Prem Sikka, accounting professor at the University of Essex, asked industry stakeholders what is transparency, and why so many talk about it and so few put it in practice. The panel discussion took place in the course of The Accountant & International Accounting Bulletin 2016 conference held in London in October
Chair: Prem Sikka, Professor of Accounting, University of Essex
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Participants:
Hilde Blomme, Deputy Chief Executive, Federation of European Accountants (now Accountancy Europe)
Adriano Corrêa, partner – Financial Advisory Services, BDO Brazil
Franklin Lau, CEO, Reanda International
Prem Sikka: We had great themes about the e-commerce revolution, about how to become big, or the fifth-largest player in the market, and about how the profession can take care of itself and flourish. We also heard a lot about this thing called transparency. What is it? What does it look like? How would I recognise it? Have we somehow reached it? Could you say a few words for us?
Hilde Blomme: It may be easier to know when you haven’t reached it. When you don’t find any information on the subject matter on which you think there should be information, it’s not transparent. So I think that’s the kind of negative definition as to what it means. In a positive way its’s the factual intents now of the need to be transparent for a company or an auditor or an accountant.
For instance, if you think about tax transparency, 10 years ago we wouldn’t have thought about tax authorities providing certain information to the public arena that they get from a business. Now there is all this discussion at the European Union level as to whether that’s still acceptable, and whether there is some information that tax authorities now get from companies that should be made public or not.
Prem Sikka: Adriano, do you have any thoughts on this thing called transparency? Because I’ve been doing accounting work since 1968, showing my age here. Ever since I entered the world of accounting, we were told, oh, we’re going to be transparent. And we’re still waiting. We haven’t got there. Why do we not seem to hit any kind of publicly acceptable level of transparency? After all, the whole world of auditing flourishes on the basis that we are going to make somebody accountable, we are ourselves to be held accountable. And this thing called transparency is very fashionable, but it’s highly elusive. Why?
Adriano Corrêa: That’s a really good question. From my perspective I think it’s not convenient for most companies to be transparent. It’s really good for the market as a whole and I’ll take an example from Brazil. I don’t know if you guys are aware of it but Corienties was the first soccer team to issue a sustainability report. And they started promoting initiatives to become transparent and publish every single statement on their website and tried to be more clear about their policies. Of course, the first thing that happened is that the regulators went for the jugular. So that didn’t really help the case.
I think it’s kind of natural for the new generations to try to be included in business decisions. So there might be a premium for companies that try to adopt a more transparent policy. But if there is no additional perceived advantages, especially for the shareholders. And if this does not reflect in cash. Then there would be a very little incentive. What we’re seeing is that the corruption scandals are forcing some of the companies in Brazil to be more transparent, but just because the cost of not being transparent is way higher than actually making the information public.
Prem Sikka: So it’s self-interest. Okay. How does China tackle this issue of transparency?
Franklin Lau: Well, I think transparency you’ll find to be quite a mystery in China. A new trend in China is the increased oversight from the regulator on the firms and the inspections from the Minister of Finance and the Chinese Institute of CPAs are increasing.
They would like the CPA firms in China to increase their standards and at the same time they are increasing the level of information that they disclose.
Prem Sikka: So it’s greater state intervention?
Lau: Yes.
Prem Sikka: Okay. I mean just to sort of broaden the debate and put my cards on the table, I’m currently advisor to the Work and Pensions Committee and we’ve been investigating BHS and doing a lot of work behind the scenes. I have found the accounts of BHS and related companies to have a lot of opacity. They’ve met all legal standards, all accounting standards, but the interesting bits I want to know are simply not there.
For example, the accounting standard FRS 8, if you want to know related party transactions, that is, how incoming profits are shifted between parents and related parties, there’s no disclosure because it’s a wholly-owned subsidiary. You want to know the cash flow statement? It’s not there because there’s a parent company. So the accounting standards have enclosed a layer of opacity. And I want to know what was the composition of the audit team? How many hours did they spend? What questions did they ask? None of that information is available.
So we might seek shelter behind elementary terms to ourselves: we are open, transparent, accountable. I didn’t find any of that in my investigation. And last week my report was released on a company called Swiss Rock by the Work and Pensions Committee. This has now gone to the SFO and there will be another one breaking in the next day or two. I can’t even relate to this idea of somehow the world of accounting is making companies accountable. Because after 48 years of accounting, I can’t find this transparency, which I was promised even in my student days.
The danger is when we look within our kind of community, we feel too comfortable that we have all these kinds of wonderful things. Well, when somebody from outside looks at it, it’s something entirely different. And we also talked about tax. And cooperation with the NGOs. Again, I’m the co-founder of Tax Justice Network. We said we wanted country-by-country reporting. The IASB did not want to talk to us. The FRC did not want to talk to us. They just were not interested in talking to anybody from civil society. So we made inroads. Made friends with UK and USA politicians as well as with European MPs. And now everybody knows country-by-country reporting is coming.
We have a plan to introduce alternative accounting standards because we feel that they are needed. But no standard-setter ever wants to talk to us. Certainly the doors are shut, and we have reached a stage where we don’t actually want to talk to them either.
