Profile TRADITIONAL VALUES

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1 Profile TRADITIONAL VALUES Sir David Tweedie, the former chairman of the International Accounting Standards Board, has a new mission: oversee the creation of a coherent global financial valuation framework. He explains the strategy to George W. Russell Photography by Colin Beere 14 July 2014

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3 Profile Very few institutions have escaped the eagle eyes of Sir David Tweedie, not even his monarch. As Chairman of the Audit Committee for the Sovereign Grant, Tweedie attends meetings four times a year at Buckingham Palace to scrutinize the British royal family s finances. It s fun, really it s so different, says the former chairman of the International Accounting Standards Board and current Chairman of the Board of Trustees of the International Valuation Standards Council. Queen Elizabeth II, Tweedie explains on a visit to Hong Kong last month, has three roles. One is head of state, and we should pay for that; two is head of nation Trooping of the Colour and Ascot Ladies Day that are not state occasions but are part of the British tradition and we should pay for that. And her third role is as a private person Mrs. Windsor that s hers. So it s the three buckets. Despite the royal finance panel s oldworld mission it is run as a sub-committee of the Lord Chamberlain s Committee it is surprisingly modern and efficient, Tweedie found. The Palace is run by a vice-admiral and a hugely respected chartered accountant (Scottish, of course) so there was no way these people would be out of touch and obsequious it s fully compliant with International Financial Reporting Standards! For Tweedie, that is a source of satisfaction. He chaired the IASB for a decade, and when he started in the job in 2001, only a handful of countries used what were then International Accounting Standards, now IFRS. But when you look at what s happened, there s more than 120 countries using IFRS, including half of the S&P 500 and two-thirds of the G20. Tweedie is now on a new mission: to restore confidence to international financial valuations. He became IVSC Chairman in October 2012 with the goal of promoting the recognition and adoption of international valuation standards. My reaction was that there was a valuation profession out there, but what we discovered was that the valuation profession was doing nothing. Valuation became a hot topic during the financial crisis with the mispricing of many assets such as those backed by subprime mortgages in the United States due to the lack of transparency in financial markets. As chairman of the IASB during the crisis when the markets froze, people were jumping at fire sales as the fair value, Tweedie recalls. He remembers being asked by members of the newly established Financial Stability Board an international organization formed during the crisis to coordinate financial authorities and standard setting bodies about what the IASB was going to do about valuing illiquid assets. My reaction was that there was a valuation profession out there, but what we discovered was that the valuation profession was doing nothing, Tweedie says. Listing the objectives Under the FSB s auspices, Tweedie looked at ways to improve valuations, as the asset sell-offs were exacerbating the crisis. The markets were just collapsing, he says. We had to set up an ad hoc group of auditors, regulators and bank credit specialists and cobble together some rules on how to do it. Soon after, Tweedie was approached about the IVSC position. When they came to me and asked if I would chair the IVSC trustees, I had three objectives, he says. Tweedie s first objective is to create one set of international valuation standards, based on his experiences at the IASB. We should find out what is the best valuation standard for a particular asset and we should all do it, he says. And we are working on a memorandum of understanding with valuation institutes in the world s most important financial centres, including Hong Kong, on the basic requirements. His second objective is to create a single profession. Basically it s trying to get the valuation profession into a similar basis as the accounting profession, he says. Chartered accountants and CPAs are well known, Tweedie says. Yet just in America, you have four business valuation institutes and five different qualifications, none of which are well known, he adds, saying he would like to see valuation specialists governed by uniform entry requirements, examinations, ethics, continuing professional development and discipline. 16 July 2014

