The Prince of Wales needs to embrace IFRS and country-by-country reporting to be relevant

August 4th, 2010

There has been some fuss in the press about the launch of a new body called the International Integrated Reporting Committee. As it says of itself:

The Prince’s Accounting for Sustainability Project (A4S) and the Global Reporting Initiative (GRI) announced on Monday 2nd August 2010 the formation of the International Integrated Reporting Committee (IIRC).

The world has never faced greater challenges: over-consumption of finite natural resources, climate change, and the need to provide clean water, food and a better standard of living for a growing global population. Decisions taken in tackling these issues need to be based on clear and comprehensive information, but as The Prince of Wales has said, we are at present “battling to meet 21st century challenges with, at best, 20th century decision making and reporting systems.”

The IIRC’s remit is to create a globally accepted framework for accounting for sustainability: a framework which brings together financial, environmental, social and governance information in a clear, concise, consistent and comparable format – put briefly, in an “integrated” format. The intention is to help with the development of more comprehensive and comprehensible information about an organization’s total performance, prospective as well as retrospective, to meet the needs of the emerging, more sustainable, global economic model.

And as Sir David Tweedie of the International Accounting Standards Board says on the IIRC web site:

The case for globally consistent financial reporting standards is well understood and accepted. It is appropriate to apply the same global approach to other aspects of corporate reporting. This initiative represents an important step on that journey

I’m not at all surprised Sir Davis is so welcoming.There are, as I have pointed out time and again,  major problems with the International Accounting Standards Board and its International Financial Reporting Standards.

The first problem is that this is self regulation by the accountancy profession for the benefit of its clients. Despite being a body with the effective delegated right to create law in more than 100 countries (and every member state of the EU) the IASB is in fact a private company incorporated in the US tax haven state of Delaware that is wholly unaccountable for its actions. Its loyalties are obvious from its source of funding, which is from the Big 4 firms of accountants and a range of their clients, many in the financial services sector. The consequence has been readily apparent. Despite being tasked by organisations like the G20 and the EU with producing accounts that serve the public interest at large the IASB has narrowly defined its task as being to provide accounts that are solely for the use of those who provider capital to companies through the world’s financial markets. In other words, they equate the public interest with that of the money markets and refuse to consider the needs for information for any other purpose, suggesting all such requests are “political” and outside its remit.

The result is an information disaster for those who are not interested in trading in the shares and bonds issued by these entities and who do, instead, wish to hold them to account for their actions and the stewardship they enjoy of the resources entrusted to them. In effect the International Accounting Standards Board ignores all issues of good governance and accountability, let alone the obligations a corporation has to its stakeholders, when creating its standards, saying all such concerns are matters of politics and social responsibility. In the process it reveals its view of the whole corporate world is reduced to the narrow perspective of the gains to be made from trading in securities on financial markets. The whole focus of its reporting is, therefore, on the likelihood of short term gain or loss with complete disregard for the actual substance of the activity a corporation undertakes.

This means that for the vast majority of users and for the vast majority of uses that exist for the financial statements of multinational corporations the accounts produced using International Accounting Standards Board issued International Financial Reporting Standards  are utterly useless. In particular, those accounts make it impossible to tell if a multinational corporation is operating in any particular country, what it does there, what level of activity it ahs there, what profit it enjoys there and whether it pays any tax as a result. As a most basic measure of the obligation of a multinational corporation to the states that host its activities the publication of this information seems absolutely essential – and yet it is dismissed by the International Accounting Standards Board as being irrelevant to the users of accounts (as it defines them) and as a ‘political’ demand for data of a corporate social responsibility nature which has no accounting relevance. But this is not true: this data is pure accounting information which is only capable of extraction from the accounting records of the companies in question and which is vital to all those who have a relationship with a multinational corporation.

The IIRC must, unfortunately, be viewed in the light of this. Corporate social responsibility data has now been largely discredited. It is voluntary, unenforceable, unaudited in most cases, inconsistent, and perceived as marketing data issued by the compliant which has no impact in holding the willingly non-compliant corporations of the world to account for the violations of trust that as inherent in their activities. In this context the IIRC does not take regulation forward but it does let the IASB continue to deny its responsibility for producing accounts that are of benefit to all users and which disclose information that is truly meaningful for all stakeholders on a consistent, audited and enforceable basis.

No wonder David Tweedie is so keen to welcome the IIRC initiative – it lets his IASB continue its ongoing abuse of its stated public obligations.

The Prince of Wales may not understand that – and the GRI, which remains a marginal and almost unknonw body despite years of existence, might be only too happy for the endorsement he supplies to them – but the reality is that this new body will only have impact of it demands:

  1. That the data it desires be included within the accounting framework
  2. Be mandatory
  3. Be subject to audit
  4. Be included in financial statements
  5. Be consistent with those financial statements
  6. Be subject to the same penalty as apply of non-disclsoure takes place in financial statements
  7. Be subject to democratic control – which the IASB is not
  8. Be on a country-by-country reporting basis.

Written by Richard Murphy

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