International Accounting Standards (Delegation of Functions) (EU Exit) Regulations 2021

Baroness Bowles of Berkhamsted Excerpts

Tuesday 27th April 2021 Grand Committee

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, it is a pleasure to follow the noble Lord, Lord Sikka, and to agree with everything he has said.

Under what the Minister referenced as the principal regulation, Regulation 7 states that an international accounting standard may be adopted only if it is not contrary to the principle that accounts must give a true and fair view of the undertaking’s assets, liabilities, financial position and profit or loss. The same provision applies for consolidated accounts, taken as a whole, as far as concerns members of the undertaking. The Secretary of State is now delegating adoption power to the endorsement board; the board and its members are being exempted from liability for getting it wrong, unless it is in bad faith.

Some might find it strange that, while there is a consultation going on about the liability of auditors and company directors for getting it wrong, those endorsing the standards that can well be part of it going wrong are absolved, unless it is in bad faith—and I think that there is some of that about, or at least conflict of interest.

The Brydon review categorically said that accounting standards are forward-looking accounting estimates and judgments, and therefore cannot be true in the literal sense. This is quoted in the restoring trust in audit consultation, which also says that

“consideration of ‘true and fair’ needs to go beyond … compliance with the financial reporting framework”.

It goes on to say that the Government are

“not aware of any systemic issues”—

so let me give a few.

Accounts that are prepared on a going-concern basis require an audited assessment of whether a company is capable of being a going concern or not. If accounts contain unrealised gains, as allowed by IFRS, those gains are not cash and cannot be used to service debt, pay down debt, invest in other assets or make distributions to shareholders. How, then, can auditors sign off the accounts of a company as a going concern if the facts required to assess that position are totally masked by the standards? The incurred loan loss provisioning problem had that effect in banks that collapsed: losses were hidden and banks were not going concerns. Even now, the PRA makes adjustments to get to the true loss-absorbing values.

With the proposed new insurance standard IFRS 17, the issues go further than unrealised profits and credit is given to reduce liabilities not merely for unrealised gains but for anticipated future income, giving the appearance of capital. This cannot be proper accounting. These unrealised gains and this anticipated income cannot be used to service debt, pay down debt or invest in other assets, and nor do they have any value as collateral. No way is this true and fair, and anyone endorsing it would surely have to be nobbled.

This seems to aptly describe the UK Endorsement Board. Three were members of the former Accounting Standards Board, which has approved defective accounting standards in the past. Several were partners in accounting firms at the time that banks were collapsing. Mr Ashley, a former ASB member, was also a career KPMG partner, which the UK Endorsement Board website fails to note. Of course, KPMG was the auditor of Carillion and HBOS. In the case of former ASB member Ms Wallace, at least the website references her connection to PwC, the auditors of Northern Rock, but it is silent about her time at Arthur Andersen. The board includes another recent PwC partner, and a partner from Grant Thornton, which is currently defending itself in connection with the auditing problems of the collapsed Patisserie Valerie. There is no mention that board member Kathryn Cearns worked for the ASB and then for the law firm Herbert Smith Freehills which, as well as providing defence advice to PwC and KPMG, also instructed the ICAEW’s counsel to give the dubious true and fair legal opinions for the FRC, from which the Government eventually distanced themselves, as I discovered in FoIs. Liz Murrall, an employee of the Investment Association, and Paul Lee, a consultant to the Investor Forum, are also on the Endorsement Board, and both those organisations are dominated by insurance companies, the accounts of which will benefit from using IFRS 17.

Who is there to represent the public interest and act on the known lie that Brydon and the Government’s consultation acknowledge—that accounting standards alone cannot be true and fair? Who is there to represent the policyholders of insurance companies who, barring more government bailouts, will be the victims if accounting standards cause them loss? One could hardly wish for a more biased view, and no wonder they need protection from liability. This is a bad SI and we do not need this UK Endorsement Board.