The simple life

Growing complexity is the bane of many accountants in business. But if the UK's Financial Reporting Council gets its way, things might start to get simpler in 2008, says Richard Young

Being a senior accountant in business has never been easy. There is the sheer volume of work, for a start. Then the fact that, unlike many other disciplines, the margin of error in the finance function is negligible. Once you reach a certain level, taking on responsibility for a host of other functions - such as IT, legal, facilities and HR - becomes the norm. And that is excluding the fact that one of your duties is to hold pretty much everyone else in the business accountable for their actions.

But most finance directors agree the core part of the job has been getting much harder over the past 20 years - in a way that adds little or no value to the enterprise. 'Changes in accounting have had a big impact,' says Frank Bandura, finance director at UK restaurant chain Carluccios. 'IFRS has signalled a massive change in the way accountants are expected to understand the numbers and present financial statements. I'm having to spend a lot of my time working on the numbers now, which was something I'd got used to under the old regime. That's going to be a big issue in 2008 when we issue our first IFRS statements.'

At one time, complexity was seen as a very bad thing. Bandura recalls the debate on accounting for inflation that raged during his days as a trainee in the 1980s. But even with massive pressure to clarify values distorted by then rampant inflation, the whole idea was abandoned because it was simply too complex.

In the era of corporate governance scandals and multi-billion dollar accounting misstatements, that willingness to abandon technical projects in the face of overwhelming complexity has been shelved. Whether it is non-salaried remuneration, pensions or exotic financial instruments, the accounting and reporting standards of the past decade have tended to the arcane.

'Some of the complexity is very frustrating,' says Bandura. 'For example, we recently adopted FRS 20 [accounting for share-based payments, a standard based on the IFRS rules] for the first time. I worked through it and came out with numbers I'm confident are correct according to the standard. But if I had to explain it to Joe Public, I think I'd have a really hard time - and even if I managed to put the arguments logically, I think I'd still be left with some pretty blank stares. There's no doubt we're overcomplicating it.'

The good news for Bandura and his fellow finance directors is that the organisation charged with setting accounting rules in the UK - the Financial Reporting Council (FRC), which is arguably the most influential of the global standards setters - has acknowledged the complexity problem.

'If I think back to the first set of public company financial statements I was involved in preparing - in 1989 when I was at [UK retailer] WH Smith - and compare them to what businesses issue now, the difference is dramatic,' says Paul Boyle, chief executive of the FRC. 'The length and complexity of the statements is a massive change for company financial executives, and has certainly brought new pressures to bear on the FD role.'

Boyle also concedes that these additional accounting and reporting requirements have come at a time when market pressures on FDs have also heightened. The speed of reporting has increased markedly over the past decade and the market has 'incredible' (his word) expectations on how quickly the numbers will come out after a period close. Risk management processes are much more complex and more formalised now, particularly in the wake of the accounting and reporting scandals at the start of the decade.

'Whenever there's a high-profile case of control failure, everyone starts scurrying around trying to make sure that the same thing won't happen again, or happen to them,' says Boyle.

'But the really big change recently has been the adoption of IFRS,' he continues. 'There had, in any case, been a general trend for annual reports to get larger and more detailed. Looking at one of my old companies, Cadbury Schweppes, the report and accounts were already much bigger before IFRS kicked in. But international standards have added another layer of complexity. As one FD told me recently, “I'm authorised to make a £6bn acquisition - but not to get lease accounting right!”'

There is a glimmer of hope on the international front, too. Last year, the International Accounting Standards Board (IASB) issued a statement declaring that it would issue no new major standards until next year. 'The IASB has listened to the needs of many interested parties and recognises the benefits that will derive from stability until 2009,' said Sir David Tweedie, IASB chairman.

A spokesperson told accounting & business that the IASB's adherence to principles-based - rather than tightly drawn and highly complex rules-driven - standards was also a sign they are taking the over-complication of accountancy seriously. Whether the board can seriously address complexity in the face of (as one standards setter told us) 'turf wars' between different national regulators is another question. Each IFRS can be tweaked not only by local legislators, but also by trans-national bodies such as the European Union, which sets the company reporting requirements. For some multinationals, that means the ideal of IFRS - one set of accounts and reports applicable everywhere - is still some way off.

'And it's not only FDs who are getting fussed by this,' says Boyle. 'We hear it from CEOs and chairmen, too. They're telling us that there's a massive cost and effort going into publishing audited financial statements that aren't even the same numbers that they discuss around the boardroom table, and that help them decide on company strategy.'

That is one reason why, in its published plan for 2008, the FRC articulates this concern as a potential threat to achieving its aim of 'relevant, reliable, understandable and comparable' company reports and accounts. The risks it identifies include:

• regulatory requirements (including those relating to financial statements and accompanying narrative) may contribute to the provision of information in a form that is overly-complex and not sufficiently relevant for users
• IFRS may develop in ways that do not contribute to their usefulness for preparers and users of accounts
• the framework of UK accounting standards - taking account of relevant EU requirements - may impose inappropriate burdens on UK companies, particularly in relation to smaller entities.

'The complexity of reports is a major concern for us here at the FRC,' says Boyle. 'Recently, it's been all one-way traffic, with more and more elements added into the annual report and accounts and precious little taken out. And the evidence suggests that people are getting fed up with that one-way trend. So one of our objectives in 2008 is to look at the complexity and relevance of corporate reports to see if we can reverse that trend.'

The 2008 plan explains: 'This project is intended to… consider whether corporate reporting requirements are disproportionate to their intended benefits. It will address the risk that corporate reporting requirements… are contributing to the increasing complexity of corporate reports without making them more useful or understandable.'

It is probably over-optimistic to expect an overwhelming reduction in complexity this year. But the fact that the FRC - and other accounting regulators - are starting to both acknowledge and identify unnecessary complexity is good news for accountants. Ian Wright, the FRC's director of corporate reporting, stresses the importance of this year's project, but also cites the FRSSE - Financial Reporting Standards for Smaller Entities - as an example of where the regulators can take clear and workable steps to address the issue.

'There is some low-hanging fruit that we might be able to address sooner rather than later - for example, lease accounting and the related thresholds,' says Wright. 'More broadly, we need to ask whether we can get better at finding simpler sets of words to explain the principles behind the standards. We'd like to be able to tell the guys in finance functions, “Here's the principle”, to help them get it right every time.'

That sounds like good news to FDs like Bandura. 'It seems at the moment that the thrust of the standards and legislation is to remove some of the judgements that an FD ought to be making,' he says. 'Yes, there should be rules in place to stop manipulation of the numbers. But it's got to the stage where there's no room for actually interpreting the performance of the business - which, I would argue, is what investors want. I do understand that the shocks of the past decade have demanded a shift in focus of the reporting rules. But from my perspective, this removal of judgement is a negative development.'

His other wish for 2008? 'Ideally, we'd get more stability into the accounting rules - changes happen so dramatically at the moment that it's becoming much harder to automate the production of accounts,' he says. 'That means the finance function is using up more resources and there's less time for the FD to add value in other areas.'

If the IASB does hold to its commitment to freeze accounting standards until 2009, and the FRC can identify - and then maybe address - where the biggest complexity risks lie, he, and many other accountants, will breathe a sigh of relief.

Richard Young is a freelance writer and editor, and former editor of Real Finance. E-mail: Richard.young@gmail.com