It’s time for investors to engage with some accounting philosophy

PEOPLE in accounting rarely talk philosophy. They tend to discuss technical detail, so it’s no wonder that financial reporting – the reports and accounts of major companies – has become ever more complex.

But over the next few months, we have a once-in-a-generation chance to do something about this. And it’s up to chairmen, chief executives, and investors to make their voices heard. Ordinary people may not be discussing what is happening in the debate over the International Accounting Standards Board’s (IASB) work on its Conceptual Framework, but it will affect them all.

The Framework, which underpins the way financial reporting works, is rarely revised. It is 20 years since it last happened. So the current revision will set the basics for accounting and financial reporting for the next 20 years. The IASB’s first consultation paper is due out shortly, and it aims to have the work wrapped up by 2015. It may sound dry and technical, but we must engage with the issues now.

At the heart lies the idea of stewardship and accountability. Who is reporting aimed at? And how effective are the standards in keeping capitalism honest? There is a tangle in the debate about these issues. The idea of “stewardship” was dropped from initial drafts because, the IASB argued, it was difficult to translate the word into other languages. It prefers to use “accountability”. But either way, the framework must emphasise both the idea of holding management to account and producing “decision-useful” information.

Importantly, these issues must be made accessible to the widest audience. And we need to understand that some concept of stewardship is at the heart of what the interested observer of business would expect.

Companies should focus on this. And they also should grapple with the idea of prudence. Prudence has been described as a “slippery concept”. It sounds like a no-brainer but, as the history of accounting shows, it can push companies into producing misleading figures by using the idea in an overly-creative way. The IASB squares this by insisting that prudence should remain at the back of peoples’ minds, but that neutrality in reporting should be the objective. But we perhaps need to split the issue between recognition and measurement. The outside world would prefer accountants to be keener on recognising the downside, than advancing the upside. They would like to see people taking losses rather more readily than profits.

We must focus on whether improving financial reporting for investors should also mean that taming complexity and encouraging simplicity become drivers within the process. And we need to make the boundaries clearer so that the place where the reporting of risk takes place, somewhere between the area of management commentary and the directors’ report, and the financial accounts themselves, is better defined.

This is a moment when everyone can have their say in how the future is shaped. People must take this opportunity to actively get their views across.

Roger Marshall is chair of the Financial Reporting Council’s Accounting Council.