It’s not every day that the head of the UK’s Financial Services Authority feels he has to send a stern warning letter to UK-listed companies. When he does wield his mighty pen you can bet that it relates to issues of serious concern.
Sir Howard Davies, chairman of the UK’s Financial Services Authority, wrote to company secretaries last month to remind them that all EU-listed companies required to publish consolidated accounts have to prepare them according to international accounting standards by 2005. Davies pointed out that many companies would have to have systems and plans in place by the beginning of 2004 so they could prepare comparative accounts a year later.
Davies’ letter was sent in reaction to a spate of surveys suggesting UK companies are poorly prepared for the switch. Indeed, many still claim to be ignorant of the EU’s ruling. The Institute of Chartered Accountants in England and Wales finds that a third of respondents are either ‘not very aware’ or ‘not at all aware’ of the EU regulation and even more are ignorant of the likely effect on their companies. Similar studies by PricewaterhouseCoopers and Grant Thornton back up the findings. By contrast, continental European companies seem to be eagerly switching to IAS, if they have not done so already.
Why aren’t UK companies taking IAS seriously? At first it seems out of character; they generally have a very good record at abiding by rules and regulations, particularly compared to companies on the continent.
The problem here lies in a feeling of superiority. Many UK-based corporate accountants feel that UK Gaap is a rung above IAS. Indeed, several respondents to the Grant Thornton survey go so far as to say they feel harmonization would devalue the quality of existing reporting in the UK. Their perception is that the current standard of UK reporting is ‘world leading’ and they fear ‘being shoehorned into something that does not fit.’
There may be some truth in those sentiments but they will be of little value to UK companies when all their peers on the continent are reporting according to IAS. The one thing all investors want on the accounting standard front is uniformity. If nine out of every ten companies in a European sector are reporting according to IAS by early next year, then few investors will be impressed by a minority still whining about ‘better British standards.’ Nor will it wash when a year later they do not have comparative accounts from 2004 or the in-depth knowledge of IAS that investors will demand. The natural reaction from institutions will be to direct their money elsewhere.
By contrast, continental European companies are already switching to IAS in droves because many of them recognize the inadequacies of their own accounting standards. The trend has already created a groundswell of support for IAS among US investors, something that is set to increase as we move closer to the 2005 deadline. UK companies would do well to sit up, listen and make the switch as early as possible to make comparisons across their sector that much easier. It might just help on the transparency front, too.
And if you are a UK company totally bemused by the above discussion then bring yourself up to date and take a look at EC regulation number 1606/2002. It’s available on the EC’s web site at https://europa.eu.int/comm/internal_market/accounting.
