Accounts of battle divide protagonists

AS BATTLES of words go, it is not that violent. The two protagonists - both Scots - claim to be chums with a shared love of under-performing football teams. And yet for much of the past decade Sir David Tweedie, chairman of the Accounting Standards Board, and Ron Paterson, senior technical partner at the accountancy firm Ernst & Young, have been sniping at each other.

To the outsider, the debate that has erupted again with the publication of the ASB's latest draft statement of principles looks somewhat arid. The two disagree on the accountancy treatment of assets and liabilities. In fact, though, as one seasoned observer has said, "this is fairly fundamental". Sir David believes that informing investors of what is really going on requires reporting assets and liabilities in accounts so that they reflect transactions, while Mr Paterson takes what is commonly termed a prudent approach and advocates matching by means of provisions, with the intention of smoothing results out over the years.

The problem for Mr Paterson is that Sir David came into his post on a reforming ticket. The ASB was launched in 1990 because its predecessor, the Accounting Standards Committee, was felt to have been undermined by all the financial engineering that contributed to the spectacular collapses at the end of the 1980s. Moreover, the chairman has a better way with words than most accountants - he terms those who want to put money aside in case they decide to carry out a restructuring advocates of "psychoanalytical accounting" - and his pronouncements tend to have the ring of common-sense to them. Accordingly, most leading accounting firms have fallen into line.

However, when the first attempt at a draft statement of principles was published three years ago, it was not only Mr Paterson and his colleagues at Ernst & Young who were upset. The draft issued in November 1995 attracted more letters of comment than any other document the ASB has published.

Although it has been three years coming, the latest version is really a clarification exercise. To aid with this, the ASB has brought out a question and answer booklet. Predictably, Mr Paterson is not impressed. "It looks like the other stuff twiddled around a bit," he said last week, adding that it was "an odd mixture" of self-evident truths and obscure arguments.

However, he seems to have lost some of his enthusiasm for the fight. While describing the explanatory booklet as "disingenuous," he conceded that the package had been "cleverly put together".

It is tempting to see this as a irrelevant skirmish that has livened up the UK accounting scene. After all, both parties will soon be departing the main stage - Sir David because his 10-year term has only a few months to go and Mr Paterson because in the summer he is leaving E&Y for a quieter life, although he insists he will still be firing in "abusive remarks".

But in fact the debate is central to the increasing pressure for international harmonisation of accounting standards. The ASB says its draft statement of principles is based on the International Accounting Standards Committee's framework and that in turn is based on the concepts that started to be introduced by the US Financial Accounting Standards Board two decades ago. Accordingly, suggests the ASB, the principles are not representative of some way-out view but are being used by leading financial reporting standard-setters around the world.

As far as Sir David is concerned, this is hardly surprising. "The principles have proved an effective means of restoring sound accounting practice by stamping out the appalling abuses of the 1980s. The dog-eared accounting concepts used in the 1980s were simply not up to the task of dealing with the transactions of the late 20th century and had to be replaced - there replacement is the Statement of Principles."