It may be recalled that, for companies in the European Union, International Financial Reporting Standards became mandatory with effect from the current year.

Now that the first two quarters' reports have come out under the new accounting and reporting standards, the implications are getting better understood. The most significant change is in the debt number. The principal reasons seem to be:

Stricter provisions for the funding of employee pension schemes. One victim of this is British Airways, which was hoping to declare its first dividend after several years, but has had to skip it because the reserves have been wiped out, under IFRS.

Stricter norms for recognition of "true sales" of securitised assets. In some cases, securitised assets and the consequent debt liabilities are being brought back on the originator's books, thus frustrating one of the basic objectives of securitisation. In a few cases, the increased debt has also led to breaches of debt covenants and capital ratios.

The biggest problem, namely "fair value" accounting of derivatives, is still to impact the reported numbers because the European Union authorities have kept the relative rules in abeyance. The principal bone of contention is the hedge accounting rules.

Last month, the Association of Corporate Treasurers in the UK criticised the relevant accounting standard IAS 39 as being out of step with valid hedging techniques and "misleading".

Hedge accounting criteria are too strict and many hedging transactions have failed to meet them even though they reduce real economic risk.

The other problem regarding IAS 39 is the question of determining "fair value" when no market value for the instrument is available. This is the case in respect of most complex derivatives and the standard allows such instruments to be valued in accordance with the underlying mathematical models.

Critics argue that, in terms of reporting and accounting, a distinction needs to be made between "mark-to-market" and "mark-to-model". It is worth recalling that the practice of mark-to-model had become notorious in the Enron case.

Indeed, most users and their auditors are finding the international accounting standards too complex -- and, some contend, too theoretical. Even companies in the UK, which were supporters of IFRS, are now finding the costs and complexities too onerous.

Indeed, banks and corporate entities in Europe are suffering from "regulatory fatigue", what with IFRS, Basle-II and the so-called Markets in Financial Instruments Directive, all of which add to complexity with little discernible benefits.

We need to keep this experience in view: as an increasingly globalising economy, we too may need to conform to IFRS or its variant, one of these days.

Big Four or Big Three?

After the demise of Arthur Andersen, there are only four big and truly international accounting firms left -- KPMG, Deloitte Touche, PricewaterhouseCoopers and Ernst & Young.

At one time, people had started wondering whether the big four would be reduced to big three as Ernst & Young was facing a damages claim of �2 billion from Equitable Life, a failed insurance company which has also sued its directors for an equally large sum.

The long running case got withdrawn last month to the relief not only of the accounting profession but also their clients, as a successful claim would have left only three competing firms.

The other members of the oligopoly are also having their own problems -- Deloitte got sued over its role in the collapse of the MG Rover Car Group; and PwC was hauled up over its audits of Mayflower by the Accountancy Investigation and Discipline Board of the UK. The fourth firm KPMG was recently fined $456 million for helping individuals to evade taxes.

The Public Company Accounting Oversight Board of the US has also recently found faults with KPMG's auditing standards. In India, the only major case one recalls is of the Reserve Bank of India [Get Quote] delisting a firm from bank audits.

Faced with such problems, the Big Four are proceeding to lobby various authorities and countries to place limits on auditor liabilities.

For instance, in a recent case involving Parmalat, Italian authorities have sued Deloitte although it claims that the auditing entity, which was its local affiliate, was legally independent of Deloitte.

This apart, even as the International Auditing & Assurance Standards Board seeks to tighten auditing standards, investors who rely on audited accounts for their investment decisions are worried that the standards are becoming overly rule-based, as distinct from being principles-based.

The latter require a judgmental input on the part of the auditor -- and not just compliance with the letter of the standard. Some investors worry that accounting firms are themselves seeking to debase standards in order to reduce possible legal liabilities and claims!