Are accounting standards political and not in SA’s best interest?

RYK VAN NIEKERK: South Africa’s accounting standards are largely based on Eurocentric standards, and this is apparently not always in the best interest of the country and economic growth. The setting of accounting standards is also very political, and South Africa must consider the adaptation of existing standards to ensure optimal benefits for South Africa. These benefits include increased or accelerated economic growth.

These are the views of Nicolaas van Wyk. He’s the CEO of the South African Institute of Business Accountants, or Saiba. Nicolaas, thanks for joining me. Just frame this perspective for us – how can accounting standards be political, and how can these accounting standards not be in the best interest of South Africa?

NICOLAAS VAN WYK: Hello Ryk, thanks for the conversation. One has to go back to the nature of accounting, and I think there’s a misunderstanding that accounting is a natural science like mathematics or natural sciences, when in fact I would describe it more as a social science. We’ve seen of late – with the whole LGBT movement, Black Lives Matter – that the old concept of what a social construct is, how to define something, is being discussed, especially in the West.

The thinking is that if accounting is a social construct, it is then subject to certain definitions, and those definitions are arrived at through discussions and assumptions. So if we question those assumptions you might get a different result.

Secondly, the international community [has] a fairly systematic process currently on how accounting standards are set. It’s really an exemplary process, where all countries that have adopted or converged to IFRS [International Financial Reporting Standards] meet regularly.

That’s one of the interesting things about accounting standards – that they’re not set by national governments. They’re not set by world regulators like the World Bank or the UN. They are set by a voluntary organisation of volunteers. The IFRS Foundation is situated or escorted in the UK, but it is registered in Delaware. Traditionally it has been influenced or determined by a Eurocentric approach, and that’s just traditional and historic through industrial development and how developing versus developed nations have evolved. So the nature of the thing has always been Western and Eurocentric.

But we’ve seen of late that countries like India, China and – that’s our point – hopefully South Africa will relook at these standards and say: ‘But if there are social constructs, whose definitions are they adhering to?’

RYK VAN NIEKERK: That is a very, very interesting point, especially the reference that accounting is not a science in itself. I think many people will look at accounting and say, listen, it’s black or white. How do social constructs then influence regulatory or accounting regulations and standards?

NICOLAAS VAN WYK: What traditionally happened was that when accounting standards were drafted, we used a historical cost approach. I was reading an article in preparation for the meeting [and] there are a number of professors that have highlighted this. One professor I’m thinking about works at Stanford University, saying that accounting should be based on historical costs.

I’ll explain the whole accounting cycle but, of late, and in an effort to better reflect information for decision-making, the standard-setters have opted for fair-value accounting.

Now once you bring in fair value, those are now opinions of people – whether it’s a valuer or investor, other stakeholders, unions or governments’ opinions – about what something is worth and how to value it, [which] will differ significantly.

So then it boils down to who has the most money, who has the most time to influence how the standards are set. It’s not unique to accounting standards; I think everything works like that.

If you compare that to a sports team, Formula 1 or MotoGP, the team that’s best-equipped, that has the most funding, the best engines, those are the teams that win – and in the same way accounting standards. We know that the US and the UK and European countries invest heavily in proper representation at these standard sector levels. But when it comes to Africa and South Africa, particularly, we are very lax in that regard.

We’ve kind of abdicated the standard-setting process to European nations. India and China, however, realised the political nature of accounting standards and how they can affect your GDP, and that’s the point we want to come to.

They appoint teams of people which they send to the standard-setting forums to influence those standards. My own experience with our local Financial Reporting Standards Council is that they are just accepting of what international standards are issued. The Companies Act in South Africa requires that a Financial Reporting Standards Council [FRSC] be appointed, and the purpose of that council is to advise the minister about what standards to adopt or to require companies in South Africa to follow.

But when I engaged with the FRSC, I asked: ‘What is your mandate or your framework? When you sent a technical person over to the international standard centres, did you ever ask parliament what their view is of the standards?’

The answer was why would they, because they’re technical. But they’re not technical, they have a direct impact on your GDP, your FDI [foreign direct investment], your unemployment ratio, because we just need to break down a little bit how financial statements affect economic growth.

