This annual publication is intended to raise awareness of the priority risks which the FSA believes it, along with providers and users of financial services, should consider. In the areas of accounting and auditing, the FSA sees three potential risks stemming from:
- the move to International Financial Reporting Standards
- the convergence between IFRSs and US Generally Accepted Accounting Principles
- the concentration of audit services, and international coordination.
In the area of financial reporting, the FSA sees "two major risks to the continued success of IFRSs
Inconsistent application across national economies, and
the potential direction of the future development of the IFRS Framework, including decision-usefulness, greater emphasis fair value accounting, and convergence with US GAAP. Some excerpts:
With regard to inconsistency, the true benefit of IFRS can only be realised through enabling a better comparison of similar entities across national boundaries, which, in turn, will provide enhanced transparency for markets and a more efficient global capital market. We also acknowledge that, under a principles-based accounting framework, there may be relevant economic and legal differences between countries such that similar transactions might
legitimately be reported in different ways. However, should local custom or
national interest operate to threaten the consistent application of IFRS, much
of this anticipated benefit could be lost.
For the development of the IFRS framework itself, there are concerns that the standards in some areas are of lesser quality than those that they have replaced. There is also a growing concern that IFRS will be interpreted and audited in a more prescriptive and rules-based way than was typically the case under UK GAAP – a risk of more 'form-over-substance' when agreeing accounting treatments. Going forward, the main areas of concern arise, in part from convergence with US GAAP and in part from the move towards 'decision usefulness' and an increasing emphasis on fair-value accounting.... Should the move towards fair value for all assets and liabilities advance significantly, many question whether the resulting information would remain sufficiently reliable to enable investors to make informed decisions about the effectiveness of the stewardship of their companies. At the same time, the ability of the audit profession to apply judgement on what constitutes a 'true
and fair' view might be ever more constrained by detailed rules, resulting in a 'presents fairly in accordance with' model of financial reporting. The progress made over the next 18 to 36 months will be critical in determining whether the potential benefits of IFRS and convergence are realised, or whether the costs connected and the ultimate outcomes experienced are
potentially disproportionate, or even negative, for UK stakeholders.