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Iceland Stock Exchange Responds To Criticism Regarding Its Surveillance Function Concerning Annual Accounts And Interim Statements

Date 22/10/2002

Aggressive Accounting

Discussions on accounting practices have been the centre of considerable media attention recently. And not without good reason, in view of what has been happening in this field, not least in the US. This focus on accounting practices should be welcomed, since there is a great deal at stake for the public, corporations and even the economy in general. The Icelandic daily Morgunbladid deserves special mention here, as the paper has provided detailed and informative coverage of the issues.

Recently Stefán Svavarsson, accountant and associate professor at the University of Iceland, delivered an address on "Creative Accounting" to a gathering of the Association of Icelandic Economists. In his address Stefán Svavarsson, who is one of the most respected accountants in Iceland and whose views thus merit careful consideration, made a number of very thought-provoking observations. He also, however, delivered a number of unfair criticisms of ICEX, insinuating that it was not carrying out its surveillance function diligently enough concerning annual accounts and interim statements, in addition to authorising three different types of statements, i.e. accounts with or without price-level adjustments and accounts in foreign currencies. These criticisms require a response and the placing of this discussion in the proper context.

Creative accounting

At the same time as Stefán criticises ICEX for insufficient surveillance, he does not seem to feel that accounting tricks and creative accounting are practiced to a greater extent in Iceland than elsewhere. It should be borne in mind that most of the cases which have sparked the extensive discussion of accounting practices and rules concerning them originate in the US, which is generally considered to be the world leader, both as far as financial markets and accounting rules are concerned. There the focus was correctly directed at those producing the accounts, i.e. the companies themselves and their executives, and the auditors' practices, rather than at the regulatory bodies. The stock exchanges were not regarded as the party at fault, since they are not responsible for the accounting of listed companies. In the wake of the scandals, the US Securities and Exchange Commission (SEC), which to some extent performs a role similar to that of the Financial Supervisory Authority here in Iceland, felt there was due cause to increase the responsibility of corporate executives. Just what effect these measures will have remains to be seen. Criticism of ICEX with regard to aggressive accounting practices, which are not even considered to be widespread in Iceland, simply fails to take its role into consideration.

Statement models

Nor is criticism of ICEX for authorising three statement models, i.e. price-level-adjusted, unadjusted, and in foreign currencies, justified. As is well-known, provisions on pricelevel- adjusted accounting have been repealed from the Annual Accounts Act, effective as of this year, with the significant exception that applying price-level adjustment was authorised for this year and the following year. ICEX can hardly disregard provisions of national legislation, with the result that, despite the resulting inconvenience, the Icelandic securities market must live with two types of statements during this two-year period. Compiling accounts in foreign currencies cannot, on the other hand, be regarded as a third model, since these accounts are based on historical cost, just as is provided for in the Annual Accounts Act. Investors on most foreign markets have to deal with companies from various countries, which thus compile their accounts in various curriencies. ICEX has seen no reason to raise objection to accounting in a foreign currency, if the Icelandic companies are of the opinion that this better serves the interests of investors. Quite the opposite: it is in the interests of ICEX and the Icelandic financial market for domestic corporations, which are mainly dependent upon market developments abroad, to be able to compile their accounts in a foreign currency - and eventually also to be able to be listed on ICEX in a foreign currency. The same is true of foreign companies, e.g. in fisheries, which could conceivably be interested in an ICEX listing in the future.

Importance of accounts

Companies' accounts are the cornerstone of their information provision. For this reason it is extremely important that accounting is done diligently, with the guiding principle being to respond to the needs of investors for accurate and comprehensive information. To achieve this, company executives must follow the strictest requirements of laws and regulations. ICEX agrees whole-heartedly with those voices urging that the review of the Annual Accounts Act be accelerated, and that the example of the EU be followed in making reference to international accounting standards rather than setting specific Icelandic laws on annual accounts. In this connection it is definitely possible to place stricter demands on companies listed on a stock exchange, or involved in one way or another with the public interest, than on others. It is also important to strengthen the activities of the Accounting Standards Board in formulating good accounting practices. ICEX is determined that all information provision on the Icelandic market be fully comparable to practices elsewhere. To this end, rules on the frequency of statements and disclosure requirements in general have gradually been harmonised with international rules. In this area ICEX has been supported by NOREX co-operation. A prospectus is required to provide more information than is generally contained in annual accounts. ICEX rules are continuously reviewed and the most recent example of efforts underway in this field is the ICEX working group on information provision on the remuneration to executives of listed companies. This working group is to deliver detailed proposals as to how listed companies should account for remuneration to their leading executives, for instance, concerning stock options, which has been one of the issues under scrutiny in the US discussion.

Roles and responsibility

Finally, to sum up how responsibility is divided concerning the compilation and regulation of accounts, it is clear that the legislation must stand up to market demands at any given time. The Accounting Standards Board must also follow closely developments in business practice and the need for formulating accounting practices in accordance with the role accorded it in the Annual Accounts Act. First and foremost, however, the responsibility for compiling accurate and non-deceptive accounts lies with the companies themselves. Accountants are responsible for attesting that the accounts give a clear picture of the situation. Surveillance by exchanges cannot compensate for insufficient legislation or rectify the situation if company executives are inclined towards creative accounting, although ICEX naturally endeavours to do its best in this regard. Nor should the role of the media, financial analysts and general shareholders be forgotten in exercising restraint and demanding informed discussion of information provision in a broad context.