Intrnational Accounting

1. ABSTRACT;

2005, marked the full implementation of the “IFRS” in the United Kingdom, many organisation in the United Kingdom and around the world that were listed on the London stock exchange  for the first time, reported under the same set of accounting regulations. This extended to all other entities apart from those companies reporting under the financial reporting standard for smaller entities (F.R.S.S.E) on 1st January 2006.

Many experts have hailed Sir David Tweede and the “I.S.A.B,” for eradication creative accounting but feared that, IFRS creates plenty of scope for the analyst to get themselves confused”. (R. Bruce, corporate governance, July 2004),

 Further, the companies now have no need of creative accounting; the analyst will do it for them, the companies now have no need of creative accounting, the analyst will do it for them.   Terry Smith, famous for his theses ‘accounting for growth’,1991,  in which he elaborated on the common creative accounting methods that was being used by United Kingdom’s topmost companies. Collins Stewart Tullet was of the opinion that analyst now are so lazy and gullible that the companies need not to be dubious with exceptions.

“Analyst just release the numbers in a press release, and none ever read a profit and loss account” His work on creative accounting in the 1991 cost him his job but added extra impetus to the work of Sir David Tweede then chairman of the “I.S.A.B”. Expert has agreed that the fact that corporate result under the new financial reporting regime will be more unpredictable and will need to be interpreted carefully. K.P.M.G also conducted interviews on the international financial reporting standard-(The challenges facing business), with the main players in the financial reporting field and the same message came out in a very loud and clear tone.(corporate governance- are analyst up to the IFRS job? Accountancy age, July, 2004).

 The purpose of this research will be to access the impact of the International Financial Reporting Standard on creative accounting in the United Kingdom, and what constrains or influences are there on creative accounting in the United Kingdom (among analyst, accountants, and auditors through questionnaire’s)

2. INTRODUCTION

Of late, there has been noteworthy increase in allegation about the practice of creative accounting pursued by listed companies in UK. Creative accounting can be defined as the “method by which management take benefit of loopholes or ambiguities in accounting standards to offer a biased picture of financial performance”. It is to be observed though it does not violate the law or regulations but may breach its spirit.  Griffith [1986] and Smith [1992] have already published their research studies on such practice by UK companies. The earliest perhaps the first study in this branch may be attributed to Briloff’s research which has documented as “creative accounting in North America”. [Briloff, 1972].

Thus ,creative accounting twists underlying financial performance of a company and disguises it in such a way as it would be difficult for analysts and investors to compare and contrast between different companies as it inconsistence with basic aims of accounting regulations.  Standard setting processes is being made superfluous and instead of constructing a level playing field but results in an unfair advantage to those companies that are able to successfully practice creative accounting.

Accounting is regulated in most countries by two principal means; first, local laws relating to corporate and other bodies; and second, a system of accounting regulation in the form of accounting standards. These organisations are mostly non-governmental. In the United Kingdom, the body that had this responsibility is Financial Reporting Standard Board. (F.R.S.B), the Review Panel and the Urgent Issue Task Force (U.I.T.F)

In 1973, the International Accounting Standard Committee (I.A.S.C) was established by agreement between several leading national accountancy bodies; by 2001, it had grown to become very important, in setting of accounting standards due to an agreement between the International Organisation of Security Commissions, (I.O.S.C.O) for developing core standards. If these standards were agreed by (I.O.S.C.O), it would be endorsed for use by the global markets. In 2000, the I.A.S.C reconstituted itself as the International Accounting Standard Board (I.A.S.B) issuing International Financial Reporting Standards (I.F.R.S) with Sir David Twede as its chairperson.

Those companies which are listed in the stock exchange alone are required to adopt IFRS in UK.  Unlisted companies if they wish to switch over to IFRS, they are at liberty to present their financials by adopting IFRS. There are about presently 7000 such listed companies in the European Union and about 2,500 listed companies operating from UK.

The reason for switch over is mainly on two counts: One being the unscrupulous accounting scandals that occurred both in Europe and in the U.S and the regulators want to tighten their grip by emphasising greater convergence between standards. Unlisted companies and limited liability partnerships in the UK can continue to comply with the accounting requirements of UK Companies Act and UK standards. However, the UK Accounting Standards Board is striving to achieve almost absolute convergence between IFRS and UK GAAP at the earliest.

Investors had lost their hard earned money due to recent financial scandals that shook the entire corporate world around the world. But, most of the companies have been rather intransigence to minimize the investor uncertainty. For example , the Committee of European Securities Regulators ( CESR) has instructed companies to disclose the major variance they anticipated under IFRS in their annual reports , but more than 66% Europe’s largest corporations failed to report any information on this count.

In 2001, the European Commission enacted a legislation that required the adoption of international standards by listed firms of all member states from 2005 onwards. (Creative accounting, C. Gowthorpe and O.Amat, Journal of Economics pp4-5) It is a well known that “in the absence of an accounting standard on a particular issue, there inevitably develops a variety of accounting treatments. From a regulatory point of view, a diversity of accounting treatments is often seen as bad, as it reduces the comparability and reliability of accounting statement and allows creative accounting to prosper. The usual objective of a creative accountant is to find accounting policies and treatment that maximise the reported profit and reduce the reported level of liabilities on the balance sheet.” (www.accaglobal.com).

Creative accounting, though not illegal can be cunningly misleading. This can occur because there, is a number of accounting transactions that are not subject to regulations or the regulations which are ambiguous. Companies sometimes may make use creative accounting in order to present   their financial statement in the best light. (Accounting Dictionary, 1999, pp104)

During the early 1980’s and 90’s, creative accounting was found to be very prevalent in the United Kingdom among companies listed on the stock exchange, which is well documented ,1991(T. Smith) accounting for growth,1986,(Griffiths),1988(Jameson), 1993 (Nasser). All these reported the use of creative accounting in the United Kingdom.

Such that, the companies now have no need of creative accounting; the analyst will do it for them.

3. LETRETURE REVIEW

This chapter investigates previous studies undertaken on creative accounting. The work of  authoritative on the field of creative accounting will initially be considered before considering work that have been carried out in countries outside the United Kingdom such as the United States where creative accounting is referred to as earnings management. The general idea found in the available literature, will form the basis upon which hypothesis will be developed for the case of creative accounting in the United Kingdom.

