UK backs global accounting rules, wants "prudence" back
LONDON Oct 3 (Reuters) - Britain still believes a specific reference to "prudence" would improve international accounting standards, but reasserted on Thursday the rules as they stand are legally binding, hoping to end any uncertainty over the matter.
Rules on how companies are audited, drawn up by the International Accounting Standards Board (IASB), are mandatory in Britain and elsewhere in the European Union, but a decision in 2010 to drop a specific reference to prudence has been questioned by some investors.
Prudence requires accountants to err on the side of caution when treating something not covered by a specific IASB rule and the investors said its omission from the foundation for the IASB's rules, known as the conceptual framework, was inconsistent with some EU and British laws.
They argued it could help banks mask any problems they were suffering, a particular concern given banks were given a clean bill of health just before taxpayers had to rescue them in the 2008 financial crisis.
One of the critics, Tim Bush of shareholder pressure group Pirc, challenged the legality of the IASB rules in a 24-page letter in 2010. Bush had no immediate comment on Thursday.
Britain's government is "entirely satisfied that the concerns expressed are misconceived", consumer affairs minister Jo Swinson said in a statement on Thursday.
Melanie McLaren, a director at the Financial Reporting Council (FRC), which regulates accounting in Britain, said the government statement, backed by a legal opinion for the FRC, ended the uncertainty over accounting practices.
"We felt we needed to listen to the investors and give the matter due consideration. Having done that we needed to make sure we were quite firm to close that uncertainty down as we approach the financial year-end," McLaren told Reuters.
The IASB is reviewing its conceptual framework and the UK government and FRC maintain a reference to prudence should be reinserted.
"It's not as if there is no concept of exercising caution in the conceptual framework, but we feel it has been de-emphasised," McLaren said.
IASB Chairman Hans Hoogervorst has so far resisted such calls, saying prudence was there "in spirit".
A 2011 report from Britain's upper legislative chamber, the House of Lords, said the IASB rules led to a "culture of box-ticking and 'neutrality' at the expense of prudence", especially for auditing banks.
"The government should reassert the vital role of prudence in audit in the UK, whatever the accounting standard," it said.
The IASB had no comment on Thursday.
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