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Letters

This month's letters: Dangers to small firms of FRS17 on accounting for pension scheme deficits

Standard behind pension crisis

I think that the ASB has failed to grasp the message that FRS17 is a theoretical calculation and such calculations can destroy companies.

It's fine for a big five firm and FTSE 100 representatives to decide that one size fits all but they clearly have not considered the small firms for whom FRS17 is a millstone. They cannot afford financial engineering to ensure that the pension deficits do not damage their reputations completely.

Consider the many small and medium-sized companies that, as good employers, started pension schemes – final salary, as most were. After 40 years many of these companies are supporting pension schemes vastly larger than themselves. If the auditor follows FRS17 and charges a theoretical sum to the profit and loss account,

it will show that the company is theoretically insolvent. So

it closes and all the staff go into unemployment and lose their life savings.

Never mind – the ASB ruling has done its job! No it hasn't – it has forced a profitable company into death or a slow and grinding decline.

Pensions, we are told, is a long-term business and investments are made for the long term. So why then does the ASB think short-termism is the right course of action?

There is an alternative and probably many companies have decided to disregard FRS17 as the ASB made an honest attempt to address a problem but have got it wrong.

I come from a generation of accountants where judgement was taught and respected. When a new FRS is issued, it now seems compliance is mandatory. There are excellent people around in the profession and in business who retain an open mind but sadly they do not get recognised for that independence.

Pensions comments

The video interview with Andrew Lennard of the Accounting Standards Board, pictured, posted on the magazine’s website www.camagonline.co.uk attracted a high response from CAs (see below), including our Letter of the Month (see left)

Sorry, but I have to say that the accountancy profession has let the British public down on this.

To try and put "true" numbers in a current profit and loss account to represent liabilities in 20-50 years time is about as relevant as the Inflation accounting standard of the 1970s. Think again.

Yes I do blame accountancy, at least in part, for the demise of the final salary pension scheme. It has forced schemes to become so risk averse that their cost has become prohibitive.

Taking greater risk in a controlled way should lead to improved long-term returns, but at the cost of short term volatility – but this can no longer be afforded due to mark to market accounting rules.

The FD’s heavy burden

Recently we have seen PLCs suffering profit warnings and deterioration in liquidity. It falls to board members to face shareholders to explain how the financial decline came about.

The finance director will be bombarded with questions: surely relevant information must have been available? Was it ignored by colleagues? Were management information systems adequate?

The situation raises the question of the responsibility of the qualified accountant in the FD role. It is a question I have had to address more than once, searching for that vague yet honest answer guided by the creed – “true and fair” – of ICAS.

First there is legal accountability, to the board of the entity of which one is a member, where collective responsibility is uppermost.

Second, there are obligations under the Companies Act.

Third, there is the responsibility, as a member of one’s institute, to abide by its strictures on presentation and disclosure of information.

Last, there is a moral and ethical responsibility to shareholders, the investing public, stock exchange and media, which see the qualified accountant as guardian of the “true and fair” concept.

If the present crisis escalates, the role of the qualified accountant in business will assume greater importance. Maybe guidance from ICAS will be necessary to assist them through this communication and accountability (or responsibility) minefield.

Cathedral that was mistaken for hotel

I find that I have to write about an item appearing on page 18 (Travel) of the June edition of CA Magazine. Under “Next Month” and in particular within the portion entitled “To Stay”, we are led to believe that the photograph is of “the Raffles Hotel, Singapore”. While you may or may not have been to Singapore, the writer most certainly has not as it is a picture of part of St Andrew’s Cathedral in the same city.

Almost anyone with even a modicum of an eye for architectural style would see that we have been presented with an ecclesiastical edifice with gothic windows and a spire to boot! By looking up www.livingdreams.org.sg you will see virtually the same photograph of the cathedral which is indeed most impressive and which, among other things, served as a makeshift hospital for wounded and dying British and Commonwealth service personnel and civilians as the Japanese onslaught bore down on Singapore in mid February of 1942.

I go back to the point made in my previous letter in [CA Magazine, September 2007] and that is that writers should ensure their contents are correct and not simply pass things off without checking them thoroughly. We CAs have to pay attention to detail and accuracy, and so should those whom you engage to contribute to the pages in our magazine.

The editor replies: I’m sorry about this mistake and happy to correct it. Pictured is the (one and only, genuine) Raffles Hotel, Singapore.

Can anyone smell eggs?

Having told supermarkets not to tell customers to BOGOF due to increasing food waste, your item highlighting sandwich shops being penalised for giving surplus food to less fortunate people (to eat!) highlights that it's not just the multiple regulators in the financial sector who are giving mixed messages which are out of kilter with stated government objectives, but the Inland Revenue seems to be similarly confused!

Did someone sneeze or can anyone smell egg sandwiches?