Obviously, the literature will focus on the nearest alternative that is creative accounting under the old accounting standard. In UK, true and fair view principle is being adopted and is regarded the predominance of the legal approach. One of the main reasons behind this was to enable the reporting of the commercial substance of business transaction rather on to legal form. [McBarnet and Whelan ,1991]. As such, this had been considered as a justification against creative accounting practices, which by definition aim to utilize loopholes or ambiguities in specific accounting standards or rules.

This research paper will mainly discuss and examine the introduction of international accounting standard mainly to eliminate creative accounting   in the United Kingdom. This is followed by interviews with analysts, auditors, company management wherever feasible and appropriate. For instance, when examining the accounting choice of a company, the “Management Discussion” and narratives provided by analysts in the annual reports of the company offers hint as to motives underlying adoption of creative accounting by the companies.

3.1 MAIN CONTRIBUTORS OUTSIDE THE U.K.

The seminal work on ‘Creative accounting ‘owed its credit with the paper of Abraham Briloff [1972] which was considered as a thought provoking during that time. Several other authors who contributed to his field of study are: Watts and Zimmerman [1986], Mian and Smith [1990], Buchan et al [1992], Pourciau [1993], Whittred and Zimmer [1994],  Simon, J [1998],Healy and Wahlen [1999], Amat , Blake  & Dowds , 1999 , Amat et al [1999] ,Larry Elliott and Richard Joseph Schroth [2002],  Jennings [2004] and Stice & Stice [2006],

3.2 CONTRIBUTORS IN U.K.

A detailed study made by Chris Higson and Mark Sproul during 2005 on impact of IFRS on accounting disclosure reveals a lot of insight on the subject.Arnold J. and Moizer,P[1984],  Day [1986], McInnes [1990],  Duk and Hunt [1990], Taylor [1990], Smith [1992], County Natwest Woodmac [1992], Atul K.Shah [1998], Griffiths [1986], Smith [1992],

4.0 RESEARCH OBJECTIVES

4.1 Introduction

After reviewing the existing literature, the main problem is to be defined and research objectives set. Thus, this chapter concentrates on the problem definition, the research boundaries, the main assumptions, the hypotheses, and the usefulness of the research.

4.2 Problem Definition.

As discussed in the third chapter, most of the studies in terms of audit fees are concentrated around large firms. Hence, it lacks works in the small companies in this field. The main research problem will thus be the exploration of factors (termed as determinants) that affect the non-encouragement of creative accounting for small companies.

4.3 Research Boundaries.

The title of the study is “has the introduction of international accounting standard done enough to eliminate creative accounting the United Kingdom?”The focus will thus be on creative accounting as reported in the financial statement of each entity. For more up-to-date data, figures used in recent annual reports will be used.

The investigation will concern only the companies and the definition and selection of companies will be as per the definition of the Companies Act1985. Only companies in U.K are used to demonstrate how IFRS helps to avoid the creative accounting due to geographical location of firms. In thisway, a larger sample of companies in U.K may be selected to allow in-depth analysis in this segment.

Quoted companies are used for two main reasons. The first one is because they are required by statute to publish accounts by adopting IFRS, thus data is readily available. Secondly, only selected listed companies in UK have been taken as sample to demonstrate the thesis goal.

.Research Objective

Dissertation Abstract Page no 2

Additionally, only ‘independent’ quoted companies are selected. Companies which have demonstrated that considerable fair disclosure has been made in their annual accounts have been selected to demonstrate the thesis objective.

4.4. Main Assumptions.

The main assumption of this study is that to verify the statement whether the introduction of international accounting standard done enough to eliminate creative accounting the United Kingdom. As discussed already in the literature review, the general idea found in the available literature, will form the basis upon which hypothesis will be developed for the case of creative accounting in the United Kingdom. Obviously, the literature will focus on the nearest alternative that is creative accounting under the old accounting standard.

In UK, true and fair view principle is being adopted and is regarded the predominance of the legal approach. One of the main reasons behind this was to enable the reporting of the commercial substance of business transaction rather on to legal form. [McBarnet and Whelan, 1991]. As such, this had been considered as a justification against creative accounting practices, which by definition aim to utilize loopholes or ambiguities in specific accounting standards or rules. This research paper will mainly discuss and examine the introduction of international accounting standard mainly to eliminate creative accounting   in the United Kingdom.

4.5 Hypotheses.

The main study aim is to prove whether the introduction of international accounting standard done enough to eliminate creative accounting the United Kingdom. . Several factors that dissuade the use of creative accounting as hypotheses are provided below. According to Ryan, Scapens and Theobold (2002, p.130), “In studying the relationships between variables, the null hypothesis [usually denoted by Ho] is usually set up as stating there is no relationship between the variables.” The alternative hypothesis is exactly the opposite of the null hypothesis and may be denoted as Ha or H1. For this study, the alternative hypotheses are as follows:

HYP 1: Whether creative accounting has been resorted malpractices in the “income recognition “area? How IFRS address this issue?

HYP 2: Whether creating accounting has been used by capitalizing the interest payable? How IFRS address this issue?

HYP 3: Whether stock has been manipulated for increase or decrease in profits? How IFRS address this issue?

HYP 4:  Whether Goodwill and intangibles valuations have been done through IFRS?

HYP 5: Whether the Company has resorted to any off sheet financing and if so, how the same has been dissuaded by IFRS?

4.6 Usefulness of the Research.

This study will be useful in four ways. Firstly, it will add to the existing body of knowledge in terms of IFRS, more particularly in the context of listed companies. Secondly, it helps to understand how users of financial statements should cope with the challenge of IFRS. Thirdly, it helps to identify those changes that are likely to have a significant impact on the appearance of the income statement and balance sheet of a company. Finally, analyst will need to become comfortable with handling increased earnings volatility in the future and in dealing with rather greater levels of disclosure.

4.6.1 Scatter Diagrams.

Use of scatter diagrams at the initial stages is useful to have a visual impression of any relationship between the dependant variable [use of IFRS] and each of the independent variables like financial instruments,share-basedpayments,goodwill amortization , deferred taxation and recognition of pension liabilities In this way, further analysis may be conducted based on the behaviour of the data.

4.6.2 Frequencies.

Frequencies in the form of tables, bar charts, and pie charts will be used to represent data like number of companies.

4.6.3 Central Tendency.

In some cases, it is more practical to represent information in the form of ‘central tendency’ of which the arithmetic mean is the most common. Arithmetic mean is the average value within a distribution. Mean of variables like financial instruments, share-based payments, and goodwill amortization amongst others will be calculated.

4.6.4 Measures of Dispersion.

Arithmetic mean may be subject to distortion if too many extreme values are present in the distribution. Thus, dispersion also will be measured in standard deviation form. Small standard deviations mean that values of a distribution are close to the mean.

