Accountancy and Management: Tweedie fires off a warning shot across company bows: The ASB has armed itself with legal opinion in an effort to pre-empt courtroom battles. Roger Trapp reports

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The Independent Online
IF ANYBODY really doubted the sincerity of David Tweedie's mission as the first chairman of the Accounting Standards Board, they must have been convinced by two documents produced by his organisation earlier this month.

The Foreword to Accounting Standards and Draft Foreword to Urgent Issues Task Force Abstracts not only cite chapter and verse in explaining their 'authority, scope and application'. They also come complete with a legal opinion drawn up by Mary Arden QC, who has since been appointed a judge, on the effects of recent changes in the law on the relationship between accounting standards and the requirement that accounts produced under the 1985 Companies Act should give a true and fair view.

Irrespective of the fact that a legal opinion - even if written by an eminent barrister who has since joined the judiciary - can always be challenged by another lawyer prepared to take the brief, this paper has a clear intent. As Mr Tweedie admits, it is designed as a warning shot across the bows of any company that might be thinking of taking on his organisation.

Although there have been claims that the much-heralded new regime has focused a lot of its attention on the easier targets, it has also shown a willingness to stand up to the very biggest companies - as the Financial Reporting Review Panel's run-ins with British Gas and most notably Trafalgar House demonstrate.

More fundamental, though, is the fact that the ASB has at last begun its attack on creative accounting for takeovers. At the end of last month it followed the April discussion paper on fair values in acquisition accounting with an attempt at least to narrow, if not to block, a loophole that would allow companies to seek some relief by switching from acquisition to merger accounting. The third element, goodwill, is expected to be covered in a document to be published later this year.

Coming on top of Financial Reporting Standard 3, with its ban on extraordinary items (and hence of the simple but misleading measure of earnings per share), one can see what Mr Tweedie means when he says: 'We're doing lots of things that are upsetting people.'

The implication of this is that the changes he and his colleagues are seeking to usher in are so momentous that it might be worth the while of a company - or several companies banded together -to spend the money on legal fees and mount a challenge to the board. Which is where the forewords and the legal opinion come in.

The Foreword to Accounting Standards stresses that compliance with accounting standards will 'normally be necessary in order for accounts to give a true and fair view'. To back this up, the ASB has appended to the document the Arden legal opinion.

Essentially an update of one she drew up with Leonard Hoffman - who is also now a judge - in the early 1980s, the opinion is seen by the board and its associated bodies as bolstering their authority. As Chris Swinson, a partner with Stoy Hayward and recent recruit to the Financial Reporting Review Panel, points out, it is a useful reflection of the way the world has been moving in the past decade.

Ten years ago, Ms Arden and Mr Hoffman felt that the Accounting Standards Committee, the ASB's predecessor, could only represent the consensus view. In what Mr Swinson says was a somewhat undermining approach, they basically said that if a strong body of professional opinion consistently disagreed with the ASC, the courts would be unlikely to enforce the standards.

Part of the problem was that the ASC was composed only of accountants. Under the revamped framework introduced nearly three years ago, ASB members are appointed by a committee drawn from the Financial Reporting Council. This body includes representatives from government, the financial community and industry as well the accountancy profession. Moreover, it, and hence the ASB, is now funded by the financial community and the Government as well as the accountancy bodies.

This wider representation and hence independence has helped to create an authority felt to be lacking in the old ASC. But there is also statutory backing. The 1989 Companies Act that introduced these changes following the recommendations made by the committee headed by Sir Ron Dearing - now chairman of the FRC - also introduced a means of determining whether company accounts complied with, among other things, the 'true and fair' requirement.

The body charged with this task is the Financial Reporting Review Panel. Although it has not yet gone to court, its present head, Edwin Glasgow QC, has made it plain that he and his colleagues will take a firm approach with anybody who contravenes not only the wording but the spirit of the standards. To emphasise the point, the Foreword to Accounting Standards emphasises that the application of standards must be guided by the spirit and reasoning behind them. In other words, cunning legal ruses will not be tolerated.

Nor is this strictness confined to the formal standards. Through its role in resolving problems that may arise with standards, the ASB's sub- committee, the Urgent Issues Task Force, has what amounts to instant standard-setting authority. But since its solutions are only adopted after extensive consultation, the courts are likely to treat them 'as of considerable standing even though they are not envisaged by the Companies Acts', according to the Arden opnion.

To Mr Swinson, the changed view is important because it suggests that the ASB can push ahead of the general view in its pronouncements 'and still be robust. It enables the ASB not to be hog-tied by the consensus.' Mr Tweedie is even plainer: 'This is a great leap forward. Before, we could not move.'

Even with this feather in his cap, the ASB chairman seems concerned not to create too much early consternation within the business community. The UITF is considering a move that might require companies to account for suddenly vacant properties as a loss straight away if they have little prospect of reoccupying or reletting them. But he is anxious to calm the fears of those who might be in danger of breaching bank covenants as the result of worsening debt/equity ratios.

Although in general against the idea of 'grandfather' clauses, by which companies can exempt activities from standards if they took place before their introduction, he has obtained guidance from the British Bankers' Association suggesting that covenants entered into as part of loan agreements will generally be governed by standards applicable at the time the deals are signed. (Photograph omitted)

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