognising that clinging on to US accounting standards is hampering corporate and capital market competitiveness, according to Rob Ward, global head of audit and assurance at PricewaterhouseCoopers.
Ward, a former president of the Institute of Accountants in Australia, says there is a head of steam behind the adoption of the international financial reporting standards (IFRS) championed by Sir David Tweedie, chairman of the International Accounting Standards Board, in the US market.
Unlike US GAAP (generally accepted accounting practice), IFRS is principles-based rather than rules-based. The new standards, which have had widespread repercussions for the way pension scheme liabilities are valued, started out in the UK and continental Europe in 2005 but have since been adopted by scores of other markets including Australia, Korea, China and Canada.
Ward, who has been PwC‘s New York-based global head of assurance since July 2005, said: “There’s a growing recognition that a combination of post-Enron regulation, Sarbanes-Oxley, SEC rules and the continuing use of US GAAP is creating barriers. A move towards IFRS makes a lot of sense for world capital markets and for the US capital market.”
He pointed to a recent announcement by the US Securities & Exchange Commission (SEC) that it intends to change the rules to make it possible for companies quoted on US exchanges to issue IFRS-based financial statements without any reconciliation to US GAAP.
However, on a visit to the accountancy partnership’s Erskine House, Edinburgh office last week, Ward said he believes that convergence between IFRS and US GAAP is “only the starting block of a process that will culminate in a radical overhaul of the way people think about accountancy.”
In an exclusive interview with The Herald, Ward said that the traditional reporting model of lumping a quoted company’s quarterly or annual financial performance figures together and then releasing audited statements into the public domain about three months after the period ends has become anachronistic.
“Once convergence has been achieved, we’ll be in a position to move on to looking at more advanced ways of evaluating a company’s performance, including real-time reporting,” he said. “However, we cannot really pursue that until convergence is in place.”
Clarifying what form this accountants’ nirvana might take, Ward referred to a report unveiled in Paris last November.
The report, entitled “Serving Global Capital Markets and the Global Economy: a View from the CEOs of the International Audit Networks” was a think-piece put together by the Big Four accountancy firms, together with BDO and Grant Thornton. The central recommendation was for a move towards continuous, real-time, internet-based reporting.
Signed off by PwC’s Samuel DiPiazza, KPMG’s Mike Rake, Grant Thornton’s David McDonnell, BDO’s Frans Samyn, Deloitte’s William Parrett, and Ernst & Young‘s James Turley, the report said: “Why, in a world where most public companies’ financial records are in digitised form, should investors and other parties have to wait a full quarter to receive pertinent financial information? Technology allows far more frequent disclosures, even daily.”
A better approach to audit
Ward said: “Timely, reliable and relevant information is essential if capital markets are to function properly. The goal is to move towards new methods of reporting that will increase transparency, improve companies’ ability to manage themselves, and increase their ability to build strong relationships with all their shareholders and stakeholders.”
There has recently been concern that a lack of competitiveness in the audit market may be driving up the audit fees for listed companies.
According to a research report published earlier this month, the cost to Britain’s blue-chip companies of providing statutory audits has jumped by 18% in the past year and has nearly doubled since 2001.
However, Ward brushed aside the view that the Big Four have too strong a hold over corporate audits – even though the Oxera report last year found that 97% of FTSE-350 companies were audited by members of the Big Four.
He said: “You could put the counter view that having four major players provides plenty of choice. Within that, quality is the key.
“I think having four major players which are competing every day brings both competition and choice. The worst thing that could happen would be to artificially intervene in the market and cobble something together a rival for the Big Four just for the sake of it. The danger is it would be lacking in quality.”
In 2006, PwC globally earned $11.3bn (£5.6bn) from assurance, primarily audit, a 6% rise on the previous year. This represented just over half of the firm’s global revenues of $21.98bn (£10.9bn).
PwC — formed from the 1998 merger of Price Waterhouse and Coopers & Lybrand and now the largest accountancy firm in the world — has 140,000 employees and audits 46 of the FTSE-100 companies.
Ward said the fastest-growing market for PwC is China. The firm has 9000 employees in the People’s Republic but Ward said it aims to grow this to 26,000 within eight years.
“We’re number one in China and we intend to remain in that position, largely through a focus on quality.”
Ward said that he “does not have a view” on the current sub-prime crisis and credit crunch, which recently came within a whisker of bringing down the Newcastle-based mortgage bank Northern Rock.
However, he did say “cycles do happen, but markets have an incredible ability to rebalance things and deal with the issues. The system will readjust, and it is big enough to cope.”
This article was published in The Herald on 1 October 2007