IFRS: Lords wonder if it's legal

An influential House of Lords committee has called on the government to investigate whether international accounting standards actually conform with UK law.

Lord Macgregor, chairman of the Lords economic affairs committee, has written a letter to Norman Lamb, a minister at the department for business, asking for a view before a debate on audit in the House of Lords expected in March.

Macgregor is concerned by claims that international standards (IFRS) have undermined the "obligation on auditors under company law to give a true and fair picture of audited accounts and led to a rule compliant, box ticking approach instead of the exercise of prudent judgement."

During hearings of the economic affairs committee Macgregor heard from City veteran Tim Bush that IFRS could breach UK law because it failed to prioritise "true and fair".

Macgregor suggests in his letter that it was "known" within UK watchdogs the Financial Reporting Council (FRC), and the UK Accounting Standards Board (ASB) "several years ago that IFRS were not in conformity with UK company law."

The question will be intensely sensitive for the regulator and UK standard setter which have backed international standards.

It's only to be guessed what the implications are if it is proven that IFRS are at odds with UK law. They have been in place since 2005 and if key players did know there was a problem there will be some stiff questions.

It raises the spectre of no audits carried out under IFRS being compliant with the law and UK audits potentially being undertaken with a key plank of UK business regulation missing.

It will be fascinating to see what Norman Lamb will have to say about the issue. At the least this could prove to be a classic uh-oh! moment for many people involved.

The big question will be what it means for the audit of banks during the run up to the financial crisis. If IFRS was not compliant there will be an issue about the status of audits that used international standards and whether they could have drawn the wrong conclusions about the financial health of banks. That's a thought that sends a shudder down the spine.

At the very least though Macgregor's letter could move what has so far been considered a fringe complaint about accounting standards to the centre of fallout and debate about the crisis, and how we deal with its implications.

Unless, of course, Lamb dismisses the claims and asserts that IFRS is quite in harmony with UK law. At which point the whole thing could fizzle out without further fuss. Though Lord Macgregor, and his fellow committee member Lord Lawson, might feel absolutely confident of their point, and keep pressing. This has the makings of turning a side show into a headline issue in the ongoing saga of dealing with the crisis.


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