LONDON Oct 3 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
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
"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.