4.6.5 Hypothesis Testing.

Hypothesis testing may take several forms. The ones used in this study are discussed below.

4.6.5.1 Bivariate test of significance.

The aim is to find out whether differences exist between the means of two groups.

The main study aim is to prove whether the introduction of international accounting standard done enough to eliminate creative accounting the United Kingdom. The critical part is to Chapter Four Research Methodology

Dissertation Proposal analyse the t-values and significance level. As a rule of thumb, if the value if greater than |2|, then the null hypothesis (Ho) is more likely to be rejected. For other hypotheses, ‘Test of Association’ will be used.

4.6.6 Test of Association.

Tests of association enable the linking of variables. For example, the link between audit fees and non-audit fees. The relationship which may exist between the variables implies that the two variables tend to influence each other. Two such methods will be used in the present study. They are discussed in sub-sections.

4.6.6.1 and 4.6.6.2.

4.6.6.1 Correlation Analysis.

‘Pearson correlation coefficient’ will be used as it measures the strength of a linear relationship between two metric variables. The coefficient lies between ‘-1’ and‘+1’, with ‘0’ representing absolutely no association between the two variables, and ±1 representing perfect link between the two variables. A positive sign indicates that as one variable increases, the other one also increases and a negative sign implies that as one variable increases the other one decrease.

Correlation analysis will be undertaken to determine the level of correlation among the independent variables. This step is important before embarking on regression analysis as too much high correlation may adversely affect the regression results due to the effect of high co linearity.

4.6.6.2 Multiple Regression Analysis.

“Multiple regression analysis is a statistical technique which analyses the linear relationship between a dependent variable and multiple independent variables by estimating coefficients for the equation for a straight line” (Hair et al., 2000). It is written in the form:

Chapter Four Research Methodology

Dissertation Proposal Page 19

Yi = a + b1X1 + b2X2 + …eI, where:

Yi = the dependent variable for the observation.

a = Intercept coefficient

b1 = Slope coefficient for independent variable X1.

X1 = Independent variable 1

ei = Error term in the regression model.

Regression analysis will be done between the Dependent variable [whether the introduction of international accounting standard done enough to eliminate creative accounting the United Kingdom] and the Independent variables namely: financial instruments, share-based payments, and goodwill amortization. Depending on the behaviour of the data, dummy variables may be introduced in the model.

4.7 Time Plan.

Table 1 gives a rough idea as to how the time will be utilised in the dissertation process.

ACTIVITIES: January February March April May

Literature Review

Data Collection

Data Analysis

Discussion

Report Writing

Report Refinement

Table 1: Ghant chart for Dissertation.

Literature Review is the first activity and is an ongoing process. Two weeks are budgeted for data collection from the FAME database. The other steps include data analysis, discussion, report writing, and report refinement.

Chapter Five Expected Findings

Dissertation Proposal

5.0 EXPECTED FINDINGS

5.1 Results.

It is expected that items like financial instruments, share-based payments, and goodwill amortization. These factors have been found to be goodde terminants in previous studies.

5.2 Contingency Plan.

It must be noted that the data may not yield any significant result in terms of determinants of IFRS dissuades the practice of creative accounting in U.K. Should this happen, other types of analyses will be explored depending on the behaviour of the data at hand. Additionally, other non-financial factors may need to be investigated. In this respect, perhaps interviews with experts in this field (like professional auditors) may help.

6. RESEARCH METHODOLOGY:

Earlier research empirical studies on practices of Creative accounting were considered the impact of creative accounting in UK. For instance, Smith [1992] in his authoritative book had detailed such creative accounting practices in UK.   A wide quantity and range of data sources were applied for the study : Prospectuses , press reports , annual reports , interviews with the company management , analysts reports , published accounts, previous empirical studies on the subject , books , articles appeared in the International Accounting magazines etc.

For example, for analysing the tactics of application of creative accounting in security like premium put convertible, information from the notes to accounts were gathered by assimilating from different pages of information like the actual and contingent liability, amount of interest charge relating to the convertibles and accounting policy adopted for convertibility in this case under IFRS   and how these were grouped together.

Likewise, previous studies conducted on the share price changes and the adoption of new accounting regulations has advanced no general conclusions. [Belkaoui, 1992].  This is especially true in the UK where less analysis has been undertaken than in the US and where the proposition of any proposed accounting regulation is often vague because of the accessibility of wide range of accounting options normally deployed to prepare financial statements. Further, the problem of ‘noise’ pollution caused by prior leakage of information has to be investigated.

However it is be observed that identification of creative accounting is very complicated as it requires time, facts of accounting standards and UK GAAP and analysation and comparison of annual report information with alternative sources.

While analysing and compiling the evidence on creative accounting, it became evident that creative accounting practices were not limited to any particular instrument but it extended to whole range of financing and operating techniques, having a constant underlying aim. The location and wording of the disclosures seemed to be actively managed, but careful scrutinisation and examination of the financial information divulged the underlying facts.

The omission of any exhaustive evaluation of the financial statements by analysts was a revelation, assisting to explain why there was a hold-up in public reaction against such creative accounting choices. This phenomenon reveals whether management truly believe that their underlying performance will enhance, creative accounting may be useful in short term since there is a usual time interval in any regulatory responses and better future performance may surpass the past creativity.

Data’s have been collected from various corporate web sites to establish that the use of   creative accounting has been discouraged by IFRS and this proves to be strong evidence that when a corporate follows IFRS, the use of creative accounting in such corporates is being discouraged. The data’s have been collected from the following corporate websites:

1. www.astrazenecaus.com/content/aboutAZ/investing/annualReports/2006.pdf.
2. www.gsk.sd/investors/annual-reports.htm.

3.www.investorrelations.barclays.co.uk/BRC1/jsp/brccontrol?task=articlegroup&value=1118&target=_self&site=inv

4. www.investors.rbs.com/investor_relations/financial_info/results.cfm.
5. www.britishland.com/financialreports/yearend2004/content/csr.htm.
6. www.investis.com/reports/vod_ar_2005_en/report.php.
7. www.xstrata.com/pub_dyn_annual_report.php.
8. http://www.ici.com/publicationsanddownloads.
9. www.nationalgrid.com/corporate/Investor+Relations/Annual+reports/
10. www.lagardere.com/us/info_financieres/publication.shtml.
11. www.novartis.com/investors/sales-results/annual-reports.shtml

The study also specifically analyses the use of IFRS by Pearson PLC and it is empirically proved that IFRS really discourages the deployment of creative accounting by corporates to reveal lower profits which will have impact of on EPS of a company.