If you look at South Africa, there are about two million companies –

RYK VAN NIEKERK: Can I interrupt you there before we get to the impact on GDP? Can you give us a practical example of how the usage of the implementation of accounting standards can create different scenarios? Why should, say, a valuation in the US be different from one in India or China, if it seems to be generally accepted in those markets?

NICOLAAS VAN WYK: I think for that we have to have a little bit of an bird’s-eye view about the economic systems. I’m going to use an example, again, of the United States. The world after the 1900s world wars adopted a dollar-based economic system and everything is [now] valued in terms of dollars. In 1971 the [then US president Richard] Nixon government walked away from the gold standard and adopted the dollar as the payment method of the world. Now with that came a lot of power to the West, and it then to a large extent determined the value of currencies and how much money can be printed and how much money goes in circulation – and, in the same way, accounting standards.

So your ability to influence them and represent your economy in a certain way is reflected in how those standards are set; and with the technical people going to those committees – and ours are really absent – they then have this ability to draft these standards in a way that will benefit their economies.

What India and China have recently done – and there is proper research about this – is of a technical nature. I’m not a technical accountant, but what I understand from the papers is when they get these standards in draft form, they will refer them to their local technical people.

They then look at them and first ask how this will affect their companies, their unemployment rate, their economic growth; and if their companies aren’t ready or will be damaged by too-early implementation, they lobby.

They will then influence the standards either to be postponed and give their companies a chance to adjust to what the standards require, or they would have carve-outs.

There’s an example of Tata in India and some big companies in China that had lobbied their governments and [said] they didn’t want to specifically implement a particular standard. In China it had to do with fair-value accounting. And even though the FASB [Financial Accounting Standards Board] from the US and the IASB [International Accounting Standards Board] prohibit this treatment in that particular context, or [for those] particular companies, the Chinese said: ‘No, but our companies will be allowed to follow this standard because it gives them a time to adjust, and there is huge cost in adjusting.’ That in itself is a benefit for your local economy.

RYK VAN NIEKERK: So what would you like to see change in South Africa?

NICOLAAS VAN WYK: Furthermore, our Department of Trade, Industry and Competition [dtic] would realise that accounting standards aren’t just something to hand over to accountants.

It sounds strange, I’m an accountant myself, but as I’ve moved up in the world and started to engage internationally I’ve seen how politics works.

We need to realise it’s a political game, and then the local Financial Reporting Standards Council should have a proper mandate that, when they determine what South Africa’s view is on standards, they should do so in terms of economic growth for South Africa, what’s the best for South African companies – and will the standard enhance employment, because it has to do with every eye.

Just going back to the economic system in a country, it consists of the two-million-and-more companies operating in South Africa daily making economic decisions, buying, selling, entering transactions – and all those transactions are summarised into a trial balance, classified in a certain way, measured and recognised into a set of financials. Those financials, if you are listed company, are then shared with your investors and shareholders. They can decide [whether] they want to invest or not. If it’s applying for credit at the bank, they also use those financials. So financials are an integral part of an economy.

But then you have to ask yourself, [with] these sets of financials how do we define what is revenue, and what do we calculate revenue as being – and your expenses and your assets and liabilities. It’s all those elements that ultimately boil up into your GDP calculation. So it has a significant impact on how you report within your financial reporting supply chain.

That is what we want the [dtic] to recognise – the importance of sets of financial statements – and then properly fund the Financial Reporting Standards Council. But besides the funding, send the right people over to the ISB [Independence Standards Board], who aren’t just technocrats but people with an economic and political understanding of how the world works, and making sure then that [the voice of] South Africa first, and then Africa, second, is heard properly, because at the moment we – and it might diverge a little bit – have a traditional approach in South Africa, because of our colonial past, to adopt or work [within] a UK framework. That is a concern for us.

I think we need to develop in a different way; we need to do what India and China are doing. They refer to a convergence of IFRS and not adoption. Adoption means we just take it as they presented it, but it shouldn’t just be like that.

RYK VAN NIEKERK: You’ve referred to politics a few times. You said this is a political game, but I struggle to see how it can be political when accounting is aimed at calculating how much tax a company must pay, and how much in dividends can be paid out. Does your reference to the ‘political’ influence refer to ignorance, or is there a sinister motive?

