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The IAS Plus Interviews — Sir David Tweedie

23 May 2012

After a few months break following the end of his ten-year stint as Chairman of the International Accounting Standards Board, Sir David Tweedie is now embarking on his year as President of the oldest accountancy body in the world, the Institute of Chartered Accountants of Scotland. Here he talks with Robert Bruce about the future of the accounting profession, about his plans for his Presidential year, the future development of IFRS, his thoughts on the continuing efforts to bring the US into a global financial reporting framework, and a whole range of other issues.

When Sir David Tweedie stood down as Chairman of the International Accounting Standards Board last June after an epic stint of ten historic years at the helm he might have expected a quieter life. It hasn’t quite worked out that way. He has been lecturing at the Edinburgh Business School and the Judge Business School at Cambridge. He has taken over as chairman of a charity close to his home in Scotland. Leuchie House is a respite care home predominantly for sufferers from multiple sclerosis. It is the only such centre in Scotland and had been threatened with closure before a campaign was set up to fight for it to remain open. That battle was won last year and Sir David is now getting the fund-raising in place to secure its future. He is also taking his critical eye to another post, Chair of the Royal Household Audit Committee, which monitors the effectiveness of the internal controls system within HM The Queen’s finances. And now he is starting his year as President of the Institute of Chartered Accountants of Scotland.

Robert Bruce: It is going to be very different, but what do you hope to achieve in your year as President of ICAS?

Sir David Tweedie: I owe a lot to ICAS. I had two great mentors in my youth. I was apprenticed to Professor David Flint at accountants Mann Judd Gordon in Glasgow and then later on there was another mentor, Bill Morrison of Thomson McLintock and later KPMG. They both had the same attitude. It was that you have to do the right thing.  It was as simple as that.  Somebody asked David’s advice and his advice was: ‘You are a CA. Do what a CA would do’ and, yes, it was a great privilege to be brought up in the tradition of those two because they made it very clear that what mattered was getting the right answer.

RB: How would you encapsulate that attitude?

DT: I remember at McLintock we were involved in looking at a report in the days of the UK national coal strike in 1984. The Coal Board were closing the pit at Cortonwood and that decision was questioned in a report by a group of accounting academics. A team of four of us were brought in to provide an independent assessment.  I was the only one from McLintock, and it was going to be very sensitive; the Coal Board was one of our major clients. And I remember Bill Morrison saying: ‘The Coal Board may not like your answers, but make sure you like your answers and you feel happy that you have said the right thing.  If we lose the client, we lose the client’. That struck me as being the epitome of a professional and we have got to somehow make sure that sort of ideal is embedded in our new members.

RB: How do you ensure that? In your day as a young apprentice you were being taught directly by senior practitioners from the profession.

DT: One of the dangers for ICAS is whether, as we now train using outside trainers and Institute staff, the connection is getting a bit more tenuous and how do we reinforce it.  So we are pretty concerned that we do get senior members of ICAS to meet with all the classes and make sure that the sort of things that David and Bill passed on to me are passed on to them, so that they understand, not just what the ethics exams say, but also get the feel of what it is all about and the experience sinks in to them. I think that’s a key role.

RB: The roots of your career were formed in the educational field, as a lecturer, professor, and as a technical advisor. What changes would you like to see now?

DT: I’ve always been keen on education and I think that now is the right time to explore non-graduate entry. These are good people and we need to bring them back on stream. How do we get them back?   We are not going to lower the standard but can we help people who don’t even consider they can get in to become an accountant.  And it’s the sort of people from, say, deprived areas, who are very, very bright, but perhaps are scared stiff of university. Nobody in their life has ever gone to university.  Scholarships don’t actually always work because those need mentors for them, otherwise they often drop out.  This year we are going to look pretty closely at the idea getting CAs to mentor them, not necessarily through university, but through something like the old apprenticeship schemes. They will be cheaper at the age of 18 for the firms, the smaller firms, and we can get something back for these people that we have lost and get them back into the profession.

