INTERNATIONAL ACCOUNTING STANDARDS (IAS)
International accounting standards (IAS) or the latest US GAAP (generally accepted accounting principles) accounting guidelines will reform the auditing world in the post-AEW investment climate. The revised accounting drafts are of major relevance to banks, funds, insurers and all types of corporation.
In particular, the latest IAS 39 and FAS 133 spell major revisions for reporting and valuation that enforce a stricter manner of stating corporate accounts.12 These have particular significance for the statement of derivative valuations in the corporate accounts. This has a direct implication in the daily mark-to-market exercise where the company is exposed to fluctuating values of derivatives.
Similarly, FRS17, the new accounting measure for funds requires them to state an actuarial valuation of funds’ assets and liabilities that are regarded as a stricter and harsher view. All parties, investors, accountants and audited companies are arguing over the animal that is called “fair value”. Like the blind man touching different parts of a camel, it is a difficult creature to pin down.
In fact, a previous financial disaster, the US Savings and Loans collapse, led to new CAMEL regulations to bolster the banking sector. Bank regulators examine subjects and judge them on a scale of 1 (best) to 5 (worst/likely to fail). The criteria are:
- capital adequacy
- asset quality
- management quality
- earnings performance
- liquidity.
In all, the companies audited may well complain that the new accounting standards are too strict and draconian, while being costly to implement. Thus, for example, the IAS cousin in the USA, as defined by the FASB, has shown more leeway for the corporate heads than might have been allowed in Europe. US company stock options held by key staff are not normally treated as expenses and deducted from corporate profits account. The usual practice is excused by the reasoning that the valuation of the options is either too complicated or inaccurate, so firms tend to leave this entry as a footnote in the corporate accounting statements. The FASB has stated that it will review this practice. Meanwhile, the IASB has decided that the options should be treated as corporate expenses – a standard for EU auditors starting 2005.
IAS standards serve to give us better foresight of corporate illness before it hits us. Some companies will invariably slip through the net, but we should (hopefully) stand a better chance of catching a cold rather than a debilitating sickness in the pre-AEW era. The new IAS are hoped to be part of a stronger corporate AEW radar to detect errant performing or corrupt companies before they implode and cause further public damage. IAS and new FAS procedures can only be part of a risk management toolkit, not the whole answer. A wider corporate picture is needed.