But it is intriguing to me that when it comes to tax matters, there’s very little public information. Country-by-country reporting was opposed by the Big Four firms, by the FRC, and the IASB. Everybody opposed it. Now, well, they know the game is up and they’re kind of adopting this. So my question is, what is the future of a kind of a profession which opposes things which are desperately needed?
People here would be familiar with the ICAEW history. It opposed the publication of income statement, the publication of balance sheet, publication of audit report, revelation of audit fees and non-audit fees. You name it, it’s opposed it. That’s its history. Yet it has failed in its project, that’s why accountants live a good life. So what is your suggestion as to how the profession can flourish given where it is now and the historical baggage? I don’t see any self-examination of where they are. Any thoughts?
Blomme: Well, that’s why I brought it up in my presentation today, because that’s something to work on for the future. Now transparency just for the sake of transparency, that’s not what you should necessarily be looking for. There is transparency for certain reasons, and there are limits to transparency and obviously companies are not ready to give a level of transparency that they see would harm their competitive position. You’ll have very difficult discussions if you bring this up.
And when within the European institutions they bring such proposals forward, they have a lot of pressure against asking for more transparency. So it’s something I think that is there to continue to grow because there is more and more stakeholder pressure and demand for it to be there. But there are limits to it. And but those limits are pushed back little by little, and you may, I hope, see more changes in the future than you have seen in the last 48 years. We feel at FEE, there is a change of mind, not necessarily what everybody everywhere in all open layers of the profession like business and all stakeholders actually you would like to. But we feel this is something which is much more talked about and there’s much more openness to actually change it compared to maybe five or 10 years ago.
Prem Sikka: Well, BDO is in a wonderful position to set new standards in transparency, which might include telling us how much money it makes from tax avoidance or composition of the audit team, the time spent, any detailed relationship with any politicians. Why does it not voluntarily do that? And then maybe if you do it, others like the Big Four firms might want to follow you
Corrêa: So first of all I don’t speak on behalf of BDO.
Prem Sikka: We’ll make you the senior partner for a moment.
Corrêa: No. These initiatives have been in place for a really long time. And even if you consider the IFRS, it will take a major meeting of several different stakeholders that try to translate the issues of the financial statements in order to try to bring new standards. So it is a work in progress still, and I think the main concern we have when it comes to transparency is the right amount of information that you need to disclose.
So when you start saying things about trying to create new standards and trying to come up with better ways of using the financial statements I think there are some things that you can try to do, and some things that you really can’t. So because at the end of the day we want to make sure that the financial statements are useful. It doesn’t matter if you’re fully disclosed if you can’t really use the information for anything, you don’t have any base of comparison. So of course there’s a balance there.
We are driving several initiatives on transparency together with the other firms in Brazil. We have a joint initiative globally from which we have our own international representatives. From our side of course it’s interesting, the more information that you have that goes public, the more information you have to audit. So basically we have a bias towards trying to come up with more transparency, more information, and trying to validate this data.
But at the same time you have the banks, you have the construction companies and so on. For one of the examples about the standards, in Brazil we have a discussion in regards to the adoption of IFRS 15. And the real estate companies don’t want to adopt in Brazil because we can use percentage of completions. From the use of the financial statements perspective, it’s really hard if they do not adopt IFRS 15. It’s in our best interest, but they’re not always game.
Prem Sikka: How is China addressing this idea transparency disclosure beyond the narrow confines of accounting? Because the problem is we think in terms of what accounting requires, not what society requires. How is China broadening this meaning?
Lau: China now it’s 100% compliant with IFRS requirements. But when you look at China, you can look at Hong Kong. We are to some extent a very good example for Chinese society to think about. And in Hong Kong they recently launched environmental, social and governance requirements. And have to be mandatory disclosed in the next year in order to list home.
We have to remember that we are running accounting firms, we are actually running businesses. We also have to be careful.
It could be detriment for the businesses themselves if they have to disclose the way they operate. For example, if we are going to disclose how many hours we’re using to do the audit, we’re disclosing our formula. There could be a lot of issues we have to think about.
Prem Sikka: Thank you, let’s take questions from the audience.
Henry Hardoon, H & H Associates: I actually think the Chinese model is the best, the composite tax system. It sort of puts accountants out of business but it’s the best way of collecting tax and meeting social responsibility and not putting all the responsibility on the accountants to make everything right.
And I think also, if you educate the public, because the public needs to know how to tell when something is good or not good, whether the company is performing or not performing. One of the things I think you could add if you wanted to extend the audit and give current data, for example, credit rating data.
Andrew Collier, Kreston International: Hilde talked about integrity, does regulation and excessive regulation actually limit the ability to exercise integrity-focused accounting skills. So in business as well as you move towards complying with the myriad regulations that are in place.
Blomme: I would say not necessarily, but I’m sure you have seen this paper on moral courage from ICAS. And there are a lot of good ideas in it. You might not agree with its conclusions, but if you say “Oh yes, integrity, that’s a fundamental principle in our profession that we have to abide by”, but if you don’t have the moral courage to stand up to it once it’s needed, then it’s not worth a lot.
So I think it’s a personal behaviour aspect rather than something you can necessarily learn by training or by abiding by more regulation. But it’s not necessarily the only way to achieve it. I think it’s a mindset. It’s something that you have, as a person, or maybe less so and then it’s more difficult to abide by.