RB: In what other ways would you like to shake up the profession?

DT: We are exploring other things. The Irish accounting profession, for example, enables people who suddenly decide in mid-career that they would like to be accountants to do so.  No firm is going to take them on, so why don’t they go to the classes and do the training exams so that when they have got halfway through the firms will be quite interested and will offer contracts to them.  The Irish have done this quite successfully. It is all about seeing ways to bring different types of people in to make the profession a bit more diverse.

RB: That’s the detail. But ICAS has traditionally gone for the big themes as well.

DT: Like the big themes of making reports readable, looking at the future of the assurance function, judgment, and the importance of principles. Interestingly enough, the Chinese have asked ICAS to produce what they call a ‘judgment framework’, about how you go about dealing with accounting principles.  This is for the Chinese profession.  But, you know, it could be very useful for a lot of developing professions.

The danger for accountants is it becoming a rule-based profession made up of people who have been brought up in a rules-based society where in this situation or that they just do x or do y, as the rules require. The real danger is it becomes a search engine profession. You Google in: ‘What’s the answer to this?’ and the answer is provided. That way you are going to end up with a monumental rule book.

That could be a real problem in the future.  To be honest what makes ICAS so distinct is the primacy of the individual being an ethical, upright, thinking person who’s bounded in the principles of accounting and auditing and not overwhelmed by pages and pages and pages of boring detail.

RB: You have become involved in the debate about prudence and fair value and neutrality and true and fair.  Where does this come from and what do you think motivates the argument which currently seems to be going round and round in circles?

DT: Well we have heard people saying that the banks would have loved to have provided for losses but unfortunately because prudence has been abolished by IFRS, they couldn’t. Well prudence hasn’t been abolished. What we took out of it was bias and we said you have to be neutral. The provisioning rules are pretty clear. If you think someone is in financial difficulty you have to look at it carefully and if in your judgment there is going to be a loss, you provide.

The example I often use is if an industry is in trouble and it looks like there’s going to be lay-offs and you’ve got mortgages in a particular town and you think some of these guys are going to get laid-off and there is going to be trouble with the mortgages that is when you start providing. Nobody has defaulted but you know it’s going to happen, because it always does happen in that situation.  So provide.  You don’t wait until a guy comes up and says: ‘I can’t pay’, which could be 18 months down the road. You provide instantly and I think during the recent financial turmoil a lot of that didn’t happen.

RB: The issue is wider, isn’t it?

DT: The whole idea of the model we have at the moment, the incurred loss model, is to stop people whacking in a big bath provision in good times and feeding it back in the bad times, so you just lose the reality of the actual economics in the two years – the one where the big provision goes through and the second one where it comes back in. We are simply trying to show what actually happens and then explain it.  The same way as we stopped insurance companies having what they call ‘catastrophe provisions’. They would see the prospect of a San Francisco earthquake, which hasn’t happened yet and hopefully never will, but might, so they have got this huge provision stuck aside and if San Francisco sadly had the earthquake the insurance companies would show another year of uninterrupted success as they released the provision.  That clearly isn’t what would have happened that year.  You should show the losses caused by the disaster but have the capital appropriated from previous years to meet the costs. In other words, you show the profits and by all means retain X for catastrophes as you should, and then when it happens you have got the capital to deal with it as you haven’t distributed it.

RB: How complicated a world is IFRS going to become? The growing number of regional interest groups will want to see tangible results from their inputs and the whole process does seem to be slowing down.  Is this just an inevitable consequence of a global constituency?

