Memorandum submitted by Mr Geoffrey Mitchell
I believe that the financial regulation of public limited companies in the United Kingdom would be enhanced by:
1. Retention in company law of the requirement for accounts to present a true and fair view
The accounts of Enron may have been technically in accordance with US GAAP (US generally accepted accounting principles) but were probably not true and fair.
There is international pressure, particularly from the United States, that within the text of accounts prepared in accordance with international accounting standards, directors and auditors report only that the statements are prepared in accordance with laws and applicable accounting standards. US companies merely assert that their financial statements are fairly presented in accordance with US GAAP. This means that if an accounting standard can be seen to permit a particular accounting treatment then this accounting treatment is allowed, irrespective of the underlying economic rationale or common sense of the presentation.
UK company law has since 1947 required directors and auditors to state whether in their opinion financial statements present a true and fair view. This is generally interpreted as meaning that the financial statements should comply with the law and accounting standards, but where directors believe that this prevents the presentation of a true and fair view then they are permitted to override the requirements of law or standards, while setting out in full in the notes to the accounts their reasons and the resulting financial impact of not following the law of standards.
Further, in their selection of treatments, where alternatives are permitted or seem to be permitted, Directors should select the most appropriate alternative. At the time of the adoption of the European Directives, the UK delegates were able to persuade their European colleagues to include the concept of a true and fair view into European law.
HMG should retain the concept of the true and fair view in British company law.
2. Accounting standards continue to be based on the concept of substance over form
UK accounting standards are based on the concept of substance over form. This has generally been the case apart from a period in the 1980s following the judgement in the Argyll Foods case in 1981, which seemed to give legal support to the concept of "form over substance".
The Accounting Standards Board strongly supports substance over form, which is best illustrated in FRS 5 "Substance of transactions".
I believe a major failure with respect to the Enron collapse in the United States was the failure of American standard setters to produce standards which required companies to reflect the substance of transactions in their financial statements rather than merely their legal form.
That the Accounting Standards Board (and the International Accounting Standards Board, given that it is likely that international accounting standards will apply to UK listed companies from 2005) be strongly urged to continue to prepare and issue accounting standards based on the concept of substance over form.
3. The creation of the position of Principal Accounting Officer
I believe that the enforcement of accounting standards would be greatly enhanced if each company was required to appoint a Principal Accounting Officer. This person should have sufficient knowledge, training, experience and qualifications to be considered an expert in the requirements of company law and accounting standards as they apply to the particular company.
The duties of this person would be to ensure that there is a good understanding of these requirements among the senior management, Audit Committee and Board with respect to the particular issues that relate to that company. This person should be required to give advice to Directors on the proper accounting treatments and to have access to sufficient information in order to be able to carry out that function.
I would not envisage that this person would have a right or duty to make public any disagreement with accounting treatments proposed by the Directors. Rather, this person should have free access to the auditors, the Chief Executive, and the Chairman of the Audit Committee with whom concerns should be raised. I see this as a different function from that of internal audit, which is focused on detailed compliance with rules, regulations and is often concerned more with issues relating to control and efficiency.
I would envisage that the Principal Accounting Officer would be a member of an accounting body with appropriate rules for admission, ethics, professional conduct and discipline. The Principal Accounting Officer would be subject to disciplinary sanctions by his or her professional body, should there be a failure to carry out the function to an appropriate standard.
A key reason for this proposal is that in many cases, the burden of explaining to senior executives and Boards on the proper requirements is left to the auditors, who then have the job of reporting on the company's compliance with those requirements. I believe this creates an unnecessary conflict. Each company should be obliged to have the technical capability to deal with accounting issues from within its own resources.
Examples of similar officers already exist in our system:
That UK company law be amended to require listed public limited companies to appoint a Principal Accounting Officer.
GEOFFREY MITCHELL OBE
Chief Accountant, Barclays PLC (from 1996, previously Head of Accounting Policies).
Technical Director, Institute of Chartered Accountants in England and Wales 1985-90.
Secretary General, International Accounting Standards Committee 1981-85.
Academic appointments in Australia 1966-81.
Professional training with Touche Ross 1961-66.
Institute of Chartered Accountants in England and Wales
Chairman, Business Law Committee.
Member, Financial Reporting Committee.
Member, Members' Directorate Management Board.
Federation des Experts Europeene (FEE).
Member, FEE Banks Working Party.
Member, FEE Capital Markets Advisory Group.
British Bankers' Association.
Member, Financial Reporting Advisory Panel.
100 Group of Finance Directors.
Member, Technical Committee.
UK Representative on the IOSCO Working Party No. 1 on auditing and accounting (representing the Securities and Investments Board) 1992-96.