< www.pearson.com/pdfs/ifrs/Pearson_IFRS_technical_analysis.pdf>

7. CREATIVE ACCOUNTING

There is no single definition of creative accounting, so various definition put forward will be quoted, unfortunately some of them date back to the 1980’s when it was widely prevalent.

In their paper, “The Ethics of Creative Accounting” authors Oriel Amat, John Blake and Jack Dowd’s define creative accounting as “a process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business.”

Financial statement are bound by laws and accounting standards. To break these is an offence and enforced as such. Judges implement the letter of the law and where there loopholes, the law may be changed. For judges, the spirit does not exist. However, finance is too complicated to have a set of watertight rules. Four authors in the United Kingdom written from different perspective, and considering creative accounting wrote of their experience as follows;

Smith (1992) reports on his experience as an investment analyst;

“We felt that much of the apparent growth in profits which had occurred in the 1980s was the result of accounting slice of hand rather than genuine economic growth, and we set to expose the main techniques involved, and live examples of companies using those techniques.”(p4)

Before resorting to creative accounting, a company should weigh the advantages it is going to derive by resorting to creative accounting and the possible outcomes as if how creative accounting manifests itself and succeeds in run away from regulatory sanction and publicity. Further, the role of press, analysts and auditors should be evaluated to aware the relative influence in the process.

From purely analysing the publicly available financial performance reports and by just ignoring interviews or active discussion with the management, it is difficult to establish the creative accounting tactics adopted by a company. To understand that the creative accounting has been pursued by a company, it requires deeper enquiry into the company and its accountant behaviour.

 As per Paul Craig Roberts, former treasury official of U.S.A in his column in Washington times opined that SEC [Security Exchange Commissions} rules and regulations authorise the creative accounting which helped companies to delay public recognition of their failures for several quarters. Perhaps executive anticipated of turning of things around, but the scene stenches since executives used the borrowed time to dispose stock and allot themselves bonuses.[1]

There exist three groups of business people who involve themselves in creating financial statement frauds. CEO and CFO are engaged in creative accounting mainly to cover up true business performance, to preserve personal control and status and to generate personal income and wealth. Middle level employees are assisting in creative accounting mainly to conceal a bad performance and to receive performance-based bonuses. Organisational scandalous persons engage in creative accounting to falsify financial statements to obtain loans or to inflate a stock they plan to sell in a stage managed show.

Devices of financial statement schemes include fabricated or made-up revenues, altering the period at which revenues are recognised, inappropriate asset reporting and valuation, hiding expenses and liabilities and improper financial accounting disclosures.

Royal Dutch / Shell Group is the third largest oil company , is a global conglomerate of [ The Netherlands’ Energy]  and petrochemical companies which is operating in more than 145 countries. During July 2004, the company reported that it had paid a total of $ 150 million in fines to the SEC and its British counterpart, FSA [Financial services Authority] due to investigations into the company’s overstatement of its oil and gas reserves.

Analysts are under severe attack on the company as its executives were made the first of four restatements related to its oil and gas reserves since January, 2004. Finally, Shell revised its claim, informing that its gas and oil reserves were only 4.47 million barrels, a 22% reduction from its previous claim. Shell finally conceived with Britain’s FSA’s findings that it abused the provisions of the Financial Services and Markets Act. Finally it was asked to pay £ 17 millions in fine, the highest the regulator has ever fined.

One of the most successful methods of restricting creative accounting is through generating publicity over such abuses. [Gallhofer and Haslam, 1993]. Listed companies are likely to be worried about their public image and hence to dissuade away from negative publicity on aggressive accounting options.

Very important link that lies between those persons who prepares the financial statement and users of the financial statement is the security or financial analyst. One will expect that of all commentators on company accounts, analysts would conduct detailed analysis of the financial statement (…………………) and spot any inconsistencies. As most users of the financial statement rely on their expertise but a study conducted by Atual K. Shah of 79 reports covering four companies, showed that analyst did not conduct any serious analytical research and very little attention was rarely given on specific aspect of accounting policies.

When a senior investment analyst was interviewed about the skills of analyst in the United Kingdom .He explained, “Analyst are generally weak in their ability to analyse accounting information. His work is supported by earlier work on the quality of U.K analyst (Taylor, 1990).Day (1986) found that none of the analyst they interviewed had any professional accounting qualifications.

Analysts make their money partly by advising investors on how to invest their monies. They may judge some firms to have good prospects than others, which are not fully reflected in their prices, and therefore their recommendation will be to buy more of the company’s shares. Alternatively, they may assume some companies to have poor prospects and therefore advice for their share to be sold.

Whilst security analysts carry their independent investigation into firms, they can come to different conclusions about a company prospects but within some degree of reasonable agreement. Very important, way of looking at a companies future is by forecasting their profits, so firm’s directors been aware of analyst forecast of their profits try to manipulate to meet analyst forecast or exceed, thereby practising creative accounting. (J. Simon, why do companies use creative accounting?).

 The rule of the analyst in the financial sector cannot be overemphasised especially in countries such as the United Kingdom, where the stock exchange play an active role in raising capital for the companies that trade on them. Therefore, it is necessary for the analyst to be abreast with IFRS and its impact.

Creative accounting is not only practiced by the private sector but also at some time by the government also. In UK, the public sector inflation officially slumped down by two-thirds during last year after controversial changes to the way the figures were worked out as revealed by a new research and the findings immediately prompted new allegation of creative accounting by UK chancellor Gordon Brown. [2]

8. WHY DO FIRMS ENGAE IN CREATIVE ACCOUNTING

An annual review provides information on the financial position of a company. It is a snapshot of the company situation, as well as a history of change. However, the message the review gives is often taken to be about the future position of the company. In particular, investors and the capital market will base their decisions on results to date and the prognosis for the future.

The shareholder and market reaction is related more and more to managers’ actions and directors are increasingly judged on profit, growth and EPS and have large bonuses at stake. So companies (and directors) want to use the report to present the message they want investors to see, and at times this needs creative accounting. There may be one-off events which so distort the figures that the underlying health of the company is obscured. Accounting techniques may be used to produce figures that are more meaningful and avoid unjustified market pessimism.

