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Accounting Questions for Discussion from AccountingWEB

On 1 October 2002 Shishi Rabbs posed this question on the AccountingWeb web site:

stewardship accounting: what is the definition of stewardship accounting ?

Neil Eglintine provided a definition, as follows:

Stewardship

A traditional approach of accounting that places an obligation on stewards or agents, such as directors, to provide relevant and reliable financial information relating to resources over which they have control but which are owned by others, such as shareholders. Not only are stewards responsible for providing information, but they must also submit to an audit.
A Dictionary of Accounting, Oxford University Press, © Market House Books Ltd 1999

Amid accusations from some that Shishi was trying to find an easy way to answer a student's project on the cheap, the discussion didn't really get beyond Neil's definition. However, Blandina Gaudeuso posed a series of questions on 7 October surrounding this issue. Both Neil and I tended to agree that Blandina didn't really move the discussion along. Nevertheless, despite my protestations to the contrary, I received several requests to answer Blandina's questions; and here they are.

You will find the questions in full at the end of this page but my responses are given here with some of the questions repeated for the sake of clarity. To see this thread in full on AccountingWEB, visit this page.

Additional definitions of stewardship

The duties and obligations of a person who manages something on behalf of other persons.
Derek French (1985)
Dictionary of Accounting Terms
FT Publications Ltd

… the concept of stewardship, for it often happens that the owner of a business entity is not personally involved in its operations and may even be forbidden by law to take an active part in it (like the sleeping partner in a partnership under the Limited Partnership Act of 1907). In such circumstances the persons actually running the business and keeping the accounts are in the position of stewards -who are accountable to the true owners for the conduct of the business's affairs.

... In preparing the accounts of any business the accountant must prepare them in such a way that they comply with national laws as well as with the requirements of the owners of the business: whoever they may be.
Geoffrey Whitehead (1998) 5/e
Bookkeeping
Made Simple Books Butterworth-Heinemann

Who are the Stewards?

We might need to answer the question of just who the stewards are, since there are at least three groups of stewards that we can consider:

the owners themselves: the owners run their own business
non owner managers on behalf of the owners: the owners take no part in the running of the business
owners and non owner managers combined: the owners manage part of the business and delegate the running of the rest of the business to professional non owner managers.
Variations on these three possibilities include the owner acting as a sleeping partner but insisting on being privy to the financial records. The nearest I can get to this in my own experience is the general practitioner who was the senior partner in his practise and he took complete control of the way the profits were calculated and shared out between all of the GPs in that practise.

Blandina's second question asks why can't some of a company's shareholders be part of the stewardship process? Surely they are in that they are the recipients of the stewardship reports, and they ought to feel comfortable that properly qualified, appointed and regulated auditors are managing their audit for them. In the early days of stewardship there was no such audit, of course. Read what follows, though, with this question in mind as it is an important question and some of what follows cross refers to it.

What does the Law say about Stewardship?

Stewardship, and please correct me if I'm wrong, was essentially a common law concept when it began; but the last 50 years or so has seen a ballooning of statutory, and other, regulation over the affairs of the steward in many countries. In the UK, we have tax legislation and the companies acts that regulate a huge amount of what an accountant and steward can and cannot do. We have National Accounting standards Boards (ASB in the UK and the FASB in the USA as examples) and we have the International Accounting Standards Committee now that promulgates a wide range of financial reporting, and thus stewardship, Standards: ranging from the basic layout of an income statement, balance sheet and cash flow statement to the often esoteric financial instruments such as derivatives, swaps, junk bonds and goodness knows what else.

Stock Exchanges also regulate their corporate members very strictly, too, in many countries.

As a matter of interest IAS 39 relates to financial instruments and it is by far the longest IAS and the IASC's own explanatory booklet runs to just about 200 pages, too.

We can now see why we need to provide stewardship type information: because it is not only the owner and the manager that has a right to this information any more: the Inland Revenue has the right to receive this information; HM Customs and Excise has a right to receive some of this information; and Companies House has a right to receive this information in the case of Limited Companies.

Unreliable Information from the Stewards

Following on from the previous paragraph we have these questions from Blandina:

What if stewards decided to provide unreliable financial information?

Some people say some stewards sometimes provide incorrect financial information (eg window dressing) to fool the banker into providing them with a big fat loan. At the end the stewards fled after committing a big enough fraud with a big sum of money to finance their entire personal living expenses.

Is it true that some shareholders also would like to collaborate with the stewards to window dress accounts in order to secure some beneficial financial motives?

What do you think is best to overcome those window dressing activities? Have a mixture of shareholders as part of the steward team?

The answer to these questions must be in at least two parts

criminal
within the letter but not the spirit
If the stewards, whoever they are, provide unreliable information then they may be committing a criminal act. Should they have deliberately misled their fellow owners and managers and the Inland Revenue and HM Customs and Excise and the rest of them, then they may be liable to face criminal charges and end up in jail.

On the other hand, stewards may be exercising their rights of discretion in some cases and whilst complying with the letter of the law, they may be spitting in the face of the spirit of the law. Window dressing, creative accounting and aggressive accounting are terms that fit this kind of situation here. Just do a search on the internet for these terms, go to your library and look for books in this area or find a book in a bookshop on this subject to see the myriad possibilities that are open to stewards as they seek to provide unreliable information.

