History of Accounting Industry
The Accounting Industry of any country needs to be tightly knit and well-maintained in order to acquire hundred percent benefit from them. And the United Kingdom, being one among the top-notch economies of the world, seemed to have grasped this crucial fact rather timely. As early as 1942, the UK had started developing and supporting various accounting organisations and bodies that would help lay foundations of a strong industry. These organisations were vested with the power to decide rules, regulations and set various parameters to guide and grow the accounting industry.
The Taxation and Financial Relations Company, a part of the Institute of Chartered Accountants in England and Wales (ICAEW) was the first professionally recognized accounting organisation in the UK that saw the light of the day. This professional body was allowed to make suggestions and recommendations about various companies and their practices to the ICAEW council. In the later years, the ICAEW came up with various standards and organisations to improve the accounting industry as a whole. Few of them are:
- Statement of Intent on Accounting Standards in the 1970s to illustrate the required steps for the advancement of the accounting industry.
- Accounting Standards Steering Committee(ASSC) in 1970, with the sole objective of defining standards in financial reporting
- Survey of Published Accounts between 1968-69, that spoke about the degree of variation in accounting practices
- Joining of the Chartered Institute Of Finance and Accountancy (CIPFA) in the ASSC in 1976
- Formation of a brand new Financial Reporting Council (FRC) in the year 1990
- From 2012 to 2015, reforms were carried out on the existing FRC’s to improve the standards of the accounting industries.
An Intro about the current accounting standards followed in the UK
We are aware that the UK developed quite a few organisations, bodies as well as strategies in order to usurp its accounting sector. What we are unaware of is the Accounting standards that resulted from all these stringent strategies and organisations. The UK, by far, is at par with the world’s biggest economies when it comes to competent accounting standards. Thanks to its accounting institutions, these standards are hailed among the best and remain unrivaled.
Some common accounting standards and bodies in the UK, in comparison with other nations:
- International Financial Reporting Standards (IFRS)- issued by the Accounting Standards Board(ASB), the FRC is responsible for setting up accounting regulations, have been proven to be the only high-level accounting standard high-levels in comparison with the US GAAP, which has been found to have material differences with IFRS.
- Financial Reporting Exposure Drafts (FREDs)- FRS are first issued for consultation in the form of exposure drafts known as FRED
- Statements of Standard Accounting Practice (SSAPs)- These are the accounting standards of previous generations approved by the ICAEW or the ASC
- International Reporting Standards (IRS) – responsible for the maintenance of parity in the accounting of companies in the UK. Non-maintenance of these standards has resulted in the bankruptcy of some companies in the US.
- Statements of Recommended Practice (SORP)- These are industry-specific or sector-specific standards developed by the ASC
- The Securities and Exchange Commission in the US sets laws, while the IASC and ASB lays out some standards, lacking any legal power.
- Urgent Issues Task Force (UITF) abstracts- Constituent of standard-setting arrangement that helps in investigating conflicts in ideas, standards, etc.
- Business structure in the UK differentiates ownership from management
Decoding two main Accounting standards – GAAP and IFRS
The general concept, principles, industry-specific rules and conventions are clubbed together under one wide term, referred to as Generally Acceptable Accounting Practices (or GAAP). GAAP includes both the common or advisable accounting practices, as well as regulations or norms specific to a particular industry. GAAP serves the purpose of establishing transparency and subsequently, trust among individuals with respect to accounting and bookkeeping.
The points listed under GAAP are not universally accepted or uniform across countries. Different countries have introduced their own set rules under GAAP, attested by their respective reporting or accounting councils. In the United Kingdom, there is a body of standards and practices in accounting termed as Generally Acceptable Accounting Practice in the UK or the UK GAAP. This collection of rules and conventions is published by the Financial Reporting Council (FRC) of the UK.
The last couple of years have brought about some changes in accounting practices. Effective from the beginning of 2015, the FRC replaced the erstwhile UK GAAP with a revised set of rules. The new standard broadened the scope of the older one quite significantly and was largely based and derived from the principles of the IFRS. The International Accounting Standards Board, along with IFRS Foundation issue financial language standards acceptable globally, termed as International Financial Reporting Standards (IFRS).
