Will Financial Reporting Standards for SMEs be successfully established?

It has been almost half a year after the end of comments for the standards of FRS for SMEs. There is no announcement from IFAC so far.

The other alternative, XBRL, is moving forward and may become the only required standards.

Is it so difficult to establish the global standards for financial reporting of SMEs? It may be so if they consider in details for all the different requirements among all countries. It is not so hard in my opinion. The top level standards should be in principle. It is not possible to deal with difference among a huge number of regions. That is not possible to do.

This situation is putting a burden to my project. That is why I have to dig deeper and be sure that my clients can meet any final turnout.

Certainly, there is no technical difficulty for me. The only concern is that how many SMEs intend to have true accounting reports.

The answer may be simple, but will it be applied?

A good question is asked and the answer looks familiar, "What can be done to avoid accounting fraud scandal?".

Will there be any other answer? That is what I have the interest to know.

Most of us understand what is internal control and we may wonder why case like Société Générale could happen. If such financial body would fail, most others should be even worse. The only difference is just luck, not management at all.

Perhaps we need to have an accounting report of how many big ones had failed in front of the world for these years. We know how much a CEO had earned. We cannot know they were worth the amount at all. Good outcome might not be for their work. If one fails to protect the corporation from any scandal, he/she should not be a CEO. If one can sell, he/she is just a sales, not a CEO. If one can create, he/she is just a developer and not a CEO.

May be a CEO would better be a jack of all trades. At least, he/she should know more about accounting unless he/she is the bad sheep.

The next move: Internal Control Standards

We are talking about accounting reports standards, the GAAP, SME-FRS etc. All these may not be the remedy at all if there is no internal control. "Executives say poor internal controls contribute most to fraud" is a proof that we should know.

Some may realize that big corporations should be better. But, remember the biggest frauds are related to big corporations. If a corporation has internal control on paper, it is just window dressing only.

Due to my project, I always have the same questions to explain. Why my accounting module does not have invoicing function? Yes, there are lots of accounting programs with invoicing functions. The reason is simple. I understand internal control and the accountants should not handle invoicing. That is the basic management unless it is a one-man company. Some may say that SMEs cannot afford to have two employees to handle accounts and invoicing. I shall not complain anything because these SMEs will not have the insight to manager, not to say developing at all.

When topic like management is mentioned, HK people always supposed that the SMEs in mainland China would be lack of any system. But there is a rule in mainland China that cashier and accountant must be handled by different employee. Why? Money and accounts with the same employee is the top cause of fraud.

I can neglect this problem and follow the others. It is a simple task as I have been working with custom programming for years. But I cannot accept that my products would lead to frauds. Same as before, I have to be responsible to the clients as a company. If I do not care about this, I should be rich years ago. The only drawback for me is the 'know'. Ignorant may be the better way for business. Get the money and do not care whether the product will lead to damage fro others.

Of course, I shall work on the Invoicing as a separate module. Simple invoicing program or traditional stock control is not suitable for today. That is why I need further investigation to come up with a better design for invoicing etc.

It has been mentioned already internal control will be another part of understanding the healthiness of a corporation. I believe that this will be other standards for SMEs.

Something right and something wrong

Reading "PCAOB fines Deloitte $1 million", I think that this is a right decision. At least someone has to be punished for not performing the duty. Not only we need such organization everywhere, these reports should be widely published. In fact, governments must support this type of accusations.

Reading "Accounting Errors Cause Plunge in VeriFone Share", I feel that there is something wrong in our time. When the result was manipulated to meet or even better than expectation, the shares surged, lots of people gained and happy. When the manipulation was discovered and the result adjusted, the shares plunged, lots of people lost and unhappy. So it seems that the discovery was the bad one because of loss. By accounting, the gain is balanced by the loss and the value might remain unchanged. The only problem is someone gained and someone loss. In fact, that is the way of stock market. If one is the unlucky one, he/she will blame the timing of discovery, not until he/she sold the stocks. That means if there was no error, it is not attractive any more. Of course, the endless estimation of profit to push up the market is the tool today. This would force some CEOs to risk their career because there is no way out if performance was below the market's estimation. It is interest to know how many CEOs get away without discovered. May be we can never know. The GAAP, FRS etc. should be a good thing, otherwise bad practice will never go away.

