EUROPE – The new International Financial Reporting Standards (IFRS) take too little account of prudence, while undermining investors' ability to hold company executives to account and weakening companies' long-term decision-making, a group of UK institutional investors has claimed.
In a white paper, the group of 10 institutional investors – comprising USS Investment Management, the Local Authority Pension Fund Forum, RPMI Railpen, the London Pensions Fund Authority, Cooperative Asset Management, Royal London Asset Management, the National Employment Savings Trust (NEST), Threadneedle Investments, Governance for Owners and the UK Shareholders' Association –argued that the new accounting standards had "seriously weakened" prudent accounting and called for more transparency.
Ben Levenstein, head of UK equities at USS Investment Management and one of the paper's authors, said: "Our wish in publishing this paper is to highlight that it is not just regulators who need prudence in company accounts, but also long-term investors who rely on accurate numbers to hold executives to account.
"This is key in the promotion of long-term decision-making, which in turn will encourage greater macroeconomic stability.
"The gravity of some investors' unease about the international accounting framework is a serious concern that must be addressed."
The white paper argues that accounts providing a "true and fair" view of performance at the company level are "critical" to supporting long-term decision making within companies, confidence for long-term investors in these companies and economic stability.
They also insist on the need for investors to require accounts that reflect the true economic health, and changes to the fundamental value of the business.
This, according to them, will enable them to monitor managements' use of capital, and avoid a situation where disbursements – such as dividends – and bonuses are paid out of unrealised or 'paper' profits.
Additionally, the group argues that "prudent" accounts will help rein in excessive pay and incentivise long-term management, and highlights that prudent accounts are required by EU company law.
It adds: "Accounts must provide a basis for directors to affirm that they have discharged their fiduciary duty to the company and to all shareholders, including ensuring that capital is protected. IFRS needs to be more strongly aligned with these requirements."
The group says prudence should be "restored", while the principles of "truth and fairness" and "substance over form" should be paramount.
The group calls on the European Commission to deliver an independent review to establish whether the current endorsement process for IFRS standards in the EU would deliver prudent accounts, as required by EU company law.
"In addition, we would welcome moves to clarify the critical role of prudent accounts in ensuring shareholder capital is protected," it said.
"This could be incorporated into the ongoing review of the European Commission's proposed Accounting Directive."
The white paper follows a position paper co-signed earlier this week by a number of European investors with regards to proposed EU reforms on auditing requirements.