No voice at the standard-setting body the IASB has been more in tune with the investor point of view than that of former equity analyst Stephen Cooper FCCA
This article was first published in the October 2016 UK edition of Accounting and Business magazine.
Being a member of the International Accounting Standards Board (IASB) is unlike any other role in the accountancy profession. It not only requires an encyclopaedic knowledge of technical accounting, but also the ability to debate, negotiate and accept the consensus view. You must be willing to have your decisions and thought processes scrutinised and commented on, your arguments broadcast across the world, and your decisions questioned (and at times heavily criticised). You also have to spend a significant proportion of your working life on a plane and accept that to other accountants, you’re a boffin. It takes broad shoulders to take all that on.
Cue Stephen Cooper. Over the past nine years the FCCA and former analyst has become one of the IASB’s most respected and original voices, providing a valuable user-focused viewpoint. When his second five-year term as a board member ends in July 2017, he will be sorely missed.
His time with the IASB has certainly been eventful, spanning the financial crisis and most of the board’s major projects, including lease accounting and revenue recognition. He has played an important part in improving financial reporting during that time, something he is uniquely positioned to judge because of his previous role as a managing director in the equities division at UBS Investment Bank.
‘At UBS it was a massive problem for us, having different reporting systems around the world,’ he says. ‘Financial reporting has improved during my time on the board because of changes to pensions accounting, leases, disclosures, share-based payments and so on, but the main benefit is largely because of globalised accounting.’
The analyst who stepped up
And that is the central conundrum when it comes to analysts and financial reporting: the quality of reporting makes a big difference to the work of the analyst community, yet it has been notoriously difficult for the IASB to persuade analysts to contribute their views to the standards-setting process, let alone persuade an analyst to sit on the board. Cooper is very much an exception.
‘Very few analysts take an interest in standard-setting, and generally they have little interest in the development of standards in accounting,’ he says. ‘There’s a lot of moaning about the quality of financial reporting but no real incentive for them to do anything about it. It was like that when I joined the board and it’s the same today – some are interested and involved, but not that many. The people who care about financial reporting and who want to do something about it are the people who tend to become involved.’
Cooper has been a member of the IASB’s analyst representative group (now called the capital markets advisory committee) since it was set up in 2003 and has actively promoted greater interaction with investors and analysts. He is closely involved with the IASB’s investors in financial reporting programme, set up in 2014 to encourage greater participation of buy-side investors in the standards-setting process (it recently announced that three more investment organisations had joined the programme, taking membership to 18). ‘It’s long been recognised that the board needs more input from the investor community and I’m pleased to have contributed to that,’ says Cooper.
The accidental accountant
His own involvement with standard-setting evolved gradually. He is, in a sense, an accidental accountant – his first career choice was electrical engineering. ‘But I decided that wasn’t for me and was left at home wondering what to do next. My brother was an ACCA and I thought, why not?’
He took a job with a small firm, moving on to Baker Rooke (now Baker Tilly) where he qualified in 1983 before studying for a master’s at the LSE. In between the MSc and setting up by himself in training, he had a spell at Schroders (the merchant bank not the fund manager) working in corporate finance on M&A transactions, IPOs, etc. It was here he really got interested in the valuation of businesses and the analysis of financial statements, which has led to everything else he has done.
It was the dotcom bubble of the late 1990s that led him into standard-setting. ‘When I joined UBS in 1997 someone was writing a paper on equity valuation, which was a big issue at the time. But they were appointed head of equities in Japan just after I joined, and the firm desperately needed someone to finish the paper off. So they asked me.’
As it turned out, that project (along with UBS’s research department) came to an abrupt halt when UBS merged with Swiss Bank Corporation in 1998, but Cooper’s interest in the valuation and analysis of internet companies soon brought him to the attention of standard-setters.
Share-based payments was an area of particular interest for Cooper. ‘I felt we needed a better way of including share-based payments in financial statements. I felt they should be an expense because investors needed to factor them into their equity valuations. So I wrote a paper to that effect, saying this is what financial statements would look like if these payments were treated as an expense. It got a lot of attention because that argument went against the consensus at the time.’
As a result of his paper, he was invited to join an IASB group on share-based payments, which advised the IASB on its exposure draft and then IFRS 2, Share-based Payment. Soon after, the IASB launched a joint project with the US Financial Accounting Standards Board (FASB) on financial statement presentation, and Cooper was invited to join the international working group that advised both boards. The presentation project was eventually put on hold in 2010 – officially because it was clashing with other projects but unofficially because it was growing out of control. The board has now formally decided to include primary financial statements in its research agenda and work has started, with a discussion paper likely in 2017.
Space cadets and dinosaurs
In July 2007, he joined the IASB as a part-time member. ‘It was a good time to leave investment banking,’ he says with a smile. At the time, there was speculation about his position on the wider use of fair value – or, as then chairman David Tweedie liked to categorise members on the issue, whether he was a space cadet or a dinosaur. Cooper recalls the fair value issue as a big topic when he joined the board but did not feel under pressure about it. ‘At least, if there was, I didn’t feel it,’ he says. ‘All I remember is that after my second or third meeting one of the other board members politely enquired if I was a space cadet.’
His biggest adjustment involved stepping into a world where to make a difference he had to persuade at least seven others of his point of view. ‘I had attended one board meeting before, when they were discussing pensions accounting, and I’d got very frustrated because I disagreed with what they were saying and couldn’t put my point forward. At my first meeting as a board member I remember we discussed earnings per share; I gave a long explanation for why I thought we should do something in a particular way, and then got voted down by 11 to 1.
‘I found that feeling of not being in control difficult. At UBS I could decide what to do and how to do it – I could make decisions. But at the board I couldn’t; I could only supply one vote and I only had control of one vote. It was a question of adapting.’
Within months, the financial crisis hit and the board came under intense pressure to amend its financial instruments standard, IAS 39, to allow some instruments to be reclassified, as was the case with US GAAP at the time. The IASB rushed through an amendment in under a week, without due process, allowing some instruments to be reclassified from ‘fair value through profit and loss’ to ‘available for sale’ in some circumstances. Deloitte estimated at the time that without that amendment £4.25bn would have been recognised as losses in income in the third quarter of 2007 by just the nine European financial institutions that chose to apply it.
While the reclassification issue was a difficult time for the board, Cooper also identifies many high points while he was involved with the IASB. ‘IFRS 2 was probably my greatest satisfaction. Having written so many times that share-based payment was an expense, and having been through so many arguments, it was very pleasing to be vindicated. I’m also pleased about getting rid of the corridor method in pensions accounting, as that was a big source of confusion for investors. And getting leases onto the balance sheet.’
One constant during his time on the board has been accounting for insurance contracts – the project was under way when he joined and the final standard is currently being drafted. His verdict on it as good but not perfect sums up the life of a standard-setter. ‘It’s a massive achievement to reach a final IFRS [International Financial Reporting Standard]. There were vast differences around the world in insurance accounting and our standard will be a big improvement. I’m unhappy about specific parts of it – with other comprehensive income, for example – but in standard-setting you can’t get everything you want. I still get frustrated when people don’t agree with me; you never get to what you think is precisely the right answer.’
The question of what he will do after leaving the board remains open. ‘I’m not making plans at this stage, but I haven’t had a break for 20 years, so I might take a short time off. But I’ll miss the intellectual challenge. How will I change accounting and how could it be better? That’s a unique challenge.’
Liz Fisher, journalist
"In standard-setting you can’t get everything you want. I still get frustrated when people don’t agree with me"