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

Lord Sikka Excerpts

Tuesday 27th April 2021 Grand Committee

[Lord Sikka (Lab) [V]]

My Lords, it is a great pleasure to join this debate.

The Government claim to be “taking back control”—that slogan has been used quite a few times—but there is no sign of that in this statutory instrument. In common with the Financial Reporting Council, the newly created Accounting Standards Endorsement Board will primarily rubber-stamp the international accounting standards, better known as the international financial reporting standards, or IFRS. These standards are produced by the International Accounting Standards Board—the IASB.

The IASB is a subsidiary of the International Financial Reporting Standards Foundation, and it is registered in the US state of Delaware. The sole reason for that was actually to avoid tax on its income. That fact alone disqualifies the IASB from acting as a standard setter, but the Government permit it to effectively set standards for the UK. The IASB is subsidised by the big four accounting firms and major corporations, among others. This enables the funders to pull levers and exercise undue influence—in other words, the IASB is already captured.

One of the UK’s biggest failures has been to build durable accounting institutions. We had the Accounting Standards Steering Committee, which morphed into the Accounting Standards Committee, the Accounting Standards Board, the Accounting Council, and now the Accounting Standards Endorsement Board. The names have changed but the entity remains colonised by scandal-ridden big accounting firms and corporations. There is no independence from corporate interests. The legislation does not require the endorsement board to hold open board meetings and it does not owe a “duty of care” to any individual stakeholder. The statutory instrument exempts it from liability, which means that there are weak pressure points upon it to advance the welfare of various stakeholders or even consider the negative impact of accounting standards.

The US has robust accounting standards which are set by the Financial Accounting Standards Board. This enables the authorities to respond to scandals. By contrast, the UK has abandoned its capacity to set accounting standards and the Government look to the IASB to respond to UK scandals. The Parliamentary Commission on Banking Standards highlighted the failures of IFRS, including fair value accounting and the demotion of prudence. We are still awaiting meaningful reforms. The collapse of Carillion also highlighted failures of fair value accounting, good will and reverse factoring; we are still awaiting reforms some two years later. The Government can say only that they are waiting for the IASB to act; meanwhile, accounting scandals continue.

Regulators such as the Prudential Regulation Authority have already learned to ignore some aspects of corporate financial statements of banks and regulated entities, especially items such as good will and capitalised software costs. Just think of the costs of looking through these documents and working out entirely different numbers. The end result is that we have two sets of financial statements: one published by companies in accordance with international accounting standards and another modified by the PRA. I hope the Minister will tell us which one is more credible.

The Government’s recent consultation paper Restoring Trust in Audit and Corporate Governance mentions possible reform of distributable profits, which requires consideration of capital maintenance. However, IFRS have no clear concept of capital maintenance. Company financial statements add up random numbers based on historical costs, amortised costs, net realisable values, present values, fair values and just plain guesses. The end result is that companies are not maintaining any financial or real capital. It is impossible to address issues around illegal dividend payments within the Government’s policies. The international accounting standards are the residue of their political games rather than what stakeholders or any set of investors might need. Contrary to what the Minister, the noble Lord, Lord Callanan, said earlier, they do not improve the quality of financial reporting.

I will illustrate that with an example relating to accounting for related party transactions. These are the material transactions that occur between a company and the parties who are in a position to exercise significant control over it. There was a time when such transactions were disclosed, but they are not disclosed now. As the US refused to accept IFRS, the IASB sought to enrol China in its project. Many Chinese companies are controlled by the Chinese Government. They did not like the related party accounting standard because they were not keen to disclose transactions between them and the companies they controlled. Did the IASB make a stand? No. It exempted Government-related companies from disclosing related party transactions. It is hard to understand the UK Government’s enthusiasm for adopting accounting standards shaped by the Chinese Government.

We all know that accounting rules affect the calculation of profits, leverage, liquidity, solvency, risks, wages, dividends, pensions and taxes. These have a direct impact on the distribution of income and wealth. Only Parliament has a democratic mandate to adjudicate on such matters. However, the Government have transferred such authority to unaccountable corporate elites and weakened Parliament. This legislation is against our national interest.