Skimming stones across the ponds of complacency

There has been a change in the corporate mindset about how accounting rules should be regarded over the past two and a half years. 

This change has been due to the work of the Office of the Chief Accountant at the ASIC, which has sent an unambiguous message to the marketplace about the importance of the rules that lay down the requirements for financial information provided to the financial markets in company annual reports.

A central figure involved in strengthening the visibility of ASIC in the accounting arena, Jan McCahey, leaves this month at the end of her term as ASIC's inaugural chief accountant. McCahey and her team at ASIC redefined the regulator's profile in financial reporting to an extent where the chief accountant's office has been the target of criticism from some parts of the business community for enforcing accounting rules as they currently stand. How did the Commission get to the point where it started skimming stones across the ponds of complacency in the area of financial reporting?

The prompt to revamp the accounting function was the need to fill a vacancy in the top accounting role and a review of the approach was undertaken by the Commission. A decision was made to brand the accounting activity in a new way that identified it with a particular division within the Commission and there was also extensive consultation on the scope of the OCA's role with the regional offices to garner feedback on the proposals. Other national regulators were visited or contacted early in the development of the OCA to see what could be learnt from the way they dealt with accounting issues. A more compact structure, resource limitations and different cultural attitudes towards regulatory activity in Australia meant McCahey, the Commission's accounting advisers and the regional commissioners had to define and implement a suite of strategies to fulfill the goal of making the Commission more visible in the accounting arena. Jan McCahey, 41, told Company Director during a recent interview that the Commission had spent a lot of time engaging with constituents and informing them about the role the ASIC has in the community.

Prior to her joining the Commission a loose coalition of bodies, including accounting organisations, were calling for better enforcement of accounting rules and a greater presence in the marketplace. McCahey says there appeared to be a lack of knowledge about the way the Commission operated in terms of accounting matters and it seemed that criticisms leveled at the Commission about an absence of accounting enforcement activity may have been ill-informed. A major part of her role at the ASIC has been to ensure the Commission's powers, attitudes and intended actions are clearly understood by the business community. "If people know how you do things and why you do them and what tools are available to you," McCahey notes. "They then have a much better appreciation of how to interact with you. A lack of knowledge always provides the risk that people will make uninformed comment." One of the tools the Commission has implemented over the recent past to boost the profile that has been the financial reporting surveillance program. Annual reports of listed companies are chosen at random by the Commission and specific accounting issues are highlighted for special attention.

Outgoing ASIC chairman Alan Cameron says the thematic approach taken by McCahey, her deputy Doug Niven and the team across the Commission to tackling accounting matters via the surveillance program has been effective. "The credit really goes to Jan for having found a way of coordinating the work done in various regional offices on common themes," Cameron explains. "Themes would be identified and large numbers of accounts would be looked at to see how they dealt with those particular areas. "That work would be brought together in releases designed to help users and issuers of financial accounts understand what the issues are and what they should be doing about them." Issues such as accounting for financial instruments, directors' remuneration, accounting for new economy entities and intangible assets are all matters that have been raised in the surveillance program. Cameron notes that there has been more than one occasion where he has had to defend the Commission for doing the work in the accounting area – work that it is specifically obligated to do under the Corporations Law.

"I have found it necessary on several occasions to defend the fact we were doing it at all. I think it was at least in part due to the fact we were being effective and some people were finding that uncomfortable because it was presumably impacting upon the way they wanted to do business," he says. "The reality is that Australian financial reporting at the end of the 80s was one of the black holes in the Australian regulatory system. Australian financial accounts had very little credibility." Cameron says the Commission has held as its objective during the 1990s – and particularly during the past two years – a goal of ensuring investors and analysts could trust what they see in financial statements put out by companies. Jan McCahey says there were many conversations when she first started where people complained that some results achieved by complying with accounting standards were not commercial. She has frequently indicated the ASIC was not interested in entertaining the "clever reading" of accounting rules that do not comply with the spirit of the Company Law. "Generally, standards are written to promote consistency in financial reporting," McCahey says. "That is their great value. That will only work if standards are applied consistently. "It's not a matter of free choice or comply if you want. It might be a frustration some people have that we might have a different view to them of what some accounting standards say." Some companies have been caught out implementing what the Commission believes to be improper accounting treatments. Corporate scalps claimed by the Commission include software company Solution 6, telecommunications play One.Tel, Australia Pacific Airports Corporation and Brisbane Airports Corporation Limited, the Seven Network, Media Entertainment Group, St George Bank, Novogen Ltd, North Ltd, Pacific Matrix and life insurer AXA Asia Pacific. McCahey says the Commission isn't the only voice expressing concerns about the way some companies are implementing accounting rules. She cites the airport lease premium amortisation debate as an example.

"I'd have to say it's not just ourselves that have the views we expressed when we dealt with the airport amortisation issue," she says. "It wasn't ASIC off on a frolic of its own, you know." While there has been general support for the strengthening of the regulator's arm in accounting matters, there are concerns expressed by some in the accounting profession and the business community that specific matters were not handed with flexibility. Also that the ASIC's views were not tested in the courts or the accounting interpretation body, the Urgent Issues Group. Michael Coleman, chair of the AICD's accounting and finance committee and a partner at KPMG, said the business community generally respected the regulator's role in the market place, but that some in the business community did feel that the ASIC was being unreasonable on issues such as accounting for intangibles. Intangibles was an issue on which two of the Big Five accounting firms, KPMG and Ernst & Young, publicly tackled the ASIC. Along with the Group of 100, the firms felt the Commission was being inflexible in the manner it was enforcing the standard. The firms also believe the AASB was wrong in issuing an accounting interpretation some commentators felt was motivated by the ASIC's move to more rigorously enforce the depreciation rules contained in the Australian accounting standard, AASB 1021. Not everyone thought the Commission was wrong in pursuing its strategy on intangible assets. CPA Australia issued a media release last year at the time the Commission began its depreciation crackdown, supporting the regulator's enforcement of existing rules. Warren McGregor, former executive director of the Australian Accounting Research Foundation, argues the Commission's actions have improved the reputation of the Australian financial markets and the visibility of the regulator in accounting matters has helped standard setters feel the end product of their work, the accounting rules themselves, will be enforced. Others have seen value in approaching the Commission earlier in the life of a matter to talk things over before an accounting problem generates trench warfare between the corporate cop and a company. One financial reporting expert recently said that the best policy with the Commission was raise issues with it early.

"I've found with clients that those who have gone to the Commission with issues and talked them over have gone away from the discussions having resolved issues with the Commission," he said. "Companies seldom get hauled over hot coals if they have discussed issues with the Commission early." It is unlikely that the momentum the Commission has developed in the accounting area will subside. If anything, the pace McCahey has set during her term will continue when her successor, long time standard-setter Ian Mackintosh, takes the driver's seat.

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