In such cases the changes may be clearly indicated in the notes to the accounts. However more often than not creative accounting is used to: hide a particularly bad year for the company; force an exceptionally good year or continue the pressure to always be the best; smooth out results to give an impression of stability or sustained improvement; hide large profits by monopolies under anti-trust threat; boost assets to avoid take-over. Distortion in one year often increases the need to distort the next year. Typically, the bad year continues and the company gets more tied into misleading figures, often seeming to devote more time to presentation of figures rather than management of the company.

9. WHAT HAVE THE ACCOUNTING STANDARD BODIES DONE

How financial reporting standards (FRS’s) are used to restrict one such effect. Establish the effect to be considered. E.g. overstated profits, smooth profit, disguised commitments, understated risk-specific type, and Tax avoidance. Relate part 2 Illustrations. Identification of relevant FRS- UK International, USA etc. Individual combined intentions, actual effects well coordinated? Any negative effects? Overstated profits are one creative accounting practice which is prevalent in a big way. The UK has come up with several Financial Reporting Standards (FRS’s) to restrict the overstating of profits.

The publication of IFRS 2 ‘Share-based Payment’ requiring companies to report the expenses of share options schemes is the latest in a sequence of crusades by International Accounting Standards Board (IASB) Chairman Sir David Tweedie to force companies to “tell it like it is”. IFRS 2 is one the biggest in the international board’s collection of big reforms. In line with the IASB’s guiding principle of accounting for assets and liabilities at their fair value, IFRS 2 requires entities to measure the fair value of share options (or “equity instruments” as it terms them) at the date they are granted. Companies are also required to charge expenses incurred in setting up and operating share option schemes against their annual profit & loss account.

The standard prescribes various disclosure requirements designed to help users of financial statements to understand: the nature and extent of share-based payment arrangements that existed during the period. How the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined; and the effect of share-based payment transactions on the entity’s profit or loss for the period and on its financial position. IFRS 2 sets out that the costs of share options should be disclosed according to their market value at the date of grant.

If no market rate is available, the valuation exercise will have to estimate what the price of those equity instruments would have been on the grant date in an arm’s length transaction between knowledgeable, willing parties. In press interviews to launch IFRS 2, Sir David quoted research from “The Analyst’s Accounting Observer” estimating that had the standard been in force during 2002, it would have knocked 10% off the corporate profits of European companies. In the US, where stock options are more popular, the impact will be even more dramatic. The profits of US high tech companies were overstated by roughly three-quarters in 2001, the IASB chairman said.

Sir David commented: “Typically, transactions in which share options are granted to employees are not recognized in an entity’s financial statements. As a result, the entity’s expenses are understated and its profits are overstated, which is potentially misleading to users of financial statements. The objective of IFRS 2 is to require that, no matter what form of remuneration is used, the entity recognizes the associated expenses. In this way, IFRS 2 will improve the quality of financial reporting by giving a clearer and more complete picture of an entity’s activities.” Until now, there has been no international accounting

Standard covering the recognition or measurement of share-based payment, the IASB pointed out. That situation is changing rapidly. The UK Accounting Standards Board issued a simultaneous statement announcing the publication of FRS 20, which includes

identical requirements to IFRS 2. From 1 January 2005, the new standard will apply for listed UK entities and would be extended to all other entities – aside from those using reporting under the Financial Reporting Standard for Smaller Entities (FRSSE) from 1 January 2006. In the US, FASB is due to publish its draft standard that will make it mandatory to “expense” option costs and to apply fair value estimates.

According to IASB senior project manager Kimberley Crook, the FASB standard “will be substantially similar to ours. The two bodies worked together to come up with solutions that were as close to each other as possible.” The boards are also planning on follow on work to eliminate differences after the standards are in force. Following responses to the draft IASB standard, the international board has taken a step towards the Americans, adopting FASB’s valuation model. The IASB draft had sought to factor in a suitable reduction in

the value of option grants if they were governed by conditions such as time of service.

To simplify the calculations, the vesting conditions will now be taken into account by adjusting the number of options in the transaction – the amount recognized will be based on the number of equity instruments that eventually vest. “Our objective is always to go for best solution, we don’t converge for the sake of it,” said Crook. Even with this simplification, the complexity of IFRS 2 could pose difficulties for smaller entities that have embraced share options, suggested Solomon Hare technical director Paul Gee. The problem will become particularly acute for unlisted UK companies who will have to apply FRS 20 for financial years beginning on/after 1 January 2006.

Recommendations:

Companies should put in place effective risk management systems with inbuilt checks and balances. Internal and External audits of risk are good tools towards successful risk assessment, prevention and remediation. Measuring and monitoring risk at a firm wide level has increased the focus on quantification and the need for a consistent firm-wide approach. Apart from the quantitative components required for effective risk management, policies, guidelines, limits, checks and balances are vital components of effective risk management. The best way to deal with the situation of financial risks is more disclosure. Much of the existing research related to the companies´ risk disclosures have been focused on technical principles, for instance, how to translate foreign currency denominated assets and liabilities while drawing up financial statements (e.g., Jacque, 1981; Ijiri, 1983; Ziebart and Choi, 1998).

In addition, the focus has been on currency risks; other types of financial risks have been almost neglected. However – in connection with the increasing pressures for companies to fulfil their accountabilities – employees, suppliers, customers and communities as a whole for example have also been regarded as having a right to the disclosure of more risk-related information. Enhanced information about what companies do to assess and manage risks is expected to improve accountability for stewardship and the overall usefulness of financial reporting (e.g., Gaa, 1986; Lev, 1988; Stanton, 1997; Bartlett and Chandler, 1997; see, also, AICPA, 1994; ICAEW, 1998).Taking into consideration the evidence that extensive disclosure has positive consequences concerning the company’s stakeholder relations previous research has concluded normatively the need for more comprehensive and informative disclosures of financial risks.

Another very important issue is regulation. In many countries, accounting regulation is based on a system of detailed rules prescribed in standards and the law. However, rule-based systems can rarely be water-tight. There may be gaps in the rules and places where the rules are vague or even incomplete. Of equal, if not greater significance is the fact that regulators may develop schemes which fulfil the letter of the rules, but undermine their spirit. Regulators may find themselves constantly lagging behind the avoidance activities of the regulates. In such circumstances, effective regulation breaks down. Hence regulators have to constantly be proactive and enact new measures to prevent creative accounting practices which border on the criminal.

Very important link that lies between preparers of the financial statement And users of the financial statement is the security or financial analyst.

