Despite seemingly similar language, the U.S. system of accounting and capital market regulation is far different from the British model and is sullying systems elsewhere as the global marketplace seeks convergence. At least that’s the view of Tim Bush, a British chartered accountant with Hermes Pensions Management in London, as described in a recent report, Divided by Common Language, published by the Institute of Chartered Accountants in England and Wales.
Bush describes the British model of accounting and regulation as based on shareholder rights and financial reporting under a single system of company law. He says the U.S. system focuses financial reporting and corporate oversight on stock market pricing, and that company law is fragmented because it is set at the state level. As standard setters and regulators seek convergence of accounting rules and financial reporting, Bush cautions against adoption of U.S. principles.
Bush
“The US securities laws are trying to do something entirely different to the financial reporting regimes of other countries because of the constitutional limitations of the U.S. federal system,” Bush writes. “However, the common language of the U.K. and U.S. can at times create a superficial similarity in both governance and reporting matters, when beneath the surface, the law is entirely different in intent and effect.
“The U.S.’s difficulties are simple in origin, and not widely understood, but their impact is global. … Outside the US, financial reporting is becoming unnecessarily confused by aspects of convergence drawing from US practices, overlooking, and in some cases undermining, the more robust aspects of those systems elsewhere that do not have the idiosyncratic constitutional problems that have driven the US reporting system to where it is today.”
Ketz
J. Edward Ketz, accounting professor at Penn State, suggested Bush may have taken a shot at the U.S. system because of recent financial scandals. “But other countries undergo what the U.S. has experienced at one time or another,” he said.
Ketz pointed out a difference in the two systems that Bush only mentions in passing—the enforcement process under the Securities and Exchange Commission. “Europe has no counterpart to the SEC with respect to the ability to take civil actions and even pursue criminal investigations against managers for accounting scandals,” he said. “Even if Britain and the U.S. approached accounting standards setting the same way, I would expect to find more accounting scandals in the U.S. because of the SEC.”
Ketz also disputes Bush’s historical account of how the U.S. was based at least in part on British principles when securities law came into existence in the early 1930s.
Albert Meyer, general partner with 2nd Opinion Research in Plano, Texas, is both a chartered accountant in the U.K. and a certified public accountant in the U.S. Having worked extensively under both systems, he says Bush’s approach is “right on track.”
“In the U.K., they have form over substance,” he said. “In the U.S., you can follow the rules but it doesn’t follow economic reality. You end up with WorldComs and Enrons. GAAP in most cases just doesn’t tell me the truth.”
Conference Board Publishes Compliance Handbook For Directors
To help compliance-wary corporate directors weave their way through the new regulatory maze, the Conference Board has published a corporate governance handbook intended to spell out what companies need to do to improve their corporate governance and compliance practices.
Titled Corporate Governance Handbook 2005: Developments in Best Practices, Compliance, and Legal Standards, it is the third in what is becoming a series of such handbooks, updated as the swift onset of new rules and regulations command. That’s according to the handbook’s co-author Carolyn Kay Brancato, research director for the Conference Board’s Corporate Governance Research Center. The first handbook was published six years ago.
The handbook calls on directors to redefine their roles with management, strengthen their independence, and improve practices and processes in the company’s key audit, compensation and governance committees. It focuses on best practices covering legal, regulatory, and stock exchange requirements, as well as key precedents established by the influential Delaware courts.
Brancato says directors today are apprehensive about their roles and their personal liability in light of high-profile legal actions against directors and executives at such companies as WorldCom, Enron and Disney. They’re looking for guidance on how to meet their responsibility for corporate oversight to the satisfaction of the legal system without becoming micromanagers.
Brancato
“The challenge is how to strike the right balance,” Brancato told Compliance Week. “Courts are focusing more on a good faith requirement to know best practices, but this is fairly new. The business judgment rule is alive and well and directors can be protected if they follow a valid process, but they have to know what the process is, put it in place and follow it.”
The Conference Board is a not-for-profit executive membership group that provides information and training to strengthen business performance. The full handbook is for sale via the Conference Board Web site.
Emerging Issues Task Force Provides Abstract On Bartering Rules
The Emerging Issues Task Force of the Financial Accounting Standards Board has issued a draft abstract indicating companies who engage in barter-type transactions involving similar inventory or other materials should following existing rules that describe how to account for any difference in value between the items.
The abstract advises companies to follow APB Opinion No. 29 Accounting for Nonmonetary Transactions, which says companies that are buying and selling similar materials can recognize no gain or loss if the materials are similar, but must calculate a difference in fair value and show a gain or loss if the materials are not similar.
The draft is available at right.
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