As new auditing regulation fights its way through European parliament we ask: Is accounting regulation useful or just a toothless lion?
As a key financial component of Europe, one might expect the UK to have tough accounting and auditing regulations. But in recent years this assumption has been shaken by a series of scandals that have led businesses to question UK financial regulatory bodies, such as the Financial Reporting Council (FRC) – the body responsible for ensuring high-quality reporting.
A particularly big scandal back in 2011 – the acquisition of tech firm Autonomy by Hewlett-Packard – has hinted at a widespread culture of ‘creative accounting’ in business and a lack of regulatory ‘teeth’ in Europe’s key financial district.
The Autonomy takeover by Hewlett-Packard
Autonomy was one of the top financially performing companies in the UK before it was acquired by the American firm Hewlett-Packard (HP). Following the $11bn purchase, HP were forced to take an $8.8bn impairment charge (that is 80 per cent of the purchase cost), suggesting that the British firm had been drastically overvalued by its previous owners.
Impairment charges – are the specific reduction on a company’s balance sheet that adjusts the value of a company’s intangible assets. This provides a competitive advantage, such as a strong brand, reputation, or high employee morale (defined by: Investor Words).
Due to this HP shareholders are now suing HP, for failing to spot alleged ‘serious accounting improprieties, misrepresentation and disclosure failures’ by ‘some former members of Autonomy’s management team’.
These allegations have been denied by former Autonomy chief executive, Mike Lynch.
Even if the Analysts from the global bank Citigroup have made comments such as it is not yet clear whether any wrongdoing would be proved, they have criticised the Financial Reporting Council (FRC) – the body responsible for ensuring high-quality reporting – stating that financial reports, such as those submitted by Autonomy before the HP purchase, are handled largely in secret and on a ‘very limited budget’.
Was the Autonomy “disclosure failures” which led to such severe impairments, a one-off case? Or does it indicate that accounting regulation is weak in practice across Europe?
The sleeping lion
However, the Financial Services Authority (FSA) – an independent body that regulates the financial services industry in the UK – have 18 regulatory penalties dispensed, totalling over £19m between January 2011 and December 2012 indicate that regulatory bodies do, in fact, have some rather sharp teeth.
While some companies have managed to get their loose accounting standards and reporting to slip through the regulator’s net – companies that have been caught certainly seem to be feeling the regulator’s teeth digging in deep.
So overall, perhaps the regulatory bodies in Europe are not so toothless after all, perhaps just sleeping lions ready to pounce!
What do you think? Are European regulators ‘toothless’? Why not add your answer in the comment box below…
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