Omission Of The Word ‘Prudence’ From International Accounting Framework Gives Banks A Longer Leash
When it comes to the framework that details international accounting standards, complex financial terms used by accountants and auditors come to mind. However, the omission of one simple word from the framework, prudence, is causing controversy in Britain and giving audited institutions and companies more leeway.
A reference to prudence was initially inserted into the framework by the International Accounting Standards Board (IASB) and omitted from the framework in 2010. Now, a few years after the omission, Britain’s government and investors in companies are questioning the omission.
According to a Reuter’s article covering the topic, “Prudence requires accountants to err on the side of caution when treating something not covered by a specific IASB rule and the investors said its omission from the foundation for the IASB’s rules, known as the conceptual framework, was inconsistent with some EU and British laws.”
The article also mentioned that the omission of prudence could help banks “mask problems,” which is especially concerning after the U.S. government had to bail out banks in 2008 with taxpayers’ money..
The omission of the section that requires accountants and auditors to side with caution doesn’t only affect Britain’s companies and government; it also affects the rest of the world’s.
As an international standard-setting board, the accounting and auditing framework created by the IASB is adopted by about 100 countries including the United States. With only 15 members and funding from accounting firms, financial institutions and a wide range of organizations, the IASB determines how companies are audited throughout the world. This is a matter that Britain isn’t taking lightly.
The Financial Reporting Council (FRC), a body that regulates accounting in Britain, has backed the opinion of Britain’s government and the country’s investors that prudence is a necessary part of the framework.
According to Melanie McLaren, director of the FRC, “It’s not as if there is no concept of exercising caution in the conceptual framework, but we feel it has been de-emphasized.”
McLaren’s reference to a de-emphasis of prudence is most likely why Britain is the first to speak up after the section on prudence was removed. Even though prudence is no longer explicitly mentioned in the framework, the need for accountants and auditors to be thorough during their analysis and reporting is a consistent theme throughout the IASB’s conceptual framework and frameworks created by other international accounting standard setting boards.
Right now, Britain’s concern is merely that – concern. No light has reportedly been shed on how the omission is affecting auditing practices throughout the country and other countries that abide by set standards. You could say that Britain is “erring on the side of caution,” much like how they want accountants and auditors to act. The only thing is, it’s questionable where Britain’s concern is coming from.
According to some political commentators, it’s possible that several investors in successful companies have banded together, made use of their authority and taken their concerns directly to the government, consequently making a huge impact on the government’s reaction. After all, McClaren did specifically mention to Reuters the concern she had for investors.
“”We felt we needed to listen to the investors and give the matter due consideration,” McClaren said.
Whether the government’s decision to revisit the international standards was its own or someone else’s uncertain. But one thing is certain: with the reinsertion of the section on prudence, auditing standards will only become better.
Robert Gibb is a writer, visionary and optimist. When he’s not writing for international entrepreneurs and established companies, he’s writing about music, politics and big ideas.
Omission Of The Word ‘Prudence’ From International Accounting Framework Gives Banks A Longer Leash
When it comes to the framework that details international accounting standards, complex financial terms used by accountants and auditors come to mind. However, the omission of one simple word from the framework, prudence, is causing controversy in Britain and giving audited institutions and companies more leeway.
A reference to prudence was initially inserted into the framework by the International Accounting Standards Board (IASB) and omitted from the framework in 2010. Now, a few years after the omission, Britain’s government and investors in companies are questioning the omission.
According to a Reuter’s article covering the topic, “Prudence requires accountants to err on the side of caution when treating something not covered by a specific IASB rule and the investors said its omission from the foundation for the IASB’s rules, known as the conceptual framework, was inconsistent with some EU and British laws.”
The article also mentioned that the omission of prudence could help banks “mask problems,” which is especially concerning after the U.S. government had to bail out banks in 2008 with taxpayers’ money..
The omission of the section that requires accountants and auditors to side with caution doesn’t only affect Britain’s companies and government; it also affects the rest of the world’s.
As an international standard-setting board, the accounting and auditing framework created by the IASB is adopted by about 100 countries including the United States. With only 15 members and funding from accounting firms, financial institutions and a wide range of organizations, the IASB determines how companies are audited throughout the world. This is a matter that Britain isn’t taking lightly.
The Financial Reporting Council (FRC), a body that regulates accounting in Britain, has backed the opinion of Britain’s government and the country’s investors that prudence is a necessary part of the framework.
According to Melanie McLaren, director of the FRC, “It’s not as if there is no concept of exercising caution in the conceptual framework, but we feel it has been de-emphasized.”
McLaren’s reference to a de-emphasis of prudence is most likely why Britain is the first to speak up after the section on prudence was removed. Even though prudence is no longer explicitly mentioned in the framework, the need for accountants and auditors to be thorough during their analysis and reporting is a consistent theme throughout the IASB’s conceptual framework and frameworks created by other international accounting standard setting boards.
Right now, Britain’s concern is merely that – concern. No light has reportedly been shed on how the omission is affecting auditing practices throughout the country and other countries that abide by set standards. You could say that Britain is “erring on the side of caution,” much like how they want accountants and auditors to act. The only thing is, it’s questionable where Britain’s concern is coming from.
According to some political commentators, it’s possible that several investors in successful companies have banded together, made use of their authority and taken their concerns directly to the government, consequently making a huge impact on the government’s reaction. After all, McClaren did specifically mention to Reuters the concern she had for investors.
“”We felt we needed to listen to the investors and give the matter due consideration,” McClaren said.
Whether the government’s decision to revisit the international standards was its own or someone else’s uncertain. But one thing is certain: with the reinsertion of the section on prudence, auditing standards will only become better.
Robert Gibb is a writer, visionary and optimist. When he’s not writing for international entrepreneurs and established companies, he’s writing about music, politics and big ideas.