Trying to fool the banker and fellow shareholders is again either criminal, unethical and immoral or just plain foolish. Of course, Blandina has the right to ask the questions since there are criminals operating in business constantly whose sole purpose seem to be to beat the system in the ways that Blandina's questions imply.

In my opinion, legislation and regulation will never fully overcome the propensity to window dress: as soon as one regulation appears, eg that leasing must be brought on balance sheet, another one is needed to regulate financial instruments … as much as there are concerned and clever legislators there are equally devious and clever stewards.

Independence of Auditors

Blandina's question on the independence of auditors is a question that always brings a smile to my face. I worry about this question a lot. At least in theory, all auditors ought to be independent of their clients; but recent history has shown that such sentiments are shallow, hollow and groundless … at least to an extent.

Of course, there are small audit firms that are and always have been independent. What about the larger audit firms, though, who seek to diversify and expand? Until fairly recently, many audit firms added value to their services by branching out from simple auditing to financial advice, then IT advice, then marketing advice, then business consultancy and then it all fell apart as Arthur Anderson and the rest imploded amid scandal after scandal.

Lets go back to the days when auditors were auditors and have done with it. Millions of auditors will go straight for my throat now and tell me I don't know what I'm talking about. My counter response is that the proof of the pudding is in the eating. There have been too many audit based scandals to remain complacent. Large and thrusting firms need to keep growing and diversifying and differentiating in order to satisfy their goals and ambitions.

Isn't there an argument for saying that the complete auditor is one for whom the audit is everything and anything else, consultancy, IT advice and so on should be best left to anyone but an auditor?

Here's the question Blandina asked in this context:

The shareholders, though, appoint auditors at their GM or AGM. But the appointment is truly influenced by the stewards. So what is the point of having such appointment? It defeats the purpose of an independent audit and incur unnecessary audit expenses.

As far as Blandina's subsequent question is concerned,

The saying that auditors are controlled by the stewards has some substance. The audit fees are proposed and tabled to be approved. If the auditors were to "co operate" with the stewards, then the audit fee could become higher? How do you think is best to have a proper control over the fees so that the stewards have no influence over the quality of the external audit?

… surely the audit fee is merely a matter of negotiation and agreement? Even though many companies are subject to mandatory statutory audits, there is no reason on earth why an auditor should charge a fee that does not represent fair payment for the services performed. Moreover the truly independent auditor would never get into the situation where these questions needed to be asked, surely.

Finally, Blandina asks about the defining of the role of the accountant and auditor:

With so many cases happening nowadays, do you think the work of the auditor and accountant should be redefined?

I have already said, and will repeat, the external auditor has a clearly defined task, as per legislation and regulation: it's what they do and offer on top of that that causes all of the problems. Internal accountants do what they need to do in order to satisfy their contracts of employment and the employer has ultimate control over that: should the employer fail to control the accountant then, following the drift of Blandina's major arguments here, the law will take its course and the accountant will be jailed, thrown out of his accounting body … as appropriate.

Conclusions

These are my responses to Blandina's questions, then! I am happy, in the end, to have been given the chance to address these issues and I hope I have done so fairly and constructively. I said that I would post these questions and answers to my own site with a link from the discussion on the AccountingWEB site that started all of this off. Duly done!

© Duncan Williamson
5 November 2002

The questions that spawned this page: see above for the link to AccountingWEB:

Blandina Gaudeuso asks
07 October 2002

1) … a question concerning Neil's choice of reference that didn't add value to the debate.

2) Why not have some shareholders as part of the "stewards" team? This will balance up the power of the non-shareholder stewards.

3) Or rather why not only shareholders can be stewards and non-shareholders can't.

4) Would it better to have shareholders as stewards rather than half non-shareholders and half shareholders as stewards?

5) Which do you think is better? The stewards team comprising all shareholders or the stewards team comprising non-shareholders?

6) Why should stewards be obligated to provide financial information, etc? If part of the steward team are shareholders, these stewards who are shareholders can testify to all other shareholders that the accounts provided are correct and verified.

7) What if stewards decided to provide unreliable financial information?

8) Some people say some stewards sometimes provide incorrect financial information (eg window dressing) to fool the banker into providing them with a big fat loan. At the end the stewards fled after committing a big enough fraud with a big sum of money to finance their entire personal living expenses.

9) Is it true that some shareholders also would like to collaborate with the stewards to window dress accounts in order to secure some beneficial financial motives?

10) What do you think is best to overcome those window dressing activities? Have a mixture of shareholders as part of the steward team?

11) The shareholders, though appoint auditors, at their GM or AGM. But the appointment is truly influenced by the stewards. So what is the point of having such appointment? It defeats the purpose of an independent audit and incur unnecessary audit expenses.

12) The saying that auditors are controlled by the stewards have some substance. The audit fees are proposed and tabled to be approved. If the auditors were to "co-operate" with the stewards, then the audit fee could become higher? How do you think is best to have a proper control over the fees so that the stewards have no influence over the quality of the external audit?

13) With so many cases happening nowadays, do you think the work of the auditor and accountant should be redefined? [If so, then the definition of stewardship accounting should change, am I right? Q1 above]