Societé Generale

Override that is dividing accountants.

Financial Times – 12/3/2008 –Asia Ed1 -Page 16In France, accountants know it as une image fidele . In the UK it has traditionally been called “true and fair” and in international accounting speak, it is officially “fair presentation”.

In any language it has one accounting purpose: to act as a last resort override allowing circumvention of the accounting rules when for some unforeseeable reason, they do not make sense.

Societe Generale is using this principle to put all the losses from Jerome Kerviel’s unauthorised dealing in its 2007 books in spite of the fact that the lossmaking trades were put on this year.

The first question is whether the French bank should be allowed to do this. The second is the far bigger issue of what this implies for the project of converging all accounting to a single set of global standards.

The accounting questions centre around SocGen’s year-end date of December 31. Many of Mr Kerviel’s losing trades were put on in 2008 and technically belong in this year. But the bank has been allowed to book all of the losses in 2007 under the override.

“Why should SocGen report an offside ‘profit’, which everyone knows was transient as it was part of an alleged fraud,” said one investor representative who supports the treatment.

Yet the International Accounting Standards Board, which wrote the rule, disagrees. “Given the facts and the information available, it seems to me that if you asked people when a loss that happened in 2008 should be reported, they’d say 2008,” said John Smith, an IASB board member.

The bigger issue facing the IASB is the problem of setting a single set of accounting standards when implementation and enforcement are left up to local regulators, who often have little influence on their colleagues elsewhere.

“What we really have here is a failure of consistent standards and regulation,” said Allen Blewitt, head of the Association of Chartered Certified Accountants. “The market is the only sanction left on SocGen right now.”

European Commission officials are understood to be upset with the AMF, the French regulator, for sanctioning the override, which is unlikely to have been allowed by at least some other EU regulators. The AMF declined to comment yesterday.

“Different jurisdictions can vary on how they interpret requirements, but this normally falls within an acceptable range. When you get something like this, which seems hard to reconcile to the standards, then people get concerned,” said Andrew Buchanan, technical partner at BDO Stoy Hayward.

The matter is made even more sensitive by the fact the US Securities and Exchange Commission is considering allowing US firms to report under IFRS as part of its longer-term goal of converging its system with the international one. Although larger firms and companies generally support the switch, there is a strong cadre urging the regulator only to move slowly.

The SEC has an override in US accounting rules, but rarely uses it. For those opposed to a rapid jump to IFRS, SocGen’s accounting is a reason to move cautiously.

“If people are willing to accept this sort of accounting then why would you want to move to a system that allows that? It is not just the SocGen issue, but that we aren’t getting good implementation of IFRS,” said Lynn Turner, former chief accountant at the SEC. “You’ve got to ask yourself what has broken in the system. There’s a problem in this company and neither the gatekeepers – the auditors – nor the regulators have done anything about it and I’m very surprised.”


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