Important points of difference between the newer the UK GAAP and IFRS areas listed below:
- The issue of cash flow statements with respect to cash vs cash and cash equivalents is handled under IFRS with fewer details
- FRS 102 doesn’t deal with assets in case of discontinued operation and sales, unlike IFRS
- Other employee benefits had no standards under UK GAAP, which has been successfully altered by the newer standards
- Exceptions to timing differences were practiced in UK GAAP for deferred, while IFRS deals with it by temporary difference approach
- Use of fair value introduces in financial assets and liabilities introduced by FRS 102, against that in UK GAAP
- Under the bracket of Specialised activities (agriculture), no standard for fair value existed, while IFRS does such a standard
- The IFRS has included an asset model which is intangible, for operators, unlike UK GAAP, which covered it through accounting by grantors for Service concession arrangements
A large part of the objective of maintaining these standards, apart from the red tape, is to create a sense of organization and trust among officers of the money market and their clients.
Challenges posed by the Accounting Industry
The effect of different disruptions is widespread, moving across industries like a juggernaut and accounting is certainly not an exception. It is a matter of record that many forms of service have undergone dramatic changes as a result of disruptions and challenges. The survival of an industry and the entities in it, hinges on the manner in which challenges are faced and sidestepped to march towards success. Here are four of the many challenges faced by the Accounting Industry.
Divergent and dissimilar conditions in different industries
Accounting, despite being a service that conforms to theories and fundamentals of accounting, needs to be compliant with regulations, taxation law and various bylaws. The combination of all the above components and requirements makes accounting different for different industries. It is not an open and shut interpretation, but an interpretation that needs to consider various regulations, some of which may appear similar, but differ from case to case. Unique cases and situations will unfold without precedent and accounting service needs to have sharp minds to carefully make the distinction and apply the applicable laws.
Reluctance of the ‘old school’ to ride the technology wave
By and large, accounting has been a traditional service, leaning on a human-intensive input. However, technology has helped automate certain processes, bringing inefficiency. Documentation has changed dramatically, storage has become a lot more secure from physical damage, and the best part has been access. Businesses and accountants now possess the ability to instantly access data from the clouds, across locations and time zones. This is a powerful dimension that needs to be embraced, failing which survival will become a challenge.
Shrinking margins and its fallouts
When margins shrink due to competition, the biggest casualty is undoubtedly the value of service – especially customer service. This is a challenge that throws any industry into a vicious cycle. As more and more competitors crowd the landscape, the attempt will be to outrun the competition with lower pricing. This results in a dominoes effect, with others falling suit. However, in some cases, this is followed by a decline in the quality of customer services. The challenge is to embrace technology, more efficient processes, rely on the best resources, optimise utilisation and make full use of the economies of scale to offer reduced costs without compromising on quality.
Inadequacy of skill/competency levels compounded by wages and attrition issues
Many accounting services have found the going tough largely due to staffing problems. By virtue of the service relying on high competency/knowledge levels of resources, a lack of the right skills set will reflect poorly on the deliverables. The need here is for accounting services to attract and retain the best talent by relying on a sound business model to keep attrition rates low. It is also vital to beat the challenge of attractive wages dangled by competitors or in related services, by ensuring ideal resource utilisation and optimisation for better returns. This will help accounting services to retain the best talent while remaining profitable and affordable. The success of an accounting service relies to a great extent on the expertise levels and practices followed. Comprehensive accounting knowledge and expertise needs to be complemented with sound strategies to offer well-rounded services to clients in a manner that can be sustained without diluting any aspect, including profits. Challenges are the agents of change. Organisations need to embrace changes to face challenges better.
Graver challenges faced by Accounting Standards in the UK in recent times:
1.Impact of Brexit
A brief introduction to Brexit
The term Brexit has been used to refer to the proposed, and now confirmed exit of the United Kingdom from the European Union. The term has been developed as a shorthand amalgamation of the phrase stating the exit of Britain from EU.
Currency stability and economic effect:
The pound had shown a remarkable 6% decline against the dollars to below $1.4, since the EU referendum. Sterling has exhibited some weakness, thus continuing the imbalance between the import-export ratio. A whopping 75% of the Chartered Institute of Management Accountants (CIMA) had voted against Brexit. This comes as a surprise considering the mere 4.2% percent of the revenue generated from clients belonging to other EU countries. The matter of fact here is that most of the expected effect post-Brexit shall be caused by the clients themselves.
