The Accounting Standards Board ASB, which governs financial reporting practices in the UK, has gone a step further in its war against unscrupulous finance executives who massage their company’s figures. The ASB has issued a preliminary version of a new Financial Reporting Standard which aims to stop bogus provisions for imaginary future costs from finding their way onto the balance sheet. Publicly quoted companies like nothing better than to smooth out their figures, giving the impression of steady incremental growth. The excuse for this behavior has always been the unpredictable reaction of the stock markets to short term dips in earnings. To this end, companies will use provisions to squirrel away profits in a good year, only to release them to boost profits in a bad year. The practice is well known in the auditing world but in the absence of any firm guidelines, it is notoriously difficult for auditors to regulate. Chairman of the ASB Sir David Tweedie said This misleading practice needs to be stopped. If the new standard is adopted, companies would have to prove they had a legal obligation to pay the expenses they are providing for.
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