The Local Authority Pension Fund Forum (LAPFF) has asked the UK Accounting Standards Endorsement Board (UKEB) to justify its approval of British accounting standards.

In the letter, LAPFF cited the collapses of HBOS, Cattles, The Bank of Scotland, the Royal Bank of Scotland, Northern Rock, Co-op Bank, Thomas Cook and Carillion as evidence of “systemic problems with accounts and audits”, and problems with the Financial Reporting Council’s (FRC) current regulations.

It cited a lack of distinction between realised and unrealised profits as the most problematic point of the standards, which LAPFF said was necessary to divulge in order to identify whether a business was capable of being a going concern or not.

The LAPFF commented: “Going concern status is an important element of the true and fair view, and vice versa. Auditors should form an opinion on going concern status based on the audited numbers in the accounts. If the accounts are inadequate for that purpose, they will reach the wrong opinion.

“The matter of realisation of profits is relevant for the going concern position of mutuals, for example, which do not pay dividends.”

The organisation explained that the distinction was required because unrealised profits could not be used to service debt or cover ordinary costs, with these requirements instead requiring the use of cold hard cash.

In its questioning of UKEB’s endorsement of the standards, LAPFF noted that international accounting standards set out in EU exit regulations from 2019 stipulated that accounts must give “a true and fair value of the undertaking’s assets, liabilities, financial position and profit or loss”.

The organisation also placed pressure on the FRC, describing the council’s December 2016 Financial Reporting Lab report as an attempt to look like it was dealing with the issue, highlighting the fact that the report used Carillion’s accounts “as an example of 'good practice' disclosure of dividend policy”.

It then pointed out that the construction giant had collapsed less than two years later.

The LAPFF’s letter concluded: “Bad accounts and bad audits are likely to mean that investments are worth less than the accounts portray, or are even worthless. Having the correct endorsement criteria is a significant matter of public interest.”

Pensions Age has contacted the FRC and UKEB for comment.

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