Accounting standards are not set by national governments or world regulators like the World Bank or the UN – they are set by a voluntary organisation of volunteers’: Saiba CEO Nicolaas van Wyk.
By Ryk van Niekerk 24 Mar 2022 00:01
RYK VAN NIEKERK: South Africa’s accounting standards are largely based on Eurocentric standards, and this is apparently not always in the best interest of the country and economic growth. The setting of accounting standards is also very political, and South Africa must consider the adaptation of existing standards to ensure optimal benefits for South Africa. These benefits include increased or accelerated economic growth.
These are the views of Nicolaas van Wyk. He’s the CEO of the South African Institute of Business Accountants, or Saiba. Nicolaas, thanks for joining me. Just frame this perspective for us – how can accounting standards be political, and how can these accounting standards not be in the best interest of South Africa?
NICOLAAS VAN WYK: Hello Ryk, thanks for the conversation. One has to go back to the nature of accounting, and I think there’s a misunderstanding that accounting is a natural science like mathematics or natural sciences, when in fact I would describe it more as a social science. We’ve seen of late – with the whole LGBT movement, Black Lives Matter – that the old concept of what a social construct is, how to define something, is being discussed, especially in the West.
The thinking is that if accounting is a social construct, it is then subject to certain definitions, and those definitions are arrived at through discussions and assumptions. So if we question those assumptions you might get a different result.
Secondly, the international community [has] a fairly systematic process currently on how accounting standards are set. It’s really an exemplary process, where all countries that have adopted or converged to IFRS [International Financial Reporting Standards] meet regularly.
That’s one of the interesting things about accounting standards – that they’re not set by national governments. They’re not set by world regulators like the World Bank or the UN. They are set by a voluntary organisation of volunteers. The IFRS Foundation is situated or escorted in the UK, but it is registered in Delaware. Traditionally it has been influenced or determined by a Eurocentric approach, and that’s just traditional and historic through industrial development and how developing versus developed nations have evolved. So the nature of the thing has always been Western and Eurocentric.
But we’ve seen of late that countries like India, China and – that’s our point – hopefully South Africa will relook at these standards and say: ‘But if there are social constructs, whose definitions are they adhering to?’
RYK VAN NIEKERK: That is a very, very interesting point, especially the reference that accounting is not a science in itself. I think many people will look at accounting and say, listen, it’s black or white. How do social constructs then influence regulatory or accounting regulations and standards?
NICOLAAS VAN WYK: What traditionally happened was that when accounting standards were drafted, we used a historical cost approach. I was reading an article in preparation for the meeting [and] there are a number of professors that have highlighted this. One professor I’m thinking about works at Stanford University, saying that accounting should be based on historical costs.
I’ll explain the whole accounting cycle but, of late, and in an effort to better reflect information for decision-making, the standard-setters have opted for fair-value accounting.
So then it boils down to who has the most money, who has the most time to influence how the standards are set. It’s not unique to accounting standards; I think everything works like that.
If you compare that to a sports team, Formula 1 or MotoGP, the team that’s best-equipped, that has the most funding, the best engines, those are the teams that win – and in the same way accounting standards. We know that the US and the UK and European countries invest heavily in proper representation at these standard sector levels. But when it comes to Africa and South Africa, particularly, we are very lax in that regard.
They appoint teams of people which they send to the standard-setting forums to influence those standards. My own experience with our local Financial Reporting Standards Council is that they are just accepting of what international standards are issued. The Companies Act in South Africa requires that a Financial Reporting Standards Council [FRSC] be appointed, and the purpose of that council is to advise the minister about what standards to adopt or to require companies in South Africa to follow.
But when I engaged with the FRSC, I asked: ‘What is your mandate or your framework? When you sent a technical person over to the international standard centres, did you ever ask parliament what their view is of the standards?’
The answer was why would they, because they’re technical. But they’re not technical, they have a direct impact on your GDP, your FDI [foreign direct investment], your unemployment ratio, because we just need to break down a little bit how financial statements affect economic growth.
If you look at South Africa, there are about two million companies –
RYK VAN NIEKERK: Can I interrupt you there before we get to the impact on GDP? Can you give us a practical example of how the usage of the implementation of accounting standards can create different scenarios? Why should, say, a valuation in the US be different from one in India or China, if it seems to be generally accepted in those markets?
NICOLAAS VAN WYK: I think for that we have to have a little bit of an bird’s-eye view about the economic systems. I’m going to use an example, again, of the United States. The world after the 1900s world wars adopted a dollar-based economic system and everything is [now] valued in terms of dollars. In 1971 the [then US president Richard] Nixon government walked away from the gold standard and adopted the dollar as the payment method of the world. Now with that came a lot of power to the West, and it then to a large extent determined the value of currencies and how much money can be printed and how much money goes in circulation – and, in the same way, accounting standards.
So your ability to influence them and represent your economy in a certain way is reflected in how those standards are set; and with the technical people going to those committees – and ours are really absent – they then have this ability to draft these standards in a way that will benefit their economies.
What India and China have recently done – and there is proper research about this – is of a technical nature. I’m not a technical accountant, but what I understand from the papers is when they get these standards in draft form, they will refer them to their local technical people.