Everything is accounted for Accounting

Perhaps it is the problem with English. Whenever any counting is accounted for, it is already the accounting's problem. Accounting is done by accountant, right? Therefore accountants are responsible for every bad thing. Good things are most likely be enjoyed by CEO, Chairman or boss.

To count the votes of a beauty Pageant does not need an accountant. A grandma or a Japanese chimp would be fine. When counting is wrong, see "Accounting error changes results of beauty pageant", it is the accountant who has counting error. Why not ask an accountant to count the sperms when we make love? Why not ask an accountant to count the lies our leaders had said?
It is ridiculous for an accountant to involve with such entertainment event. May be the paid is high, I do not know. But one thing is certain, we never have an accountant to count the presidential election. Does this mean accountant is not capable to do serious cases?

If an accountant fails to count votes, who will trust such accountant? That is why Financial Reports are hard to trust because accountants cannot count simple things properly.

Shame! Shame! Shame!

Limited liability for limited trust

We might blame the auditors for their errors leading to huge loss either through stock or investment. So some cases lead to class action against auditors for compensation. That is based on the opinion of the share holders or investors.

By reading "Accountants consider limiting their liability", it seems that the fact may be true that their fee would not be justified for the chance of unlimited liabilities.

Now, it is again the problem of the whole system. As I have pointed out earlier, the meaning of audited reports should be adjusted. 'Audited' is not fraud proof; it just means someone outside the corporation has read the reports and without guarantee that there was no error or fraud.

Perhaps we need to have something added to the audited report, declaring the auditor's fee as well as how much will be liable if there is any problem. Our judgment will be based on this information. Certainly this would lead to some new approach or knowledge. Great, every new prospect would create a lot of jobs or fortune from researching, training etc.

I do not mean that the suggestion to have limited liabilities is wrong. It is a fact because they have to face legal challenge and possible huge financial bearing.

The recent case "PwC defends audits faulted by PCAOB" makes us wonder if auditors did not work seriously or did not perform auditing, how can we know? Yes, we have to trust usually. Now this case talks about quality of audit. Like someone says we need auditing for auditors. That is a sad thing when we have to worry about someone whom we trust. By adding another layer of audit may not be perfect since fraud would happen again with higher level.

So what should we do? Well, if you want to invest, remember that it is like gambling. If you want to buy anything, there is no evidence but guess work.

Remember the source of fraud, not the auditors, not you or me, it is the leadership and the corporate governance. We have tons of theories, tons of empty talks. Nothing seems to be true. The only truth is our luck. May be we are lucky not to invest in the wrong share. May be we are out of luck when bad thins happened. That's it.

Who will be responsible for invisble value in account?

One thing that is not clear. Whenever there is accounting problem, the accountant is the first suspect and in most cases there is no way out for the accountant even if he/she has to do so by order.

This may be the first report, "When Balance Sheets Collide With the New Economy", talking about something that may not be initiated by accountants.

When the Economy is involved, when the future of the enterprise is involved, when the top management demand so and so to meet the new environment, no accountant can refuse by putting unrealistic value to the book, in other words, cooking the book.

If it is said that new accountants have been trained about related valuation methods, then accountants will face another risk if they have to do so by them. Can they refuse to put higher valuation when their superior asked? Can they prove that they had not mistake when bad things happened?

Of course, no one will be blamed if fortune or gain is obtained. Of course, someone will be blamed if there would be loss. Who? Certainly, it is the accountant.

As the world now looks for money and money by hook or by crook, there is no way to avoid frauds, a new type after one another, hopefully not bigger and bigger. But one thing is sure; it will not be good days ahead for accountants. Perhaps, accountant will become the riskiest job in the present time.