NICOLAAS VAN WYK: I don’t know whether it’s a sinister motive. I think South Africa lacks at this moment a realisation that we are competing with other countries. We first of all need to realise this. And then we’re competing with other countries in Africa, we are competing with countries in Europe and the US, and that changes things. So it’s not a ‘rainbow nation’ approach, where we all want to work nicely together in getting a result. It must be driven for our own benefit, for our own economies.

RYK VAN NIEKERK: I’m also not a technical accountant. In fact, I’m not even an accountant. I studied accounting many, many years ago. But what actual standards do you think [are] problematic for a country like South Africa?

NICOLAAS VAN WYK: What we would like to see is, first of all, that the [dtic] and the Financial Reporting Standards Council should have a direct connection with our listed companies. So it’s difficult to say is there a standard not applicable to South Africa, or which should we change?

It’s rather a question of engaging with listed companies, working in South Africa and Africa, and asking them: ‘If this standard that is proposed by the international standards [is] adopted, will it benefit your systems? Will it benefit how you represent your economic results? Will it detract from that, will it be too difficult to implement, will it be too costly?’

Then, based on their responses, we gather that information and then we represent this to the international standard-setters.

At the moment, there isn’t a conversation happening between listed companies and the dtic or medium or smaller companies on what they would prefer to do. That is what should be put on their agenda.

So what we are proposing to the [dtic] – we sent them a proposal back in 2001 – is that they set up such a structure to say, okay, companies in South Africa, what is it that bothers you about the standard? Let us then represent your interest at the ISB because at the moment it’s an outside-in approach. We don’t have any view on anything. We go to a meeting without a clear mandate or expected outcome, and then we come back and 99% just adopt whatever is issued by the international standard setters. It just doesn’t make sense to do it that way around. It should be an inside-out approach.

RYK VAN NIEKERK: I just still want to get a sense of exactly how significant the differences are between the standards used and adopted by China and India as opposed to the US and Europe of Africa. How significantly are they different?

NICOLAAS VAN WYK: The example from India might be the best example, where Tata asked the Indian government – or their standard setter – to exempt them for about two or three years from a fair-value-based accounting process.

That allowed them to adjust their systems, because they are a global company, but based in India, so there are currency differences in how they account for their transactions.

I can’t say exactly what the rand value would’ve been, but you can imagine a global company with billions in turnover, if they can get a postponement for three years where other companies have had to implement it immediately, that is a significant saving.

Then that reflects in the bottom line with Tata, and ultimately with their employees. In the same way, [that] is what we propose for South Africa.

RYK VAN NIEKERK: You sent a letter to National Treasury last year, highlighting many of these issues. Is there a process ongoing which may lead to the change of the standards we are using?

NICOLAAS VAN WYK: We’ve been lobbying hard with them. First of all, you have to explain the impact of financial reporting standards and why it’s important – not only a technical issue. The FRSC has been dormant, which also is a little bit of a blemish on our local process, because the Companies Act requires us to have this council to advise the minister. But they became defunct about two years ago.

We haven’t been sending anyone to the international standard-setting authorities. There’s not enough funding being allocated in the act, again because of a misunderstanding, and that is why we want to highlight the political nature of this. I think the [dtic] might be under the impression that this is just a technical matter, and we anyway just adopt the standards from overseas, so why do we need comment on those standards? But then they’re missing the whole point you raised earlier [that] financial statements are just there to determine tax. Well, that’s more for the small entities. We favour a tax basis of accounting to make it easier for them to report, but the IFRS is for the capital markets and the listed entities.

Given the state of the world currently and, as I said, the whole Swift system, the old currency system, how economics is running the world – we think now with the latest conflicts in Russia and Ukraine there are many other things happening with China, India, Russia, Saudi, Ghana, wanting to move away from a dollar-based economy to new things. We think accounting standards need to play a role in this. And if there’s a Brics approach to accounting or at least a lobbying group, I think that should be what the dtic should be aiming for.

That will increase our own status and standing with Brics and it’ll also be meaningful for our local companies if they can see that the dtic is looking at their interest, not just adopting standards but rather converging standards.

