CONTEMPORARY ISSUES ON FINANCIAL STANDARDS AND REPORTING SYSTEMS

BY Sikiru Salami B.Sc, ACA, ACSI

Synopsis
Introduction Definition of Terms Recent Financial Scandals Regulatory Responses Local Regulatory Developments Brief History of Accounting Standards IFRS Adoption Road Map in Nigeria

Terminology Changes
Benefits of IFRS adoption Challenges of Financial Reporting under IFRS Conclusion

Introduction
The corporate events in the last ten years have shaped, and continued to shape the face of financial reporting. Such events range from scandals of monumental proportions to world economic crises, the recovery from which is still dicey.
Governments across the world have continued to respond to these events, churning out regulations, guidelines, and policy statements to promoting economic rejuvenation and, integrity of financial reporting. The challenge of over regulation has subtle effect stifling growths, though. We cannot but accept the embrace the breeze of change whamming through the financial reporting, and carefully too.

Definition of Terms
Financial Reporting: communication of financial information useful for making investment, credit, and other business decisions (Wild, Shaw, & Chiappetta, 2009, p. 681) Such communications include income statements, balance sheets, equity reports, cash flow reports, and notes to these statements. Accounting Standards: These are authoritative statements issued by standards setting authorities(FRCN, FASB, FRC, IASB etc.) detailing principles underlying the preparation and presentation of financial statements. E.g. SAS, IAS, IFRS etc. IFRS: This stands for International Financial Reporting Standards. Its basically a combination of existing IASs, new IFRS issues, IFRICs among other statements issued the International Accounting Standards Board(IASB). To date, we have IFRS 1 to 13, replacing the existing IAS in piecemeal. International Financial Reporting Interpretations Committee (IFRIC) : IASBs interpretive body, IFRIC, is in charge of developing interpretive guidance on accounting. IPSAS: This stands for International Public Sector Accounting Standards. These are pronouncements issued by IPSASB to guide public sector financial reporting.

BRIEF OF HISTORY OF ACCOUNTING STANDARDS

The IASC, which was the predecessor body to the IASB, was founded in June 1973.It was set up as a result of an agreement by accountancy bodies in ten national jurisdictions The IASB issues IFRS, but has adopted all the IASCs IAS. Any reference to IFRS should be taken as including IAS, unless there is a specific statement to the contrary. NASB, now replaced by FRC, was established in 1982 to issue the Statements of Accounting Standards(SAS). To date in Nigeria, we have SAS 1 to 31 in issue.

Recent Financial Scandals

1. ENRON SCANDAL The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron undoubtedly is the biggest audit failure. Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff of executives that, through the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives were able to mislead Enron's board of directors and audit committee of high-risk accounting issues as well as pressure Andersen to ignore the issues.

Contd

2. WORLDCOM SCANDAL The principal players in WorldCom's accounting fraud included CFO Scott Sullivan, the General Accounting and Internal Audit departments, external auditor Arthur Andersen, and the board of directors. The case provides sufficient detail to allow for a full discussion of the pressures that lead executives and managers to "cook the books," the boundary between earnings smoothing or management and fraudulent reporting. It elicits the role for internal control systems and internal audit to prevent or rapidly detect accounting fraud. It lays bare the expectations about governance processes performed by external auditors and the board of directors, and the pressure and consequences when middle managers follow orders that they know are wrong.

Contd

3. XEROX SCANDAL This is another prominent American corporation, which improperly classified over $6 billion in revenue, leading to an overstatement of earnings by nearly $2 billion. The Securities and Exchange Commission (SEC) had charged the producer of copiers and related services with accounting manipulations. It was estimated at the time, however, that the amount involved was about half that which is now stated, or about $3 billion. A settlement was eventually reached that included a $10 million fine, as well as an agreement to conduct a further audit. There were two basic manipulations that formed the basis for the SEC investigation. The first was the so-called cookie jar method. This involved improperly storing revenue off the balance sheet and then releasing the stored funds at strategic times in order to boost lagging earnings for a particular quarter The second methodand what accounted for the larger part of the fraudulent earningswas the acceleration of revenue from short-term equipment rentals, which were improperly classified as long-term leases.

Contd

4. CADBURY SCANDAL Cadbury Nigeria is a part of the Cadbury Schweppes group, a global giant in confectionaries. The accounting fraud involved was a case of stock loading. This approach led to overstatement of earnings by over N5Billion. This scandal led to shareholders losing huge part of their investments in terms of market value. The company has since been revived into profitability

INTERNATIONAL REGULATORY RESPONSES a. Sarbanes-Oxley Act

In response to a loss of confidence among American investors reminiscent of the Great Depression, President George W. Bush signed the Sarbanes-Oxley Act into law on July 30, 2002. SOX, as the law was quickly dubbed, is intended to ensure the reliability of publicly reported financial information and bolster confidence in U.S. capital markets. SOX contains expansive duties and penalties for corporate boards, executives, directors, auditors, attorneys, and securities analysts. Although most of SOX's provisions are mandatory only for public companies that file a Form 10-K with the Securities and Exchange Commission (SEC), many private and nonprofit companies are facing market pressures to conform to the SOX standards. Private companies that fail to reasonably adopt SOX-type governance and internal control structures may face difficulty in raising capital, higher insurance premiums, greater civil liability, and a loss of status among potential customers, investors, and donors.

Contd b. Dodd Frank

The DoddFrank Wall Street Reform and Consumer Protection Act is a federal statute in the United State that was signed into law by President Barack Obama on July 21, 2010 in response to raging economic crisis, and financial scandals. The Act implements financial regulatory reform, representing a significant change in the American financial regulatory environment affecting all Federal financial regulatory agencies and almost every aspect of the nation's financial services industry. The Act covers amongst other measures, corporate governance and executive compensation reforms, new registration requirements for hedge fund and private equity fund advisers, heightened regulation of over-the-counter derivatives and assetbacked securities and new rules for credit rating agencies.

Contd

c. Vodka Rule
The Volcker Rule is a specific section of the DoddFrank Wall Street Reform and Consumer Protection Act originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker to restrict United States banks from making certain kinds of speculative investments that do not benefit their customers. Volcker argued that such speculative activity played a key role in the financial crisis of 20072010. The rule is often referred to as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank's own accounts.

LOCAL REGULATORY RESPONSES

Atedo Peterside Code of Corporate Governance, 2003 Sanusi Lamido-led Bank Reforms Passage of Financial Reporting Council Act, 2011 Adoption of IFRS Implementation Road Map with effect from January 2012 Repeal of Personal Income Tax Act

IFRS ADOPTION ROADMAP IN NIGERIA

Phase 1 : January 1, 2012 Public listed entities Significant public interest entities - Government business entities - Financial and other credit institutions - Insurance companies Phase 2: January 1, 2013 Other entities which are of significant public interest because of their natures of business, size, or number of employees or their corporate status. Not for profit entities Pension funds Other publicly owned entities Phase 3: January 1, 2014 Small and medium-sized entities.

TERMINOLOGY CHANGES
SAS IFRS

Balancesheet Profit and Loss Account

Statement of Financial Position Statement of Comprehensive Income (One Statement) or Income Statement (separate) and Statement of Comprehensive Income (two statements) including Other comprehensive Income section End of Reporting Period

Balancesheet date

Recognized in the profit and loss

Recognized in profit or loss (Note or not and)

Statement of Cash flows Principle-based Standards

Statement of Cash flows Rule-based Standards

BENEFITS ADOPTING IFRS FOR FINANCIAL REPORTING

By adopting IFRS, a business can present its financial statements on a single set of high quality, global accounting standards Our local standards are partly out of date and are not sufficiently comprehensive to form a basis for preparation of high quality financial statements. IFRS adoption will result in high quality, transparent and comparable financial statements that are based on modern accounting principles and concepts that are being applied in global markets. Companies may also benefit by using IFRS if they wish to raise capital abroad By adopting IFRS, a business can present its financial statements on the same basis as its foreign competitors, making comparisons easier. Companies with subsidiaries in countries that require or permit IFRS may be able to use one accounting language companywide. Companies also may need to convert to IFRS if they are a subsidiary of a foreign company that must use IFRS.

Challenges of Financial Reporting under IFRS

Governance and financial sustainability of the standard-setter - How can the IASB balance 'independence' and 'accountability'? - challenges of moving from voluntary donation funding model to a more stable platform Political/ sovereignty issues: -Europe sees itself as the 'biggest customer -the IASB sees the US as the biggest prize -some countries are willing to adopt full IFRS without retaining some power to adopt/amend, others are not. Cultural and economic factors Can a single set of reporting standards truly meet the needs of economies at very different stages of development Principles versus rules: a need for certainty prevails in some jurisdictions Use of fair value in emerging economies How to 'unlearn previous GAAP Capacity for change and change management Diverging views on the purpose(s) of financial reporting

IN CONCLUSION
Our desire to increase world output and improve general economic wellbeing of the world population has necessitated lax regulations, with attendant risk of business failures caused by financial scandals. This has arguably brought us nothing but economic doom. The need to tighten regulatory noose is very much imperative to curb executive malfeasances in our too-big-to-fail corporations. Over-regulation and too much dose of economic austerity measures may prove counter-productive either. The wave of change brought by IFRS has got to Nigeria, and embracing it is not an option but regulatory reality. The benefits of an IFRS adoption far outweigh the associated costs

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