One will expect that of all commentators on company accounts, analysts would conduct detailed analysis of the financial statement (…………………) and spot any inconsistencies. As most users of the financial statement rely on their expertise but a study conducted by Atul K. Shah of 79 reports covering four companies, showed that analyst did not conduct any serious analytical research and very little attention was rarely given on specific aspect of accounting policies. When a senior investment analyst was interviewed about the skills of analyst in the United Kingdom .

He explained, “Analyst are generally weak in their ability to analyse accounting information. His work is supported by earlier work on the quality of U.K analyst (Taylor, 1990).Day (1986) found that none of the analyst they interviewed had any professional accounting qualifications.

Analysts make their money partly by advising investors on how to invest their monies. They may judge some firms to have good prospects than others, which are not fully reflected in their prices, and therefore their recommendation will be to buy more of the company’s shares. Alternatively, they may assume some companies to have poor prospects and therefore advice for their share to be sold.

Whilst security analysts carry their independent investigation into firms, they can come to different conclusions about a company prospects but within some degree of reasonable agreement. Very important, way of looking at a companies future is by forecasting their profits, so firm’s directors been aware of analyst forecast of their profits try to manipulate to meet analyst forecast or exceed, thereby practising creative accounting. (J. Simon, why do companies use creative accounting?).

 The rule of the analyst in the financial sector cannot be overemphasised especially in countries such as the United Kingdom, where the stock exchange play an active rule in raising capital for the companies that trade on them. Therefore, it is necessary for the analyst to be abreast with IFRS and its impact.

10. IFRS:

Implementation of IFRS will offer future investors and third party partner’s better visualization into business performance and companies’ potential for value creation thereby harmonising various local accountancy standards, standardizing financial operations and implementing new mandatory rules for more wide-ranging information.

IFRS requirements will usher a performance management service line and will foster an opportunity for finance to add value throughout the organisation. Thus, the companies are expected to derive a cut in the cost of the capital, greater comparability and transparency of financial information and savings on their accounts finalisation costs.

The main objectives of IFRS may be defined as follows:

• To formulate a single set of premium enforceable global accounting standards.
• To present apparent and analogous high-quality information in financial statements.
• To assist capital market to arrive at economical decisions.
• To achieve union of national and international accounting standards.

One of the disadvantages of IFRS is the transparency that may offer an opportunity for the competitor’s insights into one’s business that they could deploy to their advantage.

Some large UK companies had issued a detailed assessment of the possible effect of IFRS by the end of 2004, and by February 2005 around 10% of the UK FTSE 100 had briefed analysts on the impact of IFRS. The pro-forma disclosures reveal some noteworthy IFRS effects but a modest effect on earnings overall. If one analyse the pro-forma disclosures of UK companies and also through review of the financial statements of European companies that married to IFRS recently, the following areas consistently emerge as momentous.

• Financial instruments
• Share-based payments
• Goodwill amortization
• Deferred taxation.
• Recognition of pension liabilities.

Pharmaceutical firms and banks have been to forefront in offering useful assistance on IFRS to investors. This has formed high level  speculation among analysts about the effect of  IFRS on these two sectors ; in the case of pharmaceutical firms , the impact of accounting for intangibles and in the case of banks , ambiguity in relation to IAS 39 and the use of fair value accounting.

The most important variance between IFRS and UK GAAP lies in the under mentioned areas.

• Valuation of Financial instruments especially derivatives and investments at their fair values.
• Calculation of pension costs for defined benefit schemes.
• Accounting for hedge transactions.
• Provision for deferred tax, especially on discounting of provisions and revaluations.
• Amortization of Goodwill.
• Accounting for mergers and acquisitions.
• Accounting for finance leases and in IFRS, some operating leases may become finance leases.

Further, disclosures which are mandated under IFRS and UK GAAP are in variance in certain cases.

It is criticised that IFRS is not going to bring any novel techniques of reporting of corporate accounts as the UK GAAP is already more robust. It is only the other colleagues of European Union who have big shoes to fill in.

Companies have to cough up substantial amount to rework the five years Profit and Loss account to present restated profit and loss accounts under IFRS. IFRS may push a degree of volatility into accounts which push company finance department to juggle up still more variation on the profit measure to dissuade market driven volatility.

A study reveals that about only 32% of listed companies in UK wishes to switch over to IFRS which they conceive that being a real occasion to improve their internal organization as compared to other member countries of EU which opts out at 58%.

A survey conducted by the pricewaterhousecoopers, an international firm of accounting consultants, in about 270 companies in 19 European countries discloses that about 48% of those questioned had identified the data they would require for IFRS while around 22% had already upgraded their systems to capture more information. In one another survey, it was disclosed that about 11% of respondents among large companies had engaged techniques to assure that data they gathered was resourceful.

UK companies were non-interested in switching over to IFRS as only 16% of the UK companies replied to questionnaire in affirmative as compared to their European Union counterparts. About 55% of the British companies replied that major advantage of IFRS will be on reported earnings and their presentations in the annual accounts. The other major impacts as reported by British corporations were about 21% about financial instruments and the method by which assets are valued.

Under IFRS, UK companies have to forward a complete changed presentation of financial instruments and this has resulted in increased concern for the industries. Thus, corporations are facing uneasiness in financial instruments reporting under IFRS as it is facing increased intricacy and greater unpredictability.  More than 66% of British companies are of the view that IFRS switch over will achieve greater transparency and an enhancement in the comparability of accounts. About 75% of the British companies are of the view that IFRS will offer more reliable financial and general information and will result in creation of a European financial market due to IFRS’s will bestow harmonization and the enhanced comparability .

 Creative accounting and accounting fraud are basically designed through focusing on revenue recognition and cost capitalization. There seems to be little substantial difference between the existing UK GAAP and IFRS [IAS 18 ‘Revenue’] as explained in Application Note G to FRS 5 ‘Reporting the substance of transactions’. But IFRS is emphasing significant effects as regards to requirement to expenses the fair value of stock options used in compensation and the abolition of goodwill amortization.

The chief reason for fair valuation in the balance sheet is contentious due to the fact that the companies incorporate some changes in fair value directly to income, making income correspondingly more volatile. These are the causes of additional income volatility in IFRS, as is the consequence of replacing goodwill amortization by annual impairment reviews. [Chris Higson, Mark Sproul 2006]

The enhanced deployment of fair values and of impairment reviews in IFRS will result in firm’s income more volatile and in a number of areas, IFRS demands much more disclosure hitherto and this will discourage creative accounting designs by the companies in the IFRS era.