DT: Let’s talk about the slowing down first.  The US is a major issue.  We can have international standards without the US. You can’t have global standards without them. When we started at the IASB our view of what IASB was going to do was to write what we thought was the best standard and then if the Australians, for example, wanted a leasing standard they would take this new one and substitute it for theirs. What we didn’t expect was Europe to turn round after just a few months saying, right, we are all going to go for IFRS. So suddenly we are Europe’s standard setter and then Australia and New Zealand come in so we are also the Australasian standard setter, and our focus had to change from developing technical standards to selling the idea of global standards. And to do that we needed the US.  Well, of course, the Enron crisis happened shortly after all this and Bob Herz was selected as the FASB Chairman and that was a signal, because Bob was previously a member of our Board, and he was very keen that we just bring these two systems together.

RB: And that triggered the whole reconciliation and convergence process which slowed everything down even more.

DT: We made this agreement in 2002 that what we would do would be to look at the reconciliation which you had to do if you listed in New York using IFRS. We would see where the differences were, where US GAAP was, and then look at the different standards, saying: ‘Well, is yours better than mine?’ The argument was, don’t change it, just take it, we haven’t got time to do that, just take it and thereby improve the weaker standard while achieving convergence.  And that built in, if you like, some pretty complicated standards, like IFRS 2, which I am sure will be changed and simplified, but that wasn’t the game at the time. We probably changed six standards each in various ways but this wretched reconciliation was there and the SEC in 2006 came forward with the view that where you could you should converge them. And don’t just converge an outdated standard. Write a new one.  So there was a list of about ten subjects set out and they said: ‘Let’s see progress in this and we will get rid of the reconciliation’. And they did within a year. And I think, had the crisis not happened, the SEC would have already gone for IFRS.

RB: And the crisis created the lingering uncertainty which has bedevilled the whole process ever since.

DT: Suddenly, bang, the crisis happens, the economy is in disarray, you are told accounting really isn’t that important anymore and not surprisingly it went on the back burner.  And then as we started coming out of the crisis it was resurrected again because now the issue was global financial regulation, and as Tim Geithner said on numerous occasions publicly, you can’t have such regulation unless the accounting architecture is the same worldwide, so we have got to get the accounting right first.  So he’s a firm advocate and so is the G20 and suddenly its back on the agenda again.  In the meantime you’ve got the Dodd-Frank legislation drowning the SEC. They are fighting their way through that and here’s this accounting come bubbling up in the background.

RB: And the whole process is delayed again.

DT: I think it’s been a victim of the economic circumstances, the Dodd-Frank Act, and also to be honest the issue of sovereignty. They always say when you do this you are faced with the three C’s: change, cost and control. So there is a cost.  The more we converge the less the cost is and the less the change is, but you are going to cede control to a body like the IASB in which you have a stake but which is not controlled by Americans.

RB: And the local politics starts to have an effect.

DT: It is undoubtedly still an issue and you can get someone in the mid-west and Kansas saying: ‘Why change? I am quite happy. I’ve got nothing to do with international business. I’m okay’.  But every country has got that, and the problem really is that then someone like Japan, which has been hit with the tsunami, starts to say, well, if they are not doing it, why don’t we just hold off a bit. And then you have China, which is 98% there but not word for word, saying but if these guys aren’t there yet, well let’s just hang on.  And India meanwhile saying, well, we’ve got seven different things that we don’t like and we will just stay the way we are until the others come on board. And then you get Europe saying, well, if these guys aren’t doing it, we want a few more carve outs, and suddenly the whole thing starts disintegrating.

RB: And what happens next?

DT: I think there is a danger. One, it wrecks the whole thing, or two, IFRS may stay together in one group or it goes regional, and I think probably the latter is more likely.

RB: And the consequences?

DT: IASB would continue to issue its standards, but then they’d be adapted. Japan doing its thing, China its thing, and India and Europe as well, and why not Latin America now.

RB: And the vision of a truly global accounting language?

DT: It wouldn’t happen and it would probably be another ten years for it to get together again.  So there is a danger. Once several countries start to amend the IFRSs it will take a long time to get them to agree once again to accept the standards published by IASB word-for-word.  So the SEC’s decision is critical. And even a long delay could be the equivalent to a ‘no’, because people will say: ‘Oh, it’s not going to happen’, and off they will go. The other thought for the SEC is who’s going to trust them after this because we were going to get an answer last year, and now it’s going to be a few months into this year and then if they don’t do it people will say: ‘Wait a minute, you’ve had ten years of convergence, the whole programme has been based on the United States’ needs’.

