By Ian Lavis
Global transparency has never been more important as accounting firms seek to build trust and protect clients from potential financial disaster.
As financial scandals of ever-bigger proportions hit the headlines, causing serious damage to the reputation of firms and even countries, it is clear there is a growing need for greater transparency to prevent corruption and fraud on a massive scale.
Transparency International, the global coalition against corruption, estimates that corruption can cost global GDP up to USD$1 trillion a year. In one of the highest profile examples in recent times, Toshiba was fined a record €60 million after the company overstated earnings by at least $1.2 billion over seven years.
Vital role of accountants
The accounting profession is pivotal in the fight against corruption worldwide, from corporate and public sector reporting to financial management.
Fayez Choudhury, Chief Executive Officer of IFAC, says the accountancy profession is not only well placed to drive transparency but needs to be a strong voice on the issue. In a speech made at a meeting of Chartered Accountants in England & Wales, in 2016, he said: “At the entity level we are skilled at forensic accounting and well versed on effective corporate governance arrangements and whistle-blower policies. At the national and international levels, we can help in the development of effective regimes to prevent and detect corruption. We need to be a strong voice on this issue.”
However, despite widespread recognition of the vital role of accountants, there has been little international cooperation. The issue is complicated by disagreement among countries and the accountancy profession itself over the degree of transparency that companies should adopt, and how this should be regulated.
This discrepancy was highlighted at a recent conference organised by The Accountant and International Accounting Bulletin. Hilde Blomme, Deputy Chief Executive of Accountancy Europe (formerly the Federation of European Accountants), reminded delegates that transparency played a key role in helping to enhance the “relevance and reputation” of the profession.
However, Prem Sikka, Professor of Accounting at University of Essex, UK, countered there was “no evidence” of transparency in accounting.
Prem Sikka is a strong campaigner for international reporting standards but he claims nobody in the profession is really interested. “We are too comfortable,” he told conference delegates, adding that accountants are more concerned with what the profession requires rather than what society requires.
While it may be true that, until recently, there has been a lack of momentum in the drive for transparency, this appears to be changing as businesses realise not only the need to be open but the financial benefits.
These benefits are being pushed to the fore within Praxity Global Alliance, the world’s largest alliance of independent accounting and consulting firms.
Eric Balentine, Audit Partner at Moss Adams, one of Praxity’s participant firms in the US, explains: “Financial transparency provides the users of financial information to make informed decisions by reducing information risk. This coupled with a strong internal control framework provides investors with better and more consistent information to make decisions.”
International reporting standards
There are signs of progress in the development of international reporting standards. The International Accounting Standards Board (IASB), overseen by the IFRS Foundation, is making headway in working towards a global set of accounting standards, known as IFRS Standards. Of 140 jurisdictions researched, 116 require the use of IFRS Standards for all or most public listed companies. China, Japan and India are not included but each are moving closer to aligning national standards with those of the IFRS. For those countries aligned with IFRS, one of the latest standards (IFRS 15) requires revenues to be matched to costs from 2018.
The complex process of converging US and European rules is also progressing, be it slowly. In one of the latest developments, the IASB and The Financial Accounting Standards Board (FASB) finalised their respective lease accounting standards in early 2016, after a ten-year effort.
The difficulties of agreeing standards across international borders was highlighted by The European Commission’s proposed public country-by-country reporting of tax for large multinationals to discourage aggressive tax behaviour and appease growing public dissatisfaction with tax avoidance. The initiative does not have universal support, with opponents claiming fiscal information is only meant for tax administrations.
Openness is good for the bottom line
While agreement between countries is proving hard work, individual companies are showing a greater willingness to be more transparent. They are realising that being open about their anti-corruption efforts and operations is not only beneficial but can have a positive influence on a business’s bottom line.
Transparency is becoming the new norm according to the Transparency International global coalition. In a working paper entitled, ‘The Benefits of Anti-Corruption and Corporate Transparency’, the coalition states: “Companies that have good anti-corruption programmes and openly report on them have a competitive advantage beyond meeting any compliance obligation. They benefit from risk reduction, cost savings and sustainable growth.”
One area of corporate transparency gaining momentum, and where accountants are set to have an increasingly important role, is that of human rights reporting. Richard Karmel, London IC Managing Partner at Mazars, says firms should see the onset of human rights regulations as an opportunity rather than a restriction. He says the evidence is compelling that organisations which embrace human rights reporting benefit from better engagement with employees, suppliers, investors and clients.
Corporate social responsibility (CSR) and the related reporting can be a useful tool for organizations, and accounting firm Moss Adams has adopted CSR reporting to track progress against meaningful CSR goals and key metrics. Eric Balentine adds: “Moss Adams is committed to CSR and the promotion of social values throughout the organization. Moreover, we believe that CSR reporting adds transparency to the marketplace.”
With transparency becoming ever more important, now is the time for the accounting profession to develop a clear path through the global reporting minefield to help businesses maximise the opportunities of openness.