Chapter 9: Perspectives on the drawbacks of IFRSs: Justification of deviations between ideals
9.6 Country specific environment: persistence of local elements in accounting practice
Environmental and institutional factors seem to be at the centre of discussion, counteracting the comparability and international financial harmonisation of financial reports, leading to
‘local adjustments’ or inappropriate implementation of the standards.
186
‘When I analyse different companies’ financial reports in the same sector under IFRSs, I cannot compare the results; they show different results. Of course, the environment plays a role...’ [AUD7]
‘One can compare two different financial statements but cannot reach a conclusion which one is the best, it depends on the sector. You cannot really compare a hotel and an industrial company, and express an opinion over its efficiency, capital performance and ratios. The economy of the country plays a significant role...’ [TAX1]
Some observe that standardised and harmonised accounting standards can only result in comparable financial information affecting the accounting treatments of companies’ and their industry peers. Thus, comparability is difficult to achieve at a national level, let alone internationally, where the economic and political dynamics differ.
‘There are many factors that should be taken into account when looking at a group like the EU that still retains its national characteristics. It is difficult to evaluate the Polish and the French or the Greek and the Portuguese financial statements, since everyone keeps accounting records and books in different ways...’ [BA3]
Nonetheless, there is a view that:
‘the underlying concept of IFRSs is that they should give comparable financial statements, regardless of the environment in which companies operate and their sector. They should be comparable but they are not, because of the different cultures and mentality. The standards are developed according to the Northern European culture. At some points, IFRSs have digressed from their basic principle and have become rules- based, but in few cases. If this country [Greece] had the will and the culture to produce some work, GGAP would be the best solution; we should try to gradually adopt and embrace their philosophy. Greece cannot stay behind, if everyone says x you cannot say y.’ [AUD1]
Some of the interviewees drew attention to the implementation process of IFRSs by Greek companies and the methodology used by audit firms to report economic transactions according to the IFRSs. Instead of keeping books according to IFRSs the actual established practice is to keep the books according to the GGAP and then at the end of the financial period to convert the results to the IFRSs:
187
‘A company rarely preparers the IFRSs from scratch. According to the Greek legislation all companies prepare tax accounting reports based on the GGAP. Only companies with very sophisticated software systems enter accounting transactions directly into accounts according to IFRSs and have the permission to do so. The conversion of the companies’
accounts to IFRSs is done using an Excel worksheet. The results do not differ; the issue is that it becomes easier and more accessible to Greek companies. So, they have tax books and then they make adjustments by making entries according to IFRSs, which I have to admit - it is more difficult...’ [AUD6]
‘Most of the companies keep their books according to the GGAP, namely they prepare the balance sheet and the income statement in order to fulfil their tax obligations for the tax authorities. Then they create a bridge to transit to IFRSs. Using the trial balance of the accounts they make adjustments to fit IFRSs. These calculations are prepared independently of financial accounts [he means that this process is not part of the accounting system]. They create a new accounting company and transfer the balances to facilitate the preparation of the reports. This is supported by software, and adjustments from previous financial years are automatically transferred to the current one.’ [AUD7]
However, this practice is considered inappropriate by other users who express their doubts about the reliability of the figures reported, as failing to reflect economic substance in line with IFRSs.
‘In order to apply IFRSs there is a need for two different systems; one according to the GGAP and one according to the IFRSs. It is inconceivable to be able to close the books for a three month period, take the accounts and convert them to IFRSs, it cannot be done; either you apply IFRSs or not. The Big 4 audit firms [the interviewee names two of them] have a [software] programme for restatements and conversions but it is risky because some things are not done properly […] larger companies are more committed and keeping accounting books properly.’ [ACD2]
The improper implementation of IFRSs is often seen as the result of prevailing tax regulations over financial reporting aligning with the GGAP and the CRB. Preparers tend to place emphasis on implementing the requirements as determined by tax law. Moreover, accounting issues that are not treated in the GGAP, such as accounting for deferred taxes, are considered by some as less important, since in practice they are rarely applicable to Greek
188
companies. In fact, as already discussed, companies tend to apply certain IFRSs, given that only a number of the standards relate to larger companies with more complex transactions.
The contradiction between the content of the GGAP and tax regulations is undoubtedly the main deficiency affecting financial reporting in Greece according to most interviewees, as this also subsequently affects the implementation of IFRSs. Tax law interference, or in other words the influence of the state policies and strategies in businesses’ financial reporting, is considered the ‘cancer’ of accounting. Before the adoption of IFRSs and IAS 19 in Greece and under Greek accounting law (Law 2190/20 and Presidential Decree 186/92), defined benefit liabilities fell into the definition of provisions and were recognised on balance sheets.
In practice, though, most preparers followed the requirements of the tax law and only recognised liabilities related to employees that were due to retire during the year following the end of the financial period (Morais, 2008).
The GGAP is equated to the taxation regulatory framework and, in particular, the Code for Books and Records (CBR):
‘Companies are less willing to disclose much financial information and that’s why they publish their financial statements (which is mandatory) in unpopular newspapers. The GGAP is a Greek patent; it just focused on collecting taxes.’ [MA2]
The constant amendments to tax regulations meant that the treatment for accounting transactions was constantly changing and financial statements were becoming, hence, less comparable over the years.
‘…if taxation was not so enmeshed in accounting, distorting the real picture of business activity, the GGAP wouldn’t be that bad. Taxation-related economic concepts are unacceptable. It is difficult to get a true and fair view of the financial position of a company.
Taxation serves as a source of funding for the State in order for it to survive. Financial reporting should be based on economic rationales...’ [AUD4]
‘…nine out of the ten companies required by law to recognise compensation for employees, did not do so because the tax law didn’t recognise employee benefits, even though according to the GGAP they should do it.’ [AUD2]
‘…many companies prefer to listen to the taxman, distorting the more reliable valuation of assets achieved under IFRSs. Tax results differ from financial results. Although the state
189
should interfere in a companies’ taxation, because at this moment that is its only source of income in order to operate, it should not interfere in the companies’ financial reporting (AUD4).
‘Tax regulations are many and complex, while the law changes all the time, with new circulars following other circulars, etc. It is like the tower of Babel. We have meshed the concept of the tax accountancy and accounting science. The disadvantage of the GGAP is that the tax authority interferes in Law 2190 making inappropriate interventions.’ [AUD9]
The State dominates as an accounting and tax regulator, with implications affecting the quality and ability of financial statements to represent a ‘true and fair’ view of the companies’ activities.