An accounting standard for the Eighties

Comment

The publication of the Accounting Standards Board's latest pronouncement - on "related party transactions" - comes with the definite sound of stable doors crashing shut after the horse has bolted. This is a standard aimed at executives and managers with a tendency to muddle their own private financial affairs with those of the publicly quoted companies they work for. While it does still happen, the main offenders passed away with the 1980s. The push for action came not so much from accountants - who with so much unfinished business on matters such as goodwill, deferred taxation and fixed assets, have bigger fish to fry - as the Department of Trade and Industry, which wants more done to combat fraud.

Like the ASB itself, the new standard has clear roots in the corporate collapses of the early 1980s. The idea is to expose not only the links between public and private businesses but also the specific detail of those links - house purchases, relocation expenses and other possibly suspect transactions between companies and their executives. In the words of ASB chairman Sir David Tweedie, "It is not enough to look at the puppets; users need to see the strings and know who is pulling them."

Now that financial engineering is out of fashion and companies appear more inclined to abide by the law as handed down by the no-nonsense Sir David and his ASB colleagues, it is tempting to think there is no need for this sort of thing. But the standard is not merely backward-looking. Times change and if there is a repeat of those conditions, FRS8 could prove an added bulwark against company directors who have difficulty defining where their own and shareholders' interests begin and end.

The problems, though, will come with trying to implement it. The lack of any standard in this area until now is testament to its complexity, and auditors and company officers grappling with it will find themselves dealing with a multitude of definitions. Not the least of their difficulties will be deciding which transactions should be covered, since the standard extends the group of people involved from directors to "key management". It also says the test of disclosure will be materiality to the individual rather than the company. Judgement is obviously going to be the order of the day.