Examination of Witness (Questions 340-359)|
TUESDAY 2 JULY 2002
340. That is the extent of it?
(Professor Sir David Tweedie) It is big; it is very,
341. Do you know the British equivalent figures?
(Professor Sir David Tweedie) We are developing it.
There was a group called the G4 of the major standard setters
of the world. It was Australia, Canada, US and UK. Eventually
New Zealand joined in but, as a former auditor, we did not think
that made a material difference so we kept the G4 name. Basically
what happened was that they proposed that these should all be
charged and that was the British position too. We are now going
through to produce an exposure draft. We hope to have one out
at the end of this year and a standard next year. It will be hugely
controversial, in America particularly. So there is a threat to
the funding there.
342. Did your Board take any action as a result
of the statements made to you in the US?
(Professor Sir David Tweedie) At the meeting we made
it quite clear that we would listen to arguments but we would
not listen to threats and they could go jump in the lake if that
was what they said. It has not changed us at all. Finding the
money is not our problem.
343. You have given a very good example where
there are radically different conflicting approaches to the treatment
of some issues and the expensing of stock options is one such
case. I think you are doing draft guidance on this in the autumn
and you have also received criticism, not just from American companies
but also the House of Representatives' Financial Services Committee.
There is an example which is a radical difference of opinion.
Could you give us, for the sake of argument, two other big issues
of that magnitude where the Americans on the one side say of your
draft proposals, "Forget it", something of the magnitude
of the expensing of stock options? Will those be resolved?
(Professor Sir David Tweedie) I suppose the one they
are very worried about is pension cost accounting. They have a
method which they have had in now for over 16 years. The difference
between that and FRS 17 is that FRS 17 shows up starkly what has
happened. The number is volatile, which is why it does not go
through earnings and that is why it is stuck at the bottom of
the balance sheet. If, for example, you had a deficit, the Americans
would knock 10 per cent of whatever is the highest, the assets
or the liabilities, off that figure and then they would spread
that number over the working lives of the employees, so instead
of a deficit of ten million you would end up with a number like
half a million. I do not think you could explain that to your
grandmother. You may as well take the ten million and divide it
by the cube root of the number of miles to the moon and multiply
it by your shoe size. It does not mean a thing. That is the issue
which we really believe in. Accounting has to be absolutely transparent.
One of the things we see in these markets today is that when there
are doubts about what is going on the markets get very jittery.
The reason we are in existence was the Asian crisis where companies
which looked all right suddenly just collapsed. Funds would not
go in because people were scared that the numbers did not mean
anything, so growth stopped, unemployment rose, companies could
get no cash for investment. The only way they could fix the economy
was to clean up their accounting standards which is the issue
we are talking about now. They then had a choice. They either
went for American standards or international and that in a way
is where we came into the picture. The Americans proposed that.
They proposed that the international standards should not be American
standards. They were quite decent in that respect.
344. So we have expensing of stock options and
the pensions point. Would you care to quantify how many other
big sticking points there are as between the US authorities and
companies and you?
(Professor Sir David Tweedie) Another one, and the
Americans might even agree with this, could be lease accounting.
There are billions of pounds off balance sheets in leases. It
is a very simple thing. Generally speaking when you lease something
you just charge the rental per annum. In fact you have committed
yourself to probably seven years' payments, something like that,
so why have you not shown the liability. That is going to transform
balance sheets. These are big issues: pensions, share options
going through the income statements, leasing and these special
purpose vehicles. We are looking at what the Americans have done
and we are having a meeting at the end of this month which Mary
is attending too with the Americans and Germans to see what we
are going to do about these special purpose vehicles and whether
we can come out with an international answer. Let us try to break
it. One of the things we have to do is game it so we can consider
what we would do if we were on the other side trying to play games
with this standard and how we can fix it.
345. Those are very helpful answers on the specifics.
Could you tell us what the likelihood is of making international
standards mandatory from 2005 as the EU have decided should be
(Professor Sir David Tweedie) Mandatory when?
346. International standards from 2005.
(Professor Sir David Tweedie) We know certain countries
are going to follow us. There is one major Commonwealth country,
which I cannot mention because it is coming out shortly, which
is also going to go for 2005. Our job is to make sure that Europe
and these countries have the standards in place by then and quite
frankly our programme is all 2005 predicated. What are we going
to get done by 2005? One of the big issues we have is that European
companies cannot go straight onto the New York Stock Exchange
without reconciling to American standards. The SEC have issued
what they call a concepts release which asks the question: do
you think international standards are good enough? Should we allow
them? They did that about two years ago. The answers were mixed.