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5 Profile The audit report is going to be so completely different and it s quite right though I don t think they re going far enough, to be honest. His third objective is to bring together regulators, auditors, banks, insurance companies and other stakeholders to agree on benchmarks for measuring major financial instruments. We have discovered that there are big differences between financial institutions when they value exactly the same instruments, he says. That issue, Tweedie says, throws up other questions about the robustness of financial institutions, especially given the increasingly tough risk and capital management requirements under the Basel approach. If the valuation data are suspect, Tweedie notes, that affects income statements and balance sheets. Then you have problems with financial stability. Tweedie adds that a standardized financial valuation system would create a more stable environment for auditors. IFRS requires fair values, he says. The regulators require a certain level of bank capital, which is based on balance sheet values. [If] those values are suspect, that puts huge pressure on the auditor. How does he know what the benchmark is? There isn t one. Tougher standards After all, auditing remains close to Tweedie s heart, even in his new gig. Before I even did accounting standards, I used to chair the British Auditing Practices Committee [now the Audit and Assurance Council] and I ve always been interested in audits, he says. People think it s a boring thing, but look at what happens when an audit goes wrong like Enron and WorldCom markets collapse. It is so critical to the smooth functioning of the financial system. Born in Newcastle-upon-Tyne, England, Tweedie qualified as a Scottish chartered accountant in After an apprenticeship at Mann Judd Gordon & Co. in Glasgow, he joined KMG Thomson McLintock, which became KPMG. There he rose to become United Kingdom national technical partner. That expertise propelled him to the chairmanship of the U.K. s accounting standards board from 1990 to 2000 and then the IASB chairmanship the following year, a post that he also held for a decade. Tweedie has little nostalgia for the old days of auditing. When I was technical partner of KPMG, [auditing] was almost a disgrace in certain situations and in a way that s why I went to the accounting standards board to clean it up, he says. We made it tougher to be creative. Despite the changes wrought by the IASB, Tweedie believes there is much more to be done. You ve got massive changes coming in auditing, he forecasts. The audit report is going to be so completely different and it s quite right though I don t think they re going far enough, to be honest. Tweedie identifies two major problems at the heart of auditing. One is that I think the audit report is terrible, absolutely awful, he says. It doesn t do the audit justice. He recalls that when he started as an accountant 40 years ago he could look at an audit report and tell if it was qualified just by a glance. Nowadays, you can hardly even find the opinion, he says. It s so full of who s responsible for what, and that s been a defence mechanism. Investors, says Tweedie, know that auditors have a unique insight into a company. Now, what concerns them? What have they found? What can they tell us? It all depends though on how independent auditors can be from the client. Giving more independence to the auditor might make visible certain aspects that the client company doesn t want to be seen, he acknowledges, but he says the overall benefits would outweigh any disadvantage to the client. I think that would be all for the best for the financial community. Lights in the tunnel Despite his downbeat appraisal of the audit environment, Tweedie is confident that there is improvement on the horizon, citing recent developments in Britain. It is an interesting period in the U.K. just now, he says. Have a look at the [most recent] KPMG audit report on Rolls-Royce, he says, referring to the British engineering company. What has happened is that KPMG has gone into the various risks and this is all in the report: how have they got the revenue right, are they taking profit correctly, have they accounted for various put options and explaining those risks, he says. KPMG concluded that the put option was slightly optimistic, the liability could be a bit higher, but that Rolls-Royce was being 18 July 2014

6 A PLUS IFRS isn t going away and it s the U.S. Generally Accepted Accounting Principles that s in the minority. cautious on profits, Tweedie adds. Overall you get the impression of an honest company presenting its results fairly. Tweedie acknowledges that the client agreed to such disclosures in the audit report, but says that such transparency could lead to a new standard. What it does do is give you quite a lot of confidence, he says. They really tell you about the various issues. It s not required and you found that the audit firm did it on its own. PricewaterhouseCoopers did a similar job with BP, the British multinational oil and gas company, and its contentious Russian operations, Tweedie adds. They didn t go as far as KPMG but I bet they do next time. I think that this could become almost a competition with firms trying to outdo each other. In the meantime, Tweedie is devoting most of his time to valuation. However, the links with accounting standards are strong. When we deal with fair value, the IASB will be at the table. And, similarly, when they re dealing with fair value, we ll be at the table, he says. In terms of globalization, he is confident that the United States will eventually come to terms with IFRS. IFRS isn t going away and it s the U.S. Generally Accepted Accounting Principles that s in the minority. And even in Japan, where they haven t yet made it compulsory, 20 percent of their market is already IFRS. India s coming in 2016 and China s pretty close, so the U.S. is gradually going to find itself more and more isolated. Tweedie, who turns 70 this month, shows no signs of slowing down. IVSC is taking more time than I expected, he says. Really it s a start-up organization. And, as well as auditing the royal finances, he continues to teach accounting at Cambridge and Edinburgh universities and heads two charities. After four decades as one of the world s most prominent accountants, Tweedie acknowledges that one role has him stumped. I m failing retirement. July