One of the most prominent areas of modification shall be tax-related. If and when the UK exits the EU, there shall be detailed discussions and agreement regarding governance of taxation policies, in order. Another significant point of concern shall be the accounting standards to be tabled and followed. There is bound to be an impression of disarray among the populace during and post exiting the European Union. Thus, the accountants in the United Kingdom have a huge responsibility approaching.
Challenges posed by Brexit:
Primarily, the greatest challenge posed by Brexit is the uncertainty caused. Most scenarios that have been foreseen have a very high degree of underlying assumptions. Another issue is the feasibility of remaining in the single market while continuing free movement. It is also being forecasted that the transition shall be tricky, with the possibility to jolt the British economy.
2. Challenges posed by GDPR Implementation
Effects on the commoners of basic firms:
Major effects of demerits caused by accounting standards are the GDPR implementation challenges. GDPR stands for General Data Protection Regulations. After UK’s dramatic exit from the EU, a common misconception plaguing the minds of hundreds is that UK need not follow the GDPR. But, it is to be duly noted that the GDPR will still be applicable to all companies dealing with EU and its contemporaries. And since most companies in the business sector thrive because of dealings with the EU nations, they are in for multiple losses as the GDPR implementation will be stringent. This could cost various companies millions of cash and a few many of their occupation.
Effects on growth of firms:
After the implementation of the GDPR, many business giants primarily dealing with personalised data may be on the verge of shrinking their expansions in order to comply with the regulations. Since most social media giants are in for heavy losses due to these regulations, they might have to combat rising costs by reducing payroll.
Effects on the economy:
Good or bad situations on the business front, definitely reflect on the economy. Failing to follow proper accounting standards may render businesses foggy and dodgy in nature. This may repel potential clients, driving them away due to mistrust and loss of loyalty. All of these can inadvertently affect the economy of the nation
3. Retaining the clientele – a GDPR aftermath and how GAAP tackles it
- A major setback faced by most firms in the UK is the loss of European as well as local clients due to GDPR implementation challenges. In light of the new events, the UK needs to buck up its game in the field of attracting and retaining clients. The best way to do so would be following the GAAP standards to the ‘T’. GAAP is not a rulebook but more of a directive of “do’s and don’ts” in the accounting industry. Following the GAAP principles will help keep clear records that are enriched with the right and required information. Clear records enable clients to have a clear perspective about the company. It also uplifts the company standards and imbibes trust and loyalty in clients thus attracting and retaining most of its clientele
Merits of Accounting standards in the UK
The accounting standards were introduced in the UK in order to promote the following factors within accounting as well as the business sector:
- Transparency
- Guidance and Support
- Organized Record keeping
- Efficient Business Management
Future of Accounting
So far, the discussion has been focused on the usual accounting practices and conventions, along with the foreseeable effects of the envisaged Brexit. The possible solutions to these ascertainable issues lie in the foundation elements of the accounting industry. In a study conducted by the Association of Accounting Technicians (AAT) and Association of Chartered Certified Accountants (ACCA), 47% of the MPs have displayed an affirmative stance over the Accounting industry, from the perspective of the prospective Brexit. Their belief that accountants shall face positive implications due to the uncertainty the UK faces, standing at the threshold of separation from the EU, is putting another level of confidence among accountants.
The widespread ambiguity expected among the commoners post-Brexit can become a possible boost for any individual working in the accounting industry. The potential that lies in the problem-solving and analytical aspects needed for managing such a clientele could become a boon for accountants. This approach shall be two-faceted, benefiting both the accountants’ fraternity and their clients.
A positive effect of the Brexit vote has been the ease experienced in inflation rates for the first time in six months. Another upward change has been received from Britain’s dominant service industry’s growth, faster than expected. These can be some stronghold points of attracting and retaining customers in a challenging time. But what matters the most is a positive and affirmative approach towards what might prove to be a time of financial, and socio-economic unrest. The challenges might be manifold, but so is the potential of growth and prosperity, to rise above the ambiguity. After-all, every cloud has a silver lining.
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