Red Tape

Embargoed until Monday 28th June 00:01

Referring to the recent Enron and WorldCom scandals, David Myddelton, Professor of Finance and Accounting at Cranfield Business School, says that such events are more likely, not less likely, to occur in the future as a result of increased regulation of accounting. The UK and EU are increasingly following the failed approach of the US in prescribing in detail how companies produce accounts.

“In nine years the volume of accounting regulation has increased by 150%, from an already high level, at a huge cost to companies, without any corresponding benefit”, says Myddelton in Unshackling Accountants*. Sometimes regulators impose standards that are wrong and even dangerous.

Myddelton is highly critical of new regulations, such as the International Standards, being imposed by professional bodies, by international organisations and by government regulators. He suggests that radical new approaches to accounting are not generally accepted by the profession and are likely to a lead to greater risk of financial and accounting scandals.

At the very least, increasingly prescriptive approaches to accounting lull users into a false sense of security and prevent auditors and accountants from using their judgement to ensure that accounts provide a reasonable picture of a company’s financial situation. Users of accounts should understand that they come with “health warnings” attached and interpret accounts with caution. Increasing the regulation of accounting shifts responsibility away from users and gives them a false sense of security. It also prevents the evolution of new and better accounting practices to deal with a changing world.

Myddelton proposes an alternative framework. Accounting professions could still give guidance to their members. Myddelton illustrates his ideas with draft “Accounting Suggestions” that would replace “Accounting Standards”. Auditors would still be required to give a “true and fair” view. This approach would return to regulators, professions, individual professionals and company directors and shareholders their proper responsibilities.

Read the full paper here.