The standards setter who loves a good scrap with big business

Enron: The watchdog Sir David Tweedie explains how he'll mend accounting's tattered image

Accountants used to be seen as boring old bean counters; perhaps some still are. But accountants charged with stopping corporate scandals like Enron and WorldCom have a more eventful life.

As head of the International Accounting Standards Board, Sir David Tweedie doesn't want for profile. In the world of accounting, the IASB is the legislature while the auditors are the policemen – or the sleeping policemen in the case of Enron.

The Scottish-born regulator sets the accounting rules for 24 countries around the world. Additionally, the European Commission has signed up to his scheme, so UK companies will have to comply by 2005. Sir David has also brokered a deal to merge his standards with US standards. Soon he will be setting the accounting rules for most of the developed world.

Sir David is a pleasant and soft-voiced Scot who looks younger than his 58 years. But this inoffensive exterior masks a man of iron resolve who relishes a fight. His old boss, Lord Dearing, says he would cross a motorway for a good scrap, and he has had many bouts with business in his career.

As a technical partner at KPMG in the 1980s, he saw the "horrors" that investment banks created to get assets and liabilities off their clients' balance sheets and so raise profits. "You'd look at this thing and say, 'This is outrageous'. But it wasn't against the law and it was accepted by a couple of the big accounting firms, so you had to take it."

When the UK's Accounting Standards Board was set up in 1990, he told its founder, Ron Dearing, what needed to change. To his surprise he was offered the job of chairman, a post he held for 10 years.

In tightening up the UK rules, he heard many "howls of anguish" from the business community. But it is due to his efforts that investors now have access to cashflow statements, which can be a crucial indicator of whether a company is going bust. His argument for tough standards was bolstered by the accounting scandals of the early 1990s. For example, he says the collapse of Polly Peck would have been easier to predict if it had reported cashflow.

Now in his international role, the "Perfect Storm" has provided the momentum for more radical reforms.

However, Sir David says US accounting standards were not respon- sible for the Enron scandal. "When we ask who failed, you would have to say the directors failed. The non-executives failed, the audit committee failed, the auditors failed. So did the credit ratings agencies, and the investment banks, some of whom helped with schemes designed to obfuscate. The whole thing was a real corporate governance disaster."

Enron had to restate its accounts to reveal enormous losses hidden in "special purpose entities" Jedi, Chewco and Obi-1, quaintly named after Star Wars characters. But that the accounts had to be restated makes a defence case for standards, says Sir David. "We don't think it was an accounting standards disaster. Certainly, on special purpose entities, the rules weren't that great. That's an area [the US] will fix in a month or so, and we're going to tighten our rules there too."

There are several more rules he wants to tighten up, such as how to treat the payment to staff of share options. The IASB has proposed that these should be made more transparent and taken as a cost – a move that investment bank Bear Stearns estimates could reduce the profits of US technology companies by as much as 50 per cent. Not surprisingly, those concerned have taken exception to the proposal, but their complaints are ridiculed by Sir David: "People say it's costless, it doesn't cost the company a penny. Well, if that's the case, give us some."

The issue so riled some US companies that they threatened to withdraw their funding of the IASB, which relies on payments from accountancy firms and corporations. The threat has since been retracted.

US companies had faced a similar proposal in the mid-1990s and spent a lot of cash lobbying against it. "So $70m worth of shareholders' money was being paid to stop shareholders realising what was going on," says Sir David. "That seems incredible, especially when the top five executives get 75 per cent of stock options."

He considers share options a factor in the "deceit and greed" of the Enron and WorldCom scandals, as they encouraged directors to inflate their results and thus the shares. "If there's all these options, and someone says, 'If the share price goes to x then I can retire and never work again', you can understand why they are ramping the share price."

Another issue that has riled business is how to account for the payment of pensions. When the UK Accounting Standards Board proposed that companies promising to guarantee workers' pensions must put these long-term liabilities on the balance sheet, it provoked uproar. Companies claimed they would be forced to reveal massive losses.

That led to a partial climbdown and now the liabilities will be put in the notes but not included in the balance sheet. The IASB plans to do something very similar.

But, says Sir David, don't shoot the messenger. "The real problem with pension funds is not the accounting. Why have we got deficits? Because of the removal of tax credits, three bad years of falling markets, liabilities going up as people live longer, and falling interest rates."

The long-term problem should be revealed. "If the market is showing no sign of rising, you're going to have to put more money in. That's a cash- flow problem. I think shareholders should know as soon as possible because that's less money for dividends.

"Critics say, 'You're making people change their behaviour'," adds Sir David. "Well, exactly. That's what accounting is all about. If they don't change their behaviour, why bother?"

There are more changes to come. This week new rules on merger accounting are due to be published by UK and international regulators. Insurance contracts and the method of recognising revenue will also be given the Tweedie treatment. The income statement will change from a list to a box, or "matrix", that splits out operating and financial costs, and one-off and recurring costs.

Some say IASB standards look set to get so complicated that even the clever might be confused. David Damant, a former member of the IASB, says: "Even financially educated people – for example, a bank manager who would normally be able to look through a balance sheet and work out how strong a company is – could have difficulties. International accounting standards are becoming very complicated, although very beautiful from the point of view of an investment professional."

And they'll be beautiful indeed if they prevent scandals like Enron.