The Americans said certainly not, they are not good enough. The
non-Americans said they were fine. That gave the SEC a political
problem. I do not blame them for not accepting them because I
voted against several of them in my time. What we have done is
to pick up a lot of their criticisms and tried to fix them quickly.
That is a project we published a couple of months back. What we
are now doing is meeting with the SEC and the American standard
setter and looking at the major differences, who has the best
answer. In certain cases it will be neither of us, in which case
we look for another standard setter and that is the intention.
We are going to go through these differences as fast as we can
with the intention of having the main ones out of the way by 2005.
347. Do you think that target will be a hit
across the year?
(Professor Sir David Tweedie) Certainly if the EU
are taking our standards they will have to take them whatever
we do. The intention is to have one big change and not a series
of changes. We have a priority programme to pull these two together
as quickly as we can.
348. Can we go back to stock options? Which
country in particular or countries in particular are objecting
to the proposal and threatening to stop your funding?
(Professor Sir David Tweedie) The United States.
349. Just the United States?
(Professor Sir David Tweedie) Mainly the United States.
350. You say "mainly".
(Professor Sir David Tweedie) It is so prevalent there,
that is the difference.
351. Sorry, but you said "The United States"
and then when I said "Just the United States?" you said
"Mainly the United States". That suggests other countries
(Professor Sir David Tweedie) Not to the same extent
in the sense that when
352. No; to any extent.
(Professor Sir David Tweedie) People
did not like it.
353. Which "people"?
(Professor Sir David Tweedie) Industry mainly. When
you put out these proposals
354. Sir David, may I just stop you. We have
the United States clearly listed as not liking this. Which other
countries or representatives from other countries did not like
(Professor Sir David Tweedie) I would not list other
countries. All I would say was that when it was exposed, certain
people answered saying they did not like it. That is quite different
from the lobbying which goes on in the United States. I have not
had letters from any MPs about it saying that I must stop doing
this, yet. We have had letters like that from Senators and Congressmen.
355. How much does your organisation cost?
(Professor Sir David Tweedie) It costs about $11 million
a year£7 million. Most of that is my salary!
Mr Mudie: You will know how to deal with
it if it does not come in.
356. The reason why American business is so
upset about the expensing of stock options is because it will
hit profits. What I do not quite understand is why EU companies
and companies in this country are not equally concerned about
what will happen to their balance sheets if this expensing of
stock options is introduced. Why should the Americans be so much
more concerned than British business or business in France and
Germany, because it is going to have the same effect? Is it because
we are just a bit dopey in this country?
(Professor Sir David Tweedie) No, it is not on the
same scale; that is the big difference. We estimate, for example
that for every employee of Yahoo the amount of share options in
the year 2000 was $400,000. That is a lot of money and that is
part of the problem. If we go around knocking the profits down,
the share price is going to come down and these options are going
to go under water. The whole question of aggressive earnings management
is one of the big problems we are facing. If you can hold the
share price for three or four years so you will be so rich that
your family will be taken care of for generations to come, you
can see what the temptations are going to be of just ramping the
profit figures. That is why we are absolutely convinced that the
way to deal with this sort of situation is to be pretty brutal,
not listen to compromises, if it is a liability it is on balance
sheets, the leasing should be on, pensions should be on, share
options should be charged, if you control a special purpose entity
you should consolidate it. Let us forget the exceptions, that
is it. We will hear special pleading, "We're different"
but you soon learn that the world is a special case after a while
in this job. That is one of the things we must not listen to because
the way to clear up the crisis is the way we had to deal with
it in the early 1990s in the UK, just to be bloody-minded and
do what we think is right regardless of what people say. I shall
listen to Congressmen writing in if they have a good accounting
argument, but if they just do not like the answer then I am not
listening at all.
357. The reason there is a difference is because
the use of share options is much more widespread, the quantum
is greater in the States and less significant here relatively
(Professor Sir David Tweedie) Yes. That is a good
reason for bringing it in here before it does become significant.
358. This issue of stock options. In what proportion
of the leading US companies would this be a material factor in
their accounts if it was accounted for in the way that you desire?
(Professor Sir David Tweedie) Probably most of them.
Some people say that it is costless and all they are doing is
issuing shares. You are issuing value and that is the problem.
You are giving away value when you could sell these options; it
is company money which you are giving away. They say it does not
cost at all and it is just a dilutive effect. In fact a survey
done in the States a year or two back showed that about 300 companies
in the top 500 were actually buying back shares to stop this dilution.
On average they spent $479 million each. We are talking about
359. Are you saying that in these top companies
in the US if the information were more transparently given out,
it might have some impact on their market valuation?
(Professor Sir David Tweedie) Oh, yes; at present,