In the past, creative accounting was designed mainly by dealing apparently transitory and exceptional components of a corporate income by just avoiding or ignoring them. But under IFRS era, analysts have to develop their techniques for extracting the information contained in volatility and to offer more disclosures. IRFS compels departure from existing UK accounting practice , for example , impairment rather than amortization of goodwill , the extinction of pooling , which reflects that IFRS more sensibly corroborating with US GAAP in pivotal areas.

One another area where creative accounting is widely practiced by the analyst is deferred tax area. IFRS [IAS 12] demands fuller deferred tax provisioning than under UK GAAP.

This requirement is mainly of two folds. Firstly, Under UK GAAP, deferred tax is recognized only out of timing difference whereas IAS recognises even temporary differences that can emanate from both timing and permanent differences. Secondly, IFRS obliges that provisions be made even when the significant events that would result deferred tax to become payable have not occurred by the balance sheet date. It is to be observed both these elements generally boost the charge to profit.

Utility companies in UK are currently applying benchmark treatment by discounting deferred tax. However, option to discount is eliminated under IFRS. The larger scope of IAS 12 and elimination of discounting will augment the deferred tax provisions recognised in the balance sheet but at the expenses of shareholders. This will have drastic effect on analyst ability for creative accounting in these areas.

Creative accounting is widely adopted in non accounting or omission of pension liabilities in existing GAAP. IFRS removes this window dressing by enhancing the competitiveness of the balance sheets as it recognises their pension liability or asset in complete value in the balance sheet vide requirements in IAS 19 ‘ employee benefits’ .

For example, Allied Domecq has implemented FRS 17 and distinguished net pension liabilities of £ 387 million which reduces the shareholder’s funds by about 40%. One another example is the disclosure of £ 1.6 billion of net pension liability by National Grid Transco. Amusing part of this disclosure is that had this been recognised, Shareholder’s funds would have been at stake by 106%! As s result, analysts are already able to determine the impact of pension liabilities on the balance sheet of a company.  Thus, the full pension liability disclosure mandated by IFRS dissuades the analysts to resort to creative accounting in these areas of corporate accounting.

Whether Enron type of accounting manipulations will happen in UK also? Critics are of the view that there is no possibility for occurring of Enron type of accounting manipulation in UK generally as UK accounting relies on general principles rather than detailed perspective rules. UK requirements mandate to offer ‘a true and fair view ‘of a company’s financial performance can countermand the need to enforce specific rules in certain circumstances. It is argued that it would have been impracticable to pull off the debt vanishing trick. Critics are also criticising the U.S. profession and procedures , indicating to the fact that UK adoption of ‘true and fair ‘ accounts is inherently harmless and UK auditing process is more foolproof. [Plender J.2002]

For instance, the premium put convertible bond offered issuers with an opportunity to increase the profits in starting years as they did not have to charge the effective interest rate. Further, the disadvantage was that the security had to be classified as debt in the balance sheet, thus weakening the perceived gearing position. However, the financial engineers have found out that the offshore convertible preference share which retained the above benefits but at the same time facilitated issuers to categorize the securities as equity in the balance sheet there by leading to avoidance of gearing problem.

In a nutshell, under creative accounting, there were complex series of professional collusions between lawyers, bankers and accountants, which was investigated further through articles published in the trade journals and interviews. The main aim of creative accounting was to avoid the rules without breaking the law.

One another technique of creative accounting practiced in UK was in the method of treatment of acquisition of goodwill. Financial engineers have designed for the issue of equity –classified convertibles with a very low nominal value, which assisted in creating a significant share premium reserve against which the goodwill could be offset.

The U.K HM Revenue & Customs issued guidelines as regards to adoption of fair value accounting for derivatives and according to Fitch Rating analysis , the change in accounting could have led to unfunded tax liabilities arsing in U.K Special Entities [SPE’s] that were previously more tax neutral .As temporary relief measure , UK securitisation companies are permitted to continue to apply to the older version of U.K. GAAP rather than IFRS for the purposes of determining taxable profit up to January 1 ,2008.  This will facilitate them to fulfil certain obligations so that they could pay out all their receipts except those that fund certain reserves or comprise contractually defined profits. [3]

Various study findings………………………………………

A survey conducted by PricewaterhouseCoopers survey in 2003 reveals that majority of senior executives of financial institutions in Europe, Asia and North America were of the opinion that IFRS will make it easier for financial institutions to raise capital globally , communicate results to investors and enhance the corporate governance and transparency. A KPMG International and Goldman Sachs analysis of the financial statements of 80 European companies determined that IFRS will enhance transparency and comparability, boost merger and acquisition activity and enhance capital formation.

 A group formed by the six largest accounting firms, The GGAP convergence project, surveyed 60 countries in 2003 and revealed that about 95% either have adopted or intended to adopt IFRS and have established a formal policy in place for doing so.

Further, GAPP convergence project finding reveals that the tax-driven nature of their national accounting standards makes it difficult for switching over to IFRS.

According to KPMG, more than 500 companies that have already worked towards IFRS compliance across Europe report that it has assisted incongruent departments to share financial goals. Transparency that IFRS bestow can be changed into a real competitive advantage. An IFRS compliance company can be used to drive performance management improvements, thereby helping to secure long –term shareholder value.

11. HOW IFRS DISSUADE CREATIVE ACCOUNTING IN UK COMPANIES:

The following illustrations of effect of IFRS in UK companies will justify our argument that IFRS really dissuades and discourages the use of creative accounting concept by UK companies after the implementation of IFRS in these companies:

• AstraZeneca reports a decreased EPS of $ 0.02 and a decline in net assets of $ 48 million to US $ 13.2 billion <http://www.astrazenecaus.com/content/aboutAZ/investing/annualReports/2006.pdf>
• GlaxoSmithKline demonstrates the difference between its 2003 UK GAAP and IFRS profit before tax as £ 0.3 billion [about 5%] chiefly due to recognition of a charge for share-based payments.<www.gsk.sd/investors/annual-reports.htm>
• Barclays assesses that profit before tax will augment by £ 125 million [3%] while shareholder’s funds fall by £ 1.3 billion [7%]. Overall, Balance sheet footings have augmented by £ 141 billion. [30%}. <http://www.investorrelations.barclays.co.uk/BRC1/jsp/brccontrol?task=articlegroup&value=1118&target=_self&site=inv>
• RBS applied IFRS to its 2004 results and estimated that basic earnings would increase by more than 10%, mainly as a result of goodwill no more being amortized. Further, its balance sheet “footings” reveals that its total assets, and the total of liabilities and shareholders funds, have increased by £ 100 billion [22%] though shareholder’s funds remain largely unaffected.<http://www.investors.rbs.com/investor_relations/financial_info/results.cfm>
• Northern Rock has estimated that IFRS would only have resulted in a small variance on 2004’s restated pre tax profits.

