Brian Hunt is wrong when he says that auditors provide assurance that financial statements of an organization "..are a fair presentation of its operational results, cash flows and financial position". ( Canada Must Aim for Public Accounting Excellence We Need Common Audit Standards. Financial Post February 10, 2008). But he should know since he is President and CEO of The Institute of Chartered Accountants of Ontario and a FCA. Perhaps he just forgot to add the phrase "in accordance with Canadian generally accepted accounting principles". CA's used to say that the financial statements were fair. They just don't do that anymore. Perhaps the auditors feel that GAAP somehow guarantees that the statements are fair in some absolute sense. If so, then the qualifier is not necessary. The situation is rather like the referee surveying the scene at the end of a boxing match. One contestant lies bloodied, bruised, and concussed on the mat and the referee declares "it was a fair fight".
This may seem a rather arcane quibble on my part. However the entire global economy is in turmoil as a result of banks, insurance companies, brokers, etc finding themselves in deep financial distress while their financial statements were saying .. . Well what exactly were they saying? Did they fairly reflect the underlying economic and financial reality? I think not.
At one time auditors said that the statements were "true and correct".
Later they changed their tune to "present fairly.." (without any qualifying phrase).
Now we have "present fairly…" following the rules of the game.
Others claim that the current financial distress in the financial markets is because the accounting industry was insisting that assets be marked to market i.e. written down in value and a loss reported just because the assets declined in market price. This create huge paper losses and introduced high variability to reported profits. You should talk about both sides of the issue.
ReplyDeleteFebruary 17, 2009
ReplyDeleteAnonymous you are right there are 2 sides and I summarize them as scenarios.
Scenario 1.
Financial statements continue to report assets at historical cost i.e. the way it was once upon a time.
Financial regulators and analyst lack up to date information and in tough times with tough results. But the results are not evident until corrective action becomes very costly.
Scenario 2.
Financial statements report assets at market i.e. in bad times marked down to their value now.
Now financial regulators in particular have a tough choice but the opportunity occurs before the situation becomes critical. One option is to enforce long standing guidelines [capital requirements] which curtails lending. There may be some tough times but they will be relatively short and relatively less severe.
The other alternative is that regulators can reevaluate and adjust the capital requirements to fit the circumstances. This would likely be the best possible outcome.
The key factor is that up to date information is more useful.
In my view it is preferable to have up to date information, even if unfavorable. The accounting industry should not refrain from "telling it like it is" just to take pressure off the regulators.
It is the job of regulators to do their job of regulating even if it involves difficult decisions.