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Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited
Separating the promises from the reality
As the title of this special issue of Balance Sheet suggests, 2004 is a year in the balance. It is a year when it will become much clearer whether regulation does bring order to the markets and cheaper and more efficient access to capital or whether it is simply a way of politicians covering their backs and making life harder for businesses to perform.
One of the key issues of the year is a simple one. Across Europe all listed companies will have to carry out their financial reporting under the rules promulgated by the International Accounting Standards Board by the year 2005. This means that 2004, given that comparative figures will have to be shown in 2005, is the crunch time. But it is not only Europe. Countries right around the world have latched onto the initiative and are following suit.
The question is how far this movement towards harmonizing global financial reporting can move. The stumbling block, like so much in the business world, is the US. The US financial reporting standard-setting body is committed to convergence. But this initiative has to overcome the sharp divide between the USA and much of the rest of the world. The US favors a mass of rules allowing as little judgment as possible. The rest of the world finds that business works better if people can use their judgment. Principles rather than rules are favored.
Looking forward at what 2004 holds we have examined this debate closely. Sir David Tweedie is the man in the driving seat. As chairman of the International Accounting Standards Board he is responsible for producing the financial reporting standards which will, hopefully, bring all this about. "Improved consistency and comparability should provide increased opportunities for investors to diversify, should enable both emerging and developed economies to attract capital across borders, and should reduce compliance costs for multi-national companies", he writes. "The events of 2004 will determine whether this promise will become a reality".
The enormous benefits of all this working would stretch way beyond 2004. But, needless to say, there are flies in the ointment. The final decision on imposing specific standards, particularly in Europe, lies with the politicians. As Tweedie points out: "The decision rests with the political authorities". And confidence in politicians' ability to produce a swift and effective decision is not high. Vested interests have votes and cash to fund lobbyists. Politicians tend to bow to both of those temptations.
Bob Eccles raises similar fears. In a masterly overview of the issues which face corporate institutions in the year ahead he covers much ground. But the worries remain the same. "Will some combination of constantly improving markets, rearguard action by vested interest groups, covert resistance masked by overt vocal support, indifference and exhaustion result in little meaningful change and things will settle down until the next big wave of scandals?", he asks.
Eccles concludes by saying that he is more hopeful than fearful. But the issues involved suggest that it may be a close run thing. Karel Van Hulle, speaking from the heart of the European Commission, touches on another of the key issues for the year. This is the set of rules dealing with financial instruments. These are difficult and contentious. They are definitely in the tradition of the old Irish saying that: "If you want to get there I wouldn't start from here". Van Hulle is clear. If the rules do not satisfy the European legislators then they will not be endorsed and the great harmonization experiment will start without one of its most important constituent parts in place. He turns the argument back on its head though by putting the onus on the promulgators of the rules rather than the politicians and the regulators. He argues that peoples' behaviors are the most important component.
It takes an old hand to sort such issues out. Roger Davis retired at the end of 2003 after a long and eminent career at what is now PricewaterhouseCoopers. His knowledge of the machinations of the whole London-Brussels-Washington axis is unsurpassed and he has brought it to bear on the prospects for 2004. "Is there a danger of increased corporate regulation around the world becoming a dead hand on entrepreneurship and innovation?" he asks. And his solution is that everyone must "stand firm against any resulting signs of risk-averse box-ticking and creating blame cultures within our corporations".
Adding his weight to similar arguments Mike Rake, chairman of KPMG International, suggests that some sort of balance between regulation and freedoms must be fought over. His view on what 2004 holds is one which suggests that both sides of the divide must understand the other and leave their preconceptions behind. Robert Hodgkinson would agree. As the technical director of the largest accountancy body in the UK it is his task, amongst other things, to ensure that the great 2005 initiative works well. But he is also tasked to think ahead on corporate reporting. He suggests that the concept of prospective financial information is one of the ideas that will drive the year. Like all of the contributors to this issue the insistence that greater understanding of the output of financial reporting is what will transform the efficiency of the markets is uppermost in his thoughts.
Richard Raeburn, the chief executive of the Association of Corporate Treasurers, weighs in with his views on what 2004 will hold. As you might expect of the treasurers the emphasis is heavy on the effects of the financial reporting rules for financial instruments and the effect of the Sarbanes-Oxley legislation. The treasurer's role at the heart of these measures is a difficult one. They tend to be hit from both sides. Raeburn navigates a way through. But 2004 is likely to be a difficult time nonetheless.
And finally Robert Bittlestone of Metapraxis brings us his seven points to keep uppermost in our minds during 2004. His piece rounds off an issue of Balance Sheet which effectively acts as a primer for the year ahead. It has been enormous fun dealing with these issues with our distinguished contributors. It is now over to the practitioners, our readers, to navigate the year with added insight.