          <http://companyinfo.northernrock.co.uk/investorRelations/corporateReports.asp>

• British Land’s contingent tax has the most noteworthy effect increasing provisions and reducing net assets by £ 710 million. [9%].

          <www.britishland.com/financialreports/yearend2004/content/csr.htm>

• Vodafone had decided to charge no more £ 7.3 billion amortization of goodwill, the chief factor to turning a pre tax loss of £ 2.2 billion for the six months to 30^th September 2004 into a pre tax profit of £ 4.5 billion.

          <www.investis.com/reports/vod_ar_2005_en/report.php?type=1>

• Xstrata will recognise a deferred tax liability of $ 1 billion, the effect of which will minimise shareholder’s funds by 15%. <xstrata.com/pub_dyn_annual_report.php>
• ICI exhibits an increase of 22.3p in basic earnings per share to 40.1 p while the balance sheet moves from net assets of £ 808 million to net liabilities of £ 247 million. Thus, the reduction in net assets is a result mainly due to its pension liability of £ 1.2 billion.<http://www.ici.com/publicationsanddownloads>
• Pension Liability effect under IFRS : National Grid Transco depicted a net pension liability of £ 1.6 billion and if it had been disclosed , shareholder’s funds would have been reduced by 106% Likewise, British Airways disclosure of pension liability of £ 1.2 billion net pension liability which would reduce the shareholder’s funds by 92% and BT’s disclosure of pension liability of £ 3.6 billion liability which would reduce shareholders funds by 142%<http://www.nationalgrid.com/corporate/Investor+Relations/Annual+reports/>
• Deferred Tax effect under IFRS: Lagardere, a French company is estimating to record additional deferred tax provision of € 270 million under IFRS. Further, after switching over to IFRS, Xstrata will recognise a deferred tax liability of circa $ 1 billion in respect of the difference between the carrying value of mineral reserves and resources on the balance sheet and the tax base. This will reduce the shareholder’s funds approximately  by 15%<http://www.lagardere.com/us/info_financieres/publication.shtml>
• Capitalisation of intangibles under IFRS: For the last four years, Novartis has been reporting under IFRS and has not capitalised its development expenditures except in its latest annual report where it disclosed $ 4.2 billion charge for research and development expenditure. Rolls-Royce under IFRS had revealed in its latest annual report of £281 million and profit before tax of £ 180 million.

      <http://www.novartis.com/investors/sales-results/annual-reports.shtml>

• Effect of Share-based payments under IFRS: According to GlaxoSmithKline IFRS briefing, it would have experienced an extra charge of £ 344 million relative to profit before tax of £ 6.3 billion. The company anticipated this to fall to year on year charge of around £ 200-£250 million, the current charge being unusually high in a post merger year.
• Pre-tax profit of National Grid Transco was worked out under UK GAAP as £1.39 billon. But after switching over to IFRS, the same period profit was demonstrated as 1.93 billions.[4]

PEARSON PLC- STUDY OF EFFECT OF SWITHCING OVER TO IFRS – HOW USE OF IFRS ELIMINATES CREATIVE ACCOUNTING :< www.pearson.com/pdfs/ifrs/Pearson_IFRS_technical_analysis.pdf>

Analysis of Pearson PLC financials for the year 2003 and 2004 is thought provoking. Pearson PLC has reported its result both under UK GAAP and IFRS its financials for the year 2003 and 2004 simultaneously. It is noteworthy to observe the following:

FINDINGS:

• Profit for the year 2004 has increased more than 3 times under IFRS than under UK GAAP. Likewise, Pearson PLC profit for the year 2003 has increased more than 4.58 times under IFRS as compared to its profits under UK GAAP.
• Total assets and liabilities of Pearson LLC have increased more than 1.1 times and 1.06 times respectively for the year 2004 and 2003 under IFRS as compared to its reporting under UK GAAP.
• Its earning per share has increased to 32.9p from 11.1p during 2004 when the same is reported under IFRS.
• Net effect for reporting financial results under IFRS is that creative accounting of reporting under UK GAAP which suppressed annual profit for the year 2004 of £ 88 m and £ 55 m for the year 2003 whereas disclosure of profit under IFRS had soared to £ 262 m and £ 252 m for the year 2004 and 2003. Thus, it had lead to an increased EPS of 32.9p from 11.1p during 2004 when the same is reported under IFRS. Thus, suppressed reporting of profits of corporates has been discouraged by the employment of IFRS which boosts the EPS which will ultimately benefit the shareholders of concerned shareholders.

12. CONCLUSION:

IFRS will be useful and effective to the companies to derive a cut in the cost of the capital, greater comparability and transparency of financial information and savings on their accounts finalisation costs. Thus, IFRS will usher three great changes in corporate reporting, full recognition of pension liabilities, and cessation of goodwill amortisation and expensing of stock options.

Two main accounting areas which have been left out by IFRS are the deferred tax area and the treatment of financial instruments. IFRS implementation will result in increased volatility in earnings in near future and also divulge greater levels of disclosure which analyst shall have to be comfortable with handling these data. Analyst can no longer rely on incomplete income measures like EBITDA or pre-exceptional operating profit as IFRS will make it harder for analysts to undertake this.

Creative accounting makes it difficult in comparison of the performance of different companies as it became difficult and costly and goes against the goals of harmonization of accounting practices and policies.  IFRS dissuades the avoidance of accounting rules by companies working with the help of professionals’ which offered a grave threat to effective rule-based regulation.

Different regulatory efforts, perhaps restraining professional cooperation in avoidance schemes and slimming down the abuse management power through corporate governance reforms are needed. Else, regulators would frequently meet an uphill task against the might of the corporation. Company’s fails to switch over to IFRS will be breaching financial covenants or borrowing power limits thorough a failure to anticipate the changes. IFRS is the decisive force which dissuades the ill designed creative accounting and it is the compelling event that is obliging company’s to enhance the comparability and transparency of the financial information.

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[1] ‘The Fraud of Corporate Reform ‘The New American, August 2002.

[2] “Government inflation’s fall raises questions on UK accounting. Sunday Business [United Kingdom] January, 2005.

[3] “ Draft regulations provide more clarity to U.K tax issues “,  Asset Securitization Report – August ,2006

[4]  Accounting for Miracles, Times, the [United Kingdom] March, 2005.