We use the standards that suit us, but [for] those that aren’t suiting us we either postpone the implementation to give the companies more time to apply it, which decreases the cost of doing business in South Africa and through that creates employment, or [we] exempt companies if they can motivate and say, ‘but this isn’t suitable in our circumstances’. There are two examples – India and China.

RYK VAN NIEKERK: There are several accounting bodies in South Africa. We’ve got Saiba, we’ve got Saica, the [South African] Institute for Chartered Accountants. You also have the auditor regulator, Irba. Are they also on board with your views, or do they agree with your views?

NICOLAAS VAN WYK: I don’t think they will agree with my views. I have asked them directly, we’ve had informal discussions, but my view – and it’s a personal view – about our profession in South Africa is [that it is] very much Eurocentric. It hasn’t fully accepted that we are [in] Brics, for which our partners should be India and China, not the EU or the US. That changes things. So historically – and I would ascribe it to historical reasons, given South Africa’s own history of colonisation with the UK – we still have that mindset. With Saiba, we want to place this on the agenda and say: ‘Are we fully African-centric?’ We don’t think we are at the moment.

RYK VAN NIEKERK: But should there not be an industry initiative or process, because I would think if I’m in government, listen, let’s see if [those who are] significant players in this industry, if they agree, then maybe we should prioritise it. If one body lobbies for it, does it carry enough weight?

NICOLAAS VAN WYK: You are raising a good point. But that again shows how fragmented our accounting profession is in South Africa. It’s an interesting scenario and setup. We have a dual system – on the one hand auditing for larger companies, and a lower set of assurance engagements and factual findings reports for other companies. Then there’s no unifying regulator or overseeing body for the profession. It is causing harm to our companies because as professional bodies we sometimes give different views on standards than our counterparts [do]. So it is a fragmented approach.

It’s something that was highlighted by the World Bank a few years ago. They do this thing called the ROSC Report [Reports on the Observance of Standards and Codes]. They then advise National Treasury on how they think the profession should be set up because of the important role it plays.

But those recommendations haven’t been implemented – I would explain that – by the many ministers of finance we [have] had of late. So with each minister of finance, it’s on his agenda, but it falls off because there’s a change, or there are more important things to give attention to.

Our audit regulator Irba did make submissions. It called it a comprehensive regulatory model like [that] in the UK, where you would have a regulator to strictly audit and set standards for listed companies, but when it comes to accounting, to have an oversight role – and at least then get all the professional biases to sing from the same hymn book when it comes to standards and have as their goals economic growth in Africa.

RYK VAN NIEKERK: Just lastly, let’s talk about the impact on economic growth. Don’t you think that the implementation of certain accounting standards would actually result in a difference in the rate of economic growth? Is it not maybe just a rearrangement of the deck chairs?

NICOLAAS VAN WYK: There’s some research done which we would love to share with the department.

There was, a few years back, a big effort to get as many companies as possible to adopt IFRS. It makes sense to do that, because then you have a unified set of standards, and financial reports become more meaningful and more relevant and comparable. The argument then is the more comparable financial statements are, the more confident investors would be to invest in your country because they can compare your listed companies with companies from overseas, and then can decide where they’re going to get the best returns, and that might then bring in more foreign direct investment.

But, as we’ve seen of late, of all the financial scandals, notably Steinhoff and some other big, big ones, many of them had to do with the fair-value accounting, because that allowed you to make judgements as management, as the directors.

So [with former Steinhoff CEO] Markus Jooste, many of the things that they did at Steinhoff were to interpret financial reporting standards in a certain way to increase the value of the company, and present it then as an accurate result from the companies.

This was missed by the auditors, and that carried on for many, many years until it collapsed – and that was a magnificent collapse.

So there are inherent flaws in terms of a fair-value-based accounting approach, which is a cost. We would like that to be addressed.

It’s not only about changing deck chairs, it has significant economic impact. If fair-value accounting is mismanaged, misrepresented, it has huge effects on employment and ultimately GDP, and we’re still trying to figure out how to resolve the mess that was left by Steinhoff.

RYK VAN NIEKERK: Nicolaas, thanks for coming in today and sharing your insights.

NICOLAAS VAN WYK: Thank you very much, Ryk.

RYK VAN NIEKERK: That was Nicolaas van Wyk, the CEO of the South African Institute for Business Accountants, or Saiba.