Select Committee on Treasury Minutes of Evidence


Examination of Witness (Questions 300-319)

MS MARY KEEGAN

TUESDAY 2 JULY 2002

Chairman

  300. Good morning, thank you for coming to the Committee this morning. Could you introduce yourself, please?
  (Ms Keegan) My name is Mary Keegan. I am Chairman of the UK Accounting Standards Board.

  301. Could you tell us what the function of your Board is and how that fits into the International Accounting Standards Board?
  (Ms Keegan) My function currently is the making, the amending and the withdrawal of accounting standards relevant to all UK companies. That function is likely to change in 2005. We have the regulation which will require listed groups to use international accounting standards for their group accounts. The question of which accounting standards will be used for other accounts in the UK remains to be a matter of consultation from the Department of Trade and Industry.

Mr Fallon

  302. The process of setting these standards nationally and internationally does seem very leisurely. Are you satisfied that the system can respond sufficiently quickly to collapses like Enron?
  (Ms Keegan) "Leisurely" is an interesting word. It takes time to deal with the process of researching what new issues have to be tackled, with consulting on those issues, with going through due process and I am sure one would not wish the standard setting process not to make due consultation publicly in finally arriving at a new accounting standard. That is not to say standard setters in my experience act in a leisurely manner. One also has to look at the speed of change as regards the financial information which companies are giving and therefore one has to pace how many new standards can be introduced into the corporate world at any time. There are of course both nationally and internationally two tiers of accounting standard. There are the main standards and there are what we in the UK call abstracts, internationally called interpretations. Those act as top-ups to provide additional guidance when it is perceived that a standard is not being used properly. I will give you an example. We have a standard which has long applied in the UK concerning when a financial instrument is classified as debt or shareholders' funds. Last year we realised in the UK that instruments were being issued which traded as debt but were being classified as shareholders' funds. In January we issued an Urgent Issues Task Force (UITF) abstract which clarified how those particular instruments should be dealt with. We have, yes, a slower process which requires due and full consideration and consultation, but also an ability to top up where quick guidance is needed.

  303. Is this really sufficient when you have a crisis of confidence in accounting and auditing at the moment? Your own memorandum says after Enron, "The ASB has, however, already resolved that, as the facts do emerge, it should consider whether any existing standards might need specific reconsideration". This does not seem to be very dynamic.
  (Ms Keegan) It is extremely dynamic. Let me deal very specifically with our understanding of some of the issues relevant to the Enron situation. One is the treatment of special purpose entities. We have a standard in the UK, which we have had since the mid-1990s, FRS 5 "Reporting the Substance of Transactions", which many have told us deals very well with ensuring that most special purpose entities (SPEs), if not all, are included in UK accounts. Therefore a knee-jerk reaction is perhaps not needed to try to issue a new accounting standard in that area where we have SPEs well dealt with in UK accounts. That is not to say we are complacent about the standard. We perceived one area last year where SPEs were not well included. Again a UITF abstract was issued on that subject, "Employee Benefit Trusts" which were being dealt with outside the balance sheet.

  304. Why do I have the impression that you are still strolling around looking for the stable door to bolt long after these horses have gone? It does seem rather complacent.
  (Ms Keegan) Which horses?

  305. We have had a whole series of these scandals and crises of confidence, some of which do have UK implications. You are telling us that you might need to reconsider this or you might consult on that.
  (Ms Keegan) One of the most urgent subjects for the UK to tackle is the use of fair values to ensure that derivatives are properly shown in financial accounts and that financial instruments are properly recorded at their fair value. We have just issued an exposure draft on that subject. We cannot, however, implement that exposure draft as a standard in UK accounting without some changes in the law. That requires law both at European level and then amendment to UK law. In that case it is the legislators holding us back and not the standard-setting process.

  306. You are waiting for the company law review.
  (Ms Keegan) No, we are waiting for amendment to the EU company law directives which can then be brought into the UK company law.

Mr Plaskitt

  307. Who funds your board?
  (Ms Keegan) The Financial Reporting Council (FRC) which acts as the umbrella body for the ASB and the review panel. The FRC is funded one third by the accountancy profession, that is funding from the institutes, one third by Government through the DTI and one third by business. Most of that one third from business derives from a levy administered by the FSA. We do not have direct individual corporate funding.

  308. Is it satisfactory for two thirds of your funding to be coming from the people your accounting standards then apply to? Does it make you sufficiently independent?
  (Ms Keegan) I believe it does. I believe the mechanism which was brought in in the early 1990s, which is effectively a partnership between business, the accountancy profession and Government in supervising the setting of standards in the UK is a very satisfactory situation and allows no one group to dominate the process.

  309. No one group is, but nevertheless if you trace back then the sources of where that funding is coming from, it is coming from the people you in turn are setting the rules for as to how they do their accounting. Can you not understand why looking from the outside it rather looks, as we have just heard from Lord Sharman, a high probability of the piper playing their tune?
  (Ms Keegan) May I repeat my explanation of the third of funding which comes from business? The major part of that derives from an across the board levy imposed on listed companies and administered by the listing authority within the FSA. It is not individual companies subscribing to the work of accounting standard setting.

  310. Are you entirely satisfied that no question of compromising your objectivity arises from the way your board is funded?
  (Ms Keegan) Yes, I am entirely satisfied.

Mr Cousins

  311. Are you attempting to deal with the issue of aggressive earnings management?
  (Ms Keegan) Yes. There is a variety of ways in which aggressive earnings management arises. Perhaps one of those is the question of revenue recognition. This is a subject we are tackling. We issued a discussion paper last July. We are proceeding with converting that discussion paper, consultation paper, into a draft accounting standard. You would recognise though from my explanation of where the UK is going towards international standards in 2005, that today may not be the moment unilaterally to issue a UK standard. In May we presented a paper to the IASB and to other national standard setters around the world. The IASB has now announced that it is taking the subject of revenue recognition onto its agenda. We hope to be working quite fast with IASB to provide a revenue recognition standard for the future.

  312. While of course I understand that there is to be an international approach to these accounting standards issues, do you not think the situation in the financial markets, the issue of investor confidence, is such that it would be sensible to produce some standards to deal with the issue of aggressive earnings management now?
  (Ms Keegan) It is a subject we need to keep very much in focus. If I may say so, the question of earnings management derives from standards for a number of areas. Earnings is the composite figure of a number of accounting computations. I focused first on revenue. Revenue recognition issues have been very much in the profile of debate. There are other issues, for example the management of costs, which we keep very clearly under review. Last month, for example, we published a UITF abstract which severely restricts companies, for example bidding for PFI contracts, from deferring costs to manage those through the earnings procedure. The UITF abstract now requires all those companies to write off bid costs effectively in advance of award of contract.

  313. When do you expect some standards, whether nationally derived or internationally derived, to deal with the issue of revenue recognition which you have correctly identified as being the core issue?
  (Ms Keegan) I think you must address that question to Sir David Tweedie who follows me, because that will be a matter of international timing. We could push ahead and issue a UK standard possibly in another year, but issuing a UK standard on revenue recognition in 2003, when our listed groups are going to international standards at 2005 does not seem entirely appropriate. We need to work to get one consistent answer on revenue recognition internationally, most of all because then we do not get differential solutions between the UK and the USA for example.

  314. Do you ever come under pressure from Government either to advance certain kinds of work or to delay them?
  (Ms Keegan) I have never encountered such pressure.

  315. FRS 17?
  (Ms Keegan) I have not encountered pressure from Government to change FRS 17. I have announced this morning a delay in the full adoption of FRS 17 pending reconsideration of the international standard. I am optimistic that will be a very temporary delay whilst the International Board comes to a conclusion on its international standard. Meanwhile all the FRS 17 information will continue to be disclosed in the notes to the accounts.

  316. That is interesting information for the Committee and it is not something we can properly absorb. How long do you think this delay will be in the adoption of FRS 17?
  (Ms Keegan) Very short I hope, because after all the International Board has the perfect solution which it can adopt from the UK rather than picking up the US solution.

  317. But that is speculative. In terms of programme and timetables which are in your control—I accept the point about IASB and we are shortly to hear Sir David, but we cannot lay it all off on them. In your own programmes and timetables, when are you expecting to have FRS 17 fully working?
  (Ms Keegan) If the UK were not moving to international accounting standards at 2005, then FRS 17 would be mandatory for all company accounts from June 2003. I am hoping that we might get an international exposure draft at the beginning of 2003 and that might convert to a standard, in my own view, possibly by the end of 2003/beginning 2004. I am optimistic that the delay will only be for one year. Meanwhile, may I emphasise that all the FRS 17 information will continue to be given in the notes to the accounts.

Mr Tyrie

  318. Does that not rather lend strength to the feeling that things are a little bit leisurely?
  (Ms Keegan) Not at all. I am merely trying to manage the process of companies reporting information into the marketplace so that we should not have two changes to how we account in the main accounts for pensions; two changes potentially within two years. I do not believe the market is necessarily better served by having two rapid changes than having a slight delay and the ultimate answer which will survive.

Chairman

  319. I asked earlier about the function of your Board and how it fits in with the International Accounting Standards Board. I should like to look at that in more depth. Given the decision to move within Europe to international standards for quoted companies, how will the role of the Accounting Standards Board change in the future? What will it look like in 2005? Will there be a comprehensive set of international standards then? If so, will the national standards still be in force?

  (Ms Keegan) I shall repeat my earlier answers, if I may? The question of whether we shall continue to have something called UK accounting standards will depend on Government decision, following a consultation which it intends to begin this summer. At the moment at the Accounting Standards Board we are working on the view that we will continue to have UK accounting standards and that in almost every respect those should be identical with the international accounting standards. For example, in May we issued some exposure drafts to propose replacing current UK standards with certain new proposals from the IASB. Our vision from the ASB is that our UK accounting standards should in almost all respects be identical with international ones. There may however be topics on which cost benefit decisions mean that we do not enforce certain aspects of capital markets accounting on unlisted companies. As to the role of the UK Accounting Standards Board and indeed other national standard setters in the world going forward, I should like to believe that they will survive and be much the same as they are today, not necessarily setting standards but certainly working with the International Accounting Standards Board in developing solutions. The world would be a poorer place if we had all accounting thinking just in one place. We need the national bodies in some form or description to be able to look at new solutions for accounting, to be able to propose those internationally and most of all to make sure that the voice of UK constituents, for example, is heard in the international debate and that the international standard setter does not set standards which are inexplicable—if I may put it in those terms—for application in our business environment. We are looking towards having one set of financial reporting standards for the world, but for some time to come we expect our business environments to be slightly different from one country to another. We have to make sure therefore that the international accounting standards can be properly used in those different business environments and that is what I see as the future role of a national accounting body.



 
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