By Nicky Burridge

When Sir David Tweedie – the first ever chairman of the International Accounting Standards Board (2001-11) and chair of the International Valuation Standards Council (IVSC) until October 2019 – took up a post as KPMG’s national technical partner in London in 1987, he was shocked by what he discovered.

“I started to become absolutely horrified at some of the things that were going on and the schemes the investment bankers were coming up with. They were managing to show debt as equity or manipulating profits. I spoke out a lot and wrote articles about it.”

At the time, the UK government and various accounting institutes had set up a committee to look into accounting practices and establish a new standards board. Tweedie was invited by the chair of the committee to give his views on the way forward.

Typically forthright, Tweedie told the committee chair exactly what he thought. “It was only halfway through that I realised I was being interviewed [for the new standards board],” he confesses.

In 1990, Tweedie became the first chairman of the UK Accounting Standards Board (ASB), and he describes his time as ASB chair as probably the most satisfying part of his professional life.

He quickly set up a 14-member Urgent Issues Task Force to start looking into the schemes the banks were using. If at least 10 people on the task force voted against a particular scheme, it was abolished.

“We went through dozens of schemes and we got rid of them, one after the other. It was incredibly satisfying,” he says.

The birth of the IASB

Picture: Sir David Tweedie.

The ASB was also meeting regularly with its counterparts in the US, Canada and Australia, and invited the International Accounting Standards Committee to join them. Those meetings eventually led to the creation of the International Accounting Standards Board in 2001, and Tweedie was asked to become the organisation’s first chairman, a post he held for 10 years.

Around the time the IASB launched, the European Union had decided to adopt International Accounting Standards (IAS) for the consolidated accounts of European-listed companies.

“We [the IASB] thought there was a lot in the IAS that we should start cleaning up. In retrospect, it was maybe a mistake,” Tweedie admits. “The biggest one we had problems with was IAS 39 Financial Instruments: Recognition and Measurement, which was very complicated. I used to say if you understand it, you haven’t read it properly.

“The problem was that once we started touching that, everyone thought we had written it and we took a lot of criticism.”

So what does Tweedie look for in a standard? “I think you should have short standards that are principle-based and hammer anyone who does anything that is way out of line.”

Another major issue the IASB tackled was share-based payments or share options. “It was reckoned US income statements were probably overstated by 25 to 30%. That was because they gave themselves huge options and there was no charge,” says Tweedie.

The Financial Accounting Standards Board (FASB) had tried to make companies expense these options, but the US Securities and Exchange Commission (SEC) had stepped in and said they only needed to disclose them.

“We didn’t accept that, and we required expensing. It nearly came to a fist fight,” Tweedie says. “I remember being almost nose to nose with a financial executive and he said: ‘We spent US$70 million stopping FASB doing this and we will spend more than that destroying your board and preventing you doing it.’

“The next week we voted 14 to nil to do it, and the US followed a year later.”

How joining IFRS and GAAP came unstuck

Tweedie was at the helm of the IASB during the global financial crisis (GFC), which he blames for ending an accounting standards convergence program the IASB had been working on with the chairman of FASB.

“We agreed that we would look at two sets of standards, International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP), and agree between us who had the better one, and then the other one would just take it,” he says.

But during the financial crisis in 2008 it emerged that the European Commission was planning to introduce a law allowing companies not to use fair value in certain situations, but to go back to cost. That meant they could write back losses they had incurred.

Tweedie was urged by a number of securities regulators, including the SEC, to step in and stop the law. They warned no-one would trust financial accounts if companies that were known to be making a loss were showing a profit.

“We were faced with the prospect of either blowing up the markets, or not having due process. We decided we had to step in. So we allowed them to do it, but we also put in requirements for disclosure, so anybody could work back to what the real numbers should be. That stopped a lot of companies from using it.”

“We were faced with the prospect of either blowing up the markets, or not having due process. We decided we had to step in.”

The move cost the IASB a lot of goodwill as people did not like the fact they had not done due process.

“After that, companies, certainly in the US, were fighting for survival and they weren’t really interested in converging with IFRS. Had it not been for that, I think the US would be using IFRS now.”

The intangibles of valuations

During the financial crisis, the president of the European Central Bank, Mario Draghi, asked Tweedie what accountants were doing about valuations. “My reaction was ‘we don’t do valuations, they are done by experts’. Then I discovered there were no experts out there. The financial instruments were all over the place; it was an absolute jungle,” he says.

When Tweedie was approached in 2013 about being chair of the board of trustees for IVSC, he agreed on the proviso that he could look into financial instruments. Since then, he has overseen what he calls “a major prune out in financial regulation”.

Tweedie wants an international designation for valuers – given out by professional organisations – to show they are properly trained and competent.

“We don’t want people coming in to valuations who are not proper valuers,” he says. “We feel that to be a valuer, you have got to have a certain level for entry, such as exams, ethics and continuing professional development. All the things we, as accountants, know.”

How to value intangible assets is a big issue, he says. “If you look at the S&P 500, the net assets of a company only amount to 13% of the market capitalisation, so 87% is not recorded in the financial statements. What is it?”

A lot of this difference will be due to intangibles. Accountants will have to explain what these are, and valuers will have to put a value on them. “I think it is an area that is going to expand and be very important to the accounting profession and businesses,” says Tweedie.

The accidental accountant

Tweedie never intended to go into accounting. At school, he had his sights set on being a doctor. But an unfortunate memory lapse, and a patch of stubbornness, put him on a different path.

“Just before a physics exam, when I was about 15, one of my schoolboy friends asked me what Ohm’s law was, so I told him. The first question in the exam was to state Ohm’s law. I couldn’t remember it, and I got angrier and angrier. I vowed if I couldn’t remember Ohm’s law by the time the exam ended, I’d never do physics again,” he recalls.

He didn’t remember Ohm’s law and, true to his vow, dumped physics. Unfortunately, it turned out he needed physics to get into medical school. So instead, the young Tweedie went to the University of Edinburgh and did a business degree, followed by a PhD. The business department was keen to keep him on as an academic, but he felt he couldn’t teach the subject without some real-world experience.

So the university arranged for him to spend a couple of years with an industrial company, working in different departments. But Tweedie had a different idea.

“I thought, that company knows I’m not going to stay – I’m going to be the tea boy! So I went out and did a CA [qualification] instead,” he says.

He joined Mann, Judd, Gordon & Co. in Glasgow, working under Professor David Flint, who later became president of the Institute of Chartered Accountants of Scotland (ICAS). “I loved my time as an apprentice in Glasgow. I used to say if you can deal with a second-hand car dealer in the Gorbals, a pretty run-down area in Glasgow, then you can take on Wall Street bankers quite easily,” Tweedie says.

“If you can deal with a second-hand car dealer in the Gorbals, then you can take on Wall Street bankers quite easily.”

He never went back to the business department at the University of Edinburgh; instead, he joined the accounting department. “I found accounting fascinating.”

After six years of teaching, he joined ICAS as its first technical director. A post as national research partner with KMG Thomson McLintock followed and, in 1987, the role with KPMG in London.

Although a reluctant starter, Tweedie sees a huge benefit in having an accounting background. “I think it’s the most wonderful training. When you think about it, nobody can fool you with numbers. You can look at a set of accounts and get a pretty good idea what a company is like. I have found it invaluable.”

This is an edited version of an interview with Sir David Tweedie first published in A Plus, the official magazine of the Hong Kong Institute of CPAs, aplusmag.goodbarber.app