The new accounting standards framework - Part 1 - Why?

I have spent several weeks now trying (very trying at times!) to develop a series of pages around the new standards, with an accompanying report that converts the information gathered about  specific job via a series of algorithms into a report which indicates which standard applies to that job. How hard can that be? Harder than I had anticipated. So in an attempt to help get my head into the the new multi-tier, multi-regime standards I thought I would try to explain them in plain (!) English.

Backing (way) up to see the big picture

Driving the change to Internationalisation of accounting standards is of course, globalism. Once upon a time when the majority of our trade was with neighbours auditing was quite unnecessary. We exercised judgement every time we traded with someone. If they were honest, reliable and fair we continued to trade with them. If they were rogues nobody would deal with them any more. 

Now that deal through complex networks of people we don’t know we need someone else to verify the trustworthiness of these faceless, often nameless people we are depending upon for our well-being. So the Auditor was invented. Within national borders where there was a common language and common expectations so auditing was fairly easy. We knew that a “clean” audit report indicated that this what this company said about itself was probably going to be trustworthy. To trade with or invest in them would probably be at a lower risk than another entity with a “qualified” report. We generally trusted that Auditors were good people who saw the world a lot like us and we took them at their word. 

Loss of audit credibility

The problem arose when massive companies like Enron started to come apart, and their auditors seemed not only to have missed it entirely and failed to warn us, but (certainly as portrayed by the media), were somehow complicit in their dirty dealing. A recent Readers Digest survey of most trusted professionals in New Zealand ranked Accountants (of whom Auditors are a mutation) at number 30. Thankfully we are just above lawyers, CEO’s, journalists, and sex workers, but way down the list from Firefighters, Scientists and Bus Drivers! So much for the trusted opinion!

The answer to loss of trust, of course, is increased regulation (!). If you can’t trust the person, then at least trust that someone is watching the person to make them do right. This system of checks and balances, while good in theory, has acted as a massive albatross around our necks. 

It is only exacerbated by the fact that in order to make sense of the work of an auditor or accountant working on the other side of the world we need to speak a common language. We need to know that when they say “true and fair” they mean what we mean when we say “true and fair” (apparently when the Brits came up with the phrase the other Europeans didn’t really know what they were talking about).  

Finding a common language

To be able to do communicate what we mean by our audit opinion, that we need to be confident that - firstly; the subject matter is being prepared in the same way there as we would do it here, and secondly; that the subject matter is being tested is in the same way there as we would do it here. Hence we have International Accounting Standards and International Auditing Standards. This is the cost of wanting to be able to trade internationally.

So back to the Accounting Standards. The reality is that not all entities want or need to trade or invest internationally or even have much of a public face at all. The XRB have thankfully recognised this and drawn some distinctions between outward-facing entities that require wide-scale credibility and smaller-scale local entities that will never have to be scrutinised on the international stage. Discussions of ownership, scale, public accountability and purpose are factored in to these distinctions. 

The other distinction that the XRB has drawn is around entities which operate in the public sector for public benefit and those that operate at the for-profit end of the scale. Whether an entity is primarily for community and social benefit isn’t as clear-cut as it sounds, as most of not all entities have (hopefully) some kind of public benefit - the provision of healthy food for instance is part of the goal of an entity like Fonterra. But the type and purpose of transactions often makes the distinction clearer - many transactions are non-exchange in nature, specialised assets are often held for which there may be no commercial market. The point though is that the needs of the readers of financial statements for for-profit entities and public-benefit entities will likely be somewhat different, so a distinction is made.

Part 2>> Public Benefit Entities

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