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Everybody needs standards Back  
Brian Walsh says that there needs to be extensive debate between Government and industry before an EU regulation is adopted, which will require all public companies to comply with IAS.
‘The nicest thing about standards is that there are so many of them to choose from.’… Ken Olsen, founder of Digital Equipment Corp., 1977
An early high priority for the T?naiste and Minister for Enterprise, Trade and Employment must be an extensive consultation process on future policy in relation to accounting standards in Ireland. An EU Regulation will require all listed companies in the EU to prepare their consolidated financial statements in accordance with International Accounting Standards (IAS) for accounting periods commencing on or after 1 January 2005. However, under the Regulation, Member States will have an option to extend this requirement and either permit or require other companies, or other classes of companies (such as regulated companies or large private companies or, indeed, all companies) to also adopt IAS in the preparation of their financial statements.
There is a need for an extensive debate in Ireland before the Government decides which options it exercises in implementing the regulation. While that debate has started within the accountancy profession, there is no evidence that business generally or education providers is aware that fundamental and potentially far-reaching decisions on the issue will have to be taken in the coming months.
However, if the Enron, Worldcom and Elan sagas have had any silver lining, it must be that previously media unfriendly subjects like corporate governance and accounting standards have now become fashionable topics for discussion and analysis.
The past decade has been a period of relatively uninterrupted global economic growth, reflected in rising stock market indices that often anticipated growth in company profits. This environment led to increased expectations of dividend and capital growth and the development of management rewards through non-cash incentives (such as share options) that did not burden company resources, but whose value depended on the company’s performance - sometimes short term performance rather than long term strength. Coupled with the requirement for quoted companies in the US to report quarterly, it also encouraged short-termism in the capital markets, which often overreact to bad news, putting heavy pressure on management to take short-term measures including aggressive earnings management.
Confidence in the capital markets is essential. Without that confidence, capital to finance day-to-day business and longer term investment funds will be less forthcoming and more expensive as higher interest rates and greater security are sought to offset the perceived high risk involved. Confidence depends crucially on the quality of reporting by listed companies.
Increasingly, developments in accounting standard setting nationally are being influenced by international developments. Global capital markets are moving towards acceptance of the International Accounting Standards produced by the International Accounting Standards Board (IASB).
Although the Enron affair does not so far appear to have raised any new issues for Irish/United Kingdom reporting, the accountancy profession is very conscious that no system is perfect and is committed to continuous improvement of the effective systems and standards developed in recent years. Europe is undergoing an unprecedented period of change as a key component of the drive to create an integrated financial services market in the European Union.
There are likely to be three broad options facing the Government (although variations on all three will also be possible):
• Option 1: Apply the minimum requirements of the regulation, that is IAS required only for the group accounts of listed companies.
• Option 2: Extend the IAS requirement beyond listed companies to public interest companies eg banks and larger companies
• Option 3: Extend the IAS requirement to all companies.
Each of these options has its advantages and disadvantages. Among the key issues to be considered will be the cost to Irish business, the transparency and comparability of financial information and the implications for business and the accountancy profession in particular of operating two sets of accounting standards. The position adopted by the UK Government will also be an important consideration
If option 1 is exercised, the overall cost implications to business will certainly be minimized, but problems will arise in a number of areas.
There would be the problem of an unlisted company that was applying for a listing on a stock exchange. These companies normally have to give a three-year history in their prospectus. It does not seem appropriate to give prospective investors information based on Irish accounting standards when all future financial statements will be based on IAS. The alternative is to restate the history on the basis of IAS, which in an entity with complex transactions could be both costly and time consuming. Lenders and regulators would also be faced with difficulties, as they would have to be proficient in both sets of standards in order to understand the financial statements they were reviewing. In particular companies with a lot of financial instruments, such as banks, could have significantly different results and balance sheets under IAS than they would have under Irish standards. This could impact on the calculation of capital adequacy ratios and make comparisons between unlisted banks and listed banks difficult.
These comparability issues could be resolved by adopting the second option of extending IAS to certain public interest companies and large companies, but new difficulties would arise in trying to define precisely what constituted ‘public interest’ and ‘large’ and inevitably organisations at the threshold of any definitions would have real difficulties.
The big bang approach of option three would provide greater consistency and comparability of financial statements, which would not be dependent on a listing or on size criteria. Accountants and their professional bodies would not have to support both Irish standards and the IAS on an on-going basis. However, all companies and their accountants would have to change their financial statements from the current Irish standards basis to an IAS basis. This would involve significant effort and perhaps costs where accounting systems had to be changed as well.
One potentially critical ingredient in making the decision will be the approach adopted by the UK Government. There is no independent Irish ‘setter’ of accounting standards. The Accounting Standards Board in London sets UK and Irish accounting standards and these are promulgated in Ireland by the Institute of Chartered Accountants. If the UK Government were to impose IAS on all UK companies preparing accounts, then UK standards would no longer be written and Ireland would need to establish its own standard setter if it wanted to continue to use Irish standards.
This short article can only touch on the issues, which will need careful debate and consideration before a decision is taken. However, it is vital that any decision be as fully and widely informed as possible. One option, which the Tanaiste might consider, is publishing a consultation paper on the issue and inviting comments from all interested parties.

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