FRC's CEO Argues Against Changing the Fundamental Purpose of Accounting
In a speech to the Financial Reporting Council’s (FRC’s) Annual Open Meeting, chief executive Paul Boyle argued against proposals to use accounting as a public policy tool to reduce pro-cyclicality and challenged the proposition that accounting measures that show volatility should be adjusted to create an impression of stability.
Boyle said: “It is not clear that accounting has the potential to be a public policy tool to reduce pro-cyclicality, or that it would be appropriate to use it in this way. An equally, or perhaps even more, dangerous argument now gaining currency is that accounting should be given an explicit role in promoting financial stability, rather than its traditional role of providing information useful to investors in their decision-making. The implication of this view is that accounting measures that show volatility should be adjusted to create an impression of stability.”
He said that accounting is a measurement system that presents the financial performance and position of a company in as neutral a way as possible. “It is not surprising that banks report substantial profits when the economy is doing well and reduced profits, or even losses, when the economy is doing badly. This is accounting reflecting the economic cycle, which is a good characteristic of a financial measurement system,” he said.
Boyle added: “This is not to say that current accounting standards need no improvement. But the merits of proposed ‘improvements’ need to be assessed against a clear understanding of the purposes of accounting. It may well be appropriate to attempt to reduce the volatility of economic cycles, but there are more appropriate tools than accounting to achieve this.”
In the speech, Boyle reported on the FRC’s work in helping market participants respond to the challenges to corporate reporting and governance arising from the tougher economic conditions. During the autumn of 2008, the FRC published a number of documents to assist market participants in considering the heightened risks, including a note on the challenges for audit committees. It also sought to influence the public policy debate on the corporate reporting and governance aspects of the crisis, making statements about the importance of the independence of accounting standard-setters and testifying before the Treasury Select Committee.
Boyle also warned that the risks to confidence in corporate reporting and governance remained higher than normal and that there was no room for complacency.