RB: And the consequences?

DT: Other countries will say: ‘We want agriculture done’, or ‘We’ve got a problem with the foreign currency translation out here, you haven’t, but we have.  We want that on the agenda, not your subjects’.  So you can see the pressure building up and a certain form of antagonism towards the US position.  And then people start to say: ‘Well, you’ve got four US guys on the Board, you’ve had ten years of choosing the agenda and you still can’t make your minds up, maybe you should just drop off the Board until you do.  The IASB should concentrate on those who use its standards rather than the US which might one day!’ The issue is already in the background, rumbling away, and the hints are there in the Monitoring Board’s report. It’s interesting. In a way, the SEC holds the key.

RB: And how do you see the SEC concept of condorsement. Is it a glass half-empty, or a glass half-full, even if it is the Johnnie Walker Black Label which always crops up in your jokes?

DT: Well, what we really need is a smaller glass.  I think it’s a way to ease the US position. I always try and call it condoption really.  Basically what they are saying is you finish the unfinished business: revenue recognition, leases, financial instruments, and that could take eighteen months or so. I thought it was going to be done by June last year, and frankly we could have done it by June last year, but anyway, it’s going to take that bit of time.  And then for the rest the idea would be that the US would just put all the joint standards into US GAAP and then gradually go through all the other IFRSs and replace US GAAP with them. That could take a long time.

RB: That might placate the people with no international ambitions. But it is unlikely to satisfy global businesses.

DT: The SEC could go for condorsement and also give an option to say that if companies want to go ahead now then they can do so. A lot of people won’t want this sort of slow burn condorsement offers. Then you would get companies like Ford moving across to IFRS. When you talk to Ford they make it plain that they don’t want a Ford Europe, a Ford Asia, a Ford America and so on. They want just Ford. Having different accounting in the different parts of Ford does not help to communicate.  So they are communicating through IFRS and they will convert their IFRS accounts to US GAAP if they have to, but they’d rather just publish them. And they were talking about difficulties of getting finance in Asia because people there wouldn’t accept US GAAP. They wanted IFRS, and Ford couldn’t do it quickly enough. So they had to abandon their plans.  So Ford sees a big potential.

In the US they always say they don’t want two methods of accounting. But that’s what it’s got on its stock exchange right now. It’s got IFRS for foreign registrants and US GAAP for domestic companies. And you look at the last 16 years US overseas equity investments have gone up eight times and most of these companies will not have used US GAAP.

RB: You were in New York the other day talking about principles and rules.  Is this an argument which you will continue, or is it one that the point has been made and you just have to now start leaving it to people to implement or not, as they wish?

DT: I think it’s what we are as a profession. The very early standards were fairly short and, even today, the leasing standard, for example, could be short.  I have often said that.  The US has about four standards, twenty interpretations, nothing on balance sheet, and yet you could get something like a principle: ‘Show the liability incurred by signing the lease contract and the rights to the asset obtained thereby’.  That’s it!  A liability is defined as an obligation from which you can’t escape that leads to resources leaving the organisation.  Well, that is exactly what a lease is.  Can you get out of it?  No. It’s a legal contract.  Well that’s a liability. We only need a little bit on what do you do with renewal options and what do you do on residual guarantees. The standard can be very short.

RB: Back to fundamentals.

DT: It was quite interesting. We went to see the global heads of the big firms and we talked about principle-based standards. This was probably four or five years ago. And they said: ‘Show us an example’.  We gave them a four page leasing standard and they sent it to their technical people and said: ‘Could you audit this?’  And they said: ‘Well, we could, but we could do with a little bit more help’.  So, okay, you tell them, you can have twenty pages then.  But it can be done – it can be done.