The latest report from the Institute of Chartered Accountants is unlikely to lift the quality of corporate reporting.
Reluctant is the word which best describes the tenor of the report and the process by which it evolved.
First, the institute was reluctant to accept that New Zealand's financial reporting could suffer as a result of the accounting scandals overseas.
It seemed oblivious that the branding of the big accounting firms requires common names, services and standards whether they operate in Atlanta or Auckland. It was slow to produce a discussion paper.
Second, the discussion paper was reluctant to accept that there was a need for any major change in accounting or auditing.
This produced a strong reaction when submissions were received, and about 75 per cent of those called for major changes.
Third, the report is reluctant to propose any major changes to accounting or auditing that might improve the reliability of information for shareholders.
Small wonder that the report has been called a "middle-of-the-road document". This feeling of disappointment is unfortunate, given the time and effort put into the process by the nine members of the working group. But it is not unexpected.
The accounting profession internationally has a history of opposing reforms.
In Britain, the source of much of New Zealand's accounting practice, the main accountancy body's record is poor.
In 1929 the Institute of Chartered Accountants of England and Wales objected to the publication of a profit and loss account. In the 1930s its president defended the use of secret reserves.
In 1948 it objected to any change requiring accounts of holding companies and their subsidiaries and it opposed the publication of audit reports. In 1967 it opposed the disclosure of turnover.
Three defects in the New Zealand report concern accounting standards, auditing and ethics.
The report perpetuates the myth that New Zealand's "principles-based" accounting standards are superior to "rules-based standards."
The fallacy of this is seen in the report, which warns that if companies and auditors "demand greater supporting interpretations to avoid lawyers second-guessing auditors" (whatever that might mean in clear English), then "additional rules are inevitable".
Clearly, getting around rules-based standards is little different from getting around principles-based standards.
The adoption of international standards will not improve the situation.
The submission from the Auditor-General noted that international standards "in recent times have moved in the rules-based direction" and that "a similar move is evident in some of New Zealand's standards - in particular those dealing with business combinations."
Accounting for shares in other companies follows no identifiable principle, just a series of rules applicable in particular circumstances:
A shareholding in another company may be reported at cost if it does not confer significant influence. But, if it does confer significant influence it must be reported using equity accounting. Yet again, if the shares are held and the investor controls the other company, consolidation accounting must be followed.
None of these rules result in the shares being reported in a principled way and all mislead investors about the fair value of the investment.
An opportunity to improve the quality of accounting information has been lost because the working group was reluctant to accept that the various rules used in accounting must lead to reports that are misleading, deceptive and at variance with the principle that balance sheets should show the value of assets and liabilities.
The group was also reluctant to propose any real changes which would enhance the auditors' independence, such as banning consulting services to the same client.
There is no shortage of evidence from England, Australia and the United States that independence is compromised when other services are sold to the same client.
Audit partners who are upholding professional values risk being overruled by colleagues whose consulting mentality puts values such as profitability and global presence first.
The report's suggestion of audit committees and rotation of lead partners will do little to protect the partners who put professional values ahead of partnership profits.
The group recommends further teaching of ethics to those studying accountancy. This is understandable.
The recent accounting scandals all involved unethical behaviour, by many parties including accountants.
Enron's off-balance sheet structures in tax havens were created with the input of Arthur Andersen.
Changes in ethics need to start at the highest level.
Local accounting scandals - from the tax-dodging deals of the Winebox days through Fortex's collapse to the misleading Vertex prospectus, Tower's massive writedown following a change of auditor and Tranz Rail's questionable capitalisation policies - have all caused investors to question the ethics of the professionals who produce and audit such accounting reports.
The proposals are unlikely to reassure investors that such things are in the past.
* Alan Robb is a senior lecturer in accountancy at the University of Canterbury.
<I>Alan Robb:</I